Bryan Caplan and Bob Murphy, two economists, are putting their money where their mouths are and betting on their predictions for inflation. Caplan wagers that we won’t have double-digit inflation rates any time soon:
At any point between now and January 2016, if there is a year/year increase in seasonally adjusted CPI that is at least 10%, then you pay me at that time $100.
If we get to January 2016, and there has not been any 12-month stretch in which the above happened, then I pay you $100 at that time.
There are two problems with this bet, which I would have thought would be apparent to these two as they are economists.
1. USD is not a good means of exchange when you are betting on…the value of USD. Caplan’s payout for winning is bigger than Murphy’s, as inflation will have devalued the $100 if Murphy is right that we’ll have double-digit inflation. Although maybe Murphy is merely giving Caplan odds here.
2. What is the implied discount rate here? $100 is not much at all to begin with. Assuming that you were just going to put that money under a mattress otherwise, $100 in 2016 is worth about only $84 today, at normal inflation rates. And if you are in general willing to borrow at 5 percent interest, that $100 is worth only about $63 today. That’s not that much. It is meaningless relative to the losses they would incur on all their assets if we did have high inflation. You would think that on such an important topic they’d be willing to bet a bit more. (Actually here I realize that if Caplan loses he pays earlier, and with the time value of money the $100 he forked over would be worth more. So perhaps the payouts are equivalent.)
If I were betting on inflation, I would not denominate the bet in USD. And I would bet a lot more.
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