380 karma · joined December 10, 2008
If you're going to define deflation as a fall in the price of any basket of goods, then you're just using it to mean 'the price of something went down'. You can do that if you want, but it's hardly helping the conversation.
Arc runs on all platforms that MzScheme runs on, which includes Windows.
If one person hoards dollars, they are being frugal. If everyone increases their liquidity preference, real wealth is destroyed. The gratification is not delayed, but lost forever. You are committing the fallacy of composition.
Moore's law is not deflation. Deflation is a persistent rise in the general price level, as measured using a representative basket of goods.
Have you never delayed buying a new console because you knew the price would drop soon? I have.
If dollars were to rise in value, it would constitute a transfer of wealth away from people with debts and towards people with cash savings. The first effect is that people will no longer be able to service the increasing real value of the interest on their debts, leading to default.
But the more serious secondary effect is that a rising dollar encourages people to hoard money rather than spending it, as dollars tomorrow will be worth more than dollars today. The result is a liquidity crisis, where everyone refuses to consume or invest. The liquidity squeeze makes dollars even more valuable, and so the effect is self-perpetuating, until eventually the economy grinds to a halt.
The worst historical example of deflation is the Great Depression, where local communities were having to invent their own currencies to make up for the extreme dollar shortage. The Great Depression is the reason central banks have positive inflation targets. Although inflation is bad, a small amount of inflation is a fair price if it reduces the risk of self-perpetuating deflation.
Historically, inflation has not hit the lowest paid the hardest. That's because inflation causes a reasonably uniform increase in prices, which includes the price of labour. It may be that the weakening of unions means that this effect will not occur this time, but a fall in the value of the currency suggests that prices should rise across the board, so this should be our working assumption. Usually, inflation is a transfer of wealth from those with savings to those with debts. It could conceivably help the worst off. In comparison, deflation will certainly lead to mass unemployment and will hurt the poor very badly, especailly those with debts.
You say that inflation will lead to higher welfare costs, but deflation will lead to far higher welfare costs due to mass bankruptcy and unemployment.
Furthermore, deflation increases the real value of government debt, and the depression caused by it will destroy tax revenues. This results in a higher risk of soverign default, which potentially causes a run on the currency.
In fact, almost all of the problems caused by inflation will also occur with deflation, only they will be far more severe. So that's why it makes sense for the Fed to pursue this policy. It has bad consequences, but they are minute in comparison to the deadly consequences of deflation and mass institutional failure.
It's probably a consequence of the fact that we're all taught in school to write essays, but not to be creative. When we don't know what we're doing, we fall back on that way of expressing ourselves. To beat it, you have to unlearn what you've been taught.
Time Dollars: http://www.timebanks.org/
Ithaca Hours: http://ithacahours.org/
Tlaloc: http://www.vidadigna.info/index.htm
The difference between negative interest and inflation is that the interest rate can be set by fiat (whereas inflation can be uncontrollable) and the value of one unit of the currency stays stable, so contracts written now are still meaningful in the future.
Also, no one is forced to spend, you are simply taxed for holding a non-zero balance, just as you are with a normal loan (or normal inflation, if you are in credit).
As for the examples from history: all the examples Monbiot cites are those where the normal currency has collapsed or is suffering severe deflation. So regular money was clearly not a solution in those edge cases.
It's also worth pointing out that although central banks will always be able to produce the necessary liquidity, they have to take ever greater risks to do so. At the extreme, they could purchase each and every public and private bond in the economy, but then they expose themselves to the risk of default on those loans, which could result in severe future inflation. If they are unwilling to do this, then they will not be able to stop deflation. So although they can stop deflation, it's not clear that they will.
Perhaps the most unfortunate thing about Monbiot's article is that he sees alternative currencies simply as a means to fight deflation, but Lietaer saw them as a way to create social capital. The benefit of a negative interest rate mutual credit currency is that it encourages a gift economy, rather than a competitive economy, and therefore builds social ties as well as financial wealth.
For tax: it depends on the currency in question. Barter systems that use a currency to settle barter accounts are taxed as normal income. Systems such as Time Dollars are considered tax free because they are used for non-commercial activities (http://www.timebanks.org/faqs.htm#taxexempt).
In China, there exists at least one system that is considered tax-exempt, except when the currency is exchanged for real currency, in which case it is subject to tax.
But perhaps the best argument against the usefulness of alternative currencies is that they exist, but no one uses them. There are some modest successes, such as Ithaca Hours (http://www.ithacahours.org/) and there are probably some LETS systems that work, but that's about it.
In an extreme liquidity crisis, such as the Great Depression was, they were great success, but I doubt we'll ever see that kind of crisis again. We have far more tools for preventing extreme liquidity droughts now than we did then.
I'm always most successful at getting something done when I: choose the smallest useful thing I can think of, choose something even smaller instead (which can be expanded later), develop a schedule for getting it done (e.g. 1 hour per day), keep a calendar showing whether or not I'm working as hard as I said I would (no slacking!) and timebox the whole thing (lack of time is the greatest motivator in the universe).
Update: for fun, I actually just tested this. I tried to write a language interpreter in Arc that could execute the following function:
(def fib (n)
(nth n (sequence s 0 1 (+ s.-1 s.-2))))
Many people seem to think that we could create a better currency by banning banks from 'creating money'. They don't want to ban banks, they just want to ban the idea of money 'based on debt'. Instead they propose that the government create all the money.
What they don't understand is that you can't ban 'debt money' without banning banks, and you can't ban banks without banning short-term lending altogether.
Money is usually defined as that which a community uses as a means of payment. It could equally be defined as any asset that is extremely liquid. If something can be converted into money extremely quickly at little cost then it can be used in place of money. If it is used in place of money, then it is money, as it is being used as a means of payment.
Bank accounts are by their nature extremely liquid. The purpose of a bank is to take on liquidity risk. That's to say, its job is to invest people's money in long-term (and hence high interest) investments, while at the same time allowing them access to it, should they need it. To put it another way: a bank insures investors against a sudden need for liquidity.
Therefore, any institution that offers either demand deposits or extremely short-term loans, and pays interest on them (which implies that they must be investing the money in less liquid assets) is performing the same function as a bank.
Because a bank deposit, like any very short term loan, can be quickly converted into cash, it is a highly liquid asset. It therefore is money. The banks aren't performing any kind of sinister trick. By providing liquidity insurance, they are by definition supplying the markets with highly liquid assets, and the market will always choose to use such assets as currency.
So you can't ban banks without banning short term loans, because short term borrowing with interest is banking. And you can't ban debt-based money without banning the creation of highly liquid assets, which is exactly what short term loans are.
Oh, and I suspect the writer of the letter doesn't know what "capital reserves" are either. He's probably just confusing capital with reserves.