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When I was five I asked this question and got a simple answer. I'm not an economist so it is probably incompletely or completely wrong. If you notice that your
by socmoth 14y ago
When I was five I asked this question and got a simple answer. I'm not an economist so it is probably incompletely or completely wrong.
If you notice that your money is worth more tomorrow, you are going to save your money and spend it tomorrow. This is true in situations of "deflation".
This sounds good to you, because all you have to do is wait and you'll be better off tomorrow. You don't even have to work to get more stuff.
However, you aren't the only person with this idea. Everyone saves their money in the bank. The people who sell goods and services, sell fewer goods, and maybe go out of business.
The economy slows down.
On the other side, if you design an economy so that inflation exists. People want to spend because in the future their money will be worth (a little bit) less.
Money flows around a lot. People who sells things make money and stay in business. People have jobs and the money is still worth something.
Remember money isn't worth something, trading good fluidly and efficiently is worth something. Money lets us do that. So a currency that lets us do that is good.
If anyone knows more about the situation, please add it. I don't know any economists so this story is probably pretty incomplete.
- Tichy 14y agoWell there is also this theory that people saving their money are actually giving a gift to the economy. They gave something they received money for in return, if they don't spend that money they basically sold their goods for free. See www.slate.com/articles/life/holidays/2004/12/what_i_like_about_scrooge.html I suspect few rich people keep their riches in cash.
- stevedekorte 14y agoIf that argument were correct, Moore's law would destroy the computer industry as everyone would perpetually wait to buy. As this hasn't happened, it may be worth considering the effects of time preference in both examples.
- maaku 14y agoThat's taking the argument to an unrealistic extreme. Rather, non-zero interest rates and resulting inflation/deflation incentivize market inefficiencies. Not a big enough inefficiency to drive an industry out of business (unless we're talking hyperinflation), but enough to be measurable consequences.
- Steko 14y agoAs evidenced by the large number of merchants that accept semiconductors as payment for goods and services.
- tptacek 14y agoI'm not asking a deep economic question. I'm saying, why would any real business accept payments in a currency that overtly and deliberately penalizes them for holding that currency when alternatives that don't do that are even more available? It just makes no sense to me.
- maaku 14y agoBecause the customer wants to pay in freicoins, and tools exist (or will exist - I'm talking from the future) to make acceptance hassle-free, and the value will be stable long enough to convert into the currency of your choice. (Of course the macroeconomic recession-proof nature of demurrage currency makes it desirable for merchants as well, and the zero-interest loans are a boon for entrepreneurship. I'm just saying even if you're skeptical, that shouldn't be a barrier to acceptance.)
- fleitz 14y agoWhy would anyone want to make an interest free loan with an arms length party? I understand that from time to time these things happen, like KIVA, but seriously why would I lend out my money for the opportunity of not getting it back?
- maaku 14y agoThen add appropriate interest representative of the risk you are taking on. When we say zero-interest, we're talking about basic interest/liquidity premium: the interest which is attached to loans simply because of the opportunity cost of lending, not the risk taken on.
- fleitz 14y agoI don't get it either, interest isn't inherent to a currency, when I hold dollar bills I don't accrue interest, but if I put them in a bank, or other security they do.
- wcoenen 14y agoBut if this were true, wouldn't we be in deep trouble as soon as just one deflating currency or commodity existed? All wealth would be hoarded in the form of that one thing. And gold exists. Even if you are correct and the existence of gold is detrimental to the economy, I don't see how you can prevent the effects of an existing devaluating currency/commodity by creating a new inflating one.
- Tycho 14y agoIf people hoarded cash, deflation would stop pretty quick, so doesn't the problem rather solve itself?