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Solution to Deflation: Abolish Cash

13 points by dedalus 17y ago

gasull 17y ago
Price deflation is the normal state of affairs when the Government isn't inflating the currency. It isn't a problem to be solved. A financial bubble is the problem. Japan is trying to create a bubble in its economy. Even if they succeed it will deflate at some point in the future. The bigger the bubble, the deeper and longer the recession/depression that follows the bubble.
- philwelch 17y ago
  Deflation may be the "normal state of affairs when the Government isn't inflating the currency", but that doesn't mean it isn't a problem. And that's a flawed description of affairs. Deflation is more specifically the normal state of affairs when the government enforces a legal tender law on a scarce, slow-growing currency such as gold. It doesn't happen when the currency is fast-growing, like silver was in the late 19th century, or like tobacco was during the colonial period. And it doesn't happen in a barter system. The establishment of the gold standard was a major political effort that was only accomplished by the McKinley administration around the turn of the 20th century (having been preceded with an even less tenable system of bimetallism that finally collapsed due to the Nevada silver rush). As for whether deflation is a problem, deflation disincents both investment and spending, which means in a very real way that deflation disincents economic growth. The situation you describe would also be possible only with a return to the gold standard, which would effectively price gold out of any kind of industrial use--something that would have negative economic repercussions in itself, and which would likely cause extremely high rates of deflation in the future.
  - gasull 17y ago
    I should have said "mild deflation": http://www.cato.org/pubs/policy_report/v21n3/cpr-21n3.html http://www.cato.org/pubs/policy_report/v21n3/cpr-21n3.html
    - philwelch 17y ago
      Mild deflation is better than runaway deflation just as mild inflation is better than runaway inflation. But it seems that mild inflation is actually better than mild deflation. I'm not impressed by think tanks: they come up with the conclusion first and the reasoning second.
russell 17y ago
I suspect the article is confusing cash and cash equivalents like savings accounts. It says that cash is 16% of the Japanese GDP. I have a hard time believing that. The Japanese have a high savings rate and the predominant means of saving is postal (government) savings accounts. (The last time I read about it was the middle of the last decade.) If I am correct, they are contemplating negative interests rates on savings accounts. They might be considering the elimination of cash to prevent people from pulling cash out of their savings accounts and putting it in their mattresses or lock boxes.
arihelgason 17y ago
If any country can pull it off, Japan can. The economy is dominated by a relatively small number of large conglomerates. It would be much harder to pull it off in more fragmented economies (except for very small ones perhaps).
cousin_it 17y ago
> Solution to Deflation: Abolish Cash... Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Solution to Everything: introduce an Orwellian total control scheme. I like my anonymous money just fine, thank you.
- dan_the_welder 17y ago
  So right, and let's not forget that EVERY electronic transaction incurs a cost. To paraphrase, "I for one, welcome our future Visa overlords."
  - moe 17y ago
    You have to admit it's a brilliant business model. "Let's just go and take a cut of every money transaction anyone, anywhere ever makes". Bulletproof.
    - olefoo 17y ago
      That's how a VAT is supposed to work. In theory it is the most efficient and fair form of taxation. I think Japan could maybe pull it off, but I wouldn't be too surprised if it bit them hard in unexpected ways.
      - dan_the_welder 17y ago
        No more panhandlers.
ohhellzyeah 17y ago
yeah just issue vouchers to redeem certain products from certain vendors. then said vendors set the price. voila, no deflation. you also just duplicated the economy of the soviet union in 1942.
msluyter 17y ago
I'm assuming that negative interest rates would encourage spending, but I'm wondering why this wouldn't simply encourage people to move their money to foreign banks?

13 points by dedalus 17y ago

Price deflation is the normal state of affairs when the Government isn't inflating the currency. It isn't a problem to be solved. A financial bubble is the problem. Japan is trying to create a bubble in its economy. Even if they succeed it will deflate at some point in the future. The bigger the bubble, the deeper and longer the recession/depression that follows the bubble.

philwelch 17y ago
Deflation may be the "normal state of affairs when the Government isn't inflating the currency", but that doesn't mean it isn't a problem. And that's a flawed description of affairs. Deflation is more specifically the normal state of affairs when the government enforces a legal tender law on a scarce, slow-growing currency such as gold. It doesn't happen when the currency is fast-growing, like silver was in the late 19th century, or like tobacco was during the colonial period. And it doesn't happen in a barter system. The establishment of the gold standard was a major political effort that was only accomplished by the McKinley administration around the turn of the 20th century (having been preceded with an even less tenable system of bimetallism that finally collapsed due to the Nevada silver rush). As for whether deflation is a problem, deflation disincents both investment and spending, which means in a very real way that deflation disincents economic growth. The situation you describe would also be possible only with a return to the gold standard, which would effectively price gold out of any kind of industrial use--something that would have negative economic repercussions in itself, and which would likely cause extremely high rates of deflation in the future.
- gasull 17y ago
  I should have said "mild deflation": http://www.cato.org/pubs/policy_report/v21n3/cpr-21n3.html http://www.cato.org/pubs/policy_report/v21n3/cpr-21n3.html
  - philwelch 17y ago
    Mild deflation is better than runaway deflation just as mild inflation is better than runaway inflation. But it seems that mild inflation is actually better than mild deflation. I'm not impressed by think tanks: they come up with the conclusion first and the reasoning second.

russell 17y ago

I suspect the article is confusing cash and cash equivalents like savings accounts. It says that cash is 16% of the Japanese GDP. I have a hard time believing that. The Japanese have a high savings rate and the predominant means of saving is postal (government) savings accounts. (The last time I read about it was the middle of the last decade.) If I am correct, they are contemplating negative interests rates on savings accounts. They might be considering the elimination of cash to prevent people from pulling cash out of their savings accounts and putting it in their mattresses or lock boxes.

arihelgason 17y ago

If any country can pull it off, Japan can. The economy is dominated by a relatively small number of large conglomerates. It would be much harder to pull it off in more fragmented economies (except for very small ones perhaps).

cousin_it 17y ago

> Solution to Deflation: Abolish Cash... Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Solution to Everything: introduce an Orwellian total control scheme. I like my anonymous money just fine, thank you.

dan_the_welder 17y ago
So right, and let's not forget that EVERY electronic transaction incurs a cost. To paraphrase, "I for one, welcome our future Visa overlords."
- moe 17y ago
  You have to admit it's a brilliant business model. "Let's just go and take a cut of every money transaction anyone, anywhere ever makes". Bulletproof.
  - olefoo 17y ago
    That's how a VAT is supposed to work. In theory it is the most efficient and fair form of taxation. I think Japan could maybe pull it off, but I wouldn't be too surprised if it bit them hard in unexpected ways.
    - dan_the_welder 17y ago
      No more panhandlers.

ohhellzyeah 17y ago

yeah just issue vouchers to redeem certain products from certain vendors. then said vendors set the price. voila, no deflation. you also just duplicated the economy of the soviet union in 1942.

msluyter 17y ago

I'm assuming that negative interest rates would encourage spending, but I'm wondering why this wouldn't simply encourage people to move their money to foreign banks?