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Currency isn't meant to do anything, it just is. The reason you (and others) think it's supposed to lose value is because you've been fed a set of lies meant to

by jamoes 13y ago

Currency isn't meant to do anything, it just is. The reason you (and others) think it's supposed to lose value is because you've been fed a set of lies meant to deplete your wealth. Try this thought experiment: Let's say the Federal Reserve invented two sets of currencies in 1913: The Dollar, and The DeflataDollar. Both are protected by Legal Tender Laws, both are acceptable for paying taxes, and both are basically accepted everywhere. The only difference is that the supply of Dollars increases every year (as it does now) whereas the DeflataDollar has a constant supply. If your employer offers to pay you in either of these two currencies, which one do you choose? Any rational actor would of course choose to be paid in the currency that won't lose 97% of its value every hundred or so years. The only way to maintain an inflationary currency is to enforce its usage through laws and taxation. Otherwise free individuals will choose something else to trade with.

rtpg 13y ago
how does the company get their deflataDollars? If the supply of your currency is constant, and there's economic growth in some other sector, then the company will (proportionately) collect less, and you'll end up with less deflataDollars in your hands year on year. It's basically the same as inflation.
dllthomas 13y ago
But your boss isn't going to offer you the same wage in each - they will be able to offer you more Dollars than DeflataDollars after adjusting for inflation, because he needs to take into account the expected value when he's liable to trade the currency for something else, not just the relative values now. If you want to trade for things immediately (say, buy some groceries on the way home from work) you might very well prefer the Dollars. If you plan on keeping your wages under your mattress for 20 years, obviously you should prefer the DeflataDollars, but that's not what most people do. "Any rational actor would of course choose to be paid in the currency that won't lose 97% of its value every hundred or so years." Right, because that time horizon is totally what is relevant when I'm being paid today and turning that money into other things tomorrow.
- jamoes 13y ago
  The point of the thought experiment, if followed through to its logical conclusion, is that in such a world The Dollar wouldn't even exist, only the DeflataDollar would. No one would accept a currency that's losing value (even the grocery vendor on your way home from woek) if they had the choice to accept something that will hold its value. It doesn't matter if the rate of value loss is slow or fast, it's inferior to something that holds its value.
  - dllthomas 13y ago
    And that point is just wrong. Anyone with a short enough time horizon would prefer the depreciating currency, because they can get it at a discount from those with a longer time horizon.
    - jamoes 13y ago
      > Anyone with a short enough time horizon would prefer the depreciating currency, because they can get it at a discount from those with a longer time horizon. Exactly, the inflationary currency would be sold at a discount. And the amount of the discount would increase over time until the value of the currency fell to zero.
      - dllthomas 13y ago
        I think you are confusing the real and the nominative. The currency would be sold at a real discount, which means a real premium on my labor if I am exchanging it for dollars instead of DeflataDollars, so that's what I'd prefer to accept if I will be holding it for a short time. "And the amount of the discount would increase over time until the value of the currency fell to zero." The exchange rate would change over time; that's unsurprising. I'm not sure the discount (in real terms) would change if the rate of inflation was constant. It is apparent that the value of the currency would fall toward zero - that's basically our premise; it is not apparent that it would fall to zero. You'll have to support that if you want to stand by the claim.
thedufer 13y ago
Where are people getting DeflataDollar? You've pitched it as a nearly constant-yield zero-risk investment. Circulation quickly falls to nearly 0, and we're back to having just Dollars (plus people who could afford DeflataDollars are watching their net worth grow without the shared economic benefits of a normal investment).

by jamoes 13y ago

rtpg 13y ago

how does the company get their deflataDollars? If the supply of your currency is constant, and there's economic growth in some other sector, then the company will (proportionately) collect less, and you'll end up with less deflataDollars in your hands year on year. It's basically the same as inflation.

dllthomas 13y ago

But your boss isn't going to offer you the same wage in each - they will be able to offer you more Dollars than DeflataDollars after adjusting for inflation, because he needs to take into account the expected value when he's liable to trade the currency for something else, not just the relative values now. If you want to trade for things immediately (say, buy some groceries on the way home from work) you might very well prefer the Dollars. If you plan on keeping your wages under your mattress for 20 years, obviously you should prefer the DeflataDollars, but that's not what most people do. "Any rational actor would of course choose to be paid in the currency that won't lose 97% of its value every hundred or so years." Right, because that time horizon is totally what is relevant when I'm being paid today and turning that money into other things tomorrow.

jamoes 13y ago
The point of the thought experiment, if followed through to its logical conclusion, is that in such a world The Dollar wouldn't even exist, only the DeflataDollar would. No one would accept a currency that's losing value (even the grocery vendor on your way home from woek) if they had the choice to accept something that will hold its value. It doesn't matter if the rate of value loss is slow or fast, it's inferior to something that holds its value.
- dllthomas 13y ago
  And that point is just wrong. Anyone with a short enough time horizon would prefer the depreciating currency, because they can get it at a discount from those with a longer time horizon.
  - jamoes 13y ago
    > Anyone with a short enough time horizon would prefer the depreciating currency, because they can get it at a discount from those with a longer time horizon. Exactly, the inflationary currency would be sold at a discount. And the amount of the discount would increase over time until the value of the currency fell to zero.
    - dllthomas 13y ago
      I think you are confusing the real and the nominative. The currency would be sold at a real discount, which means a real premium on my labor if I am exchanging it for dollars instead of DeflataDollars, so that's what I'd prefer to accept if I will be holding it for a short time. "And the amount of the discount would increase over time until the value of the currency fell to zero." The exchange rate would change over time; that's unsurprising. I'm not sure the discount (in real terms) would change if the rate of inflation was constant. It is apparent that the value of the currency would fall toward zero - that's basically our premise; it is not apparent that it would fall to zero. You'll have to support that if you want to stand by the claim.

thedufer 13y ago

Where are people getting DeflataDollar? You've pitched it as a nearly constant-yield zero-risk investment. Circulation quickly falls to nearly 0, and we're back to having just Dollars (plus people who could afford DeflataDollars are watching their net worth grow without the shared economic benefits of a normal investment).