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Inflation and Technology

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CrowEpistemologist

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Just a bit of musing here, but this line of thought had me wondering, "what am I missing?".

 

Here's the theory.

 

I've talked before about the meaningful aspects of currency inflation. The traditionally accepted downsides of inflation are twofold: 1) it causes savings to diminish in value; 2) it disrupts the business planning process.

 

My theory is that technology--financial and electronic advances--made available to the masses will make inflation irrelevant, as it will greatly reduce or even eliminate the two aspects above.

 

The way this can happen--and seemingly already is happening--is for the popular advent of financial technology to abstract the notion of "money" away from the notion of "currency".

 

Most laymen think of the US Dollar as "money", and plan, keep score, and save based on this notion.

 

Any sophisticated investor, however, sees US dollars as just another instrument they may move their money into, along side of stocks, commodities, real estate, other currencies, etc.

 

Or to put it plainly, in any given inflation panic, sophisticated investors virtually never get directly hurt. (Yes, insofar as a currency inflation can take down a whole market it will bring the value of most instruments down and thus affect a sophisticated investor, but this is secondary effect that is self-defeating: if nobody is affected by inflation, then there will be no broader implications for the given economy, and so on).

 

The technology I'm envisioning here looks something like this.

 

1. People don't carry cash, they only carry their bank card. (This is almost the case already).

 

2. Their bank cards are connected to a bank account which is essentially a complicated hedge fund, managed by professional investors and completely abstracted away from any given currency. (This is relatively straight-forward and easy to do, and easily imagined in the near future for a very broad swatch of the population--and is certainly the way anybody of higher net-worth manages things today).

 

3. The notion of value in one's bank account changes, wherein one does not merely ask, "how many US dollars do I have" but rather they ask a far more complex question of value based on a mix of commodities.

 

3a. Third parties create various indices that allow people to quickly ascertain the value of their holdings without direct reference to a currency

 

(This is admittedly a mental leap from where we are today for all but the most sophisticated investors).

 

***

 

One "problem" I see with my theory has to do with the old adage, "necessity is the mother of invention", or maybe, "if it's not broke, don't fix it". Yes, technologists can bring us the world I'm envisioning here--today--but you'd have to ask why this would help anybody (and as a corollary, why anybody would profit in offering this service) . The fact is that the US dollar has been a very stable store of value for the last 30 years. Insofar as this remains the case, such a mass-consumer mindset change simply couldn't take hold.

 

So as a theory of, "what's going to happen next in finance", this is certainly just speculation.

 

However, I think this has very interesting implications for politics as it relates to inflation.

 

In short, the threat of inflation is currently a big political driver in US politics. What if its proven that currency inflation doesn't matter to anybody? In the above scenario, US currency inflation actually becomes a tax cut since the US government would presumably be the only entity left trading purely in currency. (How's that for irony?).

 

Then what?

 

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Ok, let's put things in perspective.

 

Inflation determines the expected yields on any investment.  If you expect a 20% inflation rate, you know you will need a nominal interest rate above 20% for it to become profitable. It's essential to know the level of inflation for any investor willing to invest on any kind of utility.

 

Secondly, the fact your savings are in terms of a mix of investments it doesnt mean you are inmune to inflation. If you have an annual yield of 5% on your savings, and inflation is 8% your yields will be -3% negative which means you are losing money.

 

Inflations affects absolutely everything, from your purchasing power, to the level of investment, and the economy as a whole.

 

On behalf of somebody that lives in a country with 20% annual rate of inflation and I can tell you it's one big deal for economic growth. 

 

Everything is measured in terms of it's nominal worth and inflation is the measure of how things lose it's value. It actually doesn't matter whether you carry cash or a bank credit, you always consume based on the nominal worth value. 

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Ok, let's put things in perspective.

 

Inflation determines the expected yields on any investment. [...]

 

I'll stop you right there.

 

Imagine you buy some real estate, and this happens after five years:

 

1. Your investment goes up 100% on a US dollar basis.

 

2. Gold, silver, copper, soy beans, pork bellies, Toyota Camrys, all other real estate, magazine subscriptions, etc. etc. etc. also go up 100% on a US dollar basis.

 

Has your investment then, "doubled in value"? Certainly not. It's stayed the same, and US dollars have fallen in value.

 

Yes, most laymen "keep score" using US dollars today, and I mentioned this is for two reasons: 1) because its a rather complicated new concept to judge value without the use of a particular currency; 2) the US dollar has been stable for the last 30 years. But my thesis is, what if this changed en masse? What if people kept score using some other measurement?

 

Currency inflation only affects investors in that currency and nobody else. If you maintain a bank account with cash, then you are making this investment, and exposing yourself to this instrument. If you're not, you're not.

Edited by CrowEpistemologist
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You are talking pretty much about the difference between nominal value and real value.  Real value determines the value of things adjusted by inflation.

 

Of course inflation (low inflation), as the money neutrality states, doesn't affect aggregate supply in the short run, but still it has a tremendous impact on investments as people deal with their expectations based upon their wage increases compared with inflation, and entreprenurs future yields, the cost of capital and real interest rates. They are all based upon inflation.

 

Obviously in any country with high levels of inflation, hoarding physical assets such as tennis raquets could be a good way of avoiding losing your capital, but still you don't get paid with tennis raquets and investments yields are not based upon tennis raquets as far as i know.

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Obviously in any country with high levels of inflation, hoarding physical assets such as tennis raquets could be a good way of avoiding losing your capital, but still you don't get paid with tennis raquets and investments yields are not based upon tennis raquets as far as i know.

 

The mechanism of the transfer is of no consequence. Let's talk about the buying sequence of the future, with a timeline:

 

1. T = 0.00 seconds: Buyer initiates a transaction to purchase some Thing based on an current price in some Currency.

 

2. T = +0.01 seconds: Buyer initiates a purchase of Currency by trading shares/commodities/etc. from his trading account in the amount necessary to settle the transaction.

 

3. T = +0.02 seconds: Buyer transfers the Currency to the account of Seller.

 

4. T = +0.03 seconds: Seller sells the newly received Currency in his account, trading it for shares/commodities/etc.

 

So in this scenario, you actually held on to your currency for about 0.02 seconds. For the rest of the time you could care less about inflation since it will not directly effect you. Not even Zimbabwe inflation could affect this transaction.

 

And yes, you wouldn't move physical tennis rackets around, but most transactions don't use physical dollar bills anymore either (and we can easily imagine a not-too-distant future of absolutely no physical cash anywhere).

 

I'm still looking for holes in my own theory here, but from what I can tell so far, the entire notion of "inflation" is going to become a historical curiosity.

 

Right now it drives a good chunk of the rhetoric in Washington, so this certainly has short-term political implications as well.

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  • 3 months later...

[Continuing from another thread]

So I did give your theory a look. I don't understand how a fast transaction time exempts a currency or goods from inflation, since whatever this undefined technological method you're using to establish nominal values will define a currency. Looking at this now I don't see how you could link it honestly thinking it's a good argument against the chance of hyperinflation in the US, simply because you have a porous theory on how it might not happen, if it was implemented "en masse." 

 

[...]

 

I think you are confusing the concepts of "currency" and "value".

 

A currency is an investment instrument, no different that soybean futures or a stocks or oil or a Toyota Camry, etc. etc. All of these things--along with the US dollar--may increase or decrease in value. Value in this context is a measurement relative to all possible means of trading. You can use anything as a measuring stick. Most people these days use US dollars (because it's been pretty stable for the last few decades), but you can use anything else you want.

 

I never said that the idea presented here was a "good argument against the chance of [uS dollar] hyperinflation". Whether it will or won't happen is beside the point in this context. The theory I am presenting here is that it wouldn't matter a lot if it did happen--whether it will or won't happen is another discussion.

 

To be clear, however, I think this theory certainly has bearing on how much we care about this subject since my point here is that the US government can inflate their brains out and the only entity harmed in any significant way will be US dollar investors (who would be irrelevant in the grander sense) and the US government itself since it has a self-imposed standard of only accepting US dollars as payment (although presumably it would index its own fees according to an external standard of value as well).

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Crow,

So, I am supposed to invest the value of my work in an instrument that I do not understand, that can only accrue to the benefit of NY bankers, and that is manipulated to their benefit and not mine. This is supposed to be an improvement over a dollar that is manipulated by NY bankers by processes that I do not understand for their benefit and not mine? We might as well invest in Bitcoin, based on processes I do not understand for I don't know whose benefit.

I'm tired of being forced to put my money into IRA 's to invest in companies whose business I don't know, much less derivatives or hedge funds.

The dollar has not been all that stable over the last 30 years. Inflation over that time has eaten away at the purchasing power of retirement savings significantly, even if those monies were invested in the stock market.

What is more, in countries with run-away inflation, most people would be forced to spend their pay as soon as they get it or risk losing the value of their work. The value of a meal can change during the course of the meal.wages often do not keep up with inflation making many much poorer. The inflation results from an attempt to cheat the law of causality. The government creates currency from thin air to pay for goods or services (value). The losers are everyone else who has the value of their work diminished by the loss in the value of the currency. The signals in this fraud are not instantaneous. Run-away inflation causes false signals to be sent throughout an economy based on that currency, which leads to mal-investments and other problems.

Your mythical "wealthy" only really applies to super rich NY bankers. Bankers do not create wealth. That can only come from a productive business. The rest of us, even under your scheme, would be doomed to poverty and starvation. I do not want the value of my work mediated by NY bankers. Whatever you do, avoid lawyers, accountants, and doctors--they always end up with all of your money. You might add to this list, investment bankers.

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Is "inflation", as an observed economic phenomenon, restricted to a "currency" based economy?

 

There are reasons WHY "inflation" occurs in a "currency" based economy, I.e. there are mechanisms which cause it, so then WHAT is the difference in an economy shifted away from "currency" which makes it immune to the same mechanism?

Edited by StrictlyLogical
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Is "inflation", as an observed economic phenomenon, restricted to a "currency" based economy?

 

There are reasons WHY "inflation" occurs in a "currency" based economy, I.e. there are mechanisms which cause it, so then WHAT is the difference in an economy shifted away from "currency" which makes it immune to the same mechanism?

 

Here I am using the term, "inflation" to mean the reduction in the trading value of a given currency.

 

Otherwise, I'm not sure I understand your question...

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aleph_1 -- I think you missed the entire point of the OP: it's that technology would allow laymen like yourself to do exactly what savvy financial people did in the past to avoid the negative effects of inflation.

No, I think that your technology is a floating abstraction and all your riches will end up in the hands of the likes of Jon Corzine, just like the moms and pops who had money in hedge funds under his control.

Edited by aleph_1
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Here I am using the term, "inflation" to mean the reduction in the trading value of a given currency.

 

Otherwise, I'm not sure I understand your question...

 

I was trying to see if we could abstract away from the specific context of currency ... your answer indicates "no".

 

 

I think I am starting to understand your point.

 

 

Perhaps technology is the solution to facilitate this ... and well this might sound strange... using currency only for the purposes of transaction and not for "storage" of value. i.e. currency is not used to "store" value but only to "translate value" when things of some actual (tied to reality) value are exchanged.  I.e. currency itself has no value other than its ability to translate value.

 

This sounds like a floating abstraction... and at this point it may be one.  Perhaps such a thing cannot be devised or is incoherent (self-contradictory). 

 

Perhaps the solution is simply the non use of currency of any kind...

 

 

Maybe technology could help removing the need for currency and providing the necessaries for transactions which are actually based on trade, not based on the arbitrary "value of currency", not based on physical trade of actual goods, but based on trade of OWNERSHIP of actual useful/valuable things. 

 

Owning money is like owning nothing... physically trading real goods is ridiculous (the barter system), trading ownership of things having some utility/value seems difficult but solvable with technology.

 

 

If a burger joint and a customer both had the same technology informing them of the exchange rate of gold, interest in the music industry,interest in flour companies, IBM shares, and silver, and the burger joint and the customer could easily buy and sell what was needed to facilitate a transaction, a path to determining how many of what the customer had would be exchanged for a burger could easily be determined.  I can see an app on a smartphone using all the current market rates and settings determined by the owner of the phone, to say "this is a good deal" and "It will cost you 3 tenth shares of "Rapper D" or 1/245th of the cost of the most popular viewing device (TV) currently on the market" (in particular because the user chose to use TVs as his standard of value).  The user of course would have put "1/240 or less" in his app and "willing to sell any non physical thing I happen to own" in exchange for the burger.

Edited by StrictlyLogical
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All you're effectively doing is slicing the pie different ways with the burger example. It's all still pie, and subject to inflation. This abstract technology is meant to protect against inflation in our current system in the US, where money is not not backed by anything tangible. Money = credit/debt. How are you defining a value without a currency? (unless you mean bartering, and average lifespans of 30 years)

Edited by Ben Archer
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All you're effectively doing is slicing the pie different ways with the burger example. It's all still pie, and subject to inflation. This abstract technology is meant to protect against inflation in our current system in the US, where money is not not backed by anything tangible. Money = credit/debt. How are you defining a value without a currency? (unless you mean bartering, and average lifespans of 30 years)

 

Businesses/producers could arbitrarily set their "asks" for their goods or services in terms of whatever commodity (exchangeable ownable quantity with exchange rates defined in the market) they wanted to "express" their "price" with.  Others could look at that, and based on what they would have to trade (through a series of trades perhaps) the deal would happen or not. 

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Businesses/producers could arbitrarily set their "asks" for their goods or services in terms of whatever commodity (exchangeable ownable quantity with exchange rates defined in the market) they wanted to "express" their "price" with.  Others could look at that, and based on what they would have to trade (through a series of trades perhaps) the deal would happen or not. 

 

I see where you're going with this...it's similar to the OP. I've done similar small-scale testing with bitcoins and other cryptocurrencies and it's not encouraging. Right now I suspect the abuse of arbitrage could be a problem, especially if this is to applied to our current economic system. I'd have to think about how this would apply to futures and interest rates

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This sounds like a floating abstraction... and at this point it may be one.  Perhaps such a thing cannot be devised or is incoherent (self-contradictory). 

 

Ask anybody who has lived in a country that has gone through severe inflation: what I am talking about is exactly what they did to keep their head above water. The idea of not keeping your savings in currency is not a floating abstraction, it's been done and it's very real.

 

 

Perhaps the solution is simply the non use of currency of any kind...

 

 

Here's where we get into theory, surely. As a theory however, the elimination of physical cash in our society is clearly only a decade or two away (if that). My 15 year old niece doesn't even use cash anymore. A relatively straight-forward next step would be for banks to offer interest-paying checking accounts that involved a portfolio instead of just cash. Again, that certainly doesn't sound like a leap--and again, is exactly what somebody effectively does today with any serious amount of money. Clearly a product like the one I'm describing isn't much of a leap. My theory is that we don't see this product available now (to my knowledge anyhow) because it's not necessary: US dollars are working fine right now. The minute they didn't, I bet you'd see the market flooded with solutions.

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I see where you're going with this...it's similar to the OP. I've done similar small-scale testing with bitcoins and other cryptocurrencies and it's not encouraging. Right now I suspect the abuse of arbitrage could be a problem, especially if this is to applied to our current economic system. I'd have to think about how this would apply to futures and interest rates

 

I think you are all starting to get it. Bitcoins are highly speculative so why go there? Why not a slice of a real company that owns real assets and makes real money ala AAPL. Or commodities. Or derivatives of the same. Or foreign currencies. Or a mix of all of those.

 

The point is that computers allow us to transact in these mixtures in the same way we transacted in some country's currency in the old days. This changes the way we think about "inflation"--and that new way of thinking about it is, "so what". We can easily get to a place where inflation of a particular countries currency means as much to us as the some major company's stock going down the drain. Yes, a few investors might get clobbered, but the system as a whole would be fine.

 

And again, ask anybody with a >7 figure portfolio today and ask them about their exposure to the US dollar. Some might have a little (I do) but it's a very deliberate decision and if the situation changed I'd bail out in the same way I'd bail out of a company that had a bad quarter. US dollars are just another investment instrument.

 

Anyhow, something to think about. To be clear here, I'm still waiting for a "gotcha" I'm not thinking about. Thus far it would seem that "inflation" is an anachronism over which my progeny will worry not. This has enormous implications for our ideas about government policy.

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Well bitcoins was just something I was also thinking about. I see a lot of problems there, but again it's a currency.

 

Seems what you're proposing is basically an absence of currency (not of money), like a sophisticated barter system, or a "currency" of commodity–based derivatives. 

 

As for exposure to the dollar, that I think is an easy solution for anyone who's motivated and recognizes the need. I'm personally prepared to be very limited to any exposure, but that doesn't make the situation any cheerier, as I can't very well educated the rest of my family and friends (they rarely believe me anyway). 

 

Back to the OP though, I'm still very skeptical but I like the idea and am going to give it more thought, starting with arbitrage. 

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The way this can happen--and seemingly already is happening--is for the popular advent of financial technology to abstract the notion of "money" away from the notion of "currency".

 

 

I've had a bit of time to think about this, with the holiday passing.

I think what you are proposing is promissing but needs a lot of conceptual development still.

 

To start with I wanted to clarify the issue of money vs. currency. I know you've put a lot of emphasis on the distinction between money vs. currency but I find your definition too narrow, a re-definition in fact. Firstly, there is no 'objective' meanings to words (at least in this discussion) because meaning is develped via social consensus, via use, and in that sense some definitions are indeed further or closer to what is commonly accepted, and that itself may change over time. I think your radical split between 'money' and 'currency' is a departure from what is accepted, and seems unnecessary, because what you mean by 'money' is commonly called 'commodity money' and what you call currency is called 'fiat money'. I find it more consistent to refer to all media of exchange as 'money' (gold, cattle, currency) but only some of money is 'currency', that is, money-by-law. I am not attached to this definition but it seems least controversial and covers the same range of meanings.

 

I can see what you are trying to propose regarding technology being used as a means of insulating the user/investor/trader from hyperinflation, and I think that could work. Buying currency a microsecond prior to making the purchase of goods or selling it immediately (by investing it into equity or commodities) after the sale of goods could indeed make hyperinflation inconsequential, at least as long as the technology functions when you need it.

 

But given such technology hyperinflation would indeed be desirable in order to effectively erase the fraudulent 'national debt' (fraudulent under the central banking and fractional credit model) which is purportedly owed to the banks. The inflation of base money in the U.S. could indeed be geared toward such an outcome, primarily because the national debt of that economy is already impossible to repay at zero inflation. It is a risky process and could result is major social instability, but the only other option is to get rid of fractional reserve banking, nationalise the FED, and declare national debt fraudulent, but clearly the 'greatest power on earth' is not willing to do it or too afraid of the banks.

 

BUt all that does not mean that there is a need to have soem elaborate measurement mechanisms for the relative value of real goods and services (these can change depending of many factors). Currency is enough for that, that is its purpose, to universilise the measure of value, and it doesnt take much to adjust your currency holdings for inflation.

 

Now consider also how private bills of exchange and promisory notes can be used to accomplish payment. These instruments need not be denominated in dollars but in any fungible commodity-money, or can take account of inflation of the measure of value (currency).

Edited by Ben Archer
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We all agree "money" is an arbitrary but useful social construct... which in physical form had its day. 

 

Permanent electronic currency is also having its day but owning it for any appreciable time to store wealth subjects it to inflation.

 

What about replacing money with an electronic transaction facilitating "mode" of exchange which has a limited life?  "Temptrons" that last only for the duration of a single exchange.  In essence no one can "own" the stuff for any appreciable time because by its nature it IS transitory, it lasts only the time for a transaction and is not used for any other purpose (it cannot be parked). If the transaction fails, a new bundle of "temptrons" are issued according to the then current market price of the real stuff of value being exchanged.

 

Because these things do not exist beyond a single transaction they cannot (I don't think so anyway) be subject to inflation.  they cannot be parked kept or hoarded and given the absolutely arbitrary use of the things no one would want to.

 

The "arbitrary" price of real stuff can be set based on the transitory "temptrons" without the absolute value of the temptrons having any meaning whatever.

 

the final piece of the puzzle, personalized apps can normalize the temptrons to whatever value each individual consumer or producer deem important.  A consumer may choose something like the cost of water or 10 killowatthours or 30 seconds of 10000MHz of computing time, whereas a producer may choose ounces of gold or 1000 manhours of median salaried electrical engineers.  Both producers and consumers could "set" by what standard the "exchange units" are gauged, in units that made the most sense to them. 

 

Since asks and puts will make more sense to each party to each deal and the probability of maximizing value on both sides of every exchange would increase. 

Edited by StrictlyLogical
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What I mean by "normalise" is translate and replace "temptrons" as displayed to the party to the transaction with the preferred standard of value of that party.  e.g. Bob pays for everything with seconds of supercomputer time and charges using the same, while Jim sees all prices in terms of grams of silver... while in the background the App is using the current or projected asks and puts expressed in temptrons which will be used for the transaction.

Edited by StrictlyLogical
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I like how you think, you are not afraid to explore some radically new ideas.

 

Couple of observatons so far. The idea of a momentary/temporary currency is very interesting, and i am intuitively drawn towards it, but so far can't see how that would still be a 'medium' of exchange. The function of currency or money is precisely the standarisation of value that extends accross multiple transactions, so that the double incidence of wants associated with straight barter can be accomplished via proxy and thus no longer a limitation. If the currency lasts only for one transaction then why is currency needed at all, its just straight barter. I am assuming you get something for something here otherwise whats the point 'selling' something for money that will dissappear a milisecond later. Now on what basis would temptrons be issued, how would one qualify to get temptrons to buy something?

 

I suppose you could offer something for sale, a commodity of sorts, and get normalised temptrons on the spot, then trade those temptrons for what you want to buy. The spent temptrons are then automatically exchanged into a commodity of choice pre-determined by the seller of the product he sold. BUt let us say you have some extra temptrons left, which, if not spent within 30 minutes, are re-converted to the commodity of your choice. I like it.

 

But that does require some serious facillitation behind the app, like multiple exchanges at market price going on 24/7 in the backgroud, all possible but looks like significant infrustructure necessary, trading regulations and some legislative oversight, would need to untilize the existing stock exchanges. Why not. For a small transaction fee that would make sense to any service provider.

 

I can see how normalisatio could be a very effective tool to avoid favouring a particular commodity, in order not to concentrate power in one sector, like precious metals, and so mitigate any market manipulation. Relative pricing could be achieved only if the relevant commodities themselves were traded on the exchange, so only sufficiently fungible commodities could be the basis of value.

 

Good start.

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One way you can describe my overall point in the OP would be this: if US currency inflation started up in the USA again, some smart people (see above) would hack a way around it--and make themselves rich by offering useful products to everybody.

 

Besides the mechanism itself--which itself is a fascinating discussion--it's interesting to think about the implications of policy: what if nobody was afraid of inflation anymore?

 

Certainly for those of us who love the prospect of a major weapon of governments being eliminated (or at least drastically curtailed), this is a good thing.

 

However, the threat of a doomsday inflation scenario is a major feature of the mainstream Right these days. We must curtail the welfare state, we are told, not because it's inherently wrong to compel people to work for others, but rather because if we don't, Bad Things will happen. Chief among those Bad Things is a nightmare scenario of Zimbabwe-like inflation.

 

The Right has been trying to get Joe The Plumber--the guy that already pays diddlysquat in taxes and who has an immediate monetary interest in soaking the rich--to come around to their side. They aren't going to convince him with philosophical principles--which they don't even believe in and/or understand themselves--so they manufacture fear and anger from other sources. Yes, their primary ally is currently Jesus Christ ("get Right or get left"), but Milton Friedman is their future in an increasingly atheist world. If both of these characters run out of gas, then what?

 

Interesting implications...

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I would add that some inflations are worse than others, infact opposite in effect, depending on where the new money goes. If money is just pumped into the banking sector or to government, which then has to be earned by working for it dispite the dowside of depreciating value of what a real value provider has agreed to work for. Conversely, if the new money was injected as productivity grants to productive individuals and small businesses then economy would boom, the productive sector being the first recepient and primary beneficiary of new funds. Could be the same monetary inflation but if spent to stimulate productivity this would counteract the inflationary pressure on prices.

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BenArcher

 

It may be that the temporary "currency" is really just two things offered by the private organization (or government) offering the mode of exchange as a service:

 

1. A single unit to express value to enable trades between N products and services without having to maintain and calculate N!/(N-2)! possible trading rates... this is a universally used magnitude within the service... something by which to set prices. 

2. Use of the units in a temporary fashion to allow actual exchange of things of actual value according to a (momentarily) fixed "prices".

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