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How is demurrage different from inflation? Isn't the financial system already set up to encourage savers to invest their assets rather than storing value as bil

by nix 14y ago

How is demurrage different from inflation? Isn't the financial system already set up to encourage savers to invest their assets rather than storing value as bills under mattresses?

daenz 14y ago
This is what I thought of too when I read the wikipedia page for "Demurrage". Here's what's referenced there: > The major central banks' post-WWII policy of steady monetary inflation as proposed by Keynes was influenced by Gesell's idea of demurrage on currency,[2] but used inflation of the money supply rather than fees to effect the goal of increasing the velocity of money and expanding the economy.
maaku 14y ago
Demurrage drives the velocity of money up, and the interest rates down. These have other beneficial effects, such as easy access to credit (as long as you're creditworthy). More noteworthy, demurrage is assessed immediately whereas inflation is delayed. Under a demurrage system, this places an incentive to invest in assets which lead to longer-term sustainable growth. Inflation can instead incentise nearsighted short-term growth (and all the ramifications that has).
- kiba 14y ago
  This is irrelevant if people don't want to use your currency. When you invent a currency, you can't just think about monetary policies but also incentives for using it.
  - maaku 14y ago
    One step at a time ;) Some groups have had success in introducing local currencies with similar features. One path we've looked at is getting communities of people (perhaps starting with some #occupy groups and their supporters) to use it and convince local businesses to accept it, hence the subtitle of being the worlds first “global-community currency”. We're open to other ideas as well.
    - debacle 14y ago
      Is the local pizza shop going to be able to purchase sauce, cheese, flour, and pepperoni with it? Unlikely.
- runeks 14y ago
  > Under a demurrage system, this places an incentive to invest in assets which lead to longer-term sustainable growth. One of these assets being money that acts as a store of value? :)
  - maaku 14y ago
    Buying gold/bitcoins/whatever and storing them in a vault does not lead to longer-term sustainable growth [of the economy].
    - runeks 14y ago
      Indeed. And how does a currency with demurrage prevent users from investing in gold and storing it in a vault instead of investing in something that provides "longer-term sustainable growth [of the economy]"?
- enoch_r 14y ago
  Inflation also drives the velocity of money up, and the interest rate down. And both inflation and demurrage are "continuously assessed," it's just that losses to inflation aren't immediately measurable. Even if the timing of inflation/demurrage costs were different, could you explain more about the link between the timing of fees and the sustainability of investments? I don't see how the two are related.
  - maaku 14y ago
    > Inflation also drives the velocity of money up, and the interest rate down. And both inflation and demurrage are "continuously assessed," it's just that losses to inflation aren't immediately measurable. No, inflation is measurably delayed and hurts the poor and middle class more than it does the wealthy because insiders have preferential access to credit, allowing them to benefit from inflation. Instantly and continuously assessed demurrage would remove that preferential treatment. > Even if the timing of inflation/demurrage costs were different, could you explain more about the link between the timing of fees and the sustainability of investments? I don't see how the two are related. Demurrage reduces interest, where interest can have negative/short-sighted effects. As the value of an investment is calculated by discounting future cash flows by the expected interest rate, a lower interest rate means investments generating sustainable cash flow are more likely to be preferred than a one-time ROI. The classic example being clear-cutting a forest vs. sustainably harvesting it. The incentive is to clear-cut the forest when there are high interest rates, as the cash can be re-invested, whereas a sustainable logging model makes more sense as the long-term interest rate approaches zero.
    - nhaehnle 14y ago
      No, inflation is measurably delayed and hurts the poor and middle class more than it does the wealthy because insiders have preferential access to credit, allowing them to benefit from inflation. The same applies under demurrage. You're just shifting the loss of value form the real variables to the nominal variables. I've read a lot of advocacy for demurrage, but somehow nobody is ever able to put a finger onto where the difference is supposed to be exactly. Demurrage reduces interest, where interest can have negative/short-sighted effects. Perhaps it reduces the nominal interest rate. Why should it reduce the real interest rate? (Unless you suppose that after introducing demurrage inflation stays the same; but then you might as well go ahead and increase inflation to achieve the same effect)
sp332 14y ago
Inflation in the US has been pretty low lately, which does not really encourage investment (relative to hoarding). That's at least partially because huge banks control the interest rates. If someone other than huge banks could control the rate, they could make investment more enticing compared to hoarding.
- highfreq 14y ago
  The primary lever the Fed has to influence inflation is interest rates. Low interest rates tend to increase actual investment, in factories new businesses, etc, and eventually drive inflation up. Increasing interest rates now would most likely trigger a deflationary spiral.
  - maaku 14y ago
    To further this logic, demurrage allows the effects of inflation but with naturally low interest rates, reducing the probability of a positive-feedback spiral.
nhaehnle 14y ago
The rate of inflation has other effects. Prices tend to move upwards more easily than downwards; the most basic reason for this is that when you have a choice between reducing your real income via a general across-the-board inflation, or reducing your real income by cutting your nominal income, you should almost always choose the inflation (because spending is typically dominated by contracts, i.e. fixed cash flows like mortgage payments and utilities bills). So if you have a choice between (1) x% demurrage and 0% inflation, or (2) 0% demurrage and x% inflation, you should always prefer option (2). This allows prices to adjust faster, which is generally a good thing.

by nix 14y ago

How is demurrage different from inflation? Isn't the financial system already set up to encourage savers to invest their assets rather than storing value as bills under mattresses?

daenz 14y ago

This is what I thought of too when I read the wikipedia page for "Demurrage". Here's what's referenced there: > The major central banks' post-WWII policy of steady monetary inflation as proposed by Keynes was influenced by Gesell's idea of demurrage on currency,[2] but used inflation of the money supply rather than fees to effect the goal of increasing the velocity of money and expanding the economy.

maaku 14y ago

Demurrage drives the velocity of money up, and the interest rates down. These have other beneficial effects, such as easy access to credit (as long as you're creditworthy). More noteworthy, demurrage is assessed immediately whereas inflation is delayed. Under a demurrage system, this places an incentive to invest in assets which lead to longer-term sustainable growth. Inflation can instead incentise nearsighted short-term growth (and all the ramifications that has).

kiba 14y ago
This is irrelevant if people don't want to use your currency. When you invent a currency, you can't just think about monetary policies but also incentives for using it.
- maaku 14y ago
  One step at a time ;) Some groups have had success in introducing local currencies with similar features. One path we've looked at is getting communities of people (perhaps starting with some #occupy groups and their supporters) to use it and convince local businesses to accept it, hence the subtitle of being the worlds first “global-community currency”. We're open to other ideas as well.
  - debacle 14y ago
    Is the local pizza shop going to be able to purchase sauce, cheese, flour, and pepperoni with it? Unlikely.
runeks 14y ago
> Under a demurrage system, this places an incentive to invest in assets which lead to longer-term sustainable growth. One of these assets being money that acts as a store of value? :)
- maaku 14y ago
  Buying gold/bitcoins/whatever and storing them in a vault does not lead to longer-term sustainable growth [of the economy].
  - runeks 14y ago
    Indeed. And how does a currency with demurrage prevent users from investing in gold and storing it in a vault instead of investing in something that provides "longer-term sustainable growth [of the economy]"?
enoch_r 14y ago
Inflation also drives the velocity of money up, and the interest rate down. And both inflation and demurrage are "continuously assessed," it's just that losses to inflation aren't immediately measurable. Even if the timing of inflation/demurrage costs were different, could you explain more about the link between the timing of fees and the sustainability of investments? I don't see how the two are related.
- maaku 14y ago
  > Inflation also drives the velocity of money up, and the interest rate down. And both inflation and demurrage are "continuously assessed," it's just that losses to inflation aren't immediately measurable. No, inflation is measurably delayed and hurts the poor and middle class more than it does the wealthy because insiders have preferential access to credit, allowing them to benefit from inflation. Instantly and continuously assessed demurrage would remove that preferential treatment. > Even if the timing of inflation/demurrage costs were different, could you explain more about the link between the timing of fees and the sustainability of investments? I don't see how the two are related. Demurrage reduces interest, where interest can have negative/short-sighted effects. As the value of an investment is calculated by discounting future cash flows by the expected interest rate, a lower interest rate means investments generating sustainable cash flow are more likely to be preferred than a one-time ROI. The classic example being clear-cutting a forest vs. sustainably harvesting it. The incentive is to clear-cut the forest when there are high interest rates, as the cash can be re-invested, whereas a sustainable logging model makes more sense as the long-term interest rate approaches zero.
  - nhaehnle 14y ago
    No, inflation is measurably delayed and hurts the poor and middle class more than it does the wealthy because insiders have preferential access to credit, allowing them to benefit from inflation. The same applies under demurrage. You're just shifting the loss of value form the real variables to the nominal variables. I've read a lot of advocacy for demurrage, but somehow nobody is ever able to put a finger onto where the difference is supposed to be exactly. Demurrage reduces interest, where interest can have negative/short-sighted effects. Perhaps it reduces the nominal interest rate. Why should it reduce the real interest rate? (Unless you suppose that after introducing demurrage inflation stays the same; but then you might as well go ahead and increase inflation to achieve the same effect)

sp332 14y ago

Inflation in the US has been pretty low lately, which does not really encourage investment (relative to hoarding). That's at least partially because huge banks control the interest rates. If someone other than huge banks could control the rate, they could make investment more enticing compared to hoarding.

highfreq 14y ago
The primary lever the Fed has to influence inflation is interest rates. Low interest rates tend to increase actual investment, in factories new businesses, etc, and eventually drive inflation up. Increasing interest rates now would most likely trigger a deflationary spiral.
- maaku 14y ago
  To further this logic, demurrage allows the effects of inflation but with naturally low interest rates, reducing the probability of a positive-feedback spiral.

nhaehnle 14y ago

The rate of inflation has other effects. Prices tend to move upwards more easily than downwards; the most basic reason for this is that when you have a choice between reducing your real income via a general across-the-board inflation, or reducing your real income by cutting your nominal income, you should almost always choose the inflation (because spending is typically dominated by contracts, i.e. fixed cash flows like mortgage payments and utilities bills). So if you have a choice between (1) x% demurrage and 0% inflation, or (2) 0% demurrage and x% inflation, you should always prefer option (2). This allows prices to adjust faster, which is generally a good thing.