Simple Solution for Inflation

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Inflation is a problem when you save money. If inflation is 2% annually, for example, saved money loses 20% of its value after ten years and 40% after 20.

Could this problem of inflation be solved in a simple way, though, i.e. by increasing the value of date-marked currency in proportion to the inflation rate?

E.g.: if you have a $100 bill printed in 2019, its value would be $100. If you sell it in 2020, and the inflation rate for 2019 was 2%, the value of the bill would be $102 in 2020 currency.

Then, you could redeem any year's currency by simply looking up the inflation index for that year in dollars for the current year. It would basically be like collecting old currency and buying/selling it at higher-than-face value according to its age (not condition, though some people might pay more for it in better condition).

Would this solve the problem of inflation by simply allowing people to save money in cash and then providing them the means to exchange their old bills for new ones at a premium rate?

Would everyone honor such an exchange rate system or would it be possible for some reason that a given year's currency value would crash? Presumably the government can't/won't print more currency dated with earlier years so there would be no risk of the market being flooded unless many bills from a given year suddenly came onto the market for some reason. Even if that happened, however, there would be no way the bills could lose value below face value, because a $100 bill would always be worth at least $100.

So what do you think? Would it be wiser to save money in cash rather than a saving's account in order for the cash to appreciate according to its printing date? Could cash exchanges between different years of issue become another type of currency market like foreign exchange rates?

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[+3] - maxdancona - 03/29/2019I think it is funny that you are railing against "socialism" in the same post that you are suggesting that people should be limited in the number of hours we work, or the amount of money...

@livinglava,

A safer and simpler solution is to invest the funds.

1 Reply

@nacredambition,

nacredambition wrote:

A safer and simpler solution is to invest the funds.

That adds to inflation. Any commodity you buy or venture you invest in transfers money in exchange for something else, which effectively amounts to selling money.

The more money get sold, the more its value decreases. Conversely, the more money gets bought, the more its value increases.

Currency exchanges already allow foreign-currency holders to buy currency and drive its value up, but if older money could be bought with newer money at a higher rate, that would counteract inflation, i.e. by raising the value of aging money in proportion to the quantity of inflation that has occurred since the money was first printed and/or received into an account.

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@livinglava,

Thanks for sharing such a great post

1 Reply

@VikramSidhu,

VikramSidhu wrote:

Thanks for sharing such a great post

I'm glad you like it, but there are some issues to discuss beyond the general one of what aspects of it I'm not fully thinking through.

One is whether it is possible to honor the deposit date on electronically-saved money. E.g. if you spend less than you deposit, you could say that all the withdrawals from an account deplete the most recent deposits first, which would leave the earliest deposits untouched.

That would allow you, just by means of your electronic bank-deposit history to cash in on aging untouched deposits. E.g. say that you have 2017 or 2014 dollars in your account that have never been spent; you could then use those to purchase 2020 dollars at the inflation-adjusted rate. Once deposited money is electronically transferred, however, it would not be transferable as dated money, unless of course banks agreed to keep track of different currency issue years as they passed between accounts.

If you could sell those 2014 deposits for their face value plus whatever inflationary appreciation is attributed to them, would governments/banks be willing to back aged currency in this way, i.e. by buying deposits from earlier years at an appreciated rate? Idk, why or why not?

If not, then the question becomes whether it is better to save money in cash than in electronic accounts. If people realized that their savings would appreciate proportionally to inflation by saving it in cash bills with physical/ink numbering and dating, that would change banking to involve a lot more vaults, safety deposit boxes, etc.

If, however, government and banks would just agree to recognize the electronic date stamp on deposited money as the equivalent of an issue date for printed currency, then it wouldn't matter if you saved actual bills or just maintained a regular electronic bank account.

LARGER ECONOMIC ISSUES

The economic issues that could flow from this are what really make it an interesting concept, though, imo. Just think about currency markets. If each currency would have different exchange rates for each year of currency, a currency's overall strength could be influenced by the strength of its older years of currency.

So, for example, let's say 2010 US dollars are trading at 2020$1.20 due to 10 years of 2% inflation and 2010 Euros are trading at EU1.10 because of lower inflation (just examples since I don't know the actual inflation histories of these currencies off hand); then investors could buy more 2010 Euros and drive up the value, which would allow savers of Euros to cash in even more on the low-inflationary stability of that currency.

Likewise, if a currency has a relatively high inflation rate in the present, investors could also buy up older years of that currency in anticipation of higher inflation-proportional yields. By doing so, they would gain the ability to exchange the older currency for larger quantities of the present-year currency, which would effectively neutralize the inflationary value-loss of investing in that currency if it didn't have inflation-adjusted pricing for older years.

This is all a bit confusing, so I'm still not sure if there are scenarios that could occur that would cause the value of older currency years to crash. E.g. what if inflation was very high in a given currency and so older years of that currency were being valued very high. That would likely result in overvaluation and investors would avoid such a currency, expecting its government to fail at maintaining past-year buybacks at the inflation-adjusted rate. In that case, all years of the currency might crash in value, not just the most recent years issued.

So I guess this system of appreciating the value of currency by issue/deposit year would only work for relatively stable currencies with relatively low gradual inflation rates.

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@livinglava,

You could kill inflation by freezing wages, but also freezing the cost of living. No good freezing one without the other which is always the mistake.

The above would trigger a stall in the property market - since rents cannot increase.
Investors would move away from property, and housing affordability would temporarily improve, which would be good, but new house/apartment construction would crash, eventually resulting in a severe shortage of housing.

The government will have to invest in housing to balance this effect.

There you have it, Inflation solved!

1 Reply

@mystikmind,

mystikmind wrote:

You could kill inflation by freezing wages, but also freezing the cost of living. No good freezing one without the other which is always the mistake.

The invisible hand has to test where weakness lies. If prices go up and workers/unions pressure management for higher wages, then management tests pricing to see if they can get consumers to pay more. If they make products or equipment that are sold to other businesses instead of consumers, they will test if they can get those businesses to pay more and pass the higher costs on to their customers.

Fiscal conservation pressure works in the other direction. If consumers aren't getting wage raises and so they stand their ground on prices by looking for bargains and avoiding products whose price is increasing, prices must remain on par with wage levels. If businesses take loans to pay their creditors more without raising prices, however, that puts pressure on them to gradually manipulate their customers to pay more, even if those customers are standing their ground.

Quote:

The above would trigger a stall in the property market - since rents cannot increase.

Deflation in rental markets would be an interesting situation. Do people really want to own rental property badly enough to lower rents or would they rather sell off the property to someone else, and if they do will the buyer then rent it out for less or just live in it?

Quote:

Investors would move away from property, and housing affordability would temporarily improve, which would be good, but new house/apartment construction would crash, eventually resulting in a severe shortage of housing.

People used to build small houses for themselves. In the last decade or so, there was also a tiny house movement with people building their own housing on trailer beds, but they ran into problems with where they were allowed to park and live in them. Local municipalities put restrictions on what kind of housing people can build, transport, and live in and that forces people to choose between paying high rents to landlords or homelessness.

In this sense, local housing codes and restrictions result in wage pressures and thus inflation.

Quote:

The government will have to invest in housing to balance this effect.

There you have it, Inflation solved!

Not at all. When government invests in housing with subsidies or other spending, the supply side raises prices to collect more money. This happens wherever subsidies are available, including health care and education. Government inflates certain wages and products to the point where they are dependent on government subsidies. Then, because the people involved are getting paid relatively high wages, the rest of the economy also tries to raise their prices in accordance to what those higher-wage earners can afford.

Generally, if you want lower prices, you have to cut budgets, cut wages, and cut subsidies as much as possible. Hopefully, then, productive economic actors will work for less and others who don't have skills to work productively will develop them.

People will take care of others when there is good pay involved, and that makes those others dependent on money to get taken care of. Cut the money and people want to help others less, so the burden shifts to those others to work harder to take care of more of their own needs. Suddenly, instead of calling the landlord to fix the plumbing they are looking up information on how to do their own plumbing work.

That is a good thing, contrary to those who say it is good to hire a plumber because that stimulates the economy. Really all it does is stimulate more inflation and debt.

1 Reply

Why governments so love inflation
https://www.abelard.org/inflation.php

1 Reply

@Pamela Rosa,

Pamela Rosa wrote:

Why governments so love inflation
https://www.abelard.org/inflation.php

Please don't post links. If post an excerpt in a quote box with a cited link, I'll read the excerpt but I won't trust links as a rule.

Everyone who wants to live by refinancing debt loves inflation because if you can refinance at a low fixed rate, higher inflation makes your debt easier to pay off.

It is effectively a tax on saved money, though, since any money saved by anyone, rich or poor, loses value over time due to inflation.

That is why it would great to simply raise the value of money each year according to its issue/deposit date and neutralize inflation that way.

Then, if you want to update your savings to inflation-adjusted current-year money, you can just sell your old money for new money.

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@livinglava,

1) Freezing wages is easy. Freezing the cost of living is going to be more difficult, but i think it is doable, especially if you split essentials from luxuries.

2) The average property owner will be content with frozen rents. The commercial world will despise it. However, if you have frozen inflation, then the interest rates must be super low as well. Commercial investment naturally is not going to like this environment unless the investors are super conservative. So you will get good levels of investment during times of global instability, and very little during global periods of solid growth.

3) Compliance, laws of compliance from the guy on the street to the largest conglomerate are a massive cost on the economy. Governments need to consider carefully how they trade with other countries that are deficient on compliance - because it upsets the level playing field.

4) If the government is going to invest in housing in a n inflation frozen economy, they will have to take majority shareholdings in one or more large construction firms in order to control pricing - that being said, for a zero inflation economy, they will have to buy into many industries, especially banks.... basically, your country is becoming more like China!!

5) Back to the issue of compliance - i had a very good idea on that.... where today, the government might impose a tariff to protect its own industry, instead of doing that, the government could pay all the compliance costs of the industry they want to protect. The government caused those costs, they can pay them, level playing field with overseas improved!

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@mystikmind,

mystikmind wrote:

1) Freezing wages is easy. Freezing the cost of living is going to be more difficult, but i think it is doable, especially if you split essentials from luxuries.

2) The average property owner will be content with frozen rents. The commercial world will despise it. However, if you have frozen inflation, then the interest rates must be super low as well. Commercial investment naturally is not going to like this environment unless the investors are super conservative. So you will get good levels of investment during times of global instability, and very little during global periods of solid growth.

3) Compliance, laws of compliance from the guy on the street to the largest conglomerate are a massive cost on the economy. Governments need to consider carefully how they trade with other countries that are deficient on compliance - because it upsets the level playing field.

4) If the government is going to invest in housing in a n inflation frozen economy, they will have to take majority shareholdings in one or more large construction firms in order to control pricing - that being said, for a zero inflation economy, they will have to buy into many industries, especially banks.... basically, your country is becoming more like China!!

5) Back to the issue of compliance - i had a very good idea on that.... where today, the government might impose a tariff to protect its own industry, instead of doing that, the government could pay all the compliance costs of the industry they want to protect. The government caused those costs, they can pay them, level playing field with overseas improved!

Inflation is caused by spending and investment pushing up commodity prices, basically in the same way that stock prices are driven higher by speculation/buying and deflated by selling.

Money is also a commodity, however, only people rarely think of selling commodities and labor for money as purchasing money. In fact, when you work for pay you are buying money and paying for that money in time. People spend a lot of time buying money, which inflates the value of time, and then they waste a lot of money, which in turn inflates the value of the money as well.

To raise the value of both time and money, more of both must be saved and thus withheld from being spent. For economic bulls, high values of time and money are a problem because they want to spend more time and money in hopes of making even more.

So the bull economic strategy is to get people spending lots of time and money investing and spending money so that inflation will erode the cost of repaying their debts.

If bears want to drive up the value of money and time, they have to find ways to induce more saving of time and money.

One way to do that is to drive up the price of saved money by creating a market means of exchanging it for newly-issued money. That way, the value of the older money goes up with inflation and the incentive to save new money as well as older money increases with the hope of making money on inflation.

Basically, if people buy money in hopes that it will inflate because older money can be exchanged for new money in proportion to its inflation-adjusted value, that stimulates saving and thus strengthens the currency against inflation.

If holders of older money go on a selling frenzy, it will drive up the demand for new-issue money, raising its present value. That value could, of course, be lost if investors regard it as overvalued and exchange/sell it for foreign currencies.

If holders of foreign currencies buy older money with foreign currency, that would drive up the value of the purchased years of currency but leave the present year of the currency unaffected.

Basically the idea is to separate individual currencies into multiple commodities so their prices can fluctuate separately from each other, though it would of course be impossible for an older currency year to drop below the value of present day currency. E.g. US$1 must always be worth at least US$1 no matter the year of issue.

I don't know if having separate values and markets for each year of currency/deposits in this way would make it more difficult to keep track of inflation for the currency as a whole.

I also don't know whether it would be possible for anyone besides the government to exchange older year currency/deposits for inflation-adjusted new-issue currency because if you would buy 2010 money at a higher price than 2020 money, you would want to maintain the 2010 status so that it could further appreciate. If deposit transfers result in a reset of the date-stamp, there would be no reason for anyone except the government to buy the old currency at a higher value than new-issue currency.

1 Reply

@livinglava,

That looks like a very text booky response?

Certainly wages is the first link in the chain of inflation.

What makes it very complicated is that wages is something that is heavily controlled by the government, but at the same time is heavily governed by commercial demands - most notably being skilled labor. So you have these two completely different wage mechanisms operating side by side.

So if a government wants to freeze inflation, they may need to start controlling the upper limits of wages, not just the lower limits.

Already today we are seeing executive salaries coming under the spotlight more frequently - and that is having an effect, but its more of a political correctness thing rather than wage restraint.

1 Reply

@livinglava,

Quote:

Inflation is a problem when you save money. If inflation is 2% annually, for example, saved money loses 20% of its value after ten years and 40% after 20.

This is clearly mathematically incorrect. According to this logic, the money would have lost 100% of its value after 50 years.

1 Reply

@mystikmind,

mystikmind wrote:

That looks like a very text booky response?

Certainly wages is the first link in the chain of inflation.

What makes it very complicated is that wages is something that is heavily controlled by the government, but at the same time is heavily governed by commercial demands - most notably being skilled labor. So you have these two completely different wage mechanisms operating side by side.

So if a government wants to freeze inflation, they may need to start controlling the upper limits of wages, not just the lower limits.

Already today we are seeing executive salaries coming under the spotlight more frequently - and that is having an effect, but its more of a political correctness thing rather than wage restraint.

Saving is the solution. Whenever income is limited in any way, the money that's not paid out has to go somewhere. It really doesn't matter who saves it, but the money has to get frozen away and not reinvested for it to not continue circulating and causing inflation.

The problem is the interests that want to maintain positive inflation. E.g. I recall reading about a program under the Obama administration to encourage saving, which ended up costing much more money in program costs than the savings deposits that resulted from it.

In a free market, skilled workers can be replaced by new workers who learn the same skills. Then, the challenge is to harness everyone's productivity at lower wages so that the economy still produces the same or more total value at a lower cost, which amounts to price deflation instead of inflation.

The even bigger challenge of deflation, however, is to prevent it from resulting in a wasteful bull market that destroys the environment and burns up resources unsustainability in the pursuit of profit based on the low prices of commodities available, including labor.

An overvalued economy and overvalued wage costs are bad for business but good for slowing the economy down. The problem is that economically desperate people push for more spending and investment to induce more growth, and that results in inflation.

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@livinglava,

Quote:

Inflation is a problem when you save money. If inflation is 2% annually, for example, saved money loses 20% of its value after ten years and 40% after 20.

This is clearly mathematically incorrect. According to this logic, the money would have lost 100% of its value after 50 years.

Oh... and your plan actually increases inflation. Inflation happens when the there is a greater supply of money in the economy. If I can change a $100 into $125, the amount of money increases and its value decreases. This would lead to rapid inflation.

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@maxdancona,

maxdancona wrote:

Quote:
Inflation is a problem when you save money. If inflation is 2% annually, for example, saved money loses 20% of its value after ten years and 40% after 20.

This is clearly mathematically incorrect. According to this logic, the money would have lost 100% of its value after 50 years.

Maybe you're right. Let's do the math to find out:

Let's say you earn $1,000 in 2020 and inflation is 2% per year every year after that. So the cost of $1,000 worth of goods breaks down like this (without compounding):

2020 $1,000
2021 $1,020
2022 $1,040
2023 $1,060
2024 $1,080
2030 $1,200

So now your $1,000 is worth 80% of its 2020 value. If you compound it, it loses even more value.

So the 2040 cost of the same basket of goods would be $1,400, which is 71% (again, not compounding). So if you would add up all the compounded interest, that 29% would be more like 40%.

Ok, so I just plugged in the numbers to an amortization calculator and got about $2,700 for 50 years at 2%. $1,000 is 37% of $2,700 so saved money will have lost 63% of its value in that time. It may not be 100% but it is significant.

Either way, why not simply compensate people for inflation by buying old savings deposits and older year currency at inflation-adjusted rates?

The only reason not to do it is to coerce people into investing/lending their money out, which overheats the economy and causes inflation.

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I had a few minutes to think about how wonderfully horrible this plan is. It would **** up the economy in at least three ways.

1) It would increase the money supply (adding inflationary force).

2) In would make it less likely that people would save their money in a bank, or invest it in the stock market, or start small businesses. You are encouraging people to put money under their mattress, instead of using it to generate business or lending it to someone else who can,

3) It would make it much more expensive to borrow money. When I bought my car, I borrowed $11,000 in 2016. This would mean that I am borrowing in 2016 dollars and paying back in 2019 dollars.... the difference is something that I would have to pay (or else the person lending me the money will just keep it under their mattress).

The reason people get interest when they put their money in a bank, or a bond is because that money can then be used to grow the economy. This plan is the worst of both worlds.... freezing investment while growing the supply of money.

I can't think of a worse economic plan.

2 Replies

@maxdancona,

maxdancona wrote:

Oh... and your plan actually increases inflation. Inflation happens when the there is a greater supply of money in the economy. If I can change a $100 into $125, the amount of money increases and its value decreases. This would lead to rapid inflation.

Only if spent/invested. As long as the saver continues to save the money, it doesn't cause inflation.

What it does is stop inflation as a penalty for saving money instead of spending/investing it. That, in turn, encourages more saving, which would reduce inflationary pressure in the economy overall.

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@maxdancona,

There is a fourth reason this is fucked up.

The vast majority of money in the economy doesn't consist of little green rectangles with serial numbers. I have several thousands of dollars in the bank (not to mention my retirement account in stocks and bonds).

Encouraging me to remove this money from the bank (where it is now just an electron number because the money is being lent out to people building homes and starting businesses).

I don't want to have to turn my savings into green rectangles to go under my mattress. It would be a pain in the ass to keep that much cash in my house instead of in the bank.

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@maxdancona,

maxdancona wrote:

2) In would make it less likely that people would save their money in a bank, or invest it in the stock market, or start small businesses. You are encouraging people to put money under their mattress, instead of using it to generate business or lending it to someone else who can,

Banks could save more currency and/or honor deposit dates as equivalent to currency issue date.

Indeed it would discourage investment and lending, and that would counteract inflation. Inflation is caused by waste-growth where borrowing/investment/transactions occur simply because the cost of borrowing is low.

To prevent inflation, a more conservative economy is needed. Bulls push up prices to make more money if they can on anything from health care to electronics to whatever. The more people and businesses save and thus restrict their spending and investment, the more budget-tightening pressure there is to lower prices, wages, etc. That makes everyone's money worth more.

Quote:

3) It would make it much more expensive to borrow money. When I bought my car, I borrowed $11,000 in 2016. This would mean that I am borrowing in 2016 dollars and paying back in 2019 dollars.... the difference is something that I would have to pay (or else the person lending me the money will just keep it under their mattress).

Inflation is subsidizing borrowing. That's bad. People should borrow and spend less and thus create less inflationary pressure. It is better to live conservatively, both for the economy and for environmental sustainability.

Ever heard of reducing and reusing? People do that more when they are making and spending less money.

Quote:

The reason people get interest when they put their money in a bank, or a bond is because that money can then be used to grow the economy. This plan is the worst of both worlds.... freezing investment while growing the supply of money.

I can't think of a worse economic plan.

Maybe because you are a bull liberal who wants more money to circulate at the expense of those who conserve and save.

1 Reply

Simple Solution for Inflation

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