Economically, this is utterly backwards. To those without access to the cheat-code of newly created money, USD basically is a demurrage currency through inflation. In any environment where currency loses value, those with the most assets (your "1%") can best manage their investing to avoid losing value, while the people with modest amounts of savings get screwed either directly by inflation or through encouraged patronizing of the fraudulent consumer-financial industry. "Hoarding" assets by the middle class is what gives people the freedom to turn down specific jobs and hence puts them in a much better bargaining position for favorable working terms. If you want to even the wealth distribution, you have to empower the middle and lower classes to become financially self-sufficient, not simply try to attack the upper class.
Inflation hurts the poor and middle-class more than it does the wealthy, for the very reasons you mention: the rich have tools to mitigate it.
What I'm more concerned about here is making sure that under all circumstances credit is available to those who need it, interest rates are low, and money continues to flow through the economy at a predictable and at least minimum rate.
This is not an attack on the upper class, nor am I trying to redistribute wealth. In fact I'm explicitly trying to avoid that--some of the other #occupy currencies that have been floated in the past amount to little more than progressive asset taxes, the very idea of which I am categorically against. Rather, I want to create a fixed and unchangeable monetary policy which would keep the economy moving in good times and bad.
The designed incentives are set up to trade in freicoin, and immediately cash out into something else. Clearly there's got to be an opposing force that turns "immediately" into a variable length of time (maybe transaction fee versus liquidity projection). The changing of this time period based on economic conditions is going to make your monetary flow unpredictable. In fact, it seems that in "down" times when people are looking to spend less, they'll want less freicoins, causing the value to drop with positive feedback.
Presently, banks can loan out ten times the money they've obtained, so any asset-based system is going to be a step back for easy credit (which imho is a good thing). Availability of credit and low interest rates have more to do with the risk of default (assuming a sound money supply). As such, if you want to improve the availability of credit, you should work on improved tracking of people/collateral (which imho is a bad thing).
Fundamentally I think you're looking at this from the wrong perspective. Improving people's ability to live paycheck to paycheck is only further perpetuating the system where most people are at the mercy of the economy.
The steps the wealthy take to mitigate inflation are what drive a large portion of our economy. Investing in stocks, bonds, angel and venture funds, etc. puts their money to use for the economy, allowing an entrepreneur to get funding for her start-up, so companies have more money to pay employees, so local and national governments can invest in infrastructure and services, and so a rich guy loses his shirt on some stupid or unlucky bets and joins the lower classes. Inflation, to a point, is a very strong incentive against hoarding cash, and provides much of the social mobility in our economy.
those with the most assets (your "1%") can best manage their investing to avoid losing value, while the people with modest amounts of savings get screwed either directly by inflation or through encouraged patronizing of the fraudulent consumer-financial industry
Is there some reason why those with modest savings can't buy treasury bills? TIPS will match inflation and other treasury notes will often perform better. And you can buy them directly from the US government bypassing the "fraudulent consumer-financial industry" altogether.
Treasuries are not liquid assets for the average consumer -- they are held to maturity. This means that those with "modest" savings can't afford to own them, because of the liquidity risk.
If "other treasury notes will perform better", then by definition, TIPS isn't keeping up with actual inflation. Keeping up with the treasury's definition of inflation doesn't mean your savings isn't losing value.
Can you explain that a little further? I don't see why the federal government can't put out a bond that beats inflation as well as one that matches inflation. After all, inflation is sometimes incredibly low - we had deflation in 2008-09 after all.
Inflation isn't a measure of how much debt the US federal government takes on or how much money is in circulation after all, but rather the price increases of various commodities and services.
The Keynesian view is that inflation has little to do with monetary supply. The Austrian view is it does, though there are enough real-world examples of inflation without monetary supply increases and deflation with monetary supply increases to safely say that the effect is indirect at best. At the very least, it certainly isn't a 1:1 correlation.
I think a part of the point is that there is no such thing as the measure of inflation. Every measure of inflation measures some basket of goods; what if I want to buy something else with my inflating currency? Then this measure isn't relevant for me. Also, how can we know whether prices rise due to an increase in the money supply or due to something else? Consider the following example where p, q, r, s, t, u and v all denote a certain good. m denotes the monetary good. At first, the relationship, in price, between these goods is the following:
What role has an inflation in the monetary supply played in the change in prices and what role has factors such as scarcity, difficulty of production, labor costs, etc. played in the change of prices? The answer is it's impossible to tell. Sure, you could calculate an average price change between all the goods, but who is to say that this average stems from monetary inflation and not an increase in wages or an incrase in energy costs, for example?
USG cannot conjure value out of thin air, so any "free" returns must come from changing the unit of measure. The no-risk USD instrument with the highest rate of return is where conservative money should generally end up, and thus its return is the expected monetary base expansion. And since this expansion is distributed evenly across the economy, by definition it's inflation.
When analyzing inflation in terms of prices, one must also take into account how much those prices would have otherwise dropped due to non-monetary factors such as technological and market progress. If a certain widget is 10% easier to produce than yesterday but the price remains the same due to monetary base expansion, that's a silent 10% reduction of what today's purchasing power should have been. With exponential technological progress, this term is ever-more important.
> Is there some reason why those with modest savings can't buy treasury bills?
From a purely moral standpoint I think it's wrong for a government to force an inflating currency onto the public, in order to incentivize the public into buying the government's own debt. I mean, this just seems obviously criminal to me if anyone but the government were caught doing this.
Locking people into a cell is also obviously criminal if anyone but the government does it.
There are certain powers that are useful for someone to be able to exert at specific, well-defined and controlled times. This is why the government has a monopoly on physical force, and for the same reason it has a monopoly on economic force.
Note also that the government doesn't actually force you to use their currency as a store of wealth. You're really only forced to use it to pay your taxes.
> There are certain powers that are useful for someone to be able to exert at specific, well-defined and controlled times.
I agree with that. But I don't think financially encouraging anyone to use a government-made currency is one of those powers that the government should be entitled to.
> Note also that the government doesn't actually force you to use their currency as a store of wealth. You're really only forced to use it to pay your taxes.
The capital gains tax is an effective way of discouraging anyone from storing their wealth in another asset. Say I had bought gold in 1981 because I (rightly) expected inflation to increase, then in 1986, when the currency had lost half of its purchasing power - and the gold I owned had consequently doubled in dollar-value - I would be legally required to give some of that money back to the government, making the protection of my savings' purchasing power very difficult (if I want to stay on the right side of the law).
So while the government doesn't directly force anyone to use their currency to store wealth, they make it less attractive to not do so. And I suspect these efforts would increase should we experience a flee from the dollar in the future.
Legal tender laws is another type of legislation that gives unfair advantage to the government's own currency. So forcing citizens to pay their taxes in the government's currency isn't all the government does wrt. hindering currency competition.
But now people can prove if a currency is worth using by inventing new cryptocurrencies instead of just merely saying "this is utterly backwards".
I am skeptical too, as I don't see why freicoin is worth using over bitcoin. The only other currency I would use is namecoin, but that's because it actually occupy a different niche.
In theory, couldn't one gain of demurrage be that the fees could be proportional to the amount of money being "secured" (stored)? Inflation is across-the-board, but demurrage could be more targetted.
Where is all this alleged currency hoarding? Who's sitting on piles of cash? The rich certainly aren't. Does anybody really think that rich people keep vaults full of cash? They keep their money in stocks, bonds, and real estate.
The only people who do hoard actual cash are the poor and unsophisticated, who are often unable to take advantage of banking services.
The only other significant chunk of hoarding going on right now is actually being perpetrated by The Fed itself. They created vast quantities of new money in 2008 and gave it to the banks to patch up their balance sheets. The Fed is paying good interest on that money so the banks will keep it on deposit with The Fed instead of loaning it into the economy -- because that would obviously spark a firestorm of inflation.
Basically, there are two different circuits of money: central bank money (aka reserves), which is what the banks have in their accounts at the Fed, and regular money, which is what you and I have in our bank accounts.
Those circuits never cross. The money in a central bank account can never move into a regular bank deposit, and vice versa.
Therefore, the banks are actually incapable of loaning out all that money that they have, because the design literally doesn't allow it. To talk about their willingness to loan that money out is completely nonsensical.
What banks actually do when they give a loan to a non-bank is that they simply create a deposit for that entity, which means they create money out of thin air by adding an appropriate entry to their accounting system.
The system as is actually makes a lot of sense. It is a very logical design, which becomes very clear when you really trace where money shows up on balance sheets. The first circuit is central bank liabilities/bank assets, the second circuit is bank liabilities/non-bank assets. It's no wonder they can't cross.
Unfortunately, we don't learn such things at school, so pretty much everything you read about the monetary system in the media is an incoherent and illogical mess.
I think you are missing the positive sides of money-hoarding. Whenever someone doesn't spend the money that person has earned, she saves resources for someone else to use (because she doesn't consume them). This increases the availability of resources in an economy, arguably a good thing, right?
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?
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.
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.
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).
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.
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”.
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]"?
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.
> 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.
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)
Can you provide that measurement, then? How long is the period between the moment I pick up a dollar bill and the moment inflation starts to reduce its value? A month? A week? A day? If I pick up two dollar bills, 24 hours apart, is the former bill worth more than the second bill, since inflation hasn't reduced its value since I picked it up?
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.
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.
To further this logic, demurrage allows the effects of inflation but with naturally low interest rates, reducing the probability of a positive-feedback spiral.
You need to ask yourselves why anyone would choose to use this currency. Why would I request payment in Freicoin instead of USD or Bitcoin? Why would I choose to be paid in a currency that is specifically designed to not "store value"?
I'm the primary person behind this, and will answer questions here.
Since it's a donation campaign I wasn't sure if it was kosher to self-post it to HN, but raising funds isn't why I did it. I know there are a lot of people here with finance experience, and I'd be interested in engaging with you if you have something to say.
The first question that comes to mind: why not just use bitcoin? Have you explored adding the features you want to see to the (open-source) bitcoin project?
That's exactly what I have done (for the prototype) and will do (for the actual client). However adding demurrage is a protocol-level change and would represent a hard-fork.
It's better for everyone involved to simply start a fresh block chain.
EDIT: But yes, the client would be an open source fork of bitcoin.
Interesting. I guess I was mostly just focused on the bittorrent integration and block-chain pruning elements, both of which sound great for bitcoin.
Just did a very quick skimming trying to understand demurrage currency. Sounds very, very different from normal currency.
From a practical standpoint, would a two-step process make more sense:
1) Widespread adoption of peer-to-peer commodity currency (bitcoin).
2) The implementation of a second peer-to-peer currency on a different basis (demurrage).
Both of these seem like very difficult undertakings. And doing both at the same time seems like it would compound the difficulty.
Apart from Woergi, has there ever been a real-life implementation of a demurrage currency?
Excepting of course the natural cost of storing gold (vaults, guards, etc.). Which is easy for people to accept on a wide scale because its necessity is self-evident.
So this is a fork of bitcoin? How many changes have you made? Have you started mining with it? Whats to prevent you from mining the difficulty up while we fund your indiegogo?
In terms of the protocol, chiefly I have instituted mandated transaction fees based age of outputs (and updated the block verification code, wallet and knapsack selection algorithm, etc. to account for this).
There's still a fair amount of code that needs to be written for the Qt user interface and RPC calls to reflect the constantly-changing balance, as a number of sections of the Bitcoin coin base frustratingly assume that account balances stay the same over time.
> Have you started mining with it?
Only on a testnet to prove it out.
> Whats to prevent you from mining the difficulty up while we fund your indiegogo?
I'll have a coordinated release so that everyone can get in on the easy difficulty, and will use the same technique of encoding a news headline in the genesis block to prove I didn't mine it early in secret.
It'll be released with just two blocks pre-mined: the genesis block (hand-crafted), and one follow-on block as a verification step.
This doesn't make any sense, many members of the #occupy movement already use Bitcoin because the cops often try to hold the money for "evidence in an investigation".
Interesting, but I am still waiting for something that would be positioned between Bitcoin and Freicoin with inflation controlled democratically, not set by an authority (developers behind respective currencies). Every user would choose how fast coin mining should be, making the inflation/deflation react to the people using the system.
There were people on the Bitcoin forums that proposed such schemes, but not one has been found to be free of exploitable attacks.
In the end, I decided the security of a fixed rate was better than the uncertainty that someone might come along and figure out how to game the system.
Sorry to hear that it is so hard to come with a balanced reliable solution in this area. But it is a good thing that you are trying to address the bitcoin's problems.
If there were such solution, it would attract different kind of sellers and buyers than bitcoin attracts now.
If real money becomes a "hot potato" how does that encourage long-term investment? And if the wealthy transfer their stagnant wealth to something other than currency, like gold or real estate, their dollar value will skyrocket over time as the value of the dollar plummets.
> If real money becomes a "hot potato" how does that encourage long-term investment?
Because, for example, building a business that achieves steady positive cash flow would be better than a short-term one-off opportunity, since that one-off would only delay the issue of demurrage.
> And if the wealthy transfer their stagnant wealth to something other than currency, like gold or real estate, their dollar value will skyrocket over time as the value of the dollar plummets.
There's nothing in that argument unique to a demurrage currency. That same is true for inflationary currencies like the dollar. You've taken a rather extreme case of a bank-run, which is disastrous no matter the circumstances, but doesn't prove anything.
1. A short term one-off opportunity is as important as a long term
one. Want to take your truck and go sale a hundred generators? Could
work, but it would work way better after a hurricane.
2. A bank-run is a good thing. It permits to see which banks have
overextended themselves and, ultimately, punishes them (unless you
have a government giving them cash through the backdoor...).
It's like going to the dentist. Not necessary pleasant on the spot,
but it can save you a lot of pain later.
Interesting experiment. I do think that people are not interested in money that does not work as a store of value (to the best of its abilities at least). But in the end the market will decide, and maybe my expectations will be proven wrong.
It has been an uphill battle for me in trying to explain this that there really are two uses for money: store-of-value and medium-of-exchange, and that it is possible to cleanly separate the two. It's even been done successfully before, most famously in the town of Wörgl between 1932 and 1934.
Keynes centered his attention on the macroeconomy and used inflation to grease its wheels. Hayek focused on the individual and the value of a deflationary currency at that scale. Gesell showed that these are not, in fact, competing visions and by separating store-of-value from medium-of-exchange you could have your cake and eat it too.
I agree there are two uses for money. If I have a choice between being paid in a form of currency that can do both, why would I voluntarily accept a form of currency that can only do one?
That is why would anyone voluntarily accept Freicoin over any other currency?
I guess my main question is: why would people voluntarily choose to use a medium of exchange that loses value over time? Does it require force by government to make people use this currency, or is there a reason they would start using it by themselves? Said another way: how would I benefit from using a medium of exchange that slowly loses its value?
In 2009, N. Gregory Mankiw (Harvard economist, advisor in the GWBush administration) passed along for consideration an demurrage-like stimulus idea from one of his students. Namely, that the Fed could declare that one year forward, some percentage of existing currency, randomly chosen by serial number, would expire worthless:
I think the first step to a new currency is to create the groundwork to experiment with a new currency. In other words, if you can create a network of independent people and organizations who are willing to do some of their not-so-important transactions with currency X, then you stand a much better chance of discovering and vetting the best currency X.
Find individuals, artists, independent businesses, etc, etc and get them registered into a database so that this network can internally experiment with currencies.
Besides the somewhat strange economics, the greatest problem of any scheme like Bitcoin is that it is a gigantic waste of resources. Mining, which is needed to operate the system, basically amounts to an arms race between miners. If Bitcoin were actually used as a global currency, it seems realistic to suspect that a significant fraction of all global computing power would be used just for mining.
On paper, it sounds like a great idea, but the issues of adoption (why would anyone use this?) and liquidity (why would you keep a balance of freicoins any larger than you had to?) really defeat it before it even gets out the door.
This is something that needs to come from the top - governments need to stop taxing liquidity (sales and income taxes) and start taxing net worth.
This is Keynes argument against Demurrage Currency, the fees can be evaded by using a competing currency. When demurrage has been used successfully in the past, the main competing currency has been broken (30's Austria, depression era USA)
Nothing, in fact that is encouraged. I could imagine having a “checking account” in demurrage currency that my paycheck is deposited into, but at the end of the week or month I sweep excess funds (my savings) into a “savings account” backed by treasury bonds, gold, bitcoin, or similar.
The point is to keep cash itself in circulation, regardless of economic circumstances. Had we a demurrage currency in 2008, we might not have had as severe a “credit crunch” as we did--people would still want to loan or invest even in bad times. Demurrage removes, through negative incentive, the “sinks” where money can end up in unproductive storage on the ledger of some company or individual somewhere, and instead keeps it flowing through the economy.
That's not how economics works. We had a 'credit crunch' because billions of dollars in market value was disappearing, sometimes overnight, devaluing securities. A new currency that no one wants to hold for longer than they have to isn't going to change that.
