More ill-informed economic rambling

[chess]

The Inflation / Money Sink Thing:

Crash Course (http://www.chrismartenson.com/crashcourse) is very interesting, but seems to have a massive anti-inflation, pro-savings, pro-commodity-backed-money standard thing. (I thought economists worth their salt were meant to be laughing at the gold standard, not idolising it?)

Then there's a rather old text on Stamp Scrip http://userpage.fu-berlin.de/~roehrigw/fisher/ which neatly demonstrates that a money sink is good to kick-start an economy.

Edit: This theory is now a bit out of date since ilanin poked a big hole in the side of my uncritical 'buying stuff / investment is always good, right?' axiom. The people-backed money one below is still mostly current to my thinking, apart from 'how to control inflation here', though.

My thoughts are:

* Money is primarily a medium of exchange. If you want a commodity-backed store of value then buy some assets - that way your risks due to the commodity properties are more transparent and you have to take on the burden of storage etc etc.
* As a medium of exchange, money is no use in the bank. Savings encourage people to work less. People working less is bad :) that's what kills most socialist systems, after all.
* If you're going to destroy the desirability of long-term saving you also have to guarantee at least one of a minimum standard of living or a constant supply of money to each person. Fortunately there are many systems that can do this in various ways; see below for one...
* Pensions / retirement are an interesting special case - you do want people to be able to save money to have whatever advanced standard of living their productivity has sustained throughout retirement as well (and let people save in order to compete for scarce end-of-life medical interventions, quite possibly - it's a great motivator). But there are ways to deal with this too. You can exempt money that's being locked away in saving accounts that only let you take money out at 70 or so or for direct life-saving medical expenditure from your money sink, for instance.

You also need a wealth tax for this whole thing to work, because otherwise the rich mostly ignore your monetary system and trade in commodities, which they have the wherewithal to do - which does erode the 'save in commodities' thing a bit, but hopefully not too much.

To go with this, I am very interested in the idea of 'people-backed money'.

Instead of controlling the money supply by buying government bonds / interests in insurance and pension schemes / interests in businesses, you control the money supply by giving every individual a certain sum of money every (week/month/year) directly into their account. You can vary the sum of money to control inflation - but you also control inflation by some kind of stamp scrip like method, basically an explicit tax on holding money, so that people are motivated to spend their money instead.

You might say 'everyone would fly to foreign exchange, which they could hold onto' - but you can tax that too, or you can say 'well, yes, some economies are going to be forex-standard whatever you do, it's not a bad idea for a developing economy, but someone has to be the root economy and they need something like gold-backed or debt-backed or people-backed money.'

You don't get the weird thing of debt-backed money where you can massively benefit financial institutions and corps by printing money especially for them, because the money you're printing has to be distributed across the whole population. You don't get the constant-growth-requiring interest treadmill of debt-backed money, because the only 'paying it back' that happens is the anti-inflationary taxation, not an obligation to keep paying it back with interest.

You probably still do fractional reserve banking and end up in the situation where you have more debt than money, but because the liquidity of the system is so insanely high the government can easily fix a round of defaults on debt which threaten to fuck the system up by injecting money which spreads evenly across the economy and bolsters the reserves of all the banks directly (as it goes into the accounts of people some of whom won't withdraw it right away).

I know that this is undoubtedly a stupid idea for many reasons because I haven't seen anyone who isn't crazy advocating anything even similar - so can people enlighten me? :)

Comments

[requiem-17-23.livejournal.com]

You correctly identify what saving is for, then banish it. How do people insulate themselves against uncertainty under this system?

[chess]

By investing in skills and assets/infrastructure and social capital, rather than hoarding money. Make yourself a better prospect for employment / potentially self-employed in something / beloved of other people who will therefore want to take care of you, and that hedges quite nicely against uncertainty - and it encourages self-improvement rather than competing for money, which seems to have become an end in itself in today's society.

[requiem-17-23.livejournal.com]

I'm not sure that works. While out of work I need to know that my low-level Maslow needs will be provided, and I downright do not want to have to rely on anyone else for this: it is psychologically traumatic to have to admit that one has failed to provide for oneself.

I can do this by owning and running a subsistence farm. I can do this by saving in a savings account that does not lose real value. (I prefer inflation, where the number in my non-interest-bearing account does not go down, to a wealth tax, where the government takes money that I have wisely (I believe) chosen to put away against future uncertainty). I cannot do this by making myself more employable, because I cannot reasonably expect to always have a job offer on the back burner. I need stuff, or the ability to acquire stuff, without an income, for as long as possible, and I need to be able to do this for myself.

[requiem-17-23.livejournal.com]

For the record, I think that negative-interest money is a very interesting idea, with the caveat that I think that one of the things you can buy with your money in any money system should be provision for you or other people in the future.

[chess]

I hadn't thought about the 'I have to do this for myself' angle - I had assumed that people would be quite happy to have essentially government-provided unemployment insurance / be removed from the fear of not being able to meet their basic needs by a guarantee that they would always be met.

That is in an awkward tension with any attempt to avoid wealth-hoarding, though - if you let people save to provide for them and theirs, then there will always be a temptation to save _significantly more_ than they actually require to provide for them and theirs, and therefore enable 'them and theirs' to be supported at a higher level than other people without 'theirs' necessarily pulling their weight...

Also, if you let people save to provide for 'them and theirs', then there is still this massive motivation to concentrate all the resources in you and yours and screw the rest - if it becomes progressively harder to hold onto resources as you accumulate more of them, then people mostly stop attempting to accumulate at a lower level, enabling more people to be at the 'I don't need to worry about money' sweet spot rather than some being at the 'money is just numbers now' level and some living hand to mouth?

[naath.livejournal.com]

If I can't save at all then I can't "invest in skills" by, say, doing a new degree because I can't afford to pay the fees out of income; lots of things that are worth buying can not be trivially bought from income, many people these days buy them from debt instead of savings but really it's one or t'other.

[chess]

(also, to some extent, I expect this to be implemented hand-in-hand with a decent safety net - so the government hedges for uncertainty for you, to some extent)

[ilanin.livejournal.com]

(Initial disclaimer: because my approach to economics is of the Austrian school, you will disagree with me anyway. I am, however, right, at least about the causes of depressions - Hayek's theory of boom and bust looks more unimpeachable after every crash.)

What you are essentially describing is the equivalent of a system with high inflation and low interest rates - where money being saved depreciates in value rapidly (in your case it's because you are taxing it, but I don't think the actual mechanism is relevant).

The problem with this is that if nobody is saving then nobody can borrow either, meaning that the only organisation which can back capital investment is the government. This puts you on to the road to a planned or a best strongly interventionist economy, and those never work outside of theoretical models.

OK, dial things back a bit. Let's assume your savings tax isn't sufficiently punitive to make savings completely worthless, just to eliminate low-risk low-reward things like government bonds. We'll ignore the question as to how the hell the government is actually going to operate in this case because they will probably be able to do something. The problem with this is that you're encouraging malinvestment - it's effectively the same situation we had in 1928 or 2005, where not investing money is a guaranteed loser, so dubious projects that would never be backed under normal conditions receive funding. This leads to - at best - gross inefficiencies in the economy, but more likely to either rapid inflation driven by spiralling commodity prices (everybody's projects are being funded but there aren't any more resources available) followed by a bust when the bubble created by too-easy access to money is popped (normally as a result of deflationary government pressure on the availability of credit).

Practically, application of this is also impossible because you have to institute it simultaneously, everywhere as it doesn't give an advantage if just one nation is using it - not only will you get flight of capital but probably also of anyone with substantial savings (they have substantial savings, so they can afford to emigrate) which will probably wreck an economy's skills base and also take out a lot of the top-rate taxpayers who contribute about half of the country's tax income.

[ilanin.livejournal.com]

(it is axiomatic that there will always be more bad investments than good ones in any given economy, but since this is because people are muppets it's probably a fairly sensible axiom to take).

[chess]

Congratulations, you have indeed pointed out the big flaw in the 'encourage investment' thing I was accepting uncritically in the first section! I will now go back to the drawing board and see if I can come up with a different model which works around that - but I now understand why small-but-positive is the favoured inflation / money sink model, thank you :).

I have attempted to read up on Austrian School economics, but I always get distracted by the fact that so much of it is mixed up in typical US 'and the churches and local communities will provide the safety net for the poor', which works great if you're of the majority religion and skin colour in the area and terribly otherwise.

[ilanin.livejournal.com]

Just as Keynes is often hijacked to promote government interventionism in ways that he would never have supported, Hayek's name is taken in vain by the other side of the political argument. It happens, I'm afraid (there are an awful lot of loonies who claim to be Austrian school economists).

This is a half-decent bibliography to get started on the Austrian school and F.A. Hayek - and if you've not seen the rap video it's trying to explain, that's worth watching too.

[nwhyte]

I'm simply not an expert in this area but wondered if this Occupy Wall Street initiative is of interest to you?
http://www.huffingtonpost.com/2011/11/01/occupy-wall-street-financial-system_n_1069506.html