Betcha Wardancers are the players most likely to go inactive. 

Watch me!

/0

Nuh uh, xeno... I'm not letting you get away with this sham.

For you to legitimately be able to complain about the problems of a currency system, you have to be able to present an alternative.  I have presented arguments as to why eliminating inflation is impossible and why any effort to eliminate inflation will inevitably trigger an economic collapse... A real collapse... one that's actually supported by macroeconomic models.  Otherwise, inflation is inevitable regardless of economic systems.

This most recent post is honestly doing nothing more than begging the question... to which I've already replied, multiple times.  This post is pretty much 100% reiteration on my part, which is a waste of both our times.  Please, either advance the discussion or wait until you have ample time to make a substantive post (heck, try saving a post in a word document so you can work on it for multiple sittings...).

As for your little story of the man saving all his life wealth...
1: First thing's first: At the point where there's no answer to the question of whether or not there's an alternative economic system that can prevent inflation while avoiding the central bank flaws I mentioned previously... this doesn't matter because inflation is inevitable.

2: Let me reiterate this: What that old man is doing... is a bad thing!  It's the very reason why we're having trouble getting out of this economic downturn.  That's #3 from last post (which you didn't answer as well).  You can dismiss economic models all you like, but it doesn't make your statements any more true.  X(

3: Oh, right... you're also assuming that old man lives in a box with no outside contact, which is utterly divorced from reality.  In real life, that old man would be reminded constantly that inflation is a real thing ("In my day, we could buy a bottle of pop for a nickel").  Seriously, those "back in my day" speeches every grandchild hears is a recognition of the fact that inflation is a real, perpetual thing.  He knows that inflation exists.  We all do.  Putting everything into cash would be a recognition an acceptance of the fact that the value of the savings would degrade over time.  Sorry, but I'm not going to feel sorry for him.

At what point is the old man supposed to take responsibility for picking a decent asset to hold savings... such as gold or certain bonds?  Am I supposed to feel sorry for him if he held all his savings in pokemon cards?  How about if he threw all his savings in a bottomless pit, knowing full well that it was a bottomless pit from which he would never recover his assets?  This is the flaw which you're perpetuating, and which you have still blatantly ignored despite my insistence... people aren't complete dumbasses.  They see that inflation is happening, and have ways to distribute their assets to avoid inflation.  If you went to a decent mutual fund and told them you wanted your assets to overcome inflation, they'd be more than happy to invest your assets... easiest... job... ever!

As for fiat currency...

I like fiat currency, actually.  First of all, there's the argument I placed earlier in this post... you know, the one that indicted backed currencies, and got a non-substantive reply?  Yeah, that!

The other problem is that without fiat currency, you're engaging in product bundling: people who want to buy one asset are forced to buy the other.  So if I just want a medium of exchange... I have to invest in gold.  And if I just want to buy gold... I also have to invest in the stability of the US government.  That means changes in one good affect the price of the other good in ways contrary to its intent.

Let's take an example: Assume the US government collapsed.
Fiat currency: Currency collapses.  Gold investors profit big time.
Gold-backed currency: Currency collapses.  Gold investors... would be screwed, because the US government was the one holding their gold assets... oops!

See what happened?  The very thing for which gold was supposed to be a hedge against... became its undoing!

Xeno, I'm going to ask this just once.  I'm a really busy person, and I'm sure you are too.  Please, just stop reiterating posts you've already posted.  I read it.  I answered it.  I presented real economic models to indict it.  Neither of us have time to replay the exact same posts we did previously.

Then perhaps what he's asking for is some sort of acknowledgement that discussion has occurred.  Unless we go up and bug the mods or Ps personally, it's easy for someone to think their idea was ignored.  A little post, just acknowledging some discussion happened, would alleviate those concerns.

I thought Skoe was removed from the ignore list after the Memorial Day incident.

I see a couple problems with this.

First of all, even if we assume this is a problem, there's absolutely no way to stop the trend you describe without deflation.

For me to show what I mean, let  me use another model to describe both the functions of each inflation system and what we do about it.

Year 1900:
Base year for a basket of goods:
$100

Assume that we have a normal 3% inflation rate per year.  By my running of the numbers (the formula being a compound interest run, 100*1.03, multiplying the result by 1.03 until we get the doubling), it means you get a doubling in 24 years.  Let's assume, for the sake of argument, that this is the ideal doubling rate in your scenario.

So after 24 years, our basket good price is about 203.  So let's keep that 2% inflation and see what happens.

The result... is that in 14 more years, the basket price ends up at 307.  This is while under a 3% inflation rate, the normally accepted inflation rate.  It takes another 9 weeks (for 23 weeks total) for the goods basket price to reach 400.

So what does this mean for your inflation model?  Under a conventional system of observing money supply, we would say that prices are doubling every 24 years.  So in this case, there have been two doublings.  It's a consistent rate... relatively slow... yeah, we would like this inflation rate!  The Federal Reserve bankers would be patting themselves on the back, then going out for lunch while they make sure to keep doing whatever they're doing. 

But in the xeno inflation model, it would signal a crisis.  The first year saw a 100% increase in the basket of goods in 24 years.  The second period, though, saw prices increase at twice the speed, even at the low interest rate.  SO... what would the xeno model have the central bank do to keep inflation low, by their definition?  Knock down inflation... duh! 

Okay, so let's pretend that second year never happened under the xeno model.  The central bank wants to set a target inflation as their goal of keeping the doubling rate stable.  Running the numbers, it looks like a 1.7% inflation rate is the best way to achieve this.

Okay, so how does the bank continue this trend?  Next inflation period's up... time to figure out a target inflation rate again!  The new inflation rate to keep the same price increase is 1.2%

I'll assume you notice the trend.  Under your inflation story, the central bank has a smaller and smaller ratio of what is considered acceptable inflation.

Now, regardless of what is considered an acceptable inflation rate, the lowest possible inflation rate never changes: It's always 0, due to the deflation issues I described previously.

So, under the conventional model of inflation, target inflation rates are... somewhere between 2-4% per year inflation.  Under the xeno model, however, target inflation will be determined by how far from the base year you are.

The problem is when you get later in the inflation system.

Let me make this clear:
Under your interpretation, assuming 1914 is the base year in question, for the United States to have an inflation rate within your level of acceptability, the inflation rate would have to be .2% (this would actually be a high estimate, actually).  So if xeno ran the Federal Reserve, the range of acceptable inflation would be between .2% and 0%.  Otherwise, you're changing base years, which is no different from what is done now to determine the effectiveness of inflation.

There's actually two problems here with implementation.  First, this is 100% unachievable.  Central banks can influence, but can't dicatate, inflation rates.  That's determined by the economy as a whole... its buyers, sellers, banks, consumers... everyone.  This theory is demanding the equivalent of telling a central bank to fly through a small trench on a massive space station and fire a 1.8 meter proton torpedo into a 2 meter exhaust shaft to hit the station's reactor core a couple thousand kilometers down the exhaust shaft.

That target inflation rate's no bigger than a womprat!

In fact, this will be 100% impossible because, if you look at some economic schools, this would run counter to economic growth.  Keynes described inflation, in part, as a natural course of economic growth through price/wage negotiation.  People will demand higher wages from employers, employers will respond by raising prices, forcing employees to ask for higher wages, etc.  While this can't be used to describe all inflation, it's probably safe to assume there's some level of inflation triggered by this.

So if we divide up total inflation by its causes (Keynesian and Monetarist descriptions, with monetarists focusing on the money supply-focused issues)... let's describe it as:
i=K+M
(NOTE: This isn't any sort of official formula... I'm just using it as a representation)

Central banks can only control the M side of inflation.  So unless you want the government stepping into price negotiations... which has serious problems in itself, and means I get to add a list of problems with communism to the problems here... the K side of the equation will always have inflation as long as there's economic growth.  To counter this, the central bank would need to actually fight this by perpetually decreasing the money supply.  They'll be trying to guess price-based inflation rates, and trying to counter price-based inflation rates, within margins of error in the fractions of percents.

This leads to my second problem: what happens when you miss?  Now, a miss is definitely more likely under your inflation target than the conventional inflation model, because the window of acceptability will decrease as inflation increases.  So what happens if each of our models miss their target?

In your theory, the real danger is a downward miss.  The central bank would be encouraged to press for a disinflationary (not deflationary) trend in the money supply to counter the inflationary trends of price negotiations.  So in practice, the Federal Reserve's job would be trying to guess how much wage-based inflation will occur, and counter it with monetary contractions, to an accuracy within hundredths of percentage points in accuracy.  Now, if, by chance, the central bank undershoots its inflation controls, there wouldn't be much of a short term problem, except that under the acceptance of your economic standard, the central bank would be given a lower threshold for what's considered acceptable inflation, forcing them to be even more aggressive in fighting inflation in the future and thus more likely to overshoot inflation in the future.

But what about if they overshoot inflation?  As I said, inflation always occurs, in part as a result of wage negotiations.  The central bank would have to either counter this inflation or ensure it's generally the exception, not the norm, to fighting inflation.  That means the bank would need to slowly pull money out of circulation to fight inflation.  This would mean the bank is likely to eventually overshoot on its disinflationary trend and create a deflationary trend, the result of which was described extensively in one of my previous posts.  This is much less likely than under the conventional system because a slight miscalculation in the effort to reduce inflation still puts the economy within a 0-2% inflation range... not necessarily good, but not crossing the deflation threshold.

Even if you assume and factor in that a high-end miscalculation on inflation would trigger "high" inflation rates of 4-8%, that's still not nearly as bad... it hurts incomes of certain people, yes, but it's a short term impact that can be corrected the next year.  Deflation, however, is a self-sustaining cycle that requires drastic action to overcome... action which can easily be overdone, resulting in an inflationary trend and meanwhile driving up debt by the government programs necessary to overcome the debt (e.g. unemployment, stimulus programs).

Okay, that's problem #1.

Problem #2: You assume inflation is a long run problem.

In the long run, the economy corrects for inflation.  Prices increase by 2% one year, so employees will generally ask for 2% increases in wages to overcome this issue (if this doesn't happen, then it's not inflation... it's generally a change in non-inflationary market conditions... such as an excess labor supply).

Instead, investors look at inflation from a short term perspective (I say "investors" because I know there's crabby old people complaining about how, in their day, they could buy a pop for a nickel to drink while they walked 15 miles uphill both ways in the snow to and from school).  Wages are given to an individual with the assumption that the wages are worth the value given at the time they're given, which means the wages correct for inflation (if prices were all halved, your wages would be halved as well).  Spent or invested relatively soon, consumption hedges against inflation while investment overcomes inflation.  Personally... I couldn't give a crap what price levels were in 1914 when making my buying decisions... I wasn't even born there... if I compare anything, it's within the period where I'm a significant portion of the consumer/producer market.

Long story short, it's an interesting baseline, yes.  But because of issues such as the mathematical flaw I described above, and because the economy adapts to changes in the long term, this is a bad baseline, because it's just not used, at least in the sphere of economic analysts, investors, bankers, or most other people operating in the market economy.

Problem #3: I LIKE INFLATION (with limits)!

Remember what I described earlier during the deflation debate?  My first argument was a comparison of consumer behavior during a deflationary, inflationary, and hyperinflationary scenario.  There was a very simple moral to the story, which you pointed out: When inflation is low, or when it's deflationary, people are more likely to hold cash because it's a "safe" asset.  So if inflation was 0%, people who didn't want any risk would keep cash on hand as a safe investment.

That, by definition, creates deflation.  By holding onto money, you pull currency out of circulation, preventing it from being factored into the money multiplier effect... the result being an involuntary deflationary trend as consumers make selections beyond central bank actions.

> xeno syndicated wrote:

> If the trend continues, in our lifetime, Zarf, we will see the value of our money diminish much more severely and far more rapidly than our grandparents did.  And let me ask you this, if the safest place to keep your money was to hold it in cash (not bonds, not gold, not real-estate, not stocks), how much would you complain about the 3200% reduction of the value of that cash over your lifetime?

1: I wouldn't actually give a crap.  The thing is... in the long term, money's just a number.  Yeah, if I had $500 sitting under my mattress, I'd be penalized.  But that's actually the worst possible use of currency... something a government should discourage.

Why?  If currency is sitting under someone's bed, in a Scrooge McDuck safe, etc., it produces no economic growth of any kind.  Meanwhile, it means the government has to actually print more currency just to sustain currency supplies (which is a serious problem because when stored currencies finally enter the market, they create currency supply shocks).  Spend it, buy some property, get a 401k... do something to keep the currency moving around in exchanges.  Otherwise, you end up with the exact same deflationary trend I described in a previous post.

2: Actually, it's a bad comparison to say currency in the early 1900's was a safe store of value, but not now.  Modern currency isn't intended to be a store of value that you can just sit on forever.  In contrast, currency in the 1900's was still backed by gold, which means there was always something upon which to guarantee the currency.  These people weren't just sitting on dollars, then.  They were investing in gold, and the currency was just an intermediary.

And before you ask, no... backing the currency with gold would be a terrible idea (If you weren't planning on advocating a resource-based currency standard... this doesn't matter, and you can ignore it).

For one thing, it's just expensive to keep a trillion dollar stockpile of gold just sitting somewhere, and even to acquire the gold.

But more important, it means economies and monetary policies are completely stonewalled.  For example, there's a couple situations in which the Federal Reserve would want to induce inflation (in particular, during a deflationary period... like the Great Depression), for the reasons I described in a prior post.  Being required to buy gold whenever new currency is produced means th central bank can't induce such an inflationary scenario.  They could reduce the value of currency relative to gold to increase the supply of currency, but then you're really no better off than a currency unbacked by gold, except that you put unsuspecting people in a false sense of security.

More importantly, however, it actually creates a maximum limit on economic growth.

As a medium of exchange, all trades in a country necessitate the exchange of currency for gods and services.  That means currency is a requirement for exchange to occur, and thus for economic growth in a currency-dependent society.

Now, as the economy expands, the number of transactions, and the numer of people making transactions, will expand.  This inherently a necessitates an increase in the supply of money to meet the demand for money.  Without the money to meet the expanding demand for exchanges, the value of money will increase... creating a deflationary trend!  Remember, this isn't inflationary currency growth, because the increase in currency I'm talking about in this specific instance is basic requirements of currency expansion is matched by an equivalent demand for money.  This is an entirely different type of money creation, which a gold standard would hamper.

"OMG!  You've found hidden treasure!"

The planet u just colonized used to be inhabited by an long gone old race, they mastered the art of farming
Big stashes of the finest quality was found hidden in a building hidden underground.

+1,000,000 food

Don't question the fact that the food's been sitting there for 50,000 years.  Enjoy!

> Dpenguins wrote:

> your heart only breaks once. then you learn that bitches ain't nothing but hos and tricks

He's married, ya know! 

Congrats! 

EDIT: Whoops!  Insider joke was with the wrong person... that's what I get for posting when I'm not paying the slightest bit of attention! 

That qualifies as a "long" read? 

No, xeno... look back at your quote.  You specifically said that the only way to prevent an inflation-driven economic collapse is by deflating the currency.  I repeat:

> xeno syndicated wrote:

> Before I respond to your other points, will you concede that if the inflation rate doesn't turn negative for at least a decade, there is serious danger of the global economy collapsing entirely?

"if the inflation rate doesn't turn negative for at least a decade"

Inflation turning negative IS deflation... which is the exact thing I spent an entire post arguing against.  Don't try to dodge this one, because you were EXTREMELY clear regarding exactly what you advocated.  There is absolutely no way getting around this.  It was a one-sentence post, but it was an extremely clear sentence in this regards.  Honestly, I'm just not sure how you can interpret that sentence any other way.

Actually, xeno, I think I caught a flaw in your reading of the article.

For reference, let me post this:
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

I'd suggest you to play around with the website.  Specifically, compare the values the US offered for 30-year Treasury notes to inflation rates at the time.

Anyway, I'm getting to something here.  The low interest rate is, oddly enough, a US reaction to factors which make purchases of Treasury bonds a seemingly good investment.  Sounds odd, right?  Well, let's look at the outside factors:
First, new domestic buyers.  Historically, bonds compete with stocks in value and return on investments.  Stocks offer a variable return on investment, and will increase in value with increases in GDP.  Bonds, in contrast, don't offer profit-based returns, so they don't get an increase in value with an overall increase in economic growth.  However, when the economy's not doing well, stocks suddenly become an unstable investment.  So investors look for new places to put their money... and suddenly, bonds become a higher demand commodity.

There's also an increased demand from... well... economic doomsayers.  Assume you believed the US economy wouldn't recover from the recession for a while.  Let's assume you believed the US was going into a period of 1% deflation per year... in short, a "lost decade" similar to Japan's economy.  Under that belief, US Treasury bonds would be a great deal.  The recession has increased the number of people who worry about the government relapsing into a Japan-style economic crisis, increasing demand for loans.

Then we have foreign buyers.  Flint posted an article I believe about 6 months ago, mentioning that China got rid of its holdings in short term US bonds in order to buy up 30 year Treasury bonds.  Remember, China isn't there for profit purposes.  China's buying US Treasury bonds in order to perpetuate the currency imbalance by increasing the demand for dollars, increasing its value relative to the Yuan.

Combined, this means an overall increase in the number of customers for US bonds.  The law of supply and demand states that as purchasers demand a product, the seller will charge a bigger price for the product.  In this case, with an increase in buyers for treasury bonds, the US can offer a lower interest rate.

Translation: This isn't any sort of long term trend in interest rates.  The treasury bond rates for now are an isolated incident, indicative of US efforts to maximize gains from lending.  In short... it's just good business to offer low interest rates when inflation's low.