During the Great depression (1929-1940). economists recognized the need to spur consumption-one of the big problems back then was that people tended to hoard cash-they were worried and stopped purchasing. One of the proposals to get around this was the idea of "hot money"currency that would depreciate in value in a set time. the idea was that people would go out and spend immediately, so as not to lose the value of the money. Supposedly, the jump in consumption would restore demand, and get the economy growing again. Was this ever tried? If so, what were the results?
And who will accept money that’s about to lose value? Or else prices will go up to compensate for the loss of value.
I first heard about this in the Illuminatus! trilogy, hidden among the rest of the bafflegab.
I still think it sounds like something a group of drunken Economics majors came up with near the end of the night. Before computers, how would you track the decrease in value in realtime?
It also shows the confusion between money (purchasing power) and units of currency (pieces of paper).
In Ye Olden Tymes, you could do it by printing up new currency every Z time period, and the old stuff would be declared worth X/Y of the new stuff. Or for real sneakiness every so often declare that bills older than X are now wastepaper. You don’t announce the exact times in advance, but everyone knows old bills could lose their value, so you get the hot potato effect…when you get an old bill you spend it as soon as you can rather than hoard it. And make a law that people HAVE to accept old bills in payment, you can’t refuse to take the old bill.
But all this does is create simulated inflation. Which in the situation where people are hoarding cash because of deflation is what you want, inflation to counter the deflation. With paper money it’s easy to create inflation…just crank up the printing presses, and pay government expenses with fiat money created out of thin air. Giant rivers of new currency means each unit of currency is now worth less, since we have the same goods and services but a lot more money chasing those goods.
Intentional hyperinflation? That’s not a remedy for a sick economy, unless the remedy is euthanasia.
The point is that you won’t get hyperinflation, you’ll get actual economic activity, as opposed to stagnation and deflation.
Anyway, all this is academic. We know what got us out of the Great Depression: Going off the gold standard. The countries that went off the gold standard first suffered less from the Depression than the ones that held on to their gold to the bitter end. Keynesian pump-priming helped as well, but you can only do so much of that if your money supply is idiotically chained to some physical amount of metal sitting in vaults.
Even if it didn’t become hyperinflation, you’d have inflation - this system is designed to create it. And with inflation, nobody wants to save money. Having money out getting spent is nice but a healthy economy also needs money that’s being saved in order to form a source for investment capital.
Right. To expand on your point:
Inflation doesn’t encourage spending as much as it encourages investment, which is the biggest reason this plan fails: In an inflationary economy, you can’t just sit on your money. You have to invest it somewhere such that its real value, at the very least, doesn’t decline. This has the salutatory effect of putting money into the economy, which is why central banks typically target 1-2% annual inflation.
Having more money in the economy, being invested and spent, supports economic growth. Because healthy economies are growing economies, inflation which keeps pace with that growth is similarly healthy.
So, this plan is bad because it would discourage investment, because nobody would sell investment instruments to people who hold money that’s going to lose value arbitrarily, as opposed to due to a healthy rate of inflation tied to economic activity.
And, of course, tying money supply to physical counters (gold, oil barrels, conch shells, bushels of wheat, red pubic hairs, etc.) is the exact opposite of having the ability to tie inflation to economic activity, and is redolent of cargo cult thinking; in this case, the idea that money is valuable in itself, as opposed to being valuable to the extent it supports the economy as a whole.
Can I take my “hot money” and buy T-bills?
Or just buy up a bunch of it at a discount just before it loses all its value and pay off my mortgage.
Regards,
Shodan
Inflation doesn’t imply hyperinflation. :smack: (A pet peeve these days is that it’s impossible to utter the word “inflation” without an echo of “hyperinflation” coming back. 5% per year is not the same as 5% per day, folks.)
And inflation does not preclude savings. All other things being equal, interest rates of X% in a zero-inflation environment will become (X+3)% when there is predictable inflation of 3%, giving the same incentive to save.
But all other things are not equal, and there will be some tendency to spend rather than save if it is known that inflation will continue. That’s the whole point – reread OP.
I think many economists today would like to see higher inflation. OP is asking how to bring that about via some hot money device. One sees various (non-serious?) proposals for how to do that in some of the blogs. The European Central Bank already had negative interest rates, and (increasingly desperate?) just a few days ago dropped their rate on deposits from -0.2% to -0.3%. That’s right! Banks which deposit $100,000 with the ECB will get back in a year “with interest” a total of $99,700.
I’ve thought one way to encourage spending with a mechanism like “hot-money” would be an escalating VAT. Everyone would know in advance that the VAT would increase by 0.1% at the beginning of every month. (Too complicated in paractice?)
Yes,exactly that’s the entire point of the proposal. The problem in a recession is that too many people are saving instead of spending. So creating a little inflation is a good thing, as it will encourage more people to spend.
Of course, too much inflation is a bad thing, as well – then too many people are spending instead of saving. And the right response for that condition is to tighten up the money supply and lower inflation.
But worrying about too much inflation in the middle of a recession is like worrying about heatstroke when someone is freezing to death.
There are better ways of goosing inflation a bit than ‘hot money’, which has problems pointed out here. So while the goal of ‘hot money’ is a good one (at the right time, of course), it’s not really the best way of reaching that goal.
Now, it’s worth noting that, while a good balance of spending and saving, and therefore a moderate amount of inflation, will give the best overall economic growth, some groups benefit from higher or lower inflation. So while the basic economics is clear and has been known for nearly a century, there’s a lot of incentive for some to ignore the basic economics and make arguments for something that’s suboptimal for the economy as a whole, but benefits them.
They should get rid of paper money and make all coins out of uranium. The money would be burning holes in people’s pockets!
[quote=“Johnny_L.A, post:12, topic:740082”]
They should get rid of paper money and make all coins out of uranium. The money would be burning holes in people’s pockets!
[/QUOTE]The Roentgen Standardby Larry Niven
Damn! I had no idea. :smack:
The only feasible implementation I could imagine (in a first-world country at least) would be some kind of public benefit with a monthly fee against your balance. For example: Give everyone a $1,000 prepaid debit card, prevent balance transfers and cash withdrawals, and assess a $50/monthly fee until the card it used up.
This money would have to be spent pretty quickly; the only problem is whether people might use their “real” money for savings. The wealthy might, but this example scheme would be pretty similar to the stimulus payments and making work pay credits that were administered through the tax code in the last decade. It was the intent to get people to spend as much of it as possible.
What would stop a person from buying $1k worth of gold and hoarding it?
Or give people “gift cards” that expire after X. Send everyone in America a $400 voucher, and if you don’t spend it in two months it goes poof. Yes, you could stick $400 of your salary in the bank and spend the $400 voucher instead. Most people wouldn’t.
You could enact a tax on money. Every year collect a five percent tax on all the money somebody owns. That would encourage people to spend their money buying non-taxed assets.
You could even simplify the collection by ignoring the currency people have in their possession and just tax the money that’s being held in various financial institutions like banks and credit unions (the M2 minus the M0).
So in your store, would you take such a voucher to buy anything, or would you insist on receiving cash?
Gresham’s Law comes to mind. Bad money drives out good.
People will preferentially spend the hot money, and will hoard the good (ordinary) currency. So you end up with a two tier currency, and a clear disincentive to spend ordinary money. So the idea of hot money may act in exactly the opposite manner to what was intended.