I don’t think any hot money scheme could prevent that. The goal is to get money into circulation so I suppose hoarding gold is as useful a way to circulate that money as any other. Whoever sold you that gold has to spend or invest the cash they received from you.
One other problem with the OP. That’s not what “hot money” means in any way I can find.
Brazil did the opposite of “hot money” in the 1980s to reduce inflation; prices were given in URVs (Unidade real de valor - Wikipedia) - a currency that did not exist and whose conversion rate to the real currency was constantly adjusted to keep prices constant in URVs (even as they hyperinflated in the real currency), which allowed people to become used to constant prices again (see here for a bit more information How Fake Money Saved Brazil : Planet Money : NPR)
One thing I think you’d see is that people would spend the money on stuff they really don’t need. Is your twenty bucks going to be worthless tomorrow? Better buy three cases of toilet paper (or whatever) today, even if it will take you years to consume all of that.
Basically, this is what you see with health savings accounts, where the rule is use the money by year end or lose it.
Beat me to it. I suggest the OP reads about the hyperinflation in the Weimar Republic, Hungary and Zimbabwe. Those are probably the best GQ answers to the question.
Horse … water … drink … cannot.
Yes, my first thought was this was tried - by Germany in the 1920’s, by Argentina in the 1980’s, and by Russia in the 1990’s. Basically, the incentive was - spend your money now, for tomorrow it buys less. (Joke: what’s cheaper, a bus ride or a taxi ride? Why the taxi, of course, because you don’t have to pay until the end of the ride.)
the first problem is stability - for people to plan and invest, they need to be sure the investment is rational. Plus, there’s always a need for capital - to build something, for example, you need to ensure you can buy materials and pay the labourers for the life of the project. This requires you to borrow or get guarantees from someone with a wad of money… so would banks be exempt from the shrinkage? Most extreme inflation means the economy is unpredictable.
I went to a presentation by a geologist who spent some time in Russia after the USSR collapsed. He said people in Moscow got paid every day at noon, then rushed out to buy whatever they could to lock in the value of their money. In the evening they’d be standing around the Metro stations trying to barter what they’d found for something they needed.
that’s the flaw. People would buy something with value to hoard. After all, the reason they hoarded money to begin with was that the future was uncertain. Would you spend the last of your savings on a new suit or new furniture if you were not sure you’d have a job and be able to buy food in a month? People would buy whatever was allowed that carried value - gold coins? Bulk food? Cigarettes (the prison staple)?
Again, the OP is positing a problem–deflation–and proposing a solution–inflation.
Inflation doesn’t have to be at 10% per minute. It can be a 2% a year, or even 10% a year, and people don’t have to scramble to buy stuff when they get paid at the end of the day.
I suspect that the only levels of inflation which will cause enough anxiety to force spending rather than holding would be hyperinflation.
Does someone have any historical examples of “get the money moving” inflation that weren’t hyperinflationary?
Balmy. There’s just so many problems with that in terms of unfairness…
Wouldn’t people be able to buy and sell stuff, clean the notes,etc and thus refresh ?
They’d make a deal with their employer to buy into assets.
It wouldn’t necessarily be good for the economy… Suddenly all the industries are highly corrupted and their motives might not be to increase GDP, but rather defeat the inflation of “hot currency”…
There were so many unstated ideas … would the banks profit from the customers loss ? would the banks start losing in the same way ? Can you ask the government to take away a bedroom from the house rather than 25% of your retirement fund ?
It seems to be contrary to the basic requirement of recovering from recession… confidence and efficiency and increase in official and proper GDP…
People would be encourages to profit in non-GDP ways…
[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]Talk about inflation. 4.5 billion years from now it’s only half as valuable!
I think there’s also a psychological factor that can’t be overlooked. A lot of the value of money is essentially just a common belief held by a lot of people. There’s nothing inherently valuable about a dollar; it has value only because most people think it does and expect that belief will hold true in the foreseeable future.
If the government was to intentionally start a program of gradual devaluation, it might find that it was like Frankenstein’s monster. They might see the value of the dollar dropping faster than they wanted as people lost confidence in the ongoing stability of our currency. An official two percent drop in value could be magnified and cause a ten percent drop of value in the real world.
This has in fact been attempted. The idea came out of the original Social Credit economic theory. It failed more due to technical limitations (the stamps were awkward and difficult) – not an indictment of the theory but the implementation. As far as I know it hasn’t been tried since.
A 0.5% increase in spending can be a very big deal, especially given multiplier effects. OP is looking for increased spending at the margins, not Weimar Republic-style panic buying.
Uh … the U.S.A. during much of the 20th century? 3% inflation may not be a lot different than 1% inflation but modern economic management is more like gently nudging the rudder controls, rather than plunging an aircraft into stalls and barrel rolls as some of the thread participants seem to think.
The New Deal and all associated activities, to start with. It was actually very effective until the more conservative politicians convinced FDR to cut back on deficit spending, and then the Depression came back.
In fact the 70’s were a period of relatively significant inflation. The trouble is that yes, money is just an idea. People adjusted. You borrow to buy a car, knowing your paycheque will go up but the payments won’t - but the interest rate is tied to inflation, so loans and mortgages at 10% or more, were normal. People who wanted to save, they got interest rates reasonable for the rate of inflation. (IIRC 6% to 8% was normal for savings bonds.)
Mainly, this inflation was an adjustment to the price of oil going from under $2 a barrel to an exorbitant $20 a barrel after the 1973 Arab-Israeli war and the formation of OPEC. …and the realization by western politicians that they could borrow and spend like there was no tomorrow.
It ended in the early 1980’s when the western central banks realized inflation was slowly accelerating and it was not a good basis for a monetary system. The adjustment was painful.
The key to any good money system is stability and reliability.
Australia had almost 10 percent inflation from 1970 to 1990 but it never became hyperinflation. I would think that’s a level to encourage spending.
Anyone who can remember the 70s remembers inflation. Horrible, horrible, out of control inflation. Double digit inflation! Inflation at a ruinous 10% or 11%! PER YEAR. That’s high inflation, but it ain’t hyperinflation. You didn’t have to run to the store to buy stuff the minute you got paid because the prices would change by tomorrow. But you definitely had an expectation that prices would be higher…next month. The candy bar you bought for $0.30 might be $0.35 next year, and $0.40 the year after that.
This is high inflation. It is not hyperinflation. There has been hyperinflation in America. In the Confederate States of America, that is.
High inflation–double digit annual inflation–causes all sorts of economic problems. But it’s not nearly as bad as hyperinflation where prices change weekly or daily.
There are all sorts of purchases I might make today, but I think to myself, “Eh, I can wait, the price might be lower soon”. Consumer electronics and software and such come to mind. This is today, when we have 1% or 2% inflation, and some central banks are charging negative interest rates. At double digit inflation rates I’d never expect prices for anything to ever fall. They might not rise as fast as the general inflation rate, but nobody would ever cut prices. And so I’d spend the money today rather than waiting and hoping the price would go down. And thus economic stimulus, and the guys I bought stuff from would spend that money right away, and so on and so on. And then people produce more goods and services to meet the demand, and so on.
The point is, we’re much closer to the deflationary side of things than we are to hyperinflation. Companies are sitting on vast piles of money but not investing that money in anything, because they can’t think of anything profitable to invest in. There’s no shortage of capital. So worrying about inflation is crazy–as of today, Dec 11 2015. It wasn’t crazy on Dec 11, 1975, or 1985.
Manipulating the money supply to increase inflation ( eg printing more money and spending it ) would certainly seem like a sensible way to get the western world out of the mild recession it’s been in for the last 10 years. The reason we don’t it probably more to do with the demographics of the post world war 2 baby boom than anything else. Increasing inflation erodes the value of savings which is going to lose the "grey vote ". Fear of hyperinflation is a very distant secondary concern plenty of countries have gone to 10 15 percent inflation and then come back down without disaster.
Not quite.
We have printed vast amounts of money in the last 10 years. But by feeding it into the economy via “QE” and the bond market, we’ve ensured that most of the benefit goes to the 1%. So far this plan has worked superbly. For them.