What's wrong with money that continuously decreases in value?

Factual Questions
1

I got started wondering about this because of a minimum wage thread in another board here at SDMB.

Say something (for example minimum wage) tends to cause prices to go up, making money less valuable than it was before.

And say the minimum wage is raised again as a result. And this causes prices to go up again, and money becomes even less valuable.

So the minimum wage is raised again…

And so on ad howeverlongyoulike.

What’s fundamentally wrong with this?

Presumably a loaf of bread will eventually cost a million dollars. But that shouldn’t be a problem if minimum wage is ten million dollars an hour. And if printing all those zeroes becomes a problem, just make up a new “megadollar” bill or something…

“But where would all the money come from stupid?”

This is probably where I’m being boneheaded, but I thought that since money’s not tied to a physical standard, money can literally be created out of thin air. I seem to recall hearing an interview on NPR where this process was described–there’s literally a computer terminal somewhere where Fed officials can create money that did not exist before and give it to reserve banks.

So–what’s fundamentally wrong with this? Why is it bad that minimum wage raises prices, if we can just keep raising the wage to meet the prices, and keep creating bits of money so the wage can be paid?

I know inflation is supposed to be bad–but to be honest, I never understood why.

Is it just a matter of having a system people instinctively trust?

In my head I fantasize about a system where all of this is institutionalized–the money is “designed” to lose value in this way, and every so often a system kicks in that automatically divides everything by ten… and the human beings just go around blithely spending things called dollars that are actually, under the surface, in a manner of speaking, trillions and trillions of actual dollars.

2

Nothing. Who says otherwise? I suppose it could be argued that minimum wage artificially creates too much inflation, which could be “wrong,” but minor inflation in general is not in itself a bad thing.

You don’t have to fantasize: we’re living it. Every reasonable government’s monetary policy, including that of the US, attempts to prevent deflation, and thus have some measure of inflation. Inflation is institutionalized.

3

What if rather than buying a loaf of bread today you want save some money to buy a car or a house in the future? High inflation makes your savings worthless.

4

Moderate inflation is generally considered to be alright, or even a good thing. It encourages investment and is preferable to deflation. The Fed currently targets a 2% yearly inflation rate, so apparently they’re OK with it.

At some point, however, increasing inflation makes it difficult to do business, because things like contracts and leases and such are fixed to the value of the dollar at the time that they’re negotiated, and if inflation is increasing, you either have to renegotiate very frequently or accept that someone will get screwed by the falling value of the dollar.

From an individuals point of view, your view of the desirability of inflation also depends on who you are. If a lot of people owe you money, you’d like to see it low, if you owe people money, you’d like to see it high. If you have a fixed salary thats difficult to renegotiate, you’d like to see it low, if you have a salary with an automatic COLA, you don’t mind so much.

5

Only if you keep your savings under your mattress.

6

I’ve wondered about this too. Inflation and deflation have always seemed to me to be unnecessary extra features of the monetary system. Ideally, the amount of money in existence should be proportional to the amount of stuff it values, right? Economy expands, there’s more stuff, they make just enough more money that the number of currency units per unit of stuff remains the same. Likewise, if the economy contracts, they remove money to keep unit pricing the same.

Now, this is completely unrelated to our setup that involves the creation of debt. I’m not sure how to reconcile the two.

7

I guess from the OP’s “million dollar loaf of bread” example I’m thinking about hyperinflation…I remember visiting relatives in Brazil in the 80’s and talking about how it was impossible for them to save for anything, and car payment plans were structured so you didn’t actually get the car until you finished making the payments (under presumably varying terms) because the currency was continually becoming worthless.

8

There isn’t really a GQ answer for this.

If you compare states which have a minimum wage to those that don’t, there doesn’t seem to be any difference in the spread of money. That is to say, if you establish a minimum wage that actually raises the lowest wage which would be paid to something higher, then you would expect to see a smaller income disparity in those states because the money being spent on the lowest earners has to come from somewhere, and that would always be from higher up. But that doesn’t seem to be the case. States with no mandatory minimum wage seem to have no different income distribution from ones which do have one.

The reason for this would probably be that the legally mandated minimum wage is the same as it would have been if it hadn’t been legally mandated.

The thing is that people need to eat. Even if people aren’t aware of this, their stomach tells it to them soon enough. The upshot of this is that people don’t take a wage which is any lower than that which they need to survive. So if the minimum wage is simply pegged at the rate at which people need to survive, then it ends up no different from what it would be in the natural market place. Overall, the only result of having the mandatory legal wage is that every time it is bumped, it causes a small shock to the market and puts various stores out of business, people lose jobs, etc. Whereas this doesn’t occur under a natural system, because the minimum rises on a slow gradient, rather than like a set of stairs.

As the minimum wage is currently managed, there’s simply no point to it at all. It is purely a negative.

On the other hand, there is a difference between the ‘minimum needed to survive’ and the ‘minimum needed to Survive’. I may be able to live on $500 a month. But if I make $500 a month (ignoring inflation) for the rest of my life, I won’t be able to afford to feed myself and stay sheltered after I retire, and I especially won’t be able to afford my health care.

If we were to give people this value, we would have to double the minimum wage, and we would have to trust that people would save their money and keep it ready for retirement. Our policy makers think that’s unlikely to happen. It’s easier to just let people bargain for a little ‘s’ survival wage, tax those who are making above the rate to big ‘s’ survive, and set up social security, medicare, and medicaid.

But there’s certainly no value in doing like you, the OP, suggests. If you doubled the minimum wage, and the price of apples and oranges, apartment rentals, and all else doubled to match, well what’s the point? Nothing has changed, since everything changed equally. At the end of the day, the minimum wage will always be the minimum wage because there’s a significant number of people who are willing to take a wage which is at little ‘s’ survival rate, and the price of apples and rent will change to correlate to that value.

9

It sounds good, as an abstract theory.

In practice, however, you run the risk that grocery prices will rise earlier than wages will rise. In the long run, it’s not a problem (theoretically). But in the short run, it tends to be rougher on poor people than on rich people.

Positive feedback loops have a tendency to get out of control. If you want a stable system, you want negative feedback loops.

Weimar Germany, and Zimbabwe in more recent times, have not been good places to be poor.

10

When the government sets a minimum wage, it is arbitrarily setting the exchange rate for one transaction in the economy, but it is not changing anyone’s bargaining power relative to the rest of the players in the economy.

People who could only get minimum wage, will still only be able to get minimum wage. People who could get a million times minimum wage, will still be able to get a million times minimum wage.

11

Investing in a car is a great way to lose money but once in a house I’m not so sure, as your wage goes up don’t you owe less to the bank ?

12

I start a factory producing widgets at a cost of $5 each and sell them at $8, should the monetary supply reflect the production cost or the selling price? Selling price surely, but what about depreciation? I’ve produced a million widgets over 10 years, should the value of the first few thousand widgets still be a part of the considered wealth of the nation?

And what if I in year 11 improve my production so it costs $4 per widget, but widget demand has risen so I can sell at $9?

A completely stable supply of money is unrealistic and not even a good thing in theory if you use halfway realistic assumptions. Controlled low inflation is just the best policy there is overall.

13

The fundamental problem is that prices provide information.

A meter is a generally reliable guide to distance, yes? A meter always measures the same thing, so it’s easy for us to compare distances. We don’t have to change our units of measure as we sail the seas. Follow the calculations, and our navigation will be solid. We won’t run our vessel aground.

The economy requires navigating, too, but in time as well as space. The future is a dark and mysterious place, and yet businesses spend billions upon billions of dollars on investment projects based on the market information they have. And we have a unit of measure, a meterstick that we use to judge value in the economy. But our economic meterstick isn’t so constant and reliable. This presents a mighty challenge to those who seek a return on their investments: If I invest a dollar today to receive two dollars a year from now, what will those future dollars be worth? Am I actually going to make some return on my investment, or will the only value of those two future dollars be as paper to wipe my ass with?

NASA scientists have screwed up calculations in the past because they failed to make the proper conversion. Real businesses can easily make the same mistake with dollars. And the higher the inflation rate, the more difficult the conversion factor is because we’re always concerned about expected future inflation, and variance from expectations is significantly higher with higher inflation rates. High inflation cannot be predicted with any certainty. Add to that calculation horror the fact that a high inflation rate means you’re not just doing the conversion factor about future expectations once. The meterstick is in a constant state of flux. In a period of high inflation, every single economic actor must be doing very difficult unit conversions, based on random guesses about future inflation, all the time. And they will make mistakes. They will get things wrong, especially people who are trying to save and invest for the future. They will have utterly no idea of the true interest rate they should charge.

And so what happens is that they stop. They step out of the game. Investment dries up. Productive capacity stagnates. The economy becomes stalled. High inflation destroys the information that we need to have efficient, mutually-beneficial exchanges.

Moderate low inflation is ideal because of issues like sticky prices and the zero nominal lower bound on interest rates. 3% inflation is a much better situation than 3% deflation. But excessively high inflation is always, always a problem.

14

What about housewives and teenagers who don’t need their job to survive? Lots of people work for extra money on the side, and some jobs probably just aren’t worth minimum wage.

Minimum wage could easily be pegged to CPI and forgotten about. The sole reason it exists is as a political football the politicians can throw around every couple of years to divert attention from real issues.

15

Sure, (under the very high inflation circumstances I’m talking about) that would wind up being a great deal for you, and a terrible one for the bank - which is why you wouldn’t be able to find one to loan you the money.

16

In addition to that, much of the modern economic system is based on one entity’s savings becoming another’s investment. Money stuffed under a mattress isn’t driving economic improvement anywhere and is effectively taken out of the system for an indeterminate amount of time.

Money deposited in a bank (in addition to earning interest for the saver) can then be used to finance new projects, ideally projects that make some economic improvement - a new factory building the iWidget or a sandwich store in a neighborhood that didn’t have one, etc.

It’s in society’s interest to encourage the latter form of saving/investment over the former mattress form. Low and moderate inflation do this, while high inflation, and deflation do not. Zero inflation might be OK, but isn’t a stable policy target in the real world.

17

Everything is worth what someone else will pay for it - basic supply and demand. If there’s a way to supply or demand, someone will supply it to make some money to pay for what they wan to demand. Money is just a way to keep score.

Simple inflation is easy - if there is too much money, the price of everything goes up - If I know Joe has $100 that he got easily and will spend without hassle, why would I ask only $1 for my loaf of bread (unless Bill beside me offers a loaf of bead for the same price). I want $100 in my pocket too. Everything will find it’s appropriate price, inflation, except… Too little money around, the reverse is true - Joe only has 25 cents and nobody else will give me a dollar for my loaf, I’ll take the 25 cents to buy myself milk. Deflation. Wages are like prices - if what you do is valuable, you can ask more. If 100 people apply for 1 job and all can do it, the amount the employer will pay will be less.

A lot of things, like wages, have a hard time going down. (Greece today is a good example). We do not make people renegotiate their wages every morning when they show up. A little inflation means the things that are overpriced slowly lose value until they are realistically priced.

Sometime the government steps in to set prices - you must pay minimum wage, just as you cannot sell people or kidneys or DDT or freon. They distort the market because it is better than uncheck capitalism in some things.

A wage is supposed to be based on what you produce, unless you work on Wall Street. If the minimum wage goes up but the value of what you produce does not, then either the employer dumps you or charges a bit more for what you produce.

The government likes a little bit of inflation because it helps level everything out. Yes, eventually we will have million-dollar loaves of bread; however, considering that bread used to be 5 cents a hundred years ago, and now it’s what, a dollar or two - it may be a while; a century or two if we keep control of the money supply. Before then, we’ll be like Argentina or Zimbabwe and they’ll recall the money and issue new stuff with a 100-to-1 ratio,

18

Minimum wage is a poor thing to be talking about in terms of inflation.

Inflation has to do with money supply, minimum wage has nothing to do with that.

Also note that minimum wage increases lag inflation. It was $1.60 an hour 40 years ago and should be $8.95 an hour in constant dollars. It only went up to $7.25 relatively recently. And inflation since that increase has been negligible.

Just remember: If someone is trying to convince you that minimum wage increases cause inflation, they are trying to distract you from another issue.

19

IANA Economist, so these answers may be simplistic, but inflation is a measure of the supply of money. Simply put, as the supply goes up, the value goes down; one of the most basic economic prinicples in action there. The thing is, though, money doesn’t just appear, it has to come from somewhere, so it is based on loans from the fed. And this is how they control the money supply, by lowering rates, it provides incentive to borrow more money, which increases the supply, and by raising it, it decreases incentive to borrow money.

Tying wages directly to it doesn’t make any sense though because that’s not actually affecting the supply of money. If I buy a loaf of bread, regardless of the price I pay, the person I pay doesn’t end up with any more money than I spent on the loaf of bread. Now, that’s not to say that maybe there isn’t some indirect affect, as my wage may affect my willingness, or necessity, to contract debts or affect the size of those debts. But I suspect that any such relationship is sufficiently complex that drawing a direct correlation between minimum wage and inflation is overly simplistic.

20

Raising the minimum wage won’t cause inflation – not in this environment anyway. It factually increases the cost of doing business and factually lowers the narrow margins some companies have to work with. Payroll is the biggest cost of business for most. If your margins are small, an increase in minimum wage would affect your balance sheet such that you are no longer viable, or can’t expand, or can’t get a loan, or can’t cover health insurance for some employees (if some ever had it). Raising payroll = big trouble for companies teetering on the edge (fact).

Raising the minimum wage – it could be argued – risks slower economic growth and more unemployment. It might not nudge it in a very perceptible way, but it might help stagnate growth and stall progress.

Why? Because, as explained, you have some companies barely getting by. Jack up their payroll, and they have less to invest and grow the business, or they might not be viable, or make cuts, or lay people off.

Heck, given that 15-30% of the people are employed based on growth, no one wants to delay that growth or we’re going to be seeing 20% unemployment if something doesn’t give soon.

The time to talk about increasing minimum wages is when companies are growing and there’s room to spare… when margins are better and there is less risk.

Who in their right mind would F with this total F-in mess we have?