Modern economists prefer a slight inflation rate of like 2% a year. This currency would not at all be able to do this, and not work well as a medium of exchange.
Why not? Like, the S&P 500 can vary by tens of percent, but as Google suggests, global GDP only fell 3% in 2021, and it usually grows, and the more stocks are distributed, the more stable they are.
If you imagine that the world’s capitalization was once measured in dollars, but then converted to “0 to 1” proportionally to dollars, and everyone used that system, and there is no money printing anymore, what would be wrong with that?
Of course you can still express money in gold if you want, it’s just that not so many people store their money in it, and that would require exchanging money for money. If dath ilan heard a plan to ban all currencies, they would quickly come up with Something Which Is Not This.
It might seem like deflation would make you hold off on buying, but not if you thought you could get more out of buying than from your money passively growing by a few percent a year, and in that case, you would reasonably buy it. If it made people do nothing, the economy would slow down enough for deflation to stop, for them to start doing things again, and so they wouldn’t get to that point in the first place. Every transaction you make is an investment of your knowledge into the global market in the area where you believe you are smarter than the market and can outpace it in some sense.
The main reason economists like inflation is because it allows companies to lower real wages of underperforming workers without having to actually give them a pay cut.
It also has other advantages—it allows a central bank to set a negative real interest rate, giving them more flexibility in the usage of interest rate as a tool.
Deflation meanwhile is considered very bad. Some of the reasons wouldn’t be relevant here, but the key one is that meeting agreed on contracts becomes much more expensive than expected. If the wages you pay to your farm workers are tied to the stock market, but the income you get from selling farm produce is not, you have a real problem.
The main reason economists like inflation is because it allows companies to lower real wages of underperforming workers without having to actually give them a pay cut.
Yeah, I remember this part, and also the part where dath ilan don’t use it anyway, because instead they can just “order everyone to step to the right once” and accept those wages and people are sane enough to do so.
Why not? Like, the S&P 500 can vary by tens of percent, but as Google suggests, global GDP only fell 3% in 2021, and it usually grows, and the more stocks are distributed, the more stable they are.
Increases in the value of the S&P 500 are basically deflation relative to other units of account. When an asset appreciates in value, when its price goes up it is deflating relative to the currency the price is in. Like, when the price of bread increases, that means dollars are inflating, and bread is deflating. Remember, your currency is based on a percentage of global market cap. Assuming economic growth increases global market cap, the value of this currency will increase and deflate.
Remember, inflation is, by definition, the reduction in the purchasing power of a currency. It is the opposite of that thing increasing in value.
If you imagine that the world’s capitalization was once measured in dollars, but then converted to “0 to 1” proportionally to dollars, and everyone used that system, and there is no money printing anymore, what would be wrong with that?
Then you would effectively be using dollars as your currency, as your proposed currency is pegged to the dollar. And you stopped printing dollars, so now your currency is going to deflate as too few dollars chase too many goods and services as they increase with economic growth.
As you are no longer printing dollars or increasing the supply of your new currency, the only way for it to stop deflating is for economic growth to stop. You’ll run into problems like deflationary spirals and liquidity traps.
It might seem like deflation would make you hold off on buying, but not if you thought you could get more out of buying than from your money passively growing by a few percent a year, and in that case, you would reasonably buy it.
Deflation means you’d be able to buy things later at a lower price than if you bought it now. People would be incentivised to hold off on anything they didn’t need right away. This is why deflation causes hoarding, and why economists try to avoid deflation whenever possible.
Deflation is what deflationary cryptocurrencies like Bitcoin currently do. This leads to Bitcoin being used as a speculative investment instead of as a medium of exchange. Your currency would have the same problem.
In dath ilan, inflation and deflation are not used as macroeconomic tools because people are rational enough to accept wage reductions if their purchasing power remains unchanged, or to voluntarily pay the government to prevent crises without the need for a hidden tax that dilutes money by printing more during a crisis. Interest rates on loans could be lower if you expect returns that outpace deflation. If people can afford not to work, they are expected to do so, and they would spend more “shares”, redistributing them in favor of those who are more eager to work. Perhaps you aren’t really interested in having people work that much or that often, especially if you’re aiming for a utopia with a four-hour workday, or something similar. How relevant are these issues in a world where “every person is economist in the same way every earthling is a scribe by medieval standards”?
To be fair, before publishing I thought this currency could be implemented in a real world environment with less improbability. My current main doubt is “how can the market cap be so volatile with a stable GDP, and would they be closer to each other in a more adequate equilibrium?”. And I’ve basically switched to “okay oops, but under what conditions could this theoretically work, if could at all, and could you imagine better theoretical peak conditions?” mode. Deflation seems like a reasonable danger, I just can’t see how it could be avoided if everyone used market fractions at least to store their money if not to exchange. Because, like, you don’t introduce a random money-making machine into the system to solve your psychological problems at the cost of 2% of your money, there’s no place for it, so I’m guessing that people would adapt to that, and there’s a fictional example of dath ilan that such adaptation is real.
Why not? Like, the S&P 500 can vary by tens of percent, but as Google suggests, global GDP only fell 3% in 2021, and it usually grows, and the more stocks are distributed, the more stable they are.
If you imagine that the world’s capitalization was once measured in dollars, but then converted to “0 to 1” proportionally to dollars, and everyone used that system, and there is no money printing anymore, what would be wrong with that?
Of course you can still express money in gold if you want, it’s just that not so many people store their money in it, and that would require exchanging money for money. If dath ilan heard a plan to ban all currencies, they would quickly come up with Something Which Is Not This.
It might seem like deflation would make you hold off on buying, but not if you thought you could get more out of buying than from your money passively growing by a few percent a year, and in that case, you would reasonably buy it. If it made people do nothing, the economy would slow down enough for deflation to stop, for them to start doing things again, and so they wouldn’t get to that point in the first place. Every transaction you make is an investment of your knowledge into the global market in the area where you believe you are smarter than the market and can outpace it in some sense.
The main reason economists like inflation is because it allows companies to lower real wages of underperforming workers without having to actually give them a pay cut.
It also has other advantages—it allows a central bank to set a negative real interest rate, giving them more flexibility in the usage of interest rate as a tool.
Deflation meanwhile is considered very bad. Some of the reasons wouldn’t be relevant here, but the key one is that meeting agreed on contracts becomes much more expensive than expected. If the wages you pay to your farm workers are tied to the stock market, but the income you get from selling farm produce is not, you have a real problem.
Yeah, I remember this part, and also the part where dath ilan don’t use it anyway, because instead they can just “order everyone to step to the right once” and accept those wages and people are sane enough to do so.
Increases in the value of the S&P 500 are basically deflation relative to other units of account. When an asset appreciates in value, when its price goes up it is deflating relative to the currency the price is in. Like, when the price of bread increases, that means dollars are inflating, and bread is deflating. Remember, your currency is based on a percentage of global market cap. Assuming economic growth increases global market cap, the value of this currency will increase and deflate.
Remember, inflation is, by definition, the reduction in the purchasing power of a currency. It is the opposite of that thing increasing in value.
Then you would effectively be using dollars as your currency, as your proposed currency is pegged to the dollar. And you stopped printing dollars, so now your currency is going to deflate as too few dollars chase too many goods and services as they increase with economic growth.
As you are no longer printing dollars or increasing the supply of your new currency, the only way for it to stop deflating is for economic growth to stop. You’ll run into problems like deflationary spirals and liquidity traps.
Deflation means you’d be able to buy things later at a lower price than if you bought it now. People would be incentivised to hold off on anything they didn’t need right away. This is why deflation causes hoarding, and why economists try to avoid deflation whenever possible.
Deflation is what deflationary cryptocurrencies like Bitcoin currently do. This leads to Bitcoin being used as a speculative investment instead of as a medium of exchange. Your currency would have the same problem.
In dath ilan, inflation and deflation are not used as macroeconomic tools because people are rational enough to accept wage reductions if their purchasing power remains unchanged, or to voluntarily pay the government to prevent crises without the need for a hidden tax that dilutes money by printing more during a crisis. Interest rates on loans could be lower if you expect returns that outpace deflation. If people can afford not to work, they are expected to do so, and they would spend more “shares”, redistributing them in favor of those who are more eager to work. Perhaps you aren’t really interested in having people work that much or that often, especially if you’re aiming for a utopia with a four-hour workday, or something similar. How relevant are these issues in a world where “every person is economist in the same way every earthling is a scribe by medieval standards”?
Ok fair. I was assuming real world conditions rather than the ideal of Dath Ilan. Sorry for the confusion.
To be fair, before publishing I thought this currency could be implemented in a real world environment with less improbability. My current main doubt is “how can the market cap be so volatile with a stable GDP, and would they be closer to each other in a more adequate equilibrium?”. And I’ve basically switched to “okay oops, but under what conditions could this theoretically work, if could at all, and could you imagine better theoretical peak conditions?” mode. Deflation seems like a reasonable danger, I just can’t see how it could be avoided if everyone used market fractions at least to store their money if not to exchange. Because, like, you don’t introduce a random money-making machine into the system to solve your psychological problems at the cost of 2% of your money, there’s no place for it, so I’m guessing that people would adapt to that, and there’s a fictional example of dath ilan that such adaptation is real.