[Pops]

A central idea is negative interest (also known as demurrage), which discourages accumulation, allows money to circulate in the absence of growth, and encourages long-term thinking.

TOD - the author's blog

I had not really considered 'negative interest' as some kind of lever to be pulled or inflation to be a good thing.

Demurrage:

Like inflation, demurrage reduces the present value of holding a unit of currency, similar to the effect of a negative interest rate on all currency in circulation.

Obviously if money would be just as valuable 50 years hence there would be less incentive to spend or invest excess currency before it evaporates. So inflation encourages spending and investing and discourages 'hoarding' under the mattress, it keeps the velocity of money high and the economy from stagnating.

Even without growth?


I learn something every day.

[Sys1]

We have passed peak oil, so we will statistically be poorer and poorer.
If it's inflation, it means we'll still have a job, but it won't pay as much as before. And will pay less and less.
If it's deflation, it means some people will be incredibly rich while most of citizens will be jobless.

Inflation is communism, deflation is capitalism.

[PrestonSturges]

Without any inflation, you fall into a "liquidity trap." Krugmann wrote an article years ago about Japan's Lost Decade. The government has no ability to stimulate the economy and cash is the ultimate investment. Capital no longer flows for investments, only games that destroy trillions of equity so a handful of people can skim commissions and fees. This shrinkage due to equity destruction only makes the remaining cash more valuable. Without inflation, growth can drop to zero unless there is a game changing technology that everyone has to invest in.

[Plantagenet]

We've already got inflation.

Gas costs about a buck more now then it did a year ago. Food also costs more. In fact, just about everything costs more.

The only people who whine about not having inflation are people who are so rich they don't notice all the inflation.

[dolanbaker]

Without any inflation, you fall into a "liquidity trap." Krugmann wrote an article years ago about Japan's Lost Decade. The government has no ability to stimulate the economy and cash is the ultimate investment. Capital no longer flows for investments, only games that destroy trillions of equity so a handful of people can skim commissions and fees. This shrinkage due to equity destruction only makes the remaining cash more valuable. Without inflation, growth can drop to zero unless there is a game changing technology that everyone has to invest in.

Maybe in a resourse constrained world, zero growth is what is needed! Would need the change the financial system from a "lent into existance (debt based)" model to a "spent into existance (debt free)" method of creating money.

[rangerone314]

Not much is wrong with SMALL inflation as long as wages keep up, which is not guaranteed.

Hopefully someone in power comes up with the thought that a steady-state economy might be a good thing to plan for.

[Ferretlover]

As long as it does not affect me, mine or our lifestyles, nothing is wrong with it!

[Pops]

Negative interest is where we're at now. 10 yr treasuries at <2% and inflation at maybe 2-3% if you include energy and food, less in reality for the accumulation class but close anyway.

But even excluding inflation, effective rates are already going negative:

Bank of New York Mellon Corp. on Thursday took the extraordinary step of telling large clients it will charge them to hold cash.

WSJ

This is what happens when there is no expectation for growth - people aren't looking for a return, just hoping to lock in a rate of loss that is certain. Kinda what you would expect when the accumulators realize peak oil is a reality and has arrived.

Not saying that is what's happening, just saying that's what you'd expect to happen...

[PrestonSturges]

Bank fees for large accounts shows that banks are so chock full of cash they are choking on it. Nobody wants to borrow that cash, even at near zero interest and the banks would make no money lending it either. Cash is king as an investment. Only a few hyperwealthy individuals has any and them that do has quite a bit of it. When you own the world, your first priority is not to go build a factory or even hire more fry cooks.

[Kez]

The problem with consistent inflation over several decades is that the people who save, and stay out of debt, get screwed. My wages never keep up with inflation, and I keep looking for safe investments, but I often think it would just be better to just spend more now and save less, because I don't see deflation any time soon. If deflation arrives, then the savers like myself are sitting pretty.

I am convinced that the only thing keeping the US from seeing too much inflation is because of the massive trade deficit. We print more money, but half a trillion of it is exported to other countries each year.

[PrestonSturges]

The US should not tax savings AND promise a rate of return 2 points above prime.

[PrestonSturges]

The US should not tax savings AND promise a rate of return 2 points above prime.

[smiley]

I had not really considered 'negative interest' as some kind of lever to be pulled or inflation to be a good thing.

Just wait till you retire and you'll get the catch.

Say you retire at 65 and you get a fixed entitlement plus a yearly inflation correction. The "official" inflation is running at 2%, however the actual inflation rate (stripped of all statistical wizardry) is much higher say 6%.

Since your annual correction is based on the official numbers your real income decreases each year. By the time you are 80 half your income is gone. If you make it to 90, at 35% of your original entirement, you have to save up for a bag of crisps. Such is the power of compound interest.

Just ask the generation before us, they thought they had their retirement sorted (like we do) and are now sitting in a rocking chair staring at the walls of their 12x12 appartment.

Once people start talking about inflation as a tool rather than an economic phemomenon I get the creeps. Because this tool usually ends up being used for transferring money, from those who cannot defend themselves, to those who dont deserve it.

[Pops]

Because this tool usually ends up being used for transferring money, from those who cannot defend themselves, to those who dont deserve it.

No doubt stuffing cash in your mattress will result in losing value to inflation. The whole point of having a low but positive inflation target is to encourage investment instead of burying cash in the back yard or buying gold and sticking it in a safety deposit box.

But tell me again who gains that lost value?

[Cog]

If you had bought gold for the last 10 years you would have beat inflation by a considerable amount.

[smiley]

The whole point of having a low but positive inflation target is to encourage investment instead of burying cash in the back yard or buying gold and sticking it in a safety deposit box.

You believe everything the politicians say?



The argument that deflation leads to massive cash hoarding is very thin. If you look at the graph below you see that the stagflation in Japan only has a marginal effect on the savings rate. True savings are high, but they have been consistently high troughout time. That is just the Japanese attitude to money.


So the saving effect is marginal at best. To answer your question; Who benefits?
- Private debt owners, see some benefits, but this is offset by higher cost of living.
-Governments see their debt as well as future obligations shrink, but they also see higher costs. On balance I think that they will see a benefit.
-I think the ones who benefit most from inflation are corporations. They see their debts and pension obligations erode away while they can protect their revenues by increasing the prices.

[prajeshbhat]

No doubt stuffing cash in your mattress will result in losing value to inflation. The whole point of having a low but positive inflation target is to encourage investment instead of burying cash in the back yard or buying gold and sticking it in a safety deposit box.

I don't think governments can create controlled inflation through deficit spending or low interest rates at all. That's basically what the Japanese have been trying for the past 20 years. But they are seeing a deflation.

Inflation happens when private banks create large number of loans to people who are making promises on a bright future. When that hope is lost, there will be deflation and unemployment.

[evilgenius]

We have passed peak oil, so we will statistically be poorer and poorer.
If it's inflation, it means we'll still have a job, but it won't pay as much as before. And will pay less and less.
If it's deflation, it means some people will be incredibly rich while most of citizens will be jobless.

Inflation is communism, deflation is capitalism.

That's not entirely true. With inflation you have rising wages, usually. If wages don't rise, as they didn't for a lot of people in this economy over several decades, then people have to borrow the difference. Can you see that for the Fed to fight yesterday's war, over inflation, every time that they go to bat risks a bubble? Some people think it's some kind of conspiracy. I don't. Sure, it's possible that when Alan Greenspan tried to talk down inflation, saying that he was most afraid of wages going up (thus keeping wages down and feeding the bubble), he was appealing to the interests of a vast right wing conspiracy. Personally, I chalk it up to the limits of the human mind.

[prajeshbhat]

Can you see that for the Fed to fight yesterday's war, over inflation, every time that they go to bat risks a bubble? Some people think it's some kind of conspiracy. I don't. Sure, it's possible that when Alan Greenspan tried to talk down inflation, saying that he was most afraid of wages going up (thus keeping wages down and feeding the bubble), he was appealing to the interests of a vast right wing conspiracy. Personally, I chalk it up to the limits of the human mind.

Yeah that's right. A lot of people think the FED deliberately causes inflation. Some nuts go as far as to think there is a global conspiracy to create a one world neo-nazi government or new world order or something like that. The classical definition of inflation is "Inflation is the increase in money supply". The rising prices are a symptom of the increase in money supply.
They point out at the M2 money supply and say that it is the root of all evil.
Well' if that is the case how come the prices of computers and electronics have been falling for the past 3 decades. This industry exists in the same universe. They also have to deal with the same money supply and the same governments. How come we don't see the price of electronics rising drastically.