>>It is in fact a major bug that you effectively lose just by holding.
Not taking sides here, but I think it could be argued that devaluation is good because it encourages economic activity (i.e. spending) instead of mindless hoarding.
I mean, money is supposed to be a medium of transfer, not an investment/saving mechanism. We don't want people hoarding cash in a bank account. We want them to invest that cash in actual assets that can then be developed.
>Not taking sides here, but I think it could be argued that devaluation is good because it encourages economic activity (i.e. spending) instead of mindless hoarding.
So would threatening to execute anyone who spends less than n% of their take-home pay, but people don't advocate that, do they?
Before you object to the comparison, I know: "That's different: the costs would vastly exceed the benefits!"
Right, but there would be costs! There are costs any time you force people to spend (commit to purchases) earlier than they would like to -- whether you do it by inflation or the sword.
One cannot simply say, "well, economic activity [that we measure] went up, so that must have been a good idea!" But anytime someone brings up the "encourages economic activity" argument for inflation, they rarely offer any way to model the cost of moving up purchases like this, nor do they even realize it's necessary to do so!
(Edited to avoid excessive attribution of the argument.)
Inflation is a tax on assets held as dollars. That tends to make it highly progressive as savings tends to increase faster than income once you pass a certain inflection point.
The government already taxes other things (both to generate income and to alter behavior), so looking at inflation that way makes it easier IMO to make sound policy decisions rather than comparing it to executions.
Yes, you can replay another standard argument for inflation. It's still not enough: the question is how to model the cost of making people spend sooner than they otherwise would, so you can compare to the benefit thereof. Mentioning executions was just to show what happens when you ignore costs and only talk about policy benefits.
For those "taxes of other things", you still need to model its social cost to know whether it outweighs the benefit. You can't just dismiss the point as "this isn't execution".
Edit: Important thing to note: in most discussion of taxation, the theme is "how to avoid the deadweight loss", i.e. how to write the tax in a way where it just transfers money without inducing changes in behavior. Advocating inflation as a behavior-changing tax is a sharp deviation from this, requiring a very different justification and model than traditional taxation.
> in most discussion of taxation, the theme is "how to avoid the deadweight loss"
This is certainly not true for e.g excise taxes. Inflation as a tax on dollars-held is similary intended to alter behavior by encouraging those with wealth to take riskier investments (alternatively stated, to discourage long-term holding dollars, similarly to how excise taxes are intended to discourage consumption of particular goods).
I think you mean Pigovian, not excise, taxes, and you'd still need a way to model the relative benefits vs costs of hoarding. With e.g. carbon taxes, one can estimate the harms of global warming (rising sea levels, lost biodiversity) and find the social cost of an emission, then levy a tax so that people only do those carbon emissions whose welfare gain exceeds the environment-driven welfare loss (which exist, despite the rhetoric from the fiercest advocates).
When someone proposes n% inflation as a way of "taxing" hoarding, what's the corresponding model? What's the "rising sea level" there?
In cases of a ~100% "inflation tax" (aka hyperinflation), we see the harms clearly: people have to spend money almost the second they get it. They have to move up purchases and otherwise arrange their lives in ways that are extremely welfare harming, and which probably outweigh the benefits of the greater economic activity it induces.
(Contrary to a lot of talk on hyperinflation, I don't see the chief problem as being volatility; even with stable, predictable hyperinflation you have the problem of losing the main benefit of money, which is that you don't have to know what you'll ultimately be buying in order to produce something for sale.)
So likewise, to justify a Pigovian argument for inflation, you would likewise need a model, or otherwise gauge the magnitude, of the "costs of making people move up purchases [when they'd rather save and decide later]" -- the costs that become extreme in the case of hyperinflation. And yet virtually everyone enamored of the "we need to encourage economic activity" argument for activity has nothing in the way of this. Hence my frustration with it.
(The analog of hyperinflation in carbon taxes would be a ban, or absurdly high tax, on burning of fossil fuels, and has the corresponding welfare harm that the avoided fuel usage -- or costs in evading the ban -- far exceed the welfare harm of the emissions themselves.)
If you talk about small amounts of inflation, then the amount of inflation from the time I get my paycheck, to the time I can convert it to other assets is negligable. I don't need to purchase anything with it.
I haven't seen any evidence that convinces me that modest inflation causes people to spend money sooner (If you have any I would be very interested to see it).
I think that easy access to credit definitely affects people's spending behavior, but I don't have a lot of data to back that up.
But you were just saying (or relaying the point that) the inflation tax is good because it changes people's behavior in the way of spending sooner. If "there's no evidence that modest inflation causes people to spend money sooner", then it fails by the very metric you suggested.
You can't have it both ways: either inflation (of a certain rate) is good because it makes people spend sooner, or it doesn't change behavior.
Edit: or there's some other way in which you operationalize the goal of "increased economic activity" that's orthogonal to "spending earnings sooner than you otherwise would".
Perhaps because I am using my terms loosely. My apologies.
By spending I intended "purchasing depreciating (or disposable) assets"
Purchasing equities as an inflation hedge is not what I meant. Inflation does encourage riskier investments, as merely holding currency is insufficient to maintain capital.
I agree that it's an open question whether or not that's a good thing: some would argue that encouraging riskier investments encourages malinvestments which becomes a net negative; others argue that the increased activity caused by risky investments outweighs the damage done by malinvestments; I've even run into many who claim that even malinvestments are good, since moving money around is good no matter the reason.
If that last point of view is true, I'm giving up on economics, but the first two both seem reasonable to me.
Depreciating vs investment assets is orthogonal; both lose value more slowly than money in a hyperinflationary situation.
And yes, there are trade offs, one of which is the malinvestments from spurring people to hold non cash. My point was that this, plus the individual welfare loss of the hoarder from having to commit to purchase sooner, must be weighed against the purported benefits of (what you got people to do via) inflation -- and (as I said at the beginning) that most people who make that argument for inflation (even economists) don't offer a way of modeling those relative benefits.
It's like arguing for an apple subsidy on the basis that apples are good, without even thinking about the costs of such a subsidy (ie diversion from non-apple production).
With phrases like "economic activity" and "mindless hoarding", you're using language that short-circuits critical thinking. You're on the right track, though, with your parenthetical note, so let's start by replacing "economic activity" with "spending". Then, instead of using the inflammatory phrase "mindless hoarding", let's use the word "saving".
With this neutral terminology, we're now ready for some actual thought. We can recast the claim as follows: devaluation is good because it encourages spending and discourages saving. There's no doubt about the factual claim—devaluation does indeed encourage spending and discourage saving. But why is saving bad and spending good? This is an ethical judgment that depends on your particular set of values, but it is undeniable that devaluation (currency dilution) transfers purchasing power from savers to spenders. In particular, it's mathematically equivalent to combining a perfectly hard currency with forced confiscation (from savers) and transfer (to spenders), i.e., organized theft. Thus, from an ethical point of view, there is a strong reason not to give devaluation the benefit of the doubt.
And yet, so far as I can tell, devaluation is always given the benefit of the doubt by the mainstream. Doesn't that seem odd?
>>We can recast the claim as follows: devaluation is good because it encourages spending and discourages saving.
No, you can't. In fact, it is interesting that you blamed me for attempting to short-circuit critical thinking, and then turned around and suggested something so asinine as this.
The reason it is asinine is because not all forms of saving are equal. A grandma stashing cash under the mattress does not help anyone else but the grandma, which is why it makes sense to discourage it using devaluation mechanics built into the economy. But if she invested that cash into a value-generating asset (e.g. a company, a piece of real estate, a public project, etc.), both her and the asset developer/owner would benefit: it would be possible to develop and maintain the asset, and she would reap greater returns. And just so we're clear, it's not like we're forcing grandma to take insane risks. Government bonds have historically been incredibly safe. So devaluation exists as a mechanic to say to grandma, "instead of mindlessly hoarding your money under the mattress, buy bonds with it. As a result, we (the government) will be able to fund public projects and you will be shielded from devaluation."
It is difficult to argue that this configuration is less optimal than one in which money never loses value.
You may not agree with their analyses, but at least they can serve as a counter-narrative to the mainstream views you evidently support.
By the way, your comment can be improved by removing everything before "not all forms..." In that case, it would simply make a cogent point (though one with which I still take exception). As it stands, your comment comes across as petty and unrefined. Stay classy—it's nicer, and it's also more likely to persuade.
"Ultimately though, if money were represented directly by time or something I think that would be far more ideal as it would be guaranteed to be stable."
I'm not sure what that means. Jokes about relativity aside, time doing what? If you mean individual's labor (which has been tried a few times, see http://en.wikipedia.org/wiki/Ithaca_Hours), then that seems unlikely to even be fungible, much less stable.
