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Comment by tptacek | Hacker News Reader

I'm confused. Why would anyone hold assets in a currency designed to penalize people who hold assets in that currency?

When I was five I asked this question and got a simple answer. I'm not an economist so it is probably incompletely or completely wrong.

If you notice that your money is worth more tomorrow, you are going to save your money and spend it tomorrow. This is true in situations of "deflation".

This sounds good to you, because all you have to do is wait and you'll be better off tomorrow. You don't even have to work to get more stuff.

However, you aren't the only person with this idea. Everyone saves their money in the bank. The people who sell goods and services, sell fewer goods, and maybe go out of business.

The economy slows down.

On the other side, if you design an economy so that inflation exists. People want to spend because in the future their money will be worth (a little bit) less.

Money flows around a lot. People who sells things make money and stay in business. People have jobs and the money is still worth something.

Remember money isn't worth something, trading good fluidly and efficiently is worth something. Money lets us do that. So a currency that lets us do that is good.

If anyone knows more about the situation, please add it. I don't know any economists so this story is probably pretty incomplete.

I'm not asking a deep economic question. I'm saying, why would any real business accept payments in a currency that overtly and deliberately penalizes them for holding that currency when alternatives that don't do that are even more available? It just makes no sense to me.

Because the customer wants to pay in freicoins, and tools exist (or will exist - I'm talking from the future) to make acceptance hassle-free, and the value will be stable long enough to convert into the currency of your choice.

(Of course the macroeconomic recession-proof nature of demurrage currency makes it desirable for merchants as well, and the zero-interest loans are a boon for entrepreneurship. I'm just saying even if you're skeptical, that shouldn't be a barrier to acceptance.)

Why would anyone want to make an interest free loan with an arms length party? I understand that from time to time these things happen, like KIVA, but seriously why would I lend out my money for the opportunity of not getting it back?

Then add appropriate interest representative of the risk you are taking on.

When we say zero-interest, we're talking about basic interest/liquidity premium: the interest which is attached to loans simply because of the opportunity cost of lending, not the risk taken on.

I don't get it either, interest isn't inherent to a currency, when I hold dollar bills I don't accrue interest, but if I put them in a bank, or other security they do.

If that argument were correct, Moore's law would destroy the computer industry as everyone would perpetually wait to buy.

As this hasn't happened, it may be worth considering the effects of time preference in both examples.

That's taking the argument to an unrealistic extreme. Rather, non-zero interest rates and resulting inflation/deflation incentivize market inefficiencies. Not a big enough inefficiency to drive an industry out of business (unless we're talking hyperinflation), but enough to be measurable consequences.

As evidenced by the large number of merchants that accept semiconductors as payment for goods and services.

But if this were true, wouldn't we be in deep trouble as soon as just one deflating currency or commodity existed? All wealth would be hoarded in the form of that one thing. And gold exists.

Even if you are correct and the existence of gold is detrimental to the economy, I don't see how you can prevent the effects of an existing devaluating currency/commodity by creating a new inflating one.

Well there is also this theory that people saving their money are actually giving a gift to the economy. They gave something they received money for in return, if they don't spend that money they basically sold their goods for free.

See

www.slate.com/articles/life/holidays/2004/12/what_i_like_about_scrooge.html

I suspect few rich people keep their riches in cash.

If people hoarded cash, deflation would stop pretty quick, so doesn't the problem rather solve itself?

You wouldn't, which is entirely the point. Demurrage currency incentives people to only hold what they need for cashflow purposes, and to re-investing the rest into real capital. It's the distinction between money as store-of-value and medium-of-exchange. Traditional money tries to be both and creates problems in the process. Freicoin is designed to be a medium-of-exchange only, and converted into other assets (treasury bonds, stocks, etc.) for long-term storage of wealth.

Still confused. How does a currency that overtly disincentivizes its own use solve the problem of the hoarding of other currencies?

The demurrage encourages it's own use as a medium of exchange - use it or lose it. Hoarding of other currencies is not a problem.

I recommend reading David Graeber's "Debt: The First 5,000 Years". IIRC it has a good chapter on demurrage, as well as covering many historical currencies which by accident of design were similar to modern demurrage currency in operation.

What incentive exists for anyone to use this currency at all? Why would I ever accept a "freicoin"?

Well there's all the advantages that bitcoin has (low transaction fees, quick processing, no chargebacks, etc.). We're also working on tools & services that would make transacting in Freicoin as easy as possible, so that for example you can set a limit on how many freicoins you want to hold, and the remainder will automatically be swept into an exchange account and converted into bitcoins or dollars.

I'm not a bitcoin believer, but what advantage can you come up with for "freicoin" that bitcoin won't simply adopt?

"Come over and get kicked in the nuts! Free car service and short lines!"

I have the feeling this is in reaction to the capped total value of the bitcoin monetary system which generates deflation over time and incentivizes sparing currency instead of using it.

By adding a component of inflation, you increase exchanges.

Let's just get rid of the cap and keep things simple.

edit: Of course from a micro-economic perspective this doesn't make sense unless it was forced onto us by a government as a de facto standard.

You don't really increase exchange with other currencies if its low friction to do transactions in BTC as the optimal strategy is to keep your savings in assets that increase the most in purchasing power and only move value out at the moment of a purchase and only for the amount of the purchase. Likewise, the seller prefers to receive the highest appreciating asset in exchange if friction is low.

Inflation and demurrage do not have exactly equivalent effects, as we discuss in the about page http://freico.in/about/

AFAICS, no rational person would without external incentives.

People are right now. This currency is live, transacting, and secured by a rapidly increasing amount of computer power. On the subject of their rationality...

Would you be willing to take a bet on where this currency will be in terms of net worth vs BTC in 5 years?

No, because that would be illegal, and a possible conflict of interest for me.

Private social bets are not generally illegal, but if you're really concerned, offer the proceeds to charity.

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