I think you've got it wrong. The appeal of those pieces of paper is that they hold their value long term.
You can keep them in storage, and in 100 years they'll only have lost a mere 97% of their value.
You can keep them in storage, and in 100 years they'll only have lost a mere 97% of their value.
Try this thought experiment: Let's say the Federal Reserve invented two sets of currencies in 1913: The Dollar, and The DeflataDollar. Both are protected by Legal Tender Laws, both are acceptable for paying taxes, and both are basically accepted everywhere. The only difference is that the supply of Dollars increases every year (as it does now) whereas the DeflataDollar has a constant supply. If your employer offers to pay you in either of these two currencies, which one do you choose? Any rational actor would of course choose to be paid in the currency that won't lose 97% of its value every hundred or so years.
The only way to maintain an inflationary currency is to enforce its usage through laws and taxation. Otherwise free individuals will choose something else to trade with.
"Any rational actor would of course choose to be paid in the currency that won't lose 97% of its value every hundred or so years."
Right, because that time horizon is totally what is relevant when I'm being paid today and turning that money into other things tomorrow.
Exactly, the inflationary currency would be sold at a discount. And the amount of the discount would increase over time until the value of the currency fell to zero.
"And the amount of the discount would increase over time until the value of the currency fell to zero."
The exchange rate would change over time; that's unsurprising. I'm not sure the discount (in real terms) would change if the rate of inflation was constant. It is apparent that the value of the currency would fall toward zero - that's basically our premise; it is not apparent that it would fall to zero. You'll have to support that if you want to stand by the claim.
> It is apparent that the value of the currency would fall toward zero
I'm glad we agree on this.
> it is not apparent that it would fall to zero. You'll have to support that if you want to stand by the claim.
Fair enough. If graphed out, the value of the InflataDollar would only approach zero asymptotically. However, we're not just dealing with an abstract math equation. At a certain point, the market would lose confidence in the currency with a consistently falling value, and no one would be willing to accept it unless forced to.
I do admit that I could be wrong - predicting the behavior of humans is always imperfect. However, I am excited to see these experiments playing out in the cryptocurrency space. We have Bitcoin, which has a fixed supply of currency, and we also have Freicoin, a cryptocurrenty with demurrage (a form of currency devaluation) built into it. It will be interesting to see the futures these currencies have.
In our actual system the ability to deposit InflataDollars into accounts with fixed risk-free positive returns (backed by expected and potential supplies of InflataDollars), the government keeping inflation low, and the government requiring you to pay tax on 30-40% of your income solely in InflataDollars ensures the demand for InflataDollars will never approach zero. In fact, it's much less likely to reach zero than the demand for Bitcoins, Freicoins or tulip bulbs, none of which anybody is obliged to use in any circumstances (at least not until Bitcoin-denominated debts become widespread and readily enforceable. If I wanted to design a cryptocurrency I'd focus on that aspect)
I'm not sure whether or not that is meaningfully different from "you are obliged to use tulip bulbs if you want to grow. tulips." I am inclined to think that it could be.
Hm. Partly true, but only if their time horizon is the same as your boss. It definitely gets complicated here - we probably need rigorous models and/or simulation.