Topic: A thought experiment: Inflation's volatility down through two currencys (pegged) - page 2. (Read 267 times)

It's impossible to create such rules in the real world, especially when so much control is needed. Who's gonna watch "It is forbidden to exchange both currencies with each other" and "All goods and services are pegged on the value (A+B)/2" and who can look for one's income since they can hide it? Anyway, for thought experiment is okay By the way, dual currencies aren't new: https://en.wikipedia.org/wiki/Dual_economy_of_Cuba, yet they unified the system.

So you have two currencies with different inflation rates, A's value is bound to deteriorate faster than B's value, so people will keep B instead of A, whatever the punishment will be for violating the rules. There will be a de-pegging event of goods and services, people will use B instead of A for the economy.

The economy isn't something you can tightly control, that's why centrally planned countries failed, and de-pegging events happened.

and the net result

inflation is 30+5/2 =17.5%


when poor currency B think their currency B is more stable with only 5% minting increase.. their employers only give them a 1% pay rise per year(becase employers think the employee will save their income to get better value later)

when rich currency A is less stable with 30% minting increase.. their employers give them a 50% pay rise per year

you need to realise inflation is not exactly matched with new currency minting amount

when the poor dont get pay rises that match the economy. or the rich get better pay rises then the economy. this affects the costs of goods and the ability to buy goods which impacts inflation more so than a central banks minting process

This theoretical model simply won't work in the real world, because those rules are impossible to be followed by everyone.
How can you stop the people from exchanging currencies A and B?
Can you stop the first group or people to own only currency A and the second group to own only currency B?
The "everybody with an income above of below average income per capita" rule is impossible to be imposed, because the people could simply hide a part of their income.
The prices of goods and services cannot be pegged to currencies. What about supply, demand and production costs?
I'm kinda bad at mathematics, but wouldn't this (30%+5%)/2 formula mean that the overall growth of the total money supply will be 17,5% per year(I assume that the quantities of currency A and currency B are equal at the beginning of this theoretical model)?

I would like to know where you're trying to get at or what you are trying to point out. Rather than asking us whether this would work or not, can you please tell us why should this work?

What then if we have two different currencies, one with a considerably higher inflation rate than the other? Should it necessarily mean the negative effects of inflation will be addressed?

And if we use the formula (A+B)/2 for the prices of goods and services, would it not defeat the purpose of providing two different currencies for the two different economic classes? And what will happen to supply and demand?

It sounds pretty socialist to me but the important thing is not the adjective, and I don't think everything about socialism is bad either, the important thing is whether it would have any effect in the real world.


I don't think so because what high income earners do is keep just enough money for expenses and invest the rest in assets that beat inflation.What he is going to do is spend the cash necessary for the month and invest the rest.


Well, the way you put it, that seems to be the intention.


What do you mean? The inflation you raise is higher even than what we have had in the decade from 2010 to 2020 which was between 2 and 3%, some years even lower, although that would be official figures. If we count money supply expansion it would be higher. In other words, you are proposing a scenario approximately like the one that usually happens.

Besides, the problem with these mental experiments is that they rarely capture all the complexity. If inflation for the janitor is 5%, will his salary be raised after a year? How much? I would rather be a janitor with an inflation rate of 10% and get a 15% raise than with an inflation rate of 5% and get a 4% raise.


So I don't know why have two currencies with two inflations, then.

The problem with inflation is that it erodes the poor most of all. Raising inflation more for the rich will only make them put more money into assets and faster.

@Poker Player,

I got you.

But is it really socialist? Isn't it more opportunity for the Currency A owner to trade more with a higher volume? But is it also protecting the low income people for decaying of their money?

To have a higher inflation is not a penality. And to have a lower inflation is not to reward somebody.

The Janitor just doing the same work, over and over again ist not losing buying value of his money so much. And the Doctor with all his investments and his big income, can hustle more to make bigger profits.

My opinion is that it is a socialist thought experiment trying to control the world rather than trying to understand what it is like and act accordingly. Why do you have to penalize higher earners with an inflationary currency? I mean a surgeon you penalize him with a lower purchasing power of his currency and a janitor you reward him? And why only two currencies with two types of inflation? Why not 20? As if it were not bad enough to have one fiat currency in a country to have two currencies with two inflation rates.

A little thought experiment!

Expection:
We create a currency that is not stopping inflation, but which is slowing down inflation's negative effects. Effects like volatility.

Thought experiment #1:
- Currency A - 30 % increasing money supply/year
- Currency B - 5 % increasing money supply/year

The rules are:

- We have an average income per capita. Everybody with an income higer than 0.7 of the average income per capita is just allowed to use currency A.
- We have an average income per capita. Everybody with an income lower than 0.7 of the average income per capita is just allowed to use currency B.
- Additional everybody who is owning more value/money/goods 2.0 of the average income per capita is just allowed to use currency A.
- It is forbidden to exchange both currency with each other.
- All goods and services are pegged on the value (A+B)/2 ----- (Currency A plus Currency B divided by two)
- Every year every person is rated which currency the person can use.

Result:

What is your opinion? Would this mitigate negative effects of inflation for most vulnerable in our society? Would this work in your eyes? Which problems are you spotting?