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

You say, we impose higher taxes on people with high incomes by 30% annually because the increase in the money supply is similar to taxes, and a tax of 5% annually for individuals with medium and poor incomes, which is applied in many countries. However, stagnation is a problem, or at least everyone complains about it.

Inflation is a description of an economic problem, sometimes internal due to mismanagement of monetary i.e. money printing, high energy prices, government policies, and may be external such as supply chain problems, economic blockade or boycott, global financial crisis, economic war.

Since inflation includes multiple areas, knowing the cause of inflation will be the key to the solution, and sometimes it is unavoidable, and here comes the role of the government in mitigating the effects of that inflation.

Inflation is not bad in all cases. If it is within reasonable limits, which is 2% for most economies, it is healthy and causes increased circulation, competitiveness and employment opportunities.

It's literally a thought experiment how else is it going to work. Currency A people are given Currency A to use whether they like it or not and Currency B people can only use Currency B. Differing inflation rates across different social class to find out who the real culprit for inflation is. It can't be any simpler than that.

Can we maybe stop using Elon Musk as the standard for everything? The guy's a total dumbass and he clearly has no idea of how to handle himself and his company. It's so obnoxious at this point.

Plus it was literally said that people can't interchange currencies what part of the thought experiment telling you that currency A people could only use currency A and nothing else do you not understand? It's literally painted in all colors in front of you so as to not cause any confusion and you still managed to mess your whole notion.

Overprinting of money which leads to the devaluation of a currency is just an aftereffect. There's countless reasons why inflation happens. For one, we have the piggy-back spenders which still account for a hefty percentage of people. One must know that money that doesn't circulate is still money and is not devoid of value, but there has to be enough currency going around in order to facilitate the economy of the whole nation so printing money happens.

With the premise you have made I don't think it's going to stop inflation, What it's going to do is profile which of the two groups spend the most and save the most, which test group withholds their money supply, leading to more money being printed all because they wanna be rich in this new economy you just proposed and realized, and which of these test group's spending the most of their money. I think you already know the answer and right from the get-go one would think it's the rich that's causing inflation to happen cause they save up all their money in hopes of becoming rich with it someday, which is severely true in our current society if you'll ask me.

Why hasn't just straight up said "we would decline to use this" and moved on? I mean its simple that we would see Elon Musk type of people trying to prove to the world that they are currency B type of people and have no money at all. Look at him even right now, he literally sold his house and bought a tiny house just to "prove" that he doesn't care about being rich, then spent 40+ billion on twitter just to prove a point, which he failed to be honest but that's how being rich works.

In the end, we should be looking into this situation a bit more carefully, it wouldn't work, we would reject it as society, people at currency B will want to look like they are rich and act as if they are currency A, and people at Currency A will make it look like they are poor and use B, that's not going to work.

By the way, a follow-up question:
And what is better - controlled insignificant inflation or the same deflation?
Interested in your opinion on the positive and negative effects of these two financial models, and their "importance" for the population and the economy of the country?

PS uncontrolled wild inflation is an evil and a problem, it is not even discussed

Inflation is common and difficult to avoid, many countries try their best to reduce inflation, but on the contrary there are countries that want to improve inflation because several years the country has experienced deflation, of course experiments reducing volatility are new ideas in the economic field and worth trying.

You're starting with the same thing that people chant like a mantra and think it's true.
Money printing doesn't always trigger inflation and inflation can happen without money printing:
https://www.aier.org/article/three-common-myths-about-money-and-inflation/

Dumping 5000 quadrillions dollars n the street has no effect on inflation if everyone picks them up and buries them in the garden!


This is no longer socialism is pure economic genocidal madness. Oh wait, that's the definition of socialism.


What happens when B buys from A or the other way around?


Oh yeah, state-controlled prices with untradeable currencies, that worked wonders!


Why not just shot the kulaks like in the last century? With no rich people around all your problems will be gone, right?


Is this 2023 AD or BC?
Your enthusiasm reminds me of what went wrong in all those socialist countries, thinking of the poor so much they ended up making everyone dirt poor.
 

Well, now, that's a 2023-worthy idea! You're attempting to shield the vulnerable from inflation's wrath, and good on you for the novelty! But there's room for doubt. Firstly, this 'duo-currency' scheme might be an admin horror show. Think of auditing every wallet yearly for their cash class. And what about mid-year money windfalls? Secondly, the no-trade rule for currencies? That's akin to economic shackles. It reads, "Poor or rich, don't move." Doesn't that keep inequality alive? Seting cost via (A+B)/2 may seem neat, but it could cause a price whirlwind, considering the vast inflation gap between Currency A and B.

The idea is cool. And... it's already been implemented in a sense... And you see, the effect is nil!

And now more details ! Have you been as a tourist in Cuba? I highly recommend that you go once to see how the scheme you suggested works.

Cuba has even 3 currencies! Yes yes, I didn't misspell.
That:
- The Cuban peso. With which you can buy something, but the choice is very limited.
- The Cuban convertible peso (Peso cubano convertible), or in common parlance, the kuk (CUC)
- U.S. dollar.

And their circulation is limited by rules close to yours, in fact.
Bottom line is :
- The useless PESO - for the local masses.
- The more interesting CUC.  This is essentially Cuba's second, parallel currency, which served as a replacement for dollars and was originally intended for foreign tourists and diplomats. That is, a kind of "elite currency" with which you could eventually buy a lot more goods! Yes yes, for the peso, you are given many orders of magnitude less goods than for the CUC.
 - And the most desirable thing for Cubans, but actually forbidden to them, under threat of criminal prosecution, is the U.S. dollar. This is for the "upper caste" - the tourists, the elites, who need to be shown how happy and good it is to live in Cuba! For dollars in Cuba you can practically do anything! But the "real paradise" is not for the local population....

Well, probably a lot of people here already have their lesson learned since in crypto alone, there are so many experimental altcoins with dual currency as well, with multiple algorithms to peg something to something and still failed miserably. Remember TerraUSD (UST) & LUNA? For me, who studied finance for quite some time, history is full of de-pegging events, I can name two just from memory: (1) USD de-pegging in SEA 97/98 because of Soros, and (2) Depegging Yuan.

Not all idea is worth to be implemented if it's extremely flawed, and we just point them out. It's up to you to go forward with your idea or listen to the people to stop centrally planning the economy.

Money printing doesn't necessarily cause inflation but consuming more than what is produced. The issue with printing/inflating the money supply is that the inflated amount could add to the consumption burden thereby increasing the prices of goods/services that are limited in supply.

In regards to your experiment, I think what really matters is making sure both the users of currency A and B are very productive and aren't spending more than they deserve to spend, otherwise the higher spenders who produce less & consume more could easily push the cost to the other group considering that this is a shared responsibility... and they both buy and sell from thesame market, so one will suffer from the others irresponsibility, lack of productivity and over consumption. Besides, "A" will likely benefit more from "(A+B)/2" if it is mostly responsible for the inflation.

Money supply shouldn't be inflated infinitely and unnecessary like fiat. It should be scarce/limited like Bitcoin. And should always go to those who deserve and use it prudently.

There are many problems. I'm going to list a few. Maybe they can be fixed.


A dual-currency system suffers from Greshams Law. Eventually, nobody will spend currency B.
You are proposing an inflation rate due to increasing money supply of about 15% per year (probably actually closer to 30% because of Gresham's Law).


Unenforceable. Also, not only people use money. What about companies?
People should not be penalized for saving. 2x annual income is a pitiful amount of savings. It means you can never retire because you won't be able to save enough.



Unenforceable.


What do you mean by "pegged" and what is the value of (A+B)/2?


Imagine the cost of auditing every person every year.

If you say you are influenced by moderate socialist laws, there you have it.

A free market advocate looks at what happens and acts accordingly. The law of supply and demand is not something some evil capitalist made up, it is something you can see with your eyes. Instead from a socialist perspective instead of trying to understand that law and act accordingly, they understand that the law is unjust and try to prohibit it, regulate it or modify it. Then come edicts on maximum prices, which are a disaster since Diocletian, but do not stop repeating themselves throughout history and other similar measures that have similar results.

In this case and in this forum, the best mental experiment would be to have proposed that the Bitcoin be the only currency, period, but the Bitcoin has a libertarian origin that does not fit very well with socialist ideas, however moderate they may be. Bitcoin escapes the state, it can't manipulate it, it can't print more to spend more, and socialism doesn't like that. That's why you have to invent complicated systems to try to do social justice instead of something as simple as understanding what the world is like and acting accordingly.

Your fantasy experiment can work to mitigate the negative effects of inflation on the most vulnerable in society. By discriminating the uses of money, some people with lower incomes can only use coins with lower growth in the money supply. This helps to ensure that they are not strongly affected by the effects of inflation.

However, there are some issues that need to be considered such,  rule management and enforcement can be difficult, especially when there is chaos in the value of coins. The rules for dividing the use of money can be seen as unfair to people with high incomes and high value of goods. Banning the exchange of two currencies could cause further social segregation that could lead to segregation and limit the rights of some people. Therefore, before implementing a system like this, a comprehensive assessment is required to ensure its fairness and effectiveness for the entire community.

Too confused on the part that goods and services are pegged on the value of (A+B)/2 because if money supply of both the currencies is different the value of goods will eventually deviate and become further apart. How can you maintain this equilibrium while also keeping a set amount of money supply %age. Also how will this solve inflation? Increasing money supply is giving you the inflation eventually. Not taking into consideration the fact that growth rates of salaries are not dependent upon inflation always.

You say that is not a penalty to only have access to a currency with high inflation, while another sector of the population gets access to a currency with a lower inflation, but just stating it does not make it so, it is a clear penalty that punishes the more productive members of society simply because they are more productive, and you know what happens when such a system is put in place? Many people stop pushing as hard to become big earns and to innovate, after all what is the incentive to work hard when 30% of your wealth is stolen just with the inflation tax? After all there will be other taxes which could easily take the actual tax rate to 60% or more, and in that case I might as well just work the minimum necessary to survive and develop some cheap hobbies which you cannot tax.

The simplest way to release your plan will be to just change the tax rates for people with an income higher/lower than 0.7 of the average income per capita. Tax the first class (currency A) with 30% and tax the second class (currency B) with 5%. That's all, the problem is solved. What you say can't be released in real life because having of two currency makes it very impractical for people to exchange money between each-other, makes it very impractical to spend money in shop, also directly underlines the social status of particular person and just what if currency A group pays some extra money to currency B group to buy B currencies and hold them? I won't continue, I think you understand that it makes no sense but this idea can work in taxation. By the way, you can't make rich people pay more than poor people, the world doesn't work like that.

Thank you for the responses!

Yes, this is the good thing on a thought experiement. I do not have answers, and also I can be wrong with what I am assume. So a thought experiment brings ideas to the people, and gives answers to people which do not have the answers.

So it is not about right or wrong, it is about inspiration and exchange of ideas and knowledge.

--

And also there are cultural differences. F.E. I did not get the "socialsit thing" first, eventually because I am influenced by moderate socialists laws. I get that.

Another point is, I found out that a lot of people are unable or not wanting to anticipate. This is strange for me.

also if big business receives say a $100k for a car it sells from richguy in A currency.. how is business suppose to convert it to B currency to pay the car dealership workers minimum wage currency B.. if its not transferable

what would actually occur is a nation of two halves.. imagine east/west berlin for instance. separated by a currency wall so to speak. whereby everyone west of the wall is richer and getting high pay rise minimum 30% for their currency B but goods prices are only 17.5%
whilst the poor half are on the eastern side of the currency wall getting low pay rises capped at under 5% but then goods are sold on an averaged 17.5% inflation thus the poor get poorer

Fiat is not meant to be inflation-free, so a gradual reasonable rate of inflation is usually the goal. Inflation is supposedly healthy because it motivates people to spend money rather than hold it. Some fiat currencies are pretty stable and have a very low inflation rate without needing any additional currencies, so I'm not sure any experiments are needed here. And a currency that's backed by something is a thing that was done with the gold standard, for example.
I'm not an economist, and maybe that's why I don't get the general idea, but separate currencies basically for poor and rich sound very problematic to me.

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?