“Pushing on a String” by Josh Sidman

[Joanne98]

Most people had probably never heard this phrase a year ago. It refers to the monetary phenomenon whereby the financial authorities find themselves powerless to stimulate the economy via the normal expedient of cutting interest rates. Ordinarily, interest-rate policy is a viable tool for speeding up or slowing down the business cycle. If the economy is sluggish, interest rates are lowered, and economic activity picks up. If the economy is too active and inflation looms, interest rates are increased, and the economy slows down.

There are times though where the efficacy of interest-rate policy falters (or disappears entirely). If sentiment is extremely negative, it doesn’t matter that businesses and individuals can borrow money at low interest rates; they will still refrain from spending and investing. This is precisely the situation that our economy is in right now. Regardless of how much money the Fed pumps out, the economy stubbornly refuses to respond.

Interestingly, despite Dick Cheney’s recent assertion that “nobody saw this coming”, Fed Chairman Ben Bernanke gave a now-famous speech in 2002 anticipating precisely this set of circumstances and outlining how the Fed could respond to it. The speech earned him the nickname “Helicopter Ben”, after the most extreme monetary measure he described, which was to literally drop money out of helicopters.

What Bernanke didn’t foresee was that sentiment could get so negative that people won’t spend even if money is dropped from helicopters (which is more or less what the Fed has been doing for the last several months). And - a point which virtually every mainstream economist, government official, and media commentator has failed to note - this is not a failure of monetary policy; it is a failure of money itself.

Banks, corporations and individuals are behaving in a perfectly rational manner when they choose not to spend or invest. After all, if you expect continued economic stagnation, why would you invest? And if you expect prices to fall, why would you spend?

http://dandelionsalad.wordpress.com/2009/01/14/%e2%80%9cpushing-on-a-string%e2%80%9d-by-josh-sidman/

Money has an unfair advantage over goods because it doesn't decay. Author suggests we make money lose it's value the longer it's held. Interesting idea!

[GliderGuider]

1. Having money lose value over time is called demurrage

Demurrage

Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold.

Demurrage is sometimes cited as having advantageous economic effects, usually in the context of complementary currency systems. However, the effects of demurrage have not been extensively studied, nor have its benefits (or disadvantages) been rigorously demonstrated. The study of the effects of demurrage on an economic system is a rich and largely unexplored area of research in economics and other fields such as sociology.

Proposed Advantages

Whilst demurrage is a natural feature of private commodity money it has at various times been deliberately incorporated into currency systems as a disincentive against hoarding of money, as well as to achieve other perceived benefits. In particular, with regards to long term investment financing it has the effect of changing the dynamics of Net present value (NPV) calculations. All else being equal, a currency system with demurrage places an increased emphasis on the value of long term returns on an investment. As such it may create an incentive to invest in initiatives which offer more in the way of longer-term returns.

Demurrage also has an effect nearly identical to inflation, but without the same underlying causes. When multiple currencies are being used, Gresham's law suggests that a demurrage fee would help a currency achieve more rapid circulation. Even if only one currency is being considered, demurrage would likely increase the velocity of circulation of the currency, encouraging economic activity.

One could also view demurrage's effect as being similar to negative interests rates. However, unlike interest, it applies to all currency in circulation, not just that which originated as a loan. This has led some to propose it as a means of addressing injustices in the distribution of wealth.