A long term solution.

To the economic crisis.

The problem: People are choosing to accumulate money rather than spend it, due to physical goods depreciating over time whereas money appreciates due to positive interest. People hold onto their money -> businesses downsize or go under -> people lose jobs = economy in crisis.

The main purpose of money is to facilitate an exchange of goods; our system currently promotes the accumulation of money over the exchange of goods. Why buy a commodity such as a TV or car which depreciates in value over time, when you can keep the money AND earn positive interest over time? The only way to truly stimulate cash flow when no one wants to spend is to decrease the value of held currency over time.

Proposed solution: Demurrage- the cost of holding currency over time; a system where cash depreciates in value by being held.

Its natural corollary is a negative interest rate.

Saving is only a necessity under the current system, but no longer a factor under demurrage. Why put off producing more for the hypothetical future when you can produce more for the actual present? Just imagine all the lost productivity. For example, if person A pays person B for a book that strikes his fancy, person B can now expand his book company and hire person C who now has money to spend on consumer goods made by person D. Any person who is incentivized to save money rather than spending it will undo all that productivity.

Example of application of demurrage: a portion of the dollar bill chemically disappears each month and the bill automatically loses 10% of its current value, until its value became $0 in 10 months. A lower-tech bill without hi-tech chemistry would necessitate a tiny stamp being affixed to the bill each month (without which the bill would be invalid and illegal tender) which decreases the bill's value by 10% of its original value. Obviously new bills would have to be minted at a higher rate, but expired bills can be recycled (entailing the minor benefit of creating new jobs in of itself).

Negative interest rate- on both bank deposits and loans, at a rate tied to cash demurrage. This serves the same purpose as demurrage, to give people the incentive to spend money rather than hoard it and constrict spending and economic growth. Whereas positive interest tends to concentrate wealth, demurrage promotes its distribution. No longer would money be a scarce commodity, hoarded and kept away from others; rather it would tend to circulate at the maximum possible "velocity." Example of application: demurrage rate is 10% a month, so let's say all bank deposits lose 10% of their value a month, with the 10% going to some kind of tax fund (the tax rate would be accordingly lowered so that people aren't paying higher taxes than they are now). To avoid losing 10% of their money per month by it just sitting there, a bank could loan its money out to prospective borrowers at -5% interest, in order to recoup 5% of the principal. It's just like under the current borrowing system, with collateral and everything, since the bank is still 5% richer by making the loan than not. There is the incentive for everyone to circulate money rather than keep it for themselves.

Demurrage is NOT inflation. Intentional inflation is stupid. The idea of demurrage is controlled depreciation of UNITS OVER TIME, to model the medium of exchange after the goods that it is supposed to represent. Inflation has similar short term effects as demurrage, but works in a completely different way and is much worse long term. While demurrage devalues through fixed, controlled fees, inflation does so through a less-certain, much harder to control, and inevitably problematic expansion of the money supply.

Note that I am not proposing to abolish an interest rate, which would impair circulation rather than increase it.

To quote the economist who popularized the idea, Silvio Gesell,

"Commodities in general, straw, petrol, guano and the rest can be safely exchanged only when everyone is indifferent as to whether he possesses money or goods, and that is possible only if money is afflicted with all the defects inherent in our products. That is obvious. Our goods rot, decay, break, rust, and so only if money has equally disagreeable, loss-involving properties can it effect exchange rapidly, securely and cheaply. For such money can never, on any account, be preferred by anyone to goods.

Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of money."

Socially, under our current system, people are forced and coerced to DENY exchanges they would otherwise accept because they "cannot afford" to buy something. There is a coerciveness inherent in the appreciating currency's incentive to not spend. Both the demurrage and traditional systems "force" their participants to do something, except in the current system it's to save one's money, leading to economic depression, whereas in demurrage it's a freer flow of money which increases rates of production and growth.

A premptive rebuttal to a common objection: that we should not artificially seek to alter the real interest rate because it is a category of human action, that is, derived from natural human activity. The objection is summed up in an idea popularized by an economist named Mises:

This view of the interest rate is ONLY true if present goods do NOT depreciate at all, that is, if present goods are truly equal to future goods. The premium in the form of positive interest is ONLY justified if the present goods RETAIN their value into the future. So we're actually paying a DOUBLE PREMIUM to acquire present goods under the traditional system, in the forms of positive interest AND depreciation. No wonder there is an artificial scarcity created by positive interest.

 

You make great points. I'm with you in hoping the economy will rebound on its own.