Demurrage - is it an answer?

psionl0

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psionl0
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I have recently been researching the concept of "demurrage". In the context of money, it is a charge that is applied to currency holders. It is in effect a negative interest rate on currency. http://en.wikipedia.org/wiki/Demurrage_(currency)

The theory behind demurrage is that when money is subject to a net positive rate of interest, it becomes more durable (and therefore more desirable to possess) than anything that could be bought with it. This encourages hoarding and short-term destructive practices. For example, if a sustainably logged forest generated $1M per year then assuming a 5% interest rate, that forest would be worth a maximum of $20M. If the trees (or the land that the trees grew on) was worth more than $20M then it would make more economic sense to destroy the forest.

A similar problem occurs when a company is over-capitalized. Any company that attempts to build a "healthy" capital reserve becomes subject to risk of a hostile takeover by corporate raiders who subsequently wreck the company - ironically usually to pay the interest on the money borrowed to take over the company.

Demurrage reverses all of that. It separates the "medium of exchange" function of money from the "store of value" concept. Paying bills early and long term planning become feasible because there is no longer a need to discount the value of anything in the future. The velocity of money becomes greatly increased which stimulates the economy and may even be counter cyclical.

Economists such as John Maynard Keynes were known to study the concept of demurrage and view it favourably. However, it was ultimately decided that inflation could serve a similar purpose to demurrage (hence the need to abandon the gold standard). This approach ignores the fact that all money (including debts) is subject to the devaluation caused by inflation and it becomes necessary to seek the highest rate of return possible on any investment just to remain economically viable.

The foregoing might suggest that demurrage is mutually exclusive of inflation or interest. No such assumption is justifiable of course but it would appear that the concept of demurrage is worthy of further study because current economic practices are definitely not sustainable indefinitely.
 
I read your post with some amusement; I had no idea demurrage was anything than a ploy of scammers to get the cash flowing.
Here's a classic example of a request for a demurrage fee:
http://419.bittenus.com/14/1/kelvin-smith.html
"Attn;Beneficiary,

After waiting and no response was heard, I deposited and also paid for the Delivery fee of your $2,000,000.00 Million US Dollars, as consignment Diplomatic Carriage Bag to Universal Courier & Diplomatic Company.

I am on a visit to a friend and will not come back till, 2015. I will want you to contact the Universal Courier & Diplomatic Company to know when they will be delivering your consignment.

I have paid for the delivery charges and also the insurance fee, the only fee you will have to pay them is the Monthly Demurrage Fee which they would pay the security department that are guarding your consignment since the date of deposit.

But if you will be very fast in contacting them, you will be charged only one month demurrage fee which will cost only US$155.00 So I urge you to contact them as soon as you receive this email. And send the $55 through Western Union Money Transfer to the manager. "


Something tells me you're discussing something entirely different, so I hope.
 
psionl0 said:
The theory behind demurrage is that when money is subject to a net positive rate of interest, it becomes more durable (and therefore more desirable to possess) than anything that could be bought with it. This encourages hoarding
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I think demurrage tax reduces the attractiveness of holding money out of circulation (stuffing it under the mattress), not anything else (. . . . not keeping it in a liquid bank account for instance which is not withdrawing it from circulation). Arguably there should never be any positive incentive to hoard money out of circulation anyway, so it is not clear that this kind of thing would alter behaviour, say, in a depression, if the behaviour is already seemingly contrary to incentives. Perhaps coupled with negative nominal interest rates on demand deposits, it could be considered monetary stimulus. Its efficacy should probably be viewed sceptically just like that of other unorthodox easing methods like QE.

For example, if a sustainably logged forest generated $1M per year then assuming a 5% interest rate, that forest would be worth a maximum of $20M. If the trees (or the land that the trees grew on) was worth more than $20M then it would make more economic sense to destroy the forest.
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5% would be the discount rate or internal rate of return, not the interest rate. The discount rate also includes a risk premium--which is the compensation for the uncertainty of logging-related cash flows relative to risk free money deposits. If there is another use for the land that earns more than $1m per year (risk normalised), then the forest should be replaced for the other use. But I do not see how scrip tax on money has any bearing on that?

A similar problem occurs when a company is over-capitalized. Any company that attempts to build a "healthy" capital reserve becomes subject to risk of a hostile takeover
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This can be considered rational behaviour because a company holding cash is diluting itself. Corporations require capitalisation to continue productive (risky) activity, and anyone can do riskless saving. So corporations with excess cash should return it to investors (to do what they like with) and thereby see their unit value (share price) increase. I don't see what demurrage has to do with this. (And neither do I see the relevance of "wrecking the company" . . . . who would want to do that?)

Paying bills early and long term planning become feasible because there is no longer a need to discount the value of anything in the future.
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??

The velocity of money becomes greatly increased which stimulates the economy and may even be counter cyclical.
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Doesn't that [MV = nT] assume that transactions are value-adding? They may not be if the transaction is effected merely to avoid a penalty.
 
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Francesca R said:
Perhaps coupled with negative nominal interest rates on demand deposits, it could be considered monetary stimulus. Its efficacy should probably be viewed sceptically just like that of other unorthodox easing methods like QE.
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It is not just an abstract theory. Local "emergency currencies" known as "stamp scrip" were issued in various localities in Europe and the USA in the 1930's. The most successful of these trials was in the Austrian town of Worgl (http://en.wikipedia.org/wiki/Wörgl#The_W.C3.B6rgl_Experiment) but similar results were also observed in the US as well. In each case, the emergency currencies were outlawed, the recovery of the regions concerned halted and the depression lingered until war broke out.

Francesca R said:
5% would be the discount rate or internal rate of return, not the interest rate.
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That is technically correct. It would be even more correct to point out that the assumed 5% is net of inflation (eg a "raw" discount rate of 8% less an inflation rate of 3% approximately) but a finance lesson like that would not add to the point I was making.

Francesca R said:
If there is another use for the land that earns more than $1m per year (risk normalised), then the forest should be replaced for the other use.
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Whether there is another economic use of the land is irrelevant if the money you get from the sale of it generates more than $1M per year. You might be able to clear-fell the forest and get $30M from the sale of the wood obtained. Then you can get a return of $1.5M per year instead of $1M but in 30 years time there will be no more wood from that forest. If economics dictates that we treat every forest like that then we are leaving a terrible legacy for future generations.
 
psionl0 said:
[ . . . ] but a finance lesson like that would not add to the point I was making.
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See below:

Whether there is another economic use of the land is irrelevant
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Then how do you get a value for the land ex-forest?

if the money you get from the sale of it generates more than $1M per year. You might be able to clear-fell the forest and get $30M from the sale of the wood obtained.
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If the land with no forest ("sale of wood" complicates this--pehaps you wanna adjust your number) . . . is worth more than $20m that presumably is because of a more profitable use of the land.

Then you can get a return of $1.5M per year instead of $1M
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$1.5m how, exactly?

but in 30 years time there will be no more wood from that forest. If economics dictates that we treat every forest like that then we are leaving a terrible legacy for future generations.
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Every forest is not likely to be treated that way due to increasing scarcity (higher value) once you start clearing more of them.

But this is not at all related to scrip tax on notes and coins transacted. Yet.
 
Francesca R said:
Please show where you got the $1.5m.
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I don't know what you are getting at. $30M invested in stocks, bonds, commodities or a myriad of financial instruments should easily net you a comfortable annuity. The exact figure of $1.5M might currently be seen as optimistic (especially if it is inflation adjusted) but that doesn't change the point I am making.
 
psionl0 said:
[ . . . ] stocks, bonds, commodities or a myriad of financial instruments [ . . . ]
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Doesn't look like you got it from anywhere. The IRR of the forest is 5% and its value is $20m and its annual cash flow is $1m. Yet somehow you can fell it and sell the residual land it is on for $30m, and then play the markets to get $1.5m (which have different risk premia to timber real estate)

Sure all possible given various assumptions but--I don't know--what point you're trying to make in respect of demurrage of money or anything else. Maybe someone else does.

Care to answer the part about how increasing V by penalising abstention from transacting stimulates the economy?
 
Responses recognised for the retreat that they are. Apparently you know precious little about a subject you started yourself. Odd. . . .

Did you read somebody's blog and just copy it?
 
Francesca R said:
Responses recognised for the retreat that they are.
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I seriously doubt that you even understand my responses - let alone recognize any feature about them.

You have already shown in this thread that you don't have a clue about the concept of the "time value of money", you can't crunch any numbers and you don't recognize any relationship between the velocity of money and economic activity - whether it be inflation or productivity (but kudos for being able to recite a formula).
 
Wouldn't people respond to this by hoarding value in non-cash assets, such as gold, shares, ect? Exactly the same as in periods of deflation.
 
Brian-M said:
Wouldn't people respond to this by hoarding value in non-cash assets, such as gold, shares, ect? Exactly the same as in periods of deflation.
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The experience in Worgl was that people paid their bills first and some even pre-paid taxes to avoid the demurrage charges. Some people even planted trees since the value of something in the future is at least as great as it is in the present when demurrage applies.

Sure, the people had the option of converting their scrip back into national currency (a 2% premium applied) but unless saving up for something, there was little point. If you spend your money shortly after receiving it (like it was a hot potato) then the effect of demurrage was negligible. (For example, if the demurrage rate is 10% pa and you live from payday to payday then the demurrage cost on a take home pay of $1000 per week is about $1).

The local businesses in Worgl probably bore the brunt of the demurrage charges but considered it worthwhile just for people to have money to buy their wares.

You can learn more about the Worgl experiment at http://mises.org/daily/6336/ (seems a balanced site).
 
Francesca R said:
Confirming that you started a topic you don't know thing one about. Funny.
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Not even a non-sequitur. You could have quoted a nursery rhyme and your response would have been just as relevant.

Francesca R said:
It tells you what economic persuasion the site is on the banner at the top of each page. Yet still you didn't know.
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Oops! Had I noticed that this was an Austrian Economics website I would have picked another one. There are hundreds of them. (Still, it should make Tippit happy ;)).

Since you seem incapable of addressing the argument, here is a gift for you. It is a website that questions the extent of the role that demurrage had in the Worgl recovery.
http://reinventingmoney.com/greco-comment_on_worgl/
 
psionl0 said:
[ . . . ] addressing the argument
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Ha ha. :rolleyes:

Post 2:
psionl0 said:
The velocity of money becomes greatly increased which stimulates the economy and may even be counter cyclical.
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Francesca R said:
Doesn't that [MV = nT] assume that transactions are value-adding? They may not be if the transaction is effected merely to avoid a penalty.
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Then post 10, then post 12.

What have you got? Just answer the question. If you can. . . .
 
Francesca R said:
What have you got? Just answer the question. If you can. . . .
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No matter how often I mention Worgl, it goes straight over your head. Of course the transactions were "value-adding".

I may comment on the US experience if I can find some reliable references. Suffice to say that there was so much "value-adding" going on that it prompted a bill to be presented to congress that called for a national issue of stamp scrip.
 
No matter how many times you try to dodge answering, it will still be rejected.

How does increasing money velocity by penalising abstention from transacting stimulate the economy?

When you can back up your assertion, you may wish to try to make scrip tax relevant to the other "examples" in your OP, though these were sufficiently muddled I can see why you abandoned them.

What have you got? Nothing yet. . . .
 
:sdl: You can't refute me so you pretend I haven't given a direct answer to your questions.

Your constant attempts to make me appear foolish instead of debating me honestly have backfired badly.
 
This is the typical nonsense of economic threads here - ask for a response/clarification/cite/justification and get ever more ******** back from the idiots.
 
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balrog666 said:
This is the typical nonsense of economic threads here - ask for a response/clarification/cite/justification and get ever more ******** back from the idiots.
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I haven't seen you "ask for a response/clarification/cite/justification".

Have you got a specific question or are you going to be an uncritical thinker like Francesca and simply label every response as "********"?
 
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Aber said:
Opening post (and a few of the others:))
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That doesn't help me much. What you quoted was a response to an attack from Franseca R. - not a response to the OP title.

In all fairness, she was willing to discuss the issue initially. Then she tried to trip me up over returns on cash and when that failed, she simply labeled every response of mine as a dodge/retreat no matter what I posted.

If you think that demurrage is not a better option than inflation then at least give me reasons why you think that is the case. Don't just say that demurrage is silly because "michaelsuede/Gaetan" or something.
 
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psionl0 said:
If you think that demurrage is not a better option than inflation then at least give me reasons why you think that is the case.
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I don't think the question really is: which is better and why?

Since we already have a system without demurrage, isn't the real question: what additional value does demurrage bring that would make instituting demurrage worthwhile?

I don't see that you have addressed that very clearly so far. For the most part, the examples you give are achieved through mild inflation or don't seem to have much of a relationship to the time value of money.
 
psionl0 said:
That doesn't help me much. What you quoted was a response to an attack from Franseca R. - not a response to the OP title.

In all fairness, she was willing to discuss the issue initially. Then she tried to trip me up over returns on cash and when that failed, she simply labeled every response of mine as a dodge/retreat no matter what I posted.

If you think that demurrage is not a better option than inflation then at least give me reasons why you think that is the case. Don't just say that demurrage is silly because "michaelsuede/Gaetan" or something.
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Attack? Returns on cash? Bwaaaaaaaaaaaaaaaaaaahahahahaha!!

Perhaps you could get a 8-year-old-child to read her questions to you so that you could then answer them ... :rolleyes:
 
Dr. Keith said:
I don't see that you have addressed that very clearly so far. For the most part, the examples you give are achieved through mild inflation or don't seem to have much of a relationship to the time value of money.
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It is more a case of Francesca managing to obfuscate a simple example of "opportunity cost". If the percentage of a forest that can be sustainably logged is less than the discount rate then if makes more sense to log the entire forest, sell the wood and invest the money elsewhere.

Demurrage simply lowers the discount rate which increases the present worth of annuities.
 
psionl0 said:
It is more a case of Francesca managing to obfuscate a simple example of "opportunity cost". If the percentage of a forest that can be sustainably logged is less than the discount rate then if makes more sense to log the entire forest, sell the wood and invest the money elsewhere.

Demurrage simply lowers the discount rate which increases the present worth of annuities.
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Is that your full answer to my post or are you just going to argue with her?
 
psionl0 said:
If you think that demurrage is not a better option than inflation.
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FOR DOING WHAT? - it may be clear in your own mind, but you have not explained it. Can you also explain how you think demurrage would work in practice, for example what you consider to be money to be charged, and how the mechanism would work, as people will shift their behaviour in response.
 
Aber said:
FOR DOING WHAT? - it may be clear in your own mind, but you have not explained it. Can you also explain how you think demurrage would work in practice, for example what you consider to be money to be charged, and how the mechanism would work, as people will shift their behaviour in response.
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From what I can gather, for preventing deflation (and the cash hoarding that happens when you have deflation, which leads to a recession or depression).


Now, as far as mild inflation goes as a cure for deflation, that's all well and good, assuming you can spark mild inflation. For a long time I assumed that was easy: just print more money. However, the recent evidence of central bank policies aimed at doing just that seems to be that it is actually not quite so simple. Demurrage might be more effective; I'm not sure. At this point, other than a long-ago small-scale historical example, I'm not sure we have enough evidence to know how it would work in 2014.

In a globalized modern world where some currencies do not have demurrage and some do, wouldn't people just trade their currency with demurrage for one without demurrage?
 
Isn't inflation effectively equivalent to demurrage?
After all, the value of your savings are declining either way.

For the forest example, putting the money into a non-currency based investment such as shares would still make cutting the forest down the economically advantageous thing to do even if demurrage applies.

If the shares purchased with the profit from cutting the forest down will return greater income from dividends than you'd have gotten from sustainably logging the forest, then cutting down the forest and buying the shares would still be the financially smart thing to do.

(Maybe you could buy shares in a tree farm located where the forest used to be. Sure, fast-growing varieties of trees planted in neat rows might not be the same thing as a forest, but it produces far more wood.)
 
psionl0 said:
[ . . . ] she simply labeled every response of mine as a dodge/retreat no matter what I posted.
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Indeed--no matter what you post that is not an answer to "How does increasing money velocity by penalising abstention from transacting stimulate the economy?" it is a dodge/retreat. You could, like, you know, answer the question. Posting "Because, Worgl" is not an answer at all. You need to explain how your suggestion works.

If you think that demurrage is not a better option than inflation then at least give me reasons why you think that is the case.
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Wrong way round for this forum. You need to show what it is that inflation does that you want demurrage to do, and why it will do it as well or better. And you need to deal with challenges. Thus far, you have not, and are not.
 
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