Ten men on an island -- inflation and deflation

[EggShells]

Ten men are stranded on an island.  Some learn how to fish, others how to grow crops, and others how to find fruits.  We survive OK.

I come up with a brilliant idea.  Bartering with each other is so messy.  Why not use the tickets I issue in exchange for goods?

Somehow, I find myself owning a lot of tickets.  If a few people don't like this, I use a few tickets to get the popular guys to talk some sense into them.  Anyway, what big problem can arise, if only one man receives freely issued tickets for this innovative service to the community, and all others must earn theirs with real labor?

This system does make everyone more productive.  People spend less time planning and trading, and more time working.  So productive, that after I hire someone to cook my food, and someone to make me clothes, there is still more than enough food to go around, and everyone over-feeds himself.

By this time, I hear that there exist so many tickets around the island that people are beginning to trade goods for goods, fearing the tickets won't hold their value.  My plans must change.  I stop issuing tickets.  Hearing the news, people suddenly want those tickets again, and they begin to buy just enough to eat.  There is fear in the air and everyone has trouble selling things.  I will be OK since I have stored up so many tickets, but, for prudence's sake, I have to dismiss my cook and my tailor.  These men are in trouble, since they have sold their fishing gear and farm land, and have invested so much time learning their new trades.  They will barely survive, if they treat every ticket they own like their last.

In the meantime, I hear of a hut someone has built during the good times.  The man, having sold his land too, is trying to sell the hut to buy food.  I pick up the hut at a more than reasonable price.

The psychology that "tickets are valuable" thus firmly established, I start issuing them again.  This time, maybe I can get someone to sing for me while I eat!

------------

This is not to capture the entire essence of the modern system (which would be pretty hard to do,) but only to showcase how the state-bank alliance uses *both* inflation and deflation to strip the rest of the economy of its wealth over time, using a process that seemed familiar to Thomas Jefferson.

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[practicaldreamer]

The man says "I want you to pay 15 tickets to watch our best 11 kick a bag of wind around" - the people of Punk Island say yeah, everyone needs to let their hair down, even us punks. But when they get to the match the best 11 have been replaced with 11 players from neighbouring islands and the price of entry has gone up to 25 tickets - cos the match is going to be being filmed, and the film sold to Bitch Islands archipeligo.

   At the next inter island championship Punk Island fail to qualify as their best 11 never actually get to practice kicking around a bag of wind.

   The residents of Punk Island have an uneasy feeling that somehow, in a manner that they can't quite put their finger upon, they have been shafted up the arse - and the man has many many tickets.
   

[Q7]

It's amazing how we all get conned and commit ourselves as slaves of the system. And the thing is that since the system is so established, we have no way of escaping and freeing from the clutches and tyranny of oppression until bitcoin comes along. And that is where when we finally have options on which direction we want to take and finally break free.

[americanpegasus]

Hi, I have explored a lot of these concepts already with the idea of a 1000-man island.  I choose 1000 because with 10 people it's not likely that any currency is needed.  Everyone knows who is pulling their weight and not; instead a reputation system would prevail.  If you are the main hunter it's likely you can ask the others for whatever you want and get it.  If you are a louse, you will struggle to get help. 
 
But with 1,000 people it's not so obvious who is contributing what. 
 
As well, I extended your parable of the tickets, and went on to liken bitcoin to a sacred "rock" on the center of the island and the latest cryptonote currencies to actual hard mined gems.  Feel free to check it out and provide some commentary if you like: 
 
https://bitcointalk.org/index.php?topic=1137606.0

[NorrisK]

Really interesting read, both This 10 man island and the 1000 man island.

Makes one think a bit more about the World and system we are living in.

Personally, i dont think slight inflation is a nog problem though, it keeps Price stable with coins lost and increasing population, however, a provable amount at a set rate that can not be manipulated is probably what is needed.

[dothebeats]

An interesting read, even read the 1000-man island for broader scope since a 10-man island don't need currency, barter will do just fine. Reading the scenario made me think of the world we live in and how the system we are binded to changed the way we live and communicate. A 10-man island or a 1000-man island, as long as we are enslaved by this system, we can't do anything against it.

[Febo]

I stop issuing tickets.  Hearing the news, people suddenly want those tickets again, and they begin to buy just enough to eat.  There is fear in the air and everyone has trouble selling things.  I will be OK since I have stored up so many tickets, but, for prudence's sake, I have to dismiss my cook and my tailor.  These men are in trouble, since they have sold their fishing gear and farm land, and have invested so much time learning their new trades.  They will barely survive, if they treat every ticket they own like their last.

This is where i see Bitcoin will have problems. Well this is where i see we will have problems when Bitcoin will be one of main currencies on the world. But maybe not spending more then we need will actually return us to our cores. And will actually give Earth chance to recover of devastation we made in 20th and 21th century.

[Betwrong]

I stop issuing tickets.  Hearing the news, people suddenly want those tickets again, and they begin to buy just enough to eat.  There is fear in the air and everyone has trouble selling things.  I will be OK since I have stored up so many tickets, but, for prudence's sake, I have to dismiss my cook and my tailor.  These men are in trouble, since they have sold their fishing gear and farm land, and have invested so much time learning their new trades.  They will barely survive, if they treat every ticket they own like their last.

This is where i see Bitcoin will have problems. Well this is where i see we will have problems when Bitcoin will be one of main currencies on the world. But maybe not spending more then we need will actually return us to our cores. And will actually give Earth chance to recover of devastation we made in 20th and 21th century.

Exactly! Just imagine even now when Bitcoin is not the main currency in the world if people who have them would just spend as much of them as they need for their daily needs the demand would outbalance supply and the price of BTC will go up which most of us here are longing to.

[EggShells]

Hi, I have explored a lot of these concepts already with the idea of a 1000-man island.  I choose 1000 because with 10 people it's not likely that any currency is needed.  Everyone knows who is pulling their weight and not; instead a reputation system would prevail.  If you are the main hunter it's likely you can ask the others for whatever you want and get it.  If you are a louse, you will struggle to get help. 
 
But with 1,000 people it's not so obvious who is contributing what. 
 
As well, I extended your parable of the tickets, and went on to liken bitcoin to a sacred "rock" on the center of the island and the latest cryptonote currencies to actual hard mined gems.  Feel free to check it out and provide some commentary if you like: 
 
https://bitcointalk.org/index.php?topic=1137606.0

Thank you.  I like the 1000-man island.  It captures nicely the incentives for the issuer of money to maximize the issue until it crashes.

I haven't looked into Monero, but I thought the discovery of new tribes was great.

It might add something to the parable if we say the new tribes are autocratically run, and it only takes bribing their chiefs to get entire tribes to be "willing" to exchange goods for our notes.  When one tribe doesn't want to play any more, for whatever reason, we find another tribe.

[cutesakura]

Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. The balance between the two economic conditions is delicate, and an economy can quickly swing from one situation to the other.

Inflation is caused when goods and services are in high demand, creating a drop in availability. Consumers are willing to pay more for the items they want, causing manufacturers and service providers to charge more. Supplies can decrease for many reasons: A natural disaster can wipe out a food crop or a housing boom can exhaust building supplies, among other situations.

Deflation occurs when too many goods are available or when there is not enough money circulating to purchase those goods. For instance, if a particular type of car becomes highly popular, other manufacturers start to make a similar vehicle to compete. Soon, car companies have more of that vehicle style than they can sell, so they must drop the price to sell the cars. Companies that find themselves stuck with too much inventory must cut costs somewhere, which often leads to layoffs. Unemployed individuals do not have enough money available to purchase expensive items, which continues the trend.

When credit providers detect a decrease in prices, they often reduce the amount of credit they offer. This creates a credit crunch where consumers cannot access loans to purchase big-ticket items, leaving companies with overstocked inventory and leading to further deflation. Deflation can lead to an economic recession or depression, and the central banks usually work to stop deflation as soon as it starts.

Demand pull inflation usually occurs when there is an increase in aggregate monetary demand caused by an increase in one or more of the components of aggregate demand (AD), but where aggregate supply (AS) is slow to adjust.

The commonest causes are demand shocks, such as:

    Earnings rising above factor productivity.

    Cheaper credit, following a reduction in interest rates.

    Excessive public sector borrowing.

    A housing boom creating equity withdrawal and a positive wealth effect.

    Changes in the savings ratio.

The savings ratio

The savings ratio indicates the percentage of disposable income which is saved, rather than spent. Sudden changes in the savings ratio are an indicator of future changes in spending and AD, and can be a prelude to inflation or deflation.

A rise in the savings ratio indicates a decline in consumer confidence, whereas a fall in the savings ratio indicates a rise in confidence and spending, which can trigger an increase in the price level.

Cost-push inflation
Cost-push inflation occurs when an economy experiences a negative cost shock.

An increase in costs causes the aggregate supply curve to shift upward and to the left, resulting in a rise in the price level, and a contraction of aggregate demand.

The commonest causes are:

    Oil price shocks, caused by wars or decisions by OPEC to restrict output.

    Increases in farm prices or general food prices, following a series of poor harvests.

    Rapidly rising wage costs.

    A fall in the exchange rate, which increases the price of all imports.

    Imported cost push inflation as a result of inflation in other parts of the world.

A  fall in the exchange rate

A reduction in the exchange rate will mean that more Sterling is required to purchase a given quantity of imports; in other words, the price of imports will rise. After a time-lag, this will feed its way into retail prices.  For example, a motor vehicle imported from Germany for €50,000 would cost £25,000 at an exchange rate of £1 - €2. If Sterling falls in value, to £1 = €1.90, then the Sterling price would rise to £26,316.

Given that approximately 35% of the CPI basket of consumer goods and services are imports, the effect of a fall in the exchange rate is to raise the CPI. In addition, imported raw materials are also more expensive so costs of production will rise for those firms that source their inputs from abroad. Therefore, while a low exchange rate may be beneficial for exports, it has as a potentially inflationary effect on costs and prices.

Research by the Bank of England has identified two phases through which a change in the exchange rate 'passes through' the economy.

    In phase one, a change in the exchange rate affects import prices fairy quickly.
    In phase two, changes in import prices work their way into retail prices. Phase two may take much longer, even up to 3 years to complete.

Causes of deflation

Deflation tends to occur when the economy’s capacity, as indicated by the position of the AS curve,  grows at a faster rate than AD. Firms have to cut prices in order to stimulate sales and get rid of stocks.

Deflation can be triggered by an increase in supply. As business and consumer confidence in the economy declines, AD falls, resulting in recession.

[EggShells]

Inflation occurs when the price of goods and services rise, while deflation occurs when those prices decrease. The balance between the two economic conditions is delicate, and an economy can quickly swing from one situation to the other.

....

The commonest causes are demand shocks, such as:

....

Deflation can be triggered by an increase in supply. As business and consumer confidence in the economy declines, AD falls, resulting in recession.

....

Obviously any rigorous analysis would be complicated, but voters can't and shouldn't have to understand the details of economic policy.  In practice, this means that democracy has broken down in economics and policies are thus not necessarily designed to promote the public good.

There are, of course, natural causes to inflation and deflation, as you state.  E.g. financial leverage *should* go up to support a rapidly growing real economy.  The key is not whether asset and consumer prices go up or down, but whether the price movement is driven by market forces or state and central bank action.   If I lend out a dollar in a totally voluntary manner, and the state is not guaranteeing the debt in any way, that dollar is more likely to drive real economic growth (since I'll lose it if it's invested poorly.)  Unfortunately, a huge amount of assets are not totally free capital, and that has been the cause, over the last centuries, of the boom and bust cycles with their economic pain.

What we have in money and finance is central planning rather than a free market.  Central planning claims to champion the interests of the average person, but a look at the unpayable national debts and the spectacular wealth of bankers tied into the state-bank alliance would tell you otherwise.

[Harry Hood]

Somehow, I find myself owning a lot of tickets.  If a few people don't like this, I use a few tickets to get the popular guys to talk some sense into them.  Anyway, what big problem can arise, if only one man receives freely issued tickets for this innovative service to the community, and all others must earn theirs with real labor?

This system does make everyone more productive.  People spend less time planning and trading, and more time working.  So productive, that after I hire someone to cook my food, and someone to make me clothes, there is still more than enough food to go around, and everyone over-feeds himself.

By this time, I hear that there exist so many tickets around the island that people are beginning to trade goods for goods, fearing the tickets won't hold their value.  My plans must change.  I stop issuing tickets.  Hearing the news, people suddenly want those tickets again, and they begin to buy just enough to eat.  There is fear in the air and everyone has trouble selling things.  I will be OK since I have stored up so many tickets, but, for prudence's sake, I have to dismiss my cook and my tailor.  These men are in trouble, since they have sold their fishing gear and farm land, and have invested so much time learning their new trades.  They will barely survive, if they treat every ticket they own like their last.

In the meantime, I hear of a hut someone has built during the good times.  The man, having sold his land too, is trying to sell the hut to buy food.  I pick up the hut at a more than reasonable price.

The psychology that "tickets are valuable" thus firmly established, I start issuing them again.  This time, maybe I can get someone to sing for me while I eat!

------------

This is not to capture the entire essence of the modern system (which would be pretty hard to do,) but only to showcase how the state-bank alliance uses *both* inflation and deflation to strip the rest of the economy of its wealth over time, using a process that seemed familiar to Thomas Jefferson.

Do you really believe that the state-bank alliance's purpose, objective is to 'strip the rest of the economy of its wealth over time'? Or is that an unfortunate consequence of a capitalistic system? Or is it not unfortunate at all?

How does one strike balance?  Do they abolish these "tickets" completely? Or keep the quantity the same? Or...?

[EggShells]

Do you really believe that the state-bank alliance's purpose, objective is to 'strip the rest of the economy of its wealth over time'? Or is that an unfortunate consequence of a capitalistic system? Or is it not unfortunate at all?

How does one strike balance?  Do they abolish these "tickets" completely? Or keep the quantity the same? Or...?

Glad you brought it up.  These are key issues.

"Take wealth" would probably be a better phrasing than "strip wealth."

Assuming you're taking "capitalism" to mean free-market rather than command economies, the precise problem is the lack of capitalism.  We might think we live under free markets, but all markets are driven fundamentally by money and finance, which are centrally planned.  The problems with central planning, as with socialist real economies, are that it's too inflexible to respond to price signals, and that it benefits the few at the expense of the many, in practice, since the complexity of central planning defeats democracy.

It would be nice to remember what Reagan said, "government is not the solution; government is the problem."  There is no "managing" the tickets; the incentives are always to maximize the issuance while stability lasts -- so the system is unstable, almost by definition.

The only few modern examples of state-free finance (and/or money) were the Italian Renaissance and the Scottish free-banking era of the 18th century.  The economy did great in both cases.  Government simply needs to get out of money and finance, and let each financial asset (including monies) survive or die in the market place.