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Author Topic: Can a deflationary currency reliably be used for wages?  (Read 115 times)
chennan
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April 02, 2018, 10:18:03 PM
Merited by mprep (1), Hydrogen (1), Xavofat (1)
 #1

So a while back I remember coming across this article and happened to come across it again and was wondering what people on here thought:

https://www.economist.com/blogs/freeexchange/2014/04/money

So let me quote the more important part I would want to see debated:

Quote
The issue, as the piece explains, is that deflation in the unit of account leads to unemployment, thanks to the fact that wages generally don't adjust downward. Mr Hearn suggests that the idea that deflation might be costly is controversial among economists. I must disagree; it really isn't. Economists would love it if he were right that deflation didn't matter—that money, in economists' parlance, is neutral. If wages adjusted quickly and cleanly then they could go back to applying really straightforward classical economic models and everyone's life would be simpler. But the data are very clear on this point; wages are "sticky", and so deflation in the currency in which wages are set is costly.

...

One final point: I think it is a mistake to view deflation or zero inflation as the idyllic, uncorrupted state of a monetary system. Money is not a natural thing. It's a technology that society deploys to meet certain needs. Different monetary systems imply different things for the price level in an economy, with vastly different distributional consequences. To say that one set of distributional consequences is right while another is not would be wrong; they are what they are and society chooses which it prefers. There are costly side effects to -2% inflation or 0% inflation just as there are to 2% inflation or 15% inflation. My personal view is that the societal consensus behind low but positive inflation that prevails at the moment makes a lot of sense.

It makes an interesting point.  I mean for one thing we have seen a unit of account in somewhat recent terms, which was backed by another limited unit of account (gold standard).  But we never got to see what happened long term if we just kept the gold standard and didn't tamper with it.  What would happen as more humans came into the world and population doubled, tripled, and so on?  Would wages be able to keep up with a currency that has a hard limit?

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Hydrogen
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April 03, 2018, 04:09:51 AM
 #2

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The issue, as the piece explains, is that deflation in the unit of account leads to unemployment, thanks to the fact that wages generally don't adjust downward. Mr Hearn suggests that the idea that deflation might be costly is controversial among economists. I must disagree; it really isn't. Economists would love it if he were right that deflation didn't matter—that money, in economists' parlance, is neutral. If wages adjusted quickly and cleanly then they could go back to applying really straightforward classical economic models and everyone's life would be simpler. But the data are very clear on this point; wages are "sticky", and so deflation in the currency in which wages are set is costly.

What they could mean when they say that wages "don't adjust downward" is an employee who is paid 5 pieces of gold, can't be paid 4 pieces of gold later so that more gold can be paid to CEO's or one percenters. Deflationary money supplies do not inflate at a high rate which makes wealth redistribution more difficult.

The way things are now, an employee who is paid $15 an hour in 1980 is paid significantly more than an employee in 2018 who makes $15 an hour due to inflation. Numerically it may seem like the pay is the same, but the money supply is inflating which reduces the actual purchasing power over time. This could be what they mean when they say "wages adjust downward". Inflating the money supply in order to give the wealthy a pay raise, without it being transparent and obvious to everyone.

So, the question being debated here may be how to get away with paying employees less (wages adjusting downwards) with deflationary currencies in order to give one percenters a raise. Frameworks like trickle down economics have been devised to justify this precedent in the past. That could be the area where all of the money in economics is being thrown, and so like they say necessity is the mother of all invention.

jseverson
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April 03, 2018, 06:33:15 AM
 #3

What would happen as more humans came into the world and population doubled, tripled, and so on?  Would wages be able to keep up with a currency that has a hard limit?

It would certainly be a challenge. The move away from the gold standard was meant to address that issue, after all, as deflation was a contributing factor in the Great Depression.

This is going to sound like a very simplistic solution, but can't employers simply adjust wages by taking deflation into account? They already do this now with inflation anyway, so the reverse should work somewhat similarly in principle. We've seen a small example of Bitcoin in this situation when it suddenly surged to $19k and some managers were forced to dock participants' pay in Bitcoin, with some even setting a USD standard. It's very messy, but it seems to have worked, at least on the surface.

Either way, I don't think Bitcoin will ever kill off fiat anyway, but rather become a global alternative, so I don't think its deflationary nature is a problem.

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April 03, 2018, 08:42:35 PM
 #4

It would certainly be a challenge. The move away from the gold standard was meant to address that issue, after all, as deflation was a contributing factor in the Great Depression.

When Ben Bernanke was chairman of the federal reserve, he issued this apology accepting responsibility for the fed causing the great depression.

There's a piece explaining it hosted on the federal reserve's website.

https://www.federalreservehistory.org/essays/great_depression

This is going to sound like a very simplistic solution, but can't employers simply adjust wages by taking deflation into account? They already do this now with inflation anyway, so the reverse should work somewhat similarly in principle. We've seen a small example of Bitcoin in this situation when it suddenly surged to $19k and some managers were forced to dock participants' pay in Bitcoin, with some even setting a USD standard. It's very messy, but it seems to have worked, at least on the surface.

Either way, I don't think Bitcoin will ever kill off fiat anyway, but rather become a global alternative, so I don't think its deflationary nature is a problem.

I think there is an explanation for what they mean when they say deflationary currencies do not "adjust downward". I'll try to give you a scenario which might illustrate it.

Scenario: Imagine in the year 2010, there are $2 trillion dollars in circulation. A worker in 2010 is paid $20 an hour. Now let's say that in 2018 there are $3 trillion dollars in circulation and a worker is being paid $20/hour. The expanding money supply (inflationary) makes it easier to give raises to 1 percenters. If the amount of dollars in circulation increases from $2 trillion to $3 trillion that could represent a considerable decrease in consumer buying power. A worker who makes $20/hour when $2 trillion dollars are in circulation could also take a big pay cut if the inflationary money supply increases by 50% to 3$ trillion.

That could be what they mean when they say that inflationary currencies "adjust wages downward". The expanding money supply decreases wages without most people realizing it. Workers take a big pay cut even if the numerical value they're being paid, remains the same.

The same doesn't happen with deflationary currencies. Its extremely difficult to cut worker pay, without them realizing their pay is being cut. The same precedent doesn't apply to inflationary currencies where the paychecks of workers can be cut by expanding the money supply under circumstances where wages remain the same.

Its a ratio and supply thing.

$20 out of a $2 trillion money supply is much more valuable than $20 out of $3 trillion.

The expanding money supply gives workers an indirect and stealthy pay cut(wages adjust downwards).

It could be yet another economic framework designed to prop up "wealth inequality" as trickle down economics and similar methodologies before it.

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April 03, 2018, 10:05:19 PM
 #5

So a while back I remember coming across this article and happened to come across it again and was wondering what people on here thought:

https://www.economist.com/blogs/freeexchange/2014/04/money

So let me quote the more important part I would want to see debated:

Quote
-Snip

I don't agree, we have been on deflationary currencies for longer than we have no inflationary currencies and there's nothing to suggest that there are less jobs when its deflationary. I'm guessing though that deflationary economies will see less ''frivoulous spending'' because everyone wants to sit on it more but things like food, shelter and all necessities will be purchased no matter what. If you want mindless consumerism sure inflationary is your way to go, if you don't want that then go deflationary. I'm not at all convinced that a deflationary currency will halt economies because nobody spends. I'd say that a lot of businesses will do worse since people suddenly don't need 3 cars and 10 pair of shoes.

jseverson
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April 04, 2018, 10:58:48 AM
 #6

-snip-

Yeah, I get what you're saying. Prices keep rising while wages can't keep up (though they do adjust slowly), so it could be said that their pay is being docked. As for your point that this is being done by design i.e. using inflation to hide the fact that they're being purposefully "docked" pay, I don't necessarily agree with but I'll leave it at that.

The same doesn't happen with deflationary currencies. Its extremely difficult to cut worker pay, without them realizing their pay is being cut. The same precedent doesn't apply to inflationary currencies where the paychecks of workers can be cut by expanding the money supply under circumstances where wages remain the same.

Why would you need to hide it though? In Bitcoin's case specifically, it's priced in USD so you could always use the USD value, keeping it the same while the Bitcoin equivalent decreases. It's very messy and inelegant, as I have said, but it's really the only prospective solution I personally see to make deflationary currencies viable for wages. If that isn't possible, then I don't see a way to make it work.

I've already said that I disagree with your position that the people at the top purposefully uses inflation to dock workers' pay, so if you're saying it won't work solely because they won't let it, you may ignore my comments.

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April 04, 2018, 08:56:56 PM
 #7

Yeah, I get what you're saying. Prices keep rising while wages can't keep up (though they do adjust slowly), so it could be said that their pay is being docked. As for your point that this is being done by design i.e. using inflation to hide the fact that they're being purposefully "docked" pay, I don't necessarily agree with but I'll leave it at that.

It is definitely purposefully docked. For example, in the US, the interest rate is one way to control the supply and demand of money. If the interest rate is lowered, there is more demand for money and more ends up being printed. This increased supply of money, ceteris paribus, lowers the value of money, since there is more of it--leading to inflation. So while the government might have a debt of $1M dollars on the books, the $1M dollars is only now worth $980 thousand. Scaled out across all the government's debts, this is a significant amount of money. The manipulations of the fiat money supply are a stealth form of taxation. This is one of the reasons why decentralization is so important.
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April 04, 2018, 10:07:43 PM
 #8

Why would you need to hide it though? In Bitcoin's case specifically, it's priced in USD so you could always use the USD value, keeping it the same while the Bitcoin equivalent decreases. It's very messy and inelegant, as I have said, but it's really the only prospective solution I personally see to make deflationary currencies viable for wages. If that isn't possible, then I don't see a way to make it work.

I've already said that I disagree with your position that the people at the top purposefully uses inflation to dock workers' pay, so if you're saying it won't work solely because they won't let it, you may ignore my comments.

I have a vague feeling the most relevent statistics and data relating to economics and finance are consistently censored and repressed. I'll give you an example.



Image link: https://i.imgur.com/IrBKk5o.jpg

If someone walked into a college classroom citing the above statistics, they would be labeled a "conspiracy theorist" and ignored. It is the most "amazing coincidence" that colleges happen to implement "safe spaces" which censor "dissenting opinions" to prevent students from coming into contact with differing views or accounts of history. One might almost say it happened by design. But I think that could be too "conspiracy theoryish" for many.

It is also an "amazing coincidence" that unemployment, inflation and a host of other statistics regularly cited by the media were all redefined to illustrate a rosier image of reality awhile ago. Almost as if there were a coordinated and cooperative effort at the highest levels to hide data and statistics from the public.

The key difference between fiat currency and bitcoin may be fiat offers an integral option to dock worker pay, without them realizing their pay is being docked. Bitcoin doesn't offer that option as its supply doesn't inflate at a fast enough rate to achieve the same result. The same could be said of a gold standard. I'm used to people not agreeing with me. If you did agree with me that would be shocking and surprising so no worries.

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April 04, 2018, 11:41:18 PM
 #9

IMO this enrichment of the wealthy would be the main issue, as this worker with a $20 wage would not be able to take advantage of the deflation. He would be spending his wage as he did a year before and that 1% more wouldn't mean anything to him. At the same time the owner of the company, who has the equivalent of $10 million just lying in there, will be getting significantly richer with every 1%. People with huge amounts of currency wouldn't ever spend it as holding would be more profitable than investing.
But would it really? Maybe the economy would adjust.
In case of inflationary currency you can buy a pack of cigarettes for $5, and after some time it costs $6, but you don't feel it so much because the wages go up at the same time. If you buy the same pack of cigs with a deflationary currency, it should cost $4. But what if your wages go down? Bitcointalk sig campaigns are a great example of this reduction. With the growing value of BTC the payouts are getting cut. Note that some campaigns have been running for 2 years straight while the value of the tokens grew by 1000%.
I believe that deflationary currency can be used for wages, but how the economy adapts to this is going to be interesting to watch.

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April 05, 2018, 02:14:51 AM
 #10

Thats true hpw inflation is not the only culprit in economic disbalance but deflation equally is. But we should understand that, inflation doeant mean allot of cash, what it actually means on the ground is that the same amount of cash has lesser value now, and consequetively it might be necessary for more cash to be present.
While on the other hand, deflation doesnt really mean a cash crunch. It rather means that the same existantial cash got more value than before.

Now in wages terms, saying it cannot be altered is wrong. Everything can be altered with situations that follow.
If gold was really to not produce and value, why would one keep it? It is the matter of fact that 99% people have gold not because of its asthetic purppse but for the value that it  holds. If a situation arises when its just stagnant, people will lose interest in it.

And for wages, even if deflation happens, thats the recievers luck. Its like saying can c be used as payment mode. Why cant it be. It is deflamationary, and inflationary aswell. Even on the campaigns over this platform, rates are tweeked according to the ongoimg prices of btc. Thus things can be done when situation demands for it.
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April 05, 2018, 02:58:46 AM
 #11

To answer your question, a deflationary currency can be used for wages.  For ease, I'm assuming that you mean BTC. 

This would work in much the same way as current wages.  You would receive an equivalent amount of currency based off of your wages.  This amount would vary based off of the market value of BTC at the time paid.  Some periods you would receive more BTC some periods less.  This would function largely the same as dollar cost averaging in investing. 

I've seen a lot of commentators discussing inflationary and deflationary environments and I wanted to make some points here.

Inflation and Deflation have to do with prices.  With Inflation market prices increases and with deflation market prices decrease. 

Typically, wages are a factor in inflation since they represent the larges expenses for any business.  Wages are dependant on market forces, primarily supply and demand of labor.  If more people can do a task the less wages the employer pays.  The more specialized the skills, the more wages the employer pays. 

Usually, annual wage increases barely keep up with 'CPI' inflation much less the real inflation rate. 

Deflation is really ugly since it causes prices to decrease (usually due to a large loss of labor due to automation, retirement, etc) which causes employer revenue to decrease and the employer typically responds by reducing headcount.  This causes more deflation since consumers have less money to spend and creates a vicious cycle in the economy. 
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April 05, 2018, 04:23:12 AM
Merited by jseverson (1)
 #12

Deflation is really ugly since it causes prices to decrease (usually due to a large loss of labor due to automation, retirement, etc) which causes employer revenue to decrease and the employer typically responds by reducing headcount.  This causes more deflation since consumers have less money to spend and creates a vicious cycle in the economy.  

If it is true that deflationary currencies like bitcoin increase in value over time, then prices do not truly decrease as they are compensated by appreciating value of the currency?

For example, let's say that bitcoin appreciate's in value from $5,000 to $7,000. The price of a cup of coffee might decrease in btc due to the change in exchange rate between the US dollar and btc. But it doesn't imply that there is a necessary loss in value? The same with employee revenue "decreasing". As long as the value of the currency appreciates, there are no real issues--a rising tide lifts all ships? It is only if the currency declines in value that problems arise?

I think that you're reciting some of the standard things taught in finance and economics classes. But that those points lack historical examples or evidence to support them and tend to be moreso urban myths rather than something resembling harder or more established science.

I don't mind if you can prove me wrong here. It would be a good learning experience and I'm certain others might benefit from your explanation if you have one. So don't hold back. I'll +merit you if you can justify your stated stance well.

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April 05, 2018, 05:34:00 AM
 #13

The standard of living of Americans grew until the 70s of the last century, while the dollar was tied to gold. President Nixon in 1971 abolished the gold standard. Perhaps these events are not interrelated, but at present it can not be done for many reasons. For example, you can not devalue your own currency and make the economy a competitive world market.
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April 05, 2018, 07:58:48 AM
 #14

The article talks about "Deflation in the unit of account". The assumption is for a future world where bitcoin with a fixed and decreasing supply has replaced fiat and it, supposedly, results in lesser and lesser amount of currency being available to cater to wage requirements.
This also assumes that wages cannot be lowered as they are "sticky". That is, workers/ people want wages to increase, not decrease. (in absolute terms)

The way i am understanding this in very layman terms is that "There won't be enough BTC to distribute for everybody because it's supply is decreasing with time".
This looks like a compulsive argument. What if the majority holders just decide to HODL all of the BTC and never spend it?? What if they just decide to die fiat-less and leave their bitcoin stored on the blockchain with the private key destroyed.. Is it that kind of a scenario..??

What if BTC is the verifiable standard against which other currencies are pegged like they have always been against USD? It would be so much better if these economists were a little more open-minded and focused on informing public about how a publicly audit-able reserve currency would benefit the banking system. This would be a much better use of their time than trying to find such silly excuses against BTC.
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April 05, 2018, 12:06:05 PM
 #15

-snip-
I have to say, it's pretty refreshing talking with someone who attacks ideas rather than people lol.

I completely respect your views, and I don't doubt for a second that this is happening. The conspiracy theory in my opinion though, is that fiat was designed with this purpose in mind. We have facts and figures, but we can all arrive at different interpretations. I interpret this as an unintended shortcoming of the financial system, along with the fact that increasingly stiff competition among the lower ladder gives the people at the top much more leverage to work with. Either way, I think we can agree that the current system is fucked, and we need something better.

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April 09, 2018, 01:49:14 PM
 #16

Quote
The issue, as the piece explains, is that deflation in the unit of account leads to unemployment, thanks to the fact that wages generally don't adjust downward. Mr Hearn suggests that the idea that deflation might be costly is controversial among economists. I must disagree; it really isn't. Economists would love it if he were right that deflation didn't matter—that money, in economists' parlance, is neutral. If wages adjusted quickly and cleanly then they could go back to applying really straightforward classical economic models and everyone's life would be simpler. But the data are very clear on this point; wages are "sticky", and so deflation in the currency in which wages are set is costly.

What they could mean when they say that wages "don't adjust downward" is an employee who is paid 5 pieces of gold, can't be paid 4 pieces of gold later so that more gold can be paid to CEO's or one percenters. Deflationary money supplies do not inflate at a high rate which makes wealth redistribution more difficult.

The way things are now, an employee who is paid $15 an hour in 1980 is paid significantly more than an employee in 2018 who makes $15 an hour due to inflation. Numerically it may seem like the pay is the same, but the money supply is inflating which reduces the actual purchasing power over time. This could be what they mean when they say "wages adjust downward". Inflating the money supply in order to give the wealthy a pay raise, without it being transparent and obvious to everyone.

So, the question being debated here may be how to get away with paying employees less (wages adjusting downwards) with deflationary currencies in order to give one percenters a raise. Frameworks like trickle down economics have been devised to justify this precedent in the past. That could be the area where all of the money in economics is being thrown, and so like they say necessity is the mother of all invention

That's an interesting point, I never considered the wage increases also take into account CEO/one percenters getting basically the same, if not more percentage wage increases on top of all of that.

The bolded part is actually a pretty interesting question in itself.  My personal opinion is that a coin that doesn't have a true hard cap but a very small tail emission is probably the best approach of something like this.  hitting a limit and letting a small block reward go to miners to keep the supply somewhat level around the cap (due to loss of private keys, etc.) can help keep the coins not go hyperdeflationary (?)... idk.

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April 09, 2018, 01:54:56 PM
 #17

The article talks about "Deflation in the unit of account". The assumption is for a future world where bitcoin with a fixed and decreasing supply has replaced fiat and it, supposedly, results in lesser and lesser amount of currency being available to cater to wage requirements.
This also assumes that wages cannot be lowered as they are "sticky". That is, workers/ people want wages to increase, not decrease. (in absolute terms)

The way i am understanding this in very layman terms is that "There won't be enough BTC to distribute for everybody because it's supply is decreasing with time".
This looks like a compulsive argument. What if the majority holders just decide to HODL all of the BTC and never spend it?? What if they just decide to die fiat-less and leave their bitcoin stored on the blockchain with the private key destroyed.. Is it that kind of a scenario..??

What if BTC is the verifiable standard against which other currencies are pegged like they have always been against USD? It would be so much better if these economists were a little more open-minded and focused on informing public about how a publicly audit-able reserve currency would benefit the banking system. This would be a much better use of their time than trying to find such silly excuses against BTC.

Great counter about the fact that we can't even audit the Federal Reserve and has been the soap box so many libertarians rightfully stand on all the time.  It's funny how people always argue about how Bitcoin money is fake because they can't seem to understand how coins are "created" and just see it as numbers on a screen, when they fail to realize that their same worry is exactly what's happening to their precious fiat where the war on cash has already been commenced.

I still can't believe hundreds of millions of people trust 8-12 people or so to pull the strings to the national (and global) economy without being so much as watched in any way

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