Since you brought it up JohnDoe, I still haven't been able to really figure out the difference between demurrage and inflation.
There is no real difference. You are reasoning correctly. The only distinction is a purely nominal one. Unless psychological illusions are introduced, demurrage and inflation produce identical real outcomes.
Except with demurrage the debasement happens instantaneously, and evenly across currency owners. With inflation, prices gradually get bid up as the new money works its way through the economy
. I imagine this can be potentially disruptive, as the new money starts overly concentrated in one place. My intuition tells me bubbles could be caused this way.
Exactly, that's the key for my point 2 here.
Differences between inflation and demurrage:
1) The nominal. The accountability inconvenience that inflation produces is not needed. I'll bring an exponential growth example in the hope that you start to dislike it.
5% infaltion rate
year 0, 1 coke = 1 inflatacoin
year 1, 1 coke = 1.05 ic
year 15 1.05^15 = 2.07892818 ic
year 23 1.05^23 = 3.07152376 ic
year 29 1.05^29 = 4.1161356 ic
year 33 1.05^33 = 5.00318854 ic
year 37 1.05^37 = 6.08140694 ic
year 40 1.05^40 = 7.03998871 ic
year 43 1.05^43 = 8.14966693 ic
year 45 1.05^45 = 8.98500779 ic
year 47 1.05^47 = 9.90597109 ic
year 49 1.05^49 = 10.9213331 ic
year 51 1.05^51 = 12.0407698 ic
year 43 1.05^53 = 13.2749487 ic
see? the time to gain just one unit is getting shorter and shorter until eventually will be less than a year, then less than a mounth, less than a day, less than an hour, less than a second...
2) The financial
Inflation rises nominal interest and leaves real interest untouched. Demurrage, on the other hand lowers real interest and encourages investments.
This seems in contradiction with what we see today, but today inflation is not created by mining but is loaned to existed at low interest. This represents a transfer from the conventional lender (saver) to the privileged borrower (the government and commercial banks). [Well, it also represent transfer of wealth from every money holder to those same privileged borrowers].
The financial market becomes unfair and allows investments that are not based on saving, with catastrophic malinvestment effects.
But let's just compare our far less dangerous mining inflation with demurrage in financial terms.
A) 5% inflation, 5% interest
Since profits tend to zero by competition, the capital yield of our example tends to be equal to the interest rate, 5%.
Why the interest rate is a lower limit to capital yields?
Well, if someone borrows at 5% to invest in a 4% capital, his investment is not solvent. The only way to not loss money there is to sell the capital at a bubble price.
So our bakery costs 10000 at 5%.
His bakery yields 5% of its value annually, but the price of the capital is also rising.
In the second year, the 5% yield of its inflated 10500 will be higher than his agreed 500 annual interest quote and the difference are profits for the baker.
After 15 years, he can sell the inflated bakery to pay the principal of the loan and take the difference in price for himself.
Because the lender knows this and he's the one who decides if the bakery is built or not, he's able to charge inflation premium and the baker will still be able to pay him back (but the baker will have no profits).
When negotiating, the lender says: you pay me 10% interest rate or I keep my money (or invest it the money myself). I won't lose anything and you lose a job as baker.
So the nominal interest rate in this case would be 10% = 5% real/basic interest (or liquidity premium) + 5% inflation premium.
B) 5% demurrage, 5% interest
Here, when negotiating the lender cannot argue that he can keep the money, because he cannot deny that he will do it at a lost.
I know, with inflation the money holder is also losing but not in the same way. While the effect of demurrage is automatic and equal to every money holder, the monetary inflation precedes the price inflation. The miner has to spend his new money to create the price inflation. First he will inflate a certain market (whatever he demands) but that imbalance will be transferred to other sectors when the receiver spends it again. It will take some time until an equilibrium is reached again and this new money to affect the whole economy equally.
So let's say that the baker is brave enough to ask for a 4.9% interest rate. The money holder thinks:
"With inflation I had two options: lending at a 5% real interest rate or investing for a 5% yield, but now I can lend at 4.9% or invest it myself for 5%"
He says to the baker, "You know what? I'll buy you the bakery. Your rent will be 500, because that's what the bakery can yield."
But many lenders have done the same and the greater competition in the bakery market leads the yield of bakeries to drop to 4.9%.
Next time, when the baker asks for a 4.8% instead of 4.9%, maybe the lender says: "ok, just take it".
The yield of the bakeries will drop until all that you can make by renting one until the time destroys it equals the costs of building it, until the profits of building a bakery are zero.
Interest impedes capital profits to drop to zero.
But anyway, if you don't believe all this freeconomist theory, you still should chose demurrage over inflation.
Why not chose the alternative that is better for accounting purposes?
Has inflation any advantage over demurrage?
If it's a backed, centrally issued currency, would a reduction in the bank's conversion rate achieve the same thing?
Yes. e-gold had a demurrage of 1%. They could have defined a parallel unit without demurrage and falling conversion rate, but the effect is the same: you will receive 1% less gold next year.