The Threat of Deflation: Is Depreciating Currency the Solution?

I did not think I would ever live to see these days. Who would have thought the rise of prices will fall and fall till the day when they reverse, and things start to get cheaper and cheaper? Seems that is what threatens to happen here in India. Inflation in India is about three per cent now, and by the end of this month or later, it will get to be zero. Please read athis at ibnlive.

I thought that would be good news, but not so. Falling prices may be good for me as consumer, but is bad every other way. Apparently when prices fall, your money can buy more; but the man who makes products gets less value for his goods, so he has to lay off people, which means less circulation of money all over, which helps you actually, because the producer has to reduce his prices to get your money and so on till everyone goes out of business. This may be true or not, but at least I understand it this way.

Anyway, about a week back, I read something about Depreciating Currency and I thought it interesting, I took some notes. And here comes the chance to use them.

Let's suppose that we understand deflation and its dangers. Is there any way to counter it?

One of the most fanciful is depreciating currency, based on this concept: the quicker the money is spent, the faster its velocity: higher velocity combats deflation. Easy.

How do you ensure that money which is scarce, is not hoarded, but spent?

There is something called Wara, which has been tried. A coal-mine owner in Schwanenkirchen had the brilliant idea of putting into circulation a currency for which you have to pay an interest of one per cent every month. So obviously if you get your hands to it, you will want to get rid of it quickly. Its effect was miraculous. In a place where everything had come to a standstill because there was not enough money to go round:

“Indeed, one could not have recognized Schwanenkirchen a few months after work had been resumed at the mine. The village was [prosperous], workers and merchants were free from debts and a new spirit of freedom and life pervaded the town. Had Herr Hebecker used his 40,000 Reichmarks instead of Wära, his efforts would have inevitably resulted in failure; the money would have circulated through only one or two hands, each person retaining as much as possible and hoarding it because of the hard times.”

(from "Stamp Scrip: Money People Paid to Use" by Bruce Champ)

And I read that even today in Bavaria, there is something called Cheimgaueur in circulation since 2003. It is used alongside the Euro in more than 600 shops and firms in the area, 300000 in circulation. It loses two per cent of its value every quarter- they have an expiry date printed. Chiemgaueurs must be renewed with a sticker that costs 2% of its value. You can read it work here

I suppose money works like water, it flows through, things grow. It stagnates, things don't grow. More water, flood, inflation is terrible. But less water, drought, deflation is not so good either.

There is an argument that this kind of money does not give much of a stimulus, because over time, its worth gets less and less. I have an idea that people who are in charge of this should give the stimulus money to charitable institutions. They are not here to keep money or make money, but to spend it, right? So let the economic stimulus start with a charity label. Let any money made over to charitable institutions automatically be converted permanently into depreciating currency, and we will see money fly.

By the way, if in ten years time, you are asked to name the right person eligible for The Nobel Prize in economics, don't forget to mention me. I got this idea first, ha ha.