What flaw can be found in this economic system?

[beartheweak]

I'm starting my own country and I'm trying to determine which money system to put in place. I believe the Fiat money system is one of the major reasons America is in so much debt. I believe that if my country were to use the gold standard, it would eventually become corrupt and many flaws will exist.

The system I'm leaning the most towards is one that someone else may have already thought of. It will have a permanent, limited supply of "cash". For the grand opening of country BEARTHEWEAK, it will be announced that there is $100 (to keep it simple to explain) that will be in circulation throughout the economy, and that is the most- and the least- there ever will be. However, obviously the $100 "valuation" will fluctuate depending on the wealth of the economy. To allow for more precise prices, the $100 will be susceptible to precision splitting. By that, I mean that if the economy displays a need for there to be more currency floating around (so that I don't have to charge $1 for a bubble gum -1% of the currency in circulation!), then we will introduce penny measurements to represent 1% of a dollar. At that point, the people in the economy could charge 1 penny for a bubble gum (may still need more precision splitting because that's still a hefty 0.01% of the economy for gum). If there is further need for precision splitting, or increasing demand for the currency, then we will release something else that will be worth 1% of a penny... and so it continues. The purpose of this is to destroy artificial inflation that a mixture of the [Fed. and the Fiat money system] imposes on everyone, by default. This allows for more precision in currency, without having to destroy the value of existing dollars by creating new ones out of then air.

To have easy access to analytical data, all of the money will be stored virtually (like the money in your bank account on your debit/ATM card(s)). In other words, there would be no physical "cash" like we do in America. This has great benefits: ease of use, much less "user error", diminishing petty robbery, analytical purposes, etc.

It appears that this solves many of the issues America's money system imposes. The only flaw I can find is a person can be a currency "troll" and store up currency to drive the price up, and to ultimately have more wealth. However, this is negated because every single currency system has this flaw.

What are your thoughts?

[Charlatan]

Sounds okay to me. Have you taken into account population growth?

[Second as Farce]

Interesting idea, but how would you deal with deflation? If the money supply is "increased" by taking existing dollars and splitting their value by factors of 10, or 100, or whatever, then wouldn't that create rampant deflation within the economy? And if it does, then wouldn't it screw over debtors?

Suppose I'm a gum tycoon in your country- I make $1 a year and decide to take on $5 of debt to grow my business by buying a gum distributorship. Let's also assume I sell my gum for $.01 and sell 100 pieces a year (the numbers are a bit weird given the scale we're talking about, but you get my point). If the currency doesn't split, then I should be fine- my revenues will allow me to pay back this debt within a few years' time.

But if the currency is split due to increased demand so that the smallest denomination is $.001 instead of $.01, the currency should deflate because of that demand. Given that, I'll probably have to lower my prices to sell gum for around $.001- a tenth of what I used to sell it for. Even if more people start buying my cheaper gum, the odds of my revenues getting back to $1 a year seem pretty low, meaning I probably won't be able to pay off my creditors, even though at the time I took out the loan I would have been able to pay it back in a few years.

I'm no economist so maybe I'm misunderstanding, but that would be a big concern for me.

[Dodds]

This flaw.

http://en.wikipedia.org/wiki/Gibson's_paradox

Which is pretty much explained above.

[beartheweak]

Interesting idea, but how would you deal with deflation? If the money supply is "increased" by taking existing dollars and splitting their value by factors of 10, or 100, or whatever, then wouldn't that create rampant deflation within the economy? And if it does, then wouldn't it screw over debtors?

Suppose I'm a gum tycoon in your country- I make $1 a year and decide to take on $5 of debt to grow my business by buying a gum distributorship. Let's also assume I sell my gum for $.01 and sell 100 pieces a year (the numbers are a bit weird given the scale we're talking about, but you get my point). If the currency doesn't split, then I should be fine- my revenues will allow me to pay back this debt within a few years' time.

But if the currency is split due to increased demand so that the smallest denomination is $.001 instead of $.01, the currency should deflate because of that demand. Given that, I'll probably have to lower my prices to sell gum for around $.001- a tenth of what I used to sell it for. Even if more people start buying my cheaper gum, the odds of my revenues getting back to $1 a year seem pretty low, meaning I probably won't be able to pay off my creditors, even though at the time I took out the loan I would have been able to pay it back in a few years.

I'm no economist so maybe I'm misunderstanding, but that would be a big concern for me.

A one dollar bill and 100 pennies have the exact same monetary value. Basically, when there is a demand for the currency to "split", the currency that the other citizens possess will still have the exact same value. It's like trading in your one dollar bill for 100 pennies. You still have the same wealth, just a better way for being more precise. But you are correct in pointing out a major flaw with debtors.

I'm trying to think about how that can be circumvented. Perhaps some sort of "variable" currency. With cash being virtual, couldn't we determine the exact "value" of the dollar at any moment in time? Let's say when I go to sign a contract, I would pay them back based on the "value" increase/decrease of the dollar. I don't know the specifics of how that would work, but if we were to base the fluctuating value on how much income each person makes a year (at least something that is relative and gives people no reason to skew and distort it for personal gain- physical merchandise and services can't be measured and aren't necessarily relational because items are always changing and getting more advanced) then we could generate some sort of relative number/figure which would be a country-wide variable that constantly determines the "real" value of an item (or dollar). By the way, food shouldn't be used as the base because it's not a constant relative value. The demand for certain food raises and lowers all the time. The only values actually relative to the wealth of the economy is the percentage of the currency being earned or spent by a citizen.

After thinking through that portion, I am beginning to wonder what the use of currency with a value on it really is. Why not have everyone's "money" be a constantly fluctuating value. To determine "real value" of assets, one would just have to calculate how much of the grand percentage of currency in the economy that one possesses.

I'm going to make a claim to this variable currency and call it "Bortz". Usage: "They pay me 5 Bortz a year". The 5 Bortz is a representative number that will be used to determine the real, market value of the currency at any given point in time.

[Charlatan]

A one dollar bill and 100 pennies have the exact same monetary value. Basically, when there is a demand for the currency to "split", the currency that the other citizens possess will still have the exact same value. It's like trading in your one dollar bill for 100 pennies. You still have the same wealth, just a better way for being more precise. But you are correct in pointing out a major flaw with debtors.

I'm trying to think about how that can be circumvented. Perhaps some sort of "variable" currency. With cash being virtual, couldn't we determine the exact "value" of the dollar at any moment in time? Let's say when I go to sign a contract, I would pay them back based on the "value" increase/decrease of the dollar. I don't know the specifics of how that would work, but if we were to base the fluctuating value on how much income each person makes a year (at least something that is relative and gives people no reason to skew and distort it for personal gain- physical merchandise and services can't be measured and aren't necessarily relational because items are always changing and getting more advanced) then we could generate some sort of relative number/figure which would be a country-wide variable that constantly determines the "real" value of an item (or dollar). By the way, food shouldn't be used as the base because it's not a constant relative value. The demand for certain food raises and lowers all the time. The only values actually relative to the wealth of the economy is the percentage of the currency being earned or spent by a citizen.

After thinking through that portion, I am beginning to wonder what the use of currency with a value on it really is. Why not have everyone's "money" be a constantly fluctuating value. To determine "real value" of assets, one would just have to calculate how much of the grand percentage of currency in the economy that one possesses.

I'm going to make a claim to this variable currency and call it "Bortz". Usage: "They pay me 5 Bortz a year". The 5 Bortz is a representative number that will be used to determine the real, market value of the currency at any given point in time.

Well, after some more thought, I guess first of all you should state that you are working with way more than a hundred dollars. If you were to take into account the way people get paid more each year with a raise. But then you could also say that instead of getting a raise nothing goes up in other countries, like oil, for instance. It just may well be that the raise in salasry allows for a rise in oil prices, but let's say that they stay the same for now, ok?

If you were to have a fixed amount of money, and no growth in it, then there will be inflation either, if prices remain the same. This mean that instead of having these prices for a while, the time you have them for is increased, and that increase lasts forever. This mean you are freezing the market. I hope you think well of freezing the market?

[RjBig]

Creating a new currency as you describe is pointless...all of the economic systems we have tried have all failed repeatedly...we do not need another currency....We need a new political/Economic system that does not congregate power into the hands of only a few...Everything we have tried is like this Top- Down Power structures...We need something new...Einstein once said something to the effect of "If you keep doing the same thing over and over again expecting different results, you are crazy....Until then the BIG IDEA is the Fix we need..