There are zillions possible formulas which could be used in order to depreciate money. Here is a very simple one: Suppose we all agree that the value of freshly created money out of thin air should depreciate to 36% after Y years (Y could 27.5, but it could be equally well 50 years – that is a matter of expert adjustment by people who design monetary policy). Assume further that N is the number of years passed since the creation of that money (N could be a fraction changing every day). Then the present value of one Dollar created N years ago would be simply

( 1 – 1/Y )^N

You may notice that this is the formula we use to calculate the present value of future cash flows. So the formula is nothing new. People use it all the time. If we take Y=27.5 and N = 100, the value of one Dollar 100 years after its creation would be worth only 2.46 cents. I think this is pretty realistic. It more or less corresponds to what the Fed has accomplished by using inflation. However, inflation leads to rising prices, while the model I propose would keep present prices constant. It would instead depreciate the value of money held in the bank for the long run.

I’m sorry to say that I simply flat out do not understand what your proposing, and on many levels. Your example concerning the value of the money received for a real estate loan is bizarre. First of all, the depreciation schedule for real estate an arbitrary contrivance and wouldn’t even exist in a sane and sound financial system (or is old land really worth less to you than “new” land? – whatever that is.) I’m no genius, but if I’m not getting your theory here then you better not count on the the Fed or Treasury getting it either. Having them determine the time value of money by a formula? Are you kidding me? They can’t handle their current responsibilities. Again, it’s not intellectually honest to promote a quantitative theory on qualitative grounds alone. I challenge you to derive the formula the Fed or Treasury is to use (because they ain’t gonna do it.). A complicated system like you’re proposing (and many others) is akin to wanting one’s conscious mind to control the involuntary system of one’s body.

In reality, the economy constantly produces new goods. However, the number of goods does not increase to infinity simply because old goods fall apart or become obsolete in time. A perfect monetary system must have the same property. Money created a long time ago must depreciate in value steadily in such a way that there is always a balance between the total amount of goods and services in existence and the total amount of money in bank accounts.

To achieve this equilibrium, we only need to introduce a second parameter to money in addition to the nominal amount. That second piece of data should be the date of the creation of that money. Since most of the money today is simply a piece of computer data, it would be very easy to track the date of the creation of that money. The nominal amount of that money would than depreciate over time according to a formula set by the Treasury or by the Fed.

Let’s consider an example. Suppose you apply for a bank loan (mortgage) in order to build a house. According to the IRS, buildings and houses can be depreciated for tax purposes over a period of 27.5 years (if I remember correctly). The same time period (27.5 years) can be incorporated into the bank loan which you took out and which the bank created out of thin air. The money you spent will circulate in the economy as it travels from one checking account to another account. However, after 27.5 years that money must depreciate to zero in order to reflect the fact that the house which gave value to the money you spent has reached the end of its useful life (assuming no repairs and additional improvements were done to the original house). Properly implemented, such a system could achieve various desirable objectives:

1) very little price inflation at the consumer level, that is, the price of bread or clothes would stay more or less constant.

2) a genuine scarcity of money which would prevent the rise of monster financial institutions which are too big to fail.

3) It would make it impossible that somebody could live forever from the interest generated by his earnings during 20 years of work. In particular, the dream of living in retirement for 40 years would be only a dream – not a possible reality. In particular, we would not have any Social Security problems.

4) Most importantly, it would prevent the rise of the money class over the real part of the economy. In such a type of monetary system, the people in the manufacturing sector would be always more important that the people sitting behind an office computer (bankers and politicians).

5) Such a monetary system would encourage the production of long lasting goods. The production of low quality products with a short useful life span would not be rewarding.

I could go on, but I think you got the main idea, so I better stop here.

Thanks for responding to my post.

Robert

With all due respect what you’re saying is preposterous. But, rather than try to unwind your various qualitative arguments, I suggest you try to pin down just what rate of inflation is the proper one, quantitatively. If the proper rate of inflation cannot be calculated then your theory is not practical. Basically, you’re implying that the inflation rates/interest rates for the last 100 years or so have been wrong, and too low. In my opinion, this another example of top-down control not worjing out as hoped.

Money is created in order to compensate for the creation of products and services. The truth is that all products and services lose their value over time. Every house erected will fall apart within 30 to 50 years unless constantly maintained. Every food produced will expire within days or weeks due to natural decay. Every car produced, even if preserved in mint condition, will become worthless in time due to technological progress. Even oil, once refined into gasoline or diesel, will spoil in time and become useless.

So if the overwhelming majority of products and services produced by the economy has a finite life span, why should the money earned in producing these products and services keep its purchasing power forever? There is a contradiction here which nobody likes to talk about. Clearly, we would like to live forever and for that reason we would like our savings to last forever. But I believe this wishful thinking is a great fallacy which is the main reason for our present problems.

A huge accumulation of debts is nothing else than a huge accumulation of monetary and financial claims. Where did all this money come from? Where are the real products and services which gave value to these huge accumulations of money? The truth is, that while money accumulates exponentially, the underlying real assets (housing, bridges, highways etc) decay exponentially.

The only solution to this dilemma is to inflate the value of money away over time. The inflation rate should match the natural decay rate of real products and services. Money should not and can not be gold. There is a huge intellectual dishonesty among all those who criticize the Fed for deflating the value of the Dollar by more than 90% since the creation of the Fed in 1913. In truth, the mistake the Fed made is that it did not deflate the Dollar by 99.9% as it should have done in order to keep the economy healthy and to keep the financial sector subservant to the manufacturing sector and not the other way around as it is today.

The great fallacy of money whose worth is independent of time must come to an end one day. That will happen at the latest when all the oil fields are exhausted and all the metal mines are depleted. Only then will people start to understand that the quadrillions of Dollars held in various bank accounts are only an illusion – a reflection of our desire to life forever in a world governed by entropy and the laws of thermodynamics.

A couple of thoughts… about where we are…

The Depression was Great because it ground out the “Hope” and “Changed” the prosperity of our nation, and the world. We are only in the second or third inning, (year) in my estimation… and another significant leg down is just around the corner.

The lists of things that are over valued on paper, is incredibly long, and unless you are a “Chosen” bank (ieBoB), you and I, WE the PEOPLE, will discover, brutally and painfully, the true value of the things we think we own, over the coming decade, or two.

This is Deflation… and it is as inevitable as the sun rising tomorrow,

It’s likely, in my view, that we could have monetary inflation in the things we use and consume…(during the Depression… 75% OF THE POPULATION SPENT 100% of their income on food and rent).

Prices look as though they are falling by Government (Falsified) indicators… but not by the REAL experiences of consumers.

Wages (and taxes withheld) have fallen SIGNIFICANTLY, and will continue to fall for the foreseeable future. Even Greenspan acknowledged recently the financial problems now were/are worse than the Great Dep.

So it’s early in that game.

The mountain of Derivatives stand ready steal all the accumulated (IMAGINARY) wealth of a generation. Look at Goldman… helping Greece to HIDE it’s true problems, and betting against them!!!

Think it can’t happen here? The US is a debt junkie, moving, being forced, or choosing? to bet the house on shorter and shorter term bonds. WHEN the rates rise, and they will. that house of cards will make some of the BoB’s RICH. Uh, RICHER! The process is much closer to the edge of the cliff than most think.

That’s the PLAN. Guaranteed!

Now how about the ULTIMATE plan? Is it possible that when paper currencies fail… and they all do… that the bank runs will REQUIRE a new global currency? That currency will be all electronic… no runs on the banks. They might convert your countries currency (savings account) to the new currency, at a discount. INVISIBLE control. REAL inflation coming to the world, and the chosen banks running it all. Can’t buy or sell without the electronic money in your account. Hmmm… maybe

MOST of the Industrialized world is nearly there NOW! The structure is in place for when the failure occurs. Which bank, Government, will be the CHOSEN ONE? Hmmm… who created and sold the whole world this mountain of worthless debt and worthless paper treasuries? Who has the most derivatives? Who stands to gain? Might it be the US BoB’s? Hmmm?

Buffet called them weapons of mass financial destruction… and we know that weapons are made to be used… so it’s certain that they will.

A thousand TRILLION$ of derivatives. It’s gonna get real UGLY! Me Thinks!

What difference would it make if the FED is eliminated and Treasury is given (or resumes) the same powers that the FED has now? Fiat money is problematic no matter where it’s created. And do you think that the Department of the Treasury would be a better controller of interest rates than the heads of the Federal Reserve Banks? The free market should determine the price of money as it (ideally) does for everything else. Is transparency want you want? What good is that if the whole framework is fatally flawed anyway? Ron Paul wants the FED to open its books and be audited not as an end in itself, but as a first step to reveal its clandestine nature and hopefully gain more support for its complete elimination. Treasury likes the FED precisely because it is not transparent and not accountable and can be used to surreptitiously carry out its desires. I doubt Tim and Ben disagree on much.

Good point. I totally agree. Our current FED bank is the third one in this country. Andrew Jackson broke the second one, as you may recall from a previous article at this site. There is always a desire by some to gain control and leverage over others/institutions etc. However, there is also always a large group of people who believe that top down management is necessary or desirable (and possible). Both sides share beliefs in the unsavory and untrustworthy Self, and thus the free market and individualism by extension. Greenspan is faulted for his belief in the self-regulatory ability of the free market. That is the spin intended to deflect attention away from the actual fraud and self-serving regulations that exist. Considering that Congress is wrapping up another financial reform bill shows that people are still not getting it. As Ron Paul and others have said, Capitalism has not failed – we haven’t had real capitalism for decades. We’ve all grown up in an increasingly mixed economy, and it is very difficult to discern or prove that top-down gov. fiat actions via tariffs, regulations, subsidies, taxes, stimuli, etc. are what cause the imbalances and instabilities, and not the other way around which is what the “monetary elitists”, career politicians, and everyone else who gains an advantage by that system want you to think. Things ARE changing but your guess is as good as mine as to how it’s going to play out. In the meantime, enjoy your “ringside seat for the global financial crisis.”