You may recall my recent question regarding local currencies. Some sources of info claim that currencies can be made to be resistant/immune to inflation. I've been unable to locate any more-or-less rigorous arguments to this effect.
Questions: Does this sound reasonable? Does it sound desirable? I don't see how it would be reasonable since the value of a commodity, even a numeraire commodity, is not established by fiat. Or is it? The issuer of a local currency may declare the value of the currency to be X in terms of dollars, but then to be inflation-resistant, that value would have to be constantly changed to represent a consistent level of purchasing power. Right? Last year it was worth $1, now it's worth $1.03, for example, in terms of nominal dollars. How else could it be done, if at all? If it weren't done, then the value of the local currency would erode over time, right? If we use an Hours model, then the currency is worth 1 hour of (anybody's) labor _or_ $10 in terms of real dollars. Next year, it is worth one hour or $9.70, let's say, in real dollars. So if the value in dollars is declared by fiat, then it needs to be changed periodically to maintain purchasing power. If the value is determined by fiat, to maintain that value in the market, we must depend on the goodwill and cooperation of the participants. Is this true? If our Hour is to be worth an hour of labor or $10 of goods, it depends on the participants to act according to this rule rather than on the results of the tatonnement of the economy. A Pound Sterling is worth so many dollars because there is an active market exchanging it, and it's price is based on the ebb and flow of goods and people using the two currencies. But there is no market for our Hours; since there is no demarcation dividing goods valued in dollars from goods demoninated in Hours--is that reasonable? You can see that I'm a little confused on this. A local currency issuer could set up a stock-market type auction to determine the price of the local currency in terms of dollars, correct? Any helpful thoughts or resources? __________________________________ Do you Yahoo!? Free Pop-Up Blocker - Get it now http://companion.yahoo.com/