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Date: Mon, 20 Nov 2006 19:52:19 -0600
To: klochner &AElig eecs.umich.edu
Cc: dreeves &AElig yahoo-inc.com, mschwarz &AElig yahoo-inc.com,         yootopia-discuss &AElig yahoo-inc.com, ykouskoulas &AElig gmail.com,         bsoule &AElig gmail.com, improvetheworld &AElig umich.edu, ykouskoulas &AElig comcast.net
From: Steven Reeves <s-reeves &AElig northwestern.edu>
Subject: Re: Yootles
Status: O
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Usually I linger in the shadows of these debates, but on this subject you are all
men/women/transgendered individuals after my own heart.

To expand a bit upon Kevin's suggestions:

In traditional monetary policy theory,

p=p^e+gY+z

where "p" is the actual inflation rate for a given currency
"p^e" is the expected inflation rate
"g" is the slope of the supply curve for that currency
"Y" is the growth rate of GDP
and "z" is the effect of supply shocks

So, if you want to control inflation (and you cannot change people's expectations), you need to
either control the growth rate of the yootopian economy or control the supply shocks within that economy.

And if no Yootle is ever created or destroyed, then the growth rate of the yootopian economy is 0.  
This means that the only way to control the rate of inflation for a fixed currency with no growth
to the money supply is to control supply shocks.

So, the solution is this: create a bank of Yootopia.  If the "value" of Yootles is diluted, simply
raise the interest rate for negative balances.  This will motivate repayment, which will increase
supply.  This increased supply will combat the expected inflation rate and will allow you to
control the actual level of inflation.

If everyone is spending Yootles like mad at 5.375%, raise the rate to 20%.  Suddenly, everyone will 
increase their perceived time value per yootle, and the nominal autonomous consumption level will
naturally decrease.

-Danny's brother

==============Original message text===============
On Mon, 20 Nov 2006 6:25:04 pm CST Kevin Lochner wrote:

I'm a bit of a monetary theory buff & wouldn't mind taking a stab . . .

On Mon, 20 Nov 2006, ykouskoulas &AElig comcast.net wrote:
>
> 1. Practical usage question: If yootles are not tied to anything of 
> value, how do I know how much each is worth? I don't know how to come up 
> with a number in negotiations without having an idea about its value. 
> I.e. is a backrub worth 20 or 2000 yootles?

I *think* the plan was to use use the convention that yootles would be 
approximately equivalent to dollars for the time being.

> 2. Stabilization of value over time question: If I just start by 
> throwing out a number, is there an expectation that the value of a 
> yootle will stabilize as the currency is used over time? Or does the 
> worth of a yootle fluctuate from month to month?

My own belief is that if there is no ultimate penalty to having negative 
balances (in real money terms), then the value of yootles could fluctuate 
arbitrarily.  If there is a penalty, the value of a yootle would be 
derived from that penalty (and from peoples time-dependent consumption 
preferences).

> 3. Philosophical, 'how does currency get its value' question: I was 
> given to understand, based on economics classes that I took that 
> currencies got their values by being tied to something else of value (a 
> good or service).
> Phrasing the question in another way, "why is a dollar bill in my 
> pocket today valued such that I can buy a cup of coffee* with it, and 
> not a new computer?" What determines its value?

The dollar bill is not currently tied to anything of value.  As an aside, 
no fiat currency (i.e., not backed by a commodity) has lasted for more 
than a hundred years or so.  The dollar most recently went off the gold 
standard in the 70's and has lost much of it's purchasing power since 
then.  (http://www.infoplease.com/ipa/A0001519.html)  The value of the dollar is now largely determined by expectations and supply - if the 
supply of dollars stays constant (and is expected to stay constant or 
grow only in proportion to the size of the economy), people take the 
value of the dollar to be fixed relative to goods and services.  You pay 
$4 for a latte because you know that you can turn around and use your $4 
to buy a half a movie ticket.

When countries take on debt to the point that their abilities to pay off 
that debt becomes questionable, rational agents move assets out of the 
debt/currency and it becomes devalued based on basic supply and demand. 
That's what happened in argentina a few years ago.  Alternatively, if a 
country has debt demoninated in their own currency, they have the option 
of creating more money to pay off existing debt (also called "monetizing" 
the debt), which increases the money supply and reduces the value of the 
currency (causes inflation) also through supply/demand fundamentals.

It's a little more subtle in the US, since we have the federal reserve 
which creates dollars in exchange for debt, so the money supply is 
increased when the fed buys treasury bills from the US government. 
This is similar to the yootle system since you can't create yootles, 
you can only borrow them (i.e., issue debt).  The mechanism to monetizing 
US debt is still available presuming that the federal reserve will always 
be willing to supply dollars when our government needs them, which would
devalue everyone's dollars.  Yootles seem to solve that problem with the 
ripple-pay system, since dan issuing more yootles would only devalue his 
own yootle debts, so a dan-yootle isn't necessarily worth the same as a 
kevin-yootle.

Default/devalution here would be if someone borrowed too many yootles, 
other people would demand more yootles from them for equivalent goods (or 
a higher rate of interest) to compensate for the potential of default 
(i.e, yootle bankrupcy).  I'm not convinced that a yootle default would 
not have some unpleasant effects that "ripple" through the whole yootle 
community, but it's not obvious to me how that would play out.

As far as fundamental value goes, I think a yootle needs to be tied to 
something else of value to have any real value in itself, at least until 
people become accustomed to the system (a la the dollar, which started on 
the gold standard and is now a fiat currency).

- kevin

===========End of original message text===========