Jul 12, 2008

An economy without cash

When I was taking the Macro 1 class I was convinced that monetary policy was a joke. How can these bankers really think they have any impact whatsoever on the real economy? My suggestion was then to keep the money supply fixed. “No!” I was told by my classmate, “money supply growth must equal GDP growth”.

So what would happen under a fixed money supply? Well, a 5% GDP growth should be accompanied by a 5% decrease in prices, automatically. In other words, shifting prices would ensure market clearing. Now imagine an oil price shock. As an oil importer, you let your currency depreciate (no inflation targeting whatsoever, which would make your currency appreciate instead). So the oil shock is offset by your exports boom.

So with this fixed money supply and shifting prices, you can say bye bye to the inflation monster, as you don’t care about prices that change constantly. Now the question is how can people adapt to this? My solution is to drop cash altogether. Only debit cards and mobile phones and voice signatures. Then prices can become any fraction of any amount. With sustained GDP growth, a beer could become as cheap as 20 cents, while a phone call could be 0.0001 cent.
The Economist had already predicted the end of the cash era, but not the end of monetary policy.


F said...

..but what would happen to real wages? Monetary policy affects distribution as well.

And, your oil shock response would work only in a 2-country world, wouldn't it? Without coordination (or a global planner) I doubt that any depreciation could offset an oil shock, especially because the industrial countries trade mostly with other industrial countries, and not with Saudi Arabia..

Pierre-Louis said...

oops I had missed your comment! on the second point you are very right...good point...

to be honest I have completly forgot how monetary policy affects distribution...but what if wages were shifting with prices???