# Is inflation and demurrage equivalent?

In the first iteration of Circles the basic income would be stable of n units per time per person. To counter unlimited new creation of coins there would be a demurrage factor in the range of 5-7% per year. This would eventually lead to a stable ratio total money supply (per person in the system) at (for 5%) 20x the yearly basic income. This is because at this total money supply 5% of it (that is destroyed in demurrage) equal to the amount of basic income (new creation of money).

In the current version of Circles the x% demurrage is replaced with a x% growth factor of the basic income. Instead of having a constant issuance of n units the issuance in is increased by x% per year or simply: n * (1+x)^years.

This will result in the same kind of stability in that sense that the ratio of basic income per person to money in existence per person will stabilize at a rate of 1:(1/(x%)) = 1:20 in the case of x=5.

Now wether money increases or decreases in purchasing power (inflation or deflation) depends on many other factors. (What is the total amount of goods/trust that can be bought with the money) But giving everything else equal I would make the claim that a scheme with demurrage and stable money supply (and no inflation) and a scheme with increasing total money supply that will cause inflation are equal.

The reason we decided for the second approach is simply because it is closer to what people are used to today.

This is coming from the perspective of someone who’s been interested in alternative currencies and demurrage for a while and discovered Circles yesterday, so I may be a little uninformed or repeating previous discussion but it does seem like there would be a difference in spending patterns.

Having the quantity of your money visibly decrease is likely to directly incentivise people to use it instead of hoard it. The more abstract concept of your money losing value but still having the same number doesn’t seem likely to have the same effect.

There’s also that it seems intuitively neater to have the total money supply per person eventually balance out with the creation and destruction of money, rather than by increasing issuance. While it might equate to the same stability, it’s still taking me a while to get my own head around, let alone explain it to someone else.

A system like this which creates money so regularly from the individual’s perspective feels like it should have some counterbalance. I’m not sure that sticking closer to what people are used to, where they never really see the creation of money, is necessarily better than choosing the option that can make people feel more assured that there isn’t just an uncontrolled pouring of money into the system (even if that isn’t actually the case!).

(sorry for the late post, I just discovered these boards)

I think that demurrage systems are easier to reason about. Below are two sorts of analysis that are more difficult in an inflationary system:

Supposing an issuance amount and a demurrage ratio, the value of an untouched wallet at time t is a recursively defined function w

w(1) = i
w(t) = (1-d) * w(t-1) + i

…and will asymptotically approach some value (u) as t increases.

For instance, if i = 100 and d = 10% then u = 1000. Once you know u you can think of it as the maximum number of tokens that will be in the system due to any one user. So given a fully connected circles network of 3 users, the maximum number of circles in the network is 3u or 3000 tokens.

That’s a useful number to know about. It tells me that if I price an item above 3000 tokens, it’ll never sell. It also tells me that somebody that habitually has more than 1000 tokens is somebody who habitually gives more than they take (and they would have an outsized share of my respect for it).

It’s just like systems that we know well, except instead of a fixed supply, there’s a fixed supply per user. That’s easy math.

Another number that might be worth tracking is the average perceived value of a token according to some reference currency. Maybe there’s never global consensus about the value of one of these tokens, but if you zoom in on a particular community I bet you’ll find that local consensus emerges.

If my circles tokens went for about \$0.10 last year and this year they’re going for about \$0.30 then that’s useful information for me. It lets me set goals re: conducting myself in a way that causes this value to steadily increase.

If I find that I’m suddenly spending more or less circles for the same items, I can look for causes of the change.

The effects of an inflation-only system would be the similar, but reasoning about it numerically would be more challenging. With inflation-only, one must think in terms of rates instead of values, and that’s going to be a difficult adjustment.

Also, if one compares last year’s circles-value with this year’s circles-value, it’ll always be a decrease (supposing we embrace inflation). That kind of ruins the metric and also has a negative emotional impact that I think would be reduced if we choose demurrage.

Lastly, there’s something honest about demurrage and sneaky about inflation. When I was first introduced to inflation my dad called it “a shadow tax on people with savings accounts”. Demurrage is up front and in your face. It’s not sneaky, it’s just how the system works. It’s what makes the fairness happen, which is what makes the token valuable.

Sure, inflation does the same thing, but more awkwardly.

@MatrixMan I totally agree with you on that demurrage is a much transparenter and less sneaky way as a displaying unit. I am currently working with Daniel on an alternative Circles wallet and marketplace, which chooses the relative demurrage unit as a default unit. We referenced the relational unit to the time alive. So each hour, every one generates one OmoCircle, which then decays at 7% a year over time. This results at a stable equilibrium around 125.000 OmoCircles for each human over their lifetime.
So, if you compare the relational OmoCircles unit to “normal” Circles this is how the money supply will compare over time for each human:

If you compare then the OmoCircles to the current Euro this gets quite interesting as well:

You can read more about the omo wallet in our white paper: https://omo.li/#/visionpaper