Krugman's Baby Sitting Co-op

Slate - The Dismal Science - Aug. 13, 1998: "Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve--then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.

Now what happened in the Sweeneys' co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further."

He goes on to describe how issuing more script solved the problem of hoarding. Inflation for the win!

Unfortunately, his story is too simple. For instance, if the baby sitting coop is really trapped by a lack of liquidity, then perhaps the Co-op management should introduce a market for baby-sitting chits. Clearly, people are hoarding their baby-sitting coupons because they feel they have a certain value. If that value could be converted into cash, via a market-mechanism, then it would become clear what the true value of the baby sitting coupons was. And if the value of these coupons is too high, then it will benefit couples to hire outside babysitters. Or, if there was a market for baby-sitting coupons, then perhaps couples would feel free to use up their coupons, because they knew they could buy some (if the price was right) in an emergency.

Anyway, you can go on and on and on and on and on about secondary markets, futures markets, arbitrage, and so on, in the context of babysitting coupons. In Krugman's example, he assumes that babysitting coupons are the sole mechanism for baby sitting exchange and leaves out the larger world. I think that is why I don't buy his argument that it is okay to simply inflate one's way out this problem. And as he says,

Eventually, of course, the co-op issued too much scrip, leading to different problems ...
but one has to ask - how does one know when they have issued the right number of coupons? And what if the people issuing the coupons are themselves members of the baby-sitting coop? What's to keep them from printing coupons for themselves?

Really, the only solution for money problems like these is multiple competing sources of money. Whoever issues the money has the power, so to keep money-issuers honest, it is necessary to let competition keep inflation and greed and corruption in check. It needs to be easy to switch to another currency if you lose faith in your current currency.

You and I can't switch currencies very easily, but world wide money traders can, and they can vote with their money as to which currency they think is the best managed. That currency may not always be the US Dollar. In fact, if we, as a human race, are in fact in the process of switching to multiple currencies, then one can expect a fairly large amount of disruption as the US Dollar loses power. In particular, the ability of the US Government to solve problems by simply printing more money may significantly diminish. And in that case, the $10 trillion in debt the US Government holds may need to get paid back in something other than Dollars. And if that happens, I think there will be significant deflation, because the value of the Dollar has been purposefully inflated over the years.

On the other hand, if all of the governments get together and decide on a "new banking policy" then we may end up with a worldwide currency, which would be a very bad thing, as it would centralize monetary policy in a way we have not ever seen before. Luckily, it is unlikely these thugs will agree on much at all, except that they want less dependence on the US Dollar.

You know the Chinese curse, "May you live in interesting times"? Well, here we are. Although, in the greater context, it seems that the times are frequently interesting, as this story from the Wikipedia article states:

Some years ago, in 1936, I had to write to a very dear and honored friend of mine, who has since died, Sir Austen Chamberlain, brother of the present Prime Minister, and I concluded my letter with a rather banal remark, "that we were living in an interesting age." Evidently he read the whole letter, because by return mail he wrote to me and concluded as follows: "Many years ago, I learned from one of our diplomats in China that one of the principal Chinese curses heaped upon an enemy is, 'May you live in an interesting age.'" "Surely", he said, "no age has been more fraught with insecurity than our own present time." That was three years ago.

— Frederic R. Coudert, Proceedings of the Academy of Political Science, 1939

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