An economic thought experiment

Let's assume for a little while that money is it self somewhat smart. Not sentient - let's be clear about that, and certainly not alive - but smart enough to know when it has been spent, and to understand a passage of time. Critically, it also has a short memory - it can remember the last few hands it has passed through - but can never share that information.

Let's further assume that this magical money retains this self-knowledge despite whatever transformations are applied to it - so it does not matter if it is physical, electronic, or in a bank.

So, got all that? 

Now for the fun bit. 

Money loses value the longer you hold onto it, starting 60 days after you receive it. (This is kind of actually what happens over the long term - it is called inflation.) Let's say it loses half its value every 30 days.

But regains the lost value 30 days after it has been spent. Instantly.

Let's be clear on one other important thing: the change is i n the face value. So the $10 note becomes a $5 note, with no outward indication of the original value.

So, for example, you spend $10. The person you gave the money to holds onto it for 90 days. They now have $5. They spend it, and the seller hangs onto it for 31 days. They now have $10.

Got that?

Now, the short memory prevents money from being passed artificially in a circle to stop it losing value. 

It it magic, OK?

But now think about the economic effects of this. What do you think will happen?

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