Running Economies Off a Fixed Currency Supply Is a Terrible Idea, Here’s Why
Im really writing this post as a response to people who have commented on my articles in the past, who claim governments should run on bitcoin. In addition im writing it as a little follow up piece to my article I wrote yesterday about having options. I was talking primarily about bitcoin yesterday when I said I would rather have fiat and then have options for people who want to take advantage of them and I want to explain a bit more why.
Running an economy off deflationary currencies/commodities, ect is a bad idea for many reasons. For one, it limits the growth of human beings of a species and the advancements we make as well as fosters powerful families that end up running entire nations. When you have a deflationary currency, banks simply don’t take risks with the loans they make. Have a revolutionary business idea? They aren’t interested because they can simply hold onto the money.
Holding onto the currency is the same for regular people as well. There is no reason to spend money today when it is worth more tomorrow. The claim by many libertarians that people still need to buy basic goods, is technically true, but for the rich person, a much greater wealth gap widens because of the lack of spending. Most of the jobs in modern economies don’t cater to necessities, but rather luxuries and many of those jobs disappear when people stop spending. This was why the 2008 financial crises killed so many jobs. People stopped spending money, banks stopped lending and businesses stopped growing.
Deflationary currency is a bad idea for growth, but what is even worse is having a fixed supply. With gold at least there was a steady inflow coming in, which essentially was the rate at which governments could spend, ect. (I know gold is technically fixed, but the limit is unknown and with new ways to extract it, sometimes production ramps up). If we take something like bitcoin, in a couple decades there will be almost zero new coins, which means people are going to just hoard them, which we already see happen. The reason why the amount of coins spent on purchases is actually very small is because people believe their coins will be worth more in the future so they hold.
With a fixed currency supply, holding would happen on a mass scale and many end up hurt. As the population grows, many people will end up in extreme poverty because they are unable to accumulate the currency. Even with a fiat system we see hoarding happen to an extent, its in human nature. With a deflationary currency and even more, with a fixed supply, things become much worse. This makes a good case for holding bitcoin as an investment, but as a main government’s currency, it is most likely a terrible idea.
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Couldn't agree more. This is actually an extension of income multiplier rule. Each penny spend contributes in multiples.
This is actually true "There is no reason to spend money today when it is worth more tomorrow" and can't blame others when I myself is trying to stock few Bitcoins to utilize for future uncertainties.
Down with the ghetto conspiracy trash!! Enjoy the Flag!
I think the issue is not necessarily whether it is bitcoin, gold, or fiat currency - it more around intervention. Putting aside the deflationary aspect around 21M bitcoins, bitcoin is supposedly a currency where it is market demand tha dictates the price. Fiat currencies are controlled by central bank monetary policy - interest rates and supply. We have reached a global economic precipice never seen before at this scale - due to central bank intervention. There is a great piece published here on the market liquidity flood we are living now and will be living for a long time in the markets:
https://steemit.com/money/@thehutchreport/the-illusive-market-crash
I get your point @calaber24p about people wanting to "hoard" because it is a natural inclination if you think value is going up (eg. cabbage patch doll craze, bitcoin, etc) - however with currency, people at some point do need to spend it as they need goods and services to live. So this may limit currency hoarding to some extent. In addition, with the plethora of additional digital currencies now flooding the market as well as increased interconnected-ness of payments for global commerce this creates not only FX opportunities but also creates market competition for currencies as well.
Very interesting @calaber24p I see your points and I don't believe governments should give up their fiat money to run on bitcoin. I think cryptocurrency is useful for reducing transaction costs between international currencies. I see a problem since the 2008 crisis as being dealt with in a way that does not help the working person. In the past inflation would allow people to work themselves out of the debt and currency would effectively be devalued. But Quantitative Easing seems to have bailed out the banks but at the same time kept (reported) inflation low. Globalisation and offshoring are also helping to keep working persons in developed countries in this bind. What would you see as a way out? Bitcoin is not their solution.
But the peoples solution is the blockchain. You spend "Alts" but save in Bitcoin.
Good point @automaton. So the suggestion might be a blockchain Bitcoin, with a local Britcoin, for example.
Yes, local currency or competing currencies. Some currencies may have a fixed supply. Others may have a flexible supply. No central bank needed.
I am closely watching now Russia, who seems to be willing to make their own crypto Ruble. I think it is even worse than running on bitcoin or some other alt coins. Giving up total control to crypto production to government, puts everyone to the same position as it was with fiat.
Great post and I see your point entirely.
The problem is that with a Fiat currency the constant devaluation of purchasing power meaning the average person working a normal minimum wage job will never succeed in life.
The problem starts with the education system...
No schools incorporate the education of money. In All forms. Such as: How money really works, Fiat, Debt, Mortgages, Loans etc.
Not one single subject of money is taught in school.
Because of this. The general population that don't seek to educate themselves about money are clueless and are a sheep/slave to the system.
In my opinion this is all done on purpose.
People work to pay bills, to save, to loose their savings due to devaluation. So they have to work their whole life just to pay of debts and survive.
The rich get rich and the poor get poor as they say.
Great post though :)
Have a wonderful day!!
Part of the problem is also that we (at least in capitalist systems have been taught to "worship" growth excessively. Even if I am happy in my 2-bedroom house, I am under pressure to "need" a 3-bedroom house... but it's artificial demand, which creates the psychological construct of scarcity, even when it's not real. Not suggesting "scarcity" isn't real, sometimes but much of the time the articficially created fear of scarcity is greater than the actual scarcity. If we live in a world that's more oriented to "plenty" the need to heard sort of drops away.
What you say-- in the context of our current state of societies-- is absolutely true, though... and will continue to be so, as long as the notion arbitrage exists... long before there were Bitcoin and the like, I used to trade currencies; there will always be people who are looking for ways out that don't involve actual work and production... instead leveraging knowledge for profit.
What if you had a currency completely community controlled. Where as it was would deflate but over a very long period of time. Let's say 1000+ years. I has a hard cap in the billions of coins so in theory it has a limited large supply to reach a global user base. As the years go by the community could decide to adopt a new model of inflation maybe increasing the supply slightly spread distribution of the coin. Like a self evolution over time. Not just where miners have all power and say. Would not something like that be the coin of the future?
That would still mean that the single coin gets more valuable year by year, because production goes up.
In fact "fixed" is not really the bad part, its the part where the monetary inflation is smaller then the good's "inflation". Of course fixed money amount makes it all additionally hard, because other things add to that, like the simple fact that money can get lost. How do you make sure you really have a fixed money amount when it is impossible to know how much money is lost? (Just think of all the money relatives of death people find to their surprised stuffed into something. Or not and throw it away and it gets burned.)
Its likely some algo will figure it out in the future. Maybe its something like what Maker DAO is trying to do. The problem is though investors don't wanna invest in cash. If there was a crypto that was stable its not a good investment for returns. This is why the swings up and down is actually beneficial longterm for self evolving growth of the entire eco-system. Once we get past $5 trillion or so in market cap it should start to stablize where the swings are 10-20% a year and not 200%. Bad news for Investors though since stablization means lower returns and overall less innovation due to lower speculation capital.
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I agree with almost everything you're saying, but I think it misses t he whole point of cryptos... a rulerless system. We can run our economies peer-to-peer. And just because Bitcoin is deflationary, don't forget you have a lot of decimal places to go around. And after that, you have Litecoin and all the other myriad coins. I think that the greater lesson of cryptos. We don't need centralized anything. We can privately accomplish everything a government does, but with better success. A big corporation is nothing without us buying its products. Just like a Stadist system, it is valueless if people don't participate. Cryptos are our way to not participating in their system, but we have to think outside the box. You and I live most of our lives without interfacing or needing government for anything. We exchange ideas, services and products, without the intervention of governments. Cryptos make that possible on a global scale. It's a paradigm shift, and I hope future generations will take that to greater heights. Collaboration, not force, makes things better. Governments are nothing more than a monopoly of violence. Just try not paying your taxes, or disagreeing with the majority opinion. Democracy = 2 wolves and 1 sheep determining what to have for dinner!
Gov should not have a "currency". Currency creation/control should be in the hands of the people.