In Defence of Inflation | Bitcoin

It is not uncommon to hear proponents of cryptocurrencies in general, and Bitcoin in particular, make a libertarian case for the future adoption of the cryptocurrency. The libertarian case would be something in the vein of governments using fiat currencies as a means to illegally tax their citizens by means of money printing. For each dollar that the Federal Reserve prints and brings into circulation, the denominator increases while the total wealth of the economy stays the same.

 There are two arguments to be made against the libertarian case:

  • Inflation is a feature, not a bug: Before fiat currency, most national currencies were pegged with gold or silver. You could basically exchange your Dollars for a fixed amount of gold or silver. The gold anchor caused supply constraints when people were fearful. The currency became harder to come by when people were pessimistic which in turn amplified the deflationary pressures. 
  • Most of the time, you are not long the dollar. When you get your salary transferred into your account at the beginning of the month you consume some of it and you save some of it (hopefully). If you buy a property, you no longer are holding the dollars. The property is only denominated in dollars. If more dollars come into circulation, the property will have the same value but will be worth more dollars. 

What would happen if you knew that the dollars you got paid out at the beginning of the month would deflate by 20% by the end of the month? If you are a reasonable person, you would try to delay any use of your dollars until the end of the month. You would hold back on spending because your purchasing power would increase. Again, the inflation rate of the modern currency is a feature, not a bug, as it stimulates economic activity. 

The deflationary structure of Bitcoin might make it a good store of value, but less so a medium of exchange. 

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Adam Smith

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

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