It is immune to the inflation that plagues all fiat currencies
Funny thing is, most actual economists would say that the inflexibility of Bitcoin is a disadvantage.
Discussions of Bitcoin are dominated by people for whom certain rules about money (such as: "it must be a forever fixed amount") are basically articles of faith. Outside of this comparatively small population, people primarily care about other things, such as good economic growth, full employment, social equity in the sense of equality, and all sorts of things.
Having a forever fixed supply of money tends to be detrimental for those things.
I know the arguments that say inflation is required to encourage people to usefully apply their money, but I haven't seen enough to convince me that this is true.
Part of the difficulty I have with accepting the "inflation is good" argument is that I can see how economic policies result in inflation and it strikes me as a survival trait amongst economists to declare a consequence of their advice as a positive event.
Bitcoin may be an interesting test of that hypothesis.
It wouldn't be the first time that the consensus of an entire field was wrong prior to a significant counterexample appearing.
It's not so much that inflation is good (though it does tend to be as long as it's, say, single digit), it's that a fixed money supply is really, really bad.
Unfortunately, the type of people for whom a fixed money supply is an article of faith don't even see the distinction. They basically argue as if the definition of inflation were an increase in the money supply, which just doesn't make sense.
If you want to get an idea for why a fixed money supply is bad, a good exercise is to look at the actual money supply data on a daily basis. You'll see that it fluctuates quite strongly in certain rhythms, especially weekly and monthly. This is clearly related to thinks like paydays, and it reflects the fact that flexible finance allows the economy to function more efficiently. With a fixed money supply, this would not be possible.
Another, perhaps even stronger, point is that the monetarist experiment of the 1970s and 80s failed badly, in the following sense. The attempt to control the money supply by central banks resulted in wildly fluctuating short-term interest rates, which made it very difficult for the real economy to plan properly, leading to inefficiencies. As a result, central banks gave up targeting the money supply as a policy variable; they now target the interest rate as a policy variable, and allow the money supply to grow and shrink as needed to hit the interest rate target.
So, in this sense, Bitcoin is simply not needed as a test of a hypothesis, because the test has already happened!
It is only the (sometimes genuine, sometimes willful) ignorance of a small group of quasi-religiously motivated people that makes it look as if a test were still needed.
In a way, this is a fight between two systems: A decentralized, market-based systems, where money is created and destroyed decentrally, mostly by financial institutions on the one side; and on the other side, a system where the money supply is controlled by a central entity (either the central bank or, in Bitcoin's case, the Bitcoin developers).
It really shouldn't be surprising that centralized decision-making can be much worse.
It's not so much that inflation is good, than deflation is really bad. Deflation manifests as unemployment and idle resources, and created a vicious cycle.
Economists haven't had a great track record recently. Computer scientists have. Maybe the economists should take a few lessons from the people who've not just predicted the future, but invented it? Here's a trifecta of Goolsbee, Bernanke, and Krugman on their pre-crisis predictions.
‘Irresponsible’ Mortgages Have Opened Doors to Many of the
Excluded
By AUSTAN GOOLSBEE
Published: March 29, 2007
Congress is contemplating a serious tightening of
regulations to make the new forms of lending more
difficult. New research from some of the leading housing
economists in the country, however, examines the long
history of mortgage market innovations and suggests that
regulators should be mindful of the potential downside in
tightening too much. ...
These economists followed thousands of people over their
lives and examined the evidence for whether mortgage
markets have become more efficient over time. Lost in the
current discussion about borrowers’ income levels in the
subprime market is the fact that someone with a low income
now but who stands to earn much more in the future would,
in a perfect market, be able to borrow from a bank to buy a
house. That is how economists view the efficiency of a
capital market: people’s decisions unrestricted by the
amount of money they have right now.
And this study shows that measured this way, the mortgage
market has become more perfect, not more irresponsible.
Remarks by Governor Ben S. Bernanke
At the meetings of the Eastern Economic Association,
Washington, DC
February 20, 2004
The Great Moderation
One of the most striking features of the economic
landscape over the past twenty years or so has been a
substantial decline in macroeconomic volatility. ...
My view is that improvements in monetary policy, though
certainly not the only factor, have probably been an
important source of the Great Moderation.
What you can criticize economists for – and indeed, what I
sometimes berate myself for – is failing even to see that
something like this crisis was a fairly likely event. In
retrospect, it shouldn’t have been hard to notice the rise
of shadow banking, banking that is carried out by non-
depository institutions such as investment banks financing
themselves through repo. And it shouldn’t have been hard to
realize that an institution using overnight borrowing to
invest in longer-term and somewhat illiquid assets was
inherently vulnerable to something functionally equivalent
to a classic bank run – and, furthermore, that the
institutions doing this were neither backed by deposit
insurance nor effectively regulated. Economists, of all
people, should have been on guard for the fallacy of
misplaced concreteness, should have realized that not
everything that functions like a bank and creates bank-type
systemic risks looks like a traditional bank, a big marble
building with rows of tellers.
And I plead guilty to falling into that fallacy. I was
vaguely aware of the existence of a growing sector of
financial institutions that didn’t look like conventional
banks, and weren’t regulated like conventional banks, but
engaged in bank-like activities. Yet I gave no thought to
the systemic risks.
Even more broadly, economists should have been aware of the
dangers of leverage. This was hardly a new concern. Back in
1933 – yes, 1933 — Irving Fisher published his classic
paper on debt deflation, that is, on the way high levels of
debt create the possibility of a self-reinforcing downward
spiral. And the paper remains astonishingly relevant; aside
from a few archaisms of style it could have been written
from today’s headlines. So remembering Fisher all by itself
should have been enough to rouse at least a few worries as
household debt rose dramatically relative to income, not
just in America, but in a number of European nations too.
Again, I plead guilty to negligence. I had especially
little excuse for being oblivious to these dangers given
that I had actually laid great stress on balance-sheet
factors in causing financial crises in emerging market.
True, those crises had a lot to do with currency mismatch –
basically, private debt in other countries’ currencies, so
that a speculative attack on a currency could quickly
translate into a crippling collapse of domestic demand. But
I and others should have seen that this was only one
possible channel for balance-sheet crises, that plunges in
housing prices or for that matter income could have the
same effect.
While it's true that getting butthurt about fiat currency not being a good value store is not rational, calling inflation/debasement-proofing a "disadvantage" depends very much on your place in the economy.
If you have an income and the freedom to set your own pricing levels, inflation can be dandy. If you live off savings and the central bank has crushed interest rates, not so much.
Sure. From an overall welfare point-of-view, I would argue that society should discourage people living off monetary savings, anyway. Yes, this includes retirement, which is better served by a tax-funded system.
Comments
It is immune to the inflation that plagues all fiat currencies
Funny thing is, most actual economists would say that the inflexibility of Bitcoin is a disadvantage.
Discussions of Bitcoin are dominated by people for whom certain rules about money (such as: "it must be a forever fixed amount") are basically articles of faith. Outside of this comparatively small population, people primarily care about other things, such as good economic growth, full employment, social equity in the sense of equality, and all sorts of things.
Having a forever fixed supply of money tends to be detrimental for those things.
I know the arguments that say inflation is required to encourage people to usefully apply their money, but I haven't seen enough to convince me that this is true.
Part of the difficulty I have with accepting the "inflation is good" argument is that I can see how economic policies result in inflation and it strikes me as a survival trait amongst economists to declare a consequence of their advice as a positive event.
Bitcoin may be an interesting test of that hypothesis.
It wouldn't be the first time that the consensus of an entire field was wrong prior to a significant counterexample appearing.
It's not so much that inflation is good (though it does tend to be as long as it's, say, single digit), it's that a fixed money supply is really, really bad.
Unfortunately, the type of people for whom a fixed money supply is an article of faith don't even see the distinction. They basically argue as if the definition of inflation were an increase in the money supply, which just doesn't make sense.
If you want to get an idea for why a fixed money supply is bad, a good exercise is to look at the actual money supply data on a daily basis. You'll see that it fluctuates quite strongly in certain rhythms, especially weekly and monthly. This is clearly related to thinks like paydays, and it reflects the fact that flexible finance allows the economy to function more efficiently. With a fixed money supply, this would not be possible.
Another, perhaps even stronger, point is that the monetarist experiment of the 1970s and 80s failed badly, in the following sense. The attempt to control the money supply by central banks resulted in wildly fluctuating short-term interest rates, which made it very difficult for the real economy to plan properly, leading to inefficiencies. As a result, central banks gave up targeting the money supply as a policy variable; they now target the interest rate as a policy variable, and allow the money supply to grow and shrink as needed to hit the interest rate target.
So, in this sense, Bitcoin is simply not needed as a test of a hypothesis, because the test has already happened!
It is only the (sometimes genuine, sometimes willful) ignorance of a small group of quasi-religiously motivated people that makes it look as if a test were still needed.
In a way, this is a fight between two systems: A decentralized, market-based systems, where money is created and destroyed decentrally, mostly by financial institutions on the one side; and on the other side, a system where the money supply is controlled by a central entity (either the central bank or, in Bitcoin's case, the Bitcoin developers).
It really shouldn't be surprising that centralized decision-making can be much worse.
It's not so much that inflation is good, than deflation is really bad. Deflation manifests as unemployment and idle resources, and created a vicious cycle.
http://www.nytimes.com/2007/03/29/business/29scene.html?_r=0
http://www.federalreserve.gov/boarddocs/speeches/2004/200402... http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the...While it's true that getting butthurt about fiat currency not being a good value store is not rational, calling inflation/debasement-proofing a "disadvantage" depends very much on your place in the economy.
If you have an income and the freedom to set your own pricing levels, inflation can be dandy. If you live off savings and the central bank has crushed interest rates, not so much.
Sure. From an overall welfare point-of-view, I would argue that society should discourage people living off monetary savings, anyway. Yes, this includes retirement, which is better served by a tax-funded system.