Real Word Effects of Deflationary Currencies/Currency Hoarding.

3月15日

It's easy to hate on inflation. The silent tax on the poor. The rich get to borrow the money into existence and spend it into the economy at a high value and then the process of borrowing money into existence creates a devaluation of the money by the time it reaches the general public on the lower levels.

The theory on why this is meant to be good is known as "Trickle down economics". Or "Horse and sparrow economics". You can Google these terms to learn more about them. In practice, trickle down economics does not work as well with inflation because there's a degree of evaporation of what is "Trickling" down.

It's easy to argue against fractional reserve banking, money creation via debt and the inevitable currency devaluation via inflation this causes.

But is it easy to argue pro deflation?

The following economic theories would suggest deflationary BTC would not work.

Quantity Theory of Money. Classical Economics. Keynesian Economics. Monetarism. Debt Deflation Theory. Expectations Theory. Austrian Business Cycle Theory.

Here's the case in simple terms:

Inflation means things get more expensive, due to the devaluation of currency. There's the same amount of "Things" in the world but there's more money going after the same things and therefore the price of the things has to go up. Only way it can work, otherwise there'd be more demand than supply.

But deflation means things get less expensive. Sounds nice in theory. Who doesn't like cheaper things (Unless it's asset prices, which I've learned most people would prefer you never allude to ever) but what happens when things are always getting cheaper? How would your spending decisions change if you knew for sure something would be cheaper in the future?

The result of a strong belief a currency will be worth more later is currency hoarding. People do not spend the currency, because why would you?

You'd buy the things you needed, because you need them. Anything else, you'd delay buying. Why would I want to buy a Ford car today if the same amount of the currency will buy me a lambo in a year? It makes no sense. People would accumulate and hoard currency rather than engaging in the economy.

The idea of an ever rising currency does not make a lot of sense if you think about it practically. In the future are we to expect people to be living their adult life never having to work because they saved up their paper round money and it mooned so now they can just live off that ever growing nest-egg?

Who's going to clean the streets? How does this actually work...?

Let's leave aside the impracticality of it and just focus on what it'd be like if it did happen. If the main currency of the world was BTC and BTC was deflationary.

How the economy works is it's made up of the sum of transactions and everything is interlinked.

If I go to the shops today and spend a few $100 on various items, my spending is paying someone's wages.

There are two important concepts to take from this;

1 - Employers do not just hire workers. They hire workers if they have the ability to sell their services to the market. If I own a shop, I employ people for the shop if there's enough profit made from the shop for that to make sense. I don't just employ staff and pay them. My paying them is contingent on my ability to sell their services to the end customer.

2 - One person's spending is another person's income. When I buy goods or services the money I am spending is directly becoming the income of someone else. Either because they are the business owner and collecting the income or they work for a business and their services are sold to the end user by someone who pays them.

So what happens if people stop spending? Spending and incomes directly correlate. As spending is reduced, so are incomes. If people have less income they themselves are going to spend less and since incomes and spending directly correlate the reduction in spending will result in more reductions of incomes - resulting in more reductions of spending.

In practical terms this means businesses start folding. First there's cut backs on staff because businesses do not pay people, they sell their services to the end user. If they're not selling services to the end user, there's no money to pay people for working. So the first thing that happens is the work-force is stripped to match the income levels.

If this step is not sufficient, the company folds. Goes bankrupt or decides to just stop doing business because they're running a perpetual loss.

The result is loss of employment and businesses and as we've just covered this is a self enforcing loop. As more jobs are lost and more companies fail it's only logical for the domino effect to continue and more jobs are lost and more companies fail. It's a death spiral and the only way out of it is to increase the level of spending in the economy.

In classical economics, this is when the central bank lowers interest rates. Makes it more attractive to borrow money and people borrowing money expecting it to devalue go out and spend it. This spending "Stimulates the economy". Increases spending on good and services which directly increases the incomes of the general public.

How would this be achieved with BTC? Really, the only way would be to plateau or crash the price. Remove the incentive for hoarding the currency by removing the reward for doing so and/or making it painful and unprofitable to be a currency hoarder. People would swap their BTC for goods and services or invest into tangible traditional assets, like stocks.

The world in which BTC is ever rising and this is an awesome thing simply does not make sense when you think it through to its logical conclusion.

One of the following statements would have to be true of BTC became a dominant global currency:

-BTC has to plateau and side trend. Essentially, it needs pegged.
-BTC has to crash.
-BTC will create a deflationary hell where people scream out for inflationary stimulus.

One of those statements has to be true.

Some of you may be thinking at this point, "Well AI is going to lead to job displacement and cause all this stuff anyway".

But what's the discussion around the solution for AI job displacement? Universal Basic Income (UBI). This is, clearly, an inflationary solution. UBI is linked with Modern Money Theory (MMT) and MMT is inflationary. Some people joke "MMT" really stands for "More Money Today".

In short, it really does not seem possible. The idea of an ever appreciating currency - "BTC has no top" - simply goes against the way in which an economy functions. If there's an incentive to hoard to currency, the result of this has to be a collapse in the economy.

We'd end up in a weird situation where there's all the equipment needed for production. People are eager to work and produce. All the conditions for a thriving economy exist but the economy crashes and stagnates because people do not want to spend currency. And the worst things get in the econ, the more the currency is worth. A feedback loop leading to more hoarding.

If BTC was able to do what it's billed to do - become the primary currency and continue to gain value endlessly - it'd either be regulated out of existence or there'd be an outright revolt of the people against this deflationary monster.

Here's the truth, people don't like inflation but people absolutely detest deflation. The only reason there are people who are pro deflation right now is they do not have experience with deflation. They think deflation is something to strive for but history and economic models suggest to us inflation is the lesser of the two evils.

Bad things happen when there's deflation ...

Like, Hitler.

Hitler rose to power during the deflationary bust of the 1930s. He was able to rise to power by taking advantage of the fact the economy was crashing and everyone was angry about it. Hitler gave them someone to blame and proposed a solution. It was this along with the promise to restore the economy that got Hitler his footing.

If it was not for the deflationary conditions caused by the 1929 crash, it's reasonable to assume someone like Hitler would have never been able to rise to power in a prosperous country like Germany. It's also unlikely people would have been against Jewish people who were great drivers of spending and incomes in the economy.

People are liable to really disgruntled in times of deflation. Deflation often leads to Populism.

The idea of an ever rising BTC becoming the dominant currency just does not work. It doesn't work. Anyone telling you this will happen and not addressing the issues raised here are ignoring all the lessons we've learned from history and empirical studies on how economies function.

In the scenario where BTC becomes a dominant currency it has to go into a period of stagnation, collapse or it will create an economic hell which people revolt against.

We can speculate all day long about where prices might trade. At this point I'm done even debating the bear case based on TA. I've said what I've said and we'll see what happens.

But the future some people are acting as if they know for certain is coming ... would not work.

A deflationary currency would create a deflationary depression.

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Here's a critical concept. Currencies can't just go up. Something has to go down against it. This is why in the Forex market you're always a bull on something and a bear on something else. You can't just bet USD goes up. It has to go up against something else, like EUR. To go long USD, you have to short EUR.

If BTC became the dominant currency, the things on the short side of the trade would be the economy.