Bitcoin and deflation
Rick Falkvinge writes about bitcoin again. This time he claims that the deflationary character of bitcoin is not a problem. This shows that Rick understands even less of national economics and global economics than I do, and I don’t feel all that educated in the field.
We have already had a deflationary currency standard in the form of gold. It was abandoned because it failed to serve the wishes of national governments. In particular, it limited the money supply in a way that made national control over economic policy limited. It is debatable whether this was good or bad, but it was disliked by people on power all over the world and got abolished. One might argue that the great recession in the United States would never have happened if the government had been free to put in a huge stimulation package to boost the economy.
At any rate, Rick fails to see the downsides of deflation. If you have a loan denominated in bitcoin it will forever become more and more expensive. If the government takes out loans in bitcoin, it will grow by much more than the interest rate. If you house mortgage is in bitcoin, you may end up with the mortgage being worth more than your house, at which point it will be reclaimed by the lender.
The natural answer to these problems is of course “don’t do that”, but the matter is not quite that simple. As someone with a surplus of money, I would prefer to have it denominated in bitcoin, under the assumption that it is a stable and trustworthy currency. If everyone reasons like I do (the basis for all market theory), this means that there will be a shortage of money available in inflationary currencies and a surplus in bitcoin. Indeed, I would rather have my money in my mattress in bitcoin, than to be lending it to anyone. If I were to lend it, it would still be at a substantial risk premium.
One of the foundations of the capitalist world is that enterprises and private individuals can borrow capital at reasonable interest rates. If they can’t, then entrepreneurs can’t get their business ideas off the ground and young couples can’t invest in housing for their families. Humanity has so far not found a better system than the capitalist one, and it is not for want of looking. Therefore, a successful bitcoin currency is a threat to the (already tenuous) stability of the affluent economies of the world.
It is quite widely accepted by national economists that a currency should have a small amount of inflation to be most beneficial to the people who use it. The SEK has been a model for this view in the last 15 years. Before that it was mismanaged in various different ways by governments from both ends of the political spectrum, with nasty results following suit.
The reason I am discussing this subject at all is that bitcoin has many compelling traits and that I can imagine global mainsteam uptake. However, the deflationary aspects are reason enough for governments to ban the use of bitcoin as an alternative currency. The only way I see this not happening is that bitcoin catches on so quickly that the governments fail to react before popular demand makes a ban impossible.