“Inflation vs Deflation” A declaration of the superiority of Bitcoin
The subject of “Inflation vs Deflation” is an ongoing topic of debate amongst many renowned economists. I plan to give my opinions on the debate in the next few paragraphs. My goal is not to change minds, but rather make my case why BTC is superior to the US dollar in my eyes. Inflation and deflation is most likely something they taught me in high school that I ignored (along with just about everything else they taught me). While I was at Thanksgiving last year, I wore my Bitcoin shirt and of course a few family members asked me some questions about it. While I was discussing the benefits of Bitcoin the topic of inflation came up. While discussing inflation with them I discovered they are completely oblivious to the entire fiat system and its short comings. It was at that moment that I realized the general public has no idea what inflation and deflation truly is. After the conversation with my family, they walked away with some knowledge. But it occurred to me that if they were that oblivious than the majority of the population probably was as well. Do you know what inflation means? Do you understand what deflation means? Let’s discuss!
Supply and Demand
In order to understand the way inflation works it also helps to understand the basics of “supply and demand”. This is the basis of the way just about all things work in most societies. Supply and demand have a direct relationship with each other. For instance, let’s take something easy, say apples. Typically, when the supply of apples decreases the price increases. So, if there is a shortage of apples one year, chances are apples will cost more that year than in the years before when the apples were plentiful in supply. If the supply of apples is plentiful one year, chances are that apples will be more affordable due to the overwhelming supply. This concept works for just about anything with any worth in society. Replace the apples with oranges or flat screen televisions, it doesn’t matter. The basic rules still apply. It is necessary to understand the basics of supply and demand if you are to understand the value in having a currency that is not inflationary, but deflationary. Let’s discuss the pros and cons of inflationary currencies first.
Inflation of currencies is an issue that many argue is a good thing. In order to understand why they feel that way is crucial towards understanding the entire picture. I think its obvious that I am a fan of deflationary currencies but let’s just discuss some of the “benefits” of a currency that is inflationary. The first thing I hear from proponents of monetary inflation is that having an inflationary currency is better for the economy because a currency that loses value over time is less likely to be stuffed into a bank account on some banana republic. I see their point, I mean why would you want to leave the USD in your bank account for years if it is simply going to lose value? Spend it now and get the most bang for your buck! But is it that easy? I don’t think it is that easy. Let’s break it down. If I were to put a 100 dollar bill into a bank account and not touch it for 1 year, when I did finally withdraw it from my bank account the 100 dollar bill would still resemble a 100 dollar bill, but the value of that 100$ has decreased in that year thanks to the continuous additions to the supply. The federal reserve prints billions of US dollars every year which increases the supply. When the supply is increased it lowers the value of the currency. Many economists claim that inflation encourages spending and without it our economy would grow stagnant. What can inflation do to currency? Well let’s take a look at Zimbabwe as an example. The country was once a thriving place to live. But after some government interventions and excessive money creation the currency was heavily inflated. In 1980 the rate of annual inflation in the country was at a much healthier 8%. Fast forward to 2008, government intervention and corruption has led to the inflation rates hitting 231,150,888.87%. Zimbabwe was issuing 10 trillion Zimbabwe dollars bank notes in an effort to combat the rising inflation. In the end, the majority of people in the country abandoned the Zimbabwe dollar for the US dollar. This is an example of hyperinflation. But it should be a lesson to all governments around the globe. Economists think that America can ultimately avoid this due to our standing in the global community, but all things come to an end at some point. Will the US dollar ever experience hyperinflation as the Zimbabwe dollar has? That remains to be seen. I have shared a cartoon many times with many people that explains inflation of money and I will post a link here: https://www.youtube.com/watch?v=HHo3cijNr8Q&t=12s It’s a Duck tales cartoon that explains inflation of money in an easy to understand way. I encourage anyone without a full grasp on inflation to watch the video. Its less than 5 minutes and you could learn something. Inflationary currencies are created perpetually and therefore the value is guaranteed to decrease over time. Most, if not all fiat currencies are inflationary.
What makes a currency deflationary? Well first let’s discuss what deflation actually means. Deflation in terms of currency is directly related to the supply. So, if the supply is perpetually created (more currency is created than destroyed) like the US dollar, the value will decrease over time. This is what makes Bitcoin so appealing to people like me. Bitcoin has a cap of 21 million coins. No more will ever be created. In fact, Bitcoin is lost daily which creates deflation as well. If I store BTC in a wallet for a year it won’t inflate like the USD does (it may go up or down in value due to other factors but not perpetual creation like the USD) Meaning that BTC will increase with value at one point as time passes. The reason for this is the supply cap. People know there will only be 21 million coins and this very fact makes Bitcoin rare when compared to the US dollar. The less money there is the higher the demand. The US dollar has an infinite supply. These differences make Bitcoin much different that traditional fiat currencies. In my opinion it is far superior. People claim that there is not enough Bitcoin to go around and that is one of the arguments against deflation. Well I usually retort with the fact that there are 8 decimal points at this moment for Bitcoin. The smaller units have a similar relationship as a penny and a US dollar. These smaller units for Bitcoin are referred to as “Satoshis”. In the future when Bitcoin is worth much more than current prices people will typically only deal with Satoshis as Bitcoin will be too expensive. There are 2100000000000 Satoshis total that will ever be created. Each BTC contains 100 million Satoshis. The supply of over 2 zillion Satoshis is more than enough. Another point my friend Dee brought up is the fact that just because there are 8 decimal points doesn’t mean we cannot add more. This proves that the argument about the low supply of BTC making it less attractive is a ruse. Some economists like to claim that with deflation, people will hoard the currency and never spend it due to the fact that it will increase in value over time. I can see why they feel the way they do, but I do not agree. I believe people will still ultimately buy the stuff they want. No matter which currency they use. I believe the deflation offered by BTC will become more apparent when the supply is almost completely mined, and the markets are a bit less volatile (when compared to today)
I am obviously a fan of deflation, and I know that I am not alone. I predict a future with both inflationary currency and deflationary currencies. Perhaps there will be numerous currencies like there is today, or maybe there will be one “universal worlds currency” that can be spent anywhere on the planet. I cannot tell you the future as I am not clairvoyant, but I will say I believe we deserve to have access to currency that is not guaranteed to lose value over time… Currencies like Bitcoin. As one of my friends said, “We deserve an alternative to the US dollar”, and I could not agree more. I hope you enjoyed this writing!
Written by: Tim Pace 2/21/2019