When I left off with Part IV, I pointed out that there is limited potential for bitcoin to grow beyond small niches in terms of actual use as a currency because few people want to pay transaction costs. What I haven't done in any of these posts, though, is address the real arguments bitcoin advocates make for why bitcoin is the bestest thing ever. That has actually been kind of the point. My goal has been to point out the economic ridiculousness of bitcoin without touching the arguments that advocates make so as to avoid the kinds of rote arguments that bitcoin-bugs think they can make.
Still, it is worth dismantling those arguments because they are based on some fundamental misunderstandings of economics.
The basic argument that bitcoin-bugs use is that bitcoin is "better" than fiat currency because governments don't control it.
Um... that's why it is way, way worse than fiat currency.
The gold standard is among the more idiotic ideas in economics. We don't use it anymore because it is beyond stupid. Here's the basic argument for the gold standard: the amount of gold in the world is fixed. It can be mined, but there is no more to be made (alchemy is bullshit). So, if we use the gold standard, no inflation. More importantly, the government can't do anything to devalue currency, which is a stealth tax.
Let's unpack that, 'cuz that's about as much fertilizer as you can fit in a paragraph.
1) It is true that the amount of gold in the world is fixed, although we don't actually know how much gold there is.
2) The amount of gold in the money supply, when we used gold as the standard, fluctuated wildly with mining.
3) Price is really more about the relationship between goods available and the money supply. If the money supply doesn't track the goods and services available, there is a discrepancy. Too far in one direction, and you've got inflation. Too far in the other, deflation. A new mining discovery that isn't backed by growth in goods and services: inflation. Bad. Lack of mining discoveries to track growth in goods and services: deflation. Bad.
4) Prices, under the gold standard, absolutely did, and would fluctuate quite a lot. That included inflationary cycles. Just not in response to government setting the supply of money. A lot can affect the economy beyond just the supply of money.
5) Fiat currency allows the government to control the money supply in a way that reins in inflation, or reins in recessions. Milton Fucking Friedman, you morons! When Milton Friedman and John Maynard Keynes agree, and you are on the other side, pull your head out of your ass.
The basic problem with goldbuggery is that goldbugs either believe that inflation only happens when governments increase the money supply (even though governments can increase the money supply without prices going up!), or they just hate inflation more when it comes from government action than when it comes from random economic forces. (Frankly, though, most goldbugs don't even know that inflationary cycles were big in the days of the gold standard).
If you have the patience to talk to a goldbug, though, you will come across the basic claim that there isn't any more gold being made. Collide a couple of neutron stars, and sure. You've got new gold. I wouldn't want to get too close, but there's your gold.
But, let's go with that. No new gold. Dig up all the gold. Then grow the economy. What happens to prices? Permanent deflation. Fuck the gold standard. Everyone who advocates it is an idiot.
Hi, Rand Paul! (Who also thought Milton Friedman would make a good choice for Fed Chair, even though Friedman thought the gold standard was the dumbest thing ever...)
So... here's something that bitcoin fixes over the gold standard. The amount of bitcoin isn't fixed. Bitcoin is mined by computers solving complex problems, but there is no upper bound on the total amount of bitcoin that can be mined. I'll leave it to the computer people to assess whether or not the algorithm can be beaten to mine a shitload of new bitcoin, devalue the currency, etc., but let's say it can't.
In that case, you don't have a permanent deflationary cycle, but you still have several problems.
First, the amount of bitcoin isn't tied to the total value of goods and services in the economy. Hypothetically, let's say that everyone did switch to bitcoin. Ain't gonna happen, but what if it did? If the rate at which bitcoin is mined increases more slowly than the rate at which goods and services increases, you've still got deflation. Deflation means recession, and possibly depression.
That's very, very bad! Why the fuck would you want that?
On the other hand, what if it grows more quickly? There's your inflation, right there, buddy.
See, inflation and deflation aren't about the money supply itself, exactly. They are about the ratio between the money supply, the goods and services available, and the perception of that ratio. Bitcoin is set up with a mechanical algorithm for growth. Computers solve math problems to create new bitcoin, but that means there is a disconnect between the economic needs for the amount of currency there should be, and the amount of currency there would be with bitcoin.
Fiat currency allows countries to set the amount of currency according to an assessment of those ratios. That's the point of monetary policy. You set the money supply based on the size of the economy and price fluctuations in order to stabilize the economy. And, um... the economy has been way more stable since we gave up the gold standard. Fiat currency works, you fucking dumbass goldbugs.
Why would anyone want to give up that ability to stabilize the economy?
If we have any intelligence whatsoever, and any understanding of economics, we wouldn't. This is stupid.
Bitcoin is marginally less stupid than goldbuggery because at least there is a formula by which the money supply would be set to increase according to mining. The supply isn't fixed by what exists on earth in physical form, creating a long-term deflationary trap. (Yes, yes, "in the long-run, we're all dead," and that's the point at which this matters anyway, but I'm making a point about the mathematical fallacies, so fuck off with your Keynes quote). However, inflationary and deflationary cycles exist and will always exist. Exogenous shocks occur. The money supply must be set to expand according to the size of the economy and the goods and services available. That is what fiat currency can do, and what bitcoin can never do, just as gold could never do. Bitcoin doesn't solve that problem any better than gold.
Bitcoin is bullshit. The promise of solving inflation? Bullshit. Inflationary and deflationary cycles would be way worse with bitcoin. But hey, don't just take my word for it, or even my analysis for it. Look at the economic history of the gold standard, and the price fluctuations of bitcoin. Every time it rises in price, that's deflation! Every rapid price drop-- and there have been plenty of those-- that's inflation!
Bitcoin is bullshit. And the problems with giving up fiat currency don't end there. Next up, politics permitting, trade policy! I guess I'm keeping my economist hat on for a little while.
Oh, and HT: Matt Jarvis...
