If and when bitcoin becomes the reserve currency of the world (which I think it will), we will have an equity-based monetary system instead of a debt-based monetary system, and this will be a very good thing.
Bitcoin is basically deflationary. There are only ever at most 21 million bitcoins in existence. Some people lose their bitcoins, and those bitcoins usually wind up lost forever. So the total supply of bitcoin is some amount less than 21 million, and it decreases slowly over time.
As there is economic progress, the value of each bitcoin (in terms of what it can buy) tends to go up. This is because while there are more goods, there are fewer bitcoins, so the ratio of goods in existence to bitcoin in existence goes up. Each bitcoin can buy more goods. This is a deflationary monetary system, and it’s a good thing, in spite of what some bad economists may say. The bad economists don’t like deflation because it discourages spending — if your money is going to be worth more in the future than it is today, then why would you spend it now instead of saving it for tomorrow? Of course, their whole view is predicated on the false idea that consumer spending drives the economy, but that’s a separate issue that will have to be dealt with at another time. For now, let’s examine the actual consequences of a deflationary monetary system:
- If you have bitcoin (capital), you are, relatively speaking, incentivized to save it rather than spend it.
- It’s relatively hard to pay back bitcoin-denominated loans, and it’s relatively risky to make such loans.
- The market rate of interest will vary widely by creditworthiness, but for most people, loans will be hard or impossible to get.
- Investment will tend to be in the form of equity rather than debt.
- This equity-based system will be more stable than the current debt-based system.
- Production, productivity, and the proportion of economic gains that goes to labor will be relatively high, leading to generalized economic prosperity, high social mobility, and relatively high wages.
This is a lot to cover, so hang onto your hat.Continue reading “An equity-based monetary system”