When we measure economic success in dollars, we are faced with a problem: how do we truly know we are successful?
Having more dollars than we started with seems like a reasonable proposition. If I start the year with $100 and end the year with $105, then I’m getting ahead. Similarly, if I start the year earning $20/hr and end the year earning $21/hr, I’m better off than before. Right?
Unfortunately, inflation makes this calculation hard and uncertain. Right now, official measures of consumer price inflation range anywhere from 0.9% to close to 6%.
CPI-U, US CITY AVERAGE, ALL ITEMS: +5.0% since May 2020source: https://www.bls.gov/cpi/latest-numbers.htm
CPI-U, US CITY AVERAGE, ALL ITEMS LESS FOOD AND ENERGY: +3.8% since May 2020
CPI-U, US CITY AVERAGE, MEDICAL CARE: +0.9% since May 2020
CPI-W, US CITY AVERAGE, ALL ITEMS: +5.6% since May 2020
At 6% inflation, I would be falling behind even if I made the gains described above.
Furthermore, I might not want to use the official measures of inflation as a yardstick. Gold has risen more than 8% per year since we went off the gold standard. Housing prices have recently been rising at 1.8% per month, which amounts to over 20% per year. If we’re only looking at CPI, aka consumer prices, then we miss out on the fact that housing and investments are getting farther and farther out of reach for the average person.
Finally, dollar-based inflation is unpredictable. All of the measurements of inflation cited above are backwards-looking. You know what the inflation rate was last month, but you don’t know what it is today, and you certainly have no idea what it’s going to be next month or next year.
This has a bunch of unpleasant consequences.
- When I set aside money for my kids’ college or a down payment on a house, I can’t be certain I’m setting aside a sufficient amount.
- The same goes for retirement — planning how much I’m going to need for my living and medical expenses is difficult.
- If I’m running a business, and I’m earning a 15% return on capital, should I keep spending my effort on this business? It’s impossible to say if I’m actually getting ahead or not.
- When I’m negotiating for a raise, I don’t really know how much I should negotiate for. And when inflation is high, I might need to renegotiate often. Que annoying.
- If I am a landlord signing a long term lease, I’m exposed to inflation, and it’s unpredictable how much.
- If I’m a business person with a plan that goes out 5 years, it’s impossible to predict my labor costs during that time frame.
And so on. Inflation is destabilizing. It shakes foundations.
With bitcoin, we have a different kind of yardstick. There will only ever be 21 million bitcoins. That fact is known by everyone who uses bitcoin1. The fact that the number is 21 million doesn’t really matter, but the fact that the number is capped is very important. There’s a small amount of deflation in the system, but it’s basically constant. What this means is three things:
- if you wind up with more bitcoin than you started with, you are definitely getting ahead.
- if you wind up with the same amount of bitcoin, you are probably still getting ahead.
- if you wind up with less bitcoin, you might be falling behind.
This makes a much clearer hurdle. You know your own salary. You know your own balance sheet. You don’t need to think about the Fed’s balance sheet or the rate of unemployment or growth in the economy. You don’t need to think about the price of houses in the Hamptons or the cost of medical care. All you need to know is whether you’re making bitcoin, or losing it. If you’re making it, you’re getting ahead. A greater share of a fixed pie is indisputably a stronger position.
What bitcoin has done is effectively create a better yardstick and one that everybody has direct access to. This will benefit society at large, though it’s hard to quantify by how much. Subjectively, this yardstick is likely to bring more stability and ease of financial planning, especially for the long term.
Armed with BTC as a yardstick, we can re-evaluate how to evaluate. The old way of measuring success—in USD terms—is flawed and obsolete. Think of the new yardstick as a new technology that is superior to the predecessor; and by adopting the new technology, one is at an advantage. Retailers that embraced the new technology of the internet (i.e. Amazon) have been wildly successful, while retailers that didn’t embrace the new technology lagged behind. Similarly, pension funds and endowments that switch to a BTC-based evaluation function will probably fare better than those that fail to adopt this new technology. Imagine large endowments and pensions losing real purchasing power — how tragic!
1: I think eventually people will not really care or know exactly what the number of bitcoin is — they will just rely on bitcoin as a reliable store of value and the fact that it’s capped at 21mm will be somewhat esoteric financial information, more like the size of the Fed’s balance sheet today.