In the 1500s, a turning point occurred in humanity. The British and Dutch empires adopted a new concept, that enabled them to take over the world and change it in the process. Their powerful new weapon? The notion of credit, where they abandoned the idea that the old was sacred. By “borrowing” against future prosperity — through credit — they overtook their rivals.<\/p>\n
In our lifetimes, we are about to see another transformation. And ironically, due to the opposite reason: where borrowing against the future will be stopped. What\u2019s that got to do with Bitcoin? A lot.<\/p>\n
Every man and his dog is talking about Bitcoin and crypto currency. But one thing few people seem to talk about, let alone understand, is that Bitcoin has a fixed supply \u2014 specifically, 21 million. Which means that one day, unlike fiat currency, there will be no more \u201cBitcoins\u201d printed out for the world, which makes it deflationary. If Bitcoin becomes the Store of Value in the world like I optimistically predict<\/a>,\u00a0 what will a deflationary world look like? A world where prices, like what you pay for in shops and what you get paid as salary, are decreasing? What\u2019s that going to do to the economy? Four years ago, I made an attempt at saying deflation was a good thing (or rather, didn’t matter)<\/a> but I didn’t get to the meat. I’m going to make another attempt at it this time (although many other people are still convinced it’s a problem<\/a>).<\/p>\n Let\u2019s unpack it. First let\u2019s start with the concept of inflation itself.<\/p>\n Inflation<\/strong> Inflation is basically when prices rise and there is a corresponding decrease in value of your cash to purchase \u2014 so the US and Australia have it as official economic policy to see prices rises by 2% each year. Short term, it means producers of output get more money, which makes economic output higher. But eventually, labour costs catch up so it’s a neutral impact on the economy<\/a>. That is, in a best case scenario.<\/p>\n If expectations are managed, this can\u00a0help jump start an economy short term, useful for elections. But really what\u2019s happening is that long term inflation erodes the value of people\u2019s savings (as their purchasing parity drops) while at the same time it reduces the effective value of debt (for a similar reason). So basically, for a long term \u201cneutral impact\u201d on the economy, debt holders are rewarded and hoarders of cash are penalised.<\/p>\n Debt funds consumption and investment, which grows output in an economy. Savings are a leakage from the economy which do the opposite. So in this sense, this political philosophy broadly speaking, is aligned with growing the system.<\/p>\n Meaning, inflation is evil, but in a good kind of way so we encourage it if we can control it.<\/p>\n Let\u2019s now look at the real question: what\u2019s economic growth?<\/p>\n Economic output<\/strong> It basically comes down to two things: productivity improvements, which is doing the same thing cheaper (so that extra cash can go to other things), and population growth, which means there are now more people to consume in the economy. More people also means more workers, and remember, labour is a factor of production<\/a> so the more available people (and time we have), the more we can produce. If we can pair productivity growth to population growth, we get economic growth: as we have more available cash to hire more people, they in turn can produce more output (if we assume the marginal output of labour put to work is higher than the marginal saving from productivity). By the definition of GDP, which is based on consumption, more goods being output and more people consuming means voila: more economic activity.<\/p>\n But that\u2019s not the only thing that can brings cash into a system to fund consumption. Enter debt.<\/p>\n Debt<\/strong> In the present, this is great: we have another form of cash injection into the economy, but for the future generations, this is effectively a leakage as their earnings are taxed.<\/p>\n Which brings us to the magic of inflation: that debt will get eroded, by a compounding amount, so that it\u2019s practically non existent 2-3 generations from today. Assuming of course, the highway robbery from cash holders continues and inflation is constant.<\/p>\n But not with Bitcoin.<\/p>\n Bitcoin\u2019s economic impact<\/strong> Shock! Horror! The Kenyesian’s approach by Governments around the world to boost the economy will be eliminated! However, not all is lost. If investments can return a higher rate than what a saver would get hoarding their cash, then investment will still occur in the economy. And with investment, comes not just more cash into a system but also innovation, which might spark productivity improvements. This increases economic output.<\/p>\n Governments will be forced to stop abusing their position to borrow money to be paid by future generations, and instead, investment managers and entrepreneurs who can execute a higher return than deflationary<\/em> returns, will instead be the custodians of increased economic output.<\/p>\n Which puts creativity, risk taking, and ingenuity, as the sole creator of economic prosperity. Which is how it should be: it’s making the competition of good ideas the thing the drives us forward.<\/p>\n
\nHere\u2019s a question most people don\u2019t seem to be able to explain. Why do governments, like my tax masters the US and Australia, make 2% inflation a \u201ctarget\u201d.<\/p>\n
\nHow do you grow an economy? The easy answer is that exports bring cash into an economy, but what about actual global output? If we take out this artificial growth, which is a transfer of cash between economies through trade, what actually creates net growth?<\/p>\n
\nThe invention of credit created the world we know today. But a thing that makes me scratch my head is how every government and citizen in this world seems to be in debt. If you look at the estimates, there isn\u2019t one \u201cbank\u201d \u2014 every government seems to be in debt<\/a>. Which basically implies one thing: we are borrowing money that will be paid by future tax,\u00a0or the future income of citizens.<\/p>\n
\nWith a deflationary currency that rules the world, cash holders will get rewarded for saving, as sitting on their economic value will increase with time. Inflation targets will now become de<\/em>flation targets, but for the same goal of price stability. Instead of prices creeping up each year, they will creep down each year. More significantly,\u00a0 debt will no longer be in the equation: as debt will only get more expensive over time (due to its purchasing parity) and it’s utilisation will drop.<\/p>\n