A Neo-Gold Standard: Exploring the Effects of a Weak Coalition of Central Banks Inflation Targeting Bitcoin

The Problem of A Deflationary Supply Restricted E-Currency

A good place to start an inquiry into the optimal use case of bitcoin is George Selgin’s essay “Synthetic Commodity Money” where he expounds on the new possibility of a money that has an externally controlled supply rate such that it is not politically manipulable. Bitcoin is one consideration and example of a synthetic commodity money. Selgin also gives the example of the Swiss dinar which effectively became synthetic commodity money when the issuance was cut off to those that were relying on its purchasing power:

The Important Similarity Between Bitcoin And Gold

The usefulness of gold as an inflation hedge is cruxed on a phenomenon that is well explained by Nash in the Southern Economic Journal entry entitled “Ideal Money”. Nash points out that it is not the actually rarity of gold that makes it scarce but that natural throttle created by the increased costs of digging deeper:

The Value of Bitcoin is Related to the Value of Centrally Banked Money

Satoshi Nakamoto said the “The price of any commodity tends to gravitate toward the production cost.”. But this isn’t perfectly true at least from the short term perspective. In his essay, “The Monetary Value of Liquid Commodities”, Nick Szabo explains that certain store of value commodities gain prices that are valued well beyond their cost of production especially at times of global monetary instability:

A Challenge: Can Bitcoin Be Ideal Money Without an Elastic Supply?

In an open letter style essay, “A Challenge to the Bitcoin Community” Selgin starts the following inquiry:

Avoiding the Problem of Subjective Value

The subjective theory of value is an admission that an objective unit of value is impossible since value differs depending on social factors as well as time and space. What is valuable to someone might have a different value to someone else. And what is valuable to someone in one circumstance might have a different value to that same person in a different circumstance.

Congressional Admission of the Relationship Between Bitcoin and FED Inflation Targeting

If bitcoin continues to expand its network it is foreseeable that central banks would, regardless if they considered the truth of it, be forced to adjust their monetary policy actions based on the effects of the competition. This is explained in a Congressional Research report on bitcoin:

Conclusion

Because the value of bitcoin is inversely tied to the quality of our traditional money system the co-operative effort of each nation optimally managing the “wellness” of their respective currencies will bring each of the currencies into a state of equilibrium in relation to the value of bitcoin. That is to say the concept of having truly Ideal Money, which is effectively the global value stabilization of our major currencies, could quite plausibly be expected to be brought about in the very near future (perhaps 2 or 3 years or more or less). The proposal then is that citizenry asks that their government’s mandate Ideal Money, money ultimately (asymptotically) pegged to bitcoin’s value, and to declare this endeavour and definition of money “well-managed” by fiat.

References

“The price of any commodity tends to gravitate toward the production cost.”, Satoshi Nakamoto https://bitcointalk.org/index.php?topic=57.msg415#msg415

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