I was recently invited to a group chat by Shinobimonkey to discuss the macroeconomic implications of bitcoin and its possible relationship to John Nash’s Ideal Money. It was very off the cuff and we decided to record it without preparation. The dialogue went reasonably well for my first time speaking on the subject and engaging with this group. Shinobi will produce the audio clip and hopefully it will be available for public listening soon.
Although there were a few different opinions in the group chat to me the main focus was the difference between me and Shinobimonkey’s view. He’s read a little of Nash’s work and is intrigued by it to some degree, but he feels that hyperbitcoinization is the likely end game scenario rather than Ideal Money.
Hyperbitcoinization is the idea that as the citizens learn about the value of bitcoin governments and central banks will print themselves into hyperinflation and bitcoin will take over as the mainstream currency. The process is said to be perpetual and so the idea is it will happen very quickly. Some news outlets are starting to suggest that hyperbitcoinization is the only viable option for Venezuela as the Venezuelan economy is teetering towards hyperinflation (if its not already there).
But I don’t exactly see this happening.
First bitcoin isn’t ready to scale in this regard, and even if we had lighting channels (a second layer solution to add a higher transaction capacity) I’m not exactly sure that this would facilitate an impoverished people. Bitcoin is limited in its transaction capacity and its relatively costly to use unless you are transacting with a threshold amount of value.
Furthermore, and this is more to the point of Ideal Money, central banks do have the ability to enact monetary policy which can reign in the supply of money thus increasing its relative value. Venezuela probably doesn’t want to do this, or at least its government and monetary policy makers might not want to because it is helpful for exports if they devalue the Bolivar.
But what will these policy makes do when faced with hyperbitcoinization?
The landscape for the game has changed. The Venezuelan policy makers must now compete with bitcoin and they risk losing all their customers. So to the extent that they can I am suggesting, out of pure self interest, the central banks will fight back by trying to value stabilize versus bitcoin.
How much can a government do this?
This question was asked multiple times in our dialogue. One such way to increase the value of their respective currency could be to raise interest rates, but this has an immediate impact on the debts of the citizenry. How high can a government raise interest rates? How “good” of a money can a government offer and is there a ceiling in this regard?
At what point does the scale tip beyond no return (ie hyperbitoinization)?
But I see another observation here and although it may be my ignorance on the subject and a complete misapplication of economics and how our financial system works, I think this is the heart of the phenomenon and the question we should be discussing as a globally connected civilization.
What if in a given nation the citizenry starts to flock to bitcoin and takes out fiat based loans with high and higher interest rates (or low or none or negative) does this inflate the fiat currency?
As I understand in regard to basic macro economic theory and money theory, if the economy grows then to keep a stable money you must expand the supply (conversely to keep money stable you must contract the supply if the economy contracts).
If bitcoin is to be ultimately deflationary, because of this trend towards hyperbitcoinization, then the citizenry will be taking fiat loans and investing in a good investment-bitcoin. Imagine our banking system if in the recent past, perhaps the 2008 housing crisis, the citizens were investing in a strong well valued asset rather than houses that were not valued based on their materials and production capacity but simply on the inflating loan and toxic mortgages supplied themselves.
In other words it could be completely natural, and of the strong money type, if citizens were taking (fiat) loans out and paying interest on an internationally valuated e-currency with a stable and finite supply that mimics the same inflation hedge properties that we historically valued gold for.
The next major economic trend might be a race towards this process, in which governments encourage their citizens to procure as much bitcoin as fast as they can and therefore encourage the banks to facilitate this process as well . Hyperbitcoinization then takes on a slightly different form. There is still the hysteria and the valuation for bitcoin that brings it to the money. But its not necessary that our domestic legacy fiat currencies should inflate.
In countries that procure great wealth through bitcoin we should expect their local fiat to reflect this simply as part of their underlying economy. The ultimate equilibrium being Ideal Money: international stabilization and in relation to a secularly deflating currency bitcoin.