I want us to re-visit the concept of Hyperbitcoinization which is touted by bitcoin maximalists. It occurs to me that most people that suggest bitcoin will hyperinflate fiat don’t actually specify what they mean by that. I think we can start with Daniel Krawisz’s “essay” Hyperbitcoinization to understand how he defines it and then think about the other different possibilities that people could mean when they use or imply the term.
He starts of with a (baseless) assertion that “any hapless currency” will hyperinflate if it stands in bitcoin’s path (whatever that means):
This article is about the possibility of Bitcoin-induced currency demonetization, or hyperbitcoinization, which is what would happen to any hapless currency that stands in Bitcoin’s path of total world domination.
If this happens, the currency will rapidly lose value as Bitcoin supplants it.
And then he asks the question he will attempt to answer with the implication that he will base his reasoning in economic theory:
What would such an event be like and how can it be understood economically?
Here he suggests that there needn’t be a change in the supply (trend?) of fiat in order for it to hyperinflate:
…a hyperbitcoinization event need not be accompanied by any change in the supply of either currency.
I suppose this is the economics he alluded to mixed with the implication that a government increases its treasury without the nation as a whole benefiting:
As the government forms a habit of inflating the money supply, its people form a habit of anticipating rising prices. This prevents the government from gaining as much each time it inflates. Thus, to get the same kick, the government must inflate more. The money loses value once people anticipate such heavy inflation that they can’t spend it fast enough and it no longer functions as a currency.
The observation that hyperinflation somehow fools people and the assertion that hyperbitcoiniszation is both “regular” and “predictable”:
…hyperinflation is inherently an attempt to fool people, whereas hyperbitcoinization is quite regular and predictable (at least by comparison).
And now that the reasoning has been laid we come to the ‘therefore’:
Therefore people will more easily see that they had better switch over. Thus, as fast as hyperinflation is, hyperbitcoinization will be even faster. It will happen much faster than you expect.
The assertion that it will happen faster than fast and much faster than you expect.
The article is devoid of any economic theory and is full of completely baseless assertion.
Inflation Targeting: How Central Banks Work
As nations moved off the Bretton Woods standard and to a floating currency system eventually the concept of inflation targeting become popular. The idea is an array of (local) prices is used in order to gauge the purchasing power of the respective currency. A central bank will have a target (ie 2%) and will use policy tools to inspire the markets to expand or contract the money supply and credit in order to maintain the slightly (usually) degrading purchasing power of the units.
If inflation over a period is such that the target is exceeded (ie 3% when it is supposed to be 2%) then the central bank makes efforts to have the supply of managed such that the inflation goes down (ie purchasing power (trend) of money units increases).
The central bank managers do not consider excessive inflation above their targets a bonus (nor do they benefit monetarily from not achieving their goals!).
The Effects of Bitcoin on Inflation Targeting
If the introduction of bitcoin was such that it put downward pressure on the purchasing power of “fiat” of a nation then this would show up in the measured inflation (ie inflation might be 3% or 4% or more etc).
Without changing its role or function a central bank will simply make use of policy tools, like it always does, in order to affect the money supply such that the measured inflation would be reigned in.
This is not to say (yet) that a central bank has the powers and resources to continually battle with constant inflation pressure that bitcoin might imply.
I have only noted here that there is nothing in a central bankers purview that would cause them to do anything but continue their policy of keeping inflation mild.
How Can a Central Bank Issue Hyper Deflationary Money and For How Long Could They Sustain?
If bitcoin’s purchasing power and/or exchange price for “fiat” began to increase to the point of emergency from a central banking perspective (ie hyperbitcoinization) it would be quite easy to make policies that specifically target bitcoin.
At the same time a central bank could simply hold bitcoin, like they sometimes hold gold, and this would have the effect of curbing the (hyper-)inflationary pressure that bitcoin would be imposing.
Then, given there is no actual threat of hyperinflation I think it could not be implied or held that bitcoin would necessarily be hyper-deflationary and so I think there would not be the implied pressure that Krawisz uses to fuel his baseless assertions.