Bitcoin maximalists (which is essentially an extension of gold-bug like austrian economic school thinking) are often found criticizing our current banking methods based on a fallacy extended from the “subjective theory of value”.
In our present day system central banking usually implies a ~2% inflation target in which the central bank managers are responsible for inspiring the markets towards. The basic idea is that they have a chosen a basket of prices of different commodities and services they use in order to inspire a money supply that keeps the aggregate of those prices at a steady and slight increase.
The subjective theory of value suggests that this is an arbitrary benchmark. Since market actors value goods and services differently the stability of the purchasing power of a money can’t actually be measured or targeted.
However, it is these same gold bug like austrian school supporters that will be caught passing around meme’s on how much purchasing power the USD has lost over the last 100 or so years (and sometimes in comparison to gold):
So how does this group re-solve that money’s purchasing power cannot be targeted because there is no proper metric for doing so but simultaneously claim that the purchasing power of the USD has dramatically (and unnaturally) fallen?
One of the only formal laid complaints about John Nash’s argument for Ideal Money is caused by this this quote here:
Our observation, based on thinking in terms of “the long term” rather than in terms of “short range expediency”, was simply that there is no ideal rate of inflation that should be selected and chosen as the target but rather that the ideal concept would necessarily be that of a zero rate for what is called inflation.
The complaint held by Paul Sztorc, Eric Voskuil, and others is that Nash’s argument for 0% inflation is an irrational call for money with a stable purchasing power.
But what these people that have made this argument have done is made the assumption that 0% inflation implies money with stable purchasing power (words are frustrating me here and I feel the nefarious community is using it to trip others up. It is a simple observation that austrians don’t believe that you can create stable money by having a standard basket of prices that the money is stabilized to and yet the same people believe it is fair to say Nash implied this is not only possible but desirable).
Nash said “zero rate for what is called inflation” he never said or implied that perfectly stable money was the goal.
This is important because when we extend the argument out to Bitcoin as a comparable basis to an ICPI (which is a global aggregate of prices Nash said his proposal COULD be based on) it then allows for a zero percent inflation target with respect to the price of Bitcoin but without making a statement about the actual (unmeasurable) purchasing power (in other words it would satisfy Nash’s proposal if our global currencies would pegged to have value trends on par with Bitcoin even if Bitcoin itself was (somehow) notably not stable in purchasing power.
Tying this all together we come to an important observation by Nash in regard to the problems an issuer of a(n electronic) money might face:
..a money would be more or less equivalently good if it had a completely steady and constant rate of inflation. Then this inflation rate could be added to all lending an borrowing contracts.
These sentiments are very inline and well supported by economist Lars Christensen in this video. What Lars explains is that the purchasing power of a money or especially the external market’s valuation is very much affected by the trustworthiness of its issuance promise. Bitcoin has a very trustworthy schedule-21 million coins released at a rate that halves every 4 years.
But there could be other rates that are just as favorable yet not at all as finite. Ethereum’s market price has held reasonably and comparably despite having an infinite supply scheduled for the time being. Most Bitcoiner’s would think that would surely cause rational mature markets to abandon the asset completely.
But inflation in regard to purchasing power is not perfectly (inversely) correlated to the amount of units that are created.
Like Nash’s quote highlights if the markets can have a strong understanding and trust in the issuer of a currency and in regard to the supply schedule then the details can simply be anticipated and factored into the ultimate market valuation and use of the currency (for contracts etc).
This is all what prompted this thought and we can understand the battle between economic schools by understanding it:
If what I have gone over is correct then we could have an issuer saying they will print units with intention of keeping a slightly steady decline in the purchasing power of the units. But if the market has confidence in this order then they will begin to stabilize the purchasing power of the units.
I have highlighted an absurdity here if we consider the markets to be the great(est) equilibrating force (ie a la hayek). It is not perfectly correct to suggest that governments/central banks simply devalue our currency by printing more of it.
In fact such a devaluation isn’t really possible if the markets will just equilibrate. What I would suggest we are observing in general and in regard to devaluation is simply a political shock to the trustworthiness of the issuance which inspires a temporary devaluation and where the ultimate control of the value of a currency in this regard is far more so driven by market forces otherwise in long standing currencies representing long standarding economies.