Is the Bitcoin standard a fallacy or real possibility ?
We hear two alarm bells at the moment.
On one hand, we’ve got the very loud inflation worried crowd calling for the Bitcoin standard.
On the other hand, we have the more quiet deflation worried crowd that sees dollar shortage.
Both of them look at the same thing, the US$ money supply.
However, they totally neglect the velocity of money:
Since 2008, the velocity of money in the US economy has literally collapsed.
No wonder that despite all the QE we haven’t seen any significant inflation.
It is a chicken and egg question:
- Is the velocity is low because there is low economic activity ?
- Is the economic activity low because there is no money circulation ?
The answer is a bit of both.
There hasn’t been any technological or industrial revolution since the internet.
So there is a lot of money circulation in that space due to the expected growth and ROI. But there is no incentive for investing in other sectors of the economy that have low return.
Therefore, economic actors park the excess money in assets instead of injecting it in the real economy, hence the low velocity of money, low economic activity and asset price bubbles (stocks, housing, crypto, etc…).
Below a complex diagram of the money flow…😉
So the Fed is indeed destroying the money when looking at asset prices skyrocketing.
However, there is no benefit to the economy since the money isn’t reaching it, there is deflation.
This deflation is amplified by technological progress that increases productivity.
So the inflationary crowd got it half right :
- Excess supply destroys the money and inflate assets.
- But low velocity deflates the real economy.
The deflationary crowd worried about a dollar shortage got it half wrong:
- It is a velocity issue, pouring more dollar won’t fix it unless there is incentive to invest in the economy.
- It is correct that the economy is heading toward deflation once the Fed stops or is unable to supply enough dollars.
Having a Bitcoin standard assumes that it has replaced all major fiat currencies and it has become the reserve one.
How likely is that ? Slim chances.
But let us assume it will happen, this means M is fixed at 21 million.
Then we are left with only one adjustment variable on the left side of the equation :
M x V = P x Q
Money velocity won’t magically increase because the world adopted Bitcoin.
The only reason the GDP has somehow managed to grow over the last 20 years has been M expansion.
Going for Bitcoin would collapse GDP = P x Q
Prices (assets, goods, services) will be the first adjustment variable until businesses are not profitable, then Q will drop as businesses go bankrupt.
Bitcoin maximalists will say it would trigger capital re-allocation as the bubbles explode.
In my opinion, a depression would erase so much capital that there wouldn’t be anyone ready to invest in businesses. Especially considering deflation equals your money is worth more tomorrow so why take the risk to invest when doing nothing makes you money.
The Bitcoin standard would trigger an endless depression with all its terrible consequences and no lever (money printer) to restart the economy.
At this stage I would say the Bitcoin standard is a fallacy unless it comes with:
- a new economic model or technological revolution that would boost the activity and money velocity.
- Or a paradigm shift where GDP growth isn’t necessary to human society development.
The first point would leave us in the same situation as today because those factors are cyclical.
So we are left with the utopia of a paradigm shift to get it to work.
My conclusion is that the Bitcoin standard is only another narrative to get more people into Bitcoin so that the whales can cash out.