Why Inflation is "Necessary" steemCreated with Sketch.

in money •  21 days ago


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I don't know about you, but I was taught in economics that inflation is absolutely necessary to run a functioning economy. I think about this all the time because now that we have the blockchain this concept is being flipped on its ear. Pretty much every crypto project has an inflation rate set in stone that can not adapt to the market. Many ERC-20 tokens and other ICOs have zero inflation. Are we doomed to fail because of this "flawed" deflationary mechanic?

First of all, we have to assume we've been lied to. Who benefits from inflation? The ones who control it. It's almost embarrassingly obvious that a private institution should not own the world's reserve currency, yet here we are.

Trillions of dollars can be printed at any moment. Interest rates can change with no guarantees. The only thing that keeps the Fed in check is the fear of losing power or profits. If the economy collapses due to gross corruption everyone loses. It's in their best interests to keep everything running just smooth enough so it can be exploited to the maximum. This creates an interesting push and pull dynamic.


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Imagine no inflation

What would happen if the Fed stopped printing money? Well, for starters, the economy would probably collapse because debt can not be paid back. More money is owed than exists, therefore, in order to pay back debt, the Fed must create more debt to pay off the old debt. This never-ending loop of debt-slavery is quite calculating and cleverly hidden from the general public's view.

Ignoring this hole, what happens when inflation stops? Volatility. When a scarce asset can't be inflated people will hoard it as a store of value. Now we have a situation where hoarding creates low liquidity, and low liquidity creates high volatility. Anyone with a lot of USD would be able to manipulate USD and send its value bouncing all over the place just like we see in the cryptosphere.

This is why Bitcoin is often criticized for not being sound money. Variable and intelligent inflation/APR can keep the economy extremely stable. This makes USD a very good unit of account. However, the tipping point is approaching. At some point the advantages of crypto will be so heavily tilted that it won't matter if it's stable or not.


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There are three main attributes of money that crypto is trying to achieve:

  • Medium of exchange

How easy is the currency to convey value? This is something that gold and other precious metals are very bad at. Heavy and bulky assets need not apply. Crypto is arguably bad at this as well at this point in time. This idea is mimicked in the whole "I want to buy a cup of coffee" argument.

However, every year it gets a little better. More infrastructure combined with simpler interfaces will continue to upgrade the space. This gives investors a lot of wiggle room to speculate because it's only a matter of time before these borderless and open access platforms are actually better mediums of exchange than fiat.

  • Store of value

Here's one we've all heard over and over. Crypto is a store of value. This is a direct and immediate result of the consensus layer dictating inflation in a programmatically transparent way. Because no one is allowed to create inflation without following the rules, this makes nearly every cryptocurrency a superior store of value in comparison to fiat. However, this store of value is exactly what makes it a poor unit of account.

  • Unit of account

If I say things like milk, sugar, car, and house, all of us could likely assign a valid USD value to these items. This is the basis of unit of account. How many people know how many Satoshi it takes to buy that cup of coffee? Very few if any. You'll know Bitcoin has made it when people start cutting out the fiat middle man and start pricing goods directly. The biggest problem here is stability. How can I know how much XYZ is supposed to cost if the value of the underlying asset keeps jumping around like a jackrabbit?



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Conclusion

We are rapidly approaching a tipping point where the value of trust far outweighs the stability gained though avenues of efficient centralized regulation. Greed will be its own undoing. Today, crypto is a poor medium of exchange, and an abysmal unit of account. However, smart money has the ability to upgrade itself at the same exponential pace of Moore's Law.

It's only a matter of time before smart money is superior to dumb money in every way. We've been past due for an upgrade to currency for the last hundred years. This financial revolution is going to hit the world like a ton of bricks. In fact, I think we have to assume that this is such a huge upgrade that new emergent properties of money will be established.

For example, what's it called when a currency can create jobs better? What is the "get paid to _____" variable called? What's it called when a currency has better governance solutions? What's the "opt in governance" variable called and how would one measure it? What's the variable called that measures how well the coin takes care of its community? Does it have universal basic income and good healthcare?

These are properties of money that don't even exist yet because fiat is so primitive and outdated.

The cryptosphere has a long way to go, but will surprise us all.

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Have you read any of <a href="https://www.oftwominds.com/blog.html"

Charles Hugh Smith's works? He outlines some of the best ways of creating wealth and useful, local currency.

We are at one of the most money printing times in history, and we are experiencing a money shortage. All that money printing is not entering the economy.

As an example, there are people who were running ATM machines, and they had to quit because they couldn't get enough cash.


As we get better and production, prices fall. But, accept for computers, no prices have really fallen.

And accurate measures of inflation put it around 12% per annum.
That is how much the price went up, but the cost went down (in labor/energy terms) so what is the actual inflation rate when you add this in?

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Indeed, they are sucking away all gains made by technology and gifting it to the mega elite. There's no other explanation. Everyone should have gotten much richer over the last 20 years looking at all the gains we've made. Instead the opposite has occured.

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We are at one of the most money printing times in history, and we are experiencing a money shortage. All that money printing is not entering the economy.

Ummm, what we have is money being "digitally issued", NOT PRINTED! The Printed Paper U$D has been reduced by some 90% of notes in circulation, I read that a few years back but it was also before the new high security notes came out. This is BY DESIGN, fewer notes in circulation. Plus lots of folks are stacking the paper fiat I believe.

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This was done during the Great Depression.
Same shit.

There was one town that had ONE $5 bill to share amongst the whole town.

This is something that gold and other precious metals are very bad at.

For 99.9% of transactions, gold and especially silver worked just fine for centuries.

There was very little inflation in America prior to the creation of the Fed. The idea that some level of inflation is inherently a good thing is a falsehood propagated by the Fed that completely coincidentally helps to transfer wealth from the 99% to the 1%.

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Yup, that statement you quoted is a DOUBLE WHAMMY!

  1. Factually Inaccurate, PM are very good at "conveying value". A small Silver, or even smaller Gold Coin carried a ton of value, so much in fact, that "penny candy" was a lot of value, for a single COPPER CENT! PMs excel at "conveying value" but as far as "portability", cryptos do exceed that. MANY Efforts of Block Chain are tying PMs to Crypto. Digix/DAO for one. It is physically backed by Gold Grams.
    +1 @preparedwombat

  2. The sentence ends with a preposition LOL!!!

😝 Double-Whammy! 😝


OTHERWISE, Great Article @edicted :-D

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I buy silver, desire gold, and believe in crypto... All three are better than any fiat product.

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I've never really understood why some inflation is good, but talking about store of value and how because of no inflation people will just horde Bitcoin made the light go on and everything a little more clear.

It will be interesting to see if there will ever be one crytpo to rule them all or if multiple cryptos will serve different niches which is what I imagine will happen.

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To me it makes much more sense to have thousands of relevant cryptocurrencies. Blockchain is a tool for community to express value, and there are thousands of communities out there that still have no representation in the space.

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Completely agree!

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Some inflation is said to be good because it incentives spending which theoretically grows the GDP, and helps the nation.

However, that requires infrastructural spending, new industries, new roads, new offices and employees... But recently, since 2008 all the new money has just gone into inflating the stock and bond markets, which is not infrastructural and does not produce lasting benefits for either the economy or the nation.

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It's only a matter of time before smart money is superior to dumb money in every way.

Do you think that's a good or bad thing? I'm not actually sure. Because if we go fully smart with all kinds of things this would lead to a kind of controlled police state system. I think centralized cash is a "good" thing when it comes to "freedom". At least there is some power left to the people. They can do whatever with it.

I think Crypto could change that. If we go smart we should do it with Cryptos. But how do we remain the decentralized state of it? Governments want their own Cryptos too and they will implement it. How can we survive this?

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It's a great thing because it's an opt in system. If someone creates a bad system anyone can opt out at any time. People are going to pick the solution that gives them the most opportunity. That's just simple supply and demand of the job market.

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People are going to pick the solution that gives them the most opportunity.

Yes, they will. But what if you're forced to use it? Do you want some petrol? Use the Petrol Coin from the Rothschild.

We only could resist this by all working together and opt out and simply protest by not participating. I think some will do it, but as @infidel1258 said, most won't. This is what scares me. I hope I'm wrong. Maybe a lot of people wake up to all kind of things because of the Crypto movement.

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Yes, this is going to happen, but in the end it doesn't even matter.

Decentralization has to prove that it is superior to the alternative in every way before everyone in the world is using blockchain. Today, this is not true, so there is going to be an ugly transition period.

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Today, this is not true, so there is going to be an ugly transition period.

Indeed. The transition is going to be very ugly.

Exciting times ahead.

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Seems to me the answer is in each of us choosing freely to not adopt those coins. And when they try to force us we resist. Most wont, but we can.

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Most wont, but we can.

Word.

The funny thing is the "money printing" is not leading going to lead to long term inflation but deflation (at least in the United States). The reason for this is because the money needed to service the debt is taken out of the economy. I believe the 2019 service amount will outpace defense spending.

That is a lot of money sucked from private companies can use to create, produce, and innovate. It will lead to a massive drain on the economy, probably leading to the collapse you mentioned.

Of course, the "money" being printed is actually debt. So there is the problem.

I found out about you after someone nominated you for worker proposal thing.... yeah man inflation worked great for 20th century when u look at our growth

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Defecit spending always leads to apparent prosperity until the currency debasement ends it economic collapse.

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Very insightful post. I completely agree with you. Just maybe we are not that close at the tipping point where we would like to be. This overdue monetary revolution is not welcomed by all. In contrast, big stakeholders will do everything to keep control over economy. They know, once crypto is taking over, they could quickly get out of the game.

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The interesting thing about that is many of the big tech companies appear to have already jumped ship. Billions of dollars are being pumped into development and regulation going our way.

The infrastructure for the Internet is already in place. Most the work left to be done is coding software, which can be done anywhere on the planet using this outward facing permissionless system.

Honestly I think we are less than five years away from radical change in the way we do business.

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Yup. I think when USD falls the powers that be will try, and probably succeed in implementing a new fiat world currency, no better than the USD and which definitely wont be led and created by the USA directly.

Perhaps China, perhaps the Euro, probably an IMF backed SDR.

If im right, in another 40 years that will die too, because all fiat dies due to manipulation and money devaluation.

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Thank you for a very insightful article. I agree that those three points are an important part if not critical parts of widespread adoption. The valuation of goods in cryptocurrency units is infrequently discussed, mass understanding or easily used graphic interfaces will be a necessary predecessor of any mass adoption phase for crypto. Ten Steem takes a lot of work to earn and it can be used to make more Steem, so should it be valued like an egg or a chicken?
These questions and others will require interesting answers.

I just completed an article on everyday uses of cryptocurrency, so this article was perfectly timed follow piece. The mechanism which have developed already make it possible to buy with crypto, But at current prices we would need ten Steem for a cup of coffee. This as you pointed out is the next big hurdle to mass adoption.

I love your articles.

I guess we think about pretty similar things.. But I have to do my Abitur and have no time for formulating a steem post..

But what I have time for: a bit of chilling on my favorite decentralized social media. (in studying breaks)

I love the input I get from you.. Especially because it's about things I keep thinking about for weeks. :)

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input on what exactly?

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Input from you about topics I'm thinking about, too.

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I completely agree, fiat printing central bank manipulation reminds me of Animal Farm, specifically the pigs who work the poor horse till he dies. And the US economy, is the horse.

When the horse dies, Americans will suffer as the nation has no way to buy foreign goods which are needed, like rice and electricity... It will be bad.

Unfortunately the pain wont be localized to the US either, since the global economy is dependant upon the USD liquidity (for now).

If this happens soon, and I think it will, crypto wont be ready, and people wont be ready for crypto, so it will be bad...

Really bad.

We have to have workers, we don't have to have dollars.
Keep working, stop paying.

The more I read into it, the US Dollar may be the biggest Ponzi Scheme ever! Scary to consider what the tipping point will lead us to.

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I assume banks, corporations, and even full governments will create their own coin and try to convince everyone it's worth using. A lot of people are going to get tricked into using crypto that isn't any better than fiat.

The inflation is a source of many problems that people have today.
That is why I don't like it and think that this is a huge problem for any society and economy.

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