The Cost Of Price Stability

Bitcoin is a contentious subject because it shines a light on a lot of the assumptions we make about money and exposes the truth. It makes us question many of the ways we see the world and puts us in an uncomfortable position. I would know, I’ve had to go through the mind job myself, and I am still learning.

To some of you, what I am about to say might sound totally crazy, and you’ll dismiss it as a reach or wack job theory, but for some of you, it may get the wheels turning.

Bitcoin haters often use shallow arguments to dismiss it, like it’s boiling the oceans, or it cannot be money because it’s volatile and then feel they’ve hit a home run and the argument is done, but I think these surface-level retorts don’t hold water when put to the test.

“The truth is like poetry– And most people fucking hate poetry.”

– Who knows?

If there’s one criticism of bitcoin that does my head in, it’s the volatility argument. When I hear people argue that bitcoin isn’t practical or it can’t be money because it moves up and down in price, I know they haven’t done the work, and I try to be tactful. But inside, know that I am seething and feel like I should place my brain in a blender and end it all.

Yes, I am being hyperbolic, but the truth is I find this such a lazy argument that shows how brainwashed we are by the money we have today, thinking it’s the norm.

Yes captain obvious

Let’s get the obvious critique out of the way. 

Yes, bitcoin’s price goes up and down in relation to fiat currencies like the dollar, but that’s the case for all units of measurement. If you measure in dollars, you’re looking at everything else through that lens; you’re measuring goods, services and assets in dollars and assuming that the price changes are all on the side of the asset, product and service and there is no price change on the part of the currency. 

People conflate the idea of a unit of measurements like a centimetre or a gram that have a fixed unit that is enforced and apply that to currency. One dollar is one dollar, which is partially correct. It is one dollar, but what it can lay claim to and how many dollars competiting for transactions can change. 

For example, let’s take the same view as you see a dollar and apply it to bitcoin. If I am measuring things in satoshis or bitcoin, then the bitcoin is not going up or down, but the price of dollars, assets, goods and services. 

For example, A house used to cost 1000 bitcoin; now it would cost me 10, it’s a case of what unit of measurement you decide to use, and since so many of us get our price signals from fiat, that is our default state of mind and frame of reference, and it’s hard to break. 

 Money is meant to reprice everything even itself

Money is the most saleable good, everyone wants it, and everyone is happy to exchange goods and services for it. Anything can “act as money” throughout the ages; money has taken the form of salt, tobacco leaves and even seashells and can take on various forms. These forms of money were fine for small circular economies where people knew one another and could maintain the integrity of the accounting system.

As our economies became bigger and more complex, we needed a more robust form of money. We eventually moved to commodity money like precious metals, such as gold and silver and then to currency as in government fiat money as we have today. 

No money has an actual value; it is all a thought abstraction and the best idea we’ve come up with to make facilitating easier trade. Money is the best measuring stick we have to create claims on goods, services and future productivity. So as humans create more goods and services or become more productive, the money has to adjust with it. 

In the last 50 years, we’ve lived on a fiat currency system with an elastic supply; as we expanded our productivity, so too did the money supply increase, not in tandem, but in a way that people simply accepted because it goes unnoticeable for many years. 

Since under a fiat money system, new currency units can be created at a whim, they can be created to match certain forces driving down prices sharply. If the expansion of the money supply is kept within certain bounds, it provides the illusion of price stability. 

In a hard money system, this is not the case, since hard money like gold and bitcoin are hard to produce, harder than the creation of other goods and services, the price of money has to constantly change in relation to goods and services. 

It could go up, it could go down, in certain places where money is in high supply, items could be more expensive; in other places where goods are in high supply, they are cheaper. People can then find these opportunities due to reliable price signals and exploit them to create a more efficient market over time. 

But since fiat destroyed these price signals, it becomes harder to find these inefficiencies, and malinvestment ensues. 

The fear of erratic prices

People who are proponents of fiat often claim that it would be impossible to conduct commerce when money keeps changing value. I would disagree. Did commerce stop during any hyperinflation events where prices are changed almost daily? No, so why would it stop if we’re using a deflationary currency? 

But if your money keeps moving up and down, how will I buy things? You would use your brain and weigh up the opportunity cost like you do every day subconsciously when you swipe your credit card. 

Entrepreneurs around the world are always repricing goods and services in relation to the money supply to maintain their business operations. They are already in the habit of evaluating costs and actively changing prices, so why would their behaviour be any different? 

When you go to the store, and you see prices change for goods you want, you change your shopping behaviour, so why would money changing purchasing power be any different? If we allow for a deflationary currency like bitcoin, it would simply look at what goods and services are in oversupply in relation to the bitcoin and price them accordingly. 

I hardly see this as the end of the world; in fact, I think it would make for a far more prudent shopping experience where people would be able to make more accurate purchases based on their needs and create price signals for entrepreneurs to follow.

Instead of the inflationary currency we have today where businesses are encouraged to strip out and hollow out products to make them cheaper all the time at the expensive quality to maintain certain price ranges. 

The tectonic plates of fiat

Under a fiat system, the amount of money is constantly changing; as an individual have no idea how much your claims are in relation to the claims created around the world. Since central banks can create currency and some institutions get prefferential access and while certain individuals have a better chance of accessing capital through debt creation, it creates imbalances in money and prices and later these trickle down into society.

Fiat money is similar to tectonic plates in that they move slowly beneath you, you may not notice them, but when those opposing forces do meet, it can create havoc. The telltale signs were always there that catastrophe was on its way.

But you didn’t have the instruments to track the movement of the plates.

I think we can all accept the fact that our fiat money purchases fewer goods and services each year. Despite the amount of effort you put into acquiring and saving, the money doesn’t reflect that value the longer you hold on to it.

If we take the bitcoin price in 2017 as an example, during its last run-up, it hit around $20 000, but the equivalent purchasing power today would be about $29 600. While many of us see 20k = 20k, that’s correct in nominal terms, but in real terms, it’s not the case. Bitcoin appreciates in value, but what you’re measuring it in is increasing in overall units too. Bitcoin is far harder to produce than fiat money, so it would require more units of fiat currency to acquire a coin.

The point is you may think that your 1 unit of fiat currency is still one unit, but it has far less utility, whereas, with bitcoin, your one bitcoin or even one satoshi has more utility.

So is the stable prices you cry about really worth debasing everyone around the world at different rates and affecting their lives in more ways than one so that you don’t have to inconvenience yourself with prices moving up and down?

If that’s your stance do you realise by advocating for less volitlity you also promote more theft through seigniorage.

What is seigniorage?

Seigniorage, also spelt seignorage or seigneurage, is the difference between the value of money and the cost to produce and distribute it. In a fiat money, world seignorage is an additional income for governments since they’re the issuers of the currency. 

In the past, when we used coins made of precious metal, seignorage was far smaller, but as we moved towards paper currency claims and digital money, that income stream became a far larger portion of government revenue.  

To print a billion or trillions today cost a fraction of the value it is meant to represent, and while we have to work and create things to acquire that value, governments can create it and lay claim to productivity in the market. 

The price paid for “stability.”

Every day, entrepreneurs are racing into different markets to try and make things cheaper and faster. When productivity gains are achieved, instead of having that deflation reflected in the price and providing consumers with lower prices, it is migrated to the currency creator. A part or all of that productivity is taken away from you by smoothing out nominal prices with the help of seigniorage. 

Governments are pocketing that additional productivity for themselves, but hey, at least you get a stable price or rather a stable slow and acceptable increase in prices over time. 

When we advocate for stable prices, we remove the profit motive for entrepreneurs; if prices remain stable, they cannot use their advantage to expand operations or capture more market share.

When we smooth our prices, we ensure businesses cannot divert resources to other operations and reap the benefits of productivity from their most optimised operations or their strategic advantages.

We make for a less competitive marketplace, as we make certain businesses unprofitable by removing margins that otherwise would keep them afloat.

When we focus on stable pricing, we pull out value to push it towards overpriced goods and services, and those are funds that could have gone towards savings, towards investments and towards creating new opportunities and limiting consumer spending.

In turn, we create fewer jobs; we reduce the opportunity for small businesses to compete and shrink our economy.

Is this really worth having a “relatively stable price”?

Global monetisation takes time

I am not saying Bitcoin isn’t volatile; of course, it is, but it will reduce over time. Sure having money lose fifty percent of its value in a day isn’t ideal, but those changes will be few and far between as the market cap grows, as more participants enter and as more liquidity enters the market. 

Once bitcoin’s market cap reaches multi-trillions, there will be very few participants with the ability to move the market in any one direction, and the volatile nature you see today will be subdued. Yes, it can move a few percentage points every day, but it won’t be as noticeable or affect commerce drastically as it does today. 

I hope I gave you some food for thought regarding this plea to have price stability and that it is the be-all and end-all argument. If you have any questions or counterarguments, I’d love to hear them, so feel free to share them with me in the comments.