Currency – Will Bitcoin’s limited supply prevent it from becoming a global currency?
To answer the second question:
What purpose would expanding the amount of Bitcoin with a fixed annual supply serve? Bitcoin consists of 100,000,000 satoshis. Even if you lose a large amount of Bitcoin (e.g. lost keys, burned, etc.), you shouldn’t experience payment issues for long. The way I see it, increasing the annual supply only adds a small inflationary fluctuation (similar to gold being mined at a physically constant rate). The question is, is that desirable? What economic purpose will it serve? Wouldn’t that undermine one of Bitcoin’s core principles?
Regarding the first question:
Deflation occurs when the value of money increases relative to the goods existing in the economy. In a world where the total money supply is fixed (e.g. Bitcoin), if the quantity of goods increases, the currency is perceived as deflationary. This is likely to happen in the future due to innovations and improvements in production (e.g. technology is driving deflationary pressures). In some ways, you can get more for the same amount of money, effectively increasing your wealth. That in itself is not a bad thing.
The problem during the Great Depression was the debt burden. Paying off debt effectively erases credit and limits the money supply, creating a deflationary effect because the quantity of money decreases instead of increasing the quantity of goods. Ultimately, this led the United States to abandon the gold standard and extend credit lines into the banking system, effectively flooding the system with money.
If the money put into the system is used to service debt, the net effect on inflation/deflation tends to be negligible. The same is true if the supply of goods increases with the money supply. The problem, as is the case these days, is when the money generated is used to purchase assets (real estate, securities, etc.) and the supply of goods is limited (supply chain issues, etc.). Inflation is then felt across multiple boundaries (consumer prices, security prices, etc.). This reduces the wealth of ordinary individuals and benefits those who owned securities before money printing began.
To keep the discussion short, I recommend the following two books by Ray Dalio:
- Principles for Dealing with Large-Scale Debt Crises (Explaining the Financial Crisis and Handling the Great Depression) is available for free at the link.
- Principles for dealing with a changing world order: Why countries succeed and fail (covering long-term debt cycles and the implications of printing money in FIAT currencies, etc.)
If you’re pressed for time, the link to the book “The Price of Tomorrow: Why Deflation Is the Key to a Prosperous Future” can be viewed as a brief summary of the two points above.
