1/ “Fiat may not be great as store of value, but it has done great as a medium of exchange, no? Anyway, money needs to be a good enough store of value to make people want it, but a bad enough store of value that people don't want it too long.”
2/ I’d give fiat a C+ for medium of exchange. It’s certainly more convenient than transferring gold within the boundaries of a jurisdiction. It’s mostly useless for anyone elsewhere in the world, and is subject to extreme friction for cross border trade.
3/ Fiat is also heavily censored, making it difficult to move, even for legit business. This problem is getting increasingly worse.
4/ Regardless of how well fiat performs in medium of exchange, you can’t ignore the store of value property of money. It’s like congratulating a professional footballer for his sprinting prowess and ignoring the fact he can barely kick a ball.
5/ “But in a system where trade is the measure of success, money needs to encourage people to exchange it again for more goods and services.”
6/ Trade should never be the measure of success. It is only the measure of success in a virtual reality of the gamification of arbitrary, flawed metrics (bureaucrats, of course, love this).
7/ Success - that is the improvement of living standards, the relief of various discomforts - is the product of the accumulation of capital. That is, physical, technological, knowledge, and spiritual capital.
8/ Trade (more importantly, the division of labour) allows us to more efficiently create capital, but it doesn’t necessarily lead to it.
9/ As an extreme example, we could exclusively trade Magic The Gathering cards for a few years but we’d wake up one day in a cardboard box.
10/ Trade can lead to the opposite of capital accumulation: capital consumption. Where we trade the future for the present (the classic example being the wearing out of industrial equipment without saving to repair or replace them).
11/ Inflation - fiat - encourages malinvestment, it ignores the reality of scarcity. Scarcity of resources, scarcity of labour, scarcity of entrepreneurship.
12/ There is a limited quantity of resources which can be deployed to achieve capital creation, regardless of the abundance of money/currency.
13/ As a result, under fiat, people are incentivised to make increasingly worse investments in projects that are simply not valuable, fast return but risky, or can’t be completed.
14/ People no longer have the option to wait for a good investment, they are encouraged to move the hot potato on as fast as possible.
15/ These are just some of the structural problems with fiat, and ignore the equally relevant points such as: moral hazard and basic incentives.
16/ Moral hazard: even if a flexible, inflationary money were optimal for an economy, it would require giving the right of money creation to politically-cosy players, and forcefully restrict it from everyone else.
17/ Incentives: Probably the most powerful of all. This is the kind of logic a five-year old can point out. As an individual, would I prefer to receive a medium which will hold its value in exchange for my goods/service, or one which will fall in value?
18/ All other things being equal, an individual will always choose the former. They are not going to choose the latter in some selfless act for society. And the only way to prevent it is to coerce. To violently force them to accept the less-preferred medium.
19/ Finally, this dystopian prediction that non-fiat - sound money - would lead everyone to hold onto their money instead of spending it is nonsense. It assumes that people have an infinitely small, nearing zero, time preference.
20/ But in reality, everyone’s time preference is positive. It’s even relatively high (and much higher in an inflationary economy). We’d always prefer something *now* rather than later.
21/ People would still buy things in a deflationary economy. Lots of things. But they’ll be incentivised to be more careful with their purchases. Only buy things they need or really want. Buy things that last.
22/ If there is deflation, if the value of money is increasing, *that means that the wider economy is getting more efficient*, providing more of what people want for cheaper.
23/ Regardless of the lack of any “hot potato effect”, the worst case scenario of money “hoarding” (saving), will be in an economy where everyone’s wants are being better and better provided for. Investment is still happening, business is still happening.
24/ If the productivity stops, then the increase in the value of money will also stop. Leading to goods and services becoming more expensive as the reality of scarcity interacts with demand. People will be incentivised to spend/invest more, rather than hoard (save).
25/ The latter case is highly unlikely though. Because historically, sound money, deflationary economies have seen rapid advances in capital accumulation, and broad improvements in the quality of life.
26/ Bonus: the focus on medium of exchange at the expense of store of value is exactly the same schoolboy mistake that shitcoiners are making today, but at an accelerated rate.
27/ The way fiat fanboys and shitcoiners are making the mistakes are subtly different, but at the core they share similarities: A) an ignorance of scarcity (both the reality and value of it);
28/ B) Creating barriers to exchange, “deinteroperability” - e.g. balkanised fiat, KYC/AML censorship, value exchange friction (a token for everything, barter, “just use atomic swaps, bro”);
29/ C) Built-in insulation from risks, lack of skin in the game, passing the buck (bailouts, quantitive easing, premines, ICOs)
30/ D) an obsession with proactively tweaking a system of incentives to magically create value - capital - rather than try to build capital itself.
