rpietila, what goal could variable emission of new coins solve or optimize? I've seen some mention smoothing the price volatility, but I am skeptical of that.
Gold does not come into existence fixed percentage per year. Actually over millenia, gold's depreciation has been only 0.2-0.3%.
That during the largest economic expansion period the rate has been over 2%, its value has kept in bay and it has not degenerated to a collectible. That during economic stagnation, war, and famine, gold mining has all but stopped, the supply has not increased when the real economy has decreased. (That it has not decreased, which would be impossible, is also important.)
Labeling Bitcoin "gold 2.0" is a clever ploy, but the emission mechanism is not equal to gold. God was wiser than Satoshi. Or had a longer perspective.
rpietila I agree with your thoughts above.
When examining non intuitive ideas like the pitfalls of excessive monetary debasement or the problems with assigning a 0% cost to time it is oh so easy to get lost in the complexity. I like to simplify such concepts as much as possible so the heart of the matter can be isolated. To evaluate the utility of these competing ideas it is useful to look at some extreme economic hypotheticals.
Let’s start with a hypothetical world where there is an assumed 0% cost to time? Let’s say that this world is growing briskly at 5% each year and has adopted a fully mined cryptocurrency. What is a wealthy young cryptobarron to do in such a world? Should he invest his coin in productive but potentially risky business or should he simply HODL. If he locks his funds away for 40 years and growth continues unchanged he will increase his purchasing power by a factor of 7. After 60 years when his children inherit the money that original purchasing power will have increased almost 19 fold.
In such a world there is a tremendous incentive not to invest or take risks. Simply by doing nothing one gets a free claim on the future productivity and work of all those who are developing knowledge, and driving productivity growth. The reality in such a world is that it will not continue to grow at 5%. Money will be horded, investments will decline, and growth with drop. Only when the growth is much much lower will it be economically palatable to risk some precious cryptocurrency.
Is massive debasement best then? Excessive debasement has significant problems as well. Lets look at a very different economic extreme and compare how an economy functions under a debased and non debased currency.
Lets look at a Mad Max world
. It is a post apocalyptic world with 0% growth no investment opportunities, and no social safety net. The currency is gold but the technology to mine it has been temporarily lost. A worker in this world may earn a fixed salary his entire life (makes the math easier). If he works for 40 years before becoming disabled but lives an addition 20 years before succumbing it is easy to calculate how much he will need to save to provide for himself in his "golden" years. He needs to save exactly 33% of his salary for 40 years if he wants to maintain the same level of purchasing power for a 20 year “retirement”.Now lets add debasement to this world and make it worse by adding a despotic government and a forced transition to fiat currency. If the new government debases the money supply by 5% a year but otherwise does nothing productive the economic situation deteriorates markedly for our poor worker. Even if he is one of the lucky ones and manages to captures some of that government spending (say enough keep his income in line with inflation). He will find it quite difficult to maintain his lifestyle once he no longer works. Our worker would need to double his savings rate to 66% each year if he expects to live 20 years post retirement and maintain equal purchasing power throughout his life. Other workers, those unable to capture any government spending do much worse.
In a world with limited growth excessive debasement decimates the elderly and those on fixed incomes. The reality of the human condition dictates that we all face a potentially prolonged period at the end of our lives when we are incapable of productive work and must consume previously stored savings to survive. It is this fundamental human condition that limits how much debasement can be tolerated and why we start to fear and oppose debasement as we age.
The equilibrium point between these competing inefficiencies is a debasement rate that equals the rate of economic growth.
Money is claims on real capital. If claims on real capital are withheld from the market when money is stored rather than invested/spent, then some real capital has been delayed. If that delay was wise, then society benefits, but if it was mistaken then society suffers. But no one can know a priori (in advance) the outcome of decision to delay.
If long term debasement exceeds the rate of economic growth it will introduce inefficiencies into economic decision making. Claims on real capital that optimally should have been delayed will instead be invested/spent. Society as a whole suffers as a result. If long term debasement is less than underlying economic growth it provides an incentive to bury money and in the end reduces economic growth again society as a whole suffers. Equilibrium occurs when debasement matches economic growth.
