If we imposed a system like bitcoin upon a society with growth potential people would still invest, but they would not invest appropriately in response to economic opportunities. They would under-invest because a fixed supply of money creates a strong incentive against risk. With an utterly fixed money supply you receive a percentage of future economic growth simply by doing nothing. Only the most promising growth opportunities would receive investment and those with more marginal returns would be ignored. A bitcoin monetary system thus creates a strong vector against growth or in bitcoin lingo a HODL mentality.
This holds true to varying degrees until the system is sufficiently mature. At that point a fixed money supply will grow in value relative to the economy as a whole, albeit with a lag. There is no need for the money supply to dynamically adjust itself - a static supply takes care of a myriad of problems, but there are other considerations that arise.
Assume Bitcoin is the global currency and the global economy grows at 5% during a given year. The value of a Bitcoin should rise by about 5% overall. Some sectors of the economy will grow faster than that rate, others more slowly, and some may contract. Investment occurs when there is an expectation of return greater than can be obtained by other methods, so a startup generating 10% profit will be a better option than simply holding Bitcoin.
What becomes a problem is availability of the usable money supply. That's the stage when smaller denominations are used and the decimal moves to the left (smaller fractions) instead of the right (larger denominations). Long-term holders of Bitcoin who have savings that need not be actively utilized effectively centralize ownership of the units. Whether this is good or bad is another question.
To understand the problem of a bitcoin only currency growth must be understood as an integral. In any economy at a given instant there are various investment opportunities. In an economy capable of a theoretical 5% growth there will be investments that return 1% growth and those that return 50% growth. However the integral of growth opportunities the sum of all all actual known growth opportunities is a fixed value. We can never know with certainty what this is as it involves the cumulative knowledge and opportunities available to all members society.
If we hypothesize that at a specific time growth opportunity averages 5% across the economy then ideal money should be at least theoretically capable of matching resources to investment opportunity to actualize this growth.
In a bitcoin only economy if expected growth is 5% only investments with an expected return of greater then 5% will be considered. All economic opportunities with expected return between 0.1% and 5% will be ignored as it is a better economic decision to simply hold bitcoins and free ride on the faster growing sectors of the economy. Thus actual growth will not be 5% it will be less. Exactly how much less depends on the distribution of growth opportunities some have argued this is a Pareto distribution but that is irrelevant for the purposes of this discussion. The take home message is that all growth opportunities between 0 and 5% are lost. The money fails as an optimal signalling system. Depending on the distribution growth may only be 3% when the economy is capable of 5%. This generalized under-investment never goes away. There will always be under-exploitation of opportunity in such a system.
It is impossible to know from a top-down perspective what actual growth opportunities are. Opportunities are unlikely to exponentially grow forever nor are they likely to zero out forever. Both situations are possible, however, at any given time so a money with zero debasement is is potentially just as flawed as one set at 5% in terms of optimally matching capital to growth opportunities.
However, if we introduce competing currencies one optimal in a scenario of eternal exponential growth (electronic fiat) and one optimal in an environment of zero growth (bitcoin) and allow capital to move freely between them then individual actors moving back an forth between the two currencies can alter the economic signalling. Once you introduce simultaneous monetary systems the value of each does not necessarily track economic growth instead the values become driven by capital flows between them which in turn is driven by expectation and available opportunities. These two currencies send opposing economic messages. Bitcoin introduces a tendency towards under-investment fiat towards over-investment.
As bad money drives good money to a premium such an economy would likely uses fiat as its primary transactional mechanism and bitcoin would be a savings vehicle. The question is whether two such currencies along with the the ability of individuals to rationally move between them would allow an economy to capture the economic growth that would be missed in a bitcoin only economy while avoiding the over-investment inherent to a economy using only debt based fiat.
