Deflationary money is a Good Thing

Deflationary money is a Good Thing

Original Postby ZmnSCPxj

Posted on: December 1, 2023 01:14 UTC

Understanding the dynamics of government-imposed exchange rates versus free-market influence is crucial.

A government-mandated exchange rate may not align with market realities if there's an imbalance in the supply and demand for dollars. Should a government fail to mint new dollars, the circulating supply could diminish, potentially leading to a black market where dollars are valued higher than the official rate. This discrepancy invites arbitrage opportunities between formal exchanges adhering to government rates and the black market.

When a government adjusts the exchange rate without infusing additional dollars into the system, it risks creating disparities that arbitrageurs will exploit. For example, changing the rate from 1000 USD per Bitcoin (BTC) to 1250 USD per BTC requires an injection of dollars to maintain equilibrium. Without this, formal exchanges may deplete their dollar reserves as traders capitalize on the more favorable rates offered by the black market.

The concept of the Cantillon effect comes into play when considering who benefits from these government-regulated exchanges. Those with immediate access can reap significant advantages by converting their BTC at enhanced rates and purchasing goods before prices adjust. This creates a privileged class that benefits disproportionately, often at the expense of those with less access, such as workers in third-world countries whose salaries are paid in USD but who cannot easily access these privileged exchanges.

For a government-mandated exchange rate system to work equitably, it needs to offer universal access to the minting exchanges. This means allowing everyone, regardless of citizenship, the ability to participate. However, such inclusivity might face political opposition from nationalist groups, implying that while technically feasible, the establishment of a universally accessible exchange system may be challenging due to potential political hurdles.