Deflationary money is a Good Thing

Deflationary money is a Good Thing

Original Postby ZmnSCPxj

Posted on: December 1, 2023 15:11 UTC

The economic feasibility of government-mandated exchange rates has been called into question, particularly when considering the enforcement of such rates within a market economy.

The example of Venezuela illustrates the difficulty of imposing an official exchange rate for bolivars and USD due to the natural economic forces that drive the formation of black markets. These markets often emerge in response to currency imbalances created by the artificial fixing of exchange rates, which cannot be sustained if there is a significant mismatch between the supply and demand of currencies.

Furthermore, the issue of compliance with these mandated rates hinges on the existence of an entity capable of adjusting the supply of USD—creating it when the government raises the exchange rate or destroying it when the rate is lowered. Without this control mechanism, the mandated rates are unlikely to hold, leading to deviation in the form of black market rates. The proximity of individuals to the source of currency creation can result in the Cantillon effect, where those who are able to access the new rates more quickly gain an economic advantage over others.

The Cantillon effect also surfaces when individuals with insider information act on impending changes in exchange rates, thereby gaining unfairly from transactions not available to the uninformed public. This highlights that the primary issue is not inflationary money per se, but the unfair advantage gained by being close to the source of new money creation.

In the context of Bitcoin (BTC), an argument could be made that all coins have effectively been minted since the cryptocurrency's inception; they simply need to be released into circulation through mining. While miners may obtain BTC at lower costs than typical consumers, they assume significant risks and capital expenditures, such as relocating to areas with cheap or stranded energy—which are often remote and lack the comforts of civilization—and investing in the infrastructure necessary to operate a mine.