Deflationary money is a Good Thing

Deflationary money is a Good Thing

Original Postby ajtowns

Posted on: December 2, 2023 09:22 UTC

Understanding the practical implications of implementing a government-mandated exchange rate in an economy, particularly within the context of cryptocurrencies such as Bitcoin, is complex.

The enforcement of an exchange rate depends on the method of transaction. For example, when using a lightning payment, if a merchant lists an item for sale at a certain price in dollars, the wallet calculates the cost in Bitcoin and processes the payment accordingly. If the merchant attempts to use a different exchange rate, they can only refuse the payment. In contrast, transactions made with traditional banks via credit cards are trusted to convert currencies accurately, relying on legal enforcement for any breach of contract.

When a government announces a new exchange rate—for instance, 1250 USD/BTC—it doesn't create physical currency but rather reevaluates the purchasing power of Bitcoin. Goods priced in dollars would effectively become cheaper in Bitcoin terms, assuming their dollar prices don't increase simultaneously. This scenario doesn't involve constructing or destroying digital USD; it's merely a change in how future transactions are priced.

There are valid criticisms of attempting to set a fixed exchange rate for a self-minted currency, which is distinct from the situation described above. Several potential problems with aligning a cryptocurrency with traditional economic indicators, such as the Consumer Price Index (CPI), include the timeliness of data, susceptibility to manipulation by financial interests, and whether this approach addresses issues that people genuinely care about post-hyperbitcoinization, where direct BTC pricing could be more prevalent. Additionally, central bank policies often aim to manage inflation due to the Cantillon effect—a concept describing the uneven expansion of money supply affecting different parts of the economy—which might not be as relevant in a system without traditional fiat currency creation.