2 Comments

  1. A couple of more thoughts:
    – A fiat system could be partially backed by gold, with varying ratios, to provide some flexibility of the monetary base. A fiat currency partially backed by Bitcoin would be more complicated (how does the central bank obtain massive amounts of Bitcoin?).
    – Government finance: Since government cannot issue Bitcoin (they could try mining) they would have to run balanced budgets. This would, of course, have dire implications for economic growth, as most governments would have to reduce spending significantly.
    – Would debt be possible in a Bitcoin monetary system? I am not sure. Let’s assume we are in the year 2140, and the maximum number of Bitcoin has been mined. There is no more mining. 21 million Bitcoin outstanding. Now if some people borrowed Bitcoin for a year, and had to pay back those Bitcoin plus interest (in Bitcoin, assuming all fiat currency has been retired), where would those additional Bitcoin for the interest payments come from? It might be possible for certain individuals to raise additional Bitcoin by selling goods or services to others, but in aggregate over the entire Bitcoin network this doesn’t work. You simply cannot create any more Bitcoin to pay for the interest. So debt denominated in Bitcoin is apparently impossible. Which is only logical, since Bitcoin (as is gold) is nobody else’s debt, so it is a debt-free system. Which is completely contrary to our current monetary system, where, in aggregate, it is impossible for savers to acquire savings without someone else taking up debt at the same time. Which, of course, leads, to instability as debt grows faster than debt-servicing assets, and ultimately to the loss of savings as debt needs to be written down.

    • Hi Alex, thanks for the comment. I agree it’s difficult to imagine governments obtaining bitcoin on a scale needed to back national currencies. Couldn’t debt still exist, though on a smaller scale? Under the gold standard banks didn’t necessarily follow a 100% reserve policy.