Bitcoin Can't Work, It Has an Inelastic Supply of Money
Money must be elastic.
Argument: Modern economies are complex and require monetary flexibility. In times of financial crisis or economic shock, there needs to be a mechanism for the money supply to be expanded or contracted to help balance out and stabilize the effects of the situation. For example, during a recession, increasing the money supply (money being elastic) can stimulate the economy and shorten the downturn. A hard money system like Bitcoin would lead to prolonged depressions, since there’s no mechanism to inject liquidity. Bitcoin’s inelasticity will prove to be catastrophic, leading people to realize it’s no good as money.
Rebuttal: Centralized control of elasticity is the root problem, not the solution. Giving a small group of elites the power to manipulate money at will guarantees abuse. It’s a setup that begets a terrible set of ill-incentives, as discussed in the previous chapter. Sure, they can print money to stimulate the economy, but any newly printed money debases the existing money, a sad reality otherwise known as inflation. This robs savers and pumps asset prices, creating and continuously exacerbating a wealth gap between rich and poor. These are fiat problems that stem from a fiat solution. Economists say money needs to be elastic, but who controls the elasticity? If the answer is any centralized party, the outcome will always be the same: economic rot.
Granting a central authority the power to inject liquidity into the economy whenever a financial crisis arises is a short-term fix that leads to greater long-term pains. A financial crisis doesn’t come out of nowhere – it’s the inevitable result of malinvestment, excessive leverage, or external shocks exposing systemic fragility. Numerous banks over-leveraged the economy with malinvestment and reckless speculation for decades leading up to the mid 2000s, causing the bubble to eventually burst in 2008. The most rational outcome from that point would’ve been a full unwinding of malinvestment, overleveraged banks collapsing, and the corrupt system that enabled it all wiped clean. That would require immense short-term pain, but it would eliminate the problem in the long term. Instead, newly printed money propped up the very cancer that caused the crash, preserving the disease and kicking the consequences further down the road.
The constant presence of a money-printer backstop encourages malinvestment and speculation. Why act responsibly when you can recklessly speculate and get bailed out when you’re wrong? A hard money system introduces discipline and a true level of risk to capital allocations, which is what is needed for a proper economy.
Many economists and economic schools of thought will be ruined by Bitcoin’s various economic truths, this next one not the least among them: Bitcoin’s supply is perfectly elastic. Fiat economists think elasticity stems from the altering of the number of monetary units circulating in the economy, all in an attempt to find the “Goldilocks” rate of economic activity and amount of money circulating. If growth slows, they print more. If inflation gets too hot, they drain liquidity. But every injection fuels distortion. Every contraction unwinds the malinvestment that was just fueled. All that’s created is a self-reinforcing cycle of artificial booms, inevitable busts, and relentless monetary debasement. This is fiat. The fiatists have their desired mechanism for monetary elasticity, they can expand or contract the economy at will via their central banking monopoly, and yet, what results is an endless cycle of fragility, shattering, and monetary debasement. Their monetary mechanism doesn’t work, because it doesn’t work. Fiat-funded schools of thought will try to get you to think their mechanism is the solution, but that’s only so they can keep their God-tier power of manipulating money whenever they want. Monetary manipulation from a central party is simply an act of manipulation. It antagonizes nature. True and perfect monetary elasticity has nothing to do with the manipulation of monetary units.
True monetary elasticity has nothing to do with artificially changing the supply of money. It has everything to do with demand and letting prices and purchasing power adjust freely, without interference, so that the supply of money already in existence can naturally meet demand. A fixed supply of money, that is infinitely divisible, is what enables money to be perfectly elastic. When a financial recession occurs, there’s a rightful desire to get the economy up and running again – you want the recession to end. In the elastic sense, you end the recession by “expanding” the money, which is to say, you get people to start spending more money, so the economy begins to stimulate and rebound from the recession. Some economists will call the increase in spending, “increasing monetary velocity.” More money is moving (velocity increasing) as more spending occurs. The more monetary velocity increases, the more money is being spent, the more money is circulating, the more the economy is being stimulated.
Fiat’s answer to a recession is simple: print more money and flood the economy with artificial liquidity. The idea is to force demand by manipulating supply. On the surface, it seems logical, “If we effectively need more money to get out of a recession, let’s just print more money!” And it’s true, injecting more money in the economy does stimulate the economy. People will spend more. But it’s artificial. It interrupts the market's natural self-correcting process, a process where bad bets get flushed out and the economy resets on stable ground. Instead of allowing the pain to expose the problems, fiat injections prop them up. Malinvestments that should fail are kept alive. Economic cancers are nurtured, not removed. The can of consequences is kicked further down the road, where it grows heavier with every cycle.
While injecting more monetary units into the economy does get people to spend more money, the deeper truth is that it hurts every single user of that money, because all of the money has been devalued from the monetary inflation. In reality, directly printing more money is an illusionary solution, one that comes with a silent, absolute theft of value, an economy that becomes more expensive over time, and an incentive to speculate, all of which makes economic matters worse and worse as time goes on, which is exactly the track record of fiat.
Bitcoin has a fixed supply, which the fiatists hate, because they lose their ability to manipulate money. Other supposedly non-fiat economists will say, “We need more money to stimulate the economy during a downturn. Because Bitcoin has a fixed supply, there can’t be more money, thus, Bitcoin isn’t elastic, and it can’t work as money.” Ironically, it is precisely Bitcoin’s fixed supply that leads to the Goldilocks elasticity the economy is searching for.
In a financial recession, the economy contracts. Prices collapse, businesses fail, and unemployment rises. Demand decreases, as people hoard money to concentrate on only the things they truly need to survive – they demand fewer things from the economy. People sell assets for cheaper prices, desperate to receive money. Eventually, demand gets so low – prices fall so much – that people start spending again; the computer is super cheap, the corner store is on sale for a low price, airplane tickets are incredibly inexpensive. The critical need in a recession is not more monetary supply, it is lower prices. Aka, lower demand. The economy clearing is where the faux demand – the economic activity made of fluff, nonsense, and froth – gets wiped out and the economy returns to a true level of demand again. The economy needs to fully clear so that people can start spending again, without froth remaining for the next inevitable downturn. The way the economy clears is by having prices fall so significantly that a new, fresh level of demand is found. Eventually, that lower level is reached, people start spending money again, and the economy rebounds from the recession.
With a fixed supply of money, as prices fall, the purchasing power of each monetary unit increases. If an apple used to cost 1 BTC, and now, after the recession, it costs 0.5 BTC, the purchasing power of BTC has gone up. With an increase in purchasing power comes an increase in the incentive to spend – you’re getting a better deal. It’s like a smaller dosage of the lottery, if you receive more purchasing power, you’re driven to spend more. As prices fall, purchasing power rises, which leads more people to spend, which circulates more money in the economy, which is exactly the “more money” and the “increase of monetary velocity” the fiatists are seeking by printing more money, except, this time, the more money does not come from monetary debasement, it comes from sound economics.
Certain economists believe that monetary injection is required during downturns, that’s how you stimulate the economy. But what happens with repeated centralized monetary injection, is that the economy is never allowed to fully clear, because the hand of the money printer steps in before shit hits the fan. The money gets debased, the economic froth remains and builds-up, causing the economy to become more fragile and sensitive, which triggers more downturns, but, because the pain below is now even worse, the money printer steps in even quicker, which allows even more froth to remain and build-up, furthers the debasement of money, and increases the fragility of the economy once more. This is how the fiat system has compounded on itself for decades. Now, it's never been more fragile, the mechanisms of money printing have never been quicker on the trigger and as widespread, and the rate of monetary debasement has never been as systematically severe. It’s a compounding journey towards utter collapse and worthlessness, entirely rooted in unsound economics.
You don’t need to print or delete monetary units for money to be perfectly elastic, you need a fixed supply of decentralized, digital money, free-market price discovery, and infinite divisibility. Monetary elasticity is all about supply expanding or shrinking in response to economic activity. Simply put, you want monetary supply to meet economic demand. Fiatists believe the supply needs to be centrally manipulated in order for this to happen, but they entirely miss that the supply of money in the economy directly relates to the demand (otherwise known as price, or value, or purchasing power) of the money. For example, if a bunch of people start demanding bitcoin more, and the price of one bitcoin begins going up (an increase in purchasing power/price/value/demand), new sellers will pop into the market, as they are now interested in selling their bitcoin at the new demand level. This leads to supply meeting the increase in demand, and it has nothing to do with the actual amount of bitcoin within the Bitcoin protocol increasing. If the reverse were to happen, if a bunch of people start demanding bitcoin less, and the price of one bitcoin begins going down, there would be less supply circulating, because less people desire bitcoin, until eventually, the price would fall to a level where demand for bitcoin begins to increase, which then increases the available supply as there is more selling to more buyers. And it continues back and forth. If nobody wanted bitcoin, there would be no bitcoin circulating. Supply would shrink to meet the shrink in demand. If everybody wanted bitcoin, there would be lots of bitcoin circulating. Supply would expand to meet the expansion in demand. But that’s where the fiatists get confused, they think the supply needs to actually shrink or expand, in other words, they think you need to actually delete or inject monetary units from or into the economy. That flawed thinking stems from fiat’s flawed roots. In a system where a central authority can manipulate money as they please, they will manipulate money, often in the form of printing money to pay for their own spending, but they will also want to sustain that system, such that they stay in power. If the economy in the fiat system were to deflate and fully clear, the system would catastrophically collapse, and the central authority would lose their grip on the money printer. So, they don’t let it deflate. They inflate.
An economy inevitably has ebbs and flows, but when you print artificial money, you cause inflation and incite fraudulent activity. Both of those things ramp up, until the system begins to overheat, at which point you do the quickest thing you can do in your power; you delete money from the economy, swinging the pendulum back around. But oh no, economic activity begins to dampen, and you can’t have the system collapse, so you print artificial money, starting the cycle all over again. The money supply manipulation is what keeps the system alive, but, more importantly, it is what the system itself is based on. That’s where all of their power lies. Of course they will advertise that monetary manipulation is necessary. They’ll use their printing powers to buy the narrative – funding economic schools of thought, media outlets, and propaganda machines, all designed to gaslight you into accepting the theft of your own wealth.
Bitcoin is, in front of your eyes, showing you that a fixed supply of money is perfectly elastic. When demand for bitcoin goes up, new supply enters the market, just as in the sense when purchasing power goes up, more people spend their money, effectively increasing supply. When demand for bitcoin goes down, supply leaves the market, just the same as when there’s a recession and economic demand falls, prices drop, leading to less money circulating in the economy. Fiat manipulates supply to chase demand. Bitcoin lets prices adjust to reveal demand, which naturally expands or shrinks supply. It’s almost too simple. In fact, fiat economists have added so much complicated nonsense to the field of economics in order to back their system up, that it looks complicated. As Ludwig von Mises, an economist based in the Austrian school of thought, who studied economics beginning in 1900 (before the Federal Reserve system and its fiat counterparts were introduced to the world in 1913) says, “The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.” Mises also believed that a free market, using the laws of supply and demand, is the most effective system for producing and distributing goods and services.
Critically, however, are the traits of the money used. The quantity of money is always sufficient for the economy, but if there’s only two units of money, and those units cannot be divided, only two people can access that economy. Money must be infinitely divisible for the quantity of money available in the economy to be secure for everybody all that money does and can do. Bitcoin is infinitely divisible. If the money can’t be transferred instantly, and if it requires a long physical journey of travel to reach final settlement (like gold), then it falls short. Bitcoin can be transferred instantly, and reaches final settlement faster and more securely than any other monetary medium on the planet. If the money can be hijacked by a central authority, such that the supply can be manipulated, the money will be overrun and debased. Bitcoin is decentralized. A centralized monetary system inherently prevents a free market, because the base of the economy – the money – is artificially manipulated by the central authority. The money becomes a tool of political power, not market choice. A decentralized monetary system incentivizes a free market, because a decentralized system is rooted in choice, not manipulation, and thus, a decentralized system is rooted in freedom. Perfect elasticity won’t be reached until sound money is globally available and a free market is unleashed.
Thankfully, Bitcoin is sound money, and Bitcoin is freedom.