I've recently read about the Great Depression period of the USA and made a striking relevance with Bitcoin.
In short, the Great Depression was caused by a drastic decrease in the circulating money (more than 1/3). This in turn lead to prices going down and therefore an increase in the purchasing power of money. Nothing new so far. However, we often tend to undervalue the importance of the financial institutions, which play a big role in increasing the standard of living of a society as a whole. Why?
Well, they gather little amount of money from a big part of the community and then finance big enterprises, which, could have not succeeded if they had not started with a great initial investment.
Think about it for a moment:
- Almost every person in developed countries is able to afford a car because of the initial investment that the financial institutions were able to give various companies for scientific researches and building factories which facilitate the economic of scale.
- We are now able to fly to the other part of Earth in less than a day, thanks to the initial researches and work, financed by various institutions.
Now, that everyone understands the significance of the financial institutions, let's imagine a world without them being able to operate. It's evident that there would be a drastic decrease in the standard of living.
What can cause the financial institutions to stop working?
- Put yourself in the situation of a person in debt
- Now add deflation into the situation (as it had been during the Great Depression)
This means that your debt will cost you more than you initially agreed upon (that is because of the increase of the purchasing power of money). A lot of people defaulted on their debts during the Great Depression. A lot more were unlikely to take any debts. Moreover, people saved their money in cash rather than investing them, because believed that the ROI (return on investment) would be much less compared to the situation if they just kept their money.
Now, please tell me, don't you think that bitcoin would face the exactly same problems, because of its deflationary nature?
And don't you think that in order for bitcoin to fulfill its dream of becoming a currency, it should make a fork which will let in a fixed amount of coins per year even after the initial supply plans have been met?