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Let's think of a hypothetical scenario if Bitcoin becomes the world's major (most used + highest market cap) currency one day. How will it change the world? The obvious point is cheaper money transfers, but what about its impact on the global economy? Is a "deflationary" currency better for the world? Is quantitative easing really that bad?

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I like this question1 - we don't get many big picture questions.

How could Bitcoin change the world?

  • A mature digital cryptocurrency could reduce trade barriers and thus increase the rate of productivity dispersion throughout society. As money is a form of fungible authenticated information2, non-proprietary digital money gets to take advantage of the information age to rapidly democratise trade with lower transactional friction.

  • It could encourage governments to move towards a more rational global currency or currency basket for sovereign wealth reserves, trade imbalances and protection from commodity price shocks. In effect the phenomena of democratised digital currencies, if not Bitcoin specifically, could accelerate global cooperation and democracy in macroeconomic practices badly in need of an overhaul.

  • It could provide an excellent educational opportunity for teaching and learning macroeconomics. As the cryptocurrencies are moving though the stages of currency development so fast as to eliminate most of the confounding factors of studying more mature currencies that evolved over several centuries of political and socio-economic change.

  • It could enrich a very small minority of early adopters. Depending on what these early adopters do with their new found wealth, they could bootstrap other social improvements.

  • It will probably not result in increased (effective) tax evasion due to the wide range of levers available to collect tax revenue. Although an increased informal sector may result in governments shifting towards regressive taxation such as consumption taxes to offset the evasion of progressive taxation.

  • It will probably not result in a cap on the money supply due to the ability to establish fractional reserve banking on top on any specie currency if legally permitted. Off-block chain Bitcoin clearing houses may evolve into fractional reserve banks to avoid on-block chain costs. In either case, it will not provide an economic solution to a political problem (deficit spending).

  • It will not create a libertarian or objectivist paradise. Such a shift in socio-economic paradigm will require both economic and social consensus. Cyptocurrencies can provide an economic consensus only.

What about its impact on the global economy?

Probable impact: Low to Medium. Possible impact: High.

It really depends on how willing various cryptocurrencies are to absorb certain "bad" aspects of fiat currencies in order to grow into a major currency with global volume. At current, I don't know what level of actual impact is likely - since you have to predict not just technology but the behaviour of people: Both of those that use or might use Bitcoin and the adaptations of its traditional and contemporary competitors and their mindshare.

Is a "deflationary" currency better for the world?

A qualified no3.

Is quantitative easing really that bad?

A qualified no3.

1. In case people think I'm a curmudgeon.
2. Each coin I have is information that the world currently owes me X amount of goods and services.
3. I can't do these questions justice in an answer primarily about how Bitcoin might change the world. Suffice to say we are currently trapped within a "growth" orientated socio-economic model which is incompatible with non-inflating money supply. The lack of true democratic control over the objectives and priorities of these federalised economic levers is a problem.

  • Excellent answers as always:) I'm wondering about the money supply issue though. It seems to me that the transparency that the blockchain provides would make bitcoin-backed fractional reserve banking impossible. Isn't it based on a fundamental degree of deception? – Brian Fabian Crain Nov 14 '13 at 19:59
  • Fractional reserve banking (FRB) is a mundane offshoot of promissory notes, an innovation that allowed trade networks to transfer reputation instead of easier-to-steal gold shipments between branches in far-flung parts of Europe. These traders became bankers (as in you can bank your notes/scrip) and eventually institutions. I recommend The Count of Monte Cristo as it provides fascinating insight into the early banking system. Any Bitcoin gateway or clearing house is by definition a bank in the historical sense as you are using banking services. – LateralFractal Nov 15 '13 at 0:09
  • To detect FRB on Bitcoin requires to know the volume of on-block settlement trade ("gold") between clearing houses versus the volume of off-block trade ("notes") within and between clearing houses by normal end-users. As long as you can redeem your gateway's off-block notes (their wallet) for on-block coins (your wallet) it functions like any other bank. Eventually the reputation of the off-blockchain network is such as that few people bat an eye when settlement trade switches away from the energy expensive on-block protocol (i.e. Bitcoin as we currently know it). Bitcoin as preliminary Fiat. – LateralFractal Nov 15 '13 at 0:10
  • @BrianFabianCrain The drive towards a fractional or even completely fiat Bitcoin can occur without deception and regardless of any gold-emulating ledger protocol it initially starts with. Most people are rational microeconomic rather than macroeconomic actors. If the off-blockchain networks provide better services at a cheaper price than DIY on-blockchain transactions, then the off-block network (money supply of Bitcoin notes) will outgrow the on-block network (supply of Bitcoin specie). The same factors that drove society away from a Gold Standard can and likely will apply to Bitcoin. – LateralFractal Nov 15 '13 at 0:11
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This is a great question and it's something I spend a lot of time thinking about. In general, I'd say no one really knows at this point and it is difficult to make more than a few guesses.

So let me have a try at that:

  • Banks would lose much of their ability to control the monetary supply, interest rates and exchange rate.
  • The financial sector would shrink and become less profitable. Probably a good thing.
  • It would become more difficult for the government to collect taxes.
  • Loans would be taken out more rarely.
  • Leverage would mostly disappear from the financial system.
  • Economic and financial transaction would not be restricted by national borders.
  • Individuals would gain more control over their own finances and money.
  • Governments would lose the ability to finance their expenses through increased debt. They'd have to run more or less balanced budgets instead.
  • There would be enormous redistributions of wealth as the shift to bitcoin occurs.

These are some of the things that come to my mind, but this list could be continued for a long time. I think it's save to say that these would be revolutionary changes and we would end up with a radically different world.

Will this actually happen? I don't know but I think it's possible.

Will the changes overall be positive? Impossible to know, but I'm optimistic.

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People are controlled through their money, and fiat currencies eventually fail. Bitcoin is an option to maintain capital without resorting to hostility. "Quantitive easing" is a fancy name for distributed theft. Theft is bad even when people claim a greater good.

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