Recently I started investing in bitmex and I’ve heard quite a lot of talks about inflation and inflation but not many people actually realize and consider what inflation and also deflation are. But why don’t you start with inflation?
We constantly needed a way to trade benefit and the most practical service is to link that with money. In the past that worked quite well because the funds that were issued were connected to gold. So every core bank had to have enough yellow metal to pay back all the money the item issued. However, in the past centuries, this changed and the yellow metal is not what is giving valuation to money but assures. As you can guess it’s very simple to abuse such electric power and certainly the major banks are not renouncing to do so. This is why they are printing money, consequently, in other words, they are “creating wealth” out of thin air without definitely having it. This process but not only exposes us to risks connected with economic collapse but it benefits also with the de-valuation of your hard-earned money. Therefore, because money may be valued at less, whoever is providing something has to increase the associated with goods to reflect all their real value, this is identified as inflation. But what’s guiding the money printing? Why are banks doing so? Well, the answer they can give you is that by devaluing their currency they are serving the exports.
In justness, in our global economy, this is correct. However, that is not the only motive. By issuing fresh income we can afford to pay back often the debts we had, in other words, most of us make new debts to the old ones. But that isn’t only it, by devaluing our currencies we are de-facto de-valuing our debts. Narrow models look great our countries love monetary inflation. In inflationary environments is actually easier to grow because arrears are cheap. But what will be the consequences of all this? Is actually hard to store wealth. When you keep the money (you proved helpful hard to get) in your bank account you are actually losing riches because your money is de-valuing pretty quickly.
Because each and every central bank has a monetary inflation target at around 2% we can well say that trying to keep money costs all of us at the very least 2% per year. This attempts savers and spur utilizes. This is how our economies will work, based on inflation and arrears.
What about deflation? Well, this is often the opposite of inflation in fact it is the biggest nightmare for our banks, let’s see why. Basically, we certainly have deflation when overall the values of goods fall. This would be due to an increase in the value of money. Firstly, it would hurt spending since consumers will be incentivized to save cash because of their value increase over time. On the other hand, merchants will probably be under constant pressure. They may need to sell their items quickly otherwise they will lose cash as the price they will demand their services will fall over time. But if there is something we all learned in these years is the fact central banks and governments tend not to care much about buyers or merchants, what they proper care the most is DEBT!!. Inside a deflationary environment, debt can be a real burden as it is only going to get bigger over time. Because the economies are based on debt imaginable what will be the consequences regarding deflation.
So to summarize, monetary inflation is growth-friendly yet is based on debt. Therefore the long term generations will pay our arrears. Deflation, on the other hand, makes progress harder but it implies that long term generations won’t have significant debt to pay (in these kinds of context it would be possible to cover slow growth).
OK so, just how all this fits with bitcoins?
Well, bitcoins are designed to end up being an alternative for money and to end up being both a store of value along with a means for trading products. They are limited in quantity and we will never have more than twenty one million bitcoins around. Consequently, they are designed to be inflationary. Now we have all seen the particular consequences of deflation tend to be. However, in a bitcoin-based upcoming it would still be possible for companies to thrive. The way to go is to switch from a debt-based economic climate to a share-based economy. Actually, because contracting debts within bitcoins would be a very expensive company can still obtain the capital they require by issuing shares of the company. This could be an interesting option as it will offer many investment decision opportunities and the wealth created will be distributed more equally among people. However, just for clearness, I have to say that part of the expenses of borrowing capital is going to be reduced under bitcoins since the fees would be extremely lower and there won’t be intermediaries between transactions (banks tear people off, both debtors and lenders). This would barrier some of the negative sides associated with deflation. Nevertheless, bitcoins will certainly face many problems regrettably, as governments still require fiat money to pay back the massive debts that we inherited through the past generations.