The volatility problem

Volatility, inflation, and deflation in a money are major causes of economic and social disorder.

Volatility

Volatility prevents adoption in the real economy. For supply chains to work, the purchasing power of the medium of exchange that enables sequential production and trade must be reasonably stable. Fiat money, while inflationary, has relatively low volatility.

More adoption as a store of value could reduce bitcoin’s volatility somewhat, but it is a serious misconception that it will automatically stabilise over time. A fixed supply can never meet a fluctuating demand at a stable price: the price is what must fluctuate instead. That volatility leaves bitcoin uncompetitive against more stable fiat currencies, be it the dollar, the euro, or the yuan, whose base money supply is managed by central banks despite the significant collateral damage those monopolies cause.

Inflation and deflation

Any relevant rate of inflation or deflation distorts relative prices, capital allocation, and production. In benign cases it impedes economic progress; in serious cases it causes creeping decline. Fiat money is prone to inflation because it lets governments create currency out of thin air to fund overspending, and then restrict supply in overreaction when those policies overheat the economy.

Inflation drives real interest rates below the natural rate, which inflates asset prices and enriches those who own real assets and shares, while harming a middle class that mostly holds debt instruments denominated in the debased money.

It is equally false that the deflation which comes with a fixed supply is less harmful than inflation. One distinction matters: falling prices from technical progress are not deflation. Actual deflation is an institutional failure that causes a shortage of money and liquidity.

The solution

Only one policy leads to naturally stable purchasing power: complementing the base money stock with decentralised credit money production and destruction by competing suppliers in a free market. A centrally controlled currency supply will always be usurped by politicians for the nation state’s insatiable demand for purchasing power.

The best regulator of the economy’s currency supply is the invisible hand, as for any other good. No special regulation is needed once market forces are not perverted by the fiat currency idea: market prices aggregate and communicate information, spontaneously adapting supply to demand.

Historically that natural regulator was the rate at which commercial bills of exchange were taken in. In Bitcredit, currency creation and reflux is regulated automatically by the minting fees of competing mints, which produce credit money from their customers’ non-fungible real e‑bills.