Bitcoin And Baseball Cards

Even less serious rates of inflation can be a problem. Certainly, the inflation the United States saw in the 1970s was a problem. It peaked at just over 10 percent at the end of the decade. This inflation did not cause the economy to collapse or even stop growth altogether, but it definitely made planning more difficult, and perhaps more importantly, led people to believe they were being cheated as their pay increases were quickly offset by rapid rises in prices.

The story with Bitcoin is the exact opposite. The value of Bitcoin has been soaring, not plummeting. But if we think of Bitcoin as a currency, this means that we are seeing massive deflation. The price of items measured in Bitcoin is going through the floor.

To make this concrete, suppose someone signed a five-year lease in Bitcoin, where they agreed to pay two Bitcoins a month for office space. (Five-year leases are common for commercial properties.) At the start of their lease in 2016, they would be paying an amount equal to less than $800 a month. Today, they would be paying over $100,000 a month for the same space. Anyone who committed to this rent would either have been forced into bankruptcy or renegotiated the lease.

Imagine the same story with a wage contract. Suppose a union had negotiated a contract where its members were paid two Bitcoins a week in 2016 with an inflation clause that provided for 2 percent raises a year. If this had been a five-year contract, these workers would now be earning well over $100,000 a week.

Suppose someone had arranged loan terms where they borrowed in Bitcoin and agreed to pay 3.0 percent interest annually. If they had taken out a thousand Bitcoin loans in 2016 (just under $400,000), their annual interest payment would be almost $1.7 million today. Again, any business that had signed a contract like this would have been forced to either renegotiate or face bankruptcy.

If this sounds like I’m making up irrelevant stories, think more closely. If Bitcoin is supposed to be a currency then it has to be possible to use it as a currency. That means being able to sign contracts that work for the parties involved. A currency that soars in value is no more useful for conducting normal economic activity than a currency that plunges in values.

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