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What Is Inflation and Deflation and a Speculation About the Bitcoin Future

Posted on May 24, 2021 by Pablo Boocks

We always needed a method to trade value and probably the most practical solution to do it would be to link it with money. During the past it worked quite nicely as the money that has been issued was associated with gold. So every central bank needed enough gold to cover back all of the money it issued. However, during the past century this changed and gold isn't what's giving value to money but promises. As possible guess it is rather an easy task to abuse to such power and certainly the major central banks aren't renouncing to take action. Because of this they're printing money, so basically they're "creating wealth" out of nothing without really having it. This technique not merely exposes us to risks of economic collapse nonetheless it results also with the de-valuation of money. Therefore, because money will probably be worth less, whoever is selling something must raise the price of goods to reflect their real value, that is called inflation. But what's behind the amount of money printing? Why are central banks doing this? Well the solution they would offer you is that by de-valuing their currency they're helping the exports.

In fairness, inside our global economy that is true. However, that's not the only real reason. By issuing fresh money we are able to afford to cover back the debts we'd, quite simply we make new debts to cover the old ones. But that's not only it, by de-valuing our currencies we have been de-facto de-valuing our debts. That is why our countries love inflation. In inflationary environments it's simpler to grow because debts are cheap. But do you know the consequences of most this? It's hard to store wealth. If you keep carefully the money (you worked hard to obtain) in your money you're actually losing wealth because your cash is de-valuing pretty quickly.

Because each central bank comes with an inflation target at around 2% we are able to well say that keeping money costs most of us at the very least 2% each year. This discourages savers and spur consumes. This is one way our economies will work, predicated on inflation and debts.

What about deflation? Well this is often the contrary of inflation in fact it is the largest nightmare for the central banks, let's understand why. Basically, we've deflation when overall the costs of goods fall. This might be due to a rise of value of money. To begin with, it could hurt spending as consumers will undoubtedly be incentivised to save lots of money because their value increase overtime. However merchants will undoubtedly be under constant pressure. They'll have to sell their goods quick otherwise they'll lose money because the price they'll charge because of their services will drop as time passes. But when there is something we learned in these years is that central banks and governments usually do not care much about consumers or merchants, what they care probably the most is DEBT!!. In a deflationary environment debt can be a genuine burden since it will only increase as time passes. Because our economies derive from debt imaginable what will function as consequences of deflation.

So in summary, inflation is growth friendly but is founded on debt. Which means future generations can pay our debts. Deflation however makes growth harder nonetheless it means that future generations won't have much debt to cover (such context it will be possible to cover slow growth).

OK just how all of this fits with bitcoins?

Well, bitcoins are made to be an alternative solution for money also to be both a store of value and a mean for trading goods. They're limited in number and we'll never have a lot more than 21 million bitcoins around. Therefore they're made to be deflationary. We now have all seen what the results of deflation are. However, in a bitcoin-based future it could still be easy for businesses to thrive. The ideal solution is to switch from the debt-based economy to a share-based economy. Actually, because contracting debts in bitcoins will be very costly business can still have the capital they want by issuing shares of these company. This may be a fascinating alternative since it will offer you many investment opportunities and the wealth generated will undoubtedly be distributed more evenly among people. However, simply for clarity, I must say that area of the costs of borrowing capital will undoubtedly be reduced under bitcoins as the fees will be extremely low and there will not be intermediaries between transactions (banks rip people off, both borrowers and lenders). This might buffer a few of the negative sides of deflation. Nevertheless, bitcoins will face many problems unfortunately, as governments still need fiat money to cover back the huge debts that people inherited from days gone by generations.