Edward Price, a former British economic official and current teacher of political economy at New York University’s Global Affairs Center, explains why fiat currencies such as cryptocurrencies are struggling to serve as money. I will explain.
Money, as mentioned in economics textbooks, serves three purposes. It is the medium of exchange, the storage of value, and the unit of account. This trio is everywhere. Economic activity (or exchange) and capital (or value) interact over time to form GDP (that is, accounting).
However, the standard story does not recognize the inherent conflict between these roles. Money cannot serve three masters at once. For one thing, money can only retain its value if its amount is somehow constrained. The more something there is, the less valuable it is. That is supply and demand. But at the same time, the expanding economy needs more money than ever to exchange. Money can only help in commerce if it is growing on its own. result? The role of cash in funding rainy days is in direct conflict with other funds — facilitating commerce. It is also supply and demand.
Therefore, it is reasonable to wake up worried about oversupply and the final disappearance of fiat currencies, but it is also reasonable to wake up again worried about undersupply. Money is always torn between the roles of inflation and deflation. In this context, expecting stability from cryptocurrencies is pretty ridiculous. But dogecoin & Co. There is nothing more than expecting it from the mighty dollar itself to defend.
Tensions between value and exchange also complicate the unit of account, which is the third role of money. Anyone who spends money to keep an economic record must distinguish between nominal and real. It’s really worth it. It’s worth your money. The name is exchange. That’s what your money claims it’s worth. Anyway, the value of money is never clear. Which one? Nominal or genuine? Instead, money is pulled in two directions, both for today’s exchange requirements and for tomorrow’s value demands. As a result, both are difficult to record within one account. Money is an asset, a currency, a record, all in one.
It basically also describes cryptocurrencies.
Consider this absurdity. Confident speculators, and early adopters like crypto, as their value can increase. People with the opposite temperament, those who seek cryptographic hedging because they may retain their value in the event of a fiat explosion. Those who study cryptography just scratch their heads. Is it an asset or a currency? Is it for business or for wealth? But that question misses the point. Money is always used for liquidity, savings and records management. Cryptography is no exception. The first two are especially garbage and the third is obsessive.
There is no escape route. Tensions between inflation and deflation in all kinds of money, and measurement problems are inevitable. Most clearly, they appear in the business cycle. For some time, money as an exchange takes precedence over money as a value. There is an upcycle. After a while, it’s overkill. Someone is surprised and casts doubt, and money rushes back to its role as value. That is the down cycle.
The irony of cryptography is that if it is a hedge against fiat currency, it will be destroyed when the treatise proves correct. If the level of future fiat currency is clearly too high, the policy rate will be raised. It will remove a lot of demand from the crypto space. Do not pass Go. On the other hand, if they really feel threatened, all governments have to do blinks and cryptography is legislated to death. Do not collect 200 Bitcoins.
People are cryptographically divided. Some people love it. Some people don’t like it. This debate reflects the broader social division over money. Some prefer policies that protect value, while others prefer policies that promote exchange. After all, there are two political parties. One is capital and the other is labor. And capitalism itself is just as inconsistent. On the one hand, capital wants to curb its supply. Is there any other way to maintain the value of money? In theory, capitalism is a squeaky inflationary hawk. The market, on the other hand, likes nothing but low interest rates and central bank asset purchases. What are the other ways to keep the market liquid? In reality, capitalism is a small fluffy dove. This discrepancy is pervasive in all markets. For example, workers need inflation to get jobs and receive invoices, but they also need to avoid inflation to continue their jobs and pay those invoices.
Again, cryptography makes no difference and is dysfunctional between the desire to be trusted by existing systems and the desire to destroy it altogether.
True believers in cryptography are probably misunderstood. It is an illusion that new forms of cash are exempt from contradictions and government control of the old. But likewise, those who completely reject cryptography are missing out on the trick. The idea of new money itself is not crazy. New currencies are constantly emerging. The truth is that money (any money) is pulled in many directions at once. Eventually, the centers can no longer be held and they all fall apart.
The value of money as a store of wealth and as a means of exchange is Vickers — sometimes they work together, and sometimes they work in opposition. That is the business cycle. Measuring the economy with money is certainly a very strange task. Are you recording churn or wealth? Expansion or bubble? How do you adjust for these contradictions? To be honest, marketers and policy makers, if any, have little idea.And you Hodler Or skeptical, you don’t.
Crypto is a transparent fad, just like fiat currencies Source link Crypto is a transparent fad, just like fiat currencies