A conversation about the future of Bitcoin and the usefulness of inflation

Thursday, 10.12pm, Café Kalifornia (Boechout)

Bitcoin Maxer (BM): ‘One day, Bitcoin will be the world’s only currency.’

Arne Maes (AM): ‘I assume then that this world will no longer include central banks. And yet it's precisely those banks, through monetary policy, that smooth out the highs and lows of economic growth.'

BM: ‘Okay, but how exactly do they do that?’

AM: ‘A central bank, like the ECB or the Fed, can raise interest rates when inflation rises. That cools down an overheated economy. The opposite happens when demand slumps: lower interest rates make borrowing cheaper. This helps keep unemployment from spiking during economic downturns.’

BM: ‘There you go, central banks are devaluing our money.’

AM: ‘Yes, but…’

BM: ‘Inflation should always be zero, full stop.’

AM: …

BM: ‘Don't you find it morally wrong that you save up money, only for it to lose value because some bureaucrats in Frankfurt say so?’

AM: ‘I get where you’re coming from.’

BM: ‘It's more than just a feeling. If I’ve earned that money, why should it be worth less? Give me one good reason why inflation is a good thing.’

AM: ‘Inflation encourages rational individuals not to hoard their money, but to put it to work.’

BM: ‘How do you mean?’

AM: ‘Simply put, consumers have to choose between buying today or waiting and paying a higher price tomorrow. That’s inflation at work. So, in that sense, inflation acts as a nudge. To spend, or, in the case of companies, to invest.’

BM: ‘Bitcoin doesn’t work like that. I’ve got my five coins, and there’ll never be more than 21 million. So I know they won’t lose value, no matter how long I hold on to them.’

AM: ‘Fair enough, but that’s not a workable economic system.’

BM: ‘Why not?’

AM: ‘Because inflation helps us allocate scarce resources in the best way possible. To avoid losing value over time, people try to increase their wealth. They do that by investing.’

BM: …

AM: (On a roll.) ‘Inflation is, in a way, the price that savers pay to contribute to future wealth creation. It encourages them to invest, helping to finance the infrastructure that protects their money. Think vaults, payment systems and professional armies. In that sense, inflation is almost a precondition for economic growth. This growth sustains the underlying structures that give your savings their value in the first place. At heart, your vision is one of extreme conservatism. It's a world in which growth no longer exists.’

BM: ‘Okay, but surely you can have all that without inflation?’

AM: (Pauses to think.) ‘Back when the ECB was trying to stimulate inflation, a few exotic ideas did the rounds. One suggestion was to hold a monthly lottery and draw a two-digit number. Any banknote ending in those digits would instantly expire. The idea was to encourage people to spend their cash.’

BM: ‘That's deflationary. I like it.’

AM: ‘Depends how you look at it. For any given banknote, there’d be a 1% chance of losing it each month. On average, that would equate to a 1% monthly decrease in purchasing power.’

BM: ‘Wait...’

AM: ‘In a way, that's similar to how crypto works now if you consider how often Bitcoins are lost or stolen. Would you really say the odds of losing your cryptocurrency in any given year are zero?’

BM: ‘Still, the price just went up another 3%. It really is the ideal store of value.’

AM: ‘I can see we’re not going to agree on this. But I assume that means the next round’s on you.’

BM: ‘Gladly, if I weren't a bit short of cash...’