How Does the Convergence of Monetary Networks Work with Grisham's Law? \ stacker news ~econ

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How Does the Convergence of Monetary Networks Work with Grisham's Law?

1274 sats \ 6 comments \ @spiderman 12 Aug econ

So I particularly heard it with reference to Bitcoins, but likely the concepts apply to other forms of currencies as well.

A few Bitcoin/econ related economic commentaries talk about the possibility of convergence of monetary networks. The narrative goes like this. If a region is highly hyper-bitcoinised (people using it as the dominant medium of exchange) and they trade with neighbouring regions (which use their own fiats), then eventually, the different monetary networks with converge to the best money (which, in their opinion, is of course BTC).

Whether BTC is really the best money is a different topic. But my question here is about this hypothetical convergence of monetary networks and even after some Google search, I cannot really find much explanation. Irrespective of whether BTC is one of the competing moneys, does it really happen? Any example from history with competing currencies among different regions?

Even right now, a lot of trade takes places between regions using USD, GBP, EUR etc. But is one of them the best form of money? Is there any possibility that other regions will accept that as the local currency, which is what the convergence seems to imply? Does not seem anything like that is remotely likely.

And then, does it somehow feel contradictory to what is known as Grisham's law? The law states bad money drives good money into hiding, it does not say the bad converges into the good. Seems like these two are totally opposite predictions.

So, to people who are better trained in economics in a more formal setting (and those who can think like an economist), does this convergence of monetary network really make sense? Some references where it has been discussed and the possibilities of it happening will be greatly appreciated.

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1220 sats \ 3 replies \ @SimpleStacker 12 Aug

Hopefully I can clear up some confusion and offer some possibilities as to how the two ideas are consistent.

Gresham's Law only really applies when there are rules and regulations governing the exchange rate of currencies. When that happens, the currency that is undervalued relative to the market will go out of circulation. For example, if based on market supply and demand, a gold coin should be worth 2 silver coins, but the government says that they're worth the same whenever you buy or sell anything, no one would be willing to trade using the gold coins.

Now let's investigate the "convergence" idea. Imagine their are two currencies issued by different governments: shitcoin and hardcoin. Shitcoin is fiat money and hardcoin is commodity based money. Moreover, the government that runs shitcoin is known to print it endlessly.

If you misunderstood Gresham's Law, you might think that shitcoin will drive out hardcoin because people will want to hoard hardcoin and they'll only want to spend shitcoin.

But that's wrong because you're forgetting that in every transaction there's both a buyer and a seller. Buyers may prefer to use up their shitcoin, but sellers won't want to accept the shitcoin. The exchange rate between shitcoin and hardcoin will go up in hardcoin's favor until an equilibrium is reached. If shitcoin devalues in this way, the government of shitcoin may have to print more shitcoin, leading to even more devaluation. If shitcoin enters into a hyperinflationary spiral, it could get to the point where it becomes almost worthless, and most economic transactions are just done in hardcoin.

So, to recap, Gresham's Law only applies when there are artificial rules governing the exchange rate between two currencies. In other cases, you should simply expect the exchange rate between the two currencies to adjust in favor of the harder money, which is what we're seeing with Bitcoin. Whether or not the market "converges" to the better currency probably depends on other factors than simply this exchange rate story.

30 sats \ 0 replies \ @Undisciplined 12 Aug

Great answer. To add to your scenario a little, you could imagine also that if there are merchants who accept both shitcoin and hardcoin, consumers might dump their shitcoin there. The tendency to do so would be stronger the more fixed the merchant holds the shitcoin/hardcoin exchange rate. That's where Gresham's Law plays out on the micro scale.

As to whether a better money does drive out the worse money, how would we know it's the better money if it didn't?

In a subjective value framework, the only standard by which something is better money is that people prefer using it to other monies for money stuff, right?

30 sats \ 0 replies \ @Fabs 12 Aug

Damn dude, that's a solid explainer.

5 sats \ 0 replies \ @CruncherDefi 12 Aug

If shitcoin devalues in this way, the government of shitcoin may have to print more shitcoin, leading to even more devaluation. If shitcoin enters into a hyperinflationary spiral, it could get to the point where it becomes almost worthless, and most economic transactions are just done in hardcoin.

Or, more realistically (which happened in our world), the shitcoin country will use the shitcoin-printing-power to quickly finance the army that takes over the hardcoin country, 'solving' the problem via force.

My hope is that bitcoin is different - it's a bottom up revolution. It's individuals that adopt it. Central power cannot possibly coerce each individual (With gold that was doable because of banks that held gold instead of individuals).

0 sats \ 0 replies \ @LAXITIVA 12 Aug

Pay the troll toll?

0 sats \ 0 replies \ @RamPl 12 Aug outlawed

stackers have outlawed this. turn on wild west mode in your /settings to see outlawed content.