I’d like to present a somewhat crazy thought experiment, which I find useful for thinking about Bitcoin as a unit of account.

Imagine a world in which dollars are illegal to directly own. Instead, we all own Treasuries. There is only one type of Treasury, a consol bond that pays $1 per year in perpetuity. Upon receipt, the $1 is immediately converted into an equivalent number of new Treasuries at the prevailing interest rate, which is manually set by the Fed. If the interest rate is 5%, for instance, you receive $1 in the form of 0.05 new Treasuries.

In this world, all taxes are paid in Treasuries. If $100 of taxes are owed and the interest rate is 5%, 5 Treasuries are owed to the government. Likewise, if a business charges $100 for a cup of coffee, 5 Treasuries are owed to the coffee shop. If a barista makes $1000 a month, he/she will receive Treasuries each month worth $1000 at the prevailing interest rate.

In this economy, the Fed effectively controls the value of the dollar. If demand for Treasuries suddenly surges, due to an unexpected negative supply shock, the Fed reduces the interest rate, just as it does today. Likewise, if demand for Treasuries suddenly falls because investments elsewhere are more attractive, the Fed raises the interest rate, keeping the value of the dollar approximately the same.

In this economy, there is no justifiable reason for the Fed to target inflation. Consumers do not own dollars, so inflation cannot spur spending. Thus, in equilibrium, the Fed would want to target 0% inflation, since that would reduce the cost of doing business and improve economic accounting. This means the interest rate the Fed would target would be the real “natural rate of interest,” or the real “risk-free rate,” which is a function of the state of the economy.

In this example, one Treasury produces $1 per year in perpetuity, but in effect, one Treasury produces new Treasuries at rate equal to the Fed’s current rate of interest. This analogy therefore maps 1-to-1 to the Bitcoin economy today, except the Bitcoin “Fed” has permanently set Bitcoin’s interest rate at 0%.

I sometimes struggle with the idea of using BTC as a unit of account because we would never price goods and services in Treasuries (unless we assume the “natural rate of interest” is constant). Even in the eventual end-state where Bitcoin dwarfs all other assets, it’s value will still vary with the natural rate of interest of the Bitcoin economy, which reflects the real rate of return expected / required by the market. Unless we can somehow know this natural rate of interest, we can’t create a stable unit of account native to the Bitcoin economy.

The good news is that as the natural rate of interest falls, the value of bitcoin rises. Undoubtedly, the rate of return required by the market is lower today than it was five or ten years ago, so it makes sense that bitcoin is worth far more. We have a long way to go before the required rate of return on Bitcoin approaches single digits, so I think it’s not unreasonable to expect significant further appreciation, as the perceived riskiness of investing in bitcoin falls.

Appreciate any thoughts! Curious how others think about BTC’s future as a unit of account.