Gonna try this series again and see if people like it. (If you want it to stop and for me to shut up and go away... don't, you know, zap anything.)
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I'm going to try explaining the first monetary level (base money), and what "velocity" portends in bitcoin and fiat... in about five minutes. Buckle up.
Bitcoin turns much monetary economics upside-down, but doesn't break it (i.e., we can still learn from it).
Money is the only good in the economy that we acquire, not to consume or make things with but to give it away later. (To many Bitcoiners' case, much later.)
In Bitcoin, money is a strictly closed system: there's a certain amount of bitcoin outstanding, and when I part with my sats, someone else receives them. The sum quantity remains the same. What's still unissued is "locked in time" (Jack Mallers: https://www.youtube.com/watch?v=d7ID3fKAFQM)
For fiat, money is much more leaky.
Monetarists -- the traditional and dominant view of money in economics departments -- think of money in terms of levels, or pyramids (https://mises.org/mises-wire/review-nik-bhatias-layered-money-gold-and-dollars-bitcoin-and-central-bank-digital-currencies.)
At the base of it sits physical dollar notes and reserves at the central bank, most comparable to on-chain bitcoin. To everyone (banks, consumers etc) but the Federal Reserve, this is also a closed system. "Banks," writes Scott Sumner in a 2021 monetary econ book -- The Money Illusion -- I can highly recommend, "don't 'create' this type of money unless they want to be arrested for counterfeiting."
Importantly, those (high-powered) dollars aren't locked in time, but subject to the Fed's discretion: print up notes, or QE up or QT down the outstanding amount of reserves And unless we wish to burn dollar notes, which in America is criminal(!), we (=banks and households) are stuck holding as much or as little base money as the Fed sees fit.
This makes the Fed really powerful... ish.
While the Fed unilaterly controls the nominal quantity of (base) money in the economy, the public decides its real price. How can we do that if we are stuck holding as much base money as the Fed wants us to?
Enter, the hot potato model. If there is more money in the system than people desire to hold, people dispose of their money balances. How does a person dispose of money balances (provided they're not burning them)?
Spending them.
Sumner again:
"As people attempt to get rid of excess cash balances, they spend their unwanted cash."
When everyone spends "unwanted" money, at the same time or sequentially, we bid for the economy's resources, increase economic activity (GDP, if you wish). We increase consumption until the existing stock of money as a share of the economy becomes the real money balance that consumers wish to hold. The Fed decides the quantity of money, but we decide its value (=purchasing power).
Under a bitcoin standard, these considerations don't quite go away. Velocity -- how often an average satoshi moves around -- still determines the real value of bitcoin (i.e., its purchasing power). The supply is fixed, and like banks and households in a fiat system, having to deal with the fiat trash already in existence (=hot potato), individual Bitcoiners must decide how much they keep in cold storage at any given time.
Moving it (i.e., spending) or saving more (hodling) moves economic activity up and down and makes the given stock of bitcoin as a share of the economy adjust to the real money demand.
Outcome?
- the fixed nature of bitcoin isn't a problem: like Mises so eloquently said, any quantity of monetary units can provide the services we require of a money
- Ideas -- memed into existence by Knut Svanholm and others chanting [infinity]/divided by 21 million -- about capping the world's real assets, miss the point. = we can have more than 21million worth of bitcoin value in assets or wealth, precisely because the sum total of the world's goods or assets don't have to pass through its money AT THE SAME TIME. The same unit of money can be used sequentially for many transactions; the process of handing sats over from one person to another can be speed up as consumers desire.
Tl;dr -- "nothing else in macroeconomics will make any sense until you understand the hot-potato effect" (Sumner).
Today's little money lesson.
Peace,
/J