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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?
  1. 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
  2. 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
I like my Infinity / 21 million meme, and I’m keeping it!!
Still, have my dirty zaps sir. I hope you use it as a sequential transaction for the next great post and don’t HODL!
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totally. NO HODLING, SHARE THE SAAAATS!
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preaaaaaaach
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20 sats \ 1 reply \ @siggy47 23 Oct
You're on a roll. Please keep them coming.
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63 sats \ 0 replies \ @nym 23 Oct
Agreed!
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Infinity / 21,000,000
Is really * / 2.1 quadrillion
And on Lightning it is * / 2.1 Quintilian
As long as there are decimal points there is never a need for printing extra money. I know that Europe has used the comma in place of the decimal point but that's because it is supposed to confuse the math of common men (wo~men). Seriously the decimal point was an extension of the invention of zero.
Let's say I go into the store with 10 sats of spendable lightning in the future. That's 10,000 mSats. The cheapest item in the store is 30 mSats. I can do a transaction of minimum 2 mSats because there is a fee and a spend. I purchase 9000 mSats which is about 90 $USD in today's market. As money gets tight prices will go down and less sats will buy more. To the point that certain items are incentives to shop like free gas, cheap gas or cookies for the kids. Etc.
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Excellent way to present your thoughts or way of seeing fiduciary money. Keep writing your posts, they are very good.
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the sum total of the world's goods or assets don't have to pass through its money AT THE SAME TIME.
For some reason this is hard for people to get. I'm surprised how often I have to make this point.
Great series! Please keep 'em coming.
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explaining economics with numbers is fun until someone gets a heart attack or a stroke.
then economics become life-oriented rather than numbers-oriented.
infinity is the abstracted value of what lives are worth. 21M becomes a satisfaction for the logical mind.
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You fail to address the fact that today the vast majority of money in use is not physical nominal money but bank account balances which are an IOU from the bank for physical cash and that these bank deposit proxies for real cash are created by the banks whenever they issue debt finance- thus the banks are hugely incentivised to create as much debt as possible. With Bitcoin this power exclusive to the banks (licensed by the central bank) to create proxy money via debt issuance, does not exist. Also you do not address the limited ability of onchain Bitcoin in terms of velocity- even today with nearly all Bitcoin held as savings (because use of Bitcoin as a payment is hugely obstructed by tax reporting demands from government) the limited transactions capacity of the Bitcoin blockchain mining process severely limits the ability for Bitcoins velocity of circulation to increase. Add to this the ever growing ratio of all available Bitcoin going into institutional custody where it is not available to be used for P2P payments and the Bitcoin protocol has serious velocity capacity limitations. We see this when transaction fees rapidly escalate at times of increased transactions demand/velocity and this while Bitcoin is far from being used for much real world payments...its nearly all just trading between holders. LN can lessen this problem of potential velocity but we are still far of from a position where Bitcoin can compete with fiat as a global payments protocol.
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