Our psychological levers have a great influence on our behavior. The flipping of perceived value of spending and investment from an inflationary currency to a deflationary currency will influence the big and small decisions we make daily. It is likely that this change will non-trivially shape the impact in energy use, resource allocation and management, and ways of living of the future.
The standard reaction of traditional economists in front of the deflationary nature of Bitcoin is that of horror: they have been trained and ingrained with the notion that deflation only exists when there is a collapse of demand. But this confuses, as it often happens, the two phenomena. There is no precedent of an inherently deflationary currency, and the only examples of deflation that historically economists could have been able to observe, appeared because of a dramatic decline of demand, as in the Great Depression, or at a lesser degree, in the Japan of the ‘90s.
The reverse however is not necessarily true, there is no inherent reason why deflation should cause a collapse in demand. The increase in value of a given currency, in relation to all the other goods in the economy, can bring to a certain level of hoarding, which in turn can make the currency more valuable. But this will not create a vicious cycle that stops all spending. At every value of the currency, decisions will be made concerning products and services that are needed, and are worth buying regardless of the possible future gains in value of the currency.
What is today’s investment and consumption model? Many times, especially in the US economy, it is easy to observe “just so” expenses, that are not valuable in the long run: the new shopping mall, the gadgets, and gizmos that fill up houses, triple garages, and extra storage.
What is potentially tomorrow’s model in a deflationary economy? Each decision to spend, and to invest will have to face a higher bar, where the return on the investment will have to outperform the unavoidable increase in the currency value. As if all your savings were automatically put in treasuries, but without a corresponding public debt being generated.
A good example of a deflationary forces already at work can be found in the consumer electronics and mobile phone industries. Under pressure from competition and the spontaneous fuel of Moore’s law, new products have higher capabilities, at constant prices. If we take the phone itself as a numéraire, the basis of the exchange, we can easily see how their unit capabilities correspond to a deflationary pressure. Apple has about $150 billion of cash reserves exactly for this reason. Spending their money unless it can match the higher bars of performance increase or utility to users would be a bad decision. But obviously this doesn’t mean that Apple will ever stop making new iPhone models as the traditional deflationary view would imply.
All of this could be very good news to the planet and to our global society. Spending for the sake of it, rather than when it is really useful, is unsustainable. And, having run out of places to hide the externalities of our actions, we now realize that unsustainability is unsustainable. Bitcoin’s deflationary effect will allow us to reprogram our minds, and behaviors to make sustainable decisions instead, driving the planetary economy to more ecological footings.
(Originally published on in the “Internet of Money” group.)