This is my first ever blog post. Welcome! I have some ideas and knowledge that have been bouncing around in my head for years, and I've just never bothered to share them online.
This is the beginning of a 5 (maybe 6) part series on why Bitcoin is THE King. Not just the king of crypto. The king of currency, period (damn you LLMs for poisoning the well on my writing style)
To understand why Bitcoin is The King, we must first understand what money is. WHY does money exist? What function does it serve? And why can't we solve all of our problems by just making more of it?
We've all thought this at one point of our lives. Truth be told, the explanation is quite simple. I'll start here before diving deeper into what money is, and what properties it tends to have.
Why Not Print More?
Our nation is in an unfathomable level of debt. And so are the other major nations! Heck, so are the minor nations. So are... all of the nations. But why? Why can't we just print $100 trillion tomorrow, pay off everyone's debt, and live happily ever after?
Answer: The Constrained World View
Growing up, a key figure in developing my understanding of economics, and later money, was Thomas Sowell. In one of his talks, he explains something known as "The Constrained" world view. What is the constrained world view?
Thomas Sowell did not invent this concept. It is a fundamental concept of Austrian Economics. The constrained world view is a way of referring to the fact that we live in a world of scarce, or constrained, resources.
We do not have infinite cars. We do not have infinite gold. We do not have infinite silicon. Nor iPhones. Computers. We do not have infinite food. We do not have infinite housing. We do not have infinite land. We especially do not have infinite Bitcoin.
If we printed $100 trillion out of thin air tomorrow, would we suddenly have infinite resources? Or would those resources still be finite?
OK sure... we would still have finite resources... but everyone would be rich enough to afford them! Right?
Well, let's think another layer deeper.
Thought Experiment
Let's propose a thought experiment. I'm going to get more detailed on this than normal, because I think the chain of events isn't as intuitive as economists lead you to believe:
Tomorrow, the government decides to hand everyone $1 million. What do you think everyone would do with this money first? Stop and think for a few seconds before reading on.
The answer is -- it depends. What would a billionaire do with this money? Nothing important. Throw it at another blue chip stock. Buy some bonds. Who cares. It's a rounding error.
What would a millionaire do with this money? Perhaps invest in their business?
What about a middle-class earner? Depends. Are they single, and childless? Are they 25, or are they 50?
What about you? What about me?
There is no right answer. Every single person is different. But one thing DOES remain constant... resources are finite.
We cannot predict what any one person would do, but we can definitely think up some likely trends. For example, much of the United States right now is currently in some level of debt. Whether it's an automobile, a mortgage, credit card debt... that'd be easy low-hanging fruit. All your debts gone! Pretty nice. What else?
Well, all my favorite restaurants... I want to eat out every single day! The restaurants are a bit crowded now... but that's fine. And I'll definitely buy a new car. And then -- wait. Why are all my favorite restaurants suddenly double in price? OK that's fine. I can still afford it. I already purchased my car, and I locked in a great interest rate.
OK, it's been 2 days now. The price of everything has... doubled again? Tripled?? Why is this happening?
Inflation
Before you know it, the price of a meal that was once $100 will, in this scenario, easily go up in price by at least an order of magnitude. Before you know it, a loaf of bread could go as high as $1000. Maybe more. Why?
Inflation as a concept is interesting because it isn't intuitive to grasp at first. But when you understand the constrained world view, it makes perfect sense.
I'm not going to sit here and explain the concept of supply and demand to you. But I AM going to try and explain the mechanics.
So let's say in this scenario, the supply of bread is the same. You go to store and you buy your favorite loaf. Same price as always, $10. Now let's say it normally takes about 8 hours of a bakery being open for it to run out of bread. But in our thought experiment -- when everyone is suddenly a millionaire, the supply of bread lasts 1 hour. All of the bread is GONE in 1 hour. What do you think the bakery owner will do?
The answer is VERY simple. Your favorite bakery is going to raise prices. The same amount of effort is going into producing the same amount of bread. But it lasts 1 hour on the shelf instead of 8. The shop has no point in being open the other 10+ hours! That's obviously not good for business.
Let's say tomorrow, the bread is $5 more expensive. Still, the shelves are cleared in 1 hour. "OK..." says the owner. "We can definitely raise these a bit more".
Suddenly, the loaf is $25. 2.5x in a matter of days! And still, they are all gone in less than an hour.
This game of "cat-and-mouse" where the owner tries to find the MOST a customer is willing to pay is known as price discovery. Let's say, eventually, the price of his bread settles on $500 a loaf in our new world. It lasts roughly the whole day. And with all the profits he made, the owner gives himself a bonus and opens another bakery.
Is this the ONLY way this scenario could play out? Not exactly. There is another scenario where a bakery owner refuses to raise prices. Let's call him John. "I can't believe Jimmy is charging $500 a loaf. Ridiculous!" says John. He refuses to raise his prices so high, charging $10 for a loaf still. What is going to happen to John in this scenario?
Well, his bread is going to run out within an hour. Maybe less than half an hour after a few days. As Jimmy makes record profit, John is sitting on the same margins as before. Now, in a vacuum where price discovery was SOLELY affecting bread, this may be a strange but sustainable state of affairs. But of course, economies are more complex. BREAD is not the only price going up in this scenario. Everything is. What's going to happen to John, who refuses to raise his price, in the face of skyrocketing costs?
Due to hyperinflation, John declares bankruptcy in a matter of days or weeks. The cost of his lease, the higher wages his workers demand, and the cost of making bread rose by triple, and eventually quadruple digits. John refused to raise prices, and he paid the price.
The bread scenario is a microcosm of what would happen nationwide. There would be a little bit of shuffling around, but the truth of the matter is this: most things wouldn't really change. The people who own all the assets would still own all the assets. You may be able to afford more for a few days or weeks. Prices would soon catch up. Wages would lag even harder than prices. Perhaps they never catch back up at all. We're back to square one, except no one has debt anymore. Until they do.
This is a VERY simplified example for the purpose of explaining inflation. In reality, the forces of hyperinflation are far more destructive and insidious. The point is, giving money away to everyone doesn't magically create more bread.
To be continued.
Coming Up in This Series
- Part 2: The History
- Part 3: WTF Happened in 1971?
- Part 4: The Solution
- Part 5: The Solution (cont)