The Better Currency: Bitcoin or Pie?

Dear Harry (and Harry),

I just read a book about Bitcoin. I was fascinated. My wife was repelled.  That’s another story.

The decentralized, public ledger, idea behind Bitcoin seems brilliant to me. But the fact that there is a cap on the number of bitcoins that will ever exist seems like a problem. Am I wrong? Help me. It seems that this would encourage saving, which is good, but discourage any sort of investing in actual goods, such as homemade pies. Here is my thinking:

Let’s say that, right now, a home-made pie is worth one bitcoin. Next year, if the pie economy grows at all, a pie will be worth less than one bitcoin. So, if I have bitcoins, I’m never going to buy that pie because next year, I’ll be able to get a better deal on pies. Also, if I am a pie maker, I’m never going to spend bitcoins on the ingredients to make pies, for the same reason.

I see that some pies must still be made because bitcoins are not edible and humans have a basic need for pies that can’t be completely eliminated (I’m not counting paleo-dieters as human, for the purposes of this article.) Is this enough to balance things out? Perhaps this will result in the perfect amount of growth in the pie economy?

It seems like it would be better if bitcoin creation was tied to the creation of pies, instead of vice versa. If every time a pie was baked, a bitcoin was created, things would work much better.

So, Mr. Harry Tuttle and Mr. Harry Dexter White, help me out here. I need some basic economics lessons and I want pies (meat pies too) to go on being made.

Best regards,

M. Ragazzo

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3 responses to “The Better Currency: Bitcoin or Pie?

  1. M. –

    To start: For lots of reasons, mostly related to debt, pricing stability is considered optimal. For prices to remain *reasonably* stable, the supply of money should remain *reasonably* close to the demand for money. That’s a complicated topic, of course, and the temptation is strong to want to fiddle with the relative supply/demand balance, the job the Fed does with varying degrees of success.

    Of course, pricing stability is, also, a complicated topic. The Fed currently (and supposedly) targets an “inflation rate” of around 2%. By my reckoning, they figure that inflation tends to encourage spending and investment. I tend to believe that’s pure hokum, as the practice inherently promotes instability and malinvestment. But, the *Church of Inflation* persists, benefitting those who borrow and are closest to the source (the Fed). Anyone come to mind?

    In the “old” monetary model, the money that was available for lending was limited to savings. For such a system to work, natural interest rates – i.e. those generated by the supply and demand for debt vs. savings – tended to promote long-term balance. Periods of high demand would naturally produce high interest rates and vice versa.

    In regard to the overall supply of money, moderate increases – such as might be associated with the mining of gold – would not, necessarily, impede growth as any excess demand for money would tend, I believe, to merely increase the velocity and/or the pattern of circulation of it’s use. We can see the opposite of this function in the economy today, whereby increases in the supply haven’t seemed to have affected velocity at all, much to the Fed’s chagrin.

    My Two Cents – HT

  2. M. Ragazzo –

    Interesting topic for consideration. Here are a few “starter” responses.

    First, in my opinion, this is inspired by and intended to be a more modern replacement for gold. So, many of the pro’s and con’s applicable to gold would generally apply here.

    Second, most of the contemporary experiences with either are not a useful guide to how they would/should/could work as an alternative to paper or digital fiat currencies. They’ve functioned as speculative commodities, even if Bitcoin is a virtual commodity.

    Third, on the issue of the money supply, there are obvious implications of a quantity of money that grows either faster or slower than the “economic need” for it. Aside from the problem of various definitions applicable here (“economic need” for one), there is, clearly, an irresistible temptation on the part of planners/politicians/greedheads to manipulate the “price of things” (both “here” and “there”) by changing the money supply. Perhaps, this topic warrants a more thorough response.

    To the extent that Bitcoin’s algorithmic supply growth is intended (again) to simulate gold’s historical pattern and prevent such manipulation is laudable, in my opinion, but may be subject to it’s own devious manipulation. For what it’s worth, while the gold supply doesn’t (usually) unexpectedly grow, it has and can, though most of the fluctuations in “price” is the response to hoarding (or dishording), much like paper currency.

    Finally, my biggest “concern”, if you will, is that all things digital are subject to the convenience and/or security of technology, with all of its boons and pitfalls. Personally, I’m forever in favor of currency that is: tangible, fungible, anonymous, ubiquitous, and difficult to manipulate. So far, for me at least, the best candidates are also the oldest.

    HT

    • Good response, HT. Thank you. I like your list at the end: tangible, fungible, anonymous etc. Bitcoin certainly isn’t tangible and I’m not sure what “fungible” means. Bitcoin does claim the other three qualities you mention, though.

      So, isn’t it a problem when the economy wants to grow but the supply of gold isn’t growing too? I suppose the supply would tend to grow some, as long as mining it is profitable. I should probably take some beginner courses. Thanks again for the response. – M. Ragazzo

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