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Friday, 16 May 2014

Despite what Bloomberg states: Monetary deflation or inflation is impossible in bitcoin

Both the economic science concept of monetary item inflation and the economic science concept of monetary item deflation are impossible with bitcoin because bitcoin is a variable real value non-monetary item (a property, not a currency - not money or a monetary item - as the US IRS stated - or "fundamentally not a currency" as the People's Bank of China (Central Bank of China) stated).
The economic science concept of inflation, unfortunately, has not only one, but, two meanings (which is sadly, but unavoidably and very humanly, rather confusing):
(1) Inflation is sometimes used to simply  mean a price increase in any single price, for example, the Bank of England sometimes states "house price inflation" when it actually means the increase in house prices in the UK: a single sector price increase in the UK, not a sustained increase in the general price level in terms of the Pound as measured in terms of the UK CPI measured in terms of the monetary item, the UK Pound - the undoubtedly main definition of inflation for people in the UK. Inflation used in this sense of simply any single price increase (not a general price level increase resulting in the decrease of the real value of the monetary item, the UK Pound) thus has as its opposite that deflation is simply any price decrease (not a general price level decrease resulting in the increase in the real value of the monetary item, the UK Pound). 
(2) Secondly, inflation is almost always (luckily and scientifically) correctly used to mean "a sustained increase in the general price level" when the general price level is taken to be indicated by the Consumer Price Index, which is calculated in terms of a fiat local currency which is assumed to be perfectly stable - when in fact the fiat currency, generally, is almost never perfectly stable (maybe perfectly stable - zero inflation - for only one or a maximum of two months in a row).
Deflation is thus impossible in bitcoin for simply the same reason: bitcoin is not a fiat currency with a real value assumed to be perfectly stable over time.
Fiat money is always a monetary item. That is: it forms part of a country's money supply. There is not one bitcoin included in any country's money supply: thus, another clear proof that bitcoin is not a monetary item (not money) although everyone calls it a virtual or digital or cryptocurrency. There is no problem with calling bitcoin a digital currency: that is how the man and woman in the street speak about bitcoin. The man or woman in the street regards any widely used medium of exchange as "money". In economic science, however, bitcoin is not a monetary item: its is a variable real value non-monetary item as very correctly indicated by the US IRS which ruled it is a property (part of Property, Plant and Equipment) and not a currency: not a monetary item or "fundamentally not a currency" as the Chinese PBOC correctly ruled.
Bitcoin has been classified as property (a variable real value non-monetary item - not a monetary item) in the US. Bitcoin has not been classified as a monetary item in any country although everybody calls it a digital currency.
Bitcoin can never be a monetary item. To become a monetary item, bitcoin has to be perfectly stable in real value or assumed to be perfectly stable in real value, like all fiat currencies are under Historical Cost Accounting, the traditional accounting model used to account almost all economic activity in the world economy.
Bitcoin speculators (the WinkleVoss Twins, et al), who are 99.9% responsible for the bitcoin phenomenon would be totally mortified if anyone would be so absolutely silly to succeed in making bitcoin perfectly stable in real value. They would die on the spot. They and the WinkleVoss Twins are betting their life´s savings on the view that bitcoin would skyrocket in price because it is limited to a total of 22 million bitcoins in about 100 year's time. So be it. Good luck to them.
However, if the bitcoin price were to take off exponentially in 100 year's time when the 22 millionth (last) bitcoin is mined with increased massive demand for bitcoin in the world economy, then it would not be because of deflation (the increase in the real value of a nominal value fiat currency - which bitcoin is not - because of a sustained decrease in the general price level indicated by the CPI which is measured in terms of that "assumed-to-be-perfectly-stable fiat currency".)
It would simply be because of a hopefully (by the WinkleVosses and other speculators) massive increase in demand for a stopped-in-supply bitcoin. It would have absolutely nothing to do with deflation or a sustained decrease in the general price level of a fiat currency that is assumed to be perfectly stable in real value - which bitcoin is not.
Anyone (for example - with all due respect for a great publication - Bloomberg) stating that bitcoin is subject to inflation (not the price increase definition) or deflation, does not understand the economic concept of monetary inflation and deflation with reference to a fiat currency that is assumed to be perfectly stable in real value.
There are a lot of things I do not understand.
To construct a CPI measured in Bitcoin is thus very silly since there are generally no consumer prices stated in bitcoin and most probably never will be.

Nicolaas Smith 

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