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Friday, 16 May 2014

It is misleading to state that bitcoin is subject to monetary inflation and deflation

A Consumer Price Index can only be calculated in the case of the currency in which the consumer items is priced being a fiat currency, i.e., it is assumed to be perfectly stable in real value under the traditional Historical Cost paradigm. No fiat currency is, in fact, generally perfectly stable in real value. All fiat currencies are thus assumed to be perfectly stable, i.e., the stable measuring unit assumption is applied. 

The CPI is then used to, e.g., inflation-adjust government indexed bonds (TIPS) on a daily basis, measure financial capital maintenance in units of constant purchasing power as in IAS 29 Financial Reporting in Hyperinflationary Economies, etc.

Bitcoin is not assumed to be perfectly stable in real value. It is not a fiat currency. It is a property as per the US IRS. It is, in fact, a variable real value non-monetary item just like any other property, plant or equipment. 

Since bitcoin is not assumed to be perfectly stable in real value (heaven forbid!), it is thus not subject to the economic concept of monetary item inflation, being a sustained increase - not in a specific price, but, in the general price level, or deflation, being a sustained decrease - not in a specific price, but, the general price level. 

It is thus a complete mistake to associate bitcoin with monetary inflation and deflation as indicated by the change in a CPI. 

On the other hand:

It is true that any single price increase is also described as inflation of that specific price. However, it is clearly understood in economics that it is not the same as monetary inflation being a sustained increase in the general price level which normally includes simultaneous decreases (also described as deflation) in various specific prices. This, nonetheless, confuses most people. 

In the same way a decrease in a specific price is described as deflation in that specific price. It is also clearly understood in economics that it is not the same as monetary deflation being a sustained decrease in the general price level which normally includes simultaneous increases (also described as inflation) in various specific prices. However, this also confuses most people.

It is thus misleading to state that bitcoin is subject to monetary inflation and deflation. It is not.

Nicolaas Smith

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