Tonight I’m going to party like it’s 1999 – an iconic line, meant to evoke the sentiment of living in the moment. If you were listening to this in ‘83, this line meant partying like the world was going to end tomorrow. If you were listening to this anytime after March of 2000, this line could read like we’re going to party like the internet bubble was about to pop – oh how timely Prince was, without even knowing it. In fact, the song could have been “Party like it’s 2007” right before the housing crash – who knows how many more party like it’s [insert catastrophic economic outcome date here] there will be. But what if we could change that? The only two constants in economics are disparity and imbalance.
The blockchain offers a solution in the form of an important economic condition, a deflationary currency. Fixed supply currencies, like Bitcoin, operate in an deflationary environment (given that the demand for the currency increases).
Inflation and deflation are relative to the purchasing power of the consumer. Traditional economic theory suggests that the demand for currency will increase with the advent of innovation, so the central clearing houses will print more money to keep up. This pushes the consumer price index (CPI) higher. The result… higher incentive to spend now; disincentivizing the consumer to save. Consider this: a consumer purchases a house, and they are able to lock-in a fixed rate mortgage with $1500 monthly payments. The relative purchasing power of that $1500 becomes lower and lower every year, making the monthly mortgage payments easier and easier to pay as time goes on. This seemed awesome in the early 2000’s when people were able to borrow at low rates and make highly leveraged purchases of homes – why should I care? It’s going to get easier and easier to pay off my mortgage, might as well party like it’s 1999, right? What if there was another option, what if the CPI decreased over time?
Since we were young (at least for me) it has been preached that sitting on a dollar will lose you money. Yes, my parents are huge proponents of *saving*, but stressed the importance of making my dollar work for me. Just merely saving won’t net you great returns, hence the gift of The Wealthy Barber at age 10 (when the consensus was still that Mutual Funds were the key to getting rich). In an inflationary economy, this is true – maybe not the get filthy rich off mutual funds part – the sitting on your money is a bad thing part. The relative purchasing power of your dollar is decreasing with the CPI increasing – econ101. BUT if the CPI was decreasing, that dollar you hold, becomes more and more valuable over time – so what would the effects be?
As a consumer, I am incentivized to hold my currency because a dollar held today is worth more tomorrow. Instead of inflation trying to keep pace with the innovators, the innovators are incentivized to build more and more badass stuff for this increasingly valuable dollar. As a consumer I am less incentivized to spend my dollar, so for me to move that currency, everyone needs to step up their game and offer a really compelling reason for me to spend. This virtuous cycle fosters an interesting market dynamic where, as the CPI goes down, everyone competes harder and harder to get a piece of it now and hold it, as opposed to get a piece now and spend it.
There obviously exists strong counterarguments on the topic. This scenario benefits the wealthy as their wealth continues to become more valuable as the CPI decreases. A deflationary currency is advantageous for the ‘haves” and disadvantageous for the ‘have-nots’. What if there was a way to combine the benefits of inflation with the characteristics of a deflationary economy? The blockchain give us this beautiful combination.
For the first time ever, current state and a future set of outcomes can be guaranteed, via the blockchain. With the advent of smart contracts, XY and Z can be committed to the blockchain far in advance, like the disbursement of currency. The set of rules and conditions by which the disbursement is governed can be set at the outset and run in perpetuity, with full transparency to the ecosystem participants.
Often, the assumption is that inflation occurs if more supply of a currency is put into circulation – this is incorrect. Inflation is the condition by which the CPI increases; an ecosystem could in fact be deflationary with currency coming out of circulation. If the increase in demand for goods and services outpaces the influx of the supply of currency to pay for it, the economy will reach a deflationary state. Economic policy today would justify minting new currency to reach equilibrium – but what if you couldn’t? And what if policy makers had no control over how it was distributed. A smart contract could be written to disperse X amount of currency per day to those who generate the greatest value for the ecosystem – mitigating the impact of the rich becoming richer, just for being rich. The set of rules of how ‘value add’ is calculated is another discussion all in itself (maybe I’ll be brave enough to tackle that one later).
The advent of cryptocurrency circa 2008 has brought about discussions of the possibilities, and equally as many questions. There exists an incredible opportunity for us to invest, investigate and continue to ask ourselves the tough questions. The most important question we need to ask ourselves today is: is it better to party like it’s 1999, or should we think about how we can economically align ourselves to live sustainably in 2099?
Written by: Tanner Philp