Fisher’s exchange equation MV =PT is used by many token platforms to justify using their token as an appreciating investment. The core but faulty rationale is that as usage of the platform grows the RHS of the equation grows and this means that the LHS also has to increase. Given a fixed amount of tokens = M and a fixed velocity =V, then by this faulty rationale, the exchange rate or price of each token has to also increase. The RHS represents the total economic activity on the platform. PT = average price level of goods (P) times average quantity of goods exchanged (T) during a period of time. Fisher himself says that his equation doesn’t apply when there is external exchange (one has to have multiple equations to account for the external exchange, with a token external exchange is the equivalent of exchange for any other currency). Aside from that fact, Fisher’s equation is only a valid approximation at equilibrium where price levels (P) on average are stable. When price levels are not stable then the averages on both sides are moving so the equation does not yet have a solution. One can’t predict what the eventual equilibrium solution will be. Also important is that unstable pricing is bad for buyers and sellers of goods (but not necessarily for speculators). Buyers and sellers don’t know how to value and price consistently. Time lags between purchase and delivery in the supply chain can destroy profits. Just ask any major exporter or importer about hedging the risk of forex price volatility. And forex price volatility is orders of magnitude less than crypto token volatility. So yes if the token appreciates it makes goods too expensive unless the producers of products reprice down (this is deflation). But for the producers to be profitable despite lower prices then everyone in the producer’s supply chain including employees must also lower their prices. This is a huge time lagging frictional effect that greatly increases transaction costs and risk. Try telling your employees they are getting a pay cut merely because their currency appreciated relative to some other currency. Suppose that product repricing (down) has occurred throughout the platform. The result is that less of the currency (token) is now needed to support the economic activity on the platform. So repricing down product nullifies the supposed appreciative driver of token price i.e. the growth in economic activity (PT).
To reiterate, what buyers and sellers of goods want is stable valuation of the token. Then the system can find an equilibrium where valuation and pricing are rational. We have only considered the problem of repricing down (deflation). But volatility has downs not just ups as well and given the time scales of supply chains even short term downward volatility (despite a longer term increasing trend) forces compensating short term product repricing up (inflation) to avoid losing profits. Continual repricing (up or down or both) is problematic because supply chains must also reprice and that takes time. So if the volatility is on a shorter time scale than the time scale of full supply chain repricing then the net result is that producers are exposed to greater risk and the attendant loss of profits. This is why there needs to be a separation of concerns into at least two tokens one for MoE and one for SoV. An appreciating (or otherwise unstable or volatile) token is always bad as an MoE. It’s ok to use an appreciating or volatile token as an SoV. BitCoin is a great example. But when the price of the MoE is driven by speculation it increases transactions costs to reprice products thereby making it a bad MoE. Product repricing is not a good fix for token price appreciation (or any type of price instability).
But more importantly product repricing exposes the inherent flaw in the valuation hypothesis. To restate, if the token price appreciates because the demand for it is increasing in order to be used as a medium of exchange for increasing demand for products then repricing products (down) removes that increase in demand for the token because less of the token is needed to provide sufficient medium of exchange for the given demand for the product. Continued repricing product down to compensate for increasing token price stifles demand for the token so there is no longer any reason for the token’s price to continue to increase with increasing demand for product. Alternatively, if product repricing down does not occur then the product becomes too expensive thereby stifling demand for the product and also commensurately stifling demand for the token as MoE. The only rational conclusion is that the appreciating price of the token is driven by speculation (foreign exchange) not increase in demand for products. Fisher’s equation is only valid at price level equilibrium which for a currency may have taken decades to arrive at with at best small perturbations along the way. Its completely inadequate as a valuation mechanism for highly volatile non-equilibrium token platform dynamics where external exchange is a significant percentage of the use of the token. Your suggestion that product repricing is a viable solution just confirms how little understanding there is on this issue. Hopefully this clarifies it for you.
