Currency Competition

This poast was brought into being after a conversation with a friend about the evergreen question: does issuing money cause inflation? We both are from Argentina, a country marred by an inflationary history AND irresponsible central bankers, but somehow, this question still appears to remain unsettled. Tbh, I still have more questions than answers, but at least I can offer a thought experiment on how to think about this question that someone might find useful.

My take on this, being myself a decent and cunning free-market enthusiast, is this one: not necessarily, but nonetheless printing money is bad and we should avoid it at all costs. I answer in this way to avoid falling into the trap that’s usually set to us by either commies, keynesians, MMT (magic money tree) bro’s, and Central Bank fans alike, who are always at the ready to flaunt at us the annoying quip: “then why does the Fed print dollars but inflation remains so low?”

“ThEn wHy dOEs tHE fEd prINt DolLArS bUt iNflAtiOn REmaINs so LoW??”

What every worthy debate adversary should do at his point is to demand me to explain what those mysterious bad outcomes that we should be wary of are, to which I would give myself the luxury of naming this phenomenon Dilution, being that the amount of money held by savers is being diluted. Honestly, this is a debate masterpiece: like an agile boxer, stuck in the corner, I throw a jab at my adversary to divert his attention and get out of the pickle.

Out of the frying pan into the fire: now I’m in the uncomfortable epistemological position that is so well known by nineteenth-century physicists, who theorized for years about the existence of the ether, modern ones, with their dark energy and dark matter, or my favorite epistemological fighters: the Pilot Wave Theory proponents (because the Copenhagen interpretation and the wave-particle duality are part of a ploy designed by international communism in order to bring down capitalism by undermining reality and objectivity). But I digress: if you can’t measure a phenomenon, does it even exist?

Anyway, my reasoning is as follows: issuing money is not necessarily harmful, as long as it is absolutely predictable. Let’s take Bitcoin as an example, (obs, I love Bitcoin), that has a perfectly-known and predictable issuance schedule, as well as when will the last token be issued. Since the Bitcoin issuance schedule is perfectly known, is there inflation in Bitcoin? Yes? No? I’m not sure, maybe you can tell me.

Here’s my thought experiment, let’s think of a competition of hypothetical currencies. All of them with a different set of parameters that describe them, and I am proposing here that we shall only know their exact issuing schedules. In this way, we will have an exact idea of the amount of money M for a given currency at any time t, as well as the rate of issuance, acceleration, and any other derivative, by knowing M as a function of t, M(t).

Let’s think of some examples

1. Null rate of issuance
2. Constant rate of issuance
3. Constante rate of issuance, capped
4. Quadratic rate of issuance
5. Rate of issuance is random, normally distributed
6. Rate of issuance follows a random walk (like the stock market)
7. Issuance is totally arbitrary and controlled by central bankers of a banana republic

How would such currencies behave? Would all of them have inflation? How much? How would the exchange rates be, ceteris paribus? And most importantly: if you had to negotiate your salary with your boss, which one would you rather be paid in? Would you pick 1? Or does the fact that the issuing schedule of options 2 to 4 are known makes it possible for the market to price it in and make them equivalent? And if it were possible for the market to price in a known issuance, could it also price option 5, by using the mean issuance? What about option 6?

This problem makes me think that the prices of these currencies (or their exchange rates) could be thought of similarly to how perpetuities are priced: imagine 2 perpetuities, paying periodic interest in their respective currencies, how would they be priced against each other at T zero? Could the market price in their different issuing schedules?

Finally, I still have to grapple with the issue of the phenomenon that I named Dilution, which is like my ether to avoid speaking of inflation, which sometimes doesn’t appear as fast as I would like. Is such a phenomenon real? Can it be measured? And if it can’t, does it matter?

Here is as far as I can go for now, with more questions than answers, but hopefully, someone can give them to me.