Inflation is a hot topic at the moment, with the Federal Reserve still peddling its line that any uptick in inflation is just transitory. And Wall Street is buying it hook, line and sinker.
“Supply grows, and the currency is devalued over time. That's typically what we've seen, what we're used to,” according to crypto analyst Alex Benfield.
Bitcoin (BTC, Tech/Adoption Grade “A-”), on the other hand, is deflationary, as Alex explains in this week’s Weiss Crypto Sunday Special.
In this timely interview, Chris and Alex break down the balance between inflationary and deflationary economic factors, as well as what a truly deflationary economy would look like.
If you haven’t seen our latest video, you can watch the full conversation here. Or keep reading for the full transcript ...
Chris Coney:
Hi there, guys. This is Chris Coney speaking, and welcome back to the Weiss Crypto Sunday Special. My guest today is Alex Benfield. Alex, welcome back to the Sunday Special, mate.
Alex Benfield:
Thanks again for having me.
Chris:
Thank you for being here. So today, we're going to be discussing Bitcoin’s technology and deflation and inflation at the same time.
So, here's my overall thesis: People tend to think in these general terms, like are we in an inflationary economy or a deflationary economy? Well, at the end of the day, that's a balance of all the various forces. So my view is that at any given time, the entire economic system is under simultaneous pressure from inflation and deflation. So, if there's more deflation than inflation, of course, we get a general deflationary curve. And if it's the other way around, we get a general inflationary curve.
The general assumption right now seems to be that the balance is in [the] inflationary direction. But there are still deflationary forces at work, and we know Bitcoin is deflationary.
So, can you start us off there in the Bitcoin realm? Bitcoin is known to be deflationary, right? Why is that?
Alex:
Yeah, I've never heard of that balance between inflation and deflation, but I like it.
Chris:
We can get into that. We'll get into that in a minute, yeah.
Alex:
It's true. Bitcoin is deflationary, which is obviously an interesting trait considering that most currencies that we know have inflationary supply. Supply grows, and the currency is devalued over time. That's typically what we've seen, what we're used to.
Bitcoin is a fixed supply. That's why it's not an inflationary currency. So that in and of itself is already pretty interesting. It's never going to get devalued over time. That is interesting in and of itself, but Bitcoin is actually deflationary on top of that. So not only does Bitcoin have a supply cap of 21 million coins that will ever be issued or mined, but coins are also lost over time.
The actual supply of Bitcoin technically is decreasing over time as coins get lost. It's estimated by Coin Metrics that the total amount of coins that have already been lost to date is somewhere around the realm of 3.9 million. So out of Bitcoin’s issue, I think we’re somewhere around 19 million of the 21 million coins. So if you take 3.9 million out of that, you've now dragged that number down to a little over 15 million Bitcoins in existence, which is extremely interesting.
Chris:
It is interesting.
Alex:
That many coins have already been lost. There are more coins that have been lost than will ever be mined moving forward. We only have about 2 million coins left to mine.
Chris:
That is a good one. And that will continue, right? Every coin that's lost is never recovered because there's a 21 million limit.
Alex:
It's gone.
Chris:
The actual total circulating supply of Bitcoin will keep going down as they get lost.
Alex
Right. And we'll never see another 3.9 million coins get lost moving forward. Most of those coins, a big chunk of them, I believe, are Satoshi coins. Early miners would lose them on old computer servers back when the block reward was drastically higher than it is now.
We're never going to see another 3.9 million points get lost in the future, but that being said, we'll see small wallets lost. People will lose accounts or access to small wallets. We can assume that trend will continue on in the future. So the supply will probably keep shrinking at a shrinking rate, but yeah, that's a deflationary currency right there. Just something that most people aren't used to.
So as the supply decreases over time, you can expect the value of Bitcoin, the value of that currency, to slowly appreciate as well, barring no other factors.
Just that shrinking supply and a constant demand would lead the price of Bitcoin to appreciate in the future.
Chris:
What's interesting is if people are doing their math based on 21 million coins — supply, we already know … it's actually scarcer than that. That's the first bigger half from this conversation, I suppose, is that the total supply of Bitcoin right now isn't 19 million. That's how many have been mined, but the maximum circulating supply is 15 million at best. And the question is — maybe this metric will come out in time — what is that rate of coin loss, right? So you could even add that into the deflationary supply.
People could say that Bitcoin is inflationary up until the point it reaches its 21 million final coin mined. And then from then, of course, the newly created currency stops, and then that's it. Then, if the economy expands, if GDP expands and there are more goods and services, well, that would be against a fixed supply, and that's where the deflationary aspect comes in. So I mentioned that the direction the overall economy goes depends on the balance of inflation and deflation, but deflation is generally seen as how a free market economy should go if progress is made.
In the world of products, and technology in particular, for example, the product should get better over time through innovation and research breakthroughs. Products should get cheaper to make, more robust, with higher performance and so on, right? And computer hardware and computer software is a good example of that: 1 megabyte of storage used to be $1 million dollars, right? And now, 1 megabyte is a fraction of a penny. So that's deflationary.
That same 1 megabyte of storage has gone down dramatically in price. However, on the opposite side of that ledger, 1 megabyte isn't that useful anymore. Technological innovation has made photos super high resolution, so most photos are bigger than 3 or 4 megabytes on an iPhone. So there [are] the two sides of that ledger going on there, right?
If Bitcoin was, say, the reserve currency of the world, and those 21 million coins have been mined and the amount of goods and services circulation continued to rise, then the price of those goods would have to go down. Is that right? That's generally how a deflationary economy is spoken of, that prices go down, right? Because they get cheaper to make them better.
So, what would happen if Bitcoin were the world reserve currency, we had mined 21 million coins and the economy continued to expand in terms of production, productivity and GDP? It’s actually a question I don't have an answer for. Do you?
Alex:
No, I don't have a quick-fire answer to that question.
Chris:
Maybe Juan will know that one. I'll ask him about that one. That is a question I actually genuinely do not know the answer to. That's what I'd have to think about some more.
Alex:
There's a lot of assumptions to get to a point where we could answer that question.
Chris:
Yeah. As opposed to ... Well yeah, I started with the premise of Bitcoin as the world's reserve currency and economic expansion continues and so on.
Alex:
There [are] a lot of things we’d have to answer. Just what would happen if Bitcoin were the world's reserve currency.
Chris:
Right. So let's expand out to the bigger economic system. We know for the last four decades, since we went off the gold standard in terms of the U.S. dollar, the U.S. dollar as a currency has been inflationary, so the total currency supply has been increasing steadily. You can look at it actually on TradingView now. They've got a price feed for them to money stock and it's on a steep incline.
Then, 2020 and all the COVID relief stimulus come, and [the U.S. dollar circulating supply] takes a massive jump up. It's been inflationary over time anyway as governments finance their deficits and so on. They've been printing money to finance those things, so that's been creating inflationary pressure, but at the same time, we know that technology is advancing and stuff's getting cheaper to do.
So that's all technological innovation, like Michael Saylor was talking about is deflationary. Because we can do more with less. Zoom is deflationary because it means all that money that was spent on business travel, conference rooms and so on now costs a fraction of what it was. You can accomplish that productivity for $15 a month or whatever, so that's actually trying to deflate the economy, right? So, if we see a rise in inflation, it must be so inflationary that it cancels out the deflationary factors. Does that make sense?
Alex:
Yeah. I see the point you're trying to make here.
Chris:
Right. Because I see inflation as a gaseous analogy. It's like you inflate a balloon, right? It expands and deflation is when it contracts, right? Economic expansion and contraction booms and busts, right? But we're in this phase where we just want to keep blowing air into the balloon, which is the U.S. dollar-denominated economy.
Alex:
The dollar balloon is inflating right now, for sure. To speak a little bit about deflation, though — and you did touch on this a little bit — is that technology is deflationary. Obviously, the cost of that 1 megabyte has gone down drastically. Technology improves our lives in general, makes things easier to do. We're able to do things with less time and hence it brings the cost down over time. As technology improves, [the] cost of certain things goes down over time. But what that allows us to do is improve our lives. So as technology drives the cost of certain things down, we tend to add to our lifestyle.
Chris:
True.
Alex:
Forty years ago, people weren't walking around with computers in their pockets. You didn't need that. That wasn't a cost that you needed. Now, you have to buy your smartphone and pay your monthly contract on that. You’ve got to have your computer at home as well. You got to have your Netflix Inc. (Nasdaq: NFLX) subscription.
Why do you have a Netflix subscription? Because Netflix made TV better. Now you have access to so many movies and shows for $10 a month. Now you got Netflix, you got Hulu, you have Disney+.
We have all these different things, and while technology has driven down the costs, we’ve continued adding to our lifestyle. So perhaps we're losing out on the benefits of the deflation that technology brings because we keep adding to our lifestyle. So perhaps we're the ones canceling out the deflation.
Chris:
That's a good goal.
Alex:
And then, obviously, the U.S. dollar is inflating. But perhaps the dollar is not inflating so much that it's canceling out all of that inflation on its own. We're filling in that gap.
Chris:
That is another force that's acting on. It's a good point. When you have more capacity, you use it. Like digital photography. That's crushed the cost of photography and made it accessible to everybody, but then it's created a lot more photography as a result. So that's the way you were just talking about: now everyone's a photographer. Not necessarily professional, but everyone can do it now.
I mentioned a minute ago that the U.S. government's response to COVID — and most government responses, actually — was to create all this stimulus. And I posed the question to myself, has that response been inflationary or deflationary? And the answer that I came to is it was both? Yes, the currency supply was inflated — in 2020, something like the currency supply was increased by 40% or something, which is absolutely ridiculous.
Alex:
I think the number is something like 40% of all U.S. dollars in existence have been printed since the start of 2020.
Chris:
That's mind-blowing.
Alex:
It is mind-blowing if you think about it, and it should be alarming to some people.
Chris:
Right.
Alex:
I don't think that that stat is just not well known as it should be.
Chris:
Right. So, that's an inflation of the currency supply. But at the same time — and unlike the decades since the 1970s, when the currency supply was increasing and everyone was still engaged in economic activity — the effect of lockdowns meant that there was a decline in economic activity.
I did this video actually at the start of the lockdown. It was called “Economic Activity Is Human Activity.” And that's absolutely true, right? GDP is people moving around, going to work, taking the bus, taking Ubers, eating at restaurants, buying sandwiches at lunchtime, doing whatever it is they do. It's expenditure, it's consumption, right? And as soon as I heard that governments around the world, including the United Kingdom where I live, were going to go on lockdown, I was like, "That's going to crash the economy," purely because you can't stop people moving around and not cause economic activity to decline because economic activity is human activity.
So that's one of those inflationary/deflationary forces happening simultaneously. They increase the currency supply dramatically, but you crash consumption because everyone's stuck. So all the other things that you would have spent money on, you didn't. So I wonder what people did with that money. Saved it? I don't know. What do you think they did with that money that they would've otherwise spent?
Alex:
Well, I absolutely don't think people were saving the money. Some people invested that money. Some people invested the money into meme stocks. In the U.S., the stimulus checks went straight into meme stocks like AMC Entertainment Holdings Inc. (NYSE: AMC) or GameStop Corp. (NYSE: GME). Now those are things that we can prove. That's how some people spent their money.
I also think that the real effect of the lockdowns is that you were trapped at home. You didn’t have your usual expenses. So I think people threw a little bit of money into Amazon.com Inc (Nasdaq: AMZN). Just let's do a little online shopping. It's the only way to get that serotonin kick in your head. Do some online shopping right now. Something will be sent to my door. So I think a lot of that, of online shopping.
Other than that, there wasn't that much to do. So I think people spent their money in worse ways than they were used to. I'm neutral on the meme stock investing, honestly. I don't really have too strong of an opinion one way or the other on that. I like the fact that more people are investing, though I don't necessarily like what they're investing in or why or their analysis as to why they're investing in those things. But that's okay.
I think really the true downfall of spending over the last year and a half has been small businesses because most didn't have established e-commerce pages, so most consumers ended up buying from Amazon and Walmart Inc. (NYSE: WMT).
These large corporations ended up having record years, which I don't think that that's a good trend. Amazon just had Prime Day the other day, and I think every year on Amazon Prime Day, the amount of shopping volume has increased. How much bigger can Amazon get? I don't know. But I think it comes at the expense of small business, and I think that's been the true downfall the last year and a half. I think the lockdowns perhaps were a fatal blow to small businesses, at least here in the United States.
Chris:
There is another side to that, though, which is your small business could set up as an Amazon marketplace shop. Because for Amazon, it's hard to be on the product end and figure out what's the consumer trend, what will sell, and then fulfill that. So Amazon is gradually extracting [itself] to the technology layer, to the platform layer, where they just take a piece of the entire economy, right? I think they'd rather do that. If they can just provide the warehousing fulfillment and the technology platform, they've no —
Alex:
I'm sure they would.
Chris:
That's where they're going, though, isn't it right? They even sell Amazon Web Services (AWS) now so that they don't even have to figure out...
Alex:
I'm sure that Amazon would love to be the backbone of our delivery, our warehousing and our cloud computing. I think they'd like to be the backbone of everything. If we want to play right into that, I think they'll be just happy to meet all those needs.
Chris:
That then becomes a —
Alex:
Ton of money.
Chris:
They will make tons of money because they just get a small percentage of everything rather than a whole piece of a small job.
Alex:
I think more worrisome than Amazon just having record profits year over year is how much power they’re taking as they become the backbone of every different industry — whether that'd be deliveries, warehousing, etc. Cloud computing is a very scary one. Thankfully, AWS does have some competitors, so we're not dependent on Amazon to run all these different aspects of our economy.
That, to me, is what's scary: the power that Amazon is getting year after year. I could care less if Jeff Bezos is the richest person in the world. I see the most powerful person. That's what scares me.
Chris:
That's very true. That's a good one. That is a good one. That's all of it. The topic, really.
Alex:
We can talk about Amazon all day long.
Chris:
Speaking of Amazon, that does link back to the whole inflation/deflation argument in terms of supply chains.
So, one of my very dearest friends owns a shipping agency. With the whole government response to COVID lockdown restrictions etc., supply chain disruption has become a huge thing. At the moment, the biggest problem in the shipping industry is being able to get space on the freight ships because there's this massive backlog of products and all the containers are in the wrong place and so on. So again, that would have caused deflation because it stops people from consuming, right? And that's generally how it goes. As economic activity increases, there's more demand chasing the existing goods, and then the prices rise because the free market is an auction at the end of the day.
It's one massive auction, and prices rise so that whoever's prepared to pay the most for X, Y or Z gets it, right? But when there's demand but [no] supply because of supply chain disruption, that naturally creates deflation because the expenditure just isn't there. Not because people don't want to buy, right? So that's another deflation aspect of the last 12 months or so.
I always contrast the increase in the currency supply with what I call the velocity of money. I think that's technically what it's called. It's the rate at which the dollar bill is spent.
For example, the plumber ends his money for the day in cash; he takes an Uber, so he pays in cash. That dollar then gets spent at the gas station, right? The gas station attendant ends it as wages. They then spend it on a pizza night. That might happen all on the same day.
So that $1 becomes $7 of expenditure by the end of the day, even though it's still $1. The more transactions that $1 bill goes through, that's the velocity of money. But again, if you look at M2 money velocity, even though the currency supply is absolutely skyrocketing — especially in the first quarter of 2020 — velocity has been declining. And then, in the first quarter of 2020, it takes this massive downturn for the reasons we've already discussed … because people were locked in their homes and they couldn't consume, therefore velocity just took another dive off of a cliff.
Back to the balloon thing. The balloon just naturally wants to deflate, right? And then the currency supply thing is constantly trying to overcompensate for the holes in the balloon by blowing more and more air into it, but it always wants to deflate unless there's real economic activity behind it.
I just find that fascinating. It feels to me all the CNBC anchors and so on just assume that it's one or the other, and when we end up in inflation, it's only because of the original point I made at the beginning that the balance has been tipped in an inflationary direction, right? So that's my whole thesis on this. The question still remains though. You've got to comment on that.
Alex:
What was that there? You called the velocity of money.
Chris:
Yes.
Alex:
Right. So it's trended downward this past year. Just to speak to that, I think that's a trend that's not going to stop. I have a feeling that it's going to continue to trend down and down and down and for exactly the reasons that we've already listed today: just how people are spending their money now.
I think velocity of money is higher when you're spending that money on Main Street. If I'm going to a small business and I'm buying a $5 sandwich for lunch, that person, that small business owner, is then supporting another small business. They're going to go buy flowers for their wife on the way home, and then that florist is going to stop at the grocery store and buy dinner when they leave. That dollar gets reused and recycled a lot more when you're spending it in a small business, just from people to people locally vs. if I spent $5 on Amazon. Amazon's is likely just going to keep that in their balance sheet until the next time they need to pay a bill. So I would imagine that Amazon has a very low velocity of money.
They're not cycling through their money as fast as a small business would. So if small businesses are dying, then I would anticipate that the velocity of money is going to continue trending downward. So how does that affect economy? I don't know. I can't answer that, but I think we'll find out.
Chris:
So that velocity story with the small businesses passing the dollar bills around, that's a cash analogy, right? Sandwich shop buys his buns from a local bakery and it stays within the local economy. So it's the speed [at] which the money can move around.
Longer term, the question is, does digital money like crypto help the velocity of money? Because it's like digital cash. A transaction I send to you is settled instantaneously, and then, it can be spent again — and not just in your local economy, but anywhere. So it's frictionless in that way. You know what I mean?
Alex:
Yeah. I mean, I think it maybe helps a little bit. But again, it just really matters where we're spending our money. Like in that small business example, it doesn't really matter if you're paying with a dollar bill, a credit card or with Bitcoin. That money's still going to get recycled because you're spending locally. If you're buying your goods off Amazon with Bitcoin, I don't necessarily think that that's going to change the velocity of that Bitcoin.
Chris:
It might because say the dollar bills finish circling around your own town. The florist that ends up with that dollar bill at the end of the day, if it were digital money, could then immediately spend that internationally. Whereas if it's cash, it would have to go to the bank and [be] deposited before they can transact it. So that's a delay in how quickly that could be respent. So that's the way I see that.
Alex:
Yeah. You're right. To an extent, I think it could help for sure. Again, I think it is important where we're spending our money, and that florist is going to spend that money faster than a large business would. That's the point I'm trying to speak to.
Chris:
Yeah. I'm totally with you. They'll go and buy some more flowers from the grower or whatever it happens to be.
There is another side point, though, that you made there about if the big-tech companies all have increasing cash balances, which is to your point about they're profitable. They're highly profitable and they're very cash-rich at the same time. So why is that relevant to the conversation about inflation deflation? Well, increasing currency supply is causing Amazon, Apple Inc. (Nasdaq: AAPL), Microsoft Corp. (Nasdaq: MSFT) and Alphabet’s (Nasdaq: GOOGL) cash balances to evaporate. This is Michael Saylor’s point — they go to the point where they had $500 million of cash in the business and realize, "This is rotting. This money is rotting right now. We need to do something with it."
That's a challenge for Amazon as well. If they're sitting on a giant pile of cash, and the governments continue to increase the currency supply as they are, they're going to impoverish Amazon as well.
Alex:
Right. I'm trying to think of how that's bad for Amazon. They have $500 million in cash or however much money they have in cash on their balance sheet. That's technically dollar bills that are out of supply, right? They're out of the circulating supply. They're not moving around. They're sitting on the balance sheet. So if Amazon were to start investing in Bitcoin, for example ... Again, if they're going to have the same benefits that MicroStrategy Inc. (Nasdaq: MSTR) has but say they were to spend that money, it could potentially increase inflation, I think. You're adding money to the circulating supply and maybe Amazon stock goes up.
Chris:
Sure.
Alex:
I think they have a lot of power with that money that's sitting in a balance sheet. Again, we can see the centralization of power here in this example with Amazon.
Chris:
Well, what you do is basically influence what gets funded and what doesn't, right? That can be everything from charities to new business startups and so on. So that's how, to your point, how they could turn it to be insidious — they can influence the direction of society by funding certain projects and not others. And you'd only fund the projects that you are ideologically aligned with, right? So if you come along with a free energy machine, then it's probably not going to get funded, right? Not by an energy company anyway. Or if you come along with a decentralized marketplace idea, Amazon's probably not going to fund that, or maybe they would if they could take an ownership stake in it.
So, the other final point I want to make is it's not just government currency creation that causes inflation because that's not the only way money is created, right?
We have fractional reserve banking, and the issuance of debt also creates money. So there's an inflation/deflation part there. If Amazon or any tech company took some of their cash and paid down debt, any debt that's paid off is currency destruction because it's taking down the liabilities.
So back to velocity of money: By people consuming and then borrowing to consume more and then borrowing to consume more and then borrowing to consume more and, all things being equal, the consumer debt would hit a wall at the point where no one would be willing to lend them any more money because it just gets ridiculous. So individuals are going to get to that point and businesses are going to get to that point and governments are going to get to that point. I think we're close. Where the appetite to invest in government bonds is going to start falling off a cliff. What do you think to that?
Alex:
Right. I think we've talked about that one in a previous special.
Chris:
That it also might create an appetite for Bitcoin, right? Back to Michael Saylor, he didn't see [bonds] as an option of putting his cash. Couldn't keep it in cash, right? Inflation is going to get inflated away. Didn't see it as putting it in bonds because they're just not sound —
Alex:
He took on debt to buy more Bitcoin.
Chris:
Yes. Yeah, absolutely. So he's betting on inflation because if you're in an inflationary environment, the debt you take out is a fixed amount, but the purchasing power of that currency declines with inflation. So, if you take the debt over a long enough period of time, say $1 million over 10 years, $1 million right now might buy the average U.S. home, for example. In about 10 years' time, that might be the hourly rate of a contractor because of massive inflation. And at that time, it would take an hour of work to pay off the debt that Michael Saylor took out 10 years prior.
He's also betting that in 10 years, the value of Bitcoin will be dramatically higher. So he's getting it both ways. He's absolutely certain about that given the size of the risk he's bought on.
Alex:
I think some numbers that we talked about for inflation in the past, and perhaps 5% inflation this year, if that were a thing, if you're able to get an interest rate on that loan for anything at less than 5%, you're making money.
Chris:
Yes. Very true.
Alex:
Just by your interest rate compared to inflation. So just holding onto that debt that you have, you're actually making money which is crazy.
Chris:
That is crazy.
Alex:
If, over an extended period of time, inflation is high enough to be higher than Michael Saylor's interest rate on that loan, he'd make money just from that, excluding the price of Bitcoin.
Chris:
That's very true. That's actually a strategy because all bets are off. All the studious things you should do with your money have gone out the window because the whole system's messed up.
Alex:
Inflation's high enough, interest rates are low enough — just take out as much debt as you can.
Chris:
Well, that's it, right? You could even — and I'm not suggesting anyone does this. This is purely just hypothetical —
Alex:
That is not financial advice.
Chris:
Not financial advice that's all. You could borrow cash from your credit card. You can borrow 10,000 pounds, whatever it is, for a 3% fee over two years and no interest. So that would be a 3.5% loan over two years. Well, we already know you could put that in stable coins and get more than 3.5% on it.
Alex:
I mentioned inflation might be higher than 3.5% over the next two years.
Chris:
So not only do you get the profit on the difference between the borrowing and the lending rate, but you also get your debt inflated away over time.
Alex:
Right.
Chris:
Which is interesting.
Alex:
We may have just stumbled in on an excellent idea here.
Chris:
Well, it's not quite as simple as that because the money you're earning is fiat, which is also devaluing. So the interest might be 10%, but the interest you earned is going to inflate away as well.
Alex:
I'm pretty sure you can earn your interest in Bitcoin.
Chris:
You could. That would actually be the smartest thing to do, I think. Borrow and then lend it, take the interest in Bitcoin or some gold token or something like that and then pay the debt off and keep the interest in a hard asset. That's the intention altogether, but that is a good idea. That is certainly a good idea.
That's what's making the DeFi courses. It's just that there are so many opportunities that you just cannot keep up with them. That's one of the biggest benefits of DeFi: it's just unicorns all over the place.
Alex:
Right. I think that's one of the interesting things, too, about an inflationary economy like this. We have inflation as high as it is; you can look at it as a bad thing or you can see that it also presents opportunities if you're willing to do the work. Certainly a little bit of a contrarian.
Chris:
That does rely on you accepting the way it is now rather than the way you think it is or should be, because the way economics is supposed to work free market mechanics, if you're still thinking that's the way it is, you won't be able to take advantage of the opportunities that are actually there. You have to go into crazy world. Okay. It's absolutely insane.
Alex:
Go against pretty much everything you've ever been taught.
Chris:
Exactly.
Alex:
Taking on as much debt as possible is actually the best way to —
Chris:
Well, that's the name of the game. Those are the rules of the new game, so you either play them or don't play them.
There's one final point I want to make here about the inflation/deflation balance. Like I said earlier, economic progress should be deflationary, right? Society moves forward, technology moves forward, advancements and technology create deflation and should get better faster and cheaper over time, assuming you had hard money that wasn't inflating.
Our experience right now, because we don't have hard money, is that stuff is getting worse and more expensive, right? I call that the flywheel of consumption. Things like planned obsolescence, like your vacuum cleaner only lasting a couple of years so you have to replace that, just like you have to replace your phone. So, it's not really our lifestyles moving forward where you get a washing machine once in 20 years and then you go looking for other good stuff to buy, innovative products. It's almost like you're treading water all the time replacing stuff.
Alex:
Things would have to change in order to have a truly deflationary economic system.
Chris:
It starts with the money, though, doesn't it? That's the reason why everyone's having to make cheaper and cheaper and cheaper products. Not because they want to. I mean, it probably hurts a lot of good brands trying to maintain the product quality but that end up not being able to compete.
Alex:
Right? Yeah. I never thought of that, but there would have to be a lot of change to have a truly deflationary economic system.
Chris:
Right. We are at the complete opposite end of that right now: The fiat economy is focused on short-term thinking. Companies are buying back their stock to push the stock price up. And ultimately, I don't know where this started, in the pursuit of short-term profits to publish better figures every quarter, research and development budgets were cut. What's the point, right? If you just reduce the budget for research development over time because you don't need to innovate, right? You just want more consumption. And if you do planned obsolescence...
Alex:
They all lose out that way.
Chris:
Everyone loses out, but it's the race to the bottom, which is what the fiat economy ultimately encourages. You go on.
Alex:
I think what's so interesting about deflation is that we're all so used to inflation and used to thinking about an inflationary economy that I'm not sure if we really understand what a deflationary economy would look like. It's so far from what we have experienced so far. It's hard to wrap your mind around, I think.
Chris:
That's true. I suppose it reminds me of if you lived in either ends of the extreme of a climate. If you lived in Norway or Greenland and then you lived in Nigeria or Saudi Arabia. And they're like, "Yeah I've seen this snowy winter thing on the TV but don't really know what that is,” right? “It's not part of my experience." And on the opposite side you've got the people in Greenland, ice cold all the time, and they're like, "I've heard of this thing, sand. Dry sand. Sounds weird." So it's almost like that in that we've only ever known. I mean you and I probably in our lifetime have only ever known an inflationary economic environment. So I have no idea.
Alex:
I don't know of anybody that's known deflationary economy. I don't even know if I've ever seen or read anything about what a deflationary economy would look like in school. I don't think I've ever seen anything like that.
Chris:
It's just an assumption. I suppose the only time we talk about it is things like the Great Depression, which is seen as a bad thing, right? Something to be avoided.
Alex:
The only time we would talk about deflation is to contrast inflation, even though I don't think I've ever seen a deflationary system. We don't really understand what it would look like.
Chris:
It's like any symmetric belief system that economic contraction is somehow a bad thing, but that would be freaking out whenever in the fall when the leaves fall off the trees, you'd be like, "No, no. Put them back on. Put them back on." And you have to shift that in order to prepare for the next cycle.
Alex:
Yeah. I don't know. Like I said, I think it's really hard to wrap your mind around deflationary economy because we've been used to inflation our entire lives. We've set up our portfolios for an inflationary system, and if all of a sudden that was flipped on its head, what would happen? I don't know.
Chris:
You have to reverse your whole thinking. Perhaps that is one of the mental blocks people have when it comes to understanding Bitcoin, because your entire economic paradigm is inflationary, and then you get this. It's like ying and yang. You've got the other side of it, and you're like, "Fixed supply? Don't know how that works." So no one knows how to make that kind of economy work, but it's happening anyway. Spontaneously and in the free market.
Alex:
Right.
Chris:
There we go. And that's the problem: Trying to understand Bitcoin from within the existing paradigm. You never will. It's a different paradigm. It's okay. You can understand inflationary fiat economies. We need to build this whole other brand new, almost another hemisphere of your brain on this area to understand Bitcoin. So you can't take any of your existing understanding to it. You need to reset the typewriter and come up with a blank sheet.
Alex:
Right. Maybe that's why I was able to understand Bitcoin. I didn't really have a previous understanding of finance, and maybe that's why most traditional financial analysts shrugged off Bitcoin when they first heard about it and are just now starting to pay attention.
Chris:
That is a very good point that the more deeply schooled you are in the old system, the harder it is to understand the new. It's not impossible — there are many people who have defected from the old system to DeFi and brought all their wisdom and experience with them. But they're few and far between because it's hard to change your world view 180 degrees like that.
Maybe it will be a generational thing. Maybe that generation will have to literally die out and then the generation of ours and afterwards will just come into this paradigm as is and will be the opposite, which is they'll only ever know a deflationary economy.
Alex:
That would fit in with Bitcoin's “S.” A technological “S” curve.
Chris:
Sure.
Alex:
That would probably be the inflection point. When that generation starts dying off and you have new generations of people that have grown up knowing nothing but Bitcoin, this new technology. And then you're going to see a rapid rise in adoption.
Chris:
And that's getting ahead of the curve, because you can already see that coming. So that's why I'm in the game anyway. Pretty good.
That was brilliant, Alex. Thanks very much again for being on Sunday Special. I think we'll leave it there for now.
Alex:
Well, thank you very much for having me again. It's always great to talk.
Chris:
Okay. That's going to do it for this edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney and Alex Benfield. Until the next one, it's me, Chris Coney, saying bye for now.
