Bitcoin, Cashless Economy and NIRP, Part II

Editorial
01.04.2016

Part One covered general features and peculiarities of bitcoin in comparison to national currencies of a cashless economy. Part Two covers bitcoin’s perspectives under conditions of negative percent rate policy (NIRP).

Cashless Economy and NIRP

Initially, the shift towards cashless economy was mainly associated with the reduction of turnover expenses and prevention of money laundering and terrorism financing. The very possibility of total government control over money flows can’t get much approval. However, the argument that “an honest person has nothing to hide and nothing to fear”, especially in the absence of any pronounced threats to those honest persons, somewhat mitigated the disapproval. Now, the shift towards cashless economy is mostly associated with NIRP.

NIRP’s basic purpose is to stimulate economic activity with crediting policy tools. Reduction of interest rates below zero should incentivise money owners not to save it in a bank, but to invest it or spend for consumer needs.

Notably, if an owner of money saved in a bank will have an option of cashing out the bank accounts and saving coins and banknotes, the purpose of converting savings to investment wouldn’t be fulfilled. For that reason, NIRP implies removal of ‘old’ cash with bank account records converted into ‘new’ cash.

Thus, money owners, including honest people, will inevitably have to pay for money saving. It means that both usage and non-usage of money will become payable.

Silvio Gesell’s Free Money

The concept of NIRP as a ‘penalty fee for the idleness of money’ isn’t new. This approach has been presented by Silvio Gesell in his book “The Natural Economic Order” as a concept. Gesell stood for fighting usury based on saving money removed from turnover and then returning only in the form of loans on interest.

Such a selfish saving mechanism results in money oversaturating the turnover when money is excessively supplied, so it disappears when demand peaks. In a word, Gesell believed the approach causes economic booms and crises.

In an attempt to oppose those negative phenomena, Gessel offered so-called Freigeld (free money), which included ‘demurrage’ – a regular fee for using money. Those having money by the end of a certain period had to pay a particular percent of a bank note’s face value. Demurrage would have made money-saving unprofitable and stimulated the turnover, as everyone would be willing to get rid of money as soon as possible.

Gesell called the money ‘free’ as he deemed it free from interest: if the money isn’t subject to saving, no one could accumulate it to loan on interest. He deemed it free from interest notwithstanding the fact that anyone who uses the money had to pay on a regular basis.

NIRP may be thus considered a state-wide variation on demurrage. In a classic example of free money implementation in Austrian town of Wörgl, demurrage comprised 1% a month, or 12% a year. Such interest rate look pretty usurious in any developed economy. Interest policy of central banks deals with tenths of a percent.

On the other hand, in Wörgl’s case, the demurrage was payable to a local magistrate who used the money for social purposes like road reconditioning. The negative interest rate for bank accounts under NIRP would still be commercial banks’ revenue.

Wörgl’s Freigeld was intended for voluntary usage simultaneously with Austrian schilling. National currencies of a NIRP-based cashless economy are conceived as mandatory and lack any alternatives.

Inflation vs Deflation

Notably, the website of Freicoin, a demurrage-based cryptocurrency created in June 2012, states that the altcoin is different from both inflationary currencies like USD or Euro, and deflationary currencies like Bitcoin.

Deflationary nature of Bitcoin is mostly related to a long term, when the number of issued bitcoins will approach 21 million. The question of what kind of currency Bitcoin is right now is rarely discussed.

Issuance of Bitcoin, as opposed to national currencies, is totally predictable; however, volatility of its exchange rate and, therefore, bitcoin-denominated prices for goods and services, is way higher than that of ‘unpredictable’ national currencies. For now, bitcoin is neither inflationary, nor deflationary, but merely highly volatile currency.

Bitcoin’s exchange rate, just like in case of any other currency, depends on both supply and demand. Demand’s stability can be maintained by neither government policy, nor math. Additionally, bitcoin issuance is not similar to supply: not all bitcoins issued by now are tradeable.

Even if we admit that bitcoin would eventually put a lid on inflation tax, it would also lead off a deflation tax. In a deflation world, the redistribution would be directed from sellers to buyers, not from buyers to sellers.

Demurrage in Wörgl was collected by the town authorities. In Bitcoin’s case, deflation revenue will go to cryptocurrency owners. When manufacturers have to sell their goods at prices lower than expected, they suffer losses, and losses do not stimulate the economy. Manufacturers using loan capital also suffer from loan inflation taking the wealth away from loanees to their creditors.

In terms of economic growth, inflation is should be preferred to deflation. When bitcoin advocates stigmatize uncontrollable government-headed money-printing that gives rise to the inflation tax, they don’t even care to specify the country.

In developing economies, there still is major inflation, so bitcoin might be a safe haven in that case. However, developed economies face other problems. Scary stories about the printing press look at least ridiculous if we recall fruitless attempts of central banks to launch inflation to avoid deflation, notwithstanding quantitative easing policy.

Bitcoin as Alternate Store of Value

Alternate stores of value gain popularity against the background of the increase in expected expenses for national currency savings and negative profits of government obligations. Bitcoin has experienced several waves of demand from people living in countries where using traditional money was troubled or risky for some reason.

However, such events are nothing but temporary crises; when they end, the trust to the national currency and banking system get back, and all currency restrictions mitigate. For that reason, Bitcoin here is a temporary emergency measure.

Nowadays, bitcoin’s deflationary nature, just like its free and instant transactions, is nothing but advertising. Only zero interest rate and pseudonymity are actually there.

Maybe, under cashless economy and NIRP conditions, those features of bitcoin could make it an attractive store of value. Combined with built-in insurance tools for exchange rate volatility, like futures or warrants, they could partially compensate its disadvantages against demurrage national currencies.

by Dmitri Bondar

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