Bitcoin And Debt

One of the biggest things a Bitcoin standard would change is how governments borrow money.

Right now, governments can make their debt easier to carry by inflating the currency. Here’s how it works in practice. You borrow $1 trillion today. You let inflation run at a few percent a year. Ten years later, that $1 trillion is worth less in real terms — so you’re effectively paying back less than you borrowed. The debt shrinks in real value without anyone officially defaulting.

This happens all the time. It’s one of the main reasons governments can keep running deficits — the money they owe becomes worth less as time goes on, quietly, without most people noticing.

Under a Bitcoin standard, that escape hatch closes. The money supply is fixed. Governments would need to actually earn or borrow the money they spend, and pay it back in full. Spending within your means stops being optional.

The hopeful version: this is exactly what’s needed. Governments would have to stop kicking debt into the future and forcing ordinary people to absorb it through inflation.

The difficult version: we’ve already borrowed an enormous amount under the old rules. The global debt pile was built assuming inflation would slowly deflate it. Removing that assumption doesn’t make the debt disappear — it makes it harder to carry.

So a Bitcoin standard world might be financially healthier in the long run. Getting there from here would be genuinely painful.

Tomorrow: Bitcoin and inequality — does it help or make things worse?

— The Daily Bit