With central banks pumping out billions of dollars like there’s no tomorrow, the possibility of rising inflation is becoming stronger by the day. This is the view of a growing number of economists, raising the possibility that bitcoin (BTC) may become more attractive as a store of value.
However, the possibility of increased bitcoin adoption raises a serious question: what would happen to the global economy in macroeconomic terms if bitcoin were used widely?
For some economists, saving via bitcoin wouldn’t significantly hurt consumer spending, while it could also increase investment. On top of this, wider bitcoin use may also potentially raise living standards in poorer countries, even if it might place limits on governmental and private credit creation.
Bitcoin adoption and spending
For other economists, saving money through bitcoin would lower spending, since you’d effectively be taking money out of circulation. This is the view of Dr John Vaz, a senior lecturer in banking and finance at Monash University.
“I don’t see increased saving through bitcoin as consistent with economic and consumer spending growth,” he tells Cryptonews.com.
“Bitcoin removes money available to the fiat monetary systems for lending and so on where there is a multiplier effect in terms of money available in the economy. Increased savings generally, in the short run, reduces consumer spending to the extent the rate of saving increases.”
That said, increased bitcoin adoption doesn’t necessarily mean that every BTC holder would save all their bitcoin. As Pete Earle from the American Institute for Economic Research explains to Cryptonews.com, economic necessity would ensure that most people would still have to spend some of their holdings.
“Ceteris paribus [other things equal]: if more people began saving in bitcoin vs. in, say, dollars, I don’t think it would hurt the US economy much. They would still have to pay their mortgages or rent, car payment, and bills; and I don’t see any reason why they’d radically change their discretionary income choices.”
Anya Nova, a crypto-economist with Power Ledger (POWR), agrees.
“Adoption of bitcoin will not lessen consumer spending,” she tells Cryptonews.com. “People losing jobs will.”
“At no point does someone decide not to buy milk because they are buying and paying in bitcoin instead. Bitcoin is an investment, so it’s attractive to people who already invest,” she adds.
Efficiency, transparency, wealth
Indeed, for Nova, increased bitcoin adoption would have mostly positive macroeconomic effects, largely because bitcoin’s transparency would encourage more prudent fiscal practices and policy.
“There are no guarantees about the future price of bitcoin, but there are certain features of BTC that can fuel increased economic growth,” she says.
“Bitcoin is transparent, meaning that anyone can freely check online how much BTC there is and which BTC accounts own the most. Such a high level of transparency puts pressure on traditional financial institutions to open up and match that openness, which can only be good for consumers and investors.”
Nova adds that transparency and confidence are crucial for economic growth, with Bitcoin’s transparency making it harder for bad players and bad products to gain traction. In other words, the more bitcoin there is in the world, the more the legacy banking and financial system will be forced to improve itself to compete.
Nova also points out that widespread adoption of bitcoin in countries suffering from very high inflation would actually help people avoid poverty.
“Widespread BTC adoption means that people who live in countries with hyperinflation can protect their savings from losing value compared to their national currency,” she says. “They can also move savings with them across borders where there are currency restrictions in place. This will lift the standard of living in those countries. “
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Of course, if we envisage a hypothetical scenario where bitcoin adoption is extremely widespread (and rapid), we may likely see some negative as well as positive effects.
According to Pete Earle, if billions of people were to convert their savings to bitcoin and transfer them into wallets, “the immediate effect would be to either impair or cause banks to collapse, which would cause the collapse of uncountable numbers of firms that employ hundreds of millions, maybe in the low billions, of people.”
As Earle adds, much “investment, lending, financing, etc. currently occurs through commercial or investment banking channels which, no matter what one’s views are on the financial sector, have a pretty efficient system set up and running.”
Likewise, John Vaz foresees that massive bitcoin adoption would deprive governments of fewer monetary tools. They’d be less able to create money and credit, which would have certain positives when it comes to avoiding massive bailouts that taxpayers end up paying for.
On the other hand, such constraints would also have downsides.
“These constraints affect macro growth (due to credit constraints and ability for banks to lend) and the ability of governments to stimulate and guide economies using monetary and fiscal policy,” he says. “Furthermore, tax avoidance would be enhanced, placing greater pressure on revenue for the government.”
Basically, widespread bitcoin adoption could have serious drawbacks, since it would circumvent so much financial infrastructure governments and businesses depend on to survive. However, assuming that adoption takes place gradually enough for the necessary infrastructure to grow around it, then bitcoin could offer more positives than negatives.
As Anya Nova concludes, “There is no need for the global economy to be different for Bitcoin to continue its upward trajectory.”
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