Reframing Inflation
By: Jon Gulson
Tags: Inflation, John Nash, Bitcoin, Nash Equilibrium

It is noted we define money too narrowly, using differing definitions which often exclude many forms [of money] in use.

This becomes problematic when understanding inflation; and since the binding value of our money lays in Central Banks targeting a ‘rate’ of inflation — it would follow that to understand money, we should understand inflation itself.

In light of this enquiry (and while we may define money too narrowly), we can reach a relatively unambiguous and generally [universally] accepted understanding of what money actually is: a medium of exchange in transactions.

Reaching a similar definition for inflation is more problematic — and one which provides its own insight in understanding [inflation] within the context of new money forms.

The Changing Basis of Consumption

John Nash showed in the bargaining problem (1950) how money is conducive to trade and bestows mutual benefits in non-cooperative scenarios.

This runs parallel with Adam Smith; whose Wealth of Nations (published 1776) was exacting in the language used to construct a new science; explaining societal conditions along the same economic — and non-cooperative — terms.

One of the distinctions Smith was keen to make was between real prices (value) and nominal prices (money) — real prices referencing the effort (work) to produce a good; and nominal prices referencing the fluctuating availability of gold (or other precious metal) at that time.

As money evolved from metallic coins to paper forms, inflation began to emerge [in the language] — not in reference to prices — but as something that happened to a paper currency. In time — and in what appears to be concurrent to the Keynesian revolution — it became redefined as a price description.

And as technology (with software) began to affect the real prices of goods and services — in terms of time saving innovation and marketable solutions— it is no coincidence Nash’s bargaining problem morphed into Nash Equilibrium and in the process, re-orientated Smith’s Invisible Hand in explaining market participation and our consuming habits.

The Changing Basis of Money

Where it is noted money is defined too narrowly, it is also seen how new forms of money have evolved outside Central Bank management — Bitcoin and cryptocurrency the most obvious examples.

It is also noted the differing levels of money, some of which are specialised for transactions between banks (or high level settlement).

All of which led monetary economist Frances Coppola in 2012 to assert:

“The proliferation of types of money means that our measures of money are deeply flawed…If the future lies with international e-currencies competing freely with national currencies, it is questionable what role if any there could be for a central bank money supply policy...” The Nature of Money

This all time Bitcoin price chart bears out Frances’ insight.

Bitcoin all time performance priced in GBP Sterling (source: Coinbase) taken 18 August 2018

Bancor Like Characteristics of Bitcoin

Coppola further elaborated her insight in respect to the new electronic money:

“…there may need to be international co-operation in the management of national exchange rates to e-currencies. Perhaps it is time for a new (virtual) Bretton Woods?” The Nature of Money

It is at Bretton Woods we can look at Bitcoin in alternative light [to that] conventionally presented — and we do this by considering Keynes bancor proposal within a supranational clearing system, the International Clearing Union — to create a new post WW2 gold like standard where the proposed bancor was the global reserve currency [and] where in effect, transnational payments flowed.

This tweet provides further depth to bancor coverage:

Pathos on the Moon

Nietzsche has been invoked to explain the conventional Bitcoin narrative: of the need to feel something among a generation who find it difficult to build wealth in the conventional sense; or who are misunderstanding Bitcoin because the narrative they are hearing is more emotive to them.

This tweet is direct:

In this regard, Bitcoiners will often talk about the ‘moon’; or the evils of decentralisation and the need for inflation resistant, censor-free money. The problem with this — a nihilistic pathos which Nietzsche felt on a deeply personal basis — is it discounts an alternative understanding of Bitcoin: that by peer to peer, Satoshi was referring to high level settlement money, in the way Keynes proposed the bancor [nation to nation].

Except where Keynes relied on the altruistic intentions [of nations] to adopt the [bancor] standard, Bitcoin can be seen in the same light of how Nash re-orientated Adam Smith: by equilibrium (game theory) through international money markets.

Money: Postmodernism’s Final Frontier

It is unclear what inflation actually is, other than some general indication of price stability; whether inflation is caused by an increase in the money supply, or is an increase in the money supply, or relates to a price behaviour is [still] equally unclear at a definitive level.

Light eruption

Further confusing still, is understanding the causation and management [of] inflation if we can’t comprehensively define it to begin with.

We return again to Nash and a theoretical concept [Nash] developed where world monies — who in reality manage themselves through local Central Banks targeting a Consumer Price Index trend— reach parity with each other on international standing. Nash coined such a scenario Ideal Money.

This is sometimes misconstrued as targeting 0% inflation, which misunderstands the new form of monetary language Ideal Money introduces: that monies are absolving themselves of inflation by reaching comparative value on a global basis.

The author of this tweet has dragged his audience’s attention to what Bitcoin could be and how it works in today’s markets:

And this commentator is prepared to defend the last bastion with the implication Bitcoin’s proof of work algorithm should be banned, because of its energy consumption — not understanding (apparently) this would require the kind of international co-ordination that Bitcoin creates through gaming of the money markets:

It’s not such a startling conclusion to reach in a world where real prices and nominal prices singularise — and where national money systems converge — is a point of no return from today’s world; a world where inflation exists only in the minds of Central Bank administrators.