Friedman k% applied to cryptocurrency

Question

Follow on to this question:

Would a cryptocurrency with a base that expanded at a fix rate face fewer difficulties than one with a stagnant base?

Edit: I'm referring specifically to the issues raised by this answer:

A moderate degree of currency inflation serves a number of useful functions in the economy. The most obvious are:

• It induces people to spend their money before it loses its value. In a deflationary environment there is an incentive to put money under your mattress and spend it in a year when it has greater purchasing power. If everbody does this then the lack of demand will lead to a decrease in overall economic activity (i.e. a recession).
• It provides a weapon against downward nominal rigidities. For example, workers are generally reluctant to accept a nominal pay cut, even if market conditions are such that the current wage is above the equilibrium level. Inflation means that their employer can simply increase wages at less than the inflation rate so that the real wage is decreasing.
• It erodes the real value of nominally denominated debt. Now, this is obviously only a pseudo-advantage because (whilst it benefits debtors) it harms creditors. However, this kind of erosion of debt may be desirable if national economic stability is threatened by high debt levels. Also, since debtors are usually poorer on average than creditors, it can reduce inequality, which may be a normative objective for the government.

Answer 1

Nominal rigidities, the idea that prices are easier to adjust up than down, are thought to be a major channel for the harm of deflation. In principal, the growing supply of bitcoins helps offset the general economic growth leading to less deflation.

The following is the rule for determining how difficult it is to mine bitcoins:

The difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty.

Source: Mining from the Bitcoin Wiki

This is the rule for the productivity of a block:

Bitcoins are created each time a user discovers a new block. The rate of block creation is approximately constant over time: 6 per hour. The number of Bitcoins generated per block is set to decrease geometrically, with a 50% reduction every four years. The result is that the number of Bitcoins in existence will never exceed 21 million.

Source: Controlled supply from the Bitcoin Wiki

This is a monetary policy rule! Let me contrast it with the Friedman (1960)'s monetary policy rule. First, with bitcoins, the money supply growth rate falls over time to zero. In Friedman (1960) the fiat money supply grows at a constant `k' percent per year. It is often proposed that 'k' be roughly 5 so that the money supply grows at roughly the same long run growth rate and successful, rich country, monetary authorities have achieved in nominal GDP growth rates. Second, while the supply of bitcoins produced in a year is fixed, the cost to produce them varies with the economic value of bitcoins. If bitcoins are valuable people will try hard to produce them and the adjustment mechanism will ensure they will cost more in electricity and hardware to produce. The general conclusion that even though the money supply is increasing under this rule it is still likely more wasteful and deflationary than a money supply that grew over time.

Bitcoin and other finite supply cryptocoin systems are converging on 'k'=0. So yes, it does seem superficially that a 'k' percent rule (k != 0 and more like 5) would be better. But here's a major consideration. Many people have argued that monetary equilibria are in fact bubbles ( Tirole (1985) and Samuelson (1958)). So an important caveat to this analysis is that choosing a higher value of 'k' may imperil the monetary equilibrium itself, leading to unstable prices or even hyperinflation.

It seems plausible that a small 'k' wouldn't do this, after all, currently the money supply is growing at something similar to a low but positive 'k' percent. But the key determinate of the value of money to A is how certain he is that B will take it. But B is talking it because she thinks that C will take it. And so on.... As such, the monetary equilibrium today can easily unravel based on expectations of what will happen in the future. So it is possible that high values of 'k' will imperil that stability. We don't really know.