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@ Martin Mladenov
2025-06-05 13:14:46What is the Fiat System and How Do Central Banks Set Interest Rates?
When central banks expand credit, they often increase the money supply by creating new money through mechanisms like quantitative easing (QE). For instance, a central bank may purchase government bonds, injecting money into the economy. This boosts liquidity but can lead to inflation when too much money chases limited goods and services.
Low interest rates make borrowing cheaper, encouraging spending and investment. However, this can overheat the economy, create speculative bubbles (e.g., in real estate), and drive inflation. Conversely, high interest rates restrict borrowing, slow the economy, and curb inflation but may trigger recessions.
How Would Interest Rates Work Under a Bitcoin Standard?
Under a Bitcoin standard, the money supply is fixed—only 21 million bitcoins will ever exist, with the last one mined around 2140. Unlike the fiat system, no central authority can manipulate the money supply or set interest rates. Instead, interest rates would be determined entirely by the market—by the supply and demand for capital.
If someone wants to borrow bitcoins, the interest rate would depend on negotiations between the lender and borrower. For example, if demand for loans is high and available bitcoins are scarce, interest rates would rise. Conversely, if there are ample bitcoin savings, rates might fall. This process would be fully decentralized and reflect real market conditions, not central bank decisions.
Since new bitcoins cannot be “printed,” there would be no inflation caused by an expanding money supply. Instead, bitcoin’s value would likely rise over time (deflation) as its fixed supply competes with growing demand. This could encourage saving over reckless spending, reshaping economic behavior.
Advantages of a Bitcoin Standard
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Protection Against Inflation: Bitcoin’s fixed supply prevents currency devaluation, a common issue with fiat money. This safeguards savings and promotes long-term planning.
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Decentralization: Without a central bank manipulating the market, economic decisions are made by individuals, not bureaucrats. This aligns with free-market principles where competition and innovation thrive.
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Transparency and Security: The Bitcoin blockchain is public and immutable, ensuring transactions are transparent and secure from tampering.
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Financial Freedom: Under a Bitcoin standard, individuals have full control over their money without government or bank interference, which is especially crucial in countries with unstable regimes or currencies.
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Discipline in Lending: Without the ability to print money, lenders would be more cautious, reducing risky investments and speculative bubbles.
Potential Drawbacks and Why a Bitcoin Standard is Superior
One major argument against a Bitcoin standard is that it could slow economic growth. Low interest rates in the fiat system encourage borrowing and spending, driving economic activity. Under a Bitcoin standard, where interest rates are market-driven and likely higher, borrowing would be costlier, potentially limiting investments in new projects.
However, this critique misses a key point: economic growth fueled by artificially low interest rates and money printing is often unsustainable. It leads to debt crises, inflation, and bubbles that eventually burst, as seen in 2008. A Bitcoin standard promotes healthy economic discipline, where investments are based on real value, not artificial capital.
Moreover, bitcoin’s deflationary nature could shift how people view money. Instead of chasing endless growth, societies might prioritize sustainability, innovation, and efficiency. This could lead to a more stable and equitable economy in the long run.
Additional Considerations
A Bitcoin standard could transform global trade. Today, countries with fiat currencies often manipulate exchange rates to gain trade advantages. With bitcoin as a universal currency, such manipulations would vanish, fostering fairer competition.
Another aspect is energy efficiency. While bitcoin mining consumes energy, it incentivizes the development of renewable sources as miners seek cheap, sustainable energy. This could accelerate the transition to a green economy.
Conclusion
The Bitcoin standard offers a vision of an economy rooted in sound money, free markets, and financial freedom. While it may slow certain aspects of economic growth, it creates a more stable and sustainable system that protects individuals from inflation and centralized control. In a world where trust in institutions is waning, the Bitcoin standard is a step toward a fairer and more transparent future.
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