I am seeing a good deal of misunderstanding arise with the popularity of Bitcoin. Much of this seems to stem from a gold standard style of thinking. It can basically be boiled down to this:

There’s a lot of moving parts in that, but this idea that a fixed money supply is good is not consistent with the history of money or even the basic facts about how modern money works. Worse, it constrains our economy in ways that make us worse off in the long-run. Make no mistake, as I’ve explained before, the gold standard was silly and no one who understands money or the history of money should ever support it. But let’s get back to Bitcoin….

The fact that Bitcoin has a fixed supply of 21MM BTC is not an aspect that makes it a useful form of money. The reason for this is simple – while we generally think of money as something we have money is actually something we don’t yet have, but can tap into. That is the essence of having credit. If you have credit you can access money when you need it. After all, credit IS money.

For instance, most of the homes in the USA are bought with a mortgage. If you have good credit a bank will take credit risk to issue you new money so you can buy something you otherwise couldn’t have afforded. When this is done our economy has that much more output and real goods (the house and the millions of building components that go into it). The borrower gets a house they couldn’t have afforded and our economy gets output it otherwise wouldn’t have had. Likewise, when people borrow too much the money supply can contract to offset this excess. This is called an elastic money supply because the money supply can expand and contract as we need it to.