Stability Property

Value is are subjective and therefore price stability is an economic fiction. The exchange price of a money is is determined by its supply and demand which is in turn affected by the supply and demand schedules of all people for all products.

We can organize monies into three supply categories:

• Rational supply (commodity, stable)
• Arbitrary supply (fiat, unstable)
• Fixed supply (bitcoin, stable)

Commodity money supply increases due to the financial incentive to produce more when price is expected to be at or above production cost (inclusive of capital cost). This relationship between price and supply is predictable despite price (and therefore supply) not being so. Because price is not predictable this monetary inflation cannot be capitalized. Therefore all holders of the money suffer a reduction in value from the increased supply. Competition ensures that this production financed by existing holders is limited to the capital cost. Destruction of the commodity decreases supply and therefore increases value. The feedback of the value decrease resulting from increased supply reduces the production incentive, creating stability.

Fiat money supply is increased arbitrarily by the sovereign due to the financial reward of seigniorage and decreases due to destruction. When this monetary inflation is predictable it can be capitalized, which discounts the return on seigniorage. As such changes to supply are often not published. Due to state monopoly protection (i.e. production is the crime of couterfeit), competition cannot effectively limit returns to capital cost. The resulting sovereign profit (tax) is the reward of seigniorage and the reason for fiat. Monopoly protection is the sole economic distinction between commodity and fiat money. The positive reward of seigniorage is only mitigated by political unrest, making fiat unstable.

Bitcoin supply is independent of price. Destruction of monetary units decreases supply and therefore increases value. Given that subsidy is predictable it is capitalized and has no affect on price over time. Its purpose is to rationally distribute units and so is eventually phased out. As fees necessarily rise with demand the utility threshold mitigates demand directly. Stability results from limiting utility as opposed to increasing supply.