Part 3, The Fed, Bitcoins, and Inflation

THE FED, BITCOINS, AND

INFLATION3. GOLD, BITCOINS, AND

INFLATION

Dale R. DeBoer, PhDDepartment of Economics, UCCS

Core functions of money

Medium of exchange

Unit of account

Store of value

Standard of deferred payment

Ideal functions?

Full Employment and Balanced

Growth Act (1978)

Humphrey-Hawkins Act

Monetary requirements

Full employment

Growth

Price stability

What is full employment?

How much growth?

How stable should prices be?

Measurement bias

Substitution

Quality

New product

Outlet

Houseman, 2003, “Sources of Bias

and Solutions to Bias in the

Consumer Price Index”

How stable should prices be?

What works best?

Stable value

Stable growth

Fiat money

Pro

Easy to get stable growth

Costless to make more

Fiat money

Pro

Con

Easy to grow too fast

Trust can be lost

Someone (or something) must control

it

How well has it done?

Gold as money

Pro

Easier to maintain trust

Could be run without external control

Gold as money

Pro

Con

Hard to grow at the “required” rate

(5%)

Costly to use as money

Still have fractional reserves

Trust still an issue

Did it grow enough?

Is it stable?

Bitcoins: a modern alternative

Decentralized virtual currency

No physical existence (sort of)

http://www.coindesk.com/10-physical-

bitcoins-good-bad-ugly/




No central authority (sort of)

Algorithm limits supply to 21 million






Source: Nakamoto

Institute






Mt. Gox intermediated 69% of

transactions in 2013

Bitcoin China intermediated 74% of

transactions in 2014



Disintermediates formal banking

sector




sector

Offers anonymous transactions




sector

Offers anonymous transactions

Eliminates fractional reserve

banking


Pros

100% reserve requirement

Eliminates central control

Anonymous

Eliminates “middle-man” costs


Pros

Cons

Will not grow as needed

Eliminates lending mechanisms

Eliminates monetary response to

crisis

Open to illegal use

Not well established or accepted

Is it stable?

Is it really new?

Part 3, The Fed, Bitcoins, and Inflation

Education

Transcript of Part 3, The Fed, Bitcoins, and Inflation