Had a little bit of a tumble down monetary econ theory yesterday, and maybe the stackers have something valuable to add to it.

What Shape is Bitcoin’s Supply Curve?

...and before y’alls go Bitcoin tech on me (duh, it’s logarithmic, asymptotically approximating 21m), that’s not what we’re talking about in monetary econ. (Mostly we conflate “supply” and “stock” and it causes misunderstandings all day long...)

Easiest illustration is commodity money, for our purposes gold.

Gold, h/t Jack Mallers, being stuck in the ground, is progressively more difficult to extract: Diminishing marginal returns rule to extracting more gold. With higher prices, though, it can pay to hire workers overtime, send them into more difficult veins, dig deeper or use more elaborate methods to get gold out of the ground.

Under a gold standard regime, i.e. when gold is money, the “price” becomes the inverse (1/P) of aggregate prices, since that’s how economists treat money in a supply-demand schedule.

Anyway, result: gold, like any other economic good, has an upward-sloping supply curve.

at higher prices (i.e., higher purchasing power of gold), we can profitably dig out more gold from the ground. It responds, with diminishing marginal utility, to the change in price. So supply is positively related to price.

Now, what about fiat and bitcoin?

Bitcoin has a vertical supply curve, as its supply responds in no way to changes in its price. It does move mechanically toward 21m, symbolized in price-quantity space as a series of shifts outward (every ten minutes) of the vertical-sloped supply curve. But at any given moment the relationship between price and supply is zero, so it has to be vertical.

Fiat, by analogy, I would want to place as a horizontal supply curve, primarily for convenience (=it’s the inverse of bitcoin). But also by reasoning through central bankers’ inflation-targeting reaction function. Any amount of fiat quantity is consistent with current price (purchasing power). And we know that central bankers expand the supply in response to purchasing power being too high (= price being too low), and they contract the supply in response to purchasing power being too low (=price being too high). That yields, in my mind, a price-targeting, price-fixing ideal that (analogous to bitcoin) shifts upward 2% every year... but the central banker supplies any quantity of fiat consistent with that goal, so what they end up doing is moving along a horizontal supply curve to hit their goals.

Anyway, two monetary economists I admire disagreed with me – Alex Salter in an AIER article from a few years ago, and Will Luther in the Twitter thread linked above.

Will, interestingly enough, says that they should both be vertical as they aren’t commodities and lack intrinsic value (monetary econ term), i.e., they lack nonmonetary use cases!

tldr: what do the ~econ stackers think?