The way it is structured Bitcoin is most certain to follow the fate of gold that ended up only being a store of value.
This is because of its fixed stock. The success of fiat money is that central banks can create more as the demand for money increases thus making it useful as an exchange mechanism and unit of account. Of course the decree of “legal tender” is a huge advantage too.
The advantage of Bitcoin compared to gold is that storage is free and transfer is virtually free and nearly immediate. To handle gold in today’s economy is impossible.
My question is: why the Bitcoin community only regards it as M0? (only tangible bitcoins in your digital wallet instead of M1, which includes deposits like in the banking system).
Why isn’t Bitcoin suitable for lending and thus the creation of money through circulation in a Bitcoin financial system?
If this were possible the creation of Bitcoin IOUs would also be feasible through a free market fractional reserve system.
Deflation happens when the supply of all goods increases relative to a stable demand, then the price of those tends to go down.
It goes down regardless of the currency. It is an imbalance caused by oversupply (in an economic boom) or a sudden decrease of demand (economic recession or depression).
The people will look for any exchange mechanism to trade. It doesn’t matter what it is. The control of production of money has limited effects to stimulate or depress an economy.
Addition of more crypto-currencies:
As new digital currencies emerge, as forks or new protocols, they will serve to moderate availability of money thus there will be no deflation to prevent the proliferation of digital currencies.
Since digital currencies are infinite through the creation of new ones (in the end just like fiat money!) they will auto-compensate the problem of stock. Even algorithms will be created to arbitrage between them.
Don’t pay attention to Krugman!