Sounds like a fair summary of current mainstream neo-Keynesian monetary policy. I just wanted to point out to you that this system is by no means normal, stable, or rational, and it has no successful historical precedent. It's just been "the system" for the past 40+ years in G8 countries.
This is not neo-Keynesian at all, it is rather neo-classical, in Friedman's tradition. Keynesians want to influence economic activity with monetary policy ; Friedman considers just the monetary value stability. Keynesians think that one should print more money if the economy depresses, and that one should restrict monetary supply if the economy booms. Friedman's monetary view is rather that the monetary supply should keep money's value as constant as possible:
https://en.wikipedia.org/wiki/MonetarismMonetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.
You can hardly think of Friedman as a neo-Keynesian.
One should regulate the money supply so as to keep as stable a monetary value as possible, in the sense of Nash's ideal money.
https://en.wikipedia.org/wiki/Ideal_moneyIdeal money is working in the theory similar to the gold standard, but it is generally based on a Nonpolitical Value Standard. "A possible nonpolitical basis for a value standard that could be used for money would be a good industrial consumption price index(ICPI) statistic.
Nash proposes something of the kind in principle as the Big Mac index, but smarter. The idea is to have *constant economic value* of the money unit even though that notion itself is difficult to define precisely.
Asymptotically ideal money is the currency close to but still not ideal money. In John Nashs lecture, "Ideal Money and Asymptotically Ideal Money" focused on" the connection between fluctuation in inflation and exchange rates and the perceived long-term value of money", he mentioned that: "Good money is money that is expected to maintain its value over time. Bad money is expected to lose value over time, as under conditions of inflation. The policy of inflation targeting, whereby central banks set monetary policy with the objective of stabilizing inflation at a particular rate, leads in the long run to what Nash called asymptotically ideal money currency that, while not achieving perfect stability, becomes more stable over time."[4] That means if a currency has shown a trend to be more stable，it could become an asymptotically ideal money or even the ideal money in the future.
He considered the Euro as a good candidate for asymptotically ideal money, exactly because the European central bank has only a single objective: inflation of 2%, and no neo-Keynesian targets to meet.
Aren't you forgetting that inflation also arises from increased monetary velocity, not just increased supply? So the increased nominal exchange value is not necessarily "catastrophic deflation" at all.
That is true, but velocity is something that is hard to control, is a function of people's habits, mood and so on,
and is especially a function of the perception of whether an asset is speculative or not. When you look at monetary velocity, it is not something that has uniform behaviour, and remains grossly within some boundaries. You cannot "regulate" velocity. You cannot make people spend faster or hoard more. In fact, velocity is at the origin of two instabilities: the deflationary spiral, and hyper inflation. The deflationary spiral happens when people speculate on the strongly rising value of a monetary asset: they hoard it more and more, lowering as such, the velocity, and hence increasing even more the market value of those few coins on the market, confirming the speculation of rise. This is bitcoin's behaviour.
On the other hand, hyper inflation is when people speculate on a strongly falling value of a monetary asset: they try to get rid of it as quickly as possible, increasing as such the velocity to very high values, and hence, decreasing even more the market value of the mass of coins chasing goods in the market, confirming the speculation of drop. This is what has happened to some famous hyper inflations like the Reichsmark.
The knowledge of a stabilizing mechanism avoids both instabilities, but one doesn't have any handle on people's spending decisions which determine velocity ; as such, the only thing one has a handle on, is the coin emission.
As you point out, in a classic deflationary event, the velocity of money spirals downward as the currency becomes more valuable - it's smarter to hold money than buy goods and services. This doesn't effect bitcoin for several reaons: 1. bitcoin not a primary unit of account, and 2. it isn't required to purchase vital goods and services.
But then it is not in a state to become a currency ! If the argument against why it is not behaving like a currency, is: "because it is not a currency yet", then that's not very convincing as an argument of why it is a good currency, no ? In fact, the deflationary spiral is even worse for a non-essential asset, because in as much as the deflationary spiral of the principal currency is tempered because after all, you HAVE TO BUY FOOD, here, nothing stops one from hoarding all of bitcoin, because you don't have to spend it to get food.
Furthermore, there is an increasing number of goods and services that can ONLY be purchased using bitcoin.
Apart from ransomware and dark markets, I wonder what ?
Remember that people buying into the bitcoin currency to acquire goods and services don't care what the fiat exchange rate is - they simply buy the coin and get the product at roughly the same exchange rate (or better if they bought in January).
You mean that someone was offering an exclusive bitcoin tooth brush for 0.1 BTC 2 years ago when it was around $200,- (so a brush for $20,-), that same tooth brush will still be sold for 0.1 BTC ($180.- right now) ? I would hurry cashing out my BTC into fiat and buy 9 toothbrush in the supermarket with it, no ?
Additionally, remember that bitcoin is a financial asset class of its own, which continues to find new market share and investment.
Absolutely. I don't claim that "bitcoin is dead". It has a bright future ! I think it will go sky high - but in the same way that complex derivatives could go sky high. Bitcoin is a hugely speculative asset, it is BY FAR its principal usage. Look at this forum. Look at what people say about it. Look at the volumes. This is all speculation. But speculation is a HUGE market. Hell, it is MUCH MUCH bigger than the fiat market. The whole financial world is the market. Not the "payments" application of fiat. It is a market that is about 10 times the world's economy all by itself. This is the true nature of bitcoin and most crypto. It is purely speculative, and once big finance will get into it, it will be HUGE. But entirely speculative and if it is well done, totally unpredictable (efficient market hypothesis).
In fact, I think crypto finally invented, what the financial world has been looking for: abstract speculative tokens. No more need to speculate on derivatives linked in the real economy, like oil, real estate, food, metals, technology or whatever: just abstract tokens to gamble on.
That's not what one pretended, but that's how it was designed.
Finally, I doubt that a complete stagnantion of BTC trade and exchange voume would happen on the bitcoin network - most people know that this would kill bitcoin and a devaluation would be close at hand.
I think that this is again this fallacy of taking a desirable objective as an actual consequence. It is not because "bitcoin would crash if there wasn't any merchant usage" that "merchant usage will emerge". But moreover, I don't think that it is true, that bitcoin has what so ever to do with merchant usage. Merchant usage was a story told in the beginning, to kickstart it, and there IS some marginal merchant usage, but it is not what bitcoin is about, nor what sets its price. Pure speculation is. And I think it has a monstrously bright future in that.