Bitcoin Solves the Impossible Trinity?

Most of my readers are probably Steemians and since you are users of Steem blockchain, you might be familiar with the blockchain scalability trilemma. But, do you know that there is also a trilemma in international monetary policies?

Like the blockchain scalability trilemma, international monetary policies also has an "impossible trinity". In an ideal world, any country will want all 3 of the following policies,

Free capital flow so that there can be more foreign investments and trades
Fixed exchange rate so that the country can gain advantages over imports/exports
Sovereign monetary policy so that the country can balance the interest of lenders and savers to control the credit market

However, it is impossible to have all 3. Based on the "Mundell-Fleming trilemma model", countries can only pick 2 out of 3. This means that if you refer to the diagram below, countries can only choose to be on side a, b or c.

Source

You might ask why can't countries have them all? Consider your country started off on side a and want to pursue sovereign monetary policy, in other words, you want to be able to manipulate your country's interest rates. If you raises interest rates, since there is free capital flow, more foreign currencies will flock in to your country so that these money can benefit from the higher interest rates. As a result, you have a higher demand on your country's currency and you will have problems maintaining the exchange rate pegs.

Now, picture your country on side b and you want to try to peg your exchange rates with other countries. Assuming your country then enters a recession and you need to lower your interest rate, a similar scenario as above will happen as you lower your interest rates, there will be more selling pressure on your country's currency resulting in a broken currency peg.

Finally, assuming you are on side c and want to open up your country to free capital flow. You will again realize that your exchange rate peg won't work as you changes the interest rate. Hence, this is the "impossible trinity". If you are interested, you can read up more from the articles listed below,

And if you are not so much of a reader, here is a video,

https://www.youtube.com/watch?v=oLbfAfCVG_4

Can Bitcoin Solve the Impossible Trinity?

Note that I am using Bitcoin here but it an be any other cryptocurrency which is sufficiently borderless, trustless, open, censorship-resistant and etc.

Assuming Bitcoin gains widespread adoption and people are exchanging goods and services for Bitcoin. Since Bitcoin is open by default, naturally there will be free capital flow in every country. Free capital flow is checked.

If Bitcoin a global currency, exchange rates will be a redundant concept. There will be no different fiat currencies to convert to. Imports and exports among countries are all negotiated in Bitcoin. Fixing exchange rates is no longer relevant.

How about sovereign monetary policy? Bitcoin has a fixed total supply and a predetermined inflation schedule. Code is law in Bitcoin and nobody can change it. So if the world uses Bitcoin, there is a hardcoded monetary policy, hence sovereign monetary policy becomes irrelevant again.

Bitcoin does not solve the impossible trinity, it just makes it irrelevant.

The fiat currency system, managed by out of control central banks, has been going downhill since they broke the peg with gold. Central banks only have 2 levers to bring countries out of recession, lower the interest rates or print more money. All these actions are merely using money from the future to plug the holes we have now. How much further can the can be kicked down the road? I am unable to predict this. However, we now have an alternative which we didn't have 11 years ago.

Of course, Bitcoin is still at its early stage and is not widely adopted enough to replace fiat entirely. However, over the years, we are seeing progress. In a recent post by @gandhibaba, he also explained why Bitcoin might be suitable as a global currency in the future. If you ask me, I think there is a pretty good chance Bitcoin might just be a global currency in the future.

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