Inflation and deflation are mechanisms for any currencies to regulate their economy.

Monetary inflation is the act of creating currency with the goal of matching the growth of the amount of goods that are exchanged in the economy. Companies and people generating goods and services tend to get more productive and generate more goods and services, and there is a need for more currency to match that growth.

Monetary inflation is also used for monetizing debts when the economy is struggling. Central banks print new money to buy a pre-determined amount of government bonds and financial assets. It’s also called quantitative easing, and thanks to a set of financial consequences results in generating lower short term interest rates. That stimulates the economy.

There is loose consensus about the fact that monetary inflation, is likely to result in price inflation: an increase of cost of goods and services.

Deflation is short for price deflation, which is the opposite of price inflation: decrease of cost of goods and services.

The number of Bitcoin in circulation is increasing until 2140, the money supply is inflating. That’s monetary inflation. After 2140, the number of Bitcoin in circulation will be decreasing (people won’t take proper care of their coins, and no new ones will be created): the money supply will be decreasing.

Slight inflation is conventionally described as good (The target for most Central banks is 2%). It drives investment and consumption which is good for the economy. With guaranted return on investment, people who own currencies will lend more to people who will create more wealth. And consumers actually buy more goods because it might be more expensive in the future.

Deflation is traditionnaly described as bad. When prices are going down, people are less willing to spend their money (if they can wait a bit for buying, they will get a better deal).

What happens when the monetary inflation of Bitcoin stops, and the money support decreases?

The short answer: we don’t know. Most economists think that monetary inflation is key to regulate the economy for the reason described above. And a decrease in the money supply doesn’t directly mean “price deflation” which is widely considered bad.

There is a small school of thought called the Austrian economists who don’t believe monetary inflation is neceserary, and that it actually hurts free markets. The claim is that inflation is actually bad because it distorts prices:

  1. It confiscates people’s wealth by unaturally increasing the price of goods or services.
  2. It privileges debtors over creditors.
  3. It doesn’t efficiently add currencies in the system because prices of different goods and services are not adjusted at the same pace.

It’s a very strict libertarian view of the world that vows that bitcoin is unbiased and a stronger currency for our free market.

What seems evident is that Bitcoin creates new concepts and we are applying old theories to make it fit into models that will not apply in the future. A fully digital currency allows for a lot more maleability that the old ones, and the maleability allows to regulate the economy in different ways than we needed to in the past.