Last night, over drinks – a detail that will gain more salience when I describe the discussion – several friends and I were talking about lots of market-related items (as well as, of course, many non-market items).

The topics were as diverse as bitcoin, New Jersey Transit, and Tesla. However…and here’s where the drinks may have played a role…we also explored intersections of the elements of this set. For example, one of our party pointed out that fifteen Teslas would produce about the same power as a diesel locomotive, but at a fraction of the price. Given the recent record of New Jersey Transit’s locomotive fleet (among other problems), perhaps this is worth considering. Not only that, going to work in a train pulled by 15 Teslas would be much more stylish.^[1]

A more interesting connection is between Bitcoin and Tesla.

In my book, I reflect at length about the significance of having money which is backed by something concrete (no matter what that is) compared to something backed only by faith – faith that other people will accept our money as a medium of exchange, in exchange for goods or services at rates reasonably predictable and not terribly volatile. Inflation is caused by too much money in the system; hyperinflation is what happens when a currency loses its anchor of confidence and people lose faith that these things will be true in the future. I talk a bit about how high rates of inflation, by eroding confidence, can lead to hyperinflation – but that’s only true of fiat currencies. If money is backed by something tangible, whether it is a precious metal or a bushel of rice, there are limits to how much it can depreciate in real terms and hyperinflation is difficult to come by in these circumstances.

In this context, consider Bitcoin or any of its crypto-currency brethren. Bitcoin is not backed by anything; indeed, it is backed by even less than the “classic” fiat currencies that issuing governments at least promise to accept in payment of citizen obligations to the government. This is not a critique – it simply is. Evidently, the inflation issue is not currently a problem with Bitcoin…as the chart below (source: Bloomberg) suggests, everything in the world is deflating in Bitcoin-equivalents.