Monetary Reality

Kevin D Williamson writes one of the best pieces yet on Bitcoin:

To argue that bitcoins are not “real money” because they have no central-bank regulation or central issuer is like arguing that a prepaid disposable cell phone is not a “real phone” because its number doesn’t appear in the directory and you don’t get a bill. That’s the point, or at least part of the point. 

I am skeptical of the Bitcoin model, but it has in no small part been a victim of its own popularity, with speculative investments in bitcoins overwhelming their use in commercial transactions. But this phenomenon is not unknown among traditional currencies. Consider the lengths to which the Swiss have had to go in recent years to stabilize the value of the franc as euros (and, to a lesser extent, dollars) bounced about. 

But that misses the broader point in a couple of ways. The first is that bitcoins and other private currencies are intended as replacements for greenbacks in approximately the same way that the Internet was intended to be a replacement for the printing press: They may do that, sure, but they will have other uses as well. Wresting control of currencies away from politicians is the only way to let money evolve. Twenty years ago, you didn’t know that you’d want to take photos with your telephone or use it as a boarding pass at the airport. Now you do. Nobody planned that. Nobody knows what “real money” is going to mean in twenty years. 

As for price instability, that is of course a fundamental issue, and … the fact that most of the world’s governments have made counterfeit currency (which is what fiat money is) legal tender complicates the environment. … A financial asset may decline in value; a U.S. dollar is practically guaranteed to, if history is any guide. Very wealthy people and institutions already have access to de facto private money in the form of various financial instruments; private currencies promise to make similar benefits available to general consumers — and, critically, to move that market beyond the reach of central bankers and regulators, and probably tax-collectors, too, in the long run.

We can probably expect a robust, competitive market in private currencies to develop, and Bitcoin may or may not be a part of the long-term picture. It may turn out to be the Packard of private currencies. We’ll know the market has arrived when people have as many choices of currency provider as they do of cell-phone provider. And that will be a critical moment in the shifting balance of power between politics and markets, another way for us to stop asking permission to engage in commerce.

This is in part why I object to … the Wall Street Journal’s characterization of the natural theater for bitcoin use as “the black market.” A better phrase for “the black market”  is “the market.” 

(I confess to being quite awestruck by the amount of incisive analysis packed into these few short paragraphs.)

March 4, 2014admin 20 Comments »
FILED UNDER :Commerce , Technology

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20 Responses to this entry

  • orlandu84 Says:

    @admin “(I confess to being quite awestruck by the amount of incisive analysis packed into these few short paragraphs.)”

    The insight amazes me as well! I could not summarize the matter better myself if I tried for a week.

    What is missing from the above, however, is that the fundamental organizing principle of a state is tax collection. Feudal lords were tax collectors just as organized crime are today: you pay them, or they make you hurt. Of course, a well run syndicate not only robs you regularly but makes sure no one else robs you. As the markets turn black, governments will have to adapt to taking only what they can. In this way, budget deficients are the fore bringers of governance deficients.

    [Reply]

    Blogospheroid Reply:

    As long as you’re occupying physical territory, there is no way to remain untaxed. Land taxation seems to be the easiest route, most compatible with the continuance of civilization. worst comes worst, a poll tax can be imposed.

    [Reply]

    Posted on March 4th, 2014 at 3:07 pm Reply | Quote
  • vimothy Says:

    To argue that bitcoins are not “real money” because they have no central-bank regulation or central issuer is like arguing that a prepaid disposable cell phone is not a “real phone” because its number doesn’t appear in the directory and you don’t get a bill.

    That is not the argument. Bitcoins are financial assets for which no corresponding liability exists. They are like shares in an imaginary company. Money is a claim on the bank. Bitcoin is a claim on nothing.

    [Reply]

    Orthodox Reply:

    Corresponding liability is debt. Gold is money. Bitcoin is money. Bank issued notes, such as modern FRNs, are debt instruments.

    [Reply]

    The Anti-Gnostic Reply:

    Or, even more fundamentally, money is a commodity in universal demand. Gold, silver, copper, FRN’s qualify. If it were a Skyrim world, healing potions would qualify.

    Bitcoins strike me as scarce (“valuable”) but highly illiquid and, as you point out, intrinsically worthless.

    [Reply]

    admin Reply:

    As you know, I find it seriously bizarre that you think having “no corresponding liability” could be a bad thing. It’s sheer debt fetishism. All the non-financial property you own has no corresponding liability. Does that make it worth less? Nick Szabo has an important model treating money as a “collectible” (like exotic stamps). No corresponding liability. No problem.

    [Reply]

    vimothy Reply:

    A financial asset corresponding to no liability is not a financial asset. It is a receipt. In fact, it is not even a receipt, since a receipt records the purchase of some good or service. Your Bitcoin is just a note that says you gave someone some money. In the future, you hope to sell this note. After all, you paid a lot of money for it, so it must be valuable.

    If any of your readers are keen, I have a ready supply of such notes at very reasonable prices. Rid yourselves of ‘debt’! (I.e., rid other people of their obligations to you, by transferring them to me.)

    [Reply]

    Posted on March 4th, 2014 at 3:47 pm Reply | Quote
  • Anon Guy Says:

    Bitcoin is the latest speculative fad, like Beanie Babies or baseball cards.

    The governments of the world can crush it any time they like, simply by making it a crime (probably money laundering) to buy or sell or trade for Bitcoins without reporting it in the ordinarily required way for financial transactions. A few high-profile prosecutions of violators, and no average person is going to take the risk of using it. Why would you? What does Bitcoin do for you that dollars don’t, if you can’t use it safely to avoid taxation and engage in illegal transactions?

    Bitcoin can be as “cyber” and “encrypted” as it wants – it can run free and loose in cyberspace, fine….but it has no meaning until you can buy something physical with it, something you want. And the government controls the physical world. If I want to buy a tank of gas with Bitcoin, but the government has declared transactions in Bitocins to be money laundering, what gas station is going to take the riisk of accepting Bitcoins for their gas? What merchant would? Who but someone in the criminal underworld would risk engaging in such transactions?

    This all leaves aside the fact that the math/technology of Bitcoin is too complicated for the average person to understand and thus trust. As the MtGox experience demonstrates, even “experts” in the field don’t understand it well enough to prevent it being stolen by the millions.

    The very rich and the central banks and the other power brokers of the world already have an alternative to fiat currency for storing wealth: gold. It is the focal point wealth storage asset par excellance. Everyone everywhere accepts it. It doesn’t require a degree in computer science to understand, and it can’t be hacked. You can store it away very quietly (as the Saddle Ridge Hoard demonstrates, you can bury it in the ground for centuries without affecting it) and move it very quietly and it will be accepted all over the world. It has a 5,000 year track record.

    Bitcoin is a complicated solution looking for a problem.

    [Reply]

    Kgaard Reply:

    Yeah that was always my main problem with Bitcoin: Too complicated to understand. In fact I agree with all the knocks on Bitcoin brought up in the comments above.The obvious risk with Bitcoins was that, as a digital currency, they could just disappear one day. Sure enough, they did.

    The notion that only a finite number of Bitcoins would ever be created was also fundamentally flawed. It meant that Bitcoin could NEVER hope to serve as a medium of exchange or even a reliable store of value.

    If somebody wants an alternative currency they’re gonna have to do better than Bitcoin. Gold is the best thing out there at the moment. Followed by silver, copper, oil, land, TIPS etc. The BEST way to hedge the government’s voracious appetite is to buy stakes in private enterprises — i.e. stocks (preferably spread around the globe). It’s like the parable of the talents: The gods reward those who are willing to put their capital to productive use …

    [Reply]

    admin Reply:

    “Looking for a problem” — [*facepalm*]
    A radically-politicized chronically-inflationary money system isn’t a problem?
    Gold gets seized. FDR already shows that’s what happens. Bitcoin is by far the best mechanism for defending wealth against government predation yet discovered — and its on a path to further escalation.

    [Reply]

    Anon Guy Reply:

    Without recapping the entire body of argument on fiat money and gold as presented on the FOFOA blog, I would say that a fiat currency that can be “managed” by the government of the country that uses it is a valuable tool. Governments are not going to give that up – they need the ability to print money and manage the money supply to deal with the various exigencies that arise. Using gold as currency – which is what the US was doing when FDR required private citizens to turn in their gold for fiat – ties the hands of government and prevents it from devaluing the currency in response to crisis. That’s why FDR seized the gold, so he could devalue the currency. Now the currency is no longer tied to gold, so there is no need to seize the gold in order to devalue the currency through printing. In fact, government does not want to hinder the ownership of gold by private citizens because the way their fiat gets credibility on the world market is by foreigners being able to use it to buy gold if they want to. And if US citizens are willing to sell their gold for dollars, then the US government doesn’t need to. Governments want their citizens to hold lots of gold – China, for example, encourages it. Any gold held within a country, whether in private or government hands, lends credibility to that country’s currency.

    Bitcoin, aside from its other problems, is limited in size and thus if you tried to use it as a currency, a medium of exchange, it would be highly deflationary. It may have use as a wealth reserve asset – something you store money value in, like paintings or land or gold – but it would not have use as a currency. We have no need of it for that. Dollars, euros, etc work just fine as a medium of exchange as well as providing governments flexibility. So, you could store some of your wealth in Bitcoins, but why put anything significant into that untried asset when you can use the premier wealth reserve asset used by all governments and the super-wealthy, gold? It has an unmatched track record as a wealth storage asset. That’s why I said Bitcoin is a solution in search of a problem. We already have fiat and gold. We don’t need Bitcoin – unless you want to transfer money internationally to avoid taxes or sell things illegally, and as I argued, the government can crack down on that in the case of Bitcoin much easier than it can with gold.

    [Reply]

    Anon Guy Reply:

    One more point – the day that central banks start showing Bitcoins on their balance sheets as a form of reserve, I will begin to think Bitcoin has a future beyond something like baseball cards and other fad collectibles.

    Posted on March 4th, 2014 at 6:50 pm Reply | Quote
  • RiverC Says:

    @vimothy

    The money-claims on banks only mean something if there is something to be traded beyond the bank. Currencies are barter-proxies primarily, and gold is money only because of its trust-worthiness, i.e. that it is materially gold. I believe fully the argument that fiat currency and bitcoin are identical in all things that are important to money as barter instrument, except that bitcoins don’t have a central bank manipulating it thinking it can remove fluctuations caused by human stupidity.

    I even believe that gold is only ‘money’ because people are willing to trade it; money itself is peculiar because like other ‘goods’ it is in fact not really a concrete thing at all.

    [Reply]

    Dan Reply:

    Gold has been usable as money almost everywhere there has been civilization and continually in all of Eurasia for a number of millennia without interruption, including during intervals when civilization went missing. A pretty durable reserve of trust, if you ask me.

    [Reply]

    Dan Reply:

    I wrote,

    “Gold has been usable as money almost everywhere …including during intervals when civilization went missing.”

    It occurs to me that this an important point… If the $hit ever hits the proverbial fan, is it reasonable to expect the power grid and the nodes of the Internet to function smoothly? When I was in Chennai, India in January, the power (and the Internet) went away for two hours every morning, just because keeping the grid going is difficult in normal times. January is the cooler season. In the hot season, the power situation is much worse.

    When unrest hits a country, the governments seem to be able to trivially take their nations offline. Not to mention that much of the world hasn’t really gotten online in the first place.

    And don’t HBD aware reactionaries think that keeping all power grids and all computer networks up in the future will be a challenge for our diverse society?

    [Reply]

    Posted on March 4th, 2014 at 7:17 pm Reply | Quote
  • pseudo-chrysostom Says:

    the more anti-ethical two ideal frameworks are, the more ‘monetary’ any potential cooperation between them becomes. money is a univocal phenomena, and liquidity is what makes aligning the interests of unadapting competitors possible. and as information systems advance, complex trades of multiple assets can take place with increasing rapidity. disparate moneys and markets blur together, the created system proximately approaches the transcendent nature of value to begin with, and of course better because of it. but who will be around to notice, who could notice, if a standing reserve of more thoroughly enframed beings is the future case. fit to purpose, the masters, their telos, a dim memory, an impossible thought, hail to the system.

    [Reply]

    Posted on March 4th, 2014 at 9:43 pm Reply | Quote
  • Anomaly UK Says:

    It’s probably worth pointing out the large misunderstanding going around about MtGox. If you bought BTC from MtGox and own them, nothing that later happens at MtGox can possibly take them from you. They are on the blockchain, and only your key can spend them.

    To lose anything from the MtGox failure (or any of the many similar incidents that have happened regularly since BTC was first traded), you would have had to have left either your traditional currency or your BTC “on deposit” at BTC. Doing that, you are completely ignoring the actual features of BTC, and using MtGox as a traditional 20th-century-style bank — albeit an unregulated five-year-old one created by card game hobbyists. You are in exactly the same position as if you bought oil futures or collateralised debt obligations from a similar fly-by-night organisation. The idea of BTC was not to replace 20th century banks by new banks, but to not need banks at all.

    Now, the obstacles that states already put in the path of transacting means you more or less need to expose yourselves to middlemen for a short time (I think possibly even a few days). But nobody who was using BTC as it was designed to be used could have lost anything except if they happened to be in the process of transacting at the time.

    Having said that, if you do use BTC “properly”, your assets are only as secure as your own IT infrastructure, which is to say, insufficiently. The problems of holding and transacting in BTC securely are real, and quite possibly a blocker to their widespread use. But a reliance on third parties is not a necessary part of cryptocurrency, and is actually the thing that they are primarily designed to avoid.

    [Reply]

    vimothy Reply:

    But MtGox wasn’t a bank, though, was it? It was an exchange. Its users were exposed to counterparty risk, not because they were ‘using Bitcoin wrong’, but because counterparty risk is a fundamental feature of any financial transaction.

    (Of course, if you never try to spend your BItcoin, your exposure to counterparty risk is greatly reduced. The technology works perfectly, for spherical cows in a vacuum.)

    [Reply]

    Orthodox Reply:

    In order to trade on the exchanges, you have to first transfer your bitcoins into an account. It is the same with stocks: you first have to transfer cash into your account at the broker. If the broker goes bust (like MF Global) you can lose your money.

    So putting your bitcoins into an account with Magic The Gathering Online Exchange was not a good idea.

    [Reply]

    Posted on March 5th, 2014 at 8:00 am Reply | Quote
  • Dan Says:

    Private currency can be seen as loyal opposition to the dollar. With alternatives such as gold and bitcoin gaining prominence in recent years, central bankers have been reasonably responsible. Inflation is currently around 1 to 2 percent, which is tolerable considering that the central bankers have the power to make it literally any number they wish.

    Right now, the dollar is strong because it seen as better than many other alternatives. For instance in India and Latin America, people flee to the dollar because it is better than their local alternatives.

    Kind of like the story about two friends in the woods who come upon a grizzly. The first one laces on his running shoes. The second one mocks him… “you can’t outrun that bear.” “But I don’t have to” the first one responds.

    As long as there are weaker currencies about, the dollar is protected. The electronic trading mob gets its fill of fresh meat.

    [Reply]

    Posted on March 5th, 2014 at 4:41 pm Reply | Quote

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