I completely understand this argument, and I've heard it many times before. I'm not entirely sure I agree with the fundamental premise though. I'm not convinced that encouraging economic growth is actually worth the required level of allowing rich guys to literally print money and use it for their own gains, which effectively what the entire central banking and banking system is and does.
What Bitcoin shows us about how money works
21–30 of 90 posts
Re: What Bitcoin shows us about how money works
#22Good article.
Two things were not addressed though, which I think have a bigger impact than the things he mentions:
1 - scalability (e.g. transactions per second) of the bitcoin block chain is abysmally low. So low in fact, that today’s society would crumble on it as it currently exists;
2 - credit markets are not addressed. How do you loan money in a bitcoin world? Our society is built upon credit transactions, from buying houses to wasting money on gadgets with credit cards. If debt cannot be issued, then it will never amount to more than second place. Perhaps a medium of exchange for the Zimbabwe’s of the world, but not supplanting a modernized country’s currency.
[edited for spelling typo]
Re: What Bitcoin shows us about how money works
#23Overall I like the article, but a few points of disagreement: 1. The US dollar has intrinsic value. That intrinsic value is that the US government accepts it as payment for taxes. Regardless of what currency you conduct your business in, the USG accepts its cut only in dollars. That creates intrinsic demand for dollars, and links that intrinsic demand directly to the US GDP. 2. Bitcoin also has intrinsic value. That…
The problem I have with your criticism is that the word intrinsic has too many definitions to be useful for communication. Even within economics it means very different things when applied to companies vs. stocks vs. options.
In this context, not a specific technical use, my best understanding of intrinsic would be the value of something apart from any external forces or interest (extrinsic value). The intrinsic value of gold comes from its usefulness as a material, or from its attractiveness, not from the fact that it is accepted as a means of exchange. The fact that a US Dollar is accepted by the US Government for payment of legal debts is an extrinsic factor, just as its general usefulness for exchange of goods in the market is extrinsic. Intrinsically it has as much value as any other pretty piece of paper.
However I can see that there is a worthy distinction to be drawn about US dollar vs. Bitcoin in the recognition of the former by the US government and other parties. I just don't see intrinsic as the best descriptor for that quality.
Re: What Bitcoin shows us about how money works
#24Earlier quoted context omitted.
How often does one get "firm evidence" about how future human affairs unfold?
We quite often get firm evidence, and the evidence turns out to be wrong. But I'm a sceptic, which is why I never bought any Bitcoins for $1 in 2012.
I have no idea whether that will happen, just trying to express what I think the rational case is for investing in Bitcoin today.
Goldbugs / conspiracy theorists have a line of argument where they describe all the fiat currencies that have ultimately experienced corruption and hyper-inflation. So I think it's fair to say that running a fiat currency successfully for more than 500 years is something that is unprecedented in the history of the world.
So over a long time horizon this makes Bitcoin extremely interesting. It's not a question of whether 1 BTC will one day be worth millions of USD, it's a question of when. There is a good chance it will be hundreds of years from now if at all.
Much financial risk is in fact sovereign risk in one form or another. This doesn't mean it's rational to hoard gold or BTC, but for entities that have a long-term view of their own future, it makes sense to care a little bit and to diversify.
Even if 10% of the long-term entities diversify into Bitcoin, that alone will drive the price up substantially. It's far too soon for that to have happened.
We are also entering an era where politics are once again a bit part of international exchange, which adds additional sovereign risk for many areas of international business and financial planning.
But Bitcoin faces the same kinds of risks as governments for corruption, mismanagement, etc. The genius of it is that the governance model makes it a lot harder for one party to really control what happens with it.
Re: What Bitcoin shows us about how money works
#25>"A bitcoin is a number, and that number has no utility outside of its ability to be accepted by someone else. Unlike gold, the the minimum value of a bitcoin is zero— its value if everyone stops believing it works. This is one reason why a bitcoin is a risky way to hold assets." I think people forget that there is a lot of value to a censorship resistant currency. Before Bitcoin was worth hundreds or thousands of do…
Bitcoin wallet can be seized and the transactions are traceable and public, so a sufficiently determined actor can figure out who has it and how much.
Then enforce their cut with violence.
Re: What Bitcoin shows us about how money works
#26> It’s pretty easy to understand that if the government were to suddenly double the number of dollars in circulation, the value of a dollar would go down by approximately half. Just because it's easy to understand doesn't mean it's correct. For example, the US money supply more than doubled in the last 10 years, yet the value of a dollar has not halved. M0 quadrupled in 10 years: https://imgur.com/a/L9mDx M1 tripled:…
Personally I think this is fairly obvious too. If the government prints a whole bunch of dollars and gives them to somebody who will just put them in a Scrooge McDuck vault so that they can dive in to them the net impact on inflation will be nil.
Less obvious is the strong dampening effect that industrial slack has on inflation. Printing more dollars can mean more cars get shifted off the lot instead of the same cars going for a higher price.
Re: What Bitcoin shows us about how money works
#27> It’s pretty easy to understand that if the government were to suddenly double the number of dollars in circulation, the value of a dollar would go down by approximately half. Just because it's easy to understand doesn't mean it's correct. For example, the US money supply more than doubled in the last 10 years, yet the value of a dollar has not halved. M0 quadrupled in 10 years: https://imgur.com/a/L9mDx M1 tripled:…
> M0 quadrupled in 10 years: https://imgur.com/a/L9mDx Presumably the demand and market forces have changed for the dollar in that time. If the central bank doubled the supply in one day, don't you think that would have an (approximately) halving impact on the value?
Here's a way to think about it using simple identities.
1) Nominal GDP = Money Spent
2) Nominal GDP = Price Level * Real GDP
3) Money Spent = Money Supply * Velocity
Therefore
4) Price Level * Real GDP = Money Supply * Velocity
So if supply doubles but velocity halves while real GDP remains constant, then there's no effect on prices.
Economists call this "pushing on a string".
The Federal Reserve increases the money supply when it buys securities like Treasury bonds and collateralized mortgages.
This puts more money in the hands of banks, brokers, and wealthy investors who used to own Treasury bonds and collateralized mortgages and now they own money instead.
Banks, brokerages and wealthy investors don't spend money as fast as regular people do. The money sits idle in savings and bank reserves.
That drives the velocity of money down as supply increases, and it's exactly what happened over the last 10 years: https://imgur.com/a/dtVJq
As M2 supply doubled, velocity dropped a lot. That's why the value of a dollar didn't halve even though the supply doubled, tripled, or quadrupled depending how you measure it.
Re: What Bitcoin shows us about how money works
#28> It’s pretty easy to understand that if the government were to suddenly double the number of dollars in circulation, the value of a dollar would go down by approximately half. Just because it's easy to understand doesn't mean it's correct. For example, the US money supply more than doubled in the last 10 years, yet the value of a dollar has not halved. M0 quadrupled in 10 years: https://imgur.com/a/L9mDx M1 tripled:…
> M0 quadrupled in 10 years: https://imgur.com/a/L9mDx Presumably the demand and market forces have changed for the dollar in that time. If the central bank doubled the supply in one day, don't you think that would have an (approximately) halving impact on the value?
It depends on who gets that pile of shiny new cash!
Re: What Bitcoin shows us about how money works
#29> It’s pretty easy to understand that if the government were to suddenly double the number of dollars in circulation, the value of a dollar would go down by approximately half. Just because it's easy to understand doesn't mean it's correct. For example, the US money supply more than doubled in the last 10 years, yet the value of a dollar has not halved. M0 quadrupled in 10 years: https://imgur.com/a/L9mDx M1 tripled:…
> M0 quadrupled in 10 years: https://imgur.com/a/L9mDx Presumably the demand and market forces have changed for the dollar in that time. If the central bank doubled the supply in one day, don't you think that would have an (approximately) halving impact on the value?
if they doubled money supply and distributed it 1 for 1 to all current dollar holders then in theory the expected price increases (inflation refers only to money supply amount, despite popular usage) would occur before any of the new dollars were spent into circulation.
if they doubled the money supply, evenly distributed it AND those new dollars were all spent at the same velocity then the expected price increase would certainly happen.
distribution & velocity are huge.
the ability of the new dollars to debase the old dollars only happens when they are spent into the economy.
the first parties to get and spend the new dollars receive the benefit side of inflation/price increases.
these bankers and economists will try to take credit for anything that has a positive twist to it, statistically speaking, but dont be fooled the central banks have very few tools and common sense + gut instinct is your friend when you're living underneath a government instituting financial repression (macroprudental policy).
Re: What Bitcoin shows us about how money works
#30Overall I like the article, but a few points of disagreement: 1. The US dollar has intrinsic value. That intrinsic value is that the US government accepts it as payment for taxes. Regardless of what currency you conduct your business in, the USG accepts its cut only in dollars. That creates intrinsic demand for dollars, and links that intrinsic demand directly to the US GDP. 2. Bitcoin also has intrinsic value. That…
> That intrinsic value is that the US government accepts it as payment for taxes That can be argued to be an abstract utility for the US Dollar, but it is not an argument for the value (or "intrinsic value", whatever that means) of the US dollar in that the value of it is what determines the tax obligation. That is, if I own taxes on a non-USD transaction (say capital gains for BTC sales), the amount of those taxes i…
> That can be argued to be an abstract utility for the US Dollar, but it is not an argument for the value (or "intrinsic value", whatever that means) of the US dollar in that the value of it is what determines the tax obligation. That is, if I own taxes on a non-USD transaction (say capital gains for BTC sales), the amount of those taxes is dependent on the value of USD. There's no forcing function -- if USD is valuable, I owe fewer dollars, if USD is cheap then I owe more dollars. There's no net demand.
In what sense is there no "net demand"? There is a fixed (at any given time) amount of USD in circulation. People will need that USD to pay taxes. That is the demand side. Where is the supply side to make it net zero?