Adam Smith Hates Bitcoin

You could be right- there was even a well written essay I read about how governments could try and turn bitcoin into an oppressive financial system, due to the ease it provides to track every transaction.

Maybe I'll have a beef with capitalism if, after the implementation of a system which trims down what I perceive to be a self-made problem (inflation fuelling governments destructive policies), I still notice persisting issues. I can't say for now. The experiment is just beginning :-)

I hope I do not have any blinding faith in any political system. It just seems to me that capitalism is what works best, and could work better with a libertarian approach. Just like Thomas Sowel says - I don't have faith, but proofs. (Still, this doesn't mean there can't be better proofs or better things we just don't know yet.)

So I would not say I hate the banking system, no more than I hate horse buggies : it just seems to me that cars are more efficient. I would hate it if horse buggies were mandatory and cars forbidden, because it would be a loss of efficiency for society.

The current banking system performs an important role, in an efficient way, but it will hopefully made obsolete and replaced by something more efficient.

It is likely that governments and capitalism will still be involved, but between governments and capitalism, I know what I fear the most.

It's not the self interested capitalists who acts following their best interests, doing things as you said, like taking away someones houses, but the governments who takes a "moral superiority" position, use their power to benefit some well connected ones, pretend to act in the common good and violating both the letter and the spirit of the law - all the while doing the very same things.

At least the capitalist doing these things is honest in the reasons why they are done. And the "good ones", Ayn Rand style capitalist, do worry about the letter and the spirit of the laws and of a contract.

She said that beautifully : "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."

The problem here is that you believe that bitcoin is being treated differently than anything that's come before. Its booms and busts are a sign that it is being used/abused for its familiar qualities, and not as much for its novel ones.

"Just like Gandhi say - first they ignore you, then they fight you, then you win"

Except for the many, many situations where "they" ignore you, then they trample you. There is not necessarily any step 3.

1. The Great Depression and deflation is a case of a general glut -- ie a lack of demand. This wasn't supposed to happen in an economy, but can from time to time due to problems with the "symbol economy" of money and credit messing up the "real economy" of goods and services. This was Keynes' insight. This has nothing to do with agricultural surpluses, and there is no evidence that depressions will be made obsolete.

2. I also suspect you may be underestimating the size and influence of the Financial sector and people's general desire to make money. Reducing friction in transaction costs will not change or reduce the desire for specilation or arbitrage. That usually has required governmental control. Our current economic crisis is based on banks making a lot of bad, questionable bets on mortgage debt - fed by poor ratings agencies, lax regulation, a housing bubble, and monetary policy that encouraged a real estate bubble. Technology and poor regulation made us all interconnected and fragile.

3. I also suspect you may be overestimating the reduction in transaction costs that bitcoin enables. Electronic funds transfer is pretty frictionless these days, as is FOREX. Large amounts need to be flagged for potential criminal, fraud, or terrorist uses - do we really want to give up those checks?

Most transaction costs have to do with human capital - we tend to be slow, yet indispensable for many initiatives.

4. Stagflation was caused by a pile of supply shocks in the Nixon era in combination with very expansionist monetary policy assumptions in the early 70s. The inflation part was fixed as soon as Volker decided to kill inflation in 1982 by tightening the money supply. The stagnation got better by the mid-late 80s. Note that Reagan was arguably the mother of all stimulators (cutting taxes AND spending like mad). But typically Keynesian dont encourage deficit backed stimulus -- except when dealing with liquidity trap (deflationary) conditions like the Great Depression, and um, now.

5. Encouraging full employment through economic policy is quite a bit different from holding back progress to keep workers employed.

That's social policy, and a different argument - how do you insulate society from the "creative destruction" of capitalism? Go too far and you rid yourself of capitalism's core benefit (growth through innovation). But fail to protect people in the short run, and you have regional unrest and revolt, as we've seen in 18th and 19th century attempts to impose free markets on traditional communities and exchange systems. Or in Thatcher's crushing of the UK coal industry and unions in the early 80s.

On the other hand, encouraging full employment through monetary and fiscal policy is just another way of promoting an efficient market that takes advantage of all the resources (eg labour) that is available to it. It is underproducing if people aren't working and want to. Perhaps that is structural (people need training, education, etc) but in the current global recession all quantitative evidence points to it not as structural but rather a lack of demand - ie. people sitting on cash instead of spending it, which makes a lot of sense when you realize this was triggered by a debt crisis. When everyone rich is paying off their debts, people aren't going to be working as much. Unless, of course you realize that it doesn't have to be this way - since interest rates are 0 and inflation is negative.