Why a Free Society Needs a Free Money
bitcoinmagazine.com
bitcoinmagazine.com
Money is a medium of exchange. Historically, it's been mostly very, very unreliable, and over the last 100 years or so has actually been remarkably solid even as a way to store wealth. But if you want to store wealth for a long period, currency is not your best bet by any stretch.
http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...
Inflation that is rapid and is not covered by interest is most definitely an erosion of wealth.
Specie backed currency was a much better store of money than fiat currency.
For example, gold was $35 dollars an ounce when the US went off the gold standard at the end of the Bretton Woods agreement in the early 1970s. The USD has now lost 95% of it's purchasing power against gold since then. It took the Romans 200 years to do the same with a currency backed by gold.
However, this is not to say that Specie backed currency is a good idea. The expansion of the money supply is, overall, a good thing when well managed. Indeed, a great problem with bitcoin is that it doesn't expand as the economy does.
There is an excellent book by a former FT journalist who now works at The Economist on the history of money called 'Paper Promises' that should be on anyone's reading list if they want to understand money, and indeed the economy, better.
Specie backed currency issued by a strong, ethical central bank with a solid management team in a stable country might be a better store of wealth - but how rare are those? Historically, very.
In the long run, we are all dead and there is no good store of wealth. In the short run, however, diversified investments in stable countries are a decent store of wealth - certainly better than any currency holding. Which is why you don't see rich people hoarding vast sums of cash. They typically keep very little money in the form of cash, because it's the least reliable. Cash, currency, is valuable as a medium of exchange, not of storage.
"When it comes down to it, the leaders of the Weinmar Republic were just running an experiment."
This makes it sound like the hyperinflation was the consequence of some recklessness, or an experiment carried out in a vacuum. The reality was very different (via WP):
"The "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports.[6]"
The Weimar government had no choice but to keep shovelling hard currency across the border to France while simultaneously being limited in its ability to earn more. This looks, economically, like a huge trade imbalance which drove down the value of the Mark, and the printing started as an attempt to keep up with the rapidly collapsing exchange rate.
It was not so much an experiment as an act of desparation by a government that was being looted at gunpoint.
Just as famine in the modern world is a political problem rather than primarily an agricultural one, hyperinflation is driven by political or economic collapse rather than some vaguely defined irresponsibility. Also, anyone in the US or UK who is scared of hyperinflation at the moment must not be aware of how close to zero and well-managed inflation actually is.
All hyperinflation in modern history has occurred for one reason, and one reason only. That is loss of confidence in currency.
Loss of confidence in a currency can be brought about by many reasons, but there is one constant factor. When hyperinflation has occurred in modern history every economy involved was decimated as and when it occurred. Examples: http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...
Is it well-managed? Bernake himself said we're in uncharted terretory: http://www.businessinsider.com/bernankes-2010-qe-2012-8
- it's a very poor third world country (Angola, Zaire, Zimbabwe etc)
- countries coming out of Communism (all the 1992 events) or other revolution (revolutionary France)
- hyperinflations triggered by war (Germany, Greece etc)
- those predating a 20th century understanding of economics
You're basically left with South America, which is somewhat exceptional and has a strong connection with the tendancy for revolutions, coups, US interference etc to trigger crises there.
US inflation, meanwhile, ticks over at a few percent and is resolutely stable, despite the best efforts of the House to trigger a crisis.
What do the years 1971, 2003 and 2010 have in common? In each year, low U.S. interest rates and the expectation of dollar depreciation led to massive "hot" money outflows from the U.S. and world-wide inflation. And in all three cases, foreign central banks intervened heavily to buy dollars to prevent their currencies from appreciating.
When central banks issue base money to buy dollars, domestic interest rates are forced down and domestic inflationary pressure is generated. Primary commodity prices go up quickly because speculators can easily bid for long positions in organized commodity futures markets when interest rates are low.
The world saw a surge in the dollar prices of primary commodity prices in 1971-73 following the Nixon shock of 1971 when the U.S. abandoned the gold standard. There was also a commodity price surge during the Greenspan-Bernanke shock of 2003-04, when the federal-funds rate was reduced to an unprecedented low of 1% followed by a falling dollar.
http://online.wsj.com/article/SB1000142405274870440570457606...
i m not sure if this is true - i read conflicting accounts. Some say that enough food stuffs are produced in the world to feed the entire world population and its a "distribution" problem, while others claim that arable land is either slowly decreasing, at least, isn't increasing, and will lead to food shortages sooner or later (sooner rather than later given bad climate).
The "sooner or later" argument is that of "Limits to Growth"; we're not there yet.
Except he also ordered hits on his enemies, or at least tried to. Feels violent to me.
>That’s what’s threatened by taxation, regulation and intimidation.
If bitcoin will have any chance of becoming a legitimate currency it will have to be regulated and most importantly taxed. Bitcoin doesn't somehow make you exempt from paying taxes just because it is a digital currency.
On the flip side, I agree that bitcoin can serve as a useful tool to conduct experiments that may be hard to conduct with other currencies and that opens up very interesting possibilities.
1950-2000 Copyright laws were a natural fit for the technologies of the day. It made sense to sell music on discs or tapes. It was easy and possible to create and enforce laws which regulated this. This happened to result in an enormous industry where big profits were made. Then technology changed in a way that made copyright laws a bad fit. The power accumulated in that industry allows them to fight to try and force the world to behave as it had previously, to keep their business model alive.
Over the last decades technology and the general structure of advanced economies (especially in Europe) have allowed a relatively (relative to other times & places) high levels of taxation government services. Governments learned how tax while avoiding destructive reactions in the economy. In a lot of cases this was trial and error (eg, >60% marginal tax rates for high earners). Subsequently a lot of European countries are now at a point where public spending is ~43% of the total.
If technology starts to threaten these models, I think we'll find it very hard to adjust. Governments will have the choice between adapting (unlikely), raising taxes in less disciplined and potentially more disruptive ways, or trying to keep the world as it was by preventing the new technology from being adopted.
I don't think bitcoin is the only such threat. Income inequality might be such a pressure. Mobile freelancers are another. Anyway, if bitcoin gets to the point where it genuinely threatens a government's ability to collect taxes, we're in for trouble.
Bitcoin is neat, but this is not correct.
"Try something and see how it goes", while worthwhile, is not science. Science requires controls and repeatable experiments.
The reason that macroeconomics is at least 50% palm reading is that there is no way to, say, take 2,000 identical universes, bail out the banks in half of them, and compare.
(Science is not the only way to determine truth; for example, you can't do repeatable experiments to identify a murderer.)
>Then you have what we’re seeing in America, which is the long, slow erosion of wealth and savings through a steady stream of monetary inflation.
Inflation does not reduce wealth. Inflation reduces the value of money. All real goods and services are worth what they're worth, regardless of the stick used to measure them. Inflation only changes the nominal measure of wealth, not wealth itself!
Furthermore, economists generally regard a small amount of inflation as better than a small amount of deflation. First, inflation helps keep prices and salaries less sticky, by constantly devaluing them. Second, inflation helps keep the banking system working (I believe). If nominal interest rates ever go negative, people will withdraw deposits from banks and just hold cash (which always has a nominal interest rate of 0%).
>Not only does inflation slowly eat away at individual wealth, but it also disincentivizes savings.
How does inflation disincentivize savings? Assuming that nominal interest rates are constant, then yes, inflation leads to lower savings. But when inflation is high, nominal rates are high, and when inflation is low, nominal rates are low. The relationship is not clear. Also, remember that S=I, savings=investment. A common misconception is that savings is putting cash aside for the future, whereas investment is spending cash on the future. However, they are actually the same thing. Read more about why savings=investment here: http://www.themoneyillusion.com/?p=12617
>One Bitcoin user created an exchange which completely solved the problem of violence in the drug trade.
This user also allegedly hired a hitman to murder someone.
>Governments try to control currencies. With all that power, shouldn’t they seek to learn as much about them as possible? Why would anyone attempt to kneecap thousands of unpaid, volunteer experimenters, who are constantly sharing with the world what we’re learning about how money works? It’s very odd.
I think the US Government is concerned with people breaking its laws. In this case, illegally buying drugs and illegally not paying taxes. It sounds like a reasonable concern to me, though I admit I'm not well informed and I welcome additional comments.
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One big downside of a "free" currency is that there are no restorative forces to keep its value constant. A huge advantage of having the US government behind the dollar is that the US can control the value of the dollar. Most of the value here comes, paradoxically, not from controlling the dollar but in markets believing that the US can control the dollar. Those market expectations then themselves keep the value of the dollar mostly constant. Having a currency with a predictable and constant value is hugely important for trade. For this reason, I can't imagine Bitcoin ever succeeding on a large scale for a long time.
Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. This is destructive.
It's destructive because the amount of money the government will print is not fully predictable, so it creates financial risks for people who plan ahead.
It's destructive because the new money enters the economy unevenly -- and basically unpredictably and unfairly, not efficiently.
It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation.
So inflation does reduce wealth, overall.
i totally agree with all your points, except inflation doesn't reduce wealth (the same amount of goods and services are produced regardless of inflation), it redistributes wealth from those who cannot hedge against inflation (usually those who don't have lots of money), to those who can.
While nominal interest rates _might_ somewhat match inflation, in practicality, having an account with a bank that you need for day to day means you don't get much interest (often there are rules like "withdraw once, and lose the monthly interest"). Sure, when you are rich and have an investment account paying 10% pa, then it somewhat balances inflation.
I want to know what the major cause of inflation is - i suspect it is a result of fractional reserve banking.
Moving money around disruptively (via inflation or other methods) makes it harder to do economic planning and successfully do large wealth creating projects. So it does mess up wealth creation.
You say you agree with my points but you are disagreeing. Hopefully this clarifies.
A major cause of inflation is printing money.
Fractional reserve banking is basically the same thing as loans. It increases the amount of money that exists only if you ignore the amount of debt that exists. If you subtract people's debt when considering how much money they have, like you should, then nothing actually happens to the money supply.
(In practice, banking is complicated by factors like FDIC insurance. But the basic idea of borrowing money then loaning out the borrowed money, while it does come with some issues, doesn't cause inflation because loaning neither creates nor consumes money, it balances out (unless you selectively ignore half of what's happening))
Unless he can find investors...
You are right that if a factory builder was saving money to build a factory, then inflation hurts his output.
However, if a factory builder takes on loans to build a factory, then inflation actually helps his output!
I would expect that most factories are built from loans, rather than savings. In general, banks are creditors and businesses/people are debtors. So perhaps inflation hurts the banking sector but helps other sectors.
Lastly, inflation only hurts the factory builder if he's using money as a store of value. If he buys stocks/bonds/commodities, then he can store value without exposing himself to the risk of inflation.
What do you think about these points?
Most theorists revolve around the effects of economic growth and supply/demand sudden changes.
However, it encourages investment, which in a modern capitalist economy is far more important to wealth creation.
Also, I believe the down-voting in my previous comment was because some took my comment personal, not because it had something condemnable in it.
Call it destructive, but historically it's the only way to prevent society from blowing up in an exponential debt meltdown.
Well, that or banning usury.
>It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation.
Except that the actual source of wealth is just labor and materials, and capital accumulation is a vampiric disease on the honest economy.
Instead of bravey we could call it risk-taking if that would make you feel better. You speak of "the actual source of wealth". Risks that can be rewaring or not. They require something for -possibly- nothing. An entrepeneur takes risks, does research and only when he is succesfull will he or she create value, thus wealth.
>I think you're mixing up labour with human capital. E.g. the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value.
I'm not mixing them up; there's just very little difference between potential labor and actual labor.
That only means that a worker can do more than labor, not that labor is all there is.
Or banning maturity transformation, http://unqualified-reservations.blogspot.in/2008/01/straight...
> Deflation (a jargon word that basically means printing money) transfers money from debtors to the rich. This is destructive.
Yep, the opposite is at least as true.
No. Inflation is a decrease in the value of money relative to the goods and services in the economy. As with all things, the price of currency depends on the supply of currency, but as with all things, it also depends on the demand for currency, speculation, etc.
> It's destructive because the amount of money the government will print is not fully predictable, so it creates financial risks for people who plan ahead.
Nothing in this world is fully predictable, but inflation for the US dollar has been approximately 2% per year for a long time, although it is now somewhat lower. This is much more stable than the price of bitcoins which can vary significantly day-to-day. If I'm planning, what I care about is prices, i.e. inflation in my definition, not quantities, inflation in your definition.
> It's destructive because the new money enters the economy unevenly -- and basically unpredictably and unfairly, not efficiently.
There's a great deal of difference between fairness and economic efficiency. You undermine your point by confusing the two, and I'm not sure what you mean here.
> It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation.
No. Inflation discourages holding cash, by which it encourages investing in the real economy. If you put your money into some investment whose value is tied to real goods and services (e.g. a factory or rental apartments), then the value of your investment will not be impacted by moderate, predictable inflation.
What? Fair == effective. Fair should be the number one concern for an economic system. Anything else means someone somewhere is sucking up the wealth.
Yes, in the end, companies are at fault for not increasing the salaries with inflation, too, but inflation is what enabled them to leave them as it is, because most people don't really keep track of inflation, and don't know when their salaries should increase and by how much according to the inflation. So the companies play this "trick" on them, by keeping salaries the same or increase them by much less than the inflation rate.
Short version, the people with first access to money (banks, hedge funds) are able to get the new money and use it before the increase in the money supply is reflected in the asset prices.
http://globaleconomicanalysis.blogspot.no/2013/02/reader-ask... http://globaleconomicanalysis.blogspot.no/2013/03/inflation-...
The reasons for the high inflation until 1923 are very well understood. And IIRC the German government knew that inflation would be caused by their policies, maybe they were surprised by the extent but certainly not by the inflation itself.
Much more interesting was the sudden end of the hyper inflation through the introduction of the Rentenmark. Which wasn't an official currency.
bitcoin definitely goes a ways towards fixing some of these problems and i think the author is right to cite it as an epic experiment.
Government backing can certainly be a valuable feature of a currency.
FTFY. :-)