Bitcoin: A flawed currency with a useful application for the Eurozone (2014)
yanisvaroufakis.eu
yanisvaroufakis.eu
EVE Online's economist was Dr. Eyjólfur Guðmundsson https://twitter.com/ccp_dreyjog and really did wonders with the economy, you should watch some of his presentations on the state of EVE online's economy. He was doing several pieces for their EVE FanFest.
I'm not afraid of making or admitting to my mistakes. I'm afraid of not learning from them.
1) It is clear that a deflationary spiral, defined as possessing the characteristics of being unexpected, not written into contracts or loans, and relatively severe (double digits) while accelerating is bad. The great depression makes this clear. We can also see it in the current Greek situation. However, runaway inflation is equally bad, as we can see from post WW1 Germany, and modern day Venezuela and Argentina. Is it the fact that the change in the buying power of money is large and unexpected, or is it the sign of the inflation percentage that is bad?
2) Under the current debt based money system, the negative effects of inflation fall primarily on the poor. The wealthy purchase government bonds, which protect them inflation. They also have bank accounts, or finance debt either directly or indirectly. This means that instead of inflation falling on the populace evenly, it falls doubly on the poor.
3) Under a constant money supply system that eschews debt, the rich must seek out investment that actually increases productivity, rather than doing parasitic zero-sum investments (such as bond purchases and loan giving) that merely transfer value from one person to another. This would tend to grow the economy faster.
4) Under a constant money supply (like Bitcoin in a few years), wages and prices would tend fall by however much the economy was growing (2% - 3% a year), but the raises that people give out for seniority would tend to overwhelm the wage issues.
Of course, local stock-specific bubbles can still exist, but they are always subject for arbitrage and voluntary exits. Global money bubble is more destructive because use of a certain money is enforced by laws and therefore people cannot easily exit or switch to alternative.
Hard money prevents the Fed from changing the inflation rate but it doesn't prevent random and severe changes in inflation and deflation.
From 2010 to 2013 bitcoin had a deflation rate of 96%. Which is insane any normal economy would turn Mad Max if it had that type of deflation. If I had received a loan for my house for 100k in 2010 I would have had to repay $1.5 BILLION in 2013.
Then from 2013 to 2014 it had an inflation rate 353%. If inflation leads to bubbles and we all used bitcoin this inflation would led to the mother of all bubbles.
So a thesis that says that saving is easier if you make debt more expensive has some problems.
Also: people need less debt if they have savings. And it's much safer to save your own money (when it's allowed) and have 100% control of your business/investment, than to borrow capital and be a slave.
1. Bitcoin
2. ?
3. Savings
2) Unexpected inflation actually benefits the poor because they tend to owe more debt, and own less fixed interest assets such as bonds.
3) Bond purchases and loans aren't zero sum investments. If we banned loans today the economy would not expand faster but would start to shrink very quickly. Contemplating banning loans from a demand side would be terrible for our economy because the velocity of money would shrink considerably and we would end up with incredibly painful deflation.
4) With mild long term deflation you run into demand problems and lack of investment. Deflation makes investments look less profitable then they are because hoarding money has great risk free returns, and the nominal future cash flows will be smaller because money will be more valuable. For instance if you buy a house for $100,000 and it returns $10,000 a year in rent. After 30 years of deflation it will only be returning $2,500. This means that many productive investments are not made because it makes more sense to hoard the money, leading to under investment and an underutilized economy.
The only economy that in recent history has experiences predictable deflation is Japan, and it does not look like an economy we would want to emulate :P.
Instead of most of humanity having to suffer through losses of wealth because their currencies are small and volatile, everyone will have stable currency pegged to their local price level, and they'll be paid to hold it.
This is completely different from Bitcoin, whose value arises from the cost of mining (hardware purchase, power, maintenance, and time spent), and people's willingness to exchange that for other currencies and/or goods.
This is not true, and represents a fundamental misunderstanding.
The value of bitcoin arises solely from the demand for it. The cost of mining is driven by the value of bitcoin, not the other way around - if demand for bitcoin were to collapse, the price would drop, and all rational miners whose current operating costs exceed the new price would stop mining. This would result in the next blocks being mined very slowly, and would eventually result in the mining difficulty dropping, bringing the cost of mining back into line with the market price.
I'd ask him one question: how is the idea of regulated, political and centralized money working out for you?
That's kind of a straw man, because the Euro is all of the burdens of a centralized fiat currency while lacking almost all of the benefits (or at least the ones most relevant to Greece's current situation).
Having a unified monetary policy among countries with incredibly fragmented and disparate fiscal policies is a recipe for disaster. Even in the US, fiscal policies are relatively unified at the federal level and states are prohibited from backing their own debt the way nation-states (like the US federal government and Eurozone countries) can.
And on that note, look at the USD. It's the strongest fiat currency in the world and the preferred medium of exchange worldwide, even despite all of the outstanding issues with the US economy and the state of the US national debt. Clearly a centralized, fiat currency can be powerful if you don't set it up for failure from day one (as the Euro was).
The UI of this place is terrible on mobile. Fingers aren't styluses, and nobody (out to three decimal places...) uses a stylus to interact with a mobile phone.
There's a difference between a temporary setback and problems with the fundamentals. This is the case in the private sector and it is the case with sovereign entities, and the people who keep buying US Bonds obviously understand this.
> and the state of the US national debt.
Debt is only a problem if you can't service it. This is doubly true with sovereign debt, where servicing debt provides people a safe place to invest their money.
None of what I said is controversial among people who understand economies. The fact people whine and moan about the USA's debt is a function of how easy it is to score cheap political points by taking advantage of the ignorant.
> None of what I said is controversial among people who understand economies.
I have a degree in economics, so yes, I understand how sovereign debt works. The point is that even if the market never loses faith in the US's ability to pay back its existing debt, if it stops being the most trustworthy source of newly-issued debt, the US loses a great deal of power.
The US is completely different. No matter how bad things get in Detroit, nobody seriously suggests expelling Michigan from the US.
Note that some BTC enterprises today like Coinbase actually defer blockchain transactions when users are exchanging in their network. That way they can aggregate small transactions and enable temporary chargebacks. But that really is all a bank can do at most - delay doing the final transactions - because they have to commit them to the global blockchain or you never actually made a transaction.
An analogy would be walking into a bank and handing the teller $100. This money goes into the cash draw (analogous to a hot wallet). When the customer behind you asks to overdraft their account and withdraw $100, your note is handed to them, but your account balance remains at $100. Now you both have $100.
Coinbase does not "defer" or "aggregate" transactions between their customers. Most internal transactions are processed "off-blockchain", which simply means that ledger entries are being updated in the background and no actual Bitcoin is being transferred.
Fractional reserve lending "backed" by BTC is possible, but then, you're not actually lending BTC - you're lending something that is "not BTC" - namely, a promise to pay BTC on demand, which is no different than fractional reserve lending that was backed by gold in the past (or, as it is today, lending that is backed by the value of the thing that is being lent - fiat currency).
The problem is that you can't think of BTC like a traditional currency because it isn't. Because it is digital in nature, it can act very much (almost exactly) like a modern currency, but when all is said and done, what you are left with is something that is much more like a commodity than actual currency.
Coinbase is free to do their internal accounting in any way that they wish as long as the numbers come out 'correct' on the balance sheet, but if I deposit BTC with them and then subsequently use that BTC to purchase goods and services, actual bitcoin will be transferred from me (via coinbase) to the merchant. The merchant receives actual bitcoin as a result of that transaction, not a promise to pay bitcoin at some point in the future. This is not fractional lending.
Banks are legally allowed to issue credit up to a specified multiple of their reserves, so, extending your analogy above, imagine an additional eight people behind you requesting to overdraft their account by $100. As a result of your $100 deposit, the bank is now legally authorized to approve each of those requests for a total of $900 in credit that was created out of nowhere. In point of fact, however, the bank can't just create money out of thin air. In order to extend this credit, they must have a reasonable expectation that the loan will be paid back - to act otherwise would have negative effects on the economy and the bank itself.
You just can't do that with BTC, and, in my opinion, that is not a limitation, but a very positive aspect of bitcoin - it doesn't fit into the current economic model.
That's not exactly how fractional reserve banking works. Banks can lend out a multiple of the reserves they hold, but they can't lend out more than their total cash on hand. If $100 was all our hypothetical bank contained, then it could only lend out $90 of it, not $900.
The exact same thing could be done with Bitcoin. If you put it in a bank, they could lend this out to another party (and use future deposits to pay you back if you tried to withdraw your BTC).
However, the point that I am trying to make is that you cannot do that with bitcoin because you cannot lend out BTC that you do not have. If you start out with 100 BTC, you can never increase that amount by any kind of fractional reserve lending - there will only ever be 100 BTC.
The idea of "BTC credit" expressed as actual BTC makes no sense -- 1 BTC is 1 BTC it is the thing that is used for trade. If you want to create a new kind of currency that is backed by bitcoin and start a bank that uses that currency for fractional lending, then there is nothing to stop you, but you would have to operate in something other than actual BTC for credit - using actual BTC for that just won't work, as you'll quickly run out of any BTC that you had after only a few transactions/loans.
You may have a good grasp of BTC, but you seem to have misunderstood lending and banking quite badly. Lending doesn't mean two people have the same money. Lending is when the lender takes money that they have, and give it in the borrower in return for a future claim of money from the borrower.
The fact that only one person can have a given BTC -- the same is true of, say, gold coins -- doesn't prevent fractional reserve banking with BTC (or gold coins.)
> Banks are legally allowed to issue credit up to a specified multiple of their reserves, so, extending your analogy above, imagine an additional eight people behind you requesting to overdraft their account by $100. As a result of your $100 deposit, the bank is now legally authorized to approve each of those requests for a total of $900 in credit that was created out of nowhere.
Er, no. Assuming the 9x multiple you seem to be assuming, and assuming that the bank was already at its limit when you made your $100 deposit, the bank would be legally permitted to honor only $90 in overdrafts from your deposit -- not $100, and certainly not $900 -- as they would need to retain the remaining $10 as the additional reserves to cover the $90 lent out for the overdrafts.
This does increase a measure of the money supply that includes both actual cash in people's hands and depository accounts, because now you have the $100 on account, and someone else has $90 they've borrowed (which they might deposit in a bank that could then keep $9 and lend out $81, etc.)
But it doesn't require the bank to magically create dollars to loan out that didn't exist before (the created money is the account balances that aren't fully covered by reserves.)
> You just can't do that with BTC,
You can do it with BTC, gold coins, etc., exactly as much as you can do it with dollars.
MtGox operated as a fractional reserve for a while, and it failed due to two reasons:
- Instead of investing the bitcoins to debtors they "lost" them.
- The complete lack of deposit insurance ensured that a bank run happened as soon as doubts of their liquidity circulated.
If you manage to fix these two problems (the second being the harder one - you'd have to work with different exchanges/banks and make sure they are regulated so they don't all fail) fraction lending isn't a problem.
0 - http://www.wired.com/2015/04/overstock-files-offer-stock-wor...
the EU expansion to the east broke greece's neck. a well educated, motivated workforce entered the EU, but smartly like Poland did not join the Euro. Amazing growth in Poland throughout the crisis of the last 7-8 years, catastrophe in Greece.
See comments from Lithuania's prime minister and others who are getting fed up with Greece.
Interestingely enough this fits Samuel P. Huntington's predictions of the Clash of Cultures. He had Greece as part of the orthodox area, separated from catholic/protestant Europe which spanned from UK to Poland. He got a lot of shit for his theories at the time, was quite prescient in hindsight.
See this graph http://i.imgur.com/vRsIMvt.png
edit: Oh I see now who the author is :D well euros or bitcoins the way Greece is going inlation or deflation will be the least of their worries....
Bitcoin is deflationary (as negative inflation) in the first sense and this is the deflation yanisv is talking about.
Yes, BTC is monetarily inflating, but
1) It's all baked in. We know exactly how much BTC is generated and will be generated and when it will stop.
2) The demand for BTC is growing, so we don't see the price collapsing exponentially.
It is actually a great place to store value, buy BTC, and over time there is just less BTC so BTC becomes more valuable.
Its not good for a daily currency to run an economy on. Something like dogecoin would do that better, albeit even doge is kinda doing it wrong because they just linearly increase the monetary base by 5 billion a year forever.
Nothing against BT...but sheesh.
Blogging? Yes
http://yanisvaroufakis.eu/2015/07/03/imf-backs-ever-so-pecul...
From everyone else, it's mostly been a lot of childish accusations, vague threats, moralizing, and pointless rhetoric. To the extent that the vast majority of the German public, for example, don't have the slightest clue what the Greek government is even asking for.
After listening to statements and interviews by Lagarde, Dijsselbloom, Juncker, Draghi and Scheuble speaking, I don't think that's a compliment. It's easy very easy to dwarf them.
Chain of causation is: money printing used to buy debt -> underpricing of debt risk -> unsustainable debt funded malinvestment -> debt collapse -> deflation as effective money supply shrinks
The irony is that they use fear of deflation to justify the very act that causes the malinvestment and debt collapse.
However I would be surprised if Spanish, Irish and Portuguese citizens are not looking at the Greek situation and wondering if they need to take some action. Coinbase, circle etc need to target these markets before they experience capital controls.
You would be forgiven for thinking there are more troubled countries that could be targeted by speculation. Italy has a 130% debt-to-GDP ratio, is still basically in recession, and has 50% public spending to GDP. Spain is approaching 100% debt, 44% public spending, and it looks like it's getting worse. Then there is Portugal, Cyprus and so on. However, if Greece goes in full default, the Euro will likely get battered and all these positions will potentially unravel, including the Irish one.
It is. Spain is scheduled to elect the local Syriza equivalent in November.
Spain lacks a cultural framework that would make the population want market based reforms, as there is so little trust in institutions, employers and employees. Its labor market is not bad because it's impossible to find productive Spaniards, but because productivity, both at the employee and the firm level, is punished.
Podemos is coming, and it's not going to be good for the country. But the alternatives are pretty bleak. Fortunately for Spaniards, a Greece-like catastrophe in Spain would be the death knell of the Eurozone, so the troika will probably bend to Podemos demands, as far as spending goes, as long as some market reforms are done along with said spending. Spain's one way out of this mess is growth.
I'm no expert on Spanish matters, but didn't they elect their current government, which advocated market based reforms, right in the middle of the crisis??
The austerity has largely been targeted at vulnerable people who don't actually cost very much in total.
https://rwer.wordpress.com/2011/09/06/rwer-issue-57-richard-...
Sure, but then we aren't talking about the Greeks, but about all the Europeans.
And escaping the devaluation of the Euro by jumping to BTC seems like a foolish move: http://www.cryptocoincharts.info/pair/btc/eur/kraken/1-year
There are capital controls preventing transfers to Greece, that would prevent yiu from transferring from Germany to Portugal, so your solution would not work.
As far as I know, the controls limit the amount from Greece, not to Greece. Of course, withdrawing can still be a pain, but so is exchanging BTC for Euros.
In my case, I'd just take a short trip to Spain and withdraw there, or if Spain is also under control, transfer some money to any of my friends abroad and ask them to send it to me in cash.
And if they can take it from one bank they can take it from another.
Who is "they"? The Greek government can't simply take from a German bank, even if the account holder is Greek.
If you look at the longer run of BTCs valuation you see bubbles and the price gravitates back to reasonable appreciations for its market size.
I'm still wondering if this whole Eurozone crisis will cause another bitcoin bubble, though. I have 10 BTC I'd like to see make me some free USD =P
The hoops you propose to jump through to maintain a source of euros is as complex as using bitcoin, however it has more points of failure.
Greeks are currently looking at a seizure of some assets over €8000 held in banks. Yes they may not be able to seize it From a German bank however the germans could seize it themselves. If the shit hits the fan throughout the euro area then your money and savings are at risk.
In both these situations the bigger issue is the failure of euro and that is a potential risk.