Rethinking the Monetization Taboo. Relevant for BitcoinSphere!

An interesting, if obliquely written, post by Adair Turner caught my eye a couple days ago.
Let me dare interpret Mr. Turner’s words, if I may. “The money has already hit the streets so, whichever way the governments’ accountants choose to cook the books is irrelevant, except for the fact that we all like to save face. I cannot imagine why economic agents should care whether the pieces of paper stored in their central banks’ vaults say one thing or the other or do not exist at all.”
I couldn’t agree more.  Zimbabwe, Weimar, Hungary or Venezuela differ from the US only in that, beyond a certain degree, face cannot be saved and monetary illusion collapses.  I remember the One Trillion note proposed by Mr. Krugman fondly, because if comes closer to admit reality, i.e. the government can inflate whenever they feel like and they are already doing it with gusto. That they are doing it in the “right” amount it is another story and that they will be equally willing to deflate when prices catch up is another.
The real game is one of redistribution, as different degrees of inflation move wealth between their citizens’ pockets. I hope one day societies are mature enough to live without the thin veil of this illusion.

Claudio Migliore

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Bitcoin is not a currency

An article on Credit Writedowns

Strictly written and read, reasonable points.  Nevertheless, reality has a way of overrunning literal government diktats that are out of touch.
Once enough people split restaurant bills and remit to their families via bitcoin, two things will happen:
– Individuals will feel entitled to ignore a stupid confiscative tax requirement that takes 5, 6 or 21.5% of the food off their children’s table in Mexico,
– The IRSs of the world will not be able to keep up with the deluge of microtransactions to enforce sales taxes.
In the end, whatever name (currency, money, asset, commodity, payment mechanism) you attach to bitcoin, if people do not accept that a government take a cut of a few percent on a money transfer, worse than what a bank now charges, it will not happen.

The Times of India: For Bitcoin to succeed, it has to embrace the government

This guy gets it totally wrong.  It is the government that can (and probably should) embrace Bitcoin and not the other way around.
Bitcoin cannot embrace anything, because it has no leader nor free will.  Government, on the other hand, has the ability to accept a new technology and a new way to account for, transfer and store value and, if its leaders or its voters want to, a new way to govern where currency manipulation is not rampant.

In Search of a Stable Electronic Currency

This one went past me until today.  Professor Robert Shiller writes a piece on March 2nd titled “In Search of a Stable Electronic Currency”.  It is utterly commentable, even if not new at all.

Shiller makes the usual unsupported comment about bubbleness of Bitcoin, already expounded by him at Davos and by many others on most media.  Not very original and, I believe, well discussed and debunked in many fora.

The fun thing is his plea for indexed currencies.  It goes like this:

Since money is a poor unit of account because it, generally, inflates (this claim is made obliquely, probably not to offend the inflators), let’s adopt indexed “quasi-currencies” based on a basket of goods.  The example of Chile’ UF is celebrated here by Prof Shiller himself.

In fact, Shiller’s paper speaks with regret about the second thoughts in Chile, where they realize that now the UF is turning from an anti-inflationary measure into a perpetuator and propagator of inflation.  The Chilean (very practical people if you ask me), used the UF as a means to straightjacket inflation, to a point where their discipline in the peso is now better than the lagging measure provided by the UF.  It is now like a waist belt.  It no longer strangles a runaway belly so you now have the luxury of worrying it can slightly widen your waistline.

However, he goes on to proposed many baskets, relevant to different audiences.  The retired persons’ basket is innocent enough, the dirt poor a little more offensive and, by extension, there could be the golf enthusiast’s and the porn addicted’s baskets as well.  Setting aside the obvious fact that any such index is subject to manipulation and bona fide statistical problems, which become more acute the more the indices are specific, this idea that humans should have not one unit of measure, albeit an imperfect one, but multiple ones (imagine the seventy year old porn-addicted golfer’s dilemmas!) in my humble opinion is both unworkable and undesirable.

What purpose would it serve for our golfer (or society) that she got into Amazon to buy a loaf of bread with the price expressed in her retiree basket while her homeless son logs in to buy a similar loaf with a price measured in subsistence basket?  While this extreme example is designed to be ludicrous, I think it represents facts well enough.

Although PayPal or Square Cash are “newish” and could make the use of some baskets a little easier, the idea is hardly revolutionary.  Indices for private and public contracts have existed for a long time and beyond Chile’s borders (this one looks interesting you can read Icelandic).  With serious and reliable statistical bureaus, they help add certainty to long term agreements in spite of changing conditions.  Many derivatives in developed financial markets are nothing but risk-reducing indices. However, where the transaction size or timespan are not paramount, they are just meaningless.

Finally, what’s that got to do with crypto currencies?

As a graduate in Economics, I have the utmost respect for those who study the discipline and know more theory than I do.  All the more reason to be baffled when reason, common knowledge and common sense are abused in order to gain the spotlight or advance pet interests.

Can Bitcoin replace the old Bretton Woods system?

 a Student at HHX on Vejlbycentervej posted the above question on a LinkedIn forum.

I assume, maybe incorrectly, he is a student who needs to write a paper and felt like lendijng a hand.


Here is my response.

Dear Jonathan,

Interesting question.  There is a short answer and a longer one.

The short one is not in the immediate future.  The why will be part of the longer answer.

There is much to be written about the Bretton Woods system, but in simple terms it was a multinational agreement to maintain national currencies of participants at a certain exchange rate among themselves and between themselves and gold.  Countries kept their exchange rates by buying their own currencies (to push up the price) and selling them (to push it down) and, as a last resort, borrowing from the IMF, the World bank and other multilateral agencies and finally liquidating its gold reserves if nothing else worked.

Although it did not perfectly replace the old gold standard from before the two world wars. it provided an anchor for local currencies and it arguably helped fuel the post WWII world trade boom.

So, short answer, Bitcoin cannot be used to stabilize national currency exchange rates right now, because its value is still too volatile.  Even gold these days would be too volatile to act as an anchor for currencies as it did until over forty years ago.

Nevertheless, if Bitcoin continues to expand its user base and it begins to have a more stable relationship not with the USD, which is its main yardstick today, but to the price of goods like bread, gasoline, a residential square foot or an hourly wage, then it might become an anchor that governments will look at in order to stabilise their currency’s value.

They might have to sell their holdings of Bitcoin to push up the price of their currency against it, which would mean preventing local inflation, or they might work hard at convincing world investors and savers that their currency is likely to stay valuable because of their responsible fiscal and monetary policies.

In doing that, though, it might come a day when local currencies will become superfluous, because, after all if they have a set value against Bitcoin, why not use Bitcoin for everything?

Please let me know if this answer helps.