Bitcoin and the U.S. Fiscal Reckoning
nationalaffairs.com
nationalaffairs.com
> In recent months, consumers have experienced higher price inflation than they have seen in decades. A major reason for the increases is that central bankers around the world — including those at the Federal Reserve — sought to compensate for Covid-19 lockdowns with dramatic monetary inflation. As a result, nearly $4 trillion in newly printed dollars, euros, and yen found their way from central banks into the coffers of global financial institutions.
This automatically assumes that the inflationary issues we are facing come from demand. However, it is very clearly a supply issue. Namely, the closure of plants and factories due to labor shortages, lockdowns, and geopolitical issues. When you reduce the supply of goods and services while demand is left the same, you get higher prices. Furthermore, OPEC isn't producing more, which increases oil prices and the prices of all other industries. The chip shortage, which is fundamentally a supply shortage, is also increasing the prices of all other goods and services that rely on chips.
This is not an issue of demand. It's similar to the 1970s: supply shocks that led to an increase in the price level.
There is also the matter of where the money the fed "prints" ends up. Its not handing out singles, they're using other instruments like buying paper. I'm not educated enough to recount exactly what the mechanisms are.
If you allow me to contrive that essentially the fed is buying stock dips for example, the funds they are creating to do so doesn't end up as you mentioned buying loafs of bread and driving up demand, it ends up in the dragon's horde of large corporations and the beneficiaries of the windfall.
So the ultra-wealthy, corporations, large institutional funds (Stanford?) and/or corporate stakeholders see their paper balances of stocks increase, and along with the fabulous credit that having lots of assets brings you, they are free to leverage these assets to consolidate other assets such as real estate, stocks (and buybacks), maybe (but probably not given the yeilds) bonds and maybe a yacht or three.
Corporations, institutions, and ultra-wealthy wouldn't suddenly be able to afford to pay off their credit cards or buy extra calculators or yogurt, that is covered nicely in the first 100k/yr.
The rest is fiefdoms and trust funds for generational transmission. Probably lobbyists too.
Gotta add about 401k/retirement plans: That money is more or less a stipend for end-of-life, how much could that really balance the scale given the facts about the business cycle?
Infact they're only buying paper.
The handouts are from the federal/state governments. The reserve has to buy the paper for the government to give out these handouts.
> the states and local municipalities don't have the fed
The federal government too doesn't "have" the fed. The federal reserve is a bank and it's independent of the government.
That will get worked out, but here's why it looks to me inflation is here to stay:
1. Wages are going up in order to solve labor shortages. Higher wages = higher cost of goods = higher prices. And wages are sticky. Workers now getting paid $25/hr probably aren't going back to $15.
2. The just in time supply chain is being re-evaluated. We need resiliency, but it's less efficient and more expensive. Higher COGS.
3. The Fed seems likely to keep increasing the supply of dollars and don't want to raise interest rates much.
Blockchain, like a lot of computing ideas, is far too academic requiring constant fetishizing, or it’ll disappear.
May as well trot out a new religion; blockchain will be as unprovable and ephemeral to the masses.
Which is great for the hopes and dreams of blockchain grifters, and “egalitarian” tech oligarchs.
They have proven one thing though; the public will chase ephemeral carrot off a cliff.
BTC does not eliminate the need for security. The USB in question would need military grade security, and the exclusivity of the claim of its holder over the ledger entries recorded in it would never be demonstrably secure, because BTC's value is information that can simultaneously exist in multiple locations.
The article reads like a high school term paper. BTC is a fiat currency whose scarcity is determined by the actions of some random computer programmers who, for now, aren't leveraging that power for their own personal benefit. Gold is a natural element whose scarcity is a function of the laws of nature, and there are no people today who can measurably exercise their own power to reduce its scarcity.
Also, not to nitpick, but a single gold bar also could theoretically have value equivalent to the entire BTC Blockchain. A single dollar bill could too. This would be the case if BTC was valueless. The article isn't very well reasoned.
Which is widely available and effectively free.
> BTC is a fiat currency whose scarcity is determined by the actions of some random computer programmers who, for now, aren't leveraging that power for their own personal benefit
Statements like this are a sure sign of not actually understanding how Bitcoin works. There is no person or cartel in the world who could successfully unilaterally change the Bitcoin consensus rules.
> Gold is a natural element whose scarcity is a function of the laws of nature
The amount of gold we’ve mined compared to the amount of gold in nature (on earth, in asteroids, etc) is infinitesimal. The amount of Bitcoin we’ve mined is 89.5%.
What? Who is going to fight off people trying to obtain or destroy that USB drive to increase the value of their own holdings (i.e. speed up deflation by reducing available bitcoin), or extract the passcode from its owner, for free?
EDIT: I realize this is the plot of Goldfinger, but the author did invoke Fort Knox, and the strategy of destroying stores of value to increase the worth of your own stash makes sense.
I don't see how it follows that if bitcoin is useful that somehow militaries or rule of law can't exist.
France sent a warship to escort its gold from the US to France. Wasn't free, probably wasn't cheap.
Edit: or just keep your private key (which is best practice)
Whilst I can appreciate why people think it might not succeed as a mainstream consumer currency — do you recognise how successful it is becoming as an asset, like gold?
Worth a read: https://www.lynalden.com/gold-and-bitcoin/
And why would anyone want to own gold? It's certainly not to protect against inflation, which seems to be what everyone talks about:
> While gold objects have existed for thousands of years, gold's role in diversified portfolios is not well understood. We critically examine popular stories such as 'gold is an inflation hedge'. We show that gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge. […]
Bitcoin has no use other than to sell or loan to someone else; or to pay taxes levied by criminals.
> Why BTC is worth exactly 0: Gold and other precious metals are largely maintenance free, do not degrade over an historical horizon, and do not require maintenance to refresh their physical properties over time. Cryptocurrencies require a sustained amount of interest in them.
And? None of these reasons mean it is worth “exactly 0” (not to mention some of them are just plain wrong). Gold requires sustained interest too!
Bitcoin continues to be the only “currency” (regardless of how practical it is in everyday life) that’s free of direct influence from government monetary policy or insider control. That reason alone makes it totally unique and extremely valuable.
> The customary standard argument is that "bitcoin has its flaws but we are getting a great technology; we will do wonders with the blockchain". No, there is no evidence that we are getting a great technology — unless "great technology" doesn’t mean "useful". And at the time of writing —in spite of all the fanfare — we have done still close to nothing with the blockchain.
It’s a technology in its infancy, and it’s also clear that we are doing useful things with crypto:
• DeFi has incredible potential to upset the power imbalance of the banking industry. It is rapidly democratizing financial instruments which were previously only available to the big guys.
• NFTs, whilst something of a fad right now, have established means of recognising ownership of digital assets.
• A global currency like Bitcoin makes international payments possible in areas where it would not be otherwise.
Meanwhile Bitcoin is up another 50%!
Nassim has a bone to pick with Saifedean, whom he wrote the forward of "The Bitcoin Standard" apparently without understanding what Bitcoin was.
https://mobile.twitter.com/saifedean/status/1382408549343580...
I can’t see that happening, by any stretch of the imagination…
There's likely to be no need for the US Government to worry about, for example, confiscating Bitcoin as FDR's administration did with gold. Today Bitcoin is comparable to Facebook's market cap. Back in FDR's day the scale of US gold holdings in relation to the US economy and its asset base was radically greater than these entities are today (today gold holdings in the US are trivial compared to the US stock market or housing market). For that type of confiscation event to happen Bitcoin would have to become a super giant asset vs global currencies, which will only occur if the US Dollar, Euro and Yen collapse or something close to it. If that happens, all manner of confiscations will be on the table, a lot of very, very bad things will be occurring.
This is a pretty simplistic view as for most of the last few decades Europe and Japan has been expanding the money supply without causing any deflation - and still caught in a deflationary spiral.
But the question of money supply should be flexible - it has to be. Eg if US population expands and the economy expands every year you need more money every year. It was a problem with the gold standard - you needed to get more gold in order for your economy to expand.
You really don’t. This is one of those weird Keynesian constraints that doesn’t actually match reality. Deflation is totally harmless as long as it’s predictable. A fixed money supply in particular (which is deflationary if the economy is growing) is great specifically because unit purchasing power tracks total productive output.
I kinda agree if this is inflation, but deflation is different.
> is great specifically because unit purchasing power tracks total productive output.
This is a problem because people horde money, just keep saving - why would you spend it? And the economy dies.
Why’s that?
> This is a problem because people horde money, just keep saving - why would you spend it? And the economy dies.
This is one of those things where local Keynesian reasoning can lead you to the wrong answer, and tons of people get trapped there.
“Hoarding money” isn’t harmful. Ideally, people should be “hoarding” money unless they want to buy something. “Passive investing” (the rational strategy with an inflationary money) is not a good thing, but a harmful inefficiency.
The key realization is that at any given time, the total human productive output sits more or less on a pareto frontier, with positions in the space representing how much of various goods are being produced. For didactic purposes, we can pretend this space is 2D and has only two goods that can be produced - “capital goods” and “consumable goods”. So you can shift human productive output between these two goods, but the total output is capped.
When people spend money, what they are doing is (often indirectly) bidding for the right to decide how some fraction of human productive output gets allocated. Either into capital goods (e.g. by buying stocks) or into consumable goods (e.g. by buying a TV).
When people don’t spend money (because they are saving/“hoarding”), they are simply choosing not to participate in this auction process. This means the people who choose to participate in the auction have less competition. Because the amount of goods being auctioned is fixed (or more accurately, lies on a pareto frontier), the people buying the goods pay less than they would in the absence of “money hoarding”. This means their purchasing power has increased!
Inflation, less saving/hoarding: People who don’t really want to spend money are forced to do so anyway unless they want to lose wealth. They either buy consumable goods they don’t really want, or invest in stocks without really thinking about it, introducing inefficiencies in asset allocation. People who do want to spend money (because they actually want a good, or have a solid investment thesis, or have a business plan) have to compete with those other people, and lose purchasing power.
Fixed supply, more saving/hoarding: People who don’t really want anything or have an investment thesis just sit on their money and it naturally appreciates in line with economic development. No need to buy index funds - money already behaves like a market-wide fund behaves today. People who actually want to buy something or have an investment thesis don’t have to compete with the former group, making it easier for them to bid on socially efficient allocations.
The effects are somewhat marginal, but I expect that with a fixed money supply, the economy would be more oriented to capital goods production and less to consumption, and also asset allocation would be a bit more efficient thanks to decreased distortion from blind “passive” investing. Life is easier for people who just want to save for the future, or don’t have an investment account.
I wonder how it works with the private banks.
Say some entrepreneur goes to their bank and borrows $100k. They try to build a business, pay rent, employees, SAAS license costs, advertising and ... goes bankrupt.
So the $100k never comes back to the bank.
Did this create $100k?
Central banks do not create money, contrary to popular opinion. Money is created in two ways: by the Treasury/Mint via bills and coins, and via private banks with credit.
See Roche:
> This paper provides a general understanding of the workings of the modern fiat monetary system in the United States within the context of the global economy. The work is primarily descriptive in nature and takes an operational perspective of the monetary system using the understandings of Monetary Realism.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
When you file bankruptcy, the assets are auctioned the bank gets back some of that money, if not the whole 100k
You created money when borrowed the 100k. The rest of it doesn't matter.
It's the case with the government and the central bank too. Money is created when the government borrows money from the bank by issuing bonds. The idea of government "printing" money is plain wrong.
(except in a physical sense when the mints print your currency notes)
> A major reason for the increases is that central bankers around the world — including those at the Federal Reserve — sought to compensate for Covid-19 lockdowns with dramatic monetary inflation. As a result, nearly $4 trillion in newly printed dollars, euros, and yen found their way from central banks into the coffers of global financial institutions.
Central banks create reserves, which are only good in the inter-bank system, and never enter general circulation. Money is created by private banks via credit. See Roche:
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
And no, reserves don't determine credit creation. The 'money multiplier' hasn't been true for several decades:
* https://research.stlouisfed.org/publications/page1-econ/2021...?