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BitCoin is an Opportunity Wasted

My favorite Uncommon Knowledge moment came in an interview with Thomas Sowell. The illustrious Mr. Robinson was grilling Tom on his assertion that the Federal Reserve should be abolished. Peter continually peppered him with the question “What do you replace it with?” Doctor Sowell answered “When you remove a cancerous growth, what do you replace it with?”

I am no more a fan of the Federal Reserve than Thomas Sowell is. The idea of a decentralized currency is extremely appealing to m…

  1. BlueAnt

    It might be worth clarifying that the point of currency divisibility is to allow currency to flow when its value goes up.

    If 1 dollar will buy you a hamburger, and then the value of the dollar goes up relative to the value of the hamburger such that 1 dollar is worth 2 hamburgers, how do you purchase a single hamburger?  You do it by dividing the dollar into smaller units, “cents”, such that 100 cents equals one dollar.  Thus 50 cents would purchase a single hamburger without creating additional dollars. (If 1 cent could purchase multiple hamburgers, further division becomes necessary.)

    If currency never strengthens relative to the goods it is used to purchase, then divisibility isn’t as big an issue.

    For Bitcoin, you only need mBTC if single BTCs become so valuable they can’t be used for small purchases.  Dividing the single unit of account is only important if BTC is planning for future appreciation of the value of BTC itself.

    Capping the total existing BTC to a known finite number is intentionally appreciating the currency relative to the stock of produced goods, assuming production is an infinitely expanding function (which is not a safe assumption).

  2. Fred Cole

    BitCoin is only the best known of a few competing currencies like that.

    Its a wonderful idea, but I expect it to get smacked down by governments more and more.  It scary to governments because they can’t control it.

    So it’ll be demonized as a tool of terrorists and drug dealers and then it’ll get regulated out of existence.

  3. BrentB67

    I think there is a distinction to be made with respect to deflation that may result from a hard or asset backed currency and deflation wrought from the unwinding of excesses resulting from misallocation of capital as a result of some previous misguided central bank intervention.

    The first scenario isn’t negative and does not motivate lack of investment. Just because a hard currency becomes more valuable doesn’t automatically mean capitalists will not seek opportunities to better their situation through investment.

    Unwinding excess capacity following yet another fed induced bubble resulting in deflation is another matter and certainly negative. Not necessarily because it exists, but because of the precious mis guided cause.

    Your description of Bit Coin acting as an asset rather than currency shows how far we have gone down the road away from hard assets/currency to world of fractional reserve banking fiat.

  4. Frank Soto
    C
    BrentB67: 

    The first scenario isn’t negative and does not motivate lack of investment. Just because a hard currency becomes more valuable doesn’t automatically mean capitalists will not seek opportunities to better their situation through investment.

    Unwinding excess capacity following yet another fed induced bubble resulting in deflation is another matter and certainly negative. Not necessarily because it exists, but because of the precious mis guided cause.

    I don’t agree with this.  Any deflation greater than the potential reward of an investment renders any such investment a bad decision.  

  5. BrentB67

    I think Dr. Sowell and others are off base in their bashing the Fed. I am not a fan of the Fed, but it is also necessary evil when dealing with fiat currency as national legal tender. Regarding the Fed’s exploitation as a political shill for a free spending Congress that is more a function of We the People demanding more government than we are willing to pay for and indirectly codifying it in the dual Fed mandate.

  6. Frank Soto
    C
    BrentB67: I think Dr. Sowell and others are off base in their bashing the Fed. I am not a fan of the Fed, but it is also necessary evil when dealing with fiat currency as national legal tender. Regarding the Fed’s exploitation as a political shill for a free spending Congress that is more a function of We the People demanding more government than we are willing to pay for and indirectly codifying it in the dual Fed mandate. 

    I agree that removing the duel mandate solves most of the problem.

  7. BrentB67

    Frank is it your position then that in a hard currency environment deflation there will never be any investment worth undertaking?

    I will challenge you with the corollary: In a manipulated, low interest rate, fiat currency environment there are too many frivolous investments made and hence why we have capital misallocation and bubbles?

  8. Frank Soto
    C
    BrentB67: Frank is it your position then that in a hard currency environment deflation there will never be any investment worth undertaking?

    If your currency is increasing in value at a rate of 5% per year because of deflation, you would be foolish to invest your money for anything less than a 6% return.  If the deflation is large enough ALL investment will shutdown.

    BrentB67: 

    I will challenge you with the corollary: In a manipulated, low interest rate, fiat currency environment there are too many frivolous investments made and hence why we have capital misallocation and bubbles?

    Right, which is why the goal is a stable currency.  I’m not on the Jim Pethokoukis, inflation is good train.

  9. BrentB67

    I agree that in a hard currency deflationary environment there may be a higher hurdle rate for investment. I think this is a feature, not a bug. Hard asset deflationary environments encourage investment whereas fiat currency inflationary environments encourage consumption.

  10. BrentB67

    Re 7 (1): Recall the source of the deflation is in a stable monetary environment – it is productivity. You are correct that as deflation accelerates the hurdle rate for investment increases leading to fewer investments in producing assets generally slowing the rate of productivity and muting the deflation. This is the market self correcting.

    In hard currency economies long term deflation may prevail, but in the short run inflation and deflation may occur to varying degrees, both of which should be self correcting.

    We have become too conditioned to an economy driven majority by debt fueled consumption. 

  11. BrentB67

    Re 7 (2): I avoid getting on any train dealing with economics that is conducted by a reporter.

  12. BrentB67

    For clarification is it dual or duel? I thought dual = 2 and duel equaled me and you going at it in a debate.

  13. Frank Soto
    C
    BrentB67: Re 7 (1): Recall the source of the deflation is in a stable monetary environment – it is productivity. You are correct that as deflation accelerates the hurdle rate for investment increases leading to fewer investments in producing assets generally slowing the rate of productivity and muting the deflation. This is the market self correcting.

    It’s not the market correcting to the point where further goods and services are not required or desired, it’s correcting to the point where they are no longer practical.  Not impractical because of capabilities or resources, impractical because of an arbitrarily chosen number that serves as the cap for the currency.

  14. Frank Soto
    C
    BrentB67: For clarification is it dual or duel? I thought dual = 2 and duel equaled me and you going at it in a debate. · 8 minutes ago

    You’re right, just a typo.

  15. BrentB67

    People still have to eat, be clothed, housed, cared for, etc. I think to get to your point that investment stops because of the appreciation of hard currency it has to be some sort of Utopia where every innovation has been accounted for and we all die of natural causes. It sort of sounds like Logan’s Run without the death panels.

  16. Frank Soto
    C
    BrentB67: People still have to eat, be clothed, housed, cared for, etc. 

    True these things won’t stop, but if a currency becomes too difficult to utilize for these tasks, they’ll find a new one, or barter directly.

  17. Mike H

    People much much smarter than me invent these crypto-currencies. I do wonder about the deflation aspect, but the fact that it is completely predictable accounts for a lot of the potential “problem.” People don’t know with anything approaching certainty when fiat currency is going to inflate or deflate and how much. You know exactly what the money supply of bitcoins is at any one time.

    Still, the deflation bugs me, but I may have just thought of a possible fix. There needs to be a market mechanism to the creation of bitcoins that coincides with the size of the economy. So if the number of goods and services grow, there is an incentive to create more bitcoins. If the economy is flat or receding, creating new bitcoins would become prohibitively expensive. But the aforementioned smarter people will have to figure out how to implement that if it’s possible.

  18. Spin

    “…with respect to deflation that may result from a hard or asset backed currency and deflation wrought from the unwinding of excesses resulting from misallocation of capital as a result of some previous misguided central bank intervention.”

    Is this is a real point or did you just string a bunch of big words together?  Because I can’t make…ahem…heads or tails of it!

  19. BrentB67
    Mike H: People much much smarter than me invent these crypto-currencies. I do wonder about the deflation aspect, but the fact that it is completely predictable accounts for a lot of the potential “problem.” People don’t know with anything approaching certainty when fiat currency is going to inflate or deflate and how much. You know exactly what the money supply of bitcoins is at any one time.

    Still, the deflation bugs me, but I may have just thought of a possible fix. There needs to be a market mechanism to the creation of bitcoins that coincides with the size of the economy. So if the number of goods and services grow, there is an incentive to create more bitcoins. If the economy is flat or receding, creating new bitcoins would become prohibitively expensive. But the aforementioned smarter people will have to figure out how to implement that if it’s possible. · 0 minutes ago

    Deflation isn’t the bugaboo it gets made out to be. You will actually receive increased purchasing power for doing nothing. 

    If we try to increase Bit Coin with the economy we lose the hard currency benefits.

  20. BrentB67
    Spin: “…with respect to deflation that may result from a hard or asset backed currency and deflation wrought from the unwinding of excesses resulting from misallocation of capital as a result of some previous misguided central bank intervention.”

    Is this is a real point or did you just string a bunch of big words together?  Because I can’t make…ahem…heads or tails of it! · 1 minute ago

    Sorry Spin. My propensity for run on sentences is noted.

    There are two kinds of deflation we are discussing.

    Hard/Fixed Currency where the quantity/quality of goods/services increases relative to currency in circulation  and the currency’s purchasing power increases or remains stable.

    Economic (for lack of better term) deflation where a central bank expands the money supply relative to goods/services resulting in excess capacity i.e. ‘bubbles’. 

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