I've been involved by a friend into his attempt at understanding how Bitcoins works.

I had only heard of Bitcoins before and assumed it was a Paypal-like service. I was wrong. After reading about it in the last couple of days, I am impressed at the system both from the technical point of view (it is, in a way, a distributed-computing system, a la SETI), and from the economics (it does take some more than basic knowledge of Money Supply theories to design a system like this).
And, I am so curious about the mystery of its origins.

So, I thought someone here knows about Bitcoins, maybe, and wants to share some thoughts? After all, this is the Empeg BBS, somebody must know for sure

Paul Krugman (Nobel prize winning economist, etc.) weighed in on the economics of Bitcoins. Krugman's critique has nothing to do with the technical aspect of how Bitcoin works, instead pointing out that it's a bad monetary design. What's sad is that this would have been trivial to fix. If there were a "BitCoin central bank" that could control the BitCoin monetary supply, they could change the rate at which new currency comes into existence, and that would address Krugman's critique.

From a technical perspective, Bitcoin is modestly clever in how it leverages peer-to-peer computation ("mining") to generate a universal tamper-resistant transaction log, protecting the integrity of the currency against double-spending. As a direct consequence of this, BitCoin is not anonymous.

Yes, you get to receive and send money using a pseudonym of your choosing, but all transactions are public. If Bob the Illegal Stuff Purveyor (BISP) advertised on some web site that his public key was whatever, and you buy something, then you're making a public statement that you're sending some coins to Bob. When the authorities later decide to shut down Bob, they've got a list of all of Bob's customers and can track each and every one of those coins to the point where it entered the BitCoin universe. And when one of those coins goes through an "exchange", where most consumers will trade cash for BitCoins, those exchanges will soon (?) be subject to regular bank regulations, allowing the authorities to make them deanonymize transactions.

As to Bitcoin's history, the inventor goes by a pseudonym. We don't know much about who actually came up with it.

Curiously, Bitcoin documents consider it to be a feature that a Bitcoin transaction is irrevocable. Once you spend money, you can't get it back. What's missing are the sorts of buyer protection you get from credit cards or Paypal. There's no way to say "the merchant didn't deliver the goods; I demand restitution." Or, that's not a feature of Bitcoin. It's instead something you'd have to pursue in the legal system. Good luck with that.

In short, I see Bitcoin as a cute hack, but with a broken economic model, zero consumer protection, and no meaningful anonymity (despite design claims to the contrary), I can't imagine it ever gaining any real traction.

Thanks! Useful and interesting info!

I imagined the Bitcoin monetary supply would be controversial.
Their attempt itself to design it somehow independently from a central bank is very interesting (and brave!), yet I am afraid it is too simple, and may have to undergo changes over time.
It is based on transactions made by humans, so not that they tried to design the Money Supply system around an algorithm only, but still, actual monetary systems are not at all that simple.
Also, the finite supply is unrealistic, I think, in the long run.

A Bitcoin Central Bank seems unlikely as that's what Bitcoin wants to avoid in the first place (A Central Bank would be the third party they don't want, and fail their p2p model).

Also very interesting is that Bitcoin is supranational. The idea of a currency that does not depend on any Country Central Bank is very interesting and I think we should be looking at how such systems evolve. They are the future, in one way or another.

I also looked into it a couple of weeks ago, but then decided against it. The main reason for this was that my PC was not powerful enough to make it worth my while.

The mining of Bitcoins relies heavily on repetitive tasks/calculations, something GPU's are hundreds of times better at than CPU's are. And, even though I have a very recent (Ivy Bridge) Intel CPU, I also use the internal GPU of the CPU for video tasks because for my use, this GPU is more than adequate. (I don't ever game)

In other words, to do some decent Bitcoin mining, I would have to buy a new video card, which would consume A LOT more power. The investment of the video card alone immediately kills the deal. But even if I were not to consider that, there's also the fact that the video card would consume so much extra energy, my electrical bill would increase x-times more than the value of Bitcoins I could ever gain through this mining process. In other words: it's a bad deal.

Oh, and yes, as Dan says: it's not really anonymous paying, not in the way they make it seem out to be. Sure, you could use an alias. Maybe even pay while being anonimized though TOR or something, but in the end I'm pretty sure there will always be a trail.

The second reason was not all that important to me, but the first one was. At first I thought this could have been a way to make money from the unused CPU/GPU cycles of you computer, but in the end you'll more than probaby loose money, if you count all the factors of cost.

Bitcoin mining is completely optional. You can trade bitcoins for real currency, buy and sell stuff with bitcoins, etc., and that has nothing to do with mining. Mining is basically a lottery where you donate tons of your CPU. If you win the lottery, you get a few bitcoins, and in the process you and all the other miners are helping preserve the integrity of the bitcoin transaction history.

As to the concern about bitcoins being independent of any sort of central bank, we already have many currencies that have this property: precious metals, land, etc. Bitcoins have the property that there's a lot less friction in the buying and selling, which is a good thing. All the other downsides, though, are pretty decisive. What the world really needs is not bitcoins, but rather cheaper credit cards (from the merchant's perspective) while retaining all the insurance and other benefits.

Along the same lines as Paul Krugman's comments, I found this recent blog post from Yves Smith of Naked Capitalism fascinating. Krugman was right that in 2011 Bitcoin's value against the dollar was languishing, but recently it's been climbing pretty steadily for a wide variety of reasons beyond the hard-coded slowdown in new coin production, including concern about deposits in Cyprus, a bug in the Bitcoin code that led to a short-lived panic, and the network effect that comes with more people using the currency.

She goes on to compare Bitcoins to precious metals as a store of value, and talks about whether the current value is a sign of a short-lived bubble or a sign of things to come.

My personal view is that they're really just a niche currency for nerds and people who want to buy pot on Silk Road. I understand why a currency without a central banker appeals to goldbugs and the like, but there's just too much friction involved in converting to and from Bitcoin to make it worthwhile for most people.

Well, you can expect that from the central-bank fanatic/apologist Krugman. Bitcoin was developed expressly to avoid the problems associated with central banking (and tyrants like Krugman) in the spirit of the Austrian school of economics, which is the less-fashionable, anti-statist, libertarian school that opposes Krugman and everything he stands for. It has a very strong academic tradition, starting with Ludwig von Mises. Freedom-minded people reject centrally-controlled money, and tend to see money as nothing more than a convenient commodity that the free market uses as a universal medium of exchange.

What I don't understand (as a follower of Austrian economics myself) is the underlying value of the bitcoin. A "real" money, to an Austrian economist, has intrinsic value -- the exact opposite of the Krugman/Keynesian idea of manipulated fiat money. I don't really understand if or how the bitcoin has intrinsic value. If there is a monetary flaw, it would be this. The fact that it is beyond the reach of statist meddlers like Bernanke, Krugman, et. al. is the most exciting thing about it.

Jim

Bitcoin's only value comes from its scarcity. Should there suddenly no longer be demand for Bitcoins, then their value becomes zero. There's no government standing behind Bitcoin. There's no company guaranteeing any sort of exchange rate, nor is there any sort of futures market in which you can hedge against Bitcoin fluctuations.

That means that supply and demand entirely drive the exchange rate of Bitcoin. Your willingness to buy Bitcoins hinges entirely on my willingness to sell you mine. This goes against the "gold standard" that the neo-Austrians seem to endorse, since there's nothing about Bitcoin that's anchored to anything real. In fact, if a central bank or hedge fund wanted to play with it, the Bitcoin marketplace is sufficiently small that it would be trivial to manipulate its exchange rate.

Krugman's criticism hinges on a specific and arbitrary feature of Bitcoin that limits the supply of new coins, artificially pushing up the value of old ones, and leading to hoarding behavior rather than spending behavior. A currency that doesn't circulate is a currency that is that much more vulnerable to manipulation.

Interestingly enough, Expensify, the site I use to report expenses, has announced that they're now supporting reimbursement in Bitcoins.

Gold's "intrinsic value" is a fig leaf. For all practical purposes, its only value comes from its scarcity in the same way Bitcoin does, and in that respect, is a pretty good online simulation of the use of precious metals as a store of value.

The only value of anything is what someone is willing to pay for it at a given time. Industrial and decorative uses of gold might place a floor on its value under most circumstances, but that floor is maybe 1% of the current market price.

There's also significant friction involved in using Bitcoin for transactions -- transactions take many minutes to clear, there's no mechanism for chargebacks, and there's no mechanism for recovering lost coins if you lose the key to whatever wallet you're storing them in. It's a bit easier to use Bitcoins to buy a pizza online than it is to try to buy one at your local pizza joint using a bar of gold, but the hassle is a difference in degree, not kind.

There actually are futures markets for Bitcoins, but not ones any sane person would trust with their money.

Futures markets are a zero-sum game. The insane people could easily be cleaning up.

I've pondered gold as an investment, but not with the rise in value lately. Interesting thought for long term investment, gold could tank in the future, assuming the right asteroid comes near that we mine.

(One of those wow, we live in the future thoughts

This is simply not true. Gold is useful for things, from industry to jewelry. Because it is useful as an object, it is possible to find someone who wants to buy your gold. People really don't understand these ideas at all. It's not necessary that *everyone* has a use for the substance, it's only necessary that there is enough demand for the intrinsic commodity to provide a market. If there is a market, then that commodity becomes useful as a medium of exchange.

There's lots of things that are scarce but don't have significant value. Scarcity is only one dimension. To be valuable, something needs to be scarce and desirable. A "hard" money is desirable (by some) for its *intrinsic* properties. On the other hand, fiat monies are only "demanded" because of distortions in the market such as legal tender laws.

One more thing on this. An ounce of gold doesn't change value. An ounce of gold is a physical thing you can hold in your hand. It is what it is. What changes value is paper money. The more money in circulation, the more it takes to buy that same ounce of gold. The gold itself hasn't changed at all.

In fact, when you look at the "prices" of things, priced in ounces of silver or ounces of gold, they are incredibly constant over time. Gasoline, for example, has traded for about 1/4 ounce of silver per gallon, which was about 25 cents from the early 1900's to about 1965. That same pre-1965 quarter, which contains 90% silver, is worth about $4.85 in today's money. In other words, gas is cheap today when priced in silver, which is consistent with lower energy costs during recessions/depressions.

We are all trained since we were kids to think of dollars as an immutable thing and the value of other things changing. But that's not at all what's happening. You need to see the physical thing, the ounce of gold or ounce of silver or gallon of diesel fuel, or whatever as the constant. It's the dollars that change.

So, that means that gold is not really an "investment" like a business is. The gold will always be exactly what it is. It will always be an ounce of gold. It's not going to multiply. It becomes "worth" more only in the sense that the dollars are becoming worth less, and it takes more of them to buy the gold. Gold is a very convenient *store* of value, but not exactly an investment.

I strongly encourage you to read Murray Rothbard's "What Has Government Done to Our Money?" which is available for free from mises.org.

In times of dramatic money printing (such as today, although the money is created electronically rather than "printed"), we should seek to protect our savings from eventual loss by inflation. One way to do this is to buy STUFF instead of holding currency. It doesn't matter what that STUFF is, but some things are better than others. Convenient STUFF that holds its value over time has certain properties:

1. It doesn't spoil, or decompose over time.
2. It will be valuable to people in the future.
3. It doesn't take a huge amount of space to store.
4. It is easily verifiable as genuine.
5. It is easily divisible into smaller quantities.

Precious metals have all of these properties, which is why free markets have gravitated to them as "money" over the millennia. Other STUFF has been used as money. In America today, people are already using ammunition as a barter currency because it is so scarce at the moment.

The whole point is that if your currency is losing value due to printing, then having your savings in that currency costs you value over time. In an extreme case of hyperinflation, it could cause you to lose all of it's value. But a truck, a gallon of diesel, a bag of rice, a rifle, or an ounce of gold, are a physical THINGS that are not subject to the whims of monetary planners (excepting situations like government seizure like the 1933 seizing of citizen-owned gold in the United States). That makes them good repositories of savings in uncertain times.

OK, one final, final comment, I promise! :-)

People who held Cypriot currency in banks in any quantities are fucked. People who spent all that money on STUFF are just fine (assuming they still have that STUFF). And they can sell or trade that STUFF for other STUFF that they need. Gold and silver have been shown over tens of thousands of years to be STUFF that people want, and that remains true today.

That's why I put all of my assets into Beanie Babies fifteen years ago. I haven't checked the prices recently, but their value must have increased dramatically by now. I'm waiting for the Beanie market to peak, and then I'll cash out and retire to a life of luxury. I know--I'll move to Mexico or something.

tanstaafl.

I specifically called out the industrial and decorative uses of gold in my comment to make the point that it's simply not true that just because something is desirable independent of its utility as a currency that it is ideal for storing value or being used to facilitate exchange of goods and services. Gold's shininess, ductility, conductivity, and malleability can be found in many other substances. If you need all of those properties in one substance, you might have a stronger need for gold, but how many people need all of those properties?



You keep using the word intrinsic in a way that suggests that gold is imbued by the creator with some magical power. Gold does have some desirability for jewelry and a few other applications, but there's more than enough gold in the world to take care of whatever demand there is for it in those capacities. The rest is sitting in vaults somewhere as a store of value because of its relative scarcity compared to other commodities. Of course, the scarcity itself is created by people who bought it to store value, and this is the same cat-chasing-its-tail shared illusion that underlies fiat currency, with the only difference being that you can't create or easily acquire more gold. (You and other Austrian types consider that a feature, many others including myself consider it a bug.)

I mean, you do realize that bank notes have some intrinsic value, right? You can burn them to keep warm in the cold, or hang them on your wall and admire their artwork. Of course there are plenty of other things that could be burned to keep warm, and anyone can photocopy the art work, so it's really just the artificial scarcity that comes with anti-counterfeiting laws that makes paper hold its value.

So, check and mate? Not quite. Keep in mind that much of gold's desirability as jewelry is *because* it's valuable. Indian weddings rely so much on gifts of gold jewelry not primarily for its beauty, but for its use as value in a dowry. It's not the demand for shiny accessories, it's demand for something valuable.



We agree that scarcity is important, but what's desirable is a function of a lot of ephemeral factors that gold is no more immune to than any number of other scarce commodities. On the issue of scarcity, one has to consider the unanticipated lack of scarcity that would come from a disruptive change in mining technology. Think that's not possible? Look at what hydraulic fracturing has done to global natural gas prices, and keep in mind that, while gold has been used as currency for a couple thousand years, two thirds of all gold in the world has been mined since around 1960. If that's not an exponential trend, it sure looks like one, and the population isn't going to grow fast enough to soak up all that excess supply.

Of course, predictability of mining efficiency isn't the only risk. There are countless variables that go into the price of gold that have nothing to do with how pretty people think it looks on their wrists or how much it adds to the sticker price of Monster cables. Going back to the example of India, suppose the recent controversy over last year's Delhi gang rape case bloomed into a full-on womens' liberation movement in India, including a push toward abandonment of the anachronistic practice of dowry. You'd see significant downward pressure on the demand for gold in a country that accounts for 30% of the global demand for gold jewelry, which represents about half of the world's gold holdings. Now, this example is far-fetched if we're looking at a year from now or three years from now, but the goldbug conceit is that gold is far more isolated from these shocks than fiat currency, and even if that were true, you'd need to offset the loss of the ability to use monetary policy to adapt to global economic changes.



This is clearly an article of faith for you, so I won't delude myself into thinking I can raeson yourself out of something you haven't reasoned yourself into. But what you're doing here is asserting something as fact that goes against the basic human understanding of the word "value", throughout all of recorded history. Before fiat currency, the value of gold changed versus the value of silver, and it changed against the value of copper, and it changed against the value of whisky, salt, beads, and everything else that's ever been used as currency, and all of those other things changed in value versus each other. You can hold all of those other things in your hand the same way you can with gold (okay, you need a bottle for the whisky), and, of course, the tautological "it is what it is" also holds for them.



Even if your numbers are accurate, this does not prove what you think it does. Just as the value of gold (and silver) depend on how much is mined and how much people want, so to does the value on the other side of the equation, i.e. the value of the gasoline. Saying the price of something with price instability measured in something else with price instability is "incredibly constant" over time means nothing.



Again, the value of the physical things also change. Sometimes we measure value in dollars, sometimes we measure it in gold coins, and sometimes we measure it in hours of work we have to do to earn the dollars or gold coins. These are all ways of measuring value. None of them are static. They all change based on how society, culture, and technology change.



This is splitting hairs -- any store of value is an investment in a world where other stores of value are depreciating faster. And no, gold doesn't multiply, but neither does whiskey.



Is that the eventual loss by inflation that your Rothbards and Schiffs have been saying for six years is just around the corner? Is there an expiration date on these claims, or is it just a reaaaally big corner? Why does the wisdom of the world market disagree with you, as evidenced by the paltry TIPS spread showing a 10-year inflation expectation in the 2% range?



Your points 1 and 2 are tautological. You want some "STUFF" that holds its vaue over time to "be valuable to people in the future." I think we'd all agree with that!



The "people" who held Cypriot currency in banks in any quantities are not "people", but large Russian oligarchs and criminals who were trying to avoid taxes. They all probably saved more money in the tax evasion than they'll lose with the large depositor haircut, and if not, it was just the cost of doing business and avoiding the instability of their own country's financial sector and political system.

The point being, nobody ever saw the Cyprus banking sector as a safe store of value compared to, say, T-bills. The big money is always going to try to find the least-regulated and lowest-cost financial sectors and tax shelters whenever possible, whether it's Cyprus, the Cayman Islands, or Luxembourg, which sounds like it'll be the next domino to fall. So, to cherry-pick Cyprus as an example of the evils of fiat money is silly. I'm sure you'll throw out Weimar and Zimbabwe next, as if the presence of a half dozen or so prominent cock-ups in countries with fiat currencies is somehow worse than the many panics and depressions that occurred in the Western world while it was on the gold standard. But somehow those get airbrushed out of the goldbug history books.

I don't know how we got onto Cypriot banks from talking about Bitcoins.

That said, regardless of your political beliefs about monetary theory, Bitcoin is, for the most part, yet another currency with a variety of pragmatic properties that make it undesirable. One last time:

- You need to safely store some crypto keys in order to store currency. Lose the keys and the currency is gone forever. Somebody steals the keys and they can spend your money. No recourse.

- There's nobody offering anything resembling deposit insurance. If you use a third-party to manage your Bitcoinage, you're dealing with their own poor security engineering. If they screw up, you lose. Likewise, since there's no FDIC insurance on this stuff, if there's a run on the 3rd-party Bitcoin bank, then they're forced to sell Bitcoins at market prices, which might well suck and could well put them under.

- Bitcoin is a teeny tiny little market compared to gold or dollars or whatever else. That opens it to manipulation. It also means great value swings, in both directions. (Anybody who thinks that Bitcoins will do nothing but gain in value is deluding themselves.)

- Bitcoin is not anonymous. It's perhaps the most trackable currency ever, so long as the end-points where you exchange other currrencies for Bitcoins are tracked. And, it looks like regulations are coming online to do exactly that.

- Bitcoin provides no buyer protection. You reach a deal to buy goods. You pay the other party. They fail to send you the product. You have zero recourse. There's nobody to complain to. You can't get your money back.

None of this is particularly partisan or disputable. The only place where we might have a dispute is whether the Bitcoin deflationary design is good or bad from a monetary perspective, but all the other concerns are still present.

De ja vu all over again...

Boom then Bust: How Electronic Cash Faltered (from March 1999)

Certainly values of commodities are relative. My point is just that paper currencies (much less digital ones) are not commodities. The "inherent-ness" of value isn't a magical thing, it is the usefulness of the commodity itself. Sure, technology changes can make commodities cheaper and this certainly happens all the time (consider computer hardware). But some things have been desirable for thousands of years and they remain quite difficult to get. Gold is one of those things, but it's only one of those things.

Which is more likely to happen over the next 10 years:

1. A major technological breakthrough allows us to mine gold without huge capital expenditures, or without diesel fuel, or without digging, or through some other means and suddenly we can product an ounce of gold out of the ground or from seawater for half what we can today? OR

2. Gasoline will be $7/gallon from inflation?

There isn't a risk of inflation, it's a certainty. Look at the prices over the last 40 years if you don't believe that. I'll take my chances betting against the chance of a huge disruption in mining technology against the sure thing of fiat currency devaluation, thank you very much.

Your example of how fiat currency can be used (to burn in a stove to heat your house) pretty much proves my point exactly. Paper money has no (significant) intrinsic value or usefulness.

Store diesel fuel if you want. Or keep your money in a bank. I don't really care. I'm trying to help people realize that just because a government calls something "money" doesn't mean it has value. THINGS and STUFF have value (or what I call "intrinsic value", relative and somewhat changing, of course).

I see how you've emotionally distanced yourself from what happened in Cyprus. The victims of the bank run there are "not people" but evil rich villains bent on avoiding taxes. As if an "oligarch" or "criminal" is not a person! Or that the capital controls only affect them and not *actual* "people". In fact, the evidence is that the biggest "oligarchs and criminals" got advance notice to get their money out by the government.



But you *are* disagreeing with it. You think that dollar bills (T-bills) are a better store of value than something you can hold in your hand, like gold. Look at the last 100 years of history of the relative value of gold vs. US Dollars and explain that to me.

Inflation is here. It's primarily in the stock market and bond market right now, but it's here. Food prices are also up, but not included in the CPI, which is a deliberate lie perpetrated on US citizens and creditors. This is all intentional as well. The Krugman/Keynesian idea is that by inflation you can lower real (inflation-adjusted) wages and this will eventually cause employment to rise. That might be true, theoretically, but it is a catastrophe for anyone who has anything saved up in the currency.

John Williams, the statistician who runs shadowstats.com, recalculates CPI-measured inflation using the US government methods from 1990 and 1980 to show how the CPI metric has been manipulated over time to distort reality. If we used the same method for calculating CPI as we did in 1990, current CPI inflation would be 6%. If we used the 1980 method, it would be about 10%. He's probably a "goldbug", too, so you can disparage him, but it's hard to get around the fact that he's using the government's own methodology to reveal the lie.

So, if you are awake, and pay any attention to your grocery bill or household expenses rather than listening to the nonsense coming from central bankers, you know that price inflation is already here. Or do you actually think the stock markets are making new highs on the strength of the economy? Give me strength. The stock market and bond market are both enormous bubbles now, brought on by electronic money printing. Suggesting the TIPS spread has anything to do with consumer inflation is like saying that shitty 1930's bungalow in inner-city Detroit was actually worth $300k. Especially since the only significant buyer of Treasuries is the Federal Reserve, allowing them to manipulate rate and yield pretty much however they want.

Bubbles pop eventually, and when this one does interest rates will spike, and TIPS along with them. You've got to be smarter than thinking that prices in a bubble mean anything, or you end up taking out a 0%-down jumbo ARM in 2006. The same people you disparage warned against doing that, too. The same people you seem to believe in were the ones telling us there was no housing bubble.

Call me a "goldbug" if you like, but it misses the point entirely. The point isn't about gold. Gold is just convenient. The point is about paper money and the lying, despicable, power-hungry, corrupt, greedy, douchebag politicians and bureaucrats who control it. Do you know why they hate "goldbugs" and seek to discredit them? Because gold and other commodities are (largely) beyond the power of the politicians to counterfeit and thus steal our savings.

Someone should create a short market on Bitcoin, like was famously documented for the housing bubble in "The Big Short" (great book if you haven't read it).

Well, you did cite Krugman on monetary theory in your first comment, so I don't know that this discussion is all that tangential. The idea that there's a beneficial role for the central bank to play in an economy is complete anathema to a fair number of people online, and it turns out that a lot of them take an interest in Bitcoin because of this bug and/or feature, despite BTC's many obvious flaws. The fact that so many libertarian-minded "hard money" types have taken a sanguine view of BTC as an online currency is quite fascinating. Whether we like it or not, the role of the central bank is an inherently political/ideological question that has a lot to do with whether people see value in things like BTC that have no central banking role.

I don't know why you're so focused on gas, which is an inherently volatile commodity controlled by a cartel that the United States has very little leverage over. Sure, they need us as consumers, but as China, India, and other countries industrialize more, OPEC will be in a stronger position to control supply and push prices upward. Frankly, I'd be shocked if gas weren't $7 in ten years, even if the Fed pursued deflationary/contractionary policy. Of course, tighter money and reduced government spending would have many other pernicious effects on our economy that would likely feed back negatively into the consumer demand for gasoline, but for simplicity let's leave those out of the equation for now.

The point is, you've set up a false choice. Do I think there's a hydro-fracking-sized disruption coming to gold mining in the next ten years? No, I do not. But I also do not think that any United States policy intervention would forestall the likelihood of $7 gas in 2023, so using it as your alternate scenario doesn't in any way support the idea that we should tighten monetary policy. We already have energy companies destroying the environment trying to pursue new oil supplies to feed the world market, all the while getting generous subsidies from the taxpayer. The idea that any movements in the direction of tighter money or commodity-backed currency would keep gas under $7 ten years from now is extremely implausible, even if you ignore the disastrous effects of shrinking safety net programs at a time when jobs are scarce.



Actually, the real "intrinsic value" of the dollar is the value that the bearer places on not being fined or imprisoned for violating legal tender laws. I would argue that this probably exceeds the face value of just about every denomination of bank note printed. It may not be compatiable with a Libertarian's view of the world, but that doesn't make it any less real to the person holding currency than the value of some shiny golden coin.




Omitted: actual evidence.

Look, of course the powerful and well-connected generally do fine when the shit encounters the fan, and yes, the criminals and oligarchs are people, but they knew what they were getting into by shoveling their money into a small country with a virtually unregulated banking sector. They did it to avoid taxes, so for them it was worth the risk of the country's economy imploding, which it eventually did.

Furthermore, the Cypriots themselves enjoyed the spoils of all of that foreign money that came in seeking low taxes and low regulation. Did the small depositor who owns a coffee shop on Cyprus know it was all about to blow up? Probably not -- surely there are a lot of innocent victims in the collapse of Cyrpus' economy.

But how do you get from there to a story about how people should have been sinking their personal wealth into gold, or gasoline, or some other tangible things? People don't do that under normal circumstances, because it's inefficient, and because commodities themselves change in value, often in a more volatile fashion than currencies do, because commodities are by their nature much more specialized than bank notes. Currency has the beneficial effect of aggregating stored value across a wide variety of industries, products, services, so that an unanticipated event like a drought has a much more muted effect on the dollar than it does on the price of wheat or livestock.

In your effort to highlight the benefits of investing in tangible commodities with more intrinsic value than fiat currency, you're completely ignoring the downside risks and drawbacks of having your wealth stored in those commodities that money was designed to mitigate. Liquidity turns out to be a very nice thing! People who have their retirement accounts in dollars do have to worry about inflation, and how the U.S. economy is doing as a whole, but they don't have to worry as much about oil supplies or the exponential growth in gold mining over the past 40 years, or the many hundreds of other things they could be putting their money in that can experience booms and busts that make Cyprus 2013 or The United States 2007 look tame by comparison. Think of the currency as sort of a "mutual fund" that consists of every single activity that contributes to the United States GDP. You can't get any more diversified than that.



Well, if you had asked me that question in 2000 (when gold was trading around $300/ounce) I would have told you that, had you bought your gold in 1980 (when gold was trading at $800/ounce), you'd have eaten about a 60% loss:



Yes, if you held on until now, you'd be very happy, but who has the balls or financial flexibility to weather that kind of loss without jumping ship unless it's just gambling money they're willing to walk away from?



I can't remember if it was you or someone else who invoked this argument a while back, but my response now is the same it was then, which is that everyone in America who has money to invest should be held responsible for knowing that the Fed has, for a long time, targeted a small but non-zero rate of inflation, and that sometimes it goes higher, and sometimes it goes lower. Any retirement planner will tell you this. Anyone who does the math when they're in their early 20s for how much to stash away in their 401k and doesn't bother to account for the Fed's well-known preference for low but positive inflation deserves what they get, quite honestly.

Hell, people used to get defined-benefit pensions in this country until Reagan shoved 401ks down our throats, and now the same free marketeers want to try to say that it's inflation that's eating their nest egg and not the fact that people are steered toward investing in the Great Wall Street Casino? Give me a break.



I enjoyed Krugman's tongue-in-cheek rejoinder to this, which is that a subscription to Shadowstats cost $175 six years ago, and today it costs... $175, or an annual inflation rate of 0.00%.

But, in all seriousness, shadowstats.com does not come close to passing the smell test, and it has nothing to do with its proprietor being a "goldbug." I did not mean to offend by using that term, and will stop using it if you see it as derogatory.

For an illustration of how absurd the shadowstats numbers are, see here. The Cliff's Notes version is that shadowstats's inflation calculator uses an annualized inflation rate of about 8.1% between 1990 and 2010, meaning that things bought in 2010 would have cost almost 5-fold what they cost in 1990.

You and I were both alive in 1990. As the linked post asks, can you even think of one item that now costs five times what it did in 1990? OK, gold. Can you name a second? Nope, not gasoline -- it's about 3-fold higher. Food? Nope, not even close. And not any of the other examples cited in that post:



I've heard this talk that he's using the BLS' own 1980 method of calculating CPI, and I haven't spent any time scrutinizing that claim, but if he is, then the people at BLS in 1980 were total dunces, because shadowstats' numbers are so very far off from observed reality. It's entirely possible that he is using their methods, and if so, their methods were terrible.



Well, the stock market indexes aren't inflation-adjusted, so the Dow's "record high" isn't any sort of record at all in real terms. I don't think anyone who pays attention is deluded into thinking our economy is healthy, but that doesn't mean there's any level of inflation that our country hasn't been able to deal with before. The hard money folks have done a piss-poor job of proving the case that inflation got us into this mess, so there's no wonder that nobody believes them when they tell us how to get out of it.



I could just as easily say the gold bubble is also ready to burst, with record prices brought on by panicked investors that will eventually sell as the global economic outlook improves. Gold fell to less than half its value between 1980 and 1990 -- why can't that happen again, especially with the exponential growth in mining production?

And, not for nothing, but it's simply inaccurate to try to tie Keynesianism to people who missed the housing bubble. Two of the most prominent Keynes-inspired economists who were way ahead of the bubble well before it burst were Paul Krugman and Nouriel Roubini, but there were many others, including Dean Baker, Joe Stiglitz, and Robert Shiller. I already cited Krugman's anticipation of the bubble on the BBS before, but I can dig up citations for the others if you'd like. Peter Schiff deserves credit for seeing it in 2005 (though he whiffed on many other predictions prior to that, and has whiffed on predicting inflation since), but you can't judge Keynesians by a different standard just because you don't like their reasoning.

This passage is so confused and self-contradictory, which should be obvious to any person following this who thinks for themselves. If a thing has "real intrinsic value" there is no need to pass laws mandating that it be accepted in exchange. Barter is perfectly legal in any case. You just don't seem to understand what you're talking about, or at least, what I'm talking about, which amounts to the same thing -- it doesn't appear there's much value in continuing the conversation.

Libertarianism is a *conclusion*, not a premise.

I'm afraid I have to give up on you. Good luck.

I honestly don't see the contradiction. Intrinsic means "belonging to the essential nature or constitution of a thing." The government constitutes the "thing" (fiat money) and imbues it with value by printing denominations on it. People worldwide recognize that value. You're getting hung up on the fact that nobody would trade anything valuable for a plain piece of paper, but of course a piece of paper is a different "thing" when it has a government's markings on it.

More importantly, I think it's rather lame of you to parachute out of the discussion based on a single paragraph highlighting our different interpretations of a rather murky concept like intrinsic value. You made some debatable claims earlier, and in my response, I highlighted what I saw as weaknesses in your argument. If you simply didn't feel like defending your claims, then that's fine, but it's pretty low-rent to bail out based on the notion that I'm not thinking for myself or don't understand what I'm talking about, and therefore can't be reasoned with.

And, not for nothing, but I never said or implied that libertarianism was a premise. I said it was a world view, but of course world views are often arrived at after careful study and consideration, and I don't doubt that's the case with you based on our previous interactions. If I felt otherwise, obviously I wouldn't have wasted my time engaging you on this topic.

Hey! This is starting to sound like an internet forum or something!

I don't get that kind of thinking. The only money I invest is money I don't need for anything else, so I don't expect to see it for a very long time. If you lose that much, who cares at that point? You might as well hold on to it and see what happens. It can't really get any worse.

Tell that to people who held Nortel stock a few years ago.

Or THQ stock over the past few years. I'm expecting a check soon that may pay for maybe one meal, if I'm lucky. Should have cashed out my employee stock purchase right at grant time when things started going downhill. I would have at least earned a bit from the discount we received.

OK, fair enough.

The thing is, legal tender laws are in place precisely because paper with numbers printed on it doesn't have any inherent, or "intrinsic" value to speak of. Governments need the legal tender laws precisely *because* the paper has no intrinsic value at all. Without the force (literally) of law, nobody in their right mind would accept a piece of paper with numbers on it for an actual tangible thing. One thing nice about commodity based monies is that the ARE themselves, actual tangible things of usefulness and value. This is what I mean by "intrinsic" value. Another way to look at it is this: without laws (which can happen during war or civil collapse), does the paper have any value? It doesn't, and history shows this repeatedly. But the gold or silver coin does, and a gallon of diesel fuel or a bag of rice does. This is an enormous difference.

So when you say that the "intrinsic value" of paper money comes from its legal status, you are really completely missing the point. There is no intrinsic value, there is only compulsory legal value. It does not become intrinsically valuable just because the government "says so". Its value is strictly due to the willingness of other people to accept that paper for goods. The real wealth is in goods, not money. Just like a person is not a slave just because the government says so, the piece of paper is still just a piece of paper, and eventually that cold, hard reality becomes self-evident.

Now, that wouldn't matter all that much in times of peace and responsible fiscal governance, but neither of those conditions apply to US dollars. The kind of reckless money printing going on right now is exactly the kind of thing that starts the death spiral of a currency collapse.

Inflationary money printing (distinct from the consequent rises in prices) is essentially counterfeiting. The recipients of the newly-printed money get to go buy things at today's prices, without having actually done anything valuable to get that money. That literally robs society of the things that that ill-gotten money purchases. Ultimately, that currency makes its way through the rest of the economy and WILL result in higher prices - eventually. It has, mostly in the stock and bond markets at the moment, which makes sense because the beneficiaries of this counterfeit money are large banks to use it to buy stocks & bonds (often to buy T-bills and then use that deposit to inflate even more by lending out -- creating -- about 10x more money in credit, pocketing the rate difference). This is just horribly dishonest, I would say criminal, and immensely destructive to people who have actually saved money.

Making matters worse, the same idiots like Krugman and statists everywhere will try to "fix" the inflation problem (when it reaches consumer goods) by imposing price controls. This will happen in the US, and evidence of this is the price controls imposed during hurricane Sandy. The combination of legal tender laws (forcing people to accept pieces of paper for actual goods) combined with government-set low prices causes "shortages". In reality, there are no actual shortages, but goods stay in warehouses rather than being shipped to stores and sold at a loss.

All of this is before us.

You seem very willing to just blindly accept the "party line" on all of this. This 2% inflation target is one example of your credulity. Why is it OK to steal 2% of people's savings every year? That's literally what inflation is, when you understand how it is created. Why not 10%? Perhaps the most booming industry in recent memory is computers, which is characterized by extreme *deflation*, yet you never question the "wisdom" of this nonsense.

The reality is that central governments like inflation because it allows them to finance government expenditures without raising taxes. They just don't want to admit it. As Henry Ford said, "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." What, exactly, do you think he was talking about?

Isn't it funny, then, that people around the world who are under no legal obligation to follow U.S. legal tender laws come up with pretty much the same valuation of the dollar that we do domestically?

My argument is very simple. A government creates the "thing" called money, backed by the full faith and credit of that government. Peoples' perception of the stability and credit-worthiness of that government factor into everyone's valuation of that money, but the value at the time it's created is easily observed. Of course that value can change, but so too can the value of gold after it's mined, so I don't see any practical difference in how "intrinsic" this value is to the paper money vs. gold. Legal tender laws do ensure that the fiat money is privileged above other media of exchange, but if it were truly just those laws that were propping up the value of the dollar, then nobody outside the U.S. would want to accept dollars to settle debts.

On inflation targeting, as I said upthread, it's not like our central bank's preference for a small but nonzero amount of inflation is a secret. Just as we expect drivers to be able to follow the rules of the road, savers need to factor inflation expectations into their savings plans.

Why do central banks tend to aim for low but positive inflation? Because the mainstream economic consensus is that deflation is the worse of two evils. You don't want too much of either, because both can spiral out of control, but if you have to have a little of one (since you can never aim for stasis with 100% accuracy) most countries have decided they'd rather have a little inflation. Yes, you slowly erode some savings, but you retain the ability to lower interest rates (which obviously can't go below zero) and you don't lose employment the way you do with deflation when everyone begins hoarding money instead of spending it on capital and wages.

But the real question, again, is: why are we talking so much about inflation when it barely makes the list of threats to the US economy right now? Even if actual inflation were higher than what CPI shows, the alternative to inflation today is mass unemployment and crippling austerity. How's that working out in Europe? You can't even blame it on the Euro, because the UK has been tightening its belt with adverse effects, and they have their own currency. Where are the austerity / tight money success stories?

Obviously when the economy is healthy again we take our foot off the accelerator and raise interest rates to soak up excess liquidity, but anyone who wants to moralize about theft from savings accounts needs an answer for what we would do about the mass layoffs and misery that would come with a tightening of monetary policy. They also might try to find better evidence of current high inflation than citing record highs in non-inflation-adjusted stock market indexes and a site that says that a Big Mac meal cost a dollar in 1990.

Back on the original topic of Bitcoins, a couple of links.

The serious: 78 percent of Bitcoin currency stashed under digital mattress, study finds



The whimsical, yet still quite informative: Buttcoin

Bitcoin value fluctuating wildly: http://www.theverge.com/2013/4/10/4209800/bitcoin-price-fluctuates-wildly-after-massive-run-up

Gold value also fluctuating, but not nearly as much as bitcoins: http://www.businessinsider.com/gold-is-getting-slammed-2013-4

But but but I was told there would be no bubbles because FREEDOM.

Currency of the future!

If only there could be some kind of organization that could manage BitCoin to make it a more stable currency. I don't know, something where smart economists have sophisticated models and powerful tools like creating and destroying BitCoin currency on the fly. I wonder if that could ever work.

Indeed, comrade.

BTC is back down to $120, so it looks as if the recovery yesterday may have been a bit of a dead cat bounce.

If only we'd implemented a "market cooldown" in 1929...

= Central Bank. Maybe a technologically advanced central bank, but a Central Bank. Not saying it's good or bad, but just observing.

It seems to me that both TigerJimmy and TonyC have both objectively good points.
Currency value is exactly the value you put on the things currency can buy. Calling it "intrinsic" or not is a debate on words, rather than concepts. And, you may print "$5" on a bill, but its value will be significantly different if with that same $5 you buy a hamburger or ten hamburgers. Value IS by definition subjective. If we're talking about "face value", that is the number you print on bills, that's nothing like the actual, real economic value. As long as we agree on words and definition, there's little to debate here, I think.

At the same time, indeed currency is more efficient and effective than barter in exchanging value among trading parties, and so in allowing a market to exist. That's the primary and possibly the only real reason why currency exist.
Yet, indeed currency >supply< and >value< (versus the goods or services it can buy) can be, and have been, manipulated by governments, and that requires, necessarily, caution and, as much as possible, surveillance and monitoring on behalf of citizens.

I find it absurd to assume Governments have always and will always be fair and honest in dealing with currency.
In the 80s Italian Governments have ALL altered exchange rate to gain international competitiveness without addressing internal efficiency issues, only to pay the bitter price for that choice two decades later when the Euro exchange rate was fixed, practically doubling internally the prices of most goods, and causing so much de facto inflation right at the beginning of the economic recession. Not to mention the huge, unjustified public debt we're still struggling to cope with. Just an example of very poor government decision making in terms of money supply.
Governments may and often will make mistakes, ("mistakes"?) and currency WILL be affected by such mistakes more than goods that do carry objective value. An apple will feed you whether it costs $1 or $100 in the market. This is undeniable and clearly I am with TigerJimmy on this. Gold may not be the answer, though, as it is not an Apple and, itself, it is a quasi-currency, and has a lot of the uncertainty of a currency, albeit probably not AS much, if you look at past data (but who knows). Still, the principle remains: currency by its own nature is will not necessarily preserve its value at desirable levels, and often because of poor economic policies or, even more often, of poor politics. It is wise to keep this in mind.

That does not mean we can address gov'ts misconduct in terms of monetary policy, or edge against fluctuation of money market or currency purchasing power, by just not using currency, or by mistrusting currency per se, as a system.

You will get no argument from me on either of these points, but the choice here isn't between two different policies with different levers, it's a choice between one policy with a set of levers that don't always work the way you want them to, and another policy with an empty control panel, save a label that reads "suck it up and work harder!"

Eliminating the central banking role means that global economic problems become your country's economic problems, whether you like it or not. The Austrians would rather let the Schumpeteresque "work of depressions" take care of everything, but if you step away from the philosophical a bit, what you're actually talking about is letting people suffer and die when you have resources available to help soften the blow. The fact that there may be negative future consequences of cranking up the printing presses does not, to me, provide an acceptable moral justification for standing by and watching while people eat cat food to survive.

With respect to Bitcoins, and to a lesser extent gold, what I think we're seeing in their prices now (which were both driven up by a whole lot of speculative investing) is the old adage that the price takes the stairs up and the elevator down. Gold isn't going to lose 60% or 70% of its value the way Bitcoins did, but I can certainly see it losing a majority of what it picked up over the last five years within the next couple years as people see opportunities in equities and capital investments.