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  • In Defense of Bitcoin Hoarding

    Posted on by Azrael 1 Comment

    In Internet slang, they are called the HODLers, the people who are clinging to their Bitcoin and refusing to spend it. Instead, they just refresh their wallet apps, feeling richer by day while deferring consumption. Many of these burgeoning millionaires live like paupers. I’ve met many of them: all over the U.S., in Israel, in Brazil. They believe that every dollar they spend today is two dollars they won’t make in a few months. Probably they are right.

    Bitcoin is undergoing a historic deflation, which simply means that its value is growing relative to the goods and services it can purchase. This is in contrast to inflation, in which the value of the currency falls relative to its purchasing power. Inflation inspires spending – better to get rid of the money while it is more valuable. Deflation inspires saving – better to keep it so that your wealth rises over time.

    So there is nothing selfish, strange, or weird about holding an asset that is rising in value. It would be irrational to do otherwise. And there is nothing odd about spending like mad in an inflation either. Our expectations of the future determine what we do today in every life and especially in monetary economics.

    Some Money! 

    This tendency to hold rather than spend is giving rise to a new claim. Bitcoin isn’t really a viable medium exchange, they say. You can’t buy a sandwich with it. Few people are paid in it. Adoption in the retail sector is slow. The total market capitalization is $219 billion and yet the trade volume nowhere near reflects that.

    And it is true that most of the big money people are just holding it. James Mackintosh, writing in the Wall Street Journal, summarizes the conclusion: “It has become a vehicle for hoarding by libertarians for gambling by hordes of speculators attracted to its wild price swings.”

    I’m looking now at the total market capitalization of the entire sector of cryptoassets: it approaches $400 billion. That is larger than the market cap of JP Morgan, by the way. That valuation is in private hands, growing in value at incredible rates. It’s risen 1,000% in 2017, and many people are predicting much higher growth in 2018.

    The Implications

    Under old-style Keynesian theory, economic growth is driven by consumer spending, not saving, so anyone who is hoarding money under the mattress is holding back progress. Hoarders are the enemy. “Every such attempt to save more by reducing consumption will so affect incomes,” wrote J.M Keynes, “that the attempt necessarily defeats itself.” He popularized what became known as the “Paradox of Thrift.”

    It’s supposed to be counterintuitive. You think that saving up for the future is a good thing. Whoops, you are hurting others and, in the long run, hurting yourself. You should be spending, even going into debt to spend.

    But sometimes “counterintuitive” is just wrong. That is the case here. There is no paradox. The intuition is right. Thrift is a good thing, on the individual level or for the whole society. Deferring consumption is the necessary precondition to permit saving. Saving is never wasteful. It’s true that infinite saving is pointless but that’s not how this works.

    You are always saving for something. The end of saving is eventual consumption in some form. More importantly for economic growth, saving is the precondition for investment. Investment is what extends the complexity of the structure of production. This leads to employment, expansion of the division of labor, and the eventual rise of wealth.

    Consider the classic case of Crusoe on the island. Every day he is out catching fish to eat. He doesn’t have time to weave a net because he is always fishing with a pole. But at some point, he realizes that he could catch more with a net. In order to gain time, he has to stop fishing. So he saves up a few days of fish so he can eat without fishing, during which time he weaves a net. That net allows him to multiply his catch by 10 times. The deferring of today’s consumption for great overall wealth later is what makes progress possible.

    The Policy of Pillage

    Once the wrong (Keynesian) theory took hold in the 1930s, it became national policy to incentivize consumption over spending. Gold was confiscated from people. Government spending, it was believed, would goose the economy to make up for the ability or willingness of people to spend. The gold standard itself was destroyed in order to build a monetary system that could be inflationary – so that the money would be worth less in the future than it is today, thereby motivating the desire to spend.

    This whole policy became a disaster for economic growth. After World War II, the US underwent a huge expansion as a result of the hoarding that occurred throughout the Depression and the War, and this was despite (and not because of) federal policy.

    After the initial boost in economic growth, the Federal Reserve began its inflationary path. The personal savings rate peaked at 15% but then savers were blindsided by a wicked hyperinflation that hit in the late seventies, pillaging the savings that had been built up for the last two decades. No surprise: personal saving fell and fell, incomes flattened, and economic growth became ever more of an uphill climb. In our own times, inflation has been fixed but now we deal with near-zero interest rates, which harms saving as well.

    As you can see in the chart, the economic crisis of 2008 traumatized a generation to the point that people began to save at much greater rates. No more would be trust the system to take care of them. It was exactly at this point that Bitcoin came into being, and created something that is really the opposite of the dollar: a currency designed to rise in value over time.

    Many of the metaphors surrounding Bitcoin were drawn from the old-world gold standard. We speak of mining, for example, and proof of work (think of miners wearing jeans, panning gold from stream or banging picks into mountains). As with gold, there is a limit on the amount that can be created. And there are multiple levels of standards to determine authenticity and truth in accounting. In some ways, Bitcoin was invented to be the ultimate anti-Keynesian monetary praxis.

    Up with Thrift

    Now we see the results. Bitcoiners are HODLers. They save. They hoard. They have turned against consumption in favor of saving. I see it myself all around me. Young people who are invested in Bitcoin turn down luxury consumption. They don’t own cars. They bike and walk. They don’t spend big on dinners. They live off cheap groceries. They know that everything they consume today eats into their capacity for consumption, investment, and building wealth for the future.

    So much for the Paradox of Thrift. Bitcoin is about the Virtue of Thrift. The pundits can decry it all day. Bitcoin doesn’t care. What’s more, you don’t need economic theory to understand this. You only have to follow the money.

    If you ever despair of the future, just consider how much capital is currently being built up in the crypto sector. There will come a time, maybe in five to 15 years, when all this deferred consumption is going to be unleashed on the world economy in the form of real capital to build wealth and prosperity. And consider too: this is not about one economy, not about one nation. It’s about the whole world, capital and prosperity without borders.

    The pundits can fulminate all they want. Technology doesn’t care.


    Jeffrey A. Tucker

    Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, economics adviser to FreeSociety.com, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books, most recently Right-Wing Collectivism: The Other Threat to Liberty, with a preface by Deirdre McCloskey (FEE 2017). He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press. He is available for press interviews via his email.

    This article was originally published on FEE.org. Read the original article.




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  • Money, It Turns Out, Is a Practical Art

    Posted on by Azrael Comment

    If you read on the topic of money’s history from any mainstream textbook, you will already know the drill. In the past, money took many forms. It was shells, pelts, salt, and various metals. Finally we got paper money, credit institutions, then central banks. At this point, we are told, history was complete. The final and best form had arrived.

    The state would be in charge of money forever. All that was left was to have it managed in a way that better served our needs. People argued about systems of government management. Maybe a rule of some sort, based on quantity or the gold price or some other scheme. The system can be reformed, but the idea of treating money as a technology to be managed by the market – well, let’s just leave that to utopians like F.A. Hayek.

    Frozen in Place

     

    But look what actually happened. From the time when money came to be nationalized by the state and managed by central banks, roughly 100 years ago, the improvements stopped. Everything else got better: cars, flight, communication, homes, indoor environments, distribution of all essentials from food to clothing to finance. What did not improve was the money itself. In fact, it became worse.

    This is for a reason. The nationalization of money froze it in place. It was no longer subject to the pressure that free enterprise places on everything else. It was the great exception (there were other exceptions too, like schools and courts). It was stuck. In the 21st century, we were using the same core money technology as we were using in the early part of the 20th century. Hardly anyone thought anything of it. Surely we had come to the end of history.

    The consequences were not only that money never got better. The nationalization of money led to a huge increase in government debt, wild swings in credit cycles, inflation, and even war because government no longer had to tax people for funds but rather could print it without limit. All of this ended up eating away at liberty itself, growing government beyond what any liberal society should tolerate, and fed human rights abuses.

    Then Came Crypto

    From the time that Bitcoin became viable, however, monetary theory would never be the same. In the years since that time (2009), I’ve noticed a gradual change taking place. We used to think about money as somehow existing in a finalized form. No more. It is now being thought of as we should have thought about it all along, as a technology that can become better in response to human needs.

    In the 19th century, the word technology was not in common use. Instead a different phrase was popular: the practical arts. I think it is better. Inventing new things for human use is an art form. But it is not art just for admiring. It is art for using, art to make life better, a tool to enable a better path forward for all.

    The practical arts today involve new apps, new buying options, new ways to communicate, new modes of transportation, and new markets. They make things cheaper, better, and more adaptive to our needs. Entrepreneurs compete to find better ways of serving us through the practical arts.

    Thanks to the rise of cryptocurrency, the practical arts are being applied to reinventing money itself. It is going on every day, with thousands of companies innovating new monetary technologies. The big breakthroughs include: the uniting of money with payment systems, the dramatic diminution of counterparty risk, the inclusion of the unbanked, the impossibility of censorship, the security of ownership, the absence of a central point of failure. We keep discovering new virtues.

    Cryptocurrency opened up the floodgates of monetary innovation a century after the enterprise had been shut down. F.A. Hayek wrote, “I have no doubt that competition would be much more inventive in providing the kind of monetary institutions needed for the proper functioning of markets.” He thought this might only happen by eliminating legal tender laws and dismantling central banks.

    Perhaps the most remarkable thing about cryptocurrency is that it unleashed competition without any reform of the system that still operates from the top down. No law was repealed, no plan was enacted, no new reforms were passed. It was as if a Maserati had sudden driven up alongside a fleet of Model Ts.

    When will mainstream monetary theory adapt to the new reality? Check back in ten years.

    When I was in Tel Aviv, Israel, recently, I did a full interview on a popular podcast on this topic and its meaning for our future.

     


    Jeffrey A. Tucker

    Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, economics adviser to FreeSociety.com, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books, most recently Right-Wing Collectivism: The Other Threat to Liberty, with a preface by Deirdre McCloskey (FEE 2017). He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press. He is available for press interviews via his email.

    This article was originally published on FEE.org. Read the original article.


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  • IMF Head Foresees the End of Banking and the Triumph of Cryptocurrency

    Posted on by Azrael Comment

    In a remarkably frank talk at a Bank of England conference, the Managing Director of the International Monetary Fund has speculated that Bitcoin and cryptocurrency have as much of a future as the Internet itself. It could displace central banks, conventional banking, and challenge the monopoly of national monies.

    Christine Lagarde–a Paris native who has held her position at the IMF since 2011–says the only substantial problems with existing cryptocurrency are fixable over time.

    In the long run, the technology itself can replace national monies, conventional financial intermediation, and even “puts a question mark on the fractional banking model we know today.”

    In a lecture that chastised her colleagues for failing to embrace the future, she warned that “Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.”

    Here are the relevant parts of her paper:

    Let us start with virtual currencies. To be clear, this is not about digital payments in existing currencies—through Paypal and other “e-money” providers such as Alipay in China, or M-Pesa in Kenya.

    Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.

    For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.

    But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.

    Better value for money?

    For instance, think of countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country—such as the U.S. dollar—some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.

    IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential. In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008.

    And yet, why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable.

    For instance, they could be issued one-for-one for dollars, or a stable basket of currencies. Issuance could be fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a “smart rule” that might reflect changing macroeconomic circumstances.

    So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.

    Better payment services?

    For example, consider the growing demand for new payment services in countries where the shared, decentralized service economy is taking off.

    This is an economy rooted in peer-to-peer transactions, in frequent, small-value payments, often across borders.

    Four dollars for gardening tips from a lady in New Zealand, three euros for an expert translation of a Japanese poem, and 80 pence for a virtual rendering of historic Fleet Street: these payments can be made with credit cards and other forms of e-money. But the charges are relatively high for small-value transactions, especially across borders.

    Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender.

    So, when the new service economy comes knocking on the Bank of England’s door, will you welcome it inside? Offer it tea—and financial liquidity?

    New models of financial intermediation

    This brings us to the second leg of our pod journey—new models of financial intermediation.

    One possibility is the break-up, or unbundling, of banking services. In the future, we might keep minimal balances for payment services on electronic wallets.

    The remaining balances may be kept in mutual funds, or invested in peer-to-peer lending platforms with an edge in big data and artificial intelligence for automatic credit scoring.

    This is a world of six-month product development cycles and constant updates, primarily of software, with a huge premium on simple user-interfaces and trusted security. A world where data is king. A world of many new players without imposing branch offices.

    Some would argue that this puts a question mark on the fractional banking model we know today, if there are fewer bank deposits and money flows into the economy through new channels.

    How would monetary policy be set in this context?

    Today’s central banks typically affect asset prices through primary dealers, or big banks, to which they provide liquidity at fixed prices—so-called open-market operations. But if these banks were to become less relevant in the new financial world, and demand for central bank balances were to diminish, could monetary policy transmission remain as effective?


    Jeffrey A. Tucker

    Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is also Chief Liberty Officer and founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books, most recently Right-Wing Collectivism: The Other Threat to Liberty, with a preface by Deirdre McCloskey (FEE 2017). He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press.

    This article was originally published on FEE.org. Read the original article.



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