Tag Archives: inflation

Crypo-Currencies: A Proving Ground for Theories of Optimal Monetary Systems

After having been cued in to Bitcoin a few weeks ago, the crypto-currency’s rise has been quite impressive. Its value has quintupled since I began following it, and the amount of goods and services for which people are willing to accept Bitcoin has been consistently expanding. Barring any unexpected catastrophe, then, I feel like it’s reasonable to expect that crypto-currency will be an important part of the economic landscape in the years to come.

That being the case, I think it is important to engage in a meaningful conversation as to the nature of the optimal monetary model for a crypto-currency. After ingeniously solving the double spending problem, the initiators of Bitcoin chose to implement a system in which, for the first few years, a large amount of money is created but, within a decade, the supply of currency will reach a cap of around ~21 million units. This model of a predictable and stable money supply could very well be the optimal one, but it carries certain risks, the largest of which might be some of the pernicious effects of deflation.

The primary concern is that, in a deflationary environment, people will choose to horde rather than spend their money. For instance, why buy a t-shirt today for six Bitcoins today when you’ll be able to get it next week for five? Such incentives might hobble the growth of the Bitcoin economy, meaning more transactions happen in other units of value while people with Bitcoins hang on to them in order to realize potential capital gains.

Different schools of economics hotly debate the legitimacy of such concerns, but, until now, they’ve never really had a chance to engage in a full blown competitive experiment to test the issue. However, since the Bitcoin source-code is open source, it would not be difficult for someone to create a rival currency that, rather than capping off at ~21,000,000 units, is designed to consistently increase the money supply by 1% per year indefinitely after the initial takeoff period. By doing so, it might be possible to learn an enormous amount about monetary economics by comparing the performance of the two economies. Additionally, an environment might emerge in which currencies with innovative elements are regularly introduced to the mix, allowing for the empirically-based semi-organic evolution of an increasingly optimal monetary system. Truly, this is an exciting time to be an econ nerd!

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2011-04-20 Geoff Golder on the New Crypto-Currency BitCoin

Local software developer Geoff Golder comes on the program to explain and discuss the implications of the newly developing online currency called BitCoin.

[blip.tv http://blip.tv/play/AYK0w2MA%5D

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Geithner Laughed at by Chinese Students

Remember when Iranian President Ahmadinejad came to speak at the UN? I’d always had mixed feelings about him; on the one hand, he’s the head of state of an extremely authoritarian country, so he’s certainly no good guy. On the other hand, however, his country had become the latest target of the Neo-Cons’ “quick, let’s attack some third-world brown people to distract the American people from their deteriorating standard of living and liberties” campaign, so I was loathe to wholeheartedly embrace the hypocritical condemnations coming out of liberty-hating “conservatives” centered around the National Review, Weekly Standard, FreeRepublic.com, etc.

In the midst of the furor, he happened to also be scheduled to speak at Columbia University, which immediately sparked controversy. Under pressure for all manner of outside groups, the administration there took the position that they were in no way endorsing what he stood for, but believed the world would be better served by providing opportunities for dialog rather than censorship. Liberty-hating neo-cons raged against this decision as enabling a tyrant, but events proved their authoritarian approach profoundly misguided.

Ahmadinejad took the stage, and the speech was fairly predictable boilerplate. However, the Columbia administration made sure to allow for a question and answer period, and a student took the opportunity to ask Ahmadinejad about the persecution of queer people in Iran, and specifically the recent execution of two gay men. The President of Iran responded “In Iran, we don’t have homosexuals like in your country.” The crowd was silent for a moment, and then burst into laughter. In that moment, the leader of an authoritarian theocracy transformed himself into a clown.

I always found that moment to be profoundly striking, because it was a moment of truth. Our perceptions of the powerful people in the world are being managed virtually all the time through carefully scripted public appearances and speeches. What’s more, even when we see the powerful with their hair down a bit, so to speak, it’s generally in the company of other powerful people who have a similar incentive to makes sure they are perceived favorably. We see a photograph of a tyrant and the leader of a progressive European democracy smiling and shaking hands at some international meeting, and are thus implicitly told that the tyrant is “okay” despite the fact that he could be responsible for the deaths of hundreds of thousands of people. In this brief, unscripted moment, the veneer cracked, and we saw the violent bigot behind the mask of modern public relations.

A similar mask-shattering moment occurred recently to another high-level public official; this time he was an American. Faced with the daunting prospect of selling $2 trillion worth of bonds to cover the bailout budget, Treasure Secretary Geithner embarked on a whirlwind tour of China in order to reassure the biggest holder of US government debt in the world that “we’re good for it”. When, like Ahmadinejad, Geithner answered a question after having delivered a speech to a university by saying “Chinese assets are very safe”, he faced a gale of laughter. While the diplomatic rhetoric continues to flow from the Chinese government, the college students know the truth. That the United States is far past the point where we’re able to service our debts and remain a First World country.

The Federal Reserve is buying Treasury Bills with freshly created money. When money is introduced to a shrinking economy, inflation is the result; inflation helps debtors and hurts creditors, and the debtors own the printing press. Everyone in power already knows this, but they’ve been devoting their efforts to making sure the average Joe doesn’t see the 800 pound gorilla in the room. It took a room full of Chinese college students to call a spade a spade; hopefully that’s a signal that more people are waking up to the true crisis we’re currently beset by. If it’s true, then perhaps we can end finally end the vain (and expensive) attempts to revive to old financial and political order and begin to set about the enormous task of beginning to craft a new world.

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Reserve Currency Watch

The Chinese currency’s challenge to the dollar is finally hitting mainstream media outlets, thanks to a recent editorial by Nouriel “Dr. Doom” Roubini in the NY Times. We at ASR have been watching this unfold for a few months now with growing consternation; hopefully Roubini’s editorial will mean our public officials will have to begin confronting the reality that our Dollar based hegemony is crumbling, and that soon we’ll be as bound by the same economic laws as every other country. We’ve gotten used to diluting our inflation in the ever-growing pool of foreign held dollars; without that outlet, we’re going to have to totally rethink the fiscal policies of the Federal government. Soon, we’re going to have to confront the hard choice: live within our means or experience hyperinflation. We’ve gotten used to having our cake and eating it too; this is going to be a very rude wake-up call for many, many people.

*UPDATE*

The story has also been picked up by the London Telegraph!  Keep the meme spreading!

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California’s Burning

So the State of California is officially broke.  According to the Raw Story, after the legislature and the governor again failed to reach a compromise bridging the 40+ billion dollar budget gap, the government is officially out of money.  Effective immediately, the state will not disburse any funds for college scholarship grants, county social services, and the highway patrol.  Furthermore, Californians will not receive their state tax returns until this is resolved.  According to sify.com, if this is not resolved by the end of the month the government will be completely out of cash.  As a result of the immediate cuts, there’s an unprecidented level of county-level push-back, as it is the counties who administer the social services.  The Sacramento Bee reports that county governments, which collect property taxes for the State, are threatening to withhold funds until the State agrees to meet its (now unfunded) obligations to them.  One has to wonder, what with California’s unemployment rate already at 9.3%, what that number will be when all of the low paid human services peons (I’m one in VT) are out of work.  In Bakersfield, CA, budget cuts could potentially eliminate 1100 of the 1500 jobs in their county’s department of Human Services.  Never mind what will happen when all of the folks who’ve become dependent on that system suddenly stop receiving services.

One aspect of this situation that I find especially interesting is the fact that the State has threatened to issue IOUs for tax returns, and has negotiated with banks, trying to convince them to accept the IOUs as deposits.  In essence, the broke government of CA is in such dire straits that they don’t have the luxury of waiting for the inflation-funded Federal bailout to bring them back to solvency.  As such, they’re trying to do an end run around the Federal money monopoly and directly inflate themselves out of their predicament.  California’s always been a step or two ahead of the rest of America; if things continue as they have been, this might become a common occurrence.

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