Tag Archives: Capitalism

The End

finish-line

A strange thing happened after I finished my last post, The Joker. I realized that I was comfortable with it being my last article on this blog. It felt like my “mic drop.”

There were times when I stopped writing for different reasons. But I always left the door open. There was a part of me that knew there were things left to say, ideas left to express. I still feel that way but I realize that there is no longer anything left for me that needs to be expressed. I could continue on. But, like all good things, the end is a vital part of the experience. That moment has come for me with this blog.

I’m proud of what I’ve done here. For over three years, I personally explored a subject most people aren’t even willing to contemplate. My understanding strengthened and I discovered things that people immersed in the subject only learn through the writing of others. I haven’t been shackled by someone else’s understanding. I never read the books or papers of the experts. Instead, I wrote my own. It started with an essay, and it culminated with this site. This is The Currency Paradox, a single volume. I really don’t need anything more.

There are some who will be pleased that this day has come. “At last,” they’ll think, “his  self-importance has ended.” “At last, this idea can die while the serious work of Capitalism continues.” There may even be some who think that I fake these discoveries, that I regurgitate words written by those with greater understanding and eloquence. They won’t believe that I could have been able to cognize some of the most important works of economics and philosophy on my own. I was never going to earn their approval and I definitely won’t try now.

There are some who will read this site and see nothing but error and those who, due to their own arrogance, will not read it at all and assume error. I took this journey to learn. I have no regard for those who may know but will not teach, will not challenge, will not express. If you refused to engage, out of fear, or doubt, or spite, your judgment means nothing to me. I came for your ideas. I challenged you all in turn. None of you stepped up. So who truly failed?

As time went on, my original essay proved to be the very definition of “anti-fragile.” It has only gotten stronger as time has passed, has only been validated. Indeed, the vast majority of the ideas I’ve presented here have not only withstood the test of time but have invalidated ideas still considered sacred in other circles. The sacred cows may still be sacred but they no longer live; they’re “zombies,” dead ideas that will persist in the minds of people too afraid to let them go. That’s only going to make the transition to come that much more painful.

I want to end here with this quote:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Adam Smith

Adam Smith missed the greater point. It is only by acting in good faith that the butcher, the brewer, or the baker can succeed. Therefore, it is not their own interest which guarantees their success, it is the morality imposed upon them by their need to serve others for their own benefit that does. None of them could prosper if they violated the trust necessary for them to benefit by offering their service to others. It is only by valuing the needs of others that they can prosper. What do they gain if their wares are poisoned? If their wares are inferior, economics states they will be supplanted by others who will provide better goods. It is only by servicing their clients greater needs that they can guarantee their own prosperity. It is only by respecting, valuing, and cultivating trust that they can actually satisfy their own self-interests. It is never a one sided exchange. It is always a symbiosis.

However, when there is monopoly power, it is easy to violate that trust. Without the check of arbitrage or competitors, the social contract of trust can be violated without regard. That is one of the main flaws of modern Capitalism. As a system built on the premise of the commitment of capital to ventures that may either succeed or fail, the elimination of arbitrage and competition is a fundamental force. It is only when those things are eliminated that markets are “captured.” By definition, that capture involves the destruction of the symbiosis of trust agents. In other words, monopoly destroys the need for social trust in the exchange of value. It becomes a form of coercion. That is why it is, ultimately, socially destructive. However, it is also the means by which Capitalism works best.

Our society cannot sustain this contradiction indefinitely.

Marx tried to prove that Capitalism’s contradictions would destroy it. What he didn’t factor in was technology’s ability to improve living standards so quickly and so pervasively. Many economists think that he was wrong. However, it is more likely that Marx just hasn’t been right yet. Capitalism is a system that fundamentally undermines social trust, particularly at its most efficient. It’s a feature of the system, not a bug. The complete elimination of arbitrage and competition is always in the best self-interest of those involved in commercial exchange, especially done on the scale which it is today.

I undermined that premise with The Currency Paradox. In a society where money is created by time/effort, it behooves those with capital to fund opportunities for competition and arbitrage, particularly in a world of seven billion people. The tremendous demand coupled with the direct value creation of the populace would spur massive innovation and scale without the destruction of social trust by monopoly. Indeed, monopoly would largely be impossible. Equitability of opportunity would be a built-in feature of the economy and greater equality would be a direct result. More importantly, those things would be achieved without sacrificing economic growth. The world would continue to become richer and more prosperous. Because time would become valuable, healthcare would become a global priority. As a result, poverty, and its attendant physical, mental, and emotional health risks, would be completely eliminated. As prosperity increased, the population would drop precipitously, tremendously lowering demand for natural resources. It is likely that almost all the major problems faced by our world would be eliminated within only a generation or two.

As time has gone on, The Currency Paradox has only grown stronger. I end this particular journey with one final, likely unassailable argument:

Capitalism may create wealth but, ultimately, it destroys social trust.

Goodbye friends. Maybe I’ll have more to say. But, if I don’t, consider what is written here and use it to strive for a better world.

The Truth About Tax Cuts

cashme

This kid is gonna be POTUS one day.

Let me ask you a question: for what do you think your taxes pay? Is it better roads, good schools, social services, like firemen and police?

Maybe, probably at the state and local level. But, at the national level, your tax dollars really don’t pay for anything.

Let me repeat that: your tax dollars really don’t pay for anything.

In the U.S., our government can literally print as much money as it wants. It can completely eliminate its liabilities more or less at will. So why collect taxes?

The truth is that, at least when it comes to taxation on a national scale, our tax dollars don’t “pay our bills.” Our government can literally print as much money as it needs to cover any entitlements, military spending, or pretty much any other bonafide social safety net expense or ridiculous boondoggle it decides to fund. Imagine if you had your own printing press that could perfectly reproduce Federal Reserve notes. And it was completely legal. Would you ever be short of cash? No? Well, that’s pretty much the way our fiat currency system works.

Politicians play on the fact that, as a controlled commodity, it’s difficult for most people to accumulate money in significant amounts. So they talk about “deficits,” ”debt,” ”spending,” etc., referencing metaphorically what most people live very much literally. The government never has to worry about running out of money. Think of it as having a bank account with infinite dollars.

When it comes to money, the government is concerned about something else entirely: debasement. It’s more worried about printing so much money that it becomes worthless. A debased currency makes everything tremendously more expensive (except debt, which would actually decrease in value).

So there are mechanisms within the fiat currency system to prevent an excessive accumulation of money. In other words, our monetary system contains mechanisms for destroying money. Fractional reserve banking is one such method.

The other is taxation.

The purpose of taxation is to remove the “extra” dollars from the economy. However, as it functions, this system is profoundly flawed.

If the purpose of taxation is to remove excess money from the system, consider what happens when taxes are “cut.” When the government cuts taxes, it has decided to remove less excess money from the economy. Why would it do that? Because, at least theoretically, the additional money could be used to spur innovation and productivity, which we call “economic growth.” That economic growth translates as societal wealth, in the form of better goods and services. Economic growth is what propels us all into progressively higher standards of living, at least materially.

However, what happens if that additional money does not create economic growth? What happens if major new innovations are not created and productivity doesn’t actually increase? What happens when the options for monetizing new products and services simply don’t materialize? Think of the “unicorns” of Silicon Valley… what would happen if Uber flamed out? What would happen if the public ends up rejecting augmented reality (AR) or virtual reality (VR)? What happens if self-driving cars end up being a dead end?

The key for tax cuts is that, if they don’t spur growth, they exacerbate the problem of currency debasement. Rather than allow the government to get those dollars back, the wealthy prefer to hold on to them by whatever means, legal or illegal. Our laws and force apparatus give those dollars real worth even though they are inherently worthless. As a matter of status, the rich want to keep those extras dollars to buy the bigger house, the bigger boat, the bigger jet, etc. More houses, more boats, more cars. At a certain level of wealth, it’s all ego tripping.

Which brings me to this point: have you ever noticed how tax cuts go almost exclusively to the wealthy? Why don’t they go mostly to those lower on the chain? The simple answer would be because that would defeat the purpose. People further down the chain will simply spend the money into the economy. “What’s wrong with that?”, you may ask. “Aren’t the rich going to get the money anyway?”

Yeah, but there’s a problem with that… it’s called “price inflation.” When merchants and businesses know that there is more available money in the economy, they tend to raise prices. Since taxes can’t be cut enough for most of those lower down the economic chain to make a material difference in their incomes, the effects of “tax cuts for everyone else” will likely simply translate to higher prices. So the money will indeed “trickle up” (actually flow up), but then everyone will be stuck with higher price levels for goods and services. Oddly enough, funneling the money directly to the rich prevents that outcome.

The real question is “Does it work?” My best answer is that it has to, at some level. At least materially, our standard of living continues to increase. There are a few large bets on the horizon technologically that could have a major positive impact on living standards, such as AR, artificial intelligence (AI) and machine learning (ML) , and autonomous vehicles. Will tax cuts help those big bets pay off? It’s possible.

But, in the wake of that, a potentially dangerous condition is also developing: the increased displacement of human labor in the value chain. Labor is the method by which most people acquire the means to participate in the economy; simply put, it’s how they earn money. However, globalization and increased technological automation is leading to an increased deprecation of Labor value. At the more developed end of the spectrum, employment is either shrinking or progressively moving to lower wage work. All signs are that this trend is accelerating. So far, Capitalism has not found a way to address what it perceives as a short-term transition that could easily become a long-term crisis. Tension is already rippling through the most advanced economies in the form of increased populism. The world is changing and Capitalism so far has shown little capacity to manage that change effectively.

If you look at taxation from the perspective of its intended purpose, then you can understand how disingenuous the arguments of the wealthy are against higher taxation. The rich want those further down the chain to shoulder more of the tax burden. The reality is that such a proposition will almost certainly have a profound effect on economic growth. As the middle class evaporates, those lower on the chain can barely afford to make their way in the modern economy as it is. If the purpose is to get the “excess” dollars out of our economy by getting it from those who can least afford to give it, I don’t see how that is going to have a positive outcome. The reality is that we tax the rich because they have the excess dollars. Their argument is that they are the ones who fund innovation and enterprise. But it’s just as likely that they will devote their money to financialization; in other words, they’ll use safe financial instruments simply to make more money rather than making riskier bets that may spur much greater growth. Even worse, a lot of that money will be used simply for indulgence, avarice, and status-seeking. As displays of opulence and decadence become more visible in our more socially connected world, the potential for backlash increases substantially, the outcomes potentially catastrophic. Remember the French Revolution?

The truth is that our economic system is fundamentally unbalanced and likely to become more so. Money is being kept out of the hands of the very people who need it most and given in wheelbarrows to the very people who need it least. The worst part is that this is probably our economy’s optimal condition; it is unlikely that the system can be made more equal, or even more equitable, without running the risk of high price inflation at least, and, potentially, economic collapse. As it stands right now, the only way the system continues to function is if it continues to become more and more unequal.

I don’t see how that ends well.

When Capitalism Mattered

privateer1

A recent conversation had me thinking about what my ideal existence would be. Strangely enough, my thoughts went to a video game named Privateer; the premise of the game is that you live on your own spaceship which you can trick out to perform a number of tasks. It really boiled down to a choice of two occupations in the game: you could be a “privateer” and buy and sell merchandise all over the galaxy and hunt pirates for bounty or you could be a pirate and rob said privateers.

My frequent readers may be thinking “so how did that piracy thing work out?”. My answer:

It didn’t. I loved playing as a privateer.

Yep, I loved buying and selling cargo (and hunting pirates). There was something kind of peaceful about going from planet to planet trading goods. Yeah, I got attacked by pirates and the game became absurdly difficult as I leveled up. But, for awhile, the feeling of being in open space and traveling to different places to sell commodities and equipment for profit was pretty fun.

To my dismay, what I realized is that, in that game, I was a Capitalist. And I enjoyed it.

Needless to say, I had to figure this out. What was so appealing about Capitalism in the game that sucked so hard in real life? Modern Capitalism is about as exciting or appealing to me as getting kicked in the jewels with spiked Louboutins. Why did I like it so much as a “privateer”?

Coming to that answer helped me understand more viscerally why I think civilization has outgrown Capitalism. The key word is “risk.” Let me set the scene for you:

Consider what the world was like throughout most of history. To put it in two words it was “ridiculously dangerous.” Whether traveling over land or sea, the chances of dying were pretty significant. Between hostile natives, highwaymen, disease, starvation, the occupations of exploration and trade were about as risky as it could get. We read about all of the famous tradesmen and explorers who helped us gain a better understanding of our world by traveling and selling stuff but we don’t read about the guys that died from dysentery or having their heads stoved in by angry Aztecs. In other words, exploration and trade were extremely risky.

In my post What is Capitalism?, I made the case that the essence of the concept was the commitment of “capital” to a venture that may either succeed or fail. Now think of the risk that was involved in the accumulation of wealth back in the day. Almost every venture had the potential to end in death. The only way anyone would have been crazy enough to take on that risk is if the payoff was worth it.

Hence, Capitalism.

Now, think of the conditions that exist today. Somali pirates notwithstanding, exactly how “risky” is travel and commerce now? What are the chances of dying or, even for that matter, experiencing serious loss when engaged in global commerce? Let’s not even talk about exploration; any place we haven’t been is someplace we know we aren’t interested in going.

You see, people, modern technology has made risk, at least in its most significant forms, obsolete. Capitalism rose as a means of incentivizing people to risk their lives for wealth. In a world of adventure, it made total sense to build an economic system around incentivizing people to do what no sane person would normally willingly do: wander off into the great unknown (or dangerous known) to find things of value.

But, in our globalized world, where is the risk now? It’s all almost entirely mathematical. Investments now primarily involve making bets against stupidity. The risk is almost entirely in people being stupid. Other than that, there is almost no real risk in our current Capitalist system. Indeed, the term “late Capitalism” is apropos. It’s a solution to a problem that no longer exists.

So, where do we go from here? You know my answer. We find a way to not only provide for people materially, we start to seriously address the matter of human dignity. We find a way to invest everyone in the success of Humanity as a species. We find a way to create “antifragile” systems, laws, and institutions that value the preservation and sustenance of social trust above all else.

Capitalism? It’s obsolete. Maybe in the void of space, where the distances are vast and the pirates have big guns, it still makes sense. But, here on Earth, the pirates are mostly gone and modern technology has made the world much, much smaller and far less dangerous.

The world of the privateer is gone. What is going to take its place?

The Trust Engine

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Somebody recently tweeted something to the effect that being “anti-Capitalist” was a form of absolutism. This person also implied that being anti-Capitalist was hypocrisy in that an anti-Capitalist enjoys the benefits of Capitalism while being “pious” about its flaws. Consider this:

I’ve enjoyed computers ever since I got my first one in my early 20s. It worked great. I was awed by what I could do with it and gaming on it was mind-blowing. I loved that thing.

Why don’t I own it anymore?

Sure, it worked. The software that ran on it was pretty good. It was fast for its time. But times changed. As the software became more capable, the system couldn’t keep up. So I upgraded. Does that mean I didn’t enjoy or benefit from my first computer? No. It simply means that, as software and networking became more sophisticated, new problems arose in software that had to be addressed. Security became a concern. On top of that, the desire for people to do more propelled evolutions in software that often required wholesale overhauls of their code bases. The new software was more robust but also placed greater demands on my system. Eventually, those changes were so extensive that I simply had to buy a newer, faster system. Luckily for me, PC hardware companies understood this reality and kept making their components faster and better.

It was simply evolution.

I’d say, like most people who enjoy computers, I have fond memories of my first real one. I’d also guess that there is not one of us who would trade in what we have now to go back to using it.

This is an easy enough argument when it comes to computers so why is it so difficult to understand when it comes to Capitalism? It’s like any other man-made system. It will work great for awhile but start to show flaws. Those flaws will be patched and patched until it is no longer practical to fix them. Then, a newer, better, more robust system will replace it.

But, oddly enough, this observation isn’t really why I wrote this post. It was just the thought that motivated a deeper exploration. I realized that I was going through life but not really understanding it. What is the essence of our existence?

I didn’t find the meaning of life but I think I did come to a few pretty significant conclusions. I came to understand what the single most important component of modern society truly is:

Trust.

It is the single most valuable component in society. It is the literal foundation on which all of civilization is built. From the very first time that two non-related humans decided to cooperate, trust has been the most relevant survival trait. Without it, society literally could not exist.

Why is this important? Because, by understanding that trust is the single most valuable component in society, you start to understand why people, at the apex of humanity’s wealth and dominance on this planet, are unhappy. Guys like Max Roser and the late Hans Rosling wave around statistics showing how much the world supposedly has improved. It’s compelling evidence. But they are completely missing the point.

The only way we can survive and prosper truly on this planet is not only by trusting one another but also by valuing the building and sustenance of it as our core ideology. My next statement may seem controversial but, on reflection, I think you will agree:

Trust is the only true religion.

If you explore the tenets of most religions, especially the major ones, trust is their foundation. The very power of the “God” concept is the belief in an objective arbiter who punishes those who violate social trust and rewards those who honor it. Indeed, what is a “belief”? It is trust in any conceptual entity without the benefit of evidence. Even our secular laws and institutions… every single one is built on the premise of trust.

Assuming I’m correct, then consider the following extrapolations:

  • In order for a system to be trusted, it must produce uniform outcomes. In other words, it must produce near identical and consistent outcomes based on context for everyone or everything in that system;
  • The only true “sin” or crime is that which violates, undermines, or destroys trust;
  • The key criteria for trust are consistency, plausibility, predictability, and reproducibility. Any system or institutions that does not fulfill those criteria will be rendered invalid.

When I look at the world, what I see is a fundamental erosion of the trust structures. This is a problem that Capitalism is not solving. Indeed, it is now exacerbating it. When equal circumstances do not produce equal, consistent, or, minimally, equitable outcomes, any system designed to produce those outcomes is fundamentally flawed. A system does not have to produce universally bad outcomes to become invalid, it only needs to produce inconsistent ones.

In any system built on trust, the most corrosive element in it is the “bad actor.” I don’t mean in a theatrical sense; an actor is simply someone who takes action. A bad actor is one who violates, undermines, destroys and, otherwise, exploits trust systems for personal gain to detrimental effect. The irony of bad actors is that many are pretty good actors in the theatrical sense.

Which brings me to this next point: one of the reasons I oppose incrementalism, at least as it relates to social progress, is that it fundamentally validates the bad actor’s actions. Remember, in order for a system to be trusted, it must produce consistent outcomes for everyone. Incrementalism is both a tacit acknowledgement and an accommodation of the bad actor in the form of tolerance. The opposition to incrementalism is rational because trust is undermined in any system where uniform outcomes under contextually similar conditions aren’t possible. By nature, such a system is fundamentally flawed.

I could continue on but I hope those who read this will take the time to relate it to their own experience. Think of the institutions with which you participate, the people with whom you interact. Do you trust them? What bad actors, in person or institution, have you engaged?

I think when you examine it more closely, you will begin to understand why there is so much discontent in the world. Look even closer and you will see that many pathological systems endure largely because, even by producing consistently negative outcomes, they create trust.

Should Capitalism ever fail, it will likely be simply because people no longer trust it.

Immutability = Extinction

Frohawk_Dodo

A thing that is not changing is dying.

Being interested in technology, I’m often confronted with the concept of “disruption.” Maybe the more apropos term is “creative destruction.” In any case, the idea that growth is indelibly linked to change is one that is pretty much unchallenged when it comes to tech.

The ironic and, at least to me, hypocritical thing is that such thinking doesn’t apply when it comes to Capitalism. Particularly in regards to Silicon Valley and its high-profile venture capitalists, Capitalism is the one concept that should forever be immune to disruption. There is a belief that we have perfected economics, that no system is possible beyond Capitalism and, therefore, no serious discussion of potential alternatives is necessary. Those who believe in the Capitalist system are prone to consider those, such as myself, who contemplate alternatives as “cranks.” Even their language is polarized; most immediately consider anything that is not Capitalist as “socialist” or “communist.” The idea that there can be anything outside of our current economic system is simply beyond their ability to grasp.

Here’s the thing: Capitalism will either change to the point where it no longer resembles what it does today or it will cease to exist entirely. This isn’t speculation or wishful thinking, it is a fact. The simple reality is that a thing that is immutable is unchanging and a thing that doesn’t change is a thing that ultimately becomes extinct.

I find it humorous how serious Capitalists are about their system. From the economists, to the finance guys, to the tech guys, Capitalism is the one thing that is truly “serious,” a thing that, for some reason or another, should not ever change. Indeed, even the subject of it changing isn’t “serious” enough to discuss, at least not in any but the most marginal way. It’s pretty preposterous really. What thing can exist in perpetuity without changing? The champions of Capitalism don’t even seem to be intelligent enough to understand that their unwillingness to seriously address its shortcomings is what guarantees its ultimate failure.

Capitalism isn’t immune to “creative destruction.” At some point, the necessity for it to alter in a substantial or even a profound way will become apparent. What then? Will its champions resist? Will they become the impediments to advancement that they attribute to “cranks” such as myself?

I have to admit, the entire process tickles me. The asymmetries of Capitalism are not indefinitely sustainable. Either a more egalitarian form of growth will evolve from it or it will alter under the specter of violence and upheaval. But, one way or the other, it will change. Or it will die. Simple as that.

So, all you “serious” guys… enjoy Capitalism now while it still resembles something you recognize. Change is coming, whether you like it or not.

The cranks will have their day.

Trump Has Already Won

kingdonald

There are few things that provide as much bang for the buck as outrage. It’s free and grants the person who indulges in it a smug sense of self-worth that few other emotions can offer.

There’s a lot of outrage going on right now regarding Donald Trump and his colorful executive orders. He definitely has taken a running start toward turning the U.S. into a totalitarian state, though few people seem to get that it was already halfway there.

Few people also seem to understand that this outrage, particularly against what is called the Muslim Travel Ban, plays right into Trump’s hands. Trump knows a whole lot about bang-for-the-buck himself. His ban affects a relatively small handful of people yet its symbolism is huge. More importantly, it plays great for his most die-hard fans. Though a small gesture in the grand scheme, it shows Trumpletons that Donald is indeed a man of his word, unlike other politicians. He said he was going to curtail immigration and he took a small but highly visible step to do that right out of the gate. And I guarantee that his core constituency, and more fence-sitters than most people are willing to admit, loved it.

The more bleeding-heart liberals, Social Justice Warriors, and “coastal elites” ride for immigrants, the more it shows Middle Americans, Rust Belters, and anyone else disaffected by the current economic system that the priorities of Americans already in this country are not a concern for them. The people outraged by Trump don’t seem to understand that it fuels him. He is not a man prone to bouts of conscience or sentiment. More importantly, he knows that he is playing a winning hand.

As long as the bleeding hearts are unable to provide a viable alternative to the economics that have harmed so many of the so-called “middle class,” Trump is running downhill. So far, the same people who have been so willing to write off huge swaths of Americans and others worldwide as simply neoliberalism’s collateral damage have been the most vocal about the injustice of banning immigrants. This may play well for the peanut gallery but, to many, it just seems like a whole lot of hypocrisy. Where was this outrage when middle America lost their jobs? Where was the handwringing when Rust Belters turned to drugs, alchohol, and, more importantly, suicide to deal with their marginalization?

As long as the bleeding hearts refuse to deal with the core issues of our economics and create a better value proposition, Trump has already won. He’ll continue to stoke hate and fear like a fire because he knows that his opponents don’t have the resolve to change a system from which they benefit. He knows that every time he appeases his constituency that their support for him will only grow. And he knows that everyone who opposes him without providing better solutions are becoming their own worst enemies.

The mark of the gifted totalitarian is not the ability to make common sense seem evil but to illuminate the natural hypocrisy of their opposition. Trump has shown that the bleeding hearts only care about certain types of people, the others, instead of the ones suffering in their own backyard. As time goes on, he’s going to forge that hypocrisy into a sword and drive it right through the heart of democracy.

By then, it’ll be considered a mercy killing.

Is Currency Devaluation Causing Deflation?

currency-war2

As a scholar, I love the “Aha!” moment when something crystallizes in my mind. That moment came to me right after I posted The Gold (and Bitcoin) Fallacy. For some reason, my brain started to fire after writing the following:

Using my methods, Bitcoin’s divisibility could indeed be leveraged to make it a viable currency. However, the exercise also revealed that Bitcoin divisibility is indeed inflationary by nature and that high demand is naturally price inflationary.

These final sentences stuck in my head and I could feel a fire burning. Then, all of a sudden…

It hit me.

I had stumbled upon something in my post Fixing Bitcoin Part II: Pricing with Bitcoin Units; the clue was in the following section:

What I’m proposing allows Bitcoin to be used mostly in whole units irrespective of what it is trading for. This system easily moves from Bitcoin to fiat currency and vice versa. Let’s start with the variables:

  1. Price of item in fiat currency;
  2. Maximum Exchange Rate (= 10 units of correlated fiat currency);
  3. # of expansions of the Fractional Rate. This correlates to demand and is equal to the number of times Bitcoin exceeds the Maximum Exchange Rate. For instance, a Fractional Rate of .000000000000001 means that demand for Bitcoin has caused its exchange rate to “turn over” 15 times. This number is easily determined simply by counting the number of places to the right of the decimal point. In the above example, the # of expansions of the Fractional Rate would be 15.
  4. Price of item in bitcoin units.

The formula for converting fiat pricing to Bitcoin pricing would be as follows:

((price in fiat currency) / (maximum exchange rate = 10)) * (# of unit expansions) = (price in bitcoin units)

Let’s say you want to sell an $899 PC in Bitcoin units. Using today’s current Bitcoin exchange rate in $USD, here’s how it would look:

($899 / 10) * ($221.20/10 = 22) = 1977.80 BTC units

Note: “221.20” is Bitcoin’s exchange rate in $USD as of this very instant; to approximate the Fractional Rate, this number is simply divided by my proposed Maximum Exchange Rate of 10 units of a correlated fiat currency. In this example, this would be equivalent to $10USD.

Conversely, the formula for converting Bitcoin pricing to fiat pricing would be as follows::

((price in bitcoin units) / (# of unit expansions)) * (maximum exchange rate = 10) = (price of in fiat currency)

Using the previous dollar figure of $899, let’s convert Bitcoin units into fiat currency:

(1977.80 / ($221.20/10 = 22)) * 10 = $899

Lets say the fractional rate is 71 instead of 22. Using the same $899 price from the previous example, here are the conversions:

($899 / 10) * 71 = 6382.90 BTC units

or

(6382.90 / 71) * 10 = $899

In this fashion, it is possible to price items in units of Bitcoin relative to fiat currency or the reverse.

What I realized is that an interesting thing occurs in this process: the price of something in bitcoin units has a direct correlation to the increase in demand for Bitcoin. When converting bitcoin into bitcoin units, I use a variable called the “Fractional Rate,” which is the number of times Bitcoin’s exchange rate would “roll over” if it had a a hard cap of $10. When I wrote my post, a single bitcoin was worth $221.20USD; the Fractional Rate would equal “22” based on dividing the exchange rate by the Maximum Exchange Rate of $10 per unit. In the other portion of the example, I speculated on a Fractional Rate of “71”; by multiplying the Fractional Rate by the Maximum Exchange Rate of $10, the proposed exchange rate would be approximately $710 (between $710.01 and $720.01 more exactly).

For more perspective, consider the current exchange rate between BTC and USD, $821.20 per bitcoin as of this moment. To determine the Fractional Rate for my equation, I would do the following:

$821.20/$10 (Maximum Exchange Rate) = 82

Compare the difference in the Fractional Rate from my Fixing Bitcoin, Part II post to this current one, “22” versus “82.” The change in the Fractional Rate represents a significant increase in the “demand” for Bitcoin as represented by the increase in the exchange price (I use the term “demand” loosely as the increase in exchange price also represents the halving of block rewards, which makes bitcoin production more scarce).

If you look at my example, you will see that an $899 computer costs 1977.80 bitcoin units at the Fractional Rate of “22” and 6382.90 bitcoin units at the Fractional Rate of “71.” In other words, the example showed a direct correlation between the increase in demand for Bitcoin and an increase in price as expressed in bitcoin units. No doubt that I could also show the reverse, a decrease in the price of an item in bitcoin units based on a decrease in the demand for Bitcoin. It’s all basic mathematics.

(Note: for more background on bitcoin units, please read The Post Where I Fix Bitcoin and Fixing Bitcoin Part II: Pricing with Bitcoin Units)

Now here is the crazy part, the part that has my brain firing…

What if there is a direct correlation between the demand for any money and prices?

What if currency devaluation is a significant cause of deflation?

The implications of this are pretty significant. Maybe this is common knowledge in the economics profession but, if I’m correct (and it isn’t), this kind of blows me away. Let’s assume I’m correct and neither insane nor way behind the curve… then what does this mean?

If demand for a money directly correlates to pricing then the current deflation and the difficulty addressing it becomes much easier to understand. Most countries are aggressively devaluing their currency to improve their ability to export goods; it’s possible that this process is counteracting inflation. The proper corrective then is for a nation experiencing disinflation or deflation to allow its money to “strengthen.” However, that process relative to other countries devaluing their currency creates a Catch-22 scenario: strengthen your currency to reach inflation targets and have your exports become less competitive or keep your currency “weak” for stronger exports at the expense of disinflation or deflation.

Another interesting aspect of this possible connection is that the ideal state of equilibrium regarding currency exchange between nations becomes determinable. Ideally, the exchange rate between nations is 1:1 based on the total money supply of each country. For instance:

Let’s say Japan’s total money supply is 1000yen and the United States’ is $200USD. The ideal exchange rate between them would be 1:1 or 5yen to $1USD. Now let’s add Great Britain to the mix at 350pounds; at 1:1, it’s exchange rate with Japan would be 1pound to 2.86yen and 1.4pounds to $1USD.

And so on.

Those exchange rates would be ideal as they would promote economic stability. Now what about monetary inflation? My supposition is that the ideal rate of currency inflation is equal to potential demand. A simplified version of this is that each country would inflate (or deflate) its currency at a percentage equal to its populations growth rate to maintain the 1:1 connection with other currencies. Obviously, this is a challenging concept in a globalized world in which demand for a nation’s currency can transcend borders. Also, the temptation for a nation to devalue its currency is pretty strong and maintaining an asymmetry with trading partners is an attractive proposition. I think that many of the issues regarding the world’s currencies stems from the contradictory needs of every country to reach target inflation rates, which may require “strengthening” a country’s money, versus creating an attractive export situation, which benefits from currency devaluation.

So, is demand for a money directly correlated to price levels? Can disinflation/deflation be corrected by “strengthening” a nation’s currency? If so, how will it affect a country’s exports? Will the prospect of this connection allow countries to more accurately identify their target inflation rates? And can strengthening or weakening their currencies provide a new weapon for controlling inflation?

Interesting questions for an interesting time.