Tag Archives: Money

The Truth About Tax Cuts

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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.

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How the West *Really* Got Rich

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Nina, Pinta, Santa Maria by BarbedWings

Yesterday, I got into an exchange on Twitter that made me simultaneously remember what I enjoy so much about the platform and why I have significantly decreased my presence on it. I responded to a blog post by economist Jared Rubin titled Why The Middle East Fell Behind; his premise, at least to my understanding, is basically that institutional stagnation resulted from the political and economic elite’s need to manage around the influence of the religious elite, who had the weight of the Quran behind them. The progressive economic improvements codified in the Quran had a major stimulative effect on growth in the Middle East; however, because they were indeed codified into the religion, they prevented economic innovation and thus impaired the region’s ability to progress through economic adaption. I don’t want to misrepresent Rubin’s work so please read his post.

I decided to respond to his post because, while I generally agreed with his reasoning, it gave me the impression that he was making the case of a Middle East that had complacently chosen a path of stagnation. As someone who has read the Quran and learned a lot about Islam’s “golden age,” Rubin’s premise did not seem consistent with the dynamic cultures from that region of that era. The Islamic Empire from 600 A.D. to 1200 A.D. was arguably one of the most progressive and advanced in history; the Middle Eastern cultures of that time forwarded the disciplines of mathematics, science, literature, philosophy, and art to unprecedented levels and it seemed incongruous that such innovation would not touch their economics. Why would a region so advanced in every other endeavor of learning fall behind so dramatically when it came to finance and economics?

To me, history easily provides that answer: war. Between the Crusades and the Mongol invasion, the Middle East endured roughly 300 years of war in some form or another. The Mongol invasion was particularly devastating as it was routine for the Mongols to depopulate and destroy entire cities, including valuable libraries and scholars likely representing hundreds of years worth of technological advancement. My premise is that much of the stagnation of the institutions of that region in that era wasn’t by choice but by necessity. Civilizations at war tend to only progress in technology that facilitates fighting war more effectively versus making other societal improvements. With the destruction of some of its most valuable technological and philosophical resources as well as the ruthless murder of tens of thousands of its brightest minds, the Middle East was devastated beyond repair. The cultures that supplanted the Arab and Persian hegemonies, particularly the Mongols and the Ottoman Turks, were assimilators versus being innovators. Though many of the advancements of the Islamic Empires of the Middle East survived, the Mongols and Turks were cultures with very different motivations and histories; while they assimilated Islam, they were not its progenitors and thus likely could only respect its traditions rather than build upon them.

I advanced my (unoriginal) premise to Rubin and the result was this thread and adjacent related ones. All in all, I think it was a pretty interesting exchange but, once again, intellectual vigor slowly started to yield to tribalism and general suck-uptitude. Thankfully, my involvement reached a natural end before too many people jumped in to “put me in my place” for the apparently serious Internet crime of engaging someone with better bonafides than mine in a fashion that wasn’t completely fawning.

I think Rubin’s premise is well reasoned. His argument reminded me of economic historian Deidre McCloskey’s recent essay on the so-called Great Enlightenment and the rise of the West which I addressed in a rebuttal. Rubin’s juxtaposition of the Middle East with Western Europe seems to me like another angle on the concept of Western Europe’s apparent exceptionalism. A lot of words have been written regarding why Western Europe came to dominate the world economically, militarily, and socially; the basic thread is that, around 1800 A.D., Western Europe, particular England, embarked on an unprecedented technological advancement called the Industrial Revolution.

I don’t intend to challenge fact. However, I’d like to advance my own theory for why Western Europe came to dominate the world.

Let’s start from the period of Islam’s Golden Age in the timeframe of 600 A.D. to 1200 A.D. Around this time, Western Europe was pretty much a backwater. In every meaningful way, the dominant cultures of the Middle East and Asia were far more technologically, militarily, and culturally advanced.

Now consider this: In what direction could Western European culture spread at that time? In pretty much any direction east or south, the peoples of Western Europe were going to encounter a more advanced culture. Are they getting through the eastern Europeans or central Asians, who have already been exposed to the advances of Islam? Nope. Are they going through the Mongols, who have militarized largely from conflict with the Islamic Empire? Nope. Are they going through the Middle East or North Africa, the heart of the Islamic Empire, which at that time is likely the most technologically and militarily advanced in the world? Nope. And, if by some miracle, they make it to the Far East… are they going through India or China, also two cultures far more advanced than them? Definitely not.

The first thing that needs to be understood is that, for a great deal of history, conquest was not an avenue for Western European cultures, at least not on land. The Western European nations (if you could even call them that) were stuck fighting each other on their little, fairly undesirable plot of land. Any attempts at serious expansion would have put them directly in the sights of a more powerful culture.

So Western Europe spent most of its time stuck in Western Europe. However, it does have something that everyone else mostly doesn’t (with the exception of China and Japan): unfettered access to a great, big ocean. When going east isn’t an option and going west means traveling over a huge body of water, an enterprising people start trying to figure out how to travel long distances over that water. So they start innovating. Their ships get bigger, faster, and more capable. Then they start exploring. Yeah, it’s expensive but not as expensive as war (even though you still continue to indulge that pastime every now and again). Now here’s where it gets interesting… they send ships out into the ocean and start finding things. People, places. But, more importantly, they start finding riches. Even better, the cultures protecting those riches, while advanced in some ways, aren’t even close to them technologically and, more importantly, militarily. On top of that, their presence has the devastating effect of making massive portions of the indigenous populations terminally ill from disease, far more effective than any army. So now, Western Europeans are raping and plundering “inferior” cultures all over the globe.

But then, it gets even better. Some enterprising individual has learned on their travels of entire cultures that can be enslaved. The best part is that those cultures are so primitive in comparison that the moral dilemma solves itself. Now they’ve discovered a whole new concept: scale. Slavery allows them to take the first timid steps in understanding the value of economies of scale. Now, there is virtually unlimited manpower to grow their economies.

But they also reached a tricky part: slavery requires space. Using slaves in all that new stolen/conquered land is fine, but those slaves can’t come to Western Europe. There’s simply not enough room. On top of that, Western Europeans figured out early that slavery is expensive. Mouths to feed and all that, which is why they switched to serfdom. “Let the nouveau rich in ‘the colonies’ deal with that headache.”

Now we’ve reached the turning point. An interesting thing happened in the colonies: a man named Eli Whitney found a way to use a machine to do the work of many slaves. In other words, a new method for developing economies of scale was developed, one that was far cheaper and far more efficient than manpower. Now, the concept of substituting machines for labor takes root.

At that point, the floodgates open. The confines of using finite physical resources, particularly physical manpower, to create wealth are circumvented by turning to an unlimited, free resource to achieve the same end: human ingenuity. In the end, it was a combination of necessity and circumstance that allowed Western Europe to make the technological leap that gained it worldwide preeminence.

Is this all a gross simplification? Yeah. I’m definitely sacrificing nuance and detail for succinctness. And I’m also fairly certain this isn’t an original idea. But it is definitely more logically coherent than the concept of Western European exceptionalism, which is really just the intellectual forerunner to white supremacy.

It wasn’t “liberty” or superiority that created the dominance of Western Europe, it was necessity along with the proper conditions. At least, that’s what makes sense to me.

Your mileage may vary.

Is Currency Devaluation Causing Deflation?

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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.

The Gold (and Bitcoin) Fallacy

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In theory, it is possible to manage the entire world’s economy with a single brick of gold, probably far less. A brick of gold can theoretically be divided down to the atom and, if money is merely a token representing value, then there are more than enough atoms in it to easily cover the value of everything on Earth.

So why isn’t that the case?

Why do governments collect tons of gold? Why do “gold bugs” buy many coins rather than just a single one?

Guys like Nick Szabo tout the infinite divisibility of Bitcoin to address its fixed limit token issue, which has been my main criticism regarding it. However, I decided to use gold as my primary example for this post in the hopes that those who believe in the infallibility of math will begin to understand the real world challenges of dividing a fixed limit currency versus simply expanding a non-fixed limit one.

There’s a reason why the world doesn’t use a single gold brick as its currency, even though it is theoretically possible to do so. What I don’t think guys like Szabo, Vinny Lingham, Balaji Srinivasan and the like truly understand is that, in order for infinite divisibility to be feasible when managing a fixed limit currency, the proportion that every holder has must shrink in order to meet demand. For example:

Let’s say four people hold equal portions of an entire fixed limit currency. Then each would hold 25% of it. If an additional person above the four was granted an equal share of the currency, then the five holders would own 20% each. If five more people were given an equal share, then the ten holders would each own 10% of the currency.

Now let’s look at the original four holders. By increasing demand for the currency, they went from owning 100% of the currency collectively to owning 40%. Their individual and collective proportions of the currency shrank.

In my previous example, each current holder had to surrender an equal portion of his share to meet the increased demand. Assuming there isn’t a physical limit for how far the currency can be divided, it is theoretically possible that a currency can be divided indefinitely under those circumstances.

However, is that possible in the real world?

Let’s say you have a brick of gold and someone purchases 25% of the brick. Now let’s say that nine others later want to purchase equal shares of the brick. What happens?

What will likely happen is that the nine will get equal shares of what remains of the brick. The proportions would then be as follows: one holder would own 25% of the currency while the other nine hold slightly more than 8% apiece.

The nature of a fixed limit currency is that it is inherently zero sum. In both of my examples, ten people were distributed 100% of a fixed limit currency. However, in my second example, the amount that could be split between nine subsequent demanders of the currency was distorted by the initial large purchase of the first. For a fixed limit currency, accumulation of it that exceeds the mathematical equilibrium of proportion of its supply relative to its demand at the individual level negatively impacts one or more holders of that currency. In other words, for a fixed limit currency, someone’s surplus of currency is someone else’s deficit. If ten people hold 100% of a fixed limit currency, the only way one of the holders could acquire more of the currency would be directly at the expense of one or more of the other holders.

Though I’m not completely certain, I suspect this was ultimately why the gold standard failed. Granted, there is no fixed limit for the supply of gold but its accumulation is slow and generally capital intensive. Its accumulation by governments and the wealthy would not have been an issue in a slow growth world, particularly as long as the pace of gold production kept up with demand. However, as economist Robert Gordon has shown, 1870 was the year the world started to profoundly change. The pace of technological progress began to rapidly accelerate along with population growth. My guess is that, in a world of the gold standard, rapidly increasing demand severely outpaced gold production and was exacerbated by governments and individuals who accumulated large quantities. In the end, my speculation is that the world simply outgrew gold. It was too scarce with which to serve an increasingly global economy.

If I’m correct and the world simply outgrew gold, then what are the prospects of an absolutely fixed limit (wannabe) currency like Bitcoin succeeding where gold failed? The same economic distortions relative to gold would be far worse with Bitcoin. Early adopters have already hopelessly distorted its ability to be used as a mass currency and, unlike gold, it is absolutely zero sum. Accumulation of bitcoin absolutely negatively impacts subsequent holders, particularly in the face of high demand. Bitcoin works until excessive demand smacks face first into the “hodlers,” particularly large accumulators. High demand will cause Bitcoin’s price relative to fiat currency to skyrocket which will slow its velocity to a trickle. Bitcoin is barely used as a currency now and its fixed limit practically guarantees that it likely will never be mainstream.

Bitcoin only works if, when divided down to the next fraction, everyone’s holdings are also automatically divided down to the next fraction. In my articles, The Post Where I Fix Bitcoin and Fixing Bitcoin Part II: Pricing with Bitcoin Units, I introduce the concept of the “bitcoin unit” to simplify the mathematics of Bitcoin and also allow it to be “expanded” and “contracted” usefully for mainstream economic purposes. 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.

The Bitter Pill: A Mea Culpa

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Russ Roberts responded via Twitter regarding my recent post title Russ Roberts’ Bitter Pill. Much respect to Roberts because he could have just ignored it altogether, especially if he thought I was way off the mark. His response caused me to revisit my post and view it with fresh eyes.

The $10 miracle pill in Roberts’ example was simply the object he used to illuminate how innovation and globalization naturally displaces certain classes of labor. Fair enough. But I liked using the miracle pill example for my own purposes because it was a perfect metaphor for what many economists and pro-Capitalists think of innovation and globalization: that the benefits outweigh the costs. You could phrase this an entirely different way:

The ends justify the means.

Here’s the thing about the miracle pill of Roberts’ example: it would likely be devastating to the world. What would be the effects of 7 billion people suddenly in perfect health, each living an average of 40-60 years longer than they do now? By definition, we would not become wealthier, we would all become much poorer as a result of the increased demands on resources. This is on top of the displacement of the millions of people in the medical field. The problem with innovation many times is unintended consequences. Indeed, if a pill actually existed that could provide perfect health and 120 years of life, it would probably never see the light of day.

As for how the world deals with the displacement of workers via innovation and globalization? That begs the question:

What is the purpose of our economy?

Is it to bring the most benefit to the most people? And, if that is indeed the case, is our current economic system the one best suited for that? Has innovation or better knowledge made it possible to improve that process?

How do we create an environment that allows full labor mobility? What do we need to do that would allow those displaced by innovation (or the market system in general) to continue to provide for themselves in a dignified manner?

My answer was to shift the power from banks to create money to the individual and tie the process directly to their productivity. If people are directly responsible for creating money, then business and governments are motivated to utilize them as the first source of capital. In a world where everyone produces money through their efforts, wealth is created directly as a result of human productivity. Rather than displacing workers, innovation would then be utilized to sate the far greater demand that would exist under those circumstances.

The same could not be stated in a world of Capitalism and the miracle pill. There is evidence that the displacement of workers by innovation and capital is accelerating and the quality of jobs being created is declining. Some economists are now arguing the merits of Universal Basic Income (UBI) versus a Universal Job Guarantee (UJG). The problem of human displacement in the process of productivity is shaping up to be one of the main challenges of this century.

My argument against Roberts’ piece was unsound and I myself committed a straw man fallacy. I have no problem admitting when I’m wrong. However, the challenges faced by the world remain the same. How do we create a world that can provide for all?

We are reaching the limits of Capitalism. Debt has far exceeded its ability to be effectively serviced. People are being displaced by capital and innovation at an accelerating pace. The environmental impact is on the verge of catastrophe. Discontent is simmering worldwide and has started to boil over in many places where populism and intolerance are on the rise. “Motivated self-interest” is unlikely to correct these problems and will likely make them much worse.

We are reaching the end of Capitalism as an effective economic system. UBI and UJG will not solve these issues because neither solves the asymmetric relationship regarding bargaining power between the individual with either business enterprise or the state. To correctly address this imbalance, the individual must be truly empowered.

My solution is for each person to have the ability create their own money through their own productive effort.

What is yours?

What Satoshi Got Wrong

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Bitcoin Mathematics

It’s been awhile since I’ve written anything about Bitcoin. Yeah, it’s trading at about $750+, has a market cap over 12 billion dollars, blah, blah, yada, yada. The truth is that Bitcoin, as a currency, simply isn’t relevant anymore. Don’t take my word for it, Timothy B. Lee, Vox Media “journalist” and former Bitcoin cheerleader, wrote what I consider to be a salient article titled Bitcoin was supposed to change the world. What happened?, pretty much making my case.

Let me tell you what happened to Bitcoin: math. I’ve written a number of posts regarding Bitcoin but most of them can be summed up simply as this:

Satoshi was wrong.

Don’t get me wrong, there was quite a bit that Satoshi actually got right with Bitcoin. Solving the Two Generals’ Problem with a Proof-of-Work system as a method for significantly increasing the marginal cost of creating a digital file was pretty brilliant. It allowed Satoshi to exploit a condition that only exists electronically and cannot be duplicated in the physical world. The key word is “divisibility.” Unlike a physical commodity, like gold, a purely mathematical concept like Bitcoin that has the same dynamics as a physical commodity that is used as money can practically be divided infinitely. The concept of infinite divisibility is what made Satoshi think he(?) had found an elegant way to create the “scarce abundance” necessary to allow Bitcoin to become both a viable method of exchange and a great store of value. It was a clever math trick which has failed utterly.

What Satoshi got wrong is not fully grasping that dividing something is not fundamentally the same as expanding it. The metaphor that I used in The Currency Paradox to describe the effect of divisibility with Bitcoin was it was like using an eye-dropper to divide a bucket of water vs. using a cup. The fallibility of that concept is obvious in the real world. However, some think that in the purely mathematical world of Bitcoin, the same limitations to such a tactic do not apply.

To state that they are incorrect would be kind. While Bitcoin is indeed a largely mathematical concept, it interfaces with the actual world in very real ways. A Bitcoin economy is very real and each actual bitcoin represents real economic activity. The very act of dividing bitcoin into smaller fractions is, by nature, monetarily inflationary. As Bitcoin is divided into smaller fractions, each subsequent fraction represents a smaller portion of Bitcoin’s total purchasing power in absolute terms. When you look at it in terms of tokens, Bitcoin’s inflation rate can never be lower than ten times its current total number of tokens. In other words, the token supply at minimum must increase by a factor of ten when Bitcoin is divided. Imagine if our Federal Reserve could only increase the money supply by a factor of ten. You wouldn’t just be dealing with inflation, you’d then be dealing with hyper-inflation.

The way Bitcoin addresses this problem is by being tied to a growth component that counterbalances this hyper-inflationary bias. While it could theoretically be any commodity, Bitcoin is currently tied to fiat currency in a very clever way: Bitcoin is debased with it. In other words, as it regards divisibility, Bitcoin acts as a scarce high-value component mixed with an abundant low-value component. In traditional debasement with physical commodities, a scarce high-value component, such as gold, would be mixed with an abundant lower-value component, such as copper. Traditionally, the effect is that far more tokens could be created than by just using the scarcer, higher value component alone; this would increase a commodity money supply without necessarily compromising the purchasing power of each individual token.

What makes Bitcoin extraordinarily clever is that, because its supply has been arbitrarily capped at 21 million units, it has artificial scarcity and acts like a scarce, high value commodity. I emphasize the word “acts” because Bitcoin itself has very little practical utility and absolutely no intrinsic utility. It is literally just a mathematical construct representing scarcity which is completely artificial yet reinforced through the extremely energy wasteful and very expensive Proof-of-Work system used as its validation method. Through currency exchanges, the mathematical concept called Bitcoin is tied to a very real and relatively abundant commodity called fiat currency. In essence, Bitcoin has flipped the concept of debasement on its head because it is the abundant, “lower value” component (fiat currency) that actually gives the “scarce, higher value” component (Bitcoin) its actual worth. Without fiat currency as a reference, Bitcoin is less than worthless as they can only be produced with energy and equipment that costs actual money yet have very little real utility.

In any case, the mathematics of a fixed currency inversely correlate to that of a non-fixed currency: while it is excessive supply of a non-fixed limit currency that degrades its average per-unit purchasing power, it is excessive demand for a fixed limit currency that degrades its average per-unit purchasing power. As demand for Bitcoin increases and it is divided into smaller fractions, each subsequent holder will own a smaller amount of its total purchasing power in absolute terms. There’s simply no getting around that.

The argument has been that it is Bitcoin’s increased value in fiat currency that makes such divisibility worthwhile. When tied to fiat currency, Bitcoin is indeed deflationary; high demand would cause a spike in the exchange rate of Bitcoin with associated fiat currencies.

However, does that mean that Bitcoin’s purchasing power in relative terms will increase? In other words, would a spike in Bitcoin’s value in an associated fiat currency actually increase its purchasing power? In November of 2013, Bitcoin’s exchange rate with the US dollar hit an all-time high of about $1200 per bitcoin or about the price of a good computer. As of today, a single bitcoin is worth about $770 US dollars, roughly the price of a good computer. If I had to guess, I’d posit that every bitcoin is and will always be naturally worth little more than the average costs associated with creating it, including energy, processing power, and infrastructure. It’s debatable whether such “storage of value” is useful or even relevant.

I find it hard to believe that someone as intelligent as Satoshi could not understand the dynamics of dividing a currency to meet demand for that currency. Bitcoin is great math but terrible economics. As I stated in The Currency Paradox, no amount of rationing with an eye-dropper can overcome the problem of needing another bucket of water.

It’s obvious that, as a currency, Bitcoin has utterly failed. Its fatal flaw lies in its fixed limit which even the benefit of being an almost purely mathematical concept cannot overcome. A good currency needs to be “scarcely abundant” but Bitcoin is actually “abundantly scarce.” Divisibility cannot and will not ever make Bitcoin abundant enough to use as an every day currency.

That’s what Satoshi got wrong.

What Makes the Chron Different

duelI enjoy a good debate. It’s the closest thing to dueling there is today and I love to mix it up. I think that vigorous debate is the cornerstone of learning and I envy the great thinkers of the past who engaged their peers in no holds barred intellectual contests. While I obviously can’t be certain, I feel comfortable stating that greater understanding was the goal though I’m sure bragging rights probably played a role too.

Today, that great pastime is almost completely extinct. Any disdain for weak or flawed ideas is interpreted as “trolling” and hitting the block button on your favorite social network is much easier than being confronted by the uncomfortable truth that your favorite idea, opinion, or belief simply doesn’t have legs.

As I stated in my previous post, Trump, Twitter, and the Failed American Experiment, I did not expect the core concepts of The Currency Paradox to hold up (though I hoped they would). I figured there were too many people with too much expertise on the subject to allow my essay to stand.

Two years later, the core concepts of The Currency Paradox have yet to meet a significant challenge. I honestly am not sure if it is because what I wrote is so bulletproof or so feeble that people are unwilling to discuss its flaws or merits more closely. I think time and evidence have continued to strengthen my points but, if I had to be completely honest, I really don’t know. Maybe the ideas are just so impractical or esoteric, people are just content to ignore them.

In lieu of debate, I’ve decided to address what I think are potential criticisms. I think the most likely one is that the ideas behind the chron, the currency innovation presented in my essay, just aren’t original. After all, currency solutions based on time have been around for a very long time.

To preemptively address that criticism, this post is about what makes the chron different from any other time-based currency solution. The factors that I’ve identified are as follows:

Two Monies vs One: probably the most significant difference the chron has versus other time-based currency solutions is that it fundamentally acts as two currencies rather than one. The eChron, or “earned chron,” represents chron that are earned as a result of effort; the xChron, or “exchanged chron,” are earned chron that are used for trade, exchange, or commerce.

This is a useful innovation because it solves the taxation problem related to most currencies in general and time-based currencies in particular. The eChron are untaxable because they are the result of the individual’s effort, the taxation of which would constitute theft. The xChron is taxable because it is given in exchange, requiring practically no personal effort.

Compatible with free markets, risk vehicles: While the eChron ensures that everyone has the same base level of pay, the xChron allows additional compensation to be awarded based on market need. This is elaborated on more fully in The Currency Paradox.

Also, because the chron is seamlessly fungible, it is a direct replacement for central-bank issued (CBI) currency and can be utilized for any risk vehicle in which CBI is used.

Compatible with modern banking: The xChron allows the chron to be used for modern banking. In other words, it is compatible with the concept of the debt liability; like CBI currency, banks can write loans in xChron. One of the main advantages of the chron is that, because they are created by people creating value by effort rather than the loan creation process, the conundrum of using money from a net-negative sum loan (due to the demand for interest) to pay off another net-negative sum loan is avoided.

The best way to think about this is that, rather than money being created from the issuing of loans, everyone owns their own money which is “printed” as a result of their time/effort.

Expansionary or contractionary: Using taxation and modern banking, chron supply can be kept very near to supply/demand equilibrium, unlike other time-based currencies. As an objective, value-based currency, a far more precise picture of the currency in circulation relative to its demand as well as any related interest obligations  can be captured versus CBI currency.

Compatible with all pricing models: How would you price a book with chron? Simply charge for the estimated time it would take to read it. A book that would take roughly an hour to read would cost 60 chron. This pricing model can easily be applied to journalism as well. How about ears of corn? Try “growth time” divided by number of ears.

Almost anything can be priced based in time/effort.

In short, what makes the chron unique among other time-based currency solutions is that it is:

  • Taxable;
  • Seamlessly fungible;
  • Compatible with free markets and modern banking;
  • Expansionary and contractionary
  • Objective.

The chron solves every major problem related to currency, including all those related to other time-based currencies. To learn more, please read The Currency Paradox.

Disagree? Then, by all means, please leave a comment.