That's what most currencies are today - symbols fully based on trust.
> In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing!
What friction are you referring to?
> The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money.
There are a finite number of Bitcoins (21 million total), so yes, that would be one way to look at it. However, that would also lead to rampant deflation, which was associated with the Great Depression - rampant unemployment, social unrest, slow growth, etc.
Or, put another way, the governments currently prefer (out of the lessons of history) encouragement of investment, full employment, and growth ... over the rentiers (i.e. dead stock) sitting on their money, and letting everyone get poorer.
You seem also to be contradicting yourself, as easier you suggest:
> There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock".
Yet its finite nature actually does encourage dead stock -- rich holders sitting on piles of cash instead of using it for productive purposes.
> Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends.
Right, Bitcoin is far superior as it merely ensures that the current fat cats get fatter and skinny cats die of starvation due to deflation.
Bitcoin is "pure fiat" as in "based on trust of the people, by the people". Notice how the government word is absent. I don't think we had that before - at least, not in a way that can not be easily abused by the government.
[there are some counter examples, independant central banks following a monetarist policy of say 4.5% M3 aggregate growth in the EU. The ECB (european central bank), unlike the FED, is almost independent from the government, but still political power managed to create funny mechanism to buy back sovereign debt, which now results in Cyprus style situation. politics and money do not mix well]
The "friction" you ignore is the bid/ask spread and volatility - bad things in any international trade. It's called currency risk and it makes import-export companies take money-market positions for a good reason.
There is also the risk of rampant inflation aka "shoes leather cost" - the best example is when talking about people in the Weimar republic who were paid an always increasing salary twice daily and immediately cashed out all their money because of the crazy inflation. You should like that - so many money changing hands at a high speed must be a good thing for the economy!
Joke aside, your understanding of economics seems very tainted by political correctness, but you correctly noticed I should have added more details, at the risk of creating a contradiction. This is a very valid critic.
The "dead stock" is theoretical - even more with pure fiat money:
- With gold, that could have been a problem, due to storage costs and alternative uses (gold is a very conductive metal, and apparently is also enjoy as jewelry by many people.
- With fiat money, some issues remain, like storage costs, but the risk of inflation is an even bigger issue.
- With a "pure fiat" money, since there are little alternative use, and even better in the case of bitcoin - no risk of inflation, the problem may vanish altogether. People invest just because inflation makes keeping cash a bad idea.
When you reduce the frictions (transaction costs, etc) and remove the risk of inflation, why not convert money to stuff you need "just in time", ie when you need it, instead of wasting time and effort to store it and look for bigger yields due to the frictions and inflation? Presently, you want to do everything you can to avoid losing capital, which creates a game theory problem for other people who have to play the same game you do. But if you remove the problem, you remove the incentives for such behaviours.
Which leads us back to what money is. You can't eat money, or sleep in money. But since you can convert it whenever you need and there can be no inflation, why bother being a rentier when you remove the risk of inflation? In fact, it might be harder to be a rentier, since instead of funding "minimal returns" (ie just a bit more than inflation) investment project of any kind, one would have to aim for "high returns" - as in startups, ambitious companies, etc.
That clarification aside, the core difference with the current system is that by removing inflation, no one will be forced to earn more and more money just to maintain a status-quo (except by your own new needs of new things - we are not hippies, most of us want new shiny things - the economy won't stop).
The removal of this coercion will make useless and redundant all those who currently live on this man-made coercion called inflation.
10% of the GDP is the financial sector - and just how many bright people are employed doing that? That's a lot of freed human capital, which could be put to better use (bring mankind to new planets) once the problem is solved. Bitcoin solved that, and the market is noticing.
If you are not sure about inflation, let me be crystal clear - it was not a bad thing when money had to be a precise unit of accounting matching the growth of the real economy, but with today's computational power (bitcoin can be divided) and networks milliseconds latency, it's not required anymore.
Stock market analogy- instead of printing more shares, companies sometimes divide them, and let the market price each division. It seems to works quite well.
Now with deflation - the great depression was turned into a real problem with the productivity of that time, countries could barely feed themselves. Less people working meant a severe shortage risk. That's not the case anymore, with the amount of agricultural surpluses we have.
I'm not blaming you for your interpretation. Just like you, I believed the lack of inflation was a problem in BTC - or that at least it should happen at a given rate to follow a monetarist approach, or that having so many bitcoins gone to the initial adopters was "unfair" for the newcomers. Now the more I see it, the more I see it as a game changer in a good way. 10% of the GDP spent every year on a problem that is now solved - I'm sorry but even if you give these 10% to those who bootstrapped bitcoin as a one-time payment, this is a steal!
I sincerely believe that in todays economies ONCE THEY USE BTC a similar situation of what in the past were problems caused by inflation or deflation problems will create instead a long period of sustaining growth - by putting human capital to a better use than solving the problems we ourselves created.
How do the keynesians explain this stagflation BTW, not enough stimulus ? Not enough gas being put on the fire ? (or maybe, demand style economics proved to many people the game was rigged and the best move was not to play, since parasitic living was a rewarded option)
You talk full employment, etc, so let's go further with your theory and take an example:
Milton Friedman visited China in the early 1960s and was taken by a government official to see a public works project. Chinese workers were building a canal. Friedman was struck by seeing everyone digging the canal with shovels. Friedman asked the official, "why no heavy earth-moving equipment?" The official said, "oh, this is a jobs program." So Friedman then says to the official, "then why don't you just give them spoons instead of shovels to create even more jobs?"
Here "full employment" maintains the inflation coercion while managing rentiers capital, is tedious and pointless - just like digging with spoons. So what exactly do you like so much about the current system?
Bitcoin is like a big experiment. The current system is adapted to a generous and social human nature with very few asocials. If the human is as good as that, this system as nothing to fear. Why would anyone want any BTC? After all, most would believe and trust the government to manage the money. But if people don't, then bitcoin is the solution.
I find it fascinating how much distrust for Government and banking systems fuels your passion for Bitcoin. So long as capitalism exists in its current state currency will just be an instrument of capitalism's will. Whether that be Bitcoin, USD or Disney Dollars.
Capitalism is what inspires transaction fees, denying health insurance requests, taking away someones house, poverty, planned obsolescence, etc.
I feel your fire is being pointed at the wrong direction. That maybe your beef is with capitalism and not whether we use semi-anonymous block chains or pieces of green paper.
You could be right- there was even a well written essay I read about how governments could try and turn bitcoin into an oppressive financial system, due to the ease it provides to track every transaction.
Maybe I'll have a beef with capitalism if, after the implementation of a system which trims down what I perceive to be a self-made problem (inflation fuelling governments destructive policies), I still notice persisting issues. I can't say for now. The experiment is just beginning :-)
I hope I do not have any blinding faith in any political system. It just seems to me that capitalism is what works best, and could work better with a libertarian approach. Just like Thomas Sowel says - I don't have faith, but proofs. (Still, this doesn't mean there can't be better proofs or better things we just don't know yet.)
So I would not say I hate the banking system, no more than I hate horse buggies : it just seems to me that cars are more efficient. I would hate it if horse buggies were mandatory and cars forbidden, because it would be a loss of efficiency for society.
The current banking system performs an important role, in an efficient way, but it will hopefully made obsolete and replaced by something more efficient.
It is likely that governments and capitalism will still be involved, but between governments and capitalism, I know what I fear the most.
It's not the self interested capitalists who acts following their best interests, doing things as you said, like taking away someones houses, but the governments who takes a "moral superiority" position, use their power to benefit some well connected ones, pretend to act in the common good and violating both the letter and the spirit of the law - all the while doing the very same things.
At least the capitalist doing these things is honest in the reasons why they are done. And the "good ones", Ayn Rand style capitalist, do worry about the letter and the spirit of the laws and of a contract.
She said that beautifully : "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."
The more times money moves around the more money others stand to gain. The economy as a whole does well when moving between parties at a consistent rate.
Eliminating the inefficient transaction doesn't just hurt profit. It hurts the very core of how our economic models currently work.
That being said Bitcoin is currently no threat to that system. It's hard to imagine it ever being honestly.
It seems inconsistent with walrasian pure and perfect competition, where profits tend to zero and the optimal outcomes are achieved.
Eliminating the inefficiencies, ie profit in pure and perfect competition, is the way the system works - non null profits attract new businesses. That's basic economics, with very special edge cases (ex - natural monopolices)
I'm not sure exactly why or how economy as a whole would do better with more inefficiencies at each point, and money moving more as you suggest.
Are you referring to the equation of the velocity of money (MV=PQ) ?
It says nothing about how desirable the outcome is (ex: broken window fallacy)
It also has to deal with the dynamic disequilibrium that is caused by entrepreneurship and innovation, which "creatively destroys" previous markets in favor of new ones. It is this process that is the source of all profit and economic growth, at least according to Schumpeter.
Does anybody really want that?
1. The Great Depression and deflation is a case of a general glut -- ie a lack of demand. This wasn't supposed to happen in an economy, but can from time to time due to problems with the "symbol economy" of money and credit messing up the "real economy" of goods and services. This was Keynes' insight. This has nothing to do with agricultural surpluses, and there is no evidence that depressions will be made obsolete.
2. I also suspect you may be underestimating the size and influence of the Financial sector and people's general desire to make money. Reducing friction in transaction costs will not change or reduce the desire for specilation or arbitrage. That usually has required governmental control. Our current economic crisis is based on banks making a lot of bad, questionable bets on mortgage debt - fed by poor ratings agencies, lax regulation, a housing bubble, and monetary policy that encouraged a real estate bubble. Technology and poor regulation made us all interconnected and fragile.
3. I also suspect you may be overestimating the reduction in transaction costs that bitcoin enables. Electronic funds transfer is pretty frictionless these days, as is FOREX. Large amounts need to be flagged for potential criminal, fraud, or terrorist uses - do we really want to give up those checks?
Most transaction costs have to do with human capital - we tend to be slow, yet indispensable for many initiatives.
4. Stagflation was caused by a pile of supply shocks in the Nixon era in combination with very expansionist monetary policy assumptions in the early 70s. The inflation part was fixed as soon as Volker decided to kill inflation in 1982 by tightening the money supply. The stagnation got better by the mid-late 80s. Note that Reagan was arguably the mother of all stimulators (cutting taxes AND spending like mad). But typically Keynesian dont encourage deficit backed stimulus -- except when dealing with liquidity trap (deflationary) conditions like the Great Depression, and um, now.
5. Encouraging full employment through economic policy is quite a bit different from holding back progress to keep workers employed.
That's social policy, and a different argument - how do you insulate society from the "creative destruction" of capitalism? Go too far and you rid yourself of capitalism's core benefit (growth through innovation). But fail to protect people in the short run, and you have regional unrest and revolt, as we've seen in 18th and 19th century attempts to impose free markets on traditional communities and exchange systems. Or in Thatcher's crushing of the UK coal industry and unions in the early 80s.
On the other hand, encouraging full employment through monetary and fiscal policy is just another way of promoting an efficient market that takes advantage of all the resources (eg labour) that is available to it. It is underproducing if people aren't working and want to. Perhaps that is structural (people need training, education, etc) but in the current global recession all quantitative evidence points to it not as structural but rather a lack of demand - ie. people sitting on cash instead of spending it, which makes a lot of sense when you realize this was triggered by a debt crisis. When everyone rich is paying off their debts, people aren't going to be working as much. Unless, of course you realize that it doesn't have to be this way - since interest rates are 0 and inflation is negative.
Wow. Talk about the delusions of being persecuted. It is important to have a discussion about whether or not bitcoin is based on a sound system. Just stuffing hands in your ears and calling the critics names solves nothing. Having a decent conversation may help the system in the long run.
I may not be an economist, but the method used for mining seemed.. illogical to me as well. If a bitcoin was released into the wild based on running real world problems like folding@home or something else it would have much more sense to me.
The problem here is that you believe that bitcoin is being treated differently than anything that's come before. Its booms and busts are a sign that it is being used/abused for its familiar qualities, and not as much for its novel ones.
"Just like Gandhi say - first they ignore you, then they fight you, then you win"
Except for the many, many situations where "they" ignore you, then they trample you. There is not necessarily any step 3.
any money declared by a government to be legal tender.[7]
state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.[8]
money without intrinsic value.[9][10]
- it is declared by a group of cooperating people to be a form of tender (legally protected only via contract law),
- they effectively have no intrinsic value,
- nor is it fixed in value to any objective standard
It's effectively not that different from currency of the "free money" era in the 1700 through early 1800's, where there were hundreds, if not thousands, of currencies in the USA issued ("by fiat") by independent banks. The civil war mostly was what changed that.
In this current context, bitcoin is more like the gold standard that typical fiat money. The supply of bitcoin can not be manipulated to manage the economy.
However, keep in mind that the programmers behind Bitcoin can change their minds and decide to generate more bitcoins. Or they can create offshoot bitcoin currencies that do this.
That's how it's like Fiat money -- there's just people and trust behind it, not shiny rocks in the ground.
What's curious is why some think managing the economy (to a limited degree) is a bad thing.
The guy may have a nobel prize, but his strong leftist views seems to be clouding his judgement.
Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust. Hoarding gold or silver or any metal or rare thing was a bad idea because of the alternative uses which where then prevented.
There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock".
In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing!
How could Adam Smith may have hated something that did not exist back then, and that many economists had previously advocated for - a single worldwide fiat currency.
The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money.
Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends.
Also, it's quite fun that a system based on trust, of the people, by the people, is not trusting the government. It's something the founding fathers would certainly be quite proud of :-)
EDIT: And to those who argue the amount of computing power and electricity to run the bitcoin network is insane, just think for a second about Moore law, or how much GDP goes to the finance sectors. IIRC it is around 10%. That sure is a whole lot of money for the simple job of allocating resources (currency, saving, investment, transaction, etc).
It seems ripe for disruption.
A bitcoin economy will be able to do the same job for a fraction of these cost, thus allowing capital to be best spent on other uses (say actually advancing technology, or building real stuff) ie human capital and physical capital, which according to mainstream economic growth theory (from Solow to Romer) is essential for economic growth - real economic growth.
If you have some data and some time to spend, draw a graph of the log of gdp per capital and the percentage of the gdp spend on the finance sector. You'll see a strange recent trend - less growth, and more gdp for the finance sector. I'm not arguing a causation, but that's some food for throughts.
Just like Gandhi say - first they ignore you, then they fight you, then you win. We are currently at step #2. I expect the heat against bitcoin to raise in the next weeks. It's a big threat for the current establishment cash cow. It's a blessing to anyone who can provide value.