Despite being no fan of bit coin, and despite this article basically defending bit coin, I still think this is an excellent article. I really liked the way it doesn't make the debate as "fiat" vs. non-fiat (as though fiat were a dirty term) but as centralized, opaque fiat vs. decentralized transparent fiat. I've also never read as clear an explanation of bit coin creating currency without creating debt. It's definitely given me something to think about.
Two critiques of the article, however, would be the complete failure to mention the deflationary risks of bit coin. You may agree or disagree with whether that's a problem, but it is one of the biggest, most consistent criticisms of bit coin out there, and it seems a tiny bit negligent not to at least mention it.
Also, the article mentions countries using bit coin as reserve currency to shield them from currency fluctuations. Which would be great if bit coin were super stable, but bit coin has already had a few big crashes. In theory, the predictable nature of bit coin should lead to stability, but in practice, it's behaved more like a tech stock, where no one's sure what it's eventual market value will be. Maybe it will become stable, but I think it's a little early to make plans as though it will.
Still, one doesn't have to agree with an article to get a lot of value out if it. Go Al-Jazeera for providing the most thought provoking article on bit coin I've read.
"I really liked the way it doesn't make the debate as "fiat" vs. non-fiat (as though fiat were a dirty term) but as centralized, opaque fiat vs. decentralized transparent fiat."
But he is plainly wrong about this -- he made up his own definition of 'fiat' which has nothing to do with the commonly accepted meaning:
"...money that derives its value from government regulation or law: the initial value of fiat money is established by government decree."
Bitcoin is simply not a fiat money: it isn't mandated by law that bitcoins have value, instead it is people (markets) who decide that. It's the exact opposite of fiat money.
Maybe he's confused because fiat money is usually ("goldbugs") contrasted on a different axis -- whether or not the money has intrinsic value (market value besides its use as currency), or is exchangeable for something that does. E.g. the gold-backed dollar, or more general commodity money (mostly historic). Commodity money and fiat money are opposites in this regard -- gold/commodity-backed money has intrinsic market value independent of its status as a currency, whereas fiat money is "worthless paper". Bitcoin is like fiat money in that it has no intrinsic value apart from as a currency. But it is not fiat money; and neither is it commodity money.
He doesn't actually say the currency is a fiat currency he just gives his opinion . "I would argue, Bitcoin is a fiat currency."
Also there are three definitions on that page.
> The term fiat money has been defined variously as:
> - any money declared by a government to be legal tender.
> - state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
> - money without intrinsic value.
Under the last definition bitcoin would be easily considered fiat.
Also he could and does debate whether you could consider the system that regulates the bitcoin currency a government which would qualify it under the other definitions.
> Bitcoin is simply not a fiat money: it isn't mandated by law that bitcoins have value, instead it is people (markets) who decide that. It's the exact opposite of fiat money.
It isn't mandated by law the value of any other law what the value of any fiat currency is. The initial value is as you said in your definition but the initial value of bitcoin is defined (the cost to produce a valid block).
Due to its nature Bitcoin is really a special case when trying to categorize it anywhere. I also think the author uses a good definition to draw out the differences.
"Also there are three definitions on that page... Under the last definition bitcoin would be easily considered fiat."
Then I regret citing it, it is wrong. That third definition actually misrepresents its source (Mankiw's Principles of Economics) -- what Mankiw actually says is:
"fiat money: money without intrinsic value that is used as money because of government decree" (emphasis mine)
"Money without intrinsic value is called fiat money. A fiat is simply an order or decree, and fiat money is established as money by government degree..."
"It isn't mandated by law the value of any other law what the value of any fiat currency is."
I meant that fiat money only has value (as opposed to... no value) because it is mandated by law -- you are required to accept it as payment of debt, to pay taxes using it, etc. Sure, what the value is in real terms is a market decision.
>I've also never read as clear an explanation of bit coin creating currency without creating debt. It's definitely given me something to think about.
Yes, that is huge. Debt-backed currency means someone is profiting off the mere existence of the currency, typically the banking system and government and anyone who owns the government bonds backing the currency, but at the expense of everyone else who uses and 'saves' it (that's not really saving).
The given rationalization for that is that a depreciating currency strongly incentivizes people to spend it or invest it instead of hoarding it in their savings accounts, improving economic growth. That's also the argument against a deflationary currency like gold-backed or bitcoin - that the ultimate result is decreased economic activity and growth.
However, that's an argument that grew out of an earlier time, when the world was less connected and dynamic. I suspect that a deflationary currency is much less of problem in our modern world, where economic activity happens at the speed of light and electricity and almost the entire world is integrated into a common market and economy.
In that world there is already huge incentive to spend an invest, and while a deflationary currency would represent a significant change, I don't think economic activity would ground to a halt under a deflationary currenncy.
In fact, the problem we're now seeing in the US and Europe is the opposite - too much incentive for borrowing and spending, not enough incentive for capital formation, eg savings. Too much debt at every level of society, from individuals to sovereign governments. I can't help but wonder if a deflationary currency that appreciates in value over time instead of depreciates would provide a higher bar for spending and investment, and alter that dynamic in favor of savings (which also a form of investment, as banks use savings to make loans).
Instead of US government bonds being the risk-free rate of return, a deflationary currency would be. That alone would be a huge economic shift, and might limit governments' out-of-control spending simply by giving investors a stronger alternative to government bonds. If a deflationary currency appreciates by, say ~3% per year, then government bonds would have to match beat that to attract investors, forcing governments to borrow and spend with more discretion.
Anyway, yes it definitely is something to think about. It's also probably a pure thought experiment, I don't see governments giving up the risk free rate of return status for their bonds any time soon.
The current problem in the Euro is too much disincentive (credit risk) for borrowing - because the borrowings built up in the past (when there was too much incentive). The incentive in the past was because there was a fixed money supply that no country controlled (i.e. a lot like gold or bitcoin) which meant that countries with a surplus (like Germany, exported more than they imported, leading to more currency going in than out) had to find a use for that money so they lent it out.
The austerity that everyone except Germany wants eased is deflation in action. And pretty much every economist agrees that it's disastrous for the countries following those policies; much better would be floating currencies and inflation getting rid of the debt instead.
(In other words, I think you have it almost 100% backwards.)
Technical point: the money supply in the Euro system isn't fixed and has never been fixed at any point in time in the past.
There is an argument that the fixed and, more importantly, uniforminterest rate across the entire zone caused problems.
I personally find the argument even more convincing that it's a wage structure problem. If you look at unit labor costs (essentially wages divided by productivity), then it becomes painfully obvious that Germany has been doing significant wage dumping - their unit labor costs have remained flat, violating the 2% inflation goal.
This caused the trade imbalances that are at the root of the current mess.
The insane thing about this is that certain German[0] economists have always been very vocal about these things -- both the implications of the trade deficit, particularly within the Euro zone, and the wage dumping or wage restraint as it's commonly referred to here.
These were fairly prominent figures and all of this has been part of the local nationwide political dialogue years before there was any debt/banking/Euro crisis. Nothing happened.
[0] And others, everywhere, I'm sure, but I'm making a statement about Germany here.
Debt-backed currency means someone is profiting off the mere existence of the currency
Why do people keep saying this? Ben Bernanke does not pocket the profits he makes off the currency. Almost all profits from printing money go straight to the Treasury.
"But now the Government can print money to monetize their debt--" except almost all credible inflation forecasts indicate the Fed isn't printing enough money, so I don't think we need to worry about this.
As for the banking system, the service charge on my bank account suggests they are not doing very well on the whole profits-from-holding-money thing.
You said you had never read as clear of an explanation... May I ask you to read my own short article explaining Bitcoin?: http://blog.zorinaq.com/?e=66 I think explaining Bitcoin is quite hard in itself, so I am always interested in getting feedback for this article.
> Two critiques of the article, however, would be the complete failure to mention the deflationary risks of bit coin. You may agree or disagree with whether that's a problem, but it is one of the biggest, most consistent criticisms of bit coin out there, and it seems a tiny bit negligent not to at least mention it.
One point to consider is, that there is a free competition between different cryptocurrencies. There already exists some more inflationary bitcoin clones, and probably more will come. The markets will choose the currency, which they think is the best for them.
"The markets will choose the currency, which they think is the best for them."
This is true, but that doesn't mean the currency will actually be better for them. Deflationary currencies are attractive to sellers and employees. They will choose them if given the option. The ill economic effects of deflationary currencies have been demonstrated.
Your phrasing seems to indicate that you believe that market-based outcomes are always ideal outcomes. I think that is incorrect.
> The ill economic effects of deflationary currencies have been demonstrated.
I'd be interested to know what you are thinking of here (as evidence). I view that claim with pretty strong skepticism. But I'd be curious to see the best argument/evidence for it.
Remember though that there are two sides to every transaction. Given a consistently deflationary currency buyers become increasingly unlikely to be willing to offer said currency as payment to sellers. Thus the liquidity of the currency will tend to dry up, especially when it is does not have legal tender status. In a single currency market this is disastrous, in a free currency market you just start using something else.
Of course, the value of the now illiquid currency will eventually become highly volatile likely ending in a crash. Hopefully after this happens several times most people would get the idea that investment in such things is not a good plan.
Additionally, I think Bitcoin advocates argue that since the money growth rate of Bitcoin is subject to a open and known process, deflationary trends will be known and expected as well. Because the deflation will be expected, there won't be the traditional negative effects associated with deflation.
Bitcoin is like money, I mean real money, so there is nothing new and better with it. The problem with money is how the bankers corrupted it for their own profit. Banks created virtual money with credits and this speculation bubble is now exploding. Some countries try to stop it by creating more depths.
There is currently nothing that could stop anyone to provide bitcoin credits and make paper money for bitcoins. This is the mistake that should be avoided. If bitcoin really takes off, than this will be the real challenge we will be facing.
It's the paper money that ruined the system where states could print them at will. They decided to stop printing money to stop inflation, but then banks created money through credits and turned people, cities and countries to slaves. Worse than all, it's now the bankers who define the rules, not the countries. So they bent it to their own adventage. They are so greedy and selfish that they didn't care if it created a bubble that will explode soon or later. Bailing out banks is the most stupid thing we could do in such situation. We're just on for another tour on the carrousel.
I agree that it would be foolish to use bitcoin as a reserve currency today, but I find it interesting that it sets a higher bound on the instability that countries will need to withstand.
Interestingly, while search volume for 'fiat' kicks-off at around the same time as bitcoin, media references start ramping up some 2.5 years earlier. Any idea why?
This is really the problem that all these discussions boil down to: definition of terms. From an operational perspective, I would claim that the money we have these days is as real as it gets.
Consider, for example, the claim in the article that our current monetary system requires trust. But is that really the case? I claim that the current money of the state is valuable to me and everybody else, no trust required.
Here's a simple line of thought to support this claim: My landlord wants the rent paid in the money of the state. This makes the money of the state valuable to me. I don't need to trust anybody or anything for this to be true.
A) Debt necessarily creates a society with certain undesirable characteristics.
B) Our monetary system is based on the creation of debt, as new money is created exactly when someone borrows, ie. gets into debt.
C) Bitcoin does not involve debt when it created; when you "create" BTC, no debt is involved. Of course you do devaluate the entire currency when you create additional BTC, but the same is true when M2 is increased in fractional-reserve banking.
Did I get the argument right?
I'm sure many people disagree with A (which I have only paraphrased very broadly since it seems hopeless to represent it in a few sentences here). B seems to be a widespread characterization of fractional reserve banking, and fairly accurate to me (but all of this bewilders me) -- is it controversial? C seems interesting; although of course this raises the question whether there aren't other alternatives that could replace/complement our monetary system (and he does discuss some in an article he links to).
I think you got the argument right. I personally don't find it very convincing, because of two things:
1. If Bitcoin ever became significantly widespread, people will start making debt contracts denominated in Bitcoin. It is merely the underlying base that is different, but debt will still exist.
2. For a monetarily sovereign state, government debt is very different from private debt. Private actors can be forced by having debt, monetarily sovereign governments cannot. In my view, it is the responsibility of the government to take on enough debt to make it possible for citizens to be debt-free.
It is true that, under current institutional arrangements, the interest paid on government debt is effectively a transfer payment to the owners of that debt (the treasury bonds), which tends to be a transfer from poor to rich, which I view as undesirable.
This is easily fixed by changing the institutional arrangements slightly. Essentially, the government simply has to use the central bank for funding to drive down its interest rate.
I'm somewhat confused about B. The monetary base is indeed expanded through the issuance of debt in fractional reserve banking, but when the Fed pursues expansionary monetary policies to keep the interest rates low doesn't that increase the money supply without the creation of debt? Or is the effect on the money supply of the expansionary policies of centrals bank small in comparison to the effect of leverage ratios of fractional reserve banks?
The article's claim the non-bitcoin money/economic system is fundamentally "based on" debt is just silly.
Think about it: governments create money "by fiat" and then pay people with it and collect it from people. FIat money is not debt. My having dollars doesn't mean I am in debt, nor does it mean anyone is in debt to me.
Credit and debt are fundemantal to economics, and will exist in any economy. (As they should - without loans and other forms of debt, people would not be able to get the capital they need to do things they need to do to get more capital. They are basically good things.)
By the way, there are alreay people lending bitcoins and thus there are already people who owe debts expressed in bitcoins. There are already bitcoin banks, bonds, options, stocks, and insurance (and probably other things). As a bitcoin user, I've seen this firsthand.
My having dollars doesn't mean I am in debt, nor does it mean anyone is in debt to me.
Technically, this is incorrect. Dollar bills are a debt of the central bank. Take a look at the Fed balance sheet, you will find that dollar bills are considered a liability from their point of view.
This has interesting consequences. If you consolidate the Treasury and the Fed - which is valid from an economics point of view, since they are just different branches of government (no matter what the Fed conspiracy people may tell you) - then both dollar bills and treasury bonds are just different types of debt of the government. It just so happens that dollar bills have zero maturity and zero coupon (interest).
Once you understand that, it is only a short step towards asking why the hell everybody is so concerned about the federal government debt. If it was really desired, one could just swap all treasuries for dollar bills - and the only primary effect is that it changes the yield curve for government debt from almost zero everywhere to zero everywhere.
I find this fascinating. If you asked a random person (including myself three years ago) what would happen if all the government debt were paid off with paper money, they would tell you - slightly paraphrased - that the world would explode. But when you look into the technical details, you find that it's just this subtle change in the yield curve. So what's going on there?
> Governments create money "by fiat" and then pay people with it and collect it from people. FIat money is not debt.
Actually, the typical way modern central banks create money\* is by giving out loans (consisting of money they just created) to banks, which must post some collateral for it. When it's paid back, the money returned to the central bank is destroyed.
This is done to create a "spring" effect in the money supply -- as having money in existence has a cost, it prevents too much liquidity pooling up in the economy. If the banks are not using the money, they want to pay it back to the central banks to get rid of the interest payments.
\* Most money is not created by the central banks, but by the commercial banks, by using fractional reserves to "multiply" the money supply. However, fractional reserves always use the central-bank-created "base money" as the base they multiply.
By the way, if someone wants to explain the author's perspective on the current economy being fundamentally based on debt, I'd like to hear that. I don't really understand his perspective.
I think the point is not that the economy is based on debt, but the monetary system, namely fractional reserve banking, is based on debt. Of course the monetary system is the basic infrastructure of our economy, so it's not exactly wrong to expand the argument.
Money as Debt is an entertaining 45 minute video on the topic. It's considered to be somewhat partisan, though, and I'm not that it's entertaining for everybody.
It's important to note that hawala is indeed informal. So informal, that if you get screwed by someone attempting to scam the system, you have no [legal] recourse. It's probably best if you're social network already includes an existing hawala broker.
I am not sure it is a big deal, other than that it is relatively unknown here, and the mindset here tends to be that financial transactions need some kind of monolithic centralized authority to be involved.
That is definitely interesting, thanks for the link. Seems like a whole different sort of financial system than what we're used to in developed nations.
Ehhh... that could be debated. Without the code (by which I refer to the algorithm) ensuring that certain behaviors are guaranteed, it won't have any value because it could be gamed into extinction. The code is the only thing that allows it to have value - essentially every currency only has value because people will trade it for goods.
My understanding of bitcoin is that it is a currency based on "mining" virtual worth. So people with "real" money and free time; mine the resources. So the wealth goes to those with the "real" money and time. Is that right?
It's interesting that many outside of tech circles seem to be fascinated with Bitcoin. I have no opinion on alternative currency, but I have an issues with Bitcoin as an approach to alternative currency: it's a power hog. To use the politically correct terminology, it's not "green". Not even close. While it has its appeal to nerds because it uses the computer, it is an ecologically unsound idea when you consider "scaling up". How much energy does it take to produce paper currency? How much to generate "bitcoins"?
Given the world's energy situation, it's neither a smart nor a feasible "implementation" of alternative currency.
Bitcoin could use a Raspberry Pi to generate all the coins. The only reason it's a power hog is because many people want to generate them, and it automatically adjusts to an higher difficulty in order to maintain the same rate of supply.
So if energy is scarce, then it becomes more expensive, so it's less profitable to run miners, so some people stop mining and Bitcoin automatically takes less energy to generate coins.
What? We're talking about cracking the cryptography: suppose someone had e.g. a preimage attack on the algorithm used to hash the blockchain. (I suspect the answer is: all your bitcoins become worthless. But all the dollars in your bank account are gone too, because your internet banking is secured using the same algorithms).
If someone announced a flaw in sha2, but didn't release details, the banks could migrate their security away from it. But the bottom would completely fall out of the bitcoin market because nobody wants to be holding when the other shoe lands.
Maybe bitcoin could be upgraded to sha3, but it would probably require action on the part of every owner. Anyone who fails to upgrade in time would find their bitcoins have evaporated. Makes it hard to react in a short time frame, whereas a bank could, in the worst case, pull the plug and ban online transactions until they've upgraded.
Can't say for sure but I think the bitcoin community would come to a majority consensus on the last block in the blockchain before the attacks started, and at which point the new crypto algorithm must be used.
I'm not sure they would force new transactions to use the new hashing algorithm. Bitcoin uses scripts (a little state machine) to embed verification behaviors directly into the blockchain. You could only introduce the new hashing algorithm to the protocol, and by natural incentive to upgrade (more security), expect more transaction outputs to use it. I'm not sure the Bitcoin developers would force clients to ignore certain hashing algorithms -- scripts can be very dynamic and the smaller the hashes are, the cheaper they are to add to the blockchain.
I think you're right. I was assuming you'd need to conduct a transaction with the new hash to "prove" ownership, but that doesn't seem necessary. If the flaw involved faking private keys, that'd be different.
Two critiques of the article, however, would be the complete failure to mention the deflationary risks of bit coin. You may agree or disagree with whether that's a problem, but it is one of the biggest, most consistent criticisms of bit coin out there, and it seems a tiny bit negligent not to at least mention it.
Also, the article mentions countries using bit coin as reserve currency to shield them from currency fluctuations. Which would be great if bit coin were super stable, but bit coin has already had a few big crashes. In theory, the predictable nature of bit coin should lead to stability, but in practice, it's behaved more like a tech stock, where no one's sure what it's eventual market value will be. Maybe it will become stable, but I think it's a little early to make plans as though it will.
Still, one doesn't have to agree with an article to get a lot of value out if it. Go Al-Jazeera for providing the most thought provoking article on bit coin I've read.