He gets it. Bitcoin is a black market currency.
The Spectator
How Bitcoin could destroy the state (and perhaps make me a bit of money)
Hugo Rifkind
(h/t Zero Hedge)
A Lightning War for Liberty
Tom Woods Talks Bitcoin with Erik Voorhees of Bitinstant
(h/t Zero Hedge)
(h/t Zero Hedge)
Soon, whether via Bitcoin or whatever comes next, it will be possible to strip banking away from bankers, and money away from governments.Wait till the War on Bitcoins.
The major internet providers block almost all peer-to-peer file sharing systems which are built on almost the same technology upon which bitcoin is built. If government wants to block bitcoin, it is easier than he thinks. Communication companies are public franchises that will do almost anything to keep politicians and regulators happy.
ReplyDeleteRyan Harris is mistaken. A few years ago companies began to block tcpip ports for services but they left port 80 for the html web open. Now all services run over port 80. There is no way they will block the port over which the web runs.
ReplyDeleteIsn’t Bitcoin in effect a central bank without an associated country? It has invented it’s own currency unit (equivalent to the dollar, Yen, etc). That unit is easily converted to dollars, Yen, etc.
ReplyDeleteIt has the power to create money out of thin air, just like a commercial bank within a particular country. It can therefor effect worldwide stimulus. Apart from the fact that Bitcoin is popular with drug dealers and others who are up to no good, central banks and governments worldwide just aren’t going to stand for Bitcoin getting too powerful.
There is a fixes money supply Ralph.
ReplyDeleteThe rate at which 'bitcoins' are created is diminishing over time, and at some point (in a few decades), it will reach 0.
Other thing is that it can be fractioned up to 0.00000001 times (but that's the same with any currency if there was desire/necessity to do so).
Anyways, I found funny most bitcoin promoters who claim it will be the fate of the current monetary system are anarcho-capitalist types, as if there were no more private currencies (run on other principles). Off course bitcoin is better when it comes to promote scams, ponzis and other bullshit than these other currencies.
The last time there was a bubble there were also a lot of rants and news on bitcoin, then went silent for a while. Pretty sure the same is about to happen, and the bubble about to collapse.
Still don't know what to buy with bitcoins, there is no real economy backing up that currency.
Its not a central anything. There is no "central". I suggest you watch the video Ralph :)
ReplyDeleteSociety is evolving. Governments and law enforcement dont create society, they adjust to how society is evolving.
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ReplyDeleteLike any elastic currency, there has to be a system for creating additional units of it. And this is always the key question: when new units of the currency are created, who receives them? As I understand the present bitcoin system, new units of the currency are created by "miners" who receive the bitcoins as a reward for winning a computational race to solve some kind of math problem.
ReplyDeleteIf bitcoin ever expands beyond the techno-geek crowd, I imagine the growing base of users will look with increasing skepticism and resentment on this somewhat parochial value judgment that has been built into the fundamental bitcoin algorithms. I guess if a currency system had been invented by bodybuilders rather than programmers, the new units of the currency would be injected into the accounts of the first guy who can perform a hundred reps with some kind of weight.
The most obvious drawback of bitcoins is that you can't pay your taxes in them, and can't discharge legally recognized debts with them unless the creditor is voluntarily willing to accept bitcoins. So the demand for them derives solely from their function as a conventional medium of exchange. Such systems can certainly survive for some time on their own, but without a foundation in tax obligations and legal regulations, they are unlikely to be very stable.
Obviously governments are unlikely to allow systems like bitcoin to evolve into massive tax evasion schemes - not unless they become the currency tools of choice of rich titans like the Kochs and Romneys of the world. Eventually governments will insist on tracking and measuring the value of exchanges taking place with bitcoin, so they can tax those exchanges - or they will shut the system down. They will have a lot of public support in this effort, since honest taxpayers will regard the bitcoiners as outlaws and parasites if they are perceived as using the system to cloak their economic activity from the usual taxes on those forms of activity.
Excellent, analysis, Dan. I'd add that the bitcoin system is really two parts, One is the currency, which as you point out is flawed on a variety of levels.
ReplyDeleteThe other half of the system, the peer to peer payment system. I think it is actually novel, unique and somewhat secure compared to current payment systems. If that system was modified to move dollars instead of bitcoins, the effect is to eliminate the bank and bankers as middle men in transactions. People are still wrapping their minds around the currency but don't appreciate the significance of not having a bank or banker.
Looks like supply of bitcoins was increasingly briskly in straight line fashion until about year end 2012 when the pace slowed down a bit.
ReplyDeletehttp://blockchain.info/charts/total-bitcoins
Interestingly enough, the slowdown in bitcoin production leads by about a month or two the recent spike higher in dollar value.
http://blockchain.info/charts/market-cap
Ryan,
ReplyDeleteAren't the operators of the bitcoin servers effectively the bankers of the bitcoin system? They are the ones who earn transaction fees, and reap the seigniorage on additions of bitcoins via mining, right?
There aren't servers for bitcoin -- it is truly peer to peer network without a centralized infrastructure of servers. When you use the software you become a provider/server as well as a user.
ReplyDeleteAnybody with a video card can mine for coins: you install a piece of software and it operates in the background. Of course people build large computer machines designed to create big mining operations, but it isn't required to do it. You can mine on your laptop, it will be slow going though.
Companies involved primarily provide forex services for bitcoins and charge a fee for doing it.
But Ryan, doesn't that mean that those who are running the mining software, and investing a lot of time and computing power in the mining of bitcoins are reaping the same kinds of benefits bankers reap in the present system?
ReplyDeleteHere are some other questions:
Can you take out a loan from a bitcoin peer? If so, to who can one appeal if the borrower does not pay?
"Can you take out a loan from a bitcoin peer?"
ReplyDeleteIf so, it makes me wonder what the term structure of interest rates looks like?
The solutions get exponentially harder to find. So in a way it is like mining gold, the price has to rise above the cost or the production slows. Those who build the mines reap the rewards, I guess. It clearly benefits early adopters. A few years ago you could mine coins with great ease with a desktop computer but not any longer.
ReplyDeleteSince each bitcoin has an ID all coins are vertical, no one can do fractional reserve lending and create horizontal bitcoins. You either have a bit coin or you don't. If you try to give a bitcoin to another peer with an ID that you don't own, other peers on the network will flag it as fraudulent and no one will accept it. So the only rules for lending are simply civil contract laws. If a person lends a bitcoin, the contract is exogenous to the software.
There is no banking system in bitcoins. There is no loaning and investment or is very primitive or insignificant. There is no return over deposits, there aren't even deposits in the traditional banking sense, neither bonds or other financial instruments to facilitate investment.
ReplyDeleteAnd there is no legal framework to protect each counterpart in a commercial contract in theory (you still rely on government enforcement and state laws). The whole system is in a vacuum, and we are still waiting for all these private institutions that will dynamize the (non-existent) economy behind it to be created.
According to anarcho-capitalist literature this should have happened already. But it hasn't. What we have seen though is major heists and a very volatile market (non usable for long term operations).
"According to anarcho-capitalist literature this should have happened already. But it hasn't. What we have seen though is major heists and a very volatile market (non usable for long term operations)."
ReplyDeleteIs the Bitcoin craze another tulip bubble? Could it also be a practical consequence of Fed QE operations?
The problem with Bitcoin (and the reason why Austrians love it) is that it "fixes" the quantity of money. We tried that. It's called a gold standard. And it didn't work. Bitcoin is a HUGE short.
ReplyDeleteParallel discussion going on about Bitcoin at the Daily Paul...
ReplyDeletehttp://www.dailypaul.com/280384/digital-bitcoin-currency-surpasses-20-national-currencies-in-value#comments
Bitcoin is quite different to usual "paper" forms of money. It's supposed to be a digital simulacrum of gold, i.e., it's supposed to be a digital commodity. Bitcoins are not financial liabilities.
ReplyDeleteThe gold bugs and Austrians are going to be sorely disappointed if a second algo is added by developers to allow for an expansion the money supply! They will claim that the old algo is the only real currency and the new ones are funny money. The irony is that this is the ultimate funny money that doesn't exist but for trust between neighbors on following the rules.
ReplyDeleteThe interesting (and I am not saying successful) challenge Bitcoin offers to MMT is that its value is entirely based on its network effects/ mutual acceptance & efficiency (much more than gold). Depending on how you view it, its strength/weakness is that it is very much fixed, moreso than gold.
ReplyDeleteSince it is not spent into the economy (once it has all been “mined”), it may NOT need to depend on state taxes to maintain its value.
Hmm, we’ll see…
Yes, I wonder if the bitcoiners will replace the terminology of "mining" with something else if they ever move to a more flexible algorithm.
ReplyDelete"The interesting (and I am not saying successful) challenge Bitcoin offers to MMT is that its value is entirely based on its network effects/ mutual acceptance & efficiency (much more than gold)."
ReplyDeleteClint - Ironically, or maybe not, you're sounding rather like Roger Erickson.
Clint,
ReplyDeleteBitcoins are indeed spent into the economy, right? They are currently being exchanged for goods and services. Their value in exchange seems to float completely free of any regulatory apparatus that can take organized steps to preserve price stability. So if a critical mass of holders of bitcoins ever become jittery about the likelihood that existing bitcoins will hold their value, they will start to dump them, driving their value down (and prices posted in bitcoins up), which will in turn accelerate the flight from bitcoins. Since there is no regulatory apparatus that can step in to put a floor under this collapse, the currency might collapse completely in a final hyerinflationary evaporation as people desperately race out of bitcoins into either other currencies or real assets. People who have foolishly speculated in an unregulated and briefly faddish exchange medium will lose almost everything.
Some of the bitcoiners seem to have the dotty idea that the value of any entity is completely determined by its relative scarcity, and so if the supply of bitcoins is capped, bitcoins will preserve their value. It's sad that people have such deficient notions of basic economics. Since bitcoins have no "intrinsic" value, their value is pure exchange value. And the level of exchange value they have at any one time is pure social convention among the universe of bitcoin users. It is grounded on nothing but expectations about the future that are extrapolations from knowledge of the recent past.
The whole world of contract, debt, law, and enforceable government obligations surrounding and buttressing the value of state-run currencies is completely absent.
"Is the Bitcoin craze another tulip bubble? Could it also be a practical consequence of Fed QE operations?"
ReplyDeleteThere was a bubble already 2 years ago. Price went up to 30 USD, then collapsed to 4 USD and slowly went up, 6 months ago it started to gain momentum and now the price has gone up to over 100 USD.
I don't think you can attribute that sort of violent volatility of price to monetary policy. Is a function of the usual behaviour of financial markets.
This behaviour is amplified by the characteristics of this market: low volume and low liquidity (compared to any other currency pair). It's very easy to move the price of bitcoins with very little money.
Over the long term, due to the fixed money supply, the mean should trend up. But due to the nature of this commodity-currency, it will all depend in the end of the added value of the currency as an exchange mean. It has a big disadvantage because the lack of a developed credit system operating in bitcoins makes it substantially worthless compared to other fiat currencies, also the lack of enforcing law authority makes it even harder to develop commercial relations, and the high volatility makes it highly risky as a mean of exchange, unit of account and as a store value.
So ultimately bitcoin will be only successful if it's commercial usage increases, the daily volume of transactions nominated in bitcoins increase a lot, and the volatility is reduced. As long as there is no real productive activity behind it, I find hard to believe it will be very successful, and eventually it's price will drop to zero.
---
As for MMT, it claims that tax drive currencies as far as I know, but that does not mean that you can't have other sort of 'money-things' or tokens to settle contracts, which in anycase, already exist, besides bitcoins.
To clarify: you're obliged to use national currencies, even if you don't want to, because of taxes. As long as there is a capable state of enforcing AND collecting taxes, a currency will remain valuable (ofc if that entity collapses or ceases to exist, means there are some serious social and economic problems, and the state currency will cease to exist or be worthless).
ReplyDeleteIn case of bitcoins, because there is no authority requiring the payment of taxes of bitcoins in bitcoins, bitcoins can be abandoned any time anyone wants.
I don't see how bitcoins can challenge this notion.
"As for MMT, it claims that tax drive currencies as far as I know, but that does not mean that you can't have other sort of 'money-things' or tokens to settle contracts, which in any case, already exist, besides bitcoins."
ReplyDeleteAccording to Alan Greenspan..... "Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury."
http://constitution.org/mon/greenspan_gold.htm
"Since bitcoins have no "intrinsic" value, their value is pure exchange value. And the level of exchange value they have at any one time is pure social convention among the universe of bitcoin users. It is grounded on nothing but expectations about the future that are extrapolations from knowledge of the recent past."
ReplyDeleteDan - Interestingly enough, many bloggers at the Daily Paul agree with you.
http://www.dailypaul.com/280384/digital-bitcoin-currency-surpasses-20-national-currencies-in-value#comments
Point of clarification. Alternative "currencies" are not opposed to MMT. In fact, MMT supports them as additional liquidity that can promote exchange, especially in cases in which state currency is in short supply. Scott Fullwiler is working in this area right now. There are a number of alternative currencies other than Bitcoin, like the Bristol pound.
ReplyDeleteThe big difference is that Bitcoin was developed as a black market currency rather than an adjunct. Bitcoin's "competition" is USD 100, euro 500 notes, and PM, which have been traditionally used for unrecorded spot transactions to maintain "privacy."
The whole world of contract, debt, law, and enforceable government obligations surrounding and buttressing the value of state-run currencies is completely absent.
ReplyDeleteThis is why Bitcoins are unlikely to replace USD 100 and euro 500 notes anytime soon. But I think that concept of digital currency has legs and will be developed. this is just the beginning of something big, although we have no way knowing now where it will lead, if anywhere at all.
"Point of clarification. Alternative "currencies" are not opposed to MMT. In fact, MMT supports them as additional liquidity that can promote exchange, especially in cases in which state currency is in short supply."
ReplyDeleteTom - Just to clarify my thinking, does that also apply toward H.R. 77 a.k.a. the Free Competition in Currencies Act?
http://www.govtrack.us/congress/bills/113/hr77
Since a local currency like the Bristol pound is always less liquid than the national currency that is accepted both in that locality and elsewhere, the only way they can help to promote exchange is if there is serious mismanagement of the more comprehensive national system (or international system - i.e. the euro in Greece). Local currency systems that are not tax-driven are just one step away from a barter system, so their proliferation is always a sign of economic devolution and political incompetence. They may also be a manifestation of an increase in parochial, localist sentiment, and so represent a pathological spread of suspicion and alienation in the broader national community.
ReplyDeleteTom, I agree there might be aspects of the bitcoin payment architecture that could be innovative and will be absorbed or adapted by existing payment systems.
ReplyDeleteOf course, we already have electronic payment systems everywhere, so that's no big deal in itself. The main difference, as vimothy points out, is that the payment assets that payers and payees manipulate with existing electronic systems are the negotiable debt instruments of third parties. A bank account balance, for example, is a debt of the bank that can be wholly or partially transferred from one account holder to another.
Ed: Tom - Just to clarify my thinking, does that also apply toward H.R. 77 a.k.a. the Free Competition in Currencies Act?
ReplyDeleteI haven't heard any of the MMT economists comment on it.
My view is that it would not produce the results its supporter suppose it would. Most of them are cranks are far as I can see.
Since a local currency like the Bristol pound is always less liquid than the national currency that is accepted both in that locality and elsewhere, the only way they can help to promote exchange is if there is serious mismanagement of the more comprehensive national system (or international system - i.e. the euro in Greece). Local currency systems that are not tax-driven are just one step away from a barter system, so their proliferation is always a sign of economic devolution and political incompetence.
ReplyDeleteNot necessarily. Helps conserve cash and credit, while expanding opportunities. It creates business where it likely would not exist otherwise.
Tom, I agree there might be aspects of the bitcoin payment architecture that could be innovative and will be absorbed or adapted by existing payment systems.
ReplyDeleteThe big thing it is going to do is increase awareness of digital money. This is the emerging trend and experiments like Bitcoin will encourage it by doing the necessary education and softening up.
In fact, the interesting thing to me is that the most conservative types who generally only want to hold gold are piling into Bitcoin. Seems incongruous, but they don't seem to be experiencing cognitive dissonance over it.
ReplyDeleteBitcoin has hit the USD 100 mark. Would you feel safer and more liiquid holding a benjamin or a bitcoin?
ReplyDeleteI wouldn't say gold buggery is "conservative". It's the realm of the apocalyptic fruitcake survivalist camp who always think everything is on the verge of collapse. Conservatives, on the other hand, tend to place their faith in enduring and well-established social institutions.
ReplyDeleteBeyond that, there is here is always some new fad to draw the attentions of speculators, gamblers and adventurers: gold; houses, dot-com stocks, bitcoins.
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ReplyDeleteDan Kervick (12:48 PM comment) – I agree with you; I was just pointing out the view taken by some regarding Bitcoins. Their argument would be that there IS an intrinsic value to Bitcoins, as the first digital currency to achieve network effects / wide acceptance; some will say this is enough (and taxes are not needed to support it).
ReplyDeleteAgain, I am not saying this is true, but it very interestingly does present almost a perfect test of the argument that taxes give value to a currency. Whatever happens, it is bound to be interesting and shed some light on debates about money.
Oh, one more point, Bitcoins WILL be a fixed quantity eventually; again, its supporters would say that this is the reason it does not need a tax to maintain its value; since no more is created and spent into the economy, they would say that none needs to be taken out of the economy to maintain Bitcoin value.
ReplyDeleteWell as Dan said these people must be economic illiterates. The value of something is not solely derived from the supply and scarcity of it.
ReplyDeleteThat's where a lot of the rants regarding monetary economics lose it. When it comes to it, it's demand which drives supply and not the other way around. It does not matter how scarce it is if here is zero demand, it's value would be zero.
Bitcoin just needs a few bubbles and it will be rendered useless for anything else than ponzi scams, when expectations about currency all turn bad.
I think I am hearing two themes argued in this exchange of comments which may be in conflict. One is that the relative scarcity of bitcoin, or in other words... supply, is not enough to maintain the intrinsic value of this digital asset. The other is that only a tax driven currency can create the demand for it to maintain its value.
ReplyDeleteConceptually I understand the second theme, but it seems to me that the more obvious effect of the power to tax in the currency is to impact the supply rather than create demand. I don't know about everyone else, but except for this time of the year I don't typically wake up in the morning thinking about how I am going to get enough money to fulfill my tax obligations. More likely at this time of the year I am trying to think of ways to itemize deductions so I can minimize my taxes.
During most of the rest of the year I get up in the morning thinking about how I can make as much money as I can so I can pay my mortgage, and my daughter's college tuition and car payments, and all the other things I need and want to do.
"I wouldn't say gold buggery is "conservative".
ReplyDeleteHmmnnn... Charming double entendre. Thank you for elevating the discussion Dan.
You think about dollars and making more dollars and optimizing your saving potential. Yes, you don't wake up thinking that the government is coming to your door and knock it off (only a few nutjobs waste their time thinking about that all the time) to collect said dollars from you, and hence you are obliged to use them.
ReplyDeleteBut the reason you think about dollars, is because everyone else uses dollars, and you need dollars to operate.
But that's not the fundamental question, the fundamental question is what is preventing you using gold coins (for example) instead of dollars. OFC at some point the common acceptance of a national currency becomes 'second nature' to everyone in that nation and no one else gives a damn. Also is true that monetary and fiscal policies have more impact through the supply side, because once you have created an environment where that currency is commonly accepted, everybody is always going to want more of it (or said other way, the demand for it is infinite, which is pretty much an exceptional feature of money versus most other goods).
But I can tell you with certainty that in the first place, the only way that currency got to be accepted is because of the authority to collect taxes in said currency and a common obedience to the law for the average citizen. Just like when severe political and social crisis happen (usually due to economic reasons), people only keeps using these currencies as far as they are enforced and/or believe in the taxing authority. So there must be a demand for the currency as a first cause, and the demand is created by the threat of force or the obedience to an authority.
Once the system is set in motion, this is usually forgotten, because everybody is worried about the supply (because money is fungible and everybody wants more of it). But not before it's commonly accepted.
Imagine that something (we’ll say Bitcoin) does become valued for some reason-say - because it is the first/best (good crypto stuff), gets network effects & becomes widely accepted, for example.
ReplyDeleteNow, _assuming the previous_, that it does have value (and Bitcoins do indeed have value at the moment, there is no denying that- I believe 123 US $ each as I write ), the argument is that it is different that other currencies, because other currencies are (by banks and/or governments) continuously created ex nihilo.
Therefore, to maintain the value of the currency (stop too much inflation) the currency MUST be taxed. Bitcoins, it could be argued, since no more will be created ex nihilo, do NOT need a tax to maintain their value.
Again, I do not claim this is a correct argument. I am just pointing out the logic of it. And yes (Tom) this does seem to present a challenge to the MMT view that taxes drive the value of currencies (again, I am not saying a successful challenge, but a logical one given the assumptions above).
Actually, I misspoke in the last paragraph. It does not present a challenge to the MMT view (many Bitcoin supporters would probably agree with the MMT view that taxes give value to currencies created ex nihilo) that taxes drive currencies; Bitcoin (potentially) provides an _alternative_ to tax supported currencies. Which of course is the whole point to the “challenge to the state” article we are discussing. (and again, as someone who believes in public purpose, I am wary of undermining governments, assuming they are just governments, which brings the discussion to a whole other area).
ReplyDeleteThis comment has been removed by the author.
ReplyDelete"So there must be a demand for the currency as a first cause, and the demand is created by the threat of force or the obedience to an authority."
ReplyDeleteIgnacio - This "threat of force" is exactly the problem that Libertarian minded people have. Cyprus is a good example.
"Bitcoin (potentially) provides an _alternative_ to tax supported currencies. Which of course is the whole point to the “challenge to the state” article we are discussing. (and again, as someone who believes in public purpose, I am wary of undermining governments, assuming they are just governments, which brings the discussion to a whole other area)."
ReplyDeleteClint - Regarding public purpose, of course there is a role for government in promoting public purpose. However, I reckon that human nature with all its warts and dark sides has really not evolved very much in say the last 10,000 years. As I see it there is no reason why human nature among those serving in government is like to be any better than what prevails in the private sector. My point is that public purpose need not be automatically assumed to be a monopoly of the government. Most enterprises seem to be better managed by the private sector where people are held accountable for exercising bad judgement and rewarded for making the right decisions. By contrast government mistakes often seem to go on for a long time before being challenged and corrected. I'm speaking in generalizations of course but I hope you get my drift.
Rombach – I hear you and see where you are coming from :).
ReplyDeleteI think the Scandinavian model works, yet also know government came from being a stationary bandit. When governments use the wealth of the people to, for example, invade Iraq for no reason, then I am not quite so certain about being in favor of a money system that helps empower that government. Reality is complicated. A pro-Bitcoin argument for a small state (that is incapable of attacking Iraq) is understandable. So is an argument for a money system that empowers the state to provide infrastructure and social security to all.
As many have said before – economics is ultimately about politics.
Which is ultimately about culture.
~~~
On your post before – in Cyprus’ case the problem was not force – they voluntarily ceded their sovereign right to a currency. The people/gov just didn't/doesn't understand monetary economics, or they would assert their sovereignty and have their own (tax driven) currency.
Clint, Chartalism doesn't claim that taxes are needed to give money value. There was credit money a long time before chartal money.
ReplyDeleteThe claim is that taxes "drive" state money, that is, currency as the unit of account declared by the state and only accepted by the state in satisfaction of obligations to the state, by forcing those in the currency zone with tax obligations to obtain the state's currency. This allows the state to transfer private resources to public use through markets.
The value of the currency, that is, its purchasing power, is determined by what the state is willing to pay in markets to transfer specific resources to public use, like at hour of unskilled labor.
The value of the currency is also determined by its cost to borrow, the interest rate, which the state can also determine if it chooses to do so and as it does in the US through the Fed. In the UK, the government outsourced the interest rate (Libor) to the big banks. One could argue that in the US the interest rate is "semi-outsourced" in that the Fed is a public-private arrangement and not all members of the BOG and FOMC are govt appointed.
Bitcoin (potentially) provides an _alternative_ to tax supported currencies. Which of course is the whole point to the “challenge to the state” article we are discussing.
ReplyDeleteAnd if something becomes a challenge to the state, the state will take all steps necessary to either eliminate it or make it difficult to use by prosecuting it. Of course, the state cannot eliminate crime, either.
Trust me, states are not going to sit idly by watching black markets develop or permit tax avoidance. This undermines their authority, and they have all the levers of power to use.
Now there is a relatively large movement in the US to reduce and ideally eliminate govt., and it is conceivable that the majority would want to severely limit the reach of government and law at some point.
But we tried that already in the US. It was called the Wild West. Some people think that is the direction the society should head again. I'm not so sure of that.
I think the Scandinavian model works, yet also know government came from being a stationary bandit. When governments use the wealth of the people to, for example, invade Iraq for no reason, then I am not quite so certain about being in favor of a money system that helps empower that government. Reality is complicated. A pro-Bitcoin argument for a small state (that is incapable of attacking Iraq) is understandable. So is an argument for a money system that empowers the state to provide infrastructure and social security to all.
ReplyDeleteAs many have said before – economics is ultimately about politics.
Which is ultimately about culture.
The US is an empire. Comparing the actions of the US to highly disparate situations doesn't tell us much. The only way to make the US a small state incapable of attacking Iraq would be to make it a confederation rather than a federation, and we already had that discussion. It was called the Civil War. Now some people want to take that up again.
"This "threat of force" is exactly the problem that Libertarian minded people have. Cyprus is a good example."
ReplyDeleteYep, but as someone else wrote the other day, there is a sensible difference between a credible threat of force, and the actual use of that force (ie. Cyprus).
And in any case, there is always such threat, in any sort of system, no matter what. There is always a frame of rules that will force you to do something maybe you wouldn't do in other circumstances.
The only difference is who is the rule maker and how accountable he is. Could potentially the same happen in Switzerland or in Norway than in Cyprus? Maybe, but I would fin it way harder (just like different choices were made in Iceland than in Ireland).
The resignation that we can't do things better or in different ways is was prevents things from getting best at the first place.
I agree with the abolition of any sort of legal tender laws that monopolize currency creation under the umbrella of the state (and in many places, these don't exist). I find also good that we have alternative currencies for both economic (these have been demonstrated to work pretty well as counter-cyclical tools) and social reasons.
But let's not get misguided here, there will be people which will have problems to accept any sort of public authority, organization of structure. Unfortunately for them, there has never ever been a period in our history since the population started to grow and first cities appeared that some sort of civil government hasn't existed (even in anarchist experiments). So good luck getting rid of that stigma.
For the rest of us all, the best we can work for and hope is to have the fairest and more just possible institutional framework, and try to improve over it, so things actually work and we can progress.
@Tom Hickey (April 3, 2013 at 12:44 PM comment)
ReplyDelete“Clint, Chartalism doesn't claim that taxes are needed to give money value.”
Tom, Chartalism claims precisely this. Both in the first instance and on an ongoing basis (i.e., stopping too much inflation, although the buffer stock of employment level is important for stopping inflation also, & related to taxation & spending/fiscal policy, of course).
Here’s Wray, for example:
“this neo-Chartalist approach emphasizes the role played by the state in designating the unit of account, and in naming exactly what thing answers to that description. Taxes (or any other monetary obligations imposed by authorities) then generate a demand for that money thing.“ (Wray, page 1*)
And Wray again:
“We increase taxes on the rich only when their spending threatens our currency with inflation” [inflation = loss of value of money] (http://neweconomicperspectives.org/2012/12/an-alternative-meme-for-money-part-6-alternative-framing-on-inflation.html)
And Warren Mosler:
(Prominent motto on top left of Mosler’s website):
“MMT: Taxes function to regulate aggregate demand, and not to raise revenue per se.”
And Wikipedia on Chartalism:
“An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment…” http://en.wikipedia.org/wiki/Chartalism [again, inflation= loss of value of money]
And Pavlina Tcherneva:
“It was already shown that taxes impart value to government money. As Innes stressed: ‘A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it’ (1914: p. 165). But he also argued that ‘the more government money there is in circulation, the poorer we are’ (ibid.: p. 161). In other words, if government money in circulation far exceeds the total tax liability, the value of the currency will fall.” (Tcherneva 2007**, Page 80)
*L. Randall Wray, The Endogenous Money Approach, Working Paper No. 17
**Tcherneva, Pavlina, 2007. “Chartalism and the tax-driven approach to money”
Cheers, Clint
Clint Ballinger: On good urbanism, sane economics, & problems in the social sciences
I should add that in the private bank-money sphere, repayment & interest payments (and any other fees) that take bank-credit money out of the private money system play the analogous role of taxes.
ReplyDeleteBanks are probably not taking out enough money to stop inflation. Since the two systems (state and private) are tightly linked in modern economies, the burden of taming inflation (through taxes or unemployment) ends up, then, falling on the state/people (rather than the private banks).
This is a mechanism of wealth transfer from the broad public to the banking/finance sector.
In other words, the private banking system is deeply subsidized, as others have pointed out before.
(I wrote before “The government already funds the banking system, both with occasional trillion dollar bailouts and on a daily basis.”
Towards a Pure State Theory of Money )
Nothing there about taxes giving money value. Taxes create demand for money in that those with tax obligations have to obtain it. Taxes "drive" money.
ReplyDeleteThis demand for the state's currency in order to pay taxes enables the government to set the value by the price is willing to pay in the market and the interest rate it sets to borrow its currency, which determines the value of money in terms of purchasing power (demand side) and financial cost of capital investment (supply side).
What is so difficult to understand about this?
I should add that in the private bank-money sphere, repayment & interest payments (and any other fees) that take bank-credit money out of the private money system play the analogous role of taxes.
ReplyDeleteOnly if they are saved and not spent either by the bank through its operations or through distribution to owners as income — which is most of the money.
"Nothing there about taxes giving money value. Taxes create demand for money"
ReplyDeleteDemand, value = same thing.
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"or through distribution to owners as income"
Yes, exactly: transfer of public wealth to the bank/finance sector, as I said. We are in agreement :)
"Nothing there about taxes giving money value"
ReplyDeleteTcherneva: "In other words, if government money in circulation far exceeds the total tax liability, the value of the currency will fall.” (Tcherneva 2007**, Page 80)
PS Tom, I'm not trying to score points or disagree with you - we are just using different words I think
ReplyDelete"drive" and "give value to". I don't think there is any real disagreement. Cheers, Clint
"Nothing there about taxes giving money value. Taxes create demand for money in that those with tax obligations have to obtain it. Taxes "drive" money."
ReplyDeleteTom, Clint - I think government power to tax in a fiat currency, and especially the power to raise taxes does much more to control the supply of money rather than to create demand for it. However from a different perspective, the Supply Side model would argue that a lower tax burden, especially on categories like capital gains creates demand for money because of the resulting higher after tax return on capital.
Demand, value = same thing
ReplyDeleteNo, not the "same thing."
To clarify, the value of a currency is equal to its purchasing power. Taxes create demand for currency that gives it purchasing power in private markets. The amount that govt is willing to exchange its currency for various private goods determines the amount of purchasing power (value) of the currency, along with the interest rate that the govt sets unless it delegates that function.
ReplyDeleteTaxes affect the purchasing power of a currency by removing consolidated non-govt net financial assets in aggregate. This is especially useful when govt delegate the bulk of money creation to banks, making the money supply endogenous. The govt can control (expand or contract) the endogenous money supply fiscally through expenditure and taxation, both of which are exogenous and influence price stability. Price level affects purchasing power. Monetary policy also affects price stability through the cost of borrowing, hence the demand for money through borrowing, which affects the amount of credit money.
Taxation alone does not determine the value of a currency.
“Taxation alone does not determine the value of a currency.”
ReplyDeleteTom - I don’t think I said that nothing else matters; in fact, I mentioned the buffer stock of (un)employment as an example that alters the value of money.
But let a government keep spending into an economy, without taxing successfully (say, a state becomes weak or loses a war), and what happens to the value of the currency?
I don’t disagree with your discussion of price levels above.
But I don’t see what you disagree with what I wrote – a major part of MMT is that taxation gives the initial value for a currency; it follows logically that continued taxation maintains that value.
There is room for disagreement with MMT on this (such as by many circuit theorists). Maybe that is where you are coming from. For the record, I think the circuit theorist critiques of Chartalism are on the whole valid, and that there must be a better synthesis of the two Post-Keynesian approaches. (something I keep bringing up on my site.
Again, I believe there are important circuit theory aspects of money that need to be better incorporated into MMT/Chartalism (and I agree with you that credit money predates state money).
But you wrote
“Clint, Chartalism doesn't claim that taxes are needed to give money value”
And this is just not correct – it is a fundamental claim of Chartalism that taxes give value to money. There are innumerable examples (one is below). I guess you, like me(!) think that the real situation is more complicated, and that private bank money has often existed without state money, and this aspect of money has to be refined in MMT theory. Maybe you mistake me pointing out what some Chartalists have argued with agreeing with that argument. So for the record, I very much agree with MMT but think circuit theory emphasis on the primacy of private bank money (historically) is accurate and important to be dealt with better.
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[the example I mention above]
“The key aspect of the Chartalist account of the origin of money is the debt relationship of the citizens to a sovereign power. Money is introduced by the State, not by private trading agents. Since money does not emerge as a commodity with favorable characteristics, conducive to it becoming a universal media of exchange, it has to obtain its value through a different mechanism. Money, as a “creature of the State” is the “thing” which is used to settle tax obligations to the State, i.e. money is the means through which obligations to the State can be extinguished. The State imposes tax obligations upon its citizens, specifies the unit of account in which these obligations are denominated, and should be redeemed. The citizens have to obtain the units in which their debts to the State can be extinguished. This is the Chartalist mechanism through which money obtains its value. Therefore, in the Chartalist framework, money is linked crucially to the obligations of the citizens to the State.”
Semenova 2007, page 3-4
Semenova, Alla, 2007. “The Origin of Money: Enhancing the Chartalist Perspective”
Clint Ballinger: On good urbanism, sane economics, & problems in the social sciences
Semenova is not MMT. I believe that MMT economists have been pretty clear that taxes get the govt's money accepted in exchange and its purchasing power (value) is the outcome of govt using its monopoly on its currency in markets, including setting the "own rate."
ReplyDeleteMMT is not equivalent to Chartalism. It is called "Neo-Chartalism." The MMT economists are different from virtually all others other than those that have chosen to follow them. Read Warren. In his view, no one got that govt is the currency monopolist.
People think that MMT is saying things it isen't because they don't read closely enough to see what MMT is actually saying and they therefore jump to incorrect conclusions. There is almost no one outside of MMT that understand MMT fully, and even within MMT is almost only the MMT economists and financial professionals that fully understand it.
I am quibbling with words because I think this is the basis of most misunderstanding of the MMT view.
Tom, Semenova was a PhD student at UMKC and the article I qt was vetted by Wray and Kelton. Of course she does not “embody” MMT. I am quite certain she is as (much more) expert on Chartalism as you or me.
ReplyDeleteTom wrote “MMT is not equivalent to Chartalism. It is called "Neo-Chartalism." “
I am quite aware of the difference. You originally wrote:
“Clint, Chartalism doesn't claim that taxes are needed to give money value”
And my response above (the qt by Semenova) is precisely about “Chartalism” – not MMT or neo-Chartalism.
And on Warren “no one got that govt is the currency monopolist.” There are plenty of Post Keynesian “economists and financial professionals” that understand money. You yourself said that private credit money pre-dates state money – which is correct. And private money still is dominant. Which suggests the govt is not a monopolist by any standard definition of the term .
This is a common circuit theory criticism of neo-chartalism; state money itself is endogenous, and this challenges some MMT views. (Which is why I am for a pure state theory of money, but that is a different thread)
(1)I am pro MMT. (2)“Chartalism” states loud and clear that taxes give and maintain the value of money. (3)There is a lot there, but circuit theory throws some complications into this. (4)Ultimately, I think those complications can be worked out. But they still need to be worked out clearly.
Clint Ballinger: On good urbanism, sane economics, & problems in the social sciences
Tom wrote “MMT is not equivalent to Chartalism. It is called "Neo-Chartalism." “
ReplyDeleteI am quite aware of the difference. You originally wrote:
“Clint, Chartalism doesn't claim that taxes are needed to give money value”
And my response above (the qt by Semenova) is precisely about “Chartalism” – not MMT or neo-Chartalism.
I will now argue that Chartalism is mistaken in this since it is too ambiguous to be meaningful, and indeed given the pre-existence of credit money, wrong.
What Chartalism states is that taxes are needed to give state money (aka chartal money and currency) value”
This is true if it is clear from the context that taxes create demand for money but that other factors are needed to give the currency the value in purchasing power it has in exchange. The value in purchasing power lies in what those with tax obligations must be willing to give the govt in the market to get the govt's money, and that is the price the govt is willing to give.
Randy says that taxes "drive" money, that is, obligations created by the govt that are only payable in the govt's currency creates a demand for it, and that the value of the currency is determined by the provider if the provider is also a monopolist (Warren).
Warren is very specific about the monopoly power of a currency sovereign. He says he knew nothing about monetary history or economic theory when he had the insight of the currency monopolist. This is the basis of Mosler economics or soft currency economics. What eventually became MMT was later built on that in conjunction chiefly with Randy Wray and Bill Mitchell, who added the background in economics.
Warren's insight was connected with Chartalism by Randy, who also connected MMT with Innes's theory of credit money and the PK view of endogenous money. These formed the basis for MMT's monetary description on which the macro theory is built.
It was Warren understanding of the relationship of the treasury and cb in a modern economy that differentiated what became MMT from previous theory and description. The developers of endogenous money theory or circuitism did not get this (and some dispute it) and this is what MMT adds to that theory to complete it.
Of course, many of these claims are disputed, and it would ge good to be clear on who says what in this regard, too, and why.
So what I am saying is that great specificity is required when speaking about MMT and it is also necessary to realize that the basis is Mosler economics or soft currency economics.
BTW, I am not saying that any of this is right or wrong, since this is not my field and I am not qualified to judge.
I am interested in linguistic and logical accuracy since that is my field. Linguistic accuracy involves use of terms in context and that means who said what under what circumstances.
Take for example, "taxes give value to state money." What does that mean exactly? Does it mean that taxes create demand for state currency or does it mean that taxes set the exchange value in terms of purchasing power?
I go by the principle 'Say what you mean." If the meaning is not clearly specified, the result is ambiguity, confusion and in the end nonsense. It's obvious that taxes create demand for the currency. Why not just say that? It's equally obvious that taxes do not set the value in terms of purchasing power of the currency. Why say something that may suggest that?
(2)“Chartalism” states loud and clear that taxes give and maintain the value of money.
ReplyDeleteIf Chartalism states that it is patently wrong. This is the whole point of alternative currencies like Bitcoin, which are not acceptable in payment of taxes anywhere.
That means the point is likely misstated. Chartalism is concerned with state money, so the statement should read taxes give and maintain the value of money, i.e., currency rather than "money."
Since the state is the sole provider of its currency ("state money") it is a monopolist by definition in that it controls the supply. As Warren observes, a monopolist has control over how tightly or loosely it exercises that monopoly. Even if the monopolist delegates some of its power, it still retains the monopoly but chooses to use it loosely. That is the situation with modern states and endogenous money.
(3)There is a lot there, but circuit theory throws some complications into this.
as I understand it, MMT economist don't think that there are any sustainable objections that they have not addressed already.
4)Ultimately, I think those complications can be worked out.
Maybe. Some circuitists have come around to the MMT position, but some likely never will.
Tom– a hypothetical:
ReplyDeleteEconomy is at full employment. There is some wage (not commodity-spike) induced inflation.
What is the MMT prescription?
Clint, this is a very practical question because all industries and firms don't reach capacity simultaneously, so there may be varying price pressures before full employment is reached.
ReplyDeleteIt's not possible to reach maximize production-productivity, employment and price stability in practice, only to optimize them. This involves some tradeoffs.
This is where the MMT JG comes in. It may be necessary in context to dampen effective demand through taxation before full employment is reached if there are price bulges in non-discretionary goods in order to prevent excessive "inflation" even though the price level is not yet technically at the point of inflation, however that is defined.
With the MMT JG it's possible to expand the buffer stock of employed instead of adding to "the reserve army of unemployed and destitute."