Archive for the ‘Economics’ Category

Money Is Subjective Value

Posted: December 10, 2022 in Economics
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by Richard Martin

All value is entirely subjective. It resides in the minds of people. Money is the most widely accepted medium of exchange. People acquire it mainly for purposes of trade and as a store of value. Gold became the money because it was the most marketable good and would therefore be the most readily exchangeable.

Before gold, there were other forms of money, all of them commodities with variable monetary qualities. Archeologists have excavated sites full of seashells and beads on strings. Some of these go back almost 100,000 BP. Rarity, beauty, skill, durability, and proof of work were required to make a good acceptable as money.

I believe that grave goods were meant to be used in the spirit world as money and a sign of wealth and status in the next life.

© Richard Martin

by Richard Martin

There is no need for governments or central banks to “manage” the money supply and the economy. Inflation is caused by governments taking over the money supply and politicizing it for various ends. THIS is the cause of increasing economic inequality and centralization. It stems originally from governments wanting to control money and the financial system to finance their wars by avoiding taxation.

Inflation is basically the seizure of wealth by stealth. If the official inflation rate — i.e., based on CPI — is 2% per annum, then the value of what your money buys is halved in 35 years. If it’s 5%, the value halves in about 15 years. You only need to apply the rule of 72. Since the start of the latest round of “quantitative easing,” newspeak for money printing, the money supply has grown at about a 20% clip. That makes your money lose half its buying power in about 3.5 years! And that’s only the official CPI inflation. In actuality, it’s much greater than that.

In the second half of the 19th century, the world was on a gold standard, where all currencies were fully redeemable in gold at a set rate. In other words, gold was the money, and national currencies were issued on fixed ratios to that. For instance, the USD was approximately 1/20 ounce of gold, by definition. That meant that all currencies were fully interconvertible at fixed exchange rates. And global trade, investment, and industrialization exploded. In 1914, the world economy was more globalized and open than at any time previous to that and since then. Even the most recent wave of globalization, which is now unravelling at breakneck pace, was arguably not as effective and efficient.

Contrary to popular belief, the 20th century has been not only the most deadly, but also the most economically contentious and disruptive to international trade, industrialization, and equality of opportunity. The worldwide stock of gold increases by an average of 2 % per year, as does global productivity, primarily due to investment in new technology and capital. In the latter part of the 19th century, most prices were stable or falling on a gentle grade. What would have happened if the world had stayed on the gold standard? We’d all be richer now.

Unfortunately, all of the belligerents in WW1 went off gold when the war started, the most important being the UK in 1914 and arguably never really went back on it, at least without assistance from the US. In 1934, Roosevelt issued an order for all US citizens holding gold to turn it in for USD at the 1:20 exchange rate, then changed it 1:35, immediately devaluing the dollars they had just received. Nice eh? This stayed the official rate until 1971 when Nixon officially closed the exchange window (only for sovereign dollar holders) because allies were trying to exchange their eurodollars for gold, as had been promised at Bretton Woods in 1944.

It’s been downhill ever since then. If you want to see the economic and social effects of this default, check out If you want to explain Trump and “populism” (I have problems with the term, but that’s for another time), it’s all right there.

© Richard Martin

by Richard Martin

Bitcoin has already been attacked unsuccessfully several times. If it were possible for a government to take down Bitcoin it would have already happened, and probably in China first. The ECB head, Christine Lagarde said almost two years ago that it was her goal to regulate crypto and bitcoin. The former is possible and should be done, the latter can’t. The ECB can’t, nor can the Fed. The only thing they can do is to conjure up CBDCs (Central Bank Digital Currencies), but if the market (i.e., the people) don’t accept them, there is nothing they can do. But they’ll try to talk them up and trash talk crypto, hoping that it will take down Bitcoin in the process. It won’t happen.

The fact that BTC can be lost or “hoarded” is irrelevant. In the past, gold was buried in hoards and graves and lost in shipwrecks. It didn’t affect a thing and only made the remaining gold more valuable. Bitcoins and other cryptos have been stolen from online exchanges since the start, the most prominent being the Mt. Gox heist in 2014.

But they can’t be stolen by hacking if you don’t hold them in an online exchange or on a device that can be accessed through the internet. These are known as “hot wallets,” a fitting term. If you hold BTC in a “cold wallet,” i.e., offline, then they can’t be stolen through hacking. There are also services that offer cold storage and multiple signatures to access them. Bitcoin ownership is linked to your private signature, which can be accessed through a 12-word or 24-word seed phrase. If you lose your cold wallet or it is stolen, all you have to do is enter your seed phrase in a new wallet to have access to BTC again, while the old wallet will be automatically zeroed. There are cases of people leaving countries with capital controls who memorized their seed phrase and reaccessed their BTC savings after they left their original jurisdiction.

There have already been hundreds of attempts to change the Bitcoin network by what’s known as hard forking the blockchain. All that happened is that the ones trying to use the “new” BTC lost out, as it depends on the consensus of work nodes (miners), verification nodes and holders/users. In 2017 there was a concerted and coordinated attempt by the great majority of miners — something like 80% — to hard fork the network to allow more and faster transactions. It failed miserably and the original blockchain won out.

There is a theoretical possibility of what’s called a “51% attack,” but that would require some entity to control over 50% of the mining power and then maintain that essentially forever. The energy costs would be astronomical and would require a grouping of sovereign entities around the world to even consider it at this stage. I’ll leave you to consider whether that is a realistic possibility.

The solution to that is to treat all crypto, except Bitcoin, as securities, and thus subject to securities laws and regulations. The heads of the SEC and the CFTC (Commodities Futures Trading Commission) in the US have both stated publicly that Bitcoin is a commodity. This means it’s an actual thing that can’t be manipulated or conjured out of thin air. It’s like pork bellies and corn. You have to expend energy and do work to create them.

 © Richard Martin

By Richard Martin

What follows is a summary of my current understanding of the “crypto” space, including Bitcoin. I am interested in this because I think it’s a fascinating topic and very important. I think there will be an overreaction (what else is new) with all kinds of regulations that will end up having unintended consequences. We keep reliving Bastiat’s “broken window fallacy.” See also the writings of Thomas Sowell.

1. “Crypto” is either a scam, a means to perpetrate a scam, or a bad idea that leads to unintended consequences, most of which are bad.

2. You don’t need crypto to scam people, although it helps if it’s dressed up as magic internet money. Madoff didn’t need crypto to scam people, nor did Ponzi (of eponymous fame), John Law, and many others throughout history too numerous to name or remember.

3. Setting aside the shady aspects of crypto, we can say that the whole “industry” comes from attempts to improve on Bitcoin through various means. The Bitcoin source code was published in late 2008 by an anonymous developer (or group) under the pseudonym “Satoshi Nakamoto.” “Nakamoto” disappeared into the ether at the end of 2010 and hasn’t been heard from since.

4. Anyone can download the code as it is freely available and try to tinker with it. But there is only one widely used and accepted implementation, Bitcoin Core, which is used to run most of the Bitcoin network.

5. So far, no one has come up with an objectively better version of the original Bitcoin concept, although there have been minor adjustments that have been adopted through the consensus of node operators, miners, and holders.

6. There have been attempts to take over the Bitcoin network, but they have all failed, and the network has only become more robust and resilient over time. In essence, you either: 1) need a massive amount of energy to take over Bitcoin, or 2) must convince the great majority of stakeholders to accept proposed changes. The former is coercive while the latter requires the changes to be advantageous for all stakeholders, both in perception and in reality.

7. Probably the best way to characterize BTC is as a form of digital gold. Like gold, it can’t be conjured out of thin air, like the USD and all other government enforced currencies. Like gold, it is intended to have saleability through time (i.e., preserve its value), but contrary to gold, it also has saleability through space (see The Bitcoin Standard by Saifedean Ammous). You can move BTC anywhere in the world at the speed of the internet at minimal cost. Gold requires massive storage and security, with enormous transportation costs to move safely and securely. As an example, France sent an aircraft carrier in the 1960s to New York to recover its gold that was still being held by the US Treasury because of WW2.

8. Given all this, BTC is intended to replace the USD as a global base money. Whether that happens or not is open to conjecture. We can think of any number of scenarios of how the US and other states react over time, some bordering on the conspiratorial.

9. In my opinion, the most likely path forward is that the Fed, SEC, CFTC, etc., plus central banks and securities/monetary regulators around the world will try to limit or even coopt crypto and BTC to maintain the current government-controlled fiat monetary system. Whether and how that happens is not predictable at present.

10. One crypto-like idea being discussed extensively is CBDCs, or Central Bank Digital Currencies. From what I gather, the idea is to create and launch fully programmable – and thus controllable – digital money. The Fed seems hesitant, but the Chinese Communist Party thinks it’s a great idea! How could it possibly go wrong?

11. As for blockchain technology, my understanding is that it is a method of storing data and information in a decentralized ledger. The Bitcoin network uses a blockchain to ensure its ledger is public, distributed, decentralized, and fully auditable. Every transaction is recorded in the blockchain and maintained by the network, which includes both the verification nodes and the work nodes (miners). Whether or not blockchains are useful in other areas remains an open question. From what I’ve read and heard, it is inefficient as a means of managing data, and centralized databases remain the gold standard (pun intended) in information management.

© Richard Martin

by Richard Martin

The current raft of insolvencies of crypto exchanges is causing a panic. But crypto-technology is only relevant to the extent that it allows creative ways to separate fools from their money. Other than that, you don’t need crypto to scam people. There will always be opportunities to do that using low tech and tried and true methods.

We have to separate Bitcoin from all the imitators, such as Doge, FTX, and Ethereum. The latter are only the most well-known of the 20,000 or so “shitcoins.” All of those are centralized and run by a small group of insiders, outright scams, or poorly secured networks with no limits on issuance. Basically, these crypto scams are a way to issue your own currency, with all the risks that implies for outsiders.

There are numerous claims of improvements to BTC, but none have panned out. It turns out that the original BTC is basically immutable, although there are procedures in place to consider and implement small improvements following strict consensus rules.

Bitcoin was designed to be electronic cash that can be transferred from peer to peer without having to go through the banking system. It can also be held “off chain,” in “cold storage,” meaning that it can be held physically in one’s personal custody, basically like precious metals. But without the storage and shipping costs.

Transactional costs are considerably lower than legacy financial system rails. For instance during November 2022, $ 1 trillion was transacted worldwide on the Bitcoin network. There are cases where $ 1 billion+ of value were moved for under a buck! Bitcoin requires proof of work by what are known as miners. Transaction blocks are added to the Blockchain on average every 10 minutes, with a difficulty adjustment every 14 days or so.

The number of BTC that will ever exist is 21,000,000, due to be achieved in about AD 2140, but the current “inflation” rate is under 2% and will halve again some time in 2024. Compare that to the USD and its derived currencies around the world.

The miner who successfully solves the mathematical puzzle gets to publish a new block of transactions and receives the Block Reward (currently 6.25 BTC) plus any transaction fees, and publishes the transaction block to the blockchain. It is generally accepted that the blockchain becomes de facto immutable after about 1 hour (6 blocks). After that, there is a possibility of “forking” the blockchain to try to take over the network, but it’s never been successfully done. While theoretically possible, it is considered astronomically unlikely that this could occur in actuality. And even it if it did, you would still need to achieve consensus among miners, nodes, and holders.

Bitcoin is evolving into what’s known as Layer 1 money, meaning it is in direct competition with the global reserve currency, the USD. The jury is still out on that, but it is already being used as a store of value and medium of exchange. These are two of the three functions of money, the other being universal unit of account. The USD is still the international unit of account, supplemented by accounting in local currencies. We don’t know if that will ever change, and it’s not certain that it is essential to having a base money that is immutable and scarce.

There are a number of Layer 2 applications being developed. The most advanced of these is the Lightning Network, which allows millions of micro-transactions per second without fees and immediate settlement. That means you can use the LN to pay for a coffee or to transfer billions, all at minimal cost and delay.

The current financial system with the US Federal Reserve and US Treasury at the top of the pyramid is a house of cards. The USD is the global Layer 1 money, backed by nothing, other than US Navy aircraft carriers and, now, B21 bombers. It allows the US to export fiat USD around the world while receiving TVs, microchips, and papayas in return.

© Richard Martin