This time it’s for the Internet. I’m skeptical, for many of the same reasons I was skeptical of the BNote. Timothy B. Lee explains. I agree with him. Reluctantly, if you can believe it.
Jason Kuznicki
Jason Kuznicki is a research fellow at the Cato Institute and contributor of Cato Unbound. He's on twitter as JasonKuznicki. His interests include political theory and history.
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At least Bitcoins float, which solves the “just like a dollar, but less useful” problem with local currencies like the BNote.
See: https://mtgox.com/trade/historyReport
Won’t work until you can pay your taxes in it. Some chance of that. I note from Tim’s comments that BitCoin already has a Mob of Stupid descending on relevant comment threads declaring it to be the Vital for the Future Survival of Freedom and Liberty, and bound to work because Leaderless Network Effect Social Mumble always beats out little details like the IRS.Report
What the IRS cannot see, it cannot tax. This is a value-adding proposition in itself. Simple use of Bitcoin represents a form of economic secession.Report
The IRS can see it just fine – that same Internet that you use to send in your return runs the other way as well. At the moment, it’s chump change for hobbyists.Report
True, but right now the IRS isn’t interested because there’s no actual income or savings to speak of being transacted in BitCoin. If there ever is, the IRS will be able to see just fine – people will need stable investments other than the currency itself. Those investments will require financial institutions. Financial institutions have to register with the regulators and comply with IRS rules. Doh.Report
Bitcoins have a predictable, ultimately fixed monetary base. As the Bitcoin economy grows, price deflation will ensue as each Bitcoin appreciates in purchasing power. So yes, most people will be happy just holding and saving in Bitcoin balances. The same was true of average citizens during the gold eras.
Nothing precludes the creation of Bitcoin lending institutions. Because there is no state manipulation of the monetary base, we have the added benefit of having accurate interest rates. Hence, the booms and busts explained by the Austrian business cycle theory will be most fortunately avoided.
Bitcoins can be converted to fiat cash through various developing face-to-face networks. Many of these will likely remain informal and not formally registered. Of course, as the Bitcoin economy grows the need for conversion will diminish as more products become available for direct purchase.Report
As the Bitcoin economy grows, price deflation will ensue
In that case, the economy won’t grow, because under deflation it makes sense to hold Bitcoins rather than spend them. You can’t have everyone happy with saving, under all conditions, and also a growing economy. There has to be spending too.
Because there is no state manipulation of the monetary base, we have the added benefit of having accurate interest rates. Hence, the booms and busts explained by the Austrian business cycle theory will be most fortunately avoided.
Austrian business cycle theory holds that government exaggerates booms and busts. But the mere existence of credit-giving institutions creates them. See Ludwig von Mises, Theory of Money and Credit.Report
The currency inflates at a controlled but dwindling rate for an incredibly long time before it reaches fixed supply. Presumably the bitcoin economy will have to be huge to ever get to that point.Report
Not exactly, Jason. Price deflation occurs because of economic growth. Prices fall because of increased production/growth relative to a stable monetary supply. Even if there were less growth, price deflation would ease.
More importantly, individuals have different time preferences. Each person has a different tolerance for deferring present consumption to save for the future (when prices are presumably lower). Some will save, others will spend. The entire industrial revolution occurred in a price deflationary environment. Much of the impressive growth in consumer electronics has likewise taken place with falling prices.
ABCT primarily blames inflationary fractional-reserve lending as the source of booms and busts. Fractional reserve lending institutions are not sustainable without government regulation and coercion. Rothbard discusses this extensively in What Has Government Done to Our Money?Report
Deflation happens because the amount of money people want to spend is less that the value (in present day money) of the transactions they want to perform. So prices fall. That can happen because there’s more stuff. Or it can happen because there’s less money. Unfortunately, once deflation happens, people will choose to save money as cash balances since their values will increase over time, and those cash balances will reduce the supply of money available for transactions, causing prices to fall further. We see this in Japan, where attempts to increase the monetary base keep failing to reduce the value of the currency.
While I’m sympathetic to some aspects of ABCT, I’m afraid the emphasis on fractional reserve banking from Rothbard and Mises is confused. All that’s needed for the money supply to be unconstrained by the supply of base money is credit. We see again and again that promises to pay circulate at or near par, regardless of any government backing. We saw this in 2008 with Repo, in fact. With Rothbard’s favored 100% reserve requirement, you’d simply find bank CDs circulating at par, producing a system exactly equivalent to fractional reserve banking.Report
But this is a double bind. If you ever create financial institutions that are large enough to be useful, no amount of gimickry will save you from the laws that say you need to register, withhold tax, and report transactions. The government may not be able to find out precisely what a hypothetical BitCoin financial institution is not reporting, but they’ll prosecute the owners for not reporting it and shut the computers down nonetheless if it ever becomes a big enough deal for them to take an interest. If you never create markets of that size, well, who cares?
I see you’re a fan of the Austrians. So let me ask you this, if people choose to save in the form of held BitCoin balances, how is the quantity of available transaction money fixed?Report
By nature, Bitcoin is a global currency. Bitcoin lending institutions could exist anywhere. They could also exist informally at the “local” community level. Because of the decentralization of communication through the internet, these communities are not even bound by geography. Some Bitcoin members have already started discussions on starting a “credit union” and this article provides an interesting perspective: http://cuhistory.blogspot.com/2011/04/bitcoin-natural-experiment-for-credit.html
As to your second point, Simon, Rothbard discusses here (http://mises.org/money/2s9.asp) the supposed problems of hoarding. He states the “total sum of cash balances is always identical with the total supply of money in the society.”Report
On the first point, sure, but if you’re going to have your bank accounts in the Bahamas, it doesn’t make any difference if they’re denominated in dollars. So why not just do that?
On the second point, the price level is determined by the amount of money people want to spend. Money people don’t want to spend has no effect on the price level, so the price level is affected by people choosing to save in cash balances. This is just obvious. I’m aware of Rothbard’s views, but I’m afraid his politics got ahead of his economic insights in several areas.Report
Uh, so let’s see…
If I am French and live in Ireland and buy something from somebody in Russia who made it from parts that came from somebody in the USA and we all use Bitcoins…how again is the IRS involved?Report
It depends what the person in the USA does with them. If they wish to save or invest them in any way, the IRS will find out if the amount of money is at all significant. If they simply hold them, then sure, they won’t, but holding cash is not usually efficient since it pays no interest. I’m assuming this applies to BitCoins too.Report
This is the point. The purpose of this kind of currency is to use it for transactions between individuals. We are so addicted to the idea of holding currency for “investment” (not for transactions for real goods and services) that it’s hard to convince people that “money” was originally only meant to be a means for buying and selling goods in the real world. Those of us who believe in freeing ourselves from debt slavery (which is why you get a lot of idealistic jargon) want to return “currency” to its true purpose. Some currency plans even penalize hanging on to the stuff without spending it. A lot of bitcoin enthusiasts of course are thinking of the investment, but the eventual purpose of it will actually transcend this limited view of money–hopefully at least. Hanging on to money as an investment sounds very smart (I guess it is, for some) but it defeats the purpose of currency in the long run. They used to call it “hoarding” when we all used gold and silver, and it was not a good thing for society or for commerce.Report
But people don’t hold money as an investment. At least not most people outside of Japan and organized crime. They buy financial products with it, albeit in some cases very cash-like financial products like checking account balances.
A currency that’s used only as a transaction medium and not as a unit of account for savings (and therefore debt) is hard to make work. Even if everything in the world were priced in BitCoins, people would choose to never hold them, and their velocity would therefore accelerate to the point of worthlessness.Report
See: Online PokerReport
I love Bitcoin. I can see the point of using it, especially since most online payment methods (such as PayPal) prevent you from selling certain things (e-cigarettes, cigars, etc) and its great to have an alternative that may do well one day!
Be sure to check out the Bitcoin Wiki at http://www.bitcoinwiki.com for some good getting started information about Bitcoin.Report