Tuesday, August 29, 2017

Crypto Currencies: Coin or Con Game?

Just yesterday the Wall Street Journal had an opinion piece by Mr. Andy Kessler, who writes for the Journal on technology and markets.  The article, “The Bitcoin Valuation Bubble” (August 28, 2017, A15) raised some interesting questions . . . such as, What is a “Bitcoin,” anyway?

When is money not money?  When it's a Bitcoin!
We have an answer to that, but let’s take a look at Kessler’s opinion.  Is it a currency?  It’s called a currency, but. . . .
According to Kessler, the answer is “no,” for two reasons.  We disagree with Kessler’s reasons for the answer, while agreeing with the answer.
First, a currency, says Kessler, “[is] based on the growth and productivity of [its country].”  The Bitcoin, in contrast, is simply “worth” what people are willing to pay for it.  It doesn’t stand for anything other than the buyer’s and seller’s opinion as to what it’s worth.
Our disagreement with Kessler here is his statement that a currency is based on the growth and productivity of a country.  Yes, Keynesian theory is that the currency is backed by the wealth of the economy, but it’s not correct.  Under Keynesian Modern Monetary Theory, a currency is backed by government debt . . . which, contrary to what Keynes thought, is not the growth and productivity of a country.  It's a hope that the government will be able to tax the growth and productivity of the country and redeem its debt.  Thus, the currency in Keynesian theory is based on the belief that the government that issued the debt that backs the currency will make good on the debt represented by the currency, as well as the amount of debt that the government has issued to back the currency.
A Three Penny Bill of Credit
Paradoxically, the government’s ability to make good on that debt and the amount of debt outstanding have an inverse relationship.  If a government can raise the money it needs from taxation, it doesn’t need to issue debt.  If a government can’t raise what it needs from taxation, it borrows from existing savings, or emits bills of credit backed by future tax collections.
Of course, the more bills of credit a government emits, the less the currency is worth, and the harder it becomes to raise money by taxation.  The modern politician’s principal task under the shell game of Keynesian economics is to try and create as much money as possible backed only by its promise to make good the obligation out of future tax collections, without at the same time doing too much damage to the economy that makes it possible to collect taxes in the first place.
The problem is that inflation is itself a tax, but a tax that is “pre-collected,” that is, the tax is levied when the government spends the newly created money by raising the quantity of money and thus increasing the price level.  People pay more for less, and growth and productivity slow down as demand decreases in response to the rise in the price level.
Actually, since the New Deal, but why quibble?
In order to try and make up for the loss of purchasing power that keeps the economy going, the government prints more money to stimulate demand artificially.  In this way the government attempts to solve the problem by doing more of what caused the problem in the first place.
That is why inflation is called a “hidden tax.”  It’s also unjust: a tax should only be spent after it’s been collected, and it should only be collected after the taxpayers or the taxpayers’ duly appointed representative has voted on it.
The second reason is that, while some people view the Bitcoin as a currency, and are wrong, others like the IRS and the Securities and Exchange Commission (yes, they’re persons . . . artificial persons, but still persons. . . .) say that Bitcoins are securities . . . and are still wrong.  Kessler doesn’t say exactly why he disagrees that Bitcoins aren’t securities, but we agree with him.  Here’s why.
Henry Thornton: There are real bills, and fictitious bills.
Once upon a time, securities — bills and notes — were divided into two categories, “fictitious bills” and “real bills.”  A fictitious bill was pretty much what it sounds like: something with only a fictional value, i.e., what it promises to deliver doesn’t exist, isn’t owned by the issuer of the bill, or isn’t worth what the bill says it’s worth.  That’s pretty fictitious, wouldn’t you agree?
And a real bill?  That, too, is pretty much what it sounds like.  It’s a bill that represents a claim on something real, that is, it exists, is owned by the issuer of the bill or it is reasonably expected that it will be owned by the issuer of the bill when the bill matures (i.e., comes due), and is worth what the bill says it’s worth.
So, is a Bitcoin a real or a fictitious bill?
Well . . . neither.  It’s not a bill at all.  The issuer, the Bitcoin people, are not obligated in any way to redeem the Bitcoins they have issued except with other Bitcoins.  In other words, if you buy a Bitcoin, the only thing the Bitcoin people owe you is . . . a Bitcoin!  There is no standard of value, nor is there any promise to deliver anything other than the Bitcoin itself.  If the issuer of a bill tried to fob you off with another bill when you presented a bill for payment on maturity, you would have the right to haul him off to jail for fraud.
So what does Kessler say a Bitcoin is?  It’s a business.  It’s a way of transferring funds, a sort of non-traceable credit card, and so criminals and others who want or need to mask their financial activity have used it.
Otherwise complex money laundering is made easy with Bitcoins
The Bitcoin is custom made for evading the eyes of the law and any regulatory interference.  As a “virtual commodity,” there isn’t even a way for an auditor to trace the buyers and sellers of something by who had possession of it.
One way of laundering money, for example, is to purchase a commodity in one country for delivery in another.  A criminal who needs to transfer, say, $100 million buys a contract in the U.S. for delivery of 20 million bushels of wheat in Columbia in thirty days.  His organization takes delivery of the wheat in Columbia and sells it.  Even at a loss, they make money because all they were interested in was a way to get the cash from one country to another without the actual cash having to cross the border.  A loss on the trade is just a cost of doing business.  A gain is gravy.
Now, instead of wheat, use Bitcoins.  A criminal buys $100 million worth of Bitcoins in the U.S., and immediately sells them in Columbia.  No waiting for delivery, no risk of somebody getting suspicious about huge commodity purchases, just a quick and clean purchase and sale of something that doesn’t even exist.  Try and trace that.  You can’t even mark the currency or note the serial numbers.  It’s like magic.  Money is spent in one country to buy Bitcoins, and — poof! — it pops up again in another country, all without anyone being the wiser.
That explains why Bitcoins aren’t really a currency, and what they are . . . but is what is being used throughout the world as currency much better?  We may look at that, tomorrow.

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