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Bitcoin had its day in front of the Senate Committee on Homeland Security and Governmental Affairs 0n Monday, promptly roofing the price to over $900 per BTC on the back of the hearing, then crashing by 30 per cent and then recovering once again.
At pixel time the crypto currency was fetching about $690 on the MTGox exchange, with the community no doubt preparing for another day of extreme volatility.
Representatives at the hearing argued that the currency wasn’t as anonymous as many believed it was, that it wasn’t a greater criminal or laundering enabler than traditional cash, that there was plenty of scope for regulated supervision, and that above all the industry had the scope to create jobs.
The job case, in particular, proved interesting not least because it immediately brought the following passage from Keynes’ General Theory to mind:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
The difference between the vision being outlined by Keynes and the one being outlined by the Bitcoin community is that in the Bitcoin case the money is being buried not by a state Treasury but by a protocol that encourages people to waste energy and computer power for the chance of social elevation. It also involves something of a Jedi mindtrick to establish faith in the units being dug up.
Nevertheless this is still an extremely Keynesian economic case for the legitimacy of a crypto currency.
The weak point in the Bitcoin incarnation of the experiment, however, is the rigidity of the system and the lack of intervening authority. Remember, the Keynesian thought experiment is mainly about creating a stealth distribution mechanism for the additional cash that’s needed in the system, as well as an incentive for people to compete against each other for economic gain — something which in its own right creates supporting jobs.
But while the experiment represents the nearest thing to a laissez faire solution to an aggregate demand problem, even Keynes himself admitted the policy should only be used as a last resort. True, it was better than taking no action at all — because the experiment would help to circulate money through the system — but the flaw was that it depended on fooling people into thinking they were doing something useful when they were not.
In Keynes’ eyes it would be much better to direct spare labour and capacity (by a mindful supervisor, no doubt) to something more socially useful, with the potential to improve quality of life.
The fact that Bitcoin resembles the Keynesian thought experiment, however, by definition suggests it suffers from the Jedi Mindtick ‘bullshit job‘ distraction issue.
Though this is not its worst crime. The greater flaw is that the Bitcoin system concentrates wealth in the hands of a group of early adopters, and support industries, which end up forming a new elite. It’s a libertarian-minded reward doctrine, but it’s a highly warped one because the incentives which are put in place reward economic agents for unproductive and socially costly behaviours. Talk about a misallocation of capital in a world where there are still genuine needs and more worthwhile risks to take.
If there are social benefits they lie only in the jobs which are created for a small section of society, the innovation sparked by an incentive to produce faster and more efficient task-specific computers and the evolution of the payments infrastructure (innovations wherein can be replicated and adopted by other currency regimes). The most compelling social benefit is probably that the scheme encourages people to learn about programming, cryptography and computers and develop skills for a digital age.
But none of these benefits currently outweigh the socially destructive aspects of Bitcoin — the most destructive of which is the fact that the system transfers wealth to a small technological elite who had the foresight to invest in infrastructure which can now extract rents from the system (even after supply is no longer growing) in the form of transaction fees.
Late comers, however, will never have the means to compete or accumulate anything but a fraction of the wealth of the early adopters.
Most importantly, the system fails to protect the economy from the hoarding problem or supply crunches. This is true even if Bitcoins begin to trade as fragments, because the means to fragment the unit does little to distribute wealth from the early stakeholders to the fractional players.
Meanwhile, if fractional lending ensues after the end of Bitcoin’s money expansion period (in response to continued demand) the system would only end up replicating the very same leveraged system we already have today — complete with its propensity for debt-deflation crises, money supply crunches and/or liability-asset mismatches — but without the safety net of a money creator of last resort.
As for the retail payment practicality argument, the Bitcoin community neglects the fact that there is a reason why most nations are currently pursuing competitive devaluation strategies.
The advocates say “ah but this won’t matter when all nationalities and retailers use Bitcoin”.
We concede, this is probably a fair statement. But such a scenario would also be the effective realisation of Keynes’ global bancor system (the bare bones of which exist in the special drawing rights system of the IMF).
The teeny weeny problems that remain:
1) For this to work all sovereigns would need to give up tax collection in domestically denominated currencies.
2) The global “currency” would remain a poor and volatile medium of exchange unless nation states broke down national borders and jurisdictions, and allowed international trade to flow completely freely.
3) The world would have to come together to forge a new-Bitcoin based Bretton Woods equivalent, ironing out inequalities via a mutually agreed tax redistribution policy.
On the plus side, if all that happened you might end up with a global reserve currency which encouraged energy-based computer efficiencies, more scrupulous cryptographic security practices and a good blend of privacy and transparency.
But it’s a big “if.”
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