05
Feb
2018
Contra Krugman Ep. 124
In this episode, we kinda sorta agree with Krugman’s take on Bitcoin. Then Tom gives a low blow when I say I think Bitcoin is fiat.
We keep it real, kids. This isn’t scripted. It comes from the heart.
I’m on Tom’s side.
https://www.thefreedictionary.com/fiat
Bitcoin is voluntary, therefore no fiat.
As for what is backing these currencies, I still support Warren Mosler’s 9mm theory of currency valuation. The practical value of a fiat comes down to how successfully governments can enforce that fiat, which basically means poking a gun in someone’s guts and demanding payment (normally called “taxation” in polite society).
It goes off the rails in places like Venezuela because the government is printing a lot more than what it can collect in taxation now that various social infrastructure is breaking down their ability to maintain the “fiat” is weakening. They still have plenty of guns in Venezuela, but as they become disorganized people understand that from here on in the property confiscation and outright killing is going to be somewhat arbitrary and largely unrelated to whether you followed the rules as a good taxpayer. That’s the other side of a protection racket… you do actually have to also provide protection.
In this episode, Bob argues that bitcoins are fiat money by eliminating what he believes are his only other two options: commodity money, and credit money.
But Mises talks about a fourth option that didn’t get any play: fiduciary media.
From Human Action:
“The issuing of money-certificates does not increase the quantity of things suitable to satisfy the demand for money for cash holding. Changes in the quantity of money-certificates therefore do not alter the supply of money and the money relation. …”
“… If the money reserve kept by the debtor against the money-substitutes issued is less than the total amount of such substitutes, we call that amount of substitutes which exceeds the reserve fiduciary media. …
“… A part of the total amount of money-substitutes issued is usually covered by a money reserve held. Thus a part of the total amount of moneysubstitutes issued is money-certificates, the rest fiduciary media. …
“… The issue of money-certificates does not increase the funds which the bank can employ in the conduct of its lending business. A bank which does not issue fiduciary media can only grant commodity credit …
“… While the quantity of money-certificates is indifferent, the quantity of fiduciary media is not. The fiduciary media affect the market phenomena in the same way as money does. Changes in their quantity influence the determination of money’s purchasing power and of prices and—temporarily—also of the rate of interest.”
The Federal Reserve Note (FRN) has lost around 96% of its value in terms of gold. So, in terms of gold (were it to be redeemable, again, in gold), 96% of FRNs are fiduciary media.
Bitcoins were created as a claim to nothing, and they trade for the same reason that unbacked FRNs do: they require a “next sucker” to accept them.
Bitcoins are 100% fiduciary media.
Also, in the next paragraph, note that Mises rejects the idea that just because something trades as if it were money, it is not, due to that fact, necessarily money:
“Earlier economists applied a different terminology. Many were prepared to call the money-substitutes simply money, as they are fit to render the services money renders. However, this terminology is not expedient.”
He’s saying the same thing I’ve been saying about money and, by extension, media of exchange (which I was able to deduce from Tom Woods’ video: Smashing Myths and Restoring Sound Money, for crying out loud), that the mere agreement to use something as money does not make it money.
It’s kind of driving me crazy that Bob and Tom have fallen for bitcoins.
I’m going to keep on denouncing bitcoins against the day that people realize it’s a Ponzi scheme and then try to discredit Austrians because of it.
Krugman is right that bitcoins are a bubble, but not because they’re not backed by the threat of death.
FRNs, and the crypto version of them that is likely to be imposed on us, are/will be bubbles even if we are coerced into using them.
FRNs exchange value doesn’t come from the threats, per se, anyway. They come from the value I place on my own life.
And since I’m willing to accept a lower quality of life in exchange for preserving my life, the fact that FRNs are traded as if they were money does not mean they are improving people’s lives.
Rather, it is the relative freedom within the confines of an imposed fiat money system that is the source of wealth creation.
guest wrote: “Bitcoins are 100% fiduciary media.”
What are they (unbacked) claims on?
I actually anticipated that challenge.
Each person believes (through hope, rather than some anchor to subjective preference that, say, gold has) that bitcoins are “worth” different things, so it’s different for each person.
That’s why, in Tom Woods’ episode on the Bitcoin Cash debate, you had one of the guys saying that he intended to try to convince businesses to accept bitcoins.
It only “works” if other people accept it. That’s a Ponzi scheme.
With commodity money, it spreads first because it is *not* used widely, thereby providing arbitrage opportunities. The freedom to enter that market for arbitrage is what causes it to spread and become a widely used medium of exchange.
You don’t have to convince anyone to use commodity money. That’s how real money spontaneously emerges out of barter.
guest wrote: “I actually anticipated that challenge.”
And you decided to dodge the question? (ha ha) Bitcoins aren’t a claim on anything, so they can’t be fiduciary media. If I open a business I can believe, through hope, that people give me dollars, but that doesn’t make my business fiduciary media.
“And you decided to dodge the question? (ha ha) ”
Or so it seems …
Until you realize that fiduciary media aren’t claims on anything either.
😉
It’s the *money certificates* that are claims on things; Notes issued in excess of money certificates – fiduciary media – cause misallocations of resources precisely because they are *not* claims, and are created because people will mistakenly believe that they are.
Bitcoins go down on myy watch. Just sayin’.
guest wrote: “Until you realize that fiduciary media aren’t claims on anything either.”
“THUS fiduciary media are claims to the payment of a given sum on demand…”
—Ludwig von Mises, Theory of Money and Credit, p. 278.
Thanks for playing.
That’s an argument from Mises’ claims, rather than argument from Mises’ logic.
Scenario: A bank creates 1 note in excess of specie, and all but 1 are redeemed.
The last note is a claim on what, now?
Answer: nothing.
Say hi to Fetz for me.
guest, you yourself aren’t a claim on real money, either. Did I just prove you are fiduciary media?
I am not a claim on real money, but if someone mistakenly believed that I was, then I’d be trading for the exact reason fiduciary media trades.
Holders of fiduciary media falsely believe that their note is redeemable.
They have to pass on their fiduciary media to “the next sucker” in order to get what money certificates entitle its holders.
(Circumstances do not allow me to continue this thread in a timely fashion, but I appreciate your time and your work.
(You’re a good sport and you’ve always treated me better than any guest account deserves.)