It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Given how poorly states like California and Illinois have funded the pension funds for their own employees, one would think that this would stop dead in its tracks any plan to have the government assist in managing private sector funds too. The spate of recent activity, however, suggests otherwise.
The financial world is plodding along like a drunken sailor avoiding debt collectors by keeping no cash in his wallet. It’s not the kind of calm that’s going to last or end well. But the storm will have to wait until after the Olympics.What a game! We’ve never watched ice hockey closely before. But watching […]
“When they come for my gun, they will have to pry it out of my cold, dead hands,” is a common refrain I often hear from the Neo-Cons when there is a threat, credible or otherwise, that the U.S. government is going to take their firearms.And, when I hear this crazy talk, I agree with […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Amidst all the revelations about how the American people, many of whom are absolutely convinced they live in a free society, have their telephone calls, emails, website visits, and who knows what else under surveillance by their own government, let’s not forget the massive infringements on financial privacy that have gone on for decades.Consider, for […]
Image: ShutterstockBitInstant CEO Charlie Shrem, along with alleged co-conspirator Robert Faiella, was arrested by federal authorities last week for allegedly laundering more than $1 million worth of Bitcoins. This is a tiny amount compared to the largest drug-and-terrorism money laundering case ever. Yet when British bank HSBC was found guilty in 2012 of laundering billions, […]
The exercise had an awesome name, inspired by the movies: “Quantum Dawn 2.”On July 18, scads of U.S. banks, stock exchanges and government agencies took part in a digital fire drill — a practice run in the event all of Wall Street came under massive cyberattack.This isn’t the first time banks have come under an […]
The faces of the Detroit bankruptcy are the thousands of pensioners whose promised benefits are suddenly part of the restructure negotiation. When Motown filed for Chapter 9 last July, the city had $11.5 billion in unsecured liabilities. The vast majority of this was pension and health care benefits owed to retired city employees.The images of […]
So you’ve maneuvered the Obamacare website, plugged in your top-secret information and found out how much you are forced to pay to avoid a fine.And for some of you, it turns out you qualify for a government subsidy — making the premium sound like a bargain. But signing on that line to accept the government’s […]
The Largest Company in History:“The United States Corporation of Government (USCOG)”I follow global social and commercial networks, looking for entrepreneurial opportunities.Innovation surges when industry and government models change. Buggy whips. Landline phones. Railroads. The Soviet Union. Apartheid South Africa. All marked social and commercial innovation, both bad and good.We are witnessing a new form of […]
We’d like to give the banks in Australia some credit. They’ve finally gone and done it. They have caught up with 1960s technology. They’ve figured out how to use PIN numbers.How to only use PIN numbers, that is. They’re considering scrapping signatures on credit cards to cut down on fraud. Apparently, having to verify your […]
We put in a good-citizen call to the SEC the other day.“There’s a massive scheme to manipulate stock prices,” we told the friendly agent.“I have to tell you that your call is being monitored so that we can better serve the public,” he replied.“Oh, don’t worry about that. The NSA is tapping our call anyway.”“Are […]
Bitcoins are largely considered digital currency (or “crypto currency”) so you’d expect it to be treated like currency on a retail web site. But the Internal Revenue Service might not think so.
Politicians — elected officials — are street smart rather than book smart.If you care about influencing government policy it helps to know how they think.Forbes contributor Nathan Lewis argues that:“Too much is done today on the oral tradition. That is, literally, what it is. In this post-Gutenberg age, we have some better alternatives.“Thus, we need […]
Bitcoin has been making headlines for months now. Extreme price fluctuations have sparked a vigorous debate: Is it a currency or a scam? Is Bitcoin viable in the long-term, or are we witnessing a bubble waiting to burst?The answers to these questions are simple: Yes, Bitcoin is a currency, but we cannot know if it […]
The Silk Road was an undercover website where you could buy or sell illegal goods — drugs mainly. I believe passports were changing hands for about $6,000, and I understand weapons were also sold, but that was ceased in response to the spate of shootings in the U.S. over the summer. The essence of the […]
The market has selected different things as money throughout history. Some of these items have served as money in isolated places for specific periods of time — for instance, cigarettes in prisoner-of-war camps. Cigarettes continue to be a currency in prisons if allowed, but if not, according to Wikipedia, “postage stamps have become a more […]
[Ed. Note: This article originally published on Jan. 24, 2013]Stocks up. Gold down. Bitcoin… waaay up.The S&P 500 busted through the 1,500 mark this morning. Stocks haven’t been this expensive since 2007… right before they got a whole lot cheaper… for a whole lot longer. Gold, meanwhile, dipped a tad. This, despite central bankers of […]
Now, this is sheer entertainment. The Chicago branch of the Federal Reserve has addressed the great monetary question of our day. A researcher has taken a detailed look at the prospects for market-based crypto-currency, with a special focus on Bitcoin. It concludes that Bitcoin is not a viable replacement for the dollar. The report includes […]
The standard version of how money came to be goes like this: First, there was barter. (A handful of nails for a pint of ale!) Then, along came various forms of money. An evolutionary derby eventually crowned gold and silver as the supreme money. And finally, credit (or debt) was born. This is the apex […]
2013 represents another turning point in the demise of the American Empire. If you view it in economic (rather than ethical or moral) terms, the high water mark of Empire was probably in the late 1990s.But the Internet bubble and bust marked an important turning point. It coincided with the birth of the euro, a […]
It was a wild ride last week in the world of the Deep Web, that section of the Internet that requires special tools to access. The feds took down the site called Silk Road and claim to have arrested its founder and administrator. The news streams were filled with lurid tales of derring-do in this […]
My community in the Deep South prides itself on friendship, community feeling, and an overall happy spirit. So it was a bit strange for all of this to be utterly smashed and obliterated in the course of a few calamitous weeks in which friend turned against friend, colleagues became antagonists and enemies, and families were […]
A new assessment of state pension obligations suggests the problem is even worse than it already appears.How much worse?EMPTY COOKIE JAR: Pension liabilities are worse than many states’ official figures indicate.Using a more conservative method of accounting for financial gains in the marketplace, there is a $4.1 trillion gap between assets and liabilities — known […]
I dreamed I saw Bernard von NotHaus, alive as you or me.Said I, “But Bernard, you’ve been jailed two years.”“I never was,” said he.Bernard has been the called the Rosa Parks of the alternative money movement. More than 10 years ago, he had this idea that he would make his own money — not the […]
Many people complain about government control of currency, but only a few do something about it. I’m not talking about movements to “audit the Fed” and such. I’m talking about real innovation that makes an end run around the government’s iron grip on the monetary system.
A few of us old folks might like to return to the days of slapping a silver dollar on the bar for a shot of whiskey, but the younger techno-savvy generation sees paying for their Negroni cocktail with virtual currency from their hand-held device. To serve this market, a new world of virtual currencies has popped up spontaneously.
In a debate, Mitt Romney said, “You couldn’t have people opening up banks in their garage and making loans.”
Really? Some people are thinking precisely along these lines and even going further to create new units of accounting.
You might think these people are crazy. After all, to be a proper money, a currency must have a nonmonetary value, a high value per unit weight, a fairly stable supply and be divisible, durable, recognizable, and homogeneous. Gold and silver fit the bill perfectly. But does that mean something else (or a variety of things) can’t?
Money develops from being the most marketable good that in turn is used for indirect trade. Historically, that has been gold and silver. However, governments have worked very hard to demonetize gold and silver with taxes on precious metals and legal tender laws. And while a few people swear by storing their wealth in gold and silver, in relation to all other financial assets, the percentage of portfolios invested in precious metals is only 1%.
The idea that government is going to re-shackle its currency to gold anytime soon, when the only way federal governments are staying in business is with an unfettered printing press, is naive. Governments always have driven and will keep driving the value of their currencies to the value of the paper. It may take decades, it may take centuries, but it will happen eventually.
The answer to the currency question may not be to reform government in a way that it can’t reasonably be reformed, but to turn loose entrepreneurial genius to solve the problem and create a quality product. There are plenty of government roadblocks, but every new innovation encounters government resistance. Entrepreneurs persevere. However, this is a particularly risky area. There are currency entrepreneurs sitting in jail for competing with the government.
In 2009, Japanese programmer “Satoshi Nakamoto” (not his real name) was designing and implementing Bitcoin. It’s not for the faint of heart. It’s proven to be highly volatile. But it’s also proven to be very useful in a digital age.
Some people in the free-market community don’t know what to think of Bitcoin and have dismissed it. They say no currency can exist that doesn’t have a prior root in physical commodity.
That is because, as Robert Murphy summarized Ludwig von Mises: “We can trace the purchasing power of money back through time until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained.”
The naysayers contend Bitcoins never had a nonmonetary commodity value. The case for it is then dismissed without thought or argument. However, Mises built his “regression theorem” on the work of Carl Menger, the father of Austrian economics and subjective value.
In Menger’s view, economizing individuals constantly look to make their lives better through trade. These individuals trade less tradable goods for more tradeable goods. What makes goods more tradeable, Menger emphasizes, is custom in a particular locale.
“But the actual performance of exchange operations of this kind presupposes a knowledge of their interest on the part of economizing individuals,” Menger writes. But Menger goes on to explain that not all individuals gain this knowledge all at once. A small number of people recognize the marketability of certain goods before most others.
These might be considered currency entrepreneurs. They anticipate consumer needs and demands, and as is the case with any other good or service, these entrepreneurs recognized more salable goods before the majority of people.
“Since there is no better way in which men can become enlightened about their economic interests than by observation of the economic success of those who employ the correct means of achieving their ends, it is evident that nothing favored the rise of money so much as the long-practiced and economically profitable acceptance of eminently saleable commodities in exchange for all others by the most discerning and most capable economizing individuals.”
For example, cattle were, at one time, the most saleable commodity and were thus considered money. Although cattle money sounds unwieldy, the Greeks and the Arabs were both on the cattle standard. This currency had four legs that could move itself, and grass was everywhere, so feeding it was inexpensive.
But then the division of labor led to the formation of cities, and the practicality of cattle money was over. Cattle were no longer marketable enough to be money. Cattle still had value, but, “They ceased to be the most saleable of commodities, the economic form of money, and finally ceased to be money at all,” Menger explains.
Then began the use of metals as money: Copper, brass and iron, and then silver and gold.
But Menger was quick to point out that various goods served as money in different locales.
“Thus money presents itself to us, in its special locally and temporally different forms, not as the result of an agreement, legislative compulsion, or mere chance, but as the natural product of differences in the economic situation of different peoples at the same time, or of the same people in different periods of their history.”
So while people contend that money must be this or must be that, or come from here, or evolve from there, Menger, the father of the Austrian school, seems to leave it up to the market. When a money becomes uneconomic to use, it loses its marketability and ceases to be money. Other marketable goods emerge as money. It’s happened throughout history and likely will continue, despite government wanting to freeze the world in place to its liking.
Which brings us back to Bitcoin, what the European Central Bank (ECB) calls in its latest report “the most successful — and probably most controversial — virtual currency scheme to date.”
Ironically, while some economists are pooh-poohing Bitcoin, the ECB devotes some of their lengthy report to the idea that the Austrian school of economics provides the theoretical roots for the virtual currency. The business cycle theory of Mises, Hayek and Bohm-Bawerk is explained in the report and Hayek’s Denationalisation of Money is mentioned.
The report writers indicate that Bitcoin supporters see the virtual currency as a starting point for ending central bank money monopolies. Like Austrians, they criticize the fractional-reserve banking system and see the scheme as inspired by the classic gold standard.
Bitcoins are already used on a global basis. They can be traded for all sorts of products, both material and virtual. Bitcoins are divisible to eight decimal places and thus can be used for any size or type of transaction.
Bitcoins are not pegged to any government currency and there is no central clearinghouse or monetary authority. Its exchange rate is determined by supply and demand through the several exchange platforms that operate in real time. Bitcoin is based on a decentralized peer-to-peer network. There are no financial institutions involved. Bitcoin’s users take care of these tasks themselves.
Additional Bitcoin supply can only be created by “miners” solving specific mathematical problems. There are somewhere around 10 million Bitcoins currently in existence, and more will be released until a total of 21 million have been created by the year 2140. According to Bitcoin’s creator (whomever he or she is), mining on Bitcoin provides incentives to be honest:
“If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or by using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth”.
The ECB’s report explains that Bitcoin supply is designed to grow in a predictable fashion. “The algorithms to be solved (i.e., the new blocks to be discovered) in order to receive newly created Bitcoins become more and more complex (more computing resources are needed).”
This steady supply increase is to avoid inflation (decrease in the value of Bitcoins) and business cycles caused when monetary authorities rapidly expand money supplies.
Bitcoin has become the currency of the online black market. For instance, The Silk Road (the Amazon of the illegal drug trade that can only be accessed through private networks using the IP scrambling service called Tor) only accepts payments in Bitcoin. However, as the ECB report points out, there are only about 10,000 Bitcoin users, and the market is illiquid and immature.
So why does the ECB give a damn about Bitcoin and other virtual currencies? The central bankers are worried that they are not regulated or closely supervised, that they could represent a challenge for public authorities and that they could have a negative impact on the reputation of central banks.
At the same time, the report makes the point that “these schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers.”
The report says big players in the financial services arena are purchasing companies in the virtual payments space. VISA acquired PlaySpan Inc., a company with a payment platform that handles transactions for digital goods.
American Express (Amex) purchased Sometrics, a company “that helps video game makers establish virtual currencies and… plans to build a virtual currency platform in other industries, taking advantage of its merchant relationships.”
This would dovetail with American Express’ entry into the prepaid credit card business. Banking industry insiders are upset with Amex and Wal-Mart, that also is offering prepaid cards, because these prepaid accounts would amount to uninsured deposits, according to Andrew Kahr, who wrote a scathing piece on the issue for American Banker.
Kahr rips into the idea with this analogy:
“To provide even lower ‘discount prices,’ should Wal-Mart rent decaying buildings that don’t satisfy local fire laws and building codes — and offer still better deals to consumers? And why should Walmart have to honor the national minimum wage law, any more than Amex honors state banking statutes? With Bluebird, Amex can already violate both the Bank Holding Company Act and many state banking statues.”
Kahr is implying that regulated fractionalized banking is safe and sound, while prepaid cards provided by huge companies like Amex and Wal-Mart is a shady scheme set up to rip off consumers. The fact is, in the case of IndyMac, panicked customers forced regulators to close the S&L by withdrawing only 7% of the huge S&L’s deposits. It was about the same for WaMu and Wachovia when regulators engineered sales of those banks being run on. Bitcoin supporters, unlike the general public, are well aware of fractionalized banking’s fragility.
Maybe what the banking industry is really afraid of is the Amexes and Wal-Marts of the world creating their own currencies and banking systems. Wal-Mart has tried to get approval to open a bank for years, and bankers have successfully stopped the retail giant for competing with them.
However, prepaid credit cards might be just the first step toward Wal-Mart issuing their own currency — Marts — that might initially be used only for purchases in Wal-Mart stores. But over time, it’s not hard to imagine Marts being traded all over town and easily converted to dollars, pesos, Yuan, or other currencies traded where Wal-Mart has stores.
Governments are destroying their currencies, and businesses know it. Entrepreneurs won’t just stand by and theorize. They’re doing something. They recognize a market opportunity. The banking industry realizes it. As Mr. Kahr concluded his article that calls for an end to all uninsured deposits: “Otherwise, we might have an unregulated Facebook or Google of payments, even PayPal, quickly becoming both highly vulnerable and TBTF. (It could actually be run by someone wearing a hoodie, without tie or even white shirt!)”
Here at LFB, we don’t know what tomorrow’s money will be. Digits and computer algorithms? Silver and gold coins engraved with someone wearing a hoodie, perhaps? What we know for sure is that we’re rooting for enterprising entrepreneurs to give the government a run for their money in the money business. Watch this space.