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Journal: In regards to Tsotha's comments on a Bitcoin Legitimacy Threat 1

Journal by wichawa

Link to Tsotha's comments, and my replies:

http://slashdot.org/comments.pl?sid=3578327&cid=43309761

Why am I responding here in a Journal? Because I was not able to login between my last comment and the time when the comments were closed for that archived article. Moving on, here is a question I posted for Tsotha in that linked thread above:

How is the commodity backed system a better system (as you suggest with your initial comment in this reply line) than the fiat system, and how does it provide for more socially optimal outcomes, and why is this evidence that a proposal like bitcoin should be considered for mass adoption?

Tsotha's reply:

Oh, that's an easy answer. A fractional reserve system like the one we have in the US should provide for more socially optimal outcomes, provided it's managed correctly. Ideally money is just a medium of exchange, and forcing individuals and businesses to include deflation into their financial planning just provides opportunities for inefficiency. Well, I guess deflation is the wrong word here, since the money supply isn't actually shrinking. But you know what I mean. A negative CPI. In theory with a fiat currency you could buy a gallon of milk for your mother at age 12 for some amount of money and buy a similar (but not the same, hopefully) gallon of milk at age 72 for the same amount of money. Because the money supply is expanding when the economy grows and shrinking when the economy shrinks. So understand I don't have anything against a debt-backed currency in theory.

But. It seems to be impossible for democracies (most likely any from of government) to keep political and fiscal considerations from eventually dominating currency management. It's just too tempting to print money when you get into a fiscal bind, because there are a whole lot of people out there who don't understand that amounts to a tax on whoever is holding the currency. So I save money for retirement and every year the money I save is worth a little less than the day I saved it. That would be okay, I suppose, if I could make safe investments that matched the increase in cost of living, but even if I can the government is going to tax away part of that money, which is really a tax on my principle as the buying power of the money hasn't changed.

As far as bitcoins go in particular, I'm not actually advocating anything. They seem like a weird hybrid between a fiat currency and one based on commodities, and I don't trust my understanding of the math well enough to be sure there's no way to make more. And over the last few years it seems anything but stable. So I rather see a return to the gold standard, which I understand has its flaws. I just think its flaws are less serious than those of a fiat currency.

Here is my reply to Tsotha:

Oh, that's an easy answer.

No, it is not an easy answer. And your answer kind of totally skirts the question.

A fractional reserve system like the one we have in the US should provide for more socially optimal outcomes, provided it's managed correctly. Ideally money is just a medium of exchange,....

I asked about the differences between fiat money and commodity backed money, and made no reference to the current fractional reserve system like that of the USA. A fractional reserve system can exist for BOTH fiat currency AND a commodity-backed currency.

But ideally yes, money would just be a medium of exchange. But throughout history it has empirically been more than that, even more so under a commodity backed system.

By definition money is a medium of exchange AND a store of value AND a unit of account. To suggest that it is only one of those three, and then to suggest a discarded system (the commodity backed system) would provide a better social optimal outcome than the current system is fallacious as it ignores what money actually is, versus what you would like it to be. Under the commodity backed system (as opposed to the fiat system), the risk for people holding money as a store of value only increases.

..... and forcing individuals and businesses to include deflation into their financial planning just provides opportunities for inefficiency. Well, I guess deflation is the wrong word here, since the money supply isn't actually shrinking. But you know what I mean. A negative CPI.

Are you referring to deflation under a fiat currency or commodity-backed currency? If so, how is this an example of "providing opportunities for inefficiency"?

In theory with a fiat currency you could buy a gallon of milk for your mother at age 12 for some amount of money and buy a similar (but not the same, hopefully) gallon of milk at age 72 for the same amount of money.

In theory, it has been shown more optimal to have the money supply best reflect the values of all the goods in the economy. Thus, it would not necessarily be a good thing if a gallon of milk cost the same in 2013 as in 2053 as this would probably imply that no new products, services, or efficiencies have been introduced to the economy and that the utopia has become stagnant.

Why do you think inflation is a bad thing? Is it bad to compare the value of a chocolate bar at 1$ to a nuclear reactor at $10000000000000000000? I mean sure, we could inflate our currency by adding decimals like Bitcoin will inevitably do, but round numbers are cool too, no?

So understand I don't have anything against a debt-backed currency in theory.

I mean if you have spent any time studying economics, which you clearly have, there is no way you can completely disagree with a fiat currency.

But. It seems to be impossible for democracies (most likely any from of government) to keep political and fiscal considerations from eventually dominating currency management.

We literally vote people into office in order to appoint people to manage our currency for us, so of course it is impossible? How is this a bad thing? Obviously you would expect a conservative politician to appoint a conservative monetary base manager, and a liberal politician to do vice versa. If you don't like who your elected officials are appointing and how they interact with the other branches of government, you should probably vote in new officials.

It's just too tempting to print money when you get into a fiscal bind, because there are a whole lot of people out there who don't understand that amounts to a tax on whoever is holding the currency.

Which western central bank has printed money over the last many years? Please do not cite Zimbabwe, as they have literally done this, and they are not what I would call "western". There were many questionable tactics employed by both the US government and the Central Bank during the 2008 recession, none of which involved printing money.

So I save money for retirement and every year the money I save is worth a little less than the day I saved it. That would be okay, I suppose, if I could make safe investments that matched the increase in cost of living, but even if I can the government is going to tax away part of that money, which is really a tax on my principle as the buying power of the money hasn't changed.

Have you heard of a "savings account"? If you are burying your money under your mattress, you should expect the value of said money to decrease at the rate of inflation. If you are making personal investments with your money, you should expect to earn a return that is less than the return offered by professionals that offer the same service. If you do not like the tax rate on your savings, you should elect new officials.

In canada, we enacted Tax Free Savings Accounts (TFSA's). Once again, this is not a problem with currency, this is a problem with your elected officials. Don't like how they are taxing you? Get new ones.

It is only like a tax on your principle if you are an idiot and bury your money under your mattress. The inflation rate is stated and is publicly available information. You can evaluate the purchasing power of the products within your own habits for yourself if you want, if you do not trust what the government is stating. If you are not being a wise investor with your own money and trusting it with those that are professionals in this respect, you should expect that money under your mattress to lose value at the rate of inflation, rather than gain small increments OVER the rate of inflation.

As far as bitcoins go in particular, I'm not actually advocating anything. They seem like a weird hybrid between a fiat currency and one based on commodities, and I don't trust my understanding of the math well enough to be sure there's no way to make more. And over the last few years it seems anything but stable. So I rather see a return to the gold standard, which I understand has its flaws. I just think its flaws are less serious than those of a fiat currency.

Well, bitcoin is a pyramid scheme where each new user increases the rate at which each previous user has the opportunity to earn a bitcoin. Even if I could be convinced that the rate at which the bitcoins will be produced is offset by the drop in percentage share of computational power of the previously existing users I would merely argue this: larger shareholders now have every incentive to increase their computational power share to previous levels as each new user simply validates the pyramid structure, and the larger shareholders still remain larger shareholder despite the additions of new computers to the system. Sure someone can come in and tip the computational power scales in their favour, but ultimately this is a system that favours the man with the most computational power. Once all the bitcoins in a chain are rewarded, they can only be divisible by the people that already own the bitcoins.

And this is the exact same problem with the commodity backed system. Ye who owns the commodity owns the power. As Paul Krugman states (on the Wiki entry for bitcoin itself): "What we want from a monetary system isnâ(TM)t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And thatâ(TM)s not at all what is happening in [bitcoin]."

This, once again, is also the primary problem with the commodity-back (or gold standard) system.

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