Despite being no fan of bit coin, and despite this article basically defending bit coin, I still think this is an excellent article. I really liked the way it doesn't make the debate as "fiat" vs. non-fiat (as though fiat were a dirty term) but as centralized, opaque fiat vs. decentralized transparent fiat. I've also never read as clear an explanation of bit coin creating currency without creating debt. It's definitely given me something to think about.
Two critiques of the article, however, would be the complete failure to mention the deflationary risks of bit coin. You may agree or disagree with whether that's a problem, but it is one of the biggest, most consistent criticisms of bit coin out there, and it seems a tiny bit negligent not to at least mention it.
Also, the article mentions countries using bit coin as reserve currency to shield them from currency fluctuations. Which would be great if bit coin were super stable, but bit coin has already had a few big crashes. In theory, the predictable nature of bit coin should lead to stability, but in practice, it's behaved more like a tech stock, where no one's sure what it's eventual market value will be. Maybe it will become stable, but I think it's a little early to make plans as though it will.
Still, one doesn't have to agree with an article to get a lot of value out if it. Go Al-Jazeera for providing the most thought provoking article on bit coin I've read.
"I really liked the way it doesn't make the debate as "fiat" vs. non-fiat (as though fiat were a dirty term) but as centralized, opaque fiat vs. decentralized transparent fiat."
But he is plainly wrong about this -- he made up his own definition of 'fiat' which has nothing to do with the commonly accepted meaning:
"...money that derives its value from government regulation or law: the initial value of fiat money is established by government decree."
Bitcoin is simply not a fiat money: it isn't mandated by law that bitcoins have value, instead it is people (markets) who decide that. It's the exact opposite of fiat money.
Maybe he's confused because fiat money is usually ("goldbugs") contrasted on a different axis -- whether or not the money has intrinsic value (market value besides its use as currency), or is exchangeable for something that does. E.g. the gold-backed dollar, or more general commodity money (mostly historic). Commodity money and fiat money are opposites in this regard -- gold/commodity-backed money has intrinsic market value independent of its status as a currency, whereas fiat money is "worthless paper". Bitcoin is like fiat money in that it has no intrinsic value apart from as a currency. But it is not fiat money; and neither is it commodity money.
He doesn't actually say the currency is a fiat currency he just gives his opinion . "I would argue, Bitcoin is a fiat currency."
Also there are three definitions on that page.
> The term fiat money has been defined variously as:
> - any money declared by a government to be legal tender.
> - state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
> - money without intrinsic value.
Under the last definition bitcoin would be easily considered fiat.
Also he could and does debate whether you could consider the system that regulates the bitcoin currency a government which would qualify it under the other definitions.
> Bitcoin is simply not a fiat money: it isn't mandated by law that bitcoins have value, instead it is people (markets) who decide that. It's the exact opposite of fiat money.
It isn't mandated by law the value of any other law what the value of any fiat currency is. The initial value is as you said in your definition but the initial value of bitcoin is defined (the cost to produce a valid block).
Due to its nature Bitcoin is really a special case when trying to categorize it anywhere. I also think the author uses a good definition to draw out the differences.
"Also there are three definitions on that page... Under the last definition bitcoin would be easily considered fiat."
Then I regret citing it, it is wrong. That third definition actually misrepresents its source (Mankiw's Principles of Economics) -- what Mankiw actually says is:
"fiat money: money without intrinsic value that is used as money because of government decree" (emphasis mine)
"Money without intrinsic value is called fiat money. A fiat is simply an order or decree, and fiat money is established as money by government degree..."
"It isn't mandated by law the value of any other law what the value of any fiat currency is."
I meant that fiat money only has value (as opposed to... no value) because it is mandated by law -- you are required to accept it as payment of debt, to pay taxes using it, etc. Sure, what the value is in real terms is a market decision.
>I've also never read as clear an explanation of bit coin creating currency without creating debt. It's definitely given me something to think about.
Yes, that is huge. Debt-backed currency means someone is profiting off the mere existence of the currency, typically the banking system and government and anyone who owns the government bonds backing the currency, but at the expense of everyone else who uses and 'saves' it (that's not really saving).
The given rationalization for that is that a depreciating currency strongly incentivizes people to spend it or invest it instead of hoarding it in their savings accounts, improving economic growth. That's also the argument against a deflationary currency like gold-backed or bitcoin - that the ultimate result is decreased economic activity and growth.
However, that's an argument that grew out of an earlier time, when the world was less connected and dynamic. I suspect that a deflationary currency is much less of problem in our modern world, where economic activity happens at the speed of light and electricity and almost the entire world is integrated into a common market and economy.
In that world there is already huge incentive to spend an invest, and while a deflationary currency would represent a significant change, I don't think economic activity would ground to a halt under a deflationary currenncy.
In fact, the problem we're now seeing in the US and Europe is the opposite - too much incentive for borrowing and spending, not enough incentive for capital formation, eg savings. Too much debt at every level of society, from individuals to sovereign governments. I can't help but wonder if a deflationary currency that appreciates in value over time instead of depreciates would provide a higher bar for spending and investment, and alter that dynamic in favor of savings (which also a form of investment, as banks use savings to make loans).
Instead of US government bonds being the risk-free rate of return, a deflationary currency would be. That alone would be a huge economic shift, and might limit governments' out-of-control spending simply by giving investors a stronger alternative to government bonds. If a deflationary currency appreciates by, say ~3% per year, then government bonds would have to match beat that to attract investors, forcing governments to borrow and spend with more discretion.
Anyway, yes it definitely is something to think about. It's also probably a pure thought experiment, I don't see governments giving up the risk free rate of return status for their bonds any time soon.
The current problem in the Euro is too much disincentive (credit risk) for borrowing - because the borrowings built up in the past (when there was too much incentive). The incentive in the past was because there was a fixed money supply that no country controlled (i.e. a lot like gold or bitcoin) which meant that countries with a surplus (like Germany, exported more than they imported, leading to more currency going in than out) had to find a use for that money so they lent it out.
The austerity that everyone except Germany wants eased is deflation in action. And pretty much every economist agrees that it's disastrous for the countries following those policies; much better would be floating currencies and inflation getting rid of the debt instead.
(In other words, I think you have it almost 100% backwards.)
Technical point: the money supply in the Euro system isn't fixed and has never been fixed at any point in time in the past.
There is an argument that the fixed and, more importantly, uniforminterest rate across the entire zone caused problems.
I personally find the argument even more convincing that it's a wage structure problem. If you look at unit labor costs (essentially wages divided by productivity), then it becomes painfully obvious that Germany has been doing significant wage dumping - their unit labor costs have remained flat, violating the 2% inflation goal.
This caused the trade imbalances that are at the root of the current mess.
The insane thing about this is that certain German[0] economists have always been very vocal about these things -- both the implications of the trade deficit, particularly within the Euro zone, and the wage dumping or wage restraint as it's commonly referred to here.
These were fairly prominent figures and all of this has been part of the local nationwide political dialogue years before there was any debt/banking/Euro crisis. Nothing happened.
[0] And others, everywhere, I'm sure, but I'm making a statement about Germany here.
Debt-backed currency means someone is profiting off the mere existence of the currency
Why do people keep saying this? Ben Bernanke does not pocket the profits he makes off the currency. Almost all profits from printing money go straight to the Treasury.
"But now the Government can print money to monetize their debt--" except almost all credible inflation forecasts indicate the Fed isn't printing enough money, so I don't think we need to worry about this.
As for the banking system, the service charge on my bank account suggests they are not doing very well on the whole profits-from-holding-money thing.
You said you had never read as clear of an explanation... May I ask you to read my own short article explaining Bitcoin?: http://blog.zorinaq.com/?e=66 I think explaining Bitcoin is quite hard in itself, so I am always interested in getting feedback for this article.
> Two critiques of the article, however, would be the complete failure to mention the deflationary risks of bit coin. You may agree or disagree with whether that's a problem, but it is one of the biggest, most consistent criticisms of bit coin out there, and it seems a tiny bit negligent not to at least mention it.
One point to consider is, that there is a free competition between different cryptocurrencies. There already exists some more inflationary bitcoin clones, and probably more will come. The markets will choose the currency, which they think is the best for them.
"The markets will choose the currency, which they think is the best for them."
This is true, but that doesn't mean the currency will actually be better for them. Deflationary currencies are attractive to sellers and employees. They will choose them if given the option. The ill economic effects of deflationary currencies have been demonstrated.
Your phrasing seems to indicate that you believe that market-based outcomes are always ideal outcomes. I think that is incorrect.
> The ill economic effects of deflationary currencies have been demonstrated.
I'd be interested to know what you are thinking of here (as evidence). I view that claim with pretty strong skepticism. But I'd be curious to see the best argument/evidence for it.
Remember though that there are two sides to every transaction. Given a consistently deflationary currency buyers become increasingly unlikely to be willing to offer said currency as payment to sellers. Thus the liquidity of the currency will tend to dry up, especially when it is does not have legal tender status. In a single currency market this is disastrous, in a free currency market you just start using something else.
Of course, the value of the now illiquid currency will eventually become highly volatile likely ending in a crash. Hopefully after this happens several times most people would get the idea that investment in such things is not a good plan.
Additionally, I think Bitcoin advocates argue that since the money growth rate of Bitcoin is subject to a open and known process, deflationary trends will be known and expected as well. Because the deflation will be expected, there won't be the traditional negative effects associated with deflation.
Bitcoin is like money, I mean real money, so there is nothing new and better with it. The problem with money is how the bankers corrupted it for their own profit. Banks created virtual money with credits and this speculation bubble is now exploding. Some countries try to stop it by creating more depths.
There is currently nothing that could stop anyone to provide bitcoin credits and make paper money for bitcoins. This is the mistake that should be avoided. If bitcoin really takes off, than this will be the real challenge we will be facing.
It's the paper money that ruined the system where states could print them at will. They decided to stop printing money to stop inflation, but then banks created money through credits and turned people, cities and countries to slaves. Worse than all, it's now the bankers who define the rules, not the countries. So they bent it to their own adventage. They are so greedy and selfish that they didn't care if it created a bubble that will explode soon or later. Bailing out banks is the most stupid thing we could do in such situation. We're just on for another tour on the carrousel.
I agree that it would be foolish to use bitcoin as a reserve currency today, but I find it interesting that it sets a higher bound on the instability that countries will need to withstand.
Interestingly, while search volume for 'fiat' kicks-off at around the same time as bitcoin, media references start ramping up some 2.5 years earlier. Any idea why?
This is really the problem that all these discussions boil down to: definition of terms. From an operational perspective, I would claim that the money we have these days is as real as it gets.
Consider, for example, the claim in the article that our current monetary system requires trust. But is that really the case? I claim that the current money of the state is valuable to me and everybody else, no trust required.
Here's a simple line of thought to support this claim: My landlord wants the rent paid in the money of the state. This makes the money of the state valuable to me. I don't need to trust anybody or anything for this to be true.
Two critiques of the article, however, would be the complete failure to mention the deflationary risks of bit coin. You may agree or disagree with whether that's a problem, but it is one of the biggest, most consistent criticisms of bit coin out there, and it seems a tiny bit negligent not to at least mention it.
Also, the article mentions countries using bit coin as reserve currency to shield them from currency fluctuations. Which would be great if bit coin were super stable, but bit coin has already had a few big crashes. In theory, the predictable nature of bit coin should lead to stability, but in practice, it's behaved more like a tech stock, where no one's sure what it's eventual market value will be. Maybe it will become stable, but I think it's a little early to make plans as though it will.
Still, one doesn't have to agree with an article to get a lot of value out if it. Go Al-Jazeera for providing the most thought provoking article on bit coin I've read.