Bitcoin is libertarian bit nonsense

The Thinker by Rodin

Are you intrigued by Bitcoin? It’s a digital currency much in the news these days. It even got a hearing on Capitol Hill last month. Surprisingly the foundation overseeing Bitcoin came out relatively unscathed. Some places are accepting Bitcoins as payment for actual goods and services. They do so on the assumption the currency has value. Like any other currency it has value because some people assert it has value.

Which raises the question, what is its value? There are clearly things you can do with Bitcoin that are convenient. It’s a sort of digital cash for our electronic age. Only it’s not really cash. Real cash doesn’t leave fingerprints. You make a Bitcoin transaction and the transaction is recorded in the coin itself.

If there is value in Bitcoin, maybe it is from the faith we place in its math. There is not much we trust anymore, but you can still trust math, and Bitcoin depends on math, not to mention encryption algorithms, to assert its value. The number of Bitcoins has a finite limit because of the power of math and algorithms. Each attempt to mint a new Bitcoin requires lots of computers to spend lots of time and use lots of energy. For all its electronic novelty, it’s hardly an environmentally friendly currency. In fact, it’s bad for the environment.

You can’t say that about gold. Granted, the process of getting gold out of the ground is often bad for the environment, but once you have it, there it is, probably to sit in highly protected bank vaults and never to be actually moved or for that matter seen. A Bitcoin is entirely virtual but it depends on lots of computer hardware to mint and to assert its value. You won’t be creating one of these with a pad of paper and a slide rule. In fact, a Bitcoin is entirely dependent on computers and high speed networks. No wonder then that it was abruptly devalued last week when China blocked Bitcoin transactions. Keep it from being used in the world’s most populous country and it has lot less utility. Of course, it’s useless to anyone without a computer or some sort of digital device, not to mention some network so you can trade the currency. So it’s not even universal. You can’t say that about the U.S. dollar.

The larger question is whether a currency built on nothing but math really can have value. It does have value at the moment, as I can actually trade Bitcoins for U.S. dollars, which in my country is what everyone accepts as currency. In the long run though I think Bitcoins are going to be worthless. I don’t plan to own any of them and maybe I can make a case why you shouldn’t either.

First, there is whether counterfeit Bitcoins can be created. New ones can be minted if you have the computer horsepower and these are “legal”, but if they can be created for virtually no computer time then they would be counterfeit. Call me suspicious but I bet either the NSA has already figured out a way to hack it or will soon. In short, to trust a Bitcoin you must buy into its assumption that it can’t be hacked. Since the dawn of the computer age, hackers have demonstrated their ability to hack anything. They love the challenge. It’s reasonable to believe that Bitcoin is going to be hacked one of these days.

Second, there’s the question of what its value represents. I’ve discussed the value of money before. My conclusion is that money essentially represents faith that the country coining the currency will remain solvent and viable. I based this conclusion on the observation that currency value falls whenever these assumptions are shaken. Having a currency based on the gold standard doesn’t seem to make any difference, as the United States has been off the gold standard since the 1970s. Printing new currency doesn’t seem to be that big a deal either, providing the new currency is used to acquire assets of value. This is what the Federal Reserve has been doing since the Great Recession: creating money (none of it actually printed, apparently) and using it to buy long term securities like mortgage-backed securities. Curiously, just printing money is not inflationary when it is used to buy tangible goods. This is providing that the institution printing the money is trusted, and the Federal Reserve is trusted. In any event, investors can value or devalue a currency based on examining its monetary system and the country’s economy. With Bitcoins, you can’t do this. It is backed by no country, which is its appeal to its adherents.

What is Bitcoin really about then? It’s about a political idea; more specifically it’s about libertarianism. It’s trying to be a means by which libertarianism becomes institutionalized. If you are not familiar with libertarianism, it’s all about freedom, buyer beware and minimal (and ideally no) government. Libertarians (at least the committed ones) are vesting their wealth in Bitcoins because it’s how they show loyalty to the cause. They want money to be frictionless and outside governmental control. Arguably, Bitcoin does a good job with this, providing buyers and sellers will accept it as having value.

But libertarianism is an idea, not a thing. Libertarianism is really more of a verb than a noun. A currency though has to be based on something real. The U.S. dollar is essentially backed up by the collective wealth of all of us who possess dollars, or assets valued in dollars, or really any property within the United States. It’s based on something tangible. You buy a house in dollars instead of Bitcoins because everyone in the transaction has faith that those dollars mean something. This is because everyone else is trading in dollars too to buy real goods and services. If the U.S. dollar gets too low, there are things we can do about it. We can petition Congress or the White House to take action. There is no one to go to to complain about the sinking value of your Bitcoins. Assuming the currency cannot be counterfeited, its only value is its finiteness, enforced by math and increasingly expensive computational processes to make new coins. That’s it. As those libertarians say, caveat emptor (buyer beware). Bitcoin buyers, caveat emptor!

This tells me something important: Bitcoin is a bogus currency, at least in the long term. Yes, you can buy stuff with it now, but only from a very limited number of sellers: those who have faith in the idea of a libertarian currency. It’s obvious to me that libertarianism is just not doable as a sustainable way of governing. I have no faith it in whatsoever because its philosophical underpinnings do not actually work in the real world.

I would like to see it in Glenn Beck’s libertarian community, however, if it ever gets built. One thing is for sure, no one is going to build it for Bitcoins. They are going to demand U.S. dollars.

The Fed giveth and the Fed taketh

The Thinker by Rodin

There are times when I tend to agree with Rep. Ron Paul (R-TX), the libertarian who argues that we should abolish the Federal Reserve. Granted, we created it to avoid banking crises in general (though it didn’t seem to stop the 2008 crash) and to even out the economic cycles for the American people. Of course, the big newsworthy thing that the Fed does is it sets interest rates. It has made interest rates so artificially low for so long that a lot of people are taking it on the chin. Others, principally well-capitalized debtors like me, stand to benefit from these artificially low interest rates.

Rates are low to stimulate the economy, or so Fed thinking goes. I have to wonder whether if rates were a few points higher the economy would really be that worse off, because our “recovery” is anemic at best. On the other hand, if interest rates were a few points higher, perhaps people would be more enthusiastic about putting money into savings, money market funds and CDs, spurred on by the higher rates of return for these relatively safe investments. Right now, due to inflation, savers are effectively losing money. While protected from large swings in the value of their capital, they are doing so at the cost of losing money on the deal or, at best, coming slightly above inflation.

Of course, the Fed is doing this deliberately. They want you to feel the pain of low interest rates so you will invest money in riskier endeavors instead, like stocks, bonds and mutual funds. This is based on the theory there that growth must come from the corporate world. Until recently many investors were happy to do so until, as I predicted, they finally woke up and realized their investments were way overvalued. This caused markets to decline precipitously and for investors to seek safety in U.S. Treasury Bills, now downgraded by Standard & Poors to AA+, but still good enough for Wall Street. Wisdom on Wall Street is now that it is better to lose a little bit of money by investing in Uncle Sam than a whole lot of money on a turbulent economy with few prospects of short-term gains.

In any economy there are going to be winners and losers. By deciding which cards it was going to play, the Fed has effectively picked winners and losers. In particular, it has disenfranchised savers. Specifically, senior citizens now are taking it on the chin, at least the smart ones. Those senior citizens who followed the typical strategy of selling stocks and mutual funds as they close in on retirement and using the proceeds to buy low risk CDs, Treasury Bills and the like have discovered their expectation of a reasonable income from interest on “safe” securities means essentially no interest on them, which means those investments really are not a good investment.

Many retired couples anticipated hundreds of dollars a month in interest income off these “safe” securities, figuring the interest would help pay some bills in their old age. Without the income, the Fed has essentially lowered their standard of living. Essentially they are paying the price so that five years ago brokerages could write shoddy homes loans. Effectively, we transferred wealth from prudent savers to reckless corporations in the shoddy mortgage writing business.

It is true that when these seniors sold their stocks and funds to buy these securities, they essentially locked in the gains for these investments made over many years. However, many seniors, particularly the well-capitalized ones, were hoping to live off the interest of these securities and keep the principle to pass it on to relatives. Instead, they are drawing down their savings to live, and at a greater rate than they anticipated. It’s a wonder they do not go down to the Fed en masse to protest, because arguably they are getting shafted. Long-standing economic rules were pulled like a rug from under their feet.

Americans in general are paying down debt and stuffing money in savings, but they too are getting shafted. Because of inflation, they are also losing money on their savings, and saving money is supposed to be a virtue. While it will be nice to have a stash of ready capital on hand when future unplanned expenses come up, they will be penalized for the privilege. This is their reward for paying down their credit card balances? This is the reward for being prudent?

Who is winning with interest rates so cheap? You would think it would be small businesses, but with the economy so fragile, they are finding it hard to get loans. If they get them at all, unless their credit is sterling, they are probably paying more than they should because of the risky economy. Of course, these days larger corporations often don’t need to borrow any money. Their bank accounts are stuffed, thank you very much, because they have become so efficient from laying off people or getting their labor at a discount. Even though business is down, thanks to these efficiencies coming at the expense of others, profits are up. Many companies are taking advantage of their hordes of cash and sagging stock prices to buy up shares of their own company at a discount. That’s good for them, but arguably it does nothing to stimulate the economy.

The winners are also people like me who are well capitalized, have an asset with plenty of equity and a steady job. My financial adviser wants me to refinance our mortgage. It seemed sort of pointless to go through the expense with the balance down to about $66K. Moreover, we already refinanced it once before. Thanks to his badgering, I called the credit union today to run the numbers. I found I could turn my 30-year loan into a 10-year loan, drop my interest rate four percent for about $2300 in closing costs. The effect would to drop my monthly payment $400. Duh! I should have done this months ago! It’s great for me to effectively have another $4800 a year in unearned income a year. But even someone who never studied finance like me knows that borrowing money at a 2.875% is crazy and artificially low. I have to wonder if home loan interest rates will ever be this low again. I figure someone will get shafted by refinancing our home loan.

One thing is for sure: I am not stimulating the economy, except for making business for mortgage processors. Maybe I am shafting senior citizens from getting decent interest rates. All I know is with money so artificially cheap that I’d be a fool not to grab it. So maybe I want the Federal Reserve to survive after all, at least as long as I can stay a financial winner.

The turmoil in the markets also means that those with capital and a long-term vision should be bargain hunting in the stock market. Alas, as my mortgage indicates I am still a debtor, but if I had spare cash lying around I’d be buying undervalued stocks. Maybe once my mortgage payment is reduced $400 a month, I should invest the difference in stocks. The future is always impossible to predict, but it’s not hard to predict that interest rates will stay at rock bottom rates for years to come. It’s a pretty good bet that we have at least a few more years of a sour economy as well.