Tuesday, April 23, 2013

The Fiat Emperor Has No Clothes

By Jon Matonis
Forbes
Thursday, April 18, 2013

http://www.forbes.com/sites/jonmatonis/2013/04/18/the-fiat-emperor-has-no-clothes/

A piece from Paul Krugman in The New York Times this week criticizes bitcoin for being antisocial and for not having a State-controlled supply while secretly admiring its powerful abstractness.

As a complicit minion in the State’s appropriation of the monetary unit, Krugman perpetuates ‘The State Theory of Money’ myth that the sovereign’s power to collect taxes and declare legal tender imbues a currency with ultimate value.

While that may be a reason to acquire a certain amount of government fiat currency, it is a transitory value because in the end it is still based on a State-sanctioned illusion. Anyone who has visited a weekend flea market has noticed the old coin and currency collector displays filled with past experiments in national fiat money. Those paper notes were at one time valued for something too.

We don’t want a pristine monetary standard untouched by human frailty as Krugman claims. We want freedom in the monetary standard untouched by the politicizing process.

In a Krugman world, centralized management of the money supply is preferable to a market-based outcome because the academically-informed economists will serve the best interests of the economy at large. However, our monetary overlords possess no special knowledge or secret sauce that justifies dictatorial control over money any more than it would justify dictatorial control over the market for something like soda beverages or dog food. Trust in mathematics trumps trust in central bankers.

The question of political control over a monetary system is the greatest litmus test for discovering those that seek control over others. Usually, it will be cloaked in terms like full employment, price stability, temporary stimulus, quantitative easing, and economic growth, but manipulation of the money supply serves only to favor the issuers of that particular monetary unit.

Money has a lot in common with religion. At some level, it requires a huge leap of faith. Yes, a belief in gold requires this too as the non-monetary value assigned to gold is probably no more than 5% of its market price. However, this is also what makes bitcoin the ultimate social money because for its value it merely requires others, not the law. Money is already the most viral thing on the planet and the network effect exponentially reinforces that.

Krugman actually struggles to assert that bitcoin is antisocial because he cites economist Paul Samuelson who once declared that money is a “social contrivance,” not something that stands outside society. Samuelson is absolutely correct on that point and bitcoin stands firmly within society. It is no one’s right to question why some place value on bitcoin and some do not since all value is subjective. The rationale for assigning value to bitcoin is as varied as the human fabric itself.

In this context, society can be defined as those mutual users willing to agree to a medium of exchange and a store of value. Since bitcoin, just as the Internet, recognizes no political boundaries, Krugman resists seeing the global monetary unit as something social. Krugman sees society only as a multitude of aggregated fiefdoms where he is the emperor’s cherished tailor.

Though, just like the untainted child in the Hans Christian Andersen fairy tale, some of us are beginning to notice. It’s not the illusion itself that so offends our sensibilities, but more the notion that a competitive illusion is not to be permitted. If a free market illusion voluntarily agreed to from the bottom up is so desperately feared, then the protectors of the State-sanctioned illusion must not have the most benevolent of motives in store for us plebeians.

I don’t know about you, but I for one can stand up and exclaim: “the fiat emperor has no clothes!” What if more of us did?

2 comments:

  1. Bitcoin is in essence about closing the circle of live again. Most people are sick of large scale businesses they cannot influence and who treat them as 'nuts and bolds'.
    Crowdfunding/bitcoin strikes back.

    Some of us thought that internet would 'make the world flat'. But what actually happens is that with internet you discover your neighbours again, fostering barter. This nearonomics context 'produces' bitcoin.

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  2. You may have noticed bitcoin suffers from massive volatility. States which control their own currencies, issue liabilities denominated in that currency and use a free-floating FX regime do not experience such instability. This alone makes sovereign currencies a superior vehicle for investment and savings because of decreased uncertainty.

    Government is the currency monopolist and as such is the price setter for its unit of account. With bitcoin prices are vulnerable to speculative manipulation, as we've seen in the last two weeks. Few will be interested in using a currency the value of which can swing by 100% or more within a few days.

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