Jun

20

Many “alternative currencies” today are novelties, born from the ingenuity of individuals tethered to a specific locale. By construction, they do not have a global scope; and, often, there is no desire for one. Take “Berkshares” in the Berkshires region of Massachusetts; it is a relatively new “local currency”, backed by a basket of local goods.  Berkshares is still a function of the dollar: when dollars are exchanged for Berkshares– they are in turn invested in US treasuries – instead of in, say, gold. However awkward, there’s something nice about it, since it elicits pride for the community’s productive efforts along with a feeling of independence. But a medium of exchange such as Berkshares doesn’t even approximate a free banking money regime – in the way that the crypto-currency Bitcoin promises to.  

With the federal funds rate parked at 25 bps –you’ve probably asked yourself why you should hold on to cash.  Last year, like many of you, I sold dollars and went long Bitcoin: 2/3 risk-on neophila, 1/3 genuine optimism with a tempered expectation for profit.  At the time, it took two weeks for clearance and dollar transfer to MtGox –the exchange where trading this cross is the most liquid.  That means the price you see today can end up nowhere near this rate on the day when your funds hit the exchange and become available for trading.

With more efficient market making for the digital currency and full-fledged electronic Bitcoin banks, that kind of barrier to entry will reduce in time. A bold step forward in this direction today would be to couple the digital currency with a protocol known as Open Transactions (OT). The infrastructure would enable agents to enter into banking contracts. It centralizes transactions and makes it easy to trace their lineage –regardless of the medium of exchange used.  In theory, as a user, you could engage in traditional banking with Bitcoin money, such as: market making, origination of derivatives, check issuance, and contract settlement. 

Morally speaking, with a free banking monetary regime, there is a unique (more or less “correct”) level of reserves a bank should hold for each level of nominal spending in the economy. So, if this total level of spending changed (i.e., if aggregate demand changes), banks should respond by adjusting their reserve ratios to meet that demand. Those that don’t are left behind –but no one is too big to fail. One of the most stable banking systems in history, the 19th century Scottish banking system , held gold reserve ratios as low as 1-2%. Banks were signaled to adjust their gold reserve holdings by monitoring levels of total payments through a central payment clearing system. The same idea goes for the digital coupling I’m suggesting.

The value added by using the OT protocol with Bitcoin is due to the transparency of the Bitcoin block chain.  As the user, the onus is on you to decide whether you have confidence entering into contracts with other agents. To assist you in that decision, this infrastructure, operating with a publically accessible digital currency network would provide users with valuable information about banks' reserves, so to speak.  In the long run, it has best chance of lending itself to a fractional reserve Bitcoin where P2P lending is possible. Popular –and, by now, tiresome – deflationary concerns about Bitcoin fall flat against this backdrop.  Free banking theory, where changes in the velocity of money are offset by changes in the private money stock– just got its modern flair with Bitcoin as a commodity base.

(If you have interest in development and validating the protocol, email me or comment: mmreilly- at - gmail.com. There are a few kinds of cryptography operations necessary to understand the public-key aspect—any expertise in cryptography/number theory/hacking would be useful).

Oct

26

 Yesterday I had the privilege of heading downtown with Presidential candidate Gary Johnson to OWS [Occupy Wall Street]. My interest in going was to gauge whether this is truly the new sans-culottes (as some have said) or a fading parade for social misfits.

The stench of un-showered bodies and marijuana was overwhelming. No surprise there. Protesters held signs with phrases like: “I Love You” and “Compassion”–and other vacant blanket statements with premises rooted in ill-defined feelings of entitlement. I tried engaging one woman in her 50s in a discussion about Social Security and various entitlements. After underscoring objective facts about the insolvency of our current system: taxing the 'rich' more would barely cover the interest on the national debt, etc. the cheeky response I received was: “Well, I simply have always been on the side of the underdog–that's why I’m here.” (She also said that “I meant nothing to her” as someone who could possibly support a Republican, Gary Johnson).

Tally 1 for the social misfit theory.

Just when I was about to throw in the towel and head home there was a woman who stood out in the crowd. Wheelchair ridden, yet she was unabashedly moving herself around through protesters. She repeated: “You are in the wrong place; you should be on the doorsteps of the politicians. It’s not Wall Street that is the problem. It’s the government bureaucrats.” – razor-sharp insight. She came over to ask me who Gary Johnson was.

We spoke. Elizabeth was a homeless woman from Midwood, Brooklyn. She had many health problems over the course of her life; including recently cancer. It took me a couple of minutes to realize that –despite her misfortune– this woman was remarkably rational. It was clear that she had at least a partial grasp on the moral imperative we face, while at the same time was living proof of it. And she was appropriately self-conscious of this fact.

During our conversation she revealed that Medicaid paid $32, 000 for her wheel chair. It didn't work. Then Medicaid sent another; costing the tax payer an additional $32,000. That one stopped working the same week that she received it. She boldly conjectured that this money pit abounds because bureaucrats don’t care — not their money. If this wheelchair corporation wasn’t able to so intently lobby their government representative, they wouldn’t have received the contract with Medicaid. This brand of moral hazard — bleeding tax payer money, costs us dearly.

OWSers, it’s your money too. Or is it?

Protesters not only want to have this continued; but, they’d add to the calamity with Obamacare. She told me the taxpayer had been previously supporting her in a $383,000 a year nursing home. What she really wanted was to live modestly in an apartment. Doing this would instead cost the taxpayer $70,000. She was first denied the (70K/yr) ‘Section 8’; but, was then ordered to receive it from a NYC judge. Shortly after receiving court order, she was sent a letter from the NYC housing authority (signed by Sheldon Silver amongst others) stating that the judge had no authority. In fact, she showed me all of her legal documents to support her claims. Almost anything I asked about she could back up with hard numbers or legal notices.

We discussed Obama’s initiatives and the so called “shovel ready” projects.

Whether she knew it by name or not, Elizabeth seemed intuitively aware of Bastiat’s Broken Window fallacy. For instance, she told me about a massive ‘street cutting’ project on Ocean Avenue in Brooklyn. What were they fixing? Upon inquiring, the workers told her that there was no reason for the cutting. One could think this is a predictable cocky response from a tongue-in-cheek worker who simply didn’t want to be inconvenienced by a wretched woman. But after weeks of investigation, she came to the (highly probable) conclusion there really wasn't any problem to fix. It was yet another Keynesian Obama initiative to create work. Students of the Austrian school understand why this is wrong. Elizabeth does too.

Toward the end of our discussion she paid me a compliment: “If this man follows your line of thinking, he’ll be successful.” I smiled and assured her that the Governor and I have discussed some of these issues. “Tell him to go to Midwood. I’m going to tell the Rabbis all about him.”

We thanked each other then headed in opposite directions.

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