Bitcoinaren prezioaz

Sarrerako, ikus Kripto-monetak


Eric Tymoigne‏ @tymoignee


Does Bitcoin Disprove MMT? … NO: The Fair Price of a Bitcoin is Zero

2017 abe. 22

The Fair Price of a Bitcoin is Zero
By Eric Tymoigne

The virtual currency craze is on a tear, with new virtual currencies emerging every day. The New York Times just ran a series of articles about them last week. “Charles Ponzi would be so proud!” one person appropriately commented at the bottom of this article.

(i) Tresna monetarioak: finantza tresnak

Monetary instruments are financial instruments. Like all financial instruments, monetary instruments have an issuer who promises to do something in the future. There are one or two common promises embedded in monetary instruments. One is that they are convertible into something else, another is that the issuer will accept them as final means of payment from his debtors. Bank accounts contain both promises (conversion into cash on demand, and one can pay debts due to banks by using funds in a bank account). Federal Reserve notes currently only contain one promise, the government will take them in payment at anytime (either directly or through the banking system in case tractability and security of payments are required). Some Federal Reserve notes were convertible into gold coins in the past. Gold coins are also monetary instruments that contain only one promise, that of being accepted back by the issuer to settle debts due to him (usually a government). Gold coins have an extra feature, they are collateralized by the value of the gold content. Note that the gold content of the coin is not a monetary instrument, and it is not what makes the coin a monetary instrument. Gold bullions were never financial instruments (they contain no promise), they are real assets, i.e. commodities (payments made with them are payments in-kind).

Given the nature of monetary instruments, they have also other characteristics common to all financial instruments. First, all financial instruments are accounting creatures. They are the asset of the bearer and the liability of the issuer. Gold coins were the liability of, e.g., the King, Federal Reserve notes are liability of the Federal Reserve, and coins are the liability of the Treasury. Currency is their liability because they (at least) promise to take their currency from bearers in payments at any time; issuers owe that to the bearers.

(ii) Bitcoinak tresna monetario gisa eta finantza, aktibo errealak

Given that bitcoins are supposed to be monetary instruments, they must follow the preceding basic rules of finance. We clearly know who the bearers are (the lucky Easter egg hunters and the persons to whom they get sold) but who is the issuer? In other words who put the eggs in the forest and is willing to accept them in payments due to him or her. I can tell you the answer for Easter eggs: none of the persons who put them in the forest promised to accept them in payments. Therefore, they are not a liability, therefore they are not a financial asset, and therefore, they are not monetary instruments. They are real assets, commodities. The same applies to bitcoins. There are commodities and people are basically involved in trading a commodity on a world scale; with much of the craze coming from China (see here for a link to world map of current bitcoins transactions). Think of international bilateral trade of Easter eggs for other commodities; it is barter on a grand scale (remember people in the past who would sell their farm for a tulip…).

(iii) Bitcoinen bidezko prezioa zero da

We just established that bitcoins are not financial instrument (…) So their fair value as financial instrument is…A BIG FAT ZERO (you can use whatever unit of account you want). A BTC 1 coin should circulate at a 100% discount (BTC 0) if it was a monetary instrument, which means of course that it would not pass hands.

This would have been different if there had been an issuer who took back bitcoins at face value in payments. As bitcoins would have come back to the issuer, they would have been destroyed (like any pizza restaurant destroys free-pizza coupons that are returned to make sure they are not stolen and reused to get another pizza). Unfortunately, nobody issued them (and they are not edible like Easter eggs) and so we are stuck with them. This was actually a mistake made throughout history. Kings would issue coins and never promise to take back them in payment! Private banks issued notes that they would not accept in payments! Fair value fell and coins would disappear as people melted them down to extract the gold and sell it as bullion. Bitcoins have not intrinsic value so their fair value would dropped to zero.

The supply of monetary instruments needs to be elastic enough to change with the demand for them. They should be easy to create (bitcoins are) BUT ALSO easy to destroy if demand declines; that maintains the scarcity of the monetary instruments while making them responsive to the needs of the economy. Bitcoin supply fails on both sides, it is not demand driven; it is exogenous.

(iv) Bitcoinak salgai moduan

Currently, the only things that give bitcoins value as commodities is their utility and their scarcity. People love the beauty, spiritual meaning, and taste of Easter eggs and so are willing to pay for them. Is there anything to love about bitcoins? People involved in illegal activities and money laundering, who have a phobia of Big Brother or who just hate the federal government, find utility in this means of payment because bitcoins allow to access the anonymous payment system. Other people who loves gambling also find utility in bitcoins. Both categories of people will be willing to pay top dollar for them given their scarcity.

One may note that what gives value to bitcoins is not that there are redeemable in dollars. They are not redeemable (their quantity can’t be reduced by converting them into something else). What gives them value is that people are willing to pay a lot of dollars for them (or tulips if you see where I am going with this: people are trading virtual tulips that grow out of thin air and never die).

(v) Ordainketa sistema, produktu ilegalak eta zergak

The structure of the payment system, not bitcoins, is actually what makes the bitcoin project so successful. It is supposedly so secretive that you can trade a bunch of illegal stuff and evade taxes. Think Easter eggs (or tulips) for coke, Easter eggs for guns, Easter eggs for prostitutes, the sky is the limit and everything is priced in an Easter egg unit of account (EE). A pound of coke EE1000. Of course, there is a slippery slope. You can write contracts in a EE unit of account that promise to deliver Easter eggs, you can securitize these contracts, you can write contracts that bet on when the supply of Easter eggs will exactly run out. Heck! You can write any contract you want because there is no regulation. Contracts can have the most stupid (and hidden) clauses in them as long as someone will swallow them in expectation of huge returns. (You did not know? They love Easter eggs on Mars!)

So there is a fixed supply of a commodity and a demand for that commodity (is it downward sloping? Probably not because speculation can easily overwhelm the use of bitcoins as anonymous payment method). A perfectly inelastic supply curve with a volatile demand curve is a recipe for wide price fluctuations of bitcoins in USD. (…)

(vi) Aktibo espekulatiboak

Put simply, Bitcoins are purely speculative assets. There are websites that help calculate if mining bitcoins is expected to be profitable, but, as one website notes: “Extrapolating bitcoin difficulty or price is pure voodoo.”

Happy searching! You could make a lot of money in dollars by speculating on Easter egg value (you won’t get rich as an Easter egg picker, i.e. miner)! But don’t get lost in the woods! By the way, just for full disclosure, those who organized the hunt collected a bunch of eggs before the forest opened to the public. They made a killing as many people were waiting for them when they came out of the forest to buy the eggs at a steep dollar price. After all, who wants to go into this stinky wet forest…just give me the dammed eggs so I can go watch TV…or sell my drugs and guns, hopefully in total anonymity and security.

Footnote: Is all this consistent with MMT? Yes. MMT does not state that all monetary instruments are government issued or that every unit of account must have its origin in a government declaration. Monetary instruments can be created by anybody but their capacity to be widely used will vary with the capacity of the issuer to make others (willingly or forcefully) indebted to him. The state usually determines the major unit of account used and what the legal tender is but anyone can issue promises and use any unit of account they want (Easter Egg, Buckaroo, etc.).

Iruzkinak (2)

  • joseba

    The trillion-dollar coin scheme, explained by the guy who invented it

    Let us now praise Beowulf, perhaps the most influential blog commenter of all time.
    By Dylan Oct 7, 2021, 1:55pm EDT

    A visualization of what a $1 trillion coin could look like.
    DonkeyHotey via Flickr

    On Tuesday, the Treasury secretary of the United States, Janet Yellen, finally said it: She does not intend to mint a platinum coin worth $1 trillion to pay for the US government’s expenses.

    If you are not familiar with the platinum coin idea, or the hashtag #MintTheCoin, or the small army of Coinistas who have become a vocal part of economics and finance circles since the early 2010s, you may be asking: What the hell are you talking about?

    The (sorta) short answer is that later this month, the US will exceed the legal limit on how much outstanding debt the federal government can hold — the debt ceiling. Senate Republicans have agreed to allow an extension through December, but that just sets up another confrontation in a few months. To avert the global economic catastrophe that might ensue if the US exceeds the debt limit, some observers have broached some truly absurd ideas.

    Enter #MintTheCoin.

    A 1997 law intended to help the Mint make money off of coin collectors gives the Treasury secretary the power to mint platinum coins of any denomination, for any reason. When commentators discovered this law during the 2011 and 2013 debt ceiling battles, they realized that this power could offer a way to sidestep the legal cap Congress places on the federal government’s borrowing.

    Instead of issuing new debt and running afoul of the debt ceiling, the Treasury secretary could simply fund the government by minting platinum coins. In 2013, even former US Mint Director Philip Diehl agreed it would work, and over the years, influential voices like financial journalist Joe Weisenthal and New York Times columnist Paul Krugman have also promoted the idea.

    But all these people did not simply stumble upon this law. It was brought to their attention by Beowulf, a blog commenter and “reply guy” better known as Atlanta-area attorney Carlos Mucha. Mucha conceived of the idea in a short comment on financier Warren Mosler’s blog posted on May 24, 2010, at 8:29 pm:

    Curiously enough Congress has already delegated to Tsy [Treasury] all the seignorage power authority it needs to mint a $1 trillion coin (even numismatic coins are legal tender at their face value and must be accepted by the Federal Reserve)– the catch is, its gotta be made of platinum (ditto the balls of any President who tried this). So for a 1 oz. coin, Tsy would net only $999.998 Billion :o)

    From this modest post, a trillion-dollar idea sprouted, one that has come to influence fiscal policy discussions in the US at the highest levels.

    I reached out to Carlos Mucha on his natural sparring grounds, Twitter, and we talked a bit via direct message about how he started the #MintTheCoin craze, how it got the attention of policymakers, and how to get out of the current debt ceiling crisis. Our DM conversation, edited for length and clarity, follows.
    Dylan Matthews

    Tell me the basic story of the trillion-dollar coin idea. How did it go from you posting in a blog comment thread to being something the president and his advisers talk about?
    Carlos Mucha

    The idea developed on the forum of Warren Mosler’s website in 2010. Warren is [a] founder of Modern Monetary Theory, which is quite popular among progressives these days. [Modern Monetary Theory, or MMT, is a heterodox school of economics that argues that concerns about the national debt are often overblown.] Anyway, the crowd was brainstorming on how to avoid a default if Congress didn’t lift the debt ceiling and I came across the platinum coin subsection (k) of the Coinage Act.

    I blogged about it a bit back then and it was picked up by other bloggers and then journalists and just snowballed from there.

    Naomi Klein’s Shock Doctrine book describes how conservatives in this country and abroad use a crisis — natural disasters and other unexpected calamities — to push through policies that would never win legislative support. What happened was, in the Obama administration, his Republican adversaries realized they could actually plan a crisis by refusing to increase the debt ceiling and then use the shock doctrine to push through their desired policy (spending cuts and, if they can get away with it, tax cuts too).

    Here’s the thing. Republicans know that by and large Dick Cheney was right: Deficits don’t matter; Reagan taught us that. It’s possible that Reagan didn’t teach Cheney that but rather [Cheney’s] best friend in the DC power circle, Don Rumsfeld.

    And where did Rumsfeld learn this? Warren Mosler. [Mosler has said he devised MMT after a discussion with Rumsfeld in the steam room of the Racquet Club in Chicago.]

    So Republicans know deficit and debt fears are overblown, but Democrats do not. So we see Carter, Clinton, and Obama clean up the balance sheet and enable Reagan, Bush, and Trump to come in and cut taxes. Progressives have [now] caught on to the game, which is why the trillion-dollar coin (and big spending plans of Bernie Sanders and AOC) resonate with the Democratic base. Anyway, that’s what I think is going on.
    Dylan Matthews

    How did you get interested in Warren Mosler and his forum? What made that a preferred place for you to post?
    Carlos Mucha

    I don’t even remember how I landed at Warren’s site, but he’s a genuinely cool guy and is always ready to engage with readers on his board.

    It helped that he was simpatico with two economists that I was already a fan of: William Vickrey (who had introduced Warren to the other post-Keynesian economists, Bill Mitchell and Randy Wray, that helped develop MMT), and Jamie Galbraith, who wrote the foreword to one of Warren’s books and who’d later quietly plug the trillion-dollar coin idea to other economists. I suspect Jamie is the proximate cause of Paul Krugman endorsing it.
    Dylan Matthews

    And from there it was a pretty short walk to people like Rep. Jerry Nadler (D-NY) promoting it and the White House having to formally comment. It’s a mainstream idea now. What was it like to watch the idea take off like this? Bewildering? Embarrassing? Entirely positive?
    Carlos Mucha

    Entirely positive. I have had clients seek me out and hire me because of it, so it’s been nice being able to, well, monetize the idea. The best part was getting an email from Phil Diehl, the former Mint director who actually drafted the platinum coin law that Congress enacted in 1997. When he said, “Yes, this will actually work,” I suddenly felt like Rodney Dangerfield in Back to School. He has a Kurt Vonnegut paper due, so naturally he hires Kurt Vonnegut to write it.

    It’s hilarious, it was basically an intellectual exercise — like a website where people hash out who the greatest third basemen of all time was or whatever — and it just took off.
    Dylan Matthews

    Have you had any politicians or Treasury/Fed officials reach out to ask you about the coin?
    Carlos Mucha

    Sure, sometimes someone in the admin, Congress, or the Fed will drop me a line asking for my take on some problem or another. If you had asked me yesterday, I would have said that was because of the trillion-dollar coin story, but after receiving this text yesterday …
    Mucha says he has received messages from an official joking about “creative legal solutions.” Carlos Mucha

    … I’m not so sure anymore. Maybe public officials secretly canvass all the Twitter reply guys for policy advice. Who knows.
    Dylan Matthews

    Treasury Secretary Janet Yellen recently seemed to close the door on the coin, telling CNBC, “I’m opposed to it and I don’t think we should consider it seriously. It’s really a gimmick. … It compromises the independence of the Fed, conflating monetary and fiscal policy.” She also argued it would fail to reassure markets, thereby creating some risks akin to those of a debt ceiling breach. What do you make of her comments?
    Carlos Mucha

    She is, by and large, very good at her job and is by all accounts a nice person, but on this she’s wrong, not just on the law but on policy.
    Dylan Matthews

    There are a few other options for the executive to get around the debt ceiling — I wrote about a couple here, like declaring that continuing to pay the government’s bills is the “least unconstitutional option” compared to failing to spend what Congress authorized.

    What do you make of these? Is it coin or bust for you, or are there non-coin ways out?
    Carlos Mucha

    At the same time as I started noodling around on platinum coinage, I found and wrote about two other loopholes too:

    Treasury can issue perpetual consols [debts that never mature and continue paying interest forever until the government buys them back]. Since there’s no guarantee to repay the principal, it doesn’t add to public debt (which measures amount of guaranteed principal).
    The Fed can just donate the Treasury securities it holds back to Treasury.

    Of the three [the above two and the coin], issuing consols is probably the least disruptive. Treasury can announce it is issuing T-bonds “payable at the pleasure of the United States” instead of a fixed term and can hold an auction later the same day. So that’s what I’d expect to see if Treasury runs out of money.

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