Felix Salmon’s Bitcoin FUD

Felix Salmon has a very good job. He gets paid—and paid well—to pretend to think. He’s very good at it. You have to respect anyone who’s good at his job.

But if by some misfortune you are actually capable of thinking for yourself and, worse, enjoy it, you cannot have Felix’s job or any job like it. Not only is Felix not paid to think, he is not allowed to think. Thinking is above his pay grade, as they say in the military. A private who thinks he’s Napoleon is not only not Napoleon, but not a very good private.

Rather, Felix’s job (as with all legitimate journalists or columnists—though the former are not even allowed to pretend to think, which must really sting) is to communicate the thoughts of his sources, rewording them as if they were his own thoughts. His sources are legitimate thinkers—professors, policymakers, and priests. Just kidding. Obviously there are no priests. Nonetheless, his sources (no sources, no journalist) have obtained distinguished titles at important institutions, which is (a) very difficult and (b) something Felix probably once tried to do, but couldn’t. If he disagreed with these distinguished sources, humbly and respectfully offering his own contrary opinion, they would look very puzzled, as though their golden retriever had attempted to engage them in a debate about Thomas Aquinas instead of fetching the goddamn ball. Then, they would find a new dog. An excellent fido is our Felix—but the planet has no shortage of dogs.

It is fundamentally erroneous for an Internet crank like me to argue with one of these microphones. You might as well argue with a dog, or a lamppost, or anything else that can’t change its mind. My beef is with the sources, or rather, the institutions. Or rather, the institution. (There is really no one these days who gets paid to think. The difference between Felix and his sources is only that Felix knows he is not really thinking, whereas his sources actually believe they are. Nonetheless, they would not have obtained their important positions had they thought differently. And might even lose them, or at least sink a little, if they changed their minds. Our Cathedral is made of real stones and real mortar and is quite invulnerable to mere windy thought.)

Nonetheless, Felix is an excellent fido and has a knack for catchy summarization. It’s not as easy as it looks. His Gladwellian airport-bestseller product is full of transparent FUD, like “OMG haxx0rs!”, to which a response would demean us both. Pretending to think is one thing. Blatant padding, another. But there are a couple of vaguely substantive anti-Bitcoin points which deserve an equally snappy response from someone with, if I may be so modest, a clue.

The first is the “argument from instability”:

This is actually a serious problem, if you’re trying to put together a currency, rather than a vehicle for financial speculation. If the currency of a country ever fluctuated as much as bitcoins did, it would never be taken seriously as a medium of exchange: how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next?

First, every currency is a “vehicle for financial speculation.” When you exchange good X for currency A on Tuesday, you are speculating that you will be able to exchange your A for good Y on Thursday. This is a guess about the future, i.e., “speculation.” Moreover, by choosing to use A as an intermediary rather than B, you are speculating that the exchange rate A/B will not change in B’s favor between Tuesday and Thursday. Otherwise you would have chosen B.

(It’s typical of our thoughtfree age that a successful financial columnist feels no qualms about using the word “speculation” as a pejorative. Can anti-Semitic rabbis be far behind?)

Second, Felix’s sources will tell him that a currency has two roles: storing purchasing power and solving the coincidence-of-wants problem. This is because Felix’s sources are thinking thoughts last actually thought in the 1930s, i.e., before computers. With these magical devices, coincidence of wants is not in principle a problem, though small frictional effects persist.

It is trivial to do business in Bitcoin when BTC/USD is unstable. Simply post the price in USD, and use the BTC/USD exchange rate as of the transaction date. Even if buyer and seller are both saving in USD, within a couple of seconds they can exchange in, send Bitcoin, and exchange out. The prices realized may differ slightly from the posted estimate, but only slightly.

In the 21st century, a currency has only one role: storing purchasing power. Or to be more exact, containing the inevitable overvaluation of at least one asset in an economy where many actors want to store purchasing power. If you can use this store of value directly in transactions, nice. Nonetheless, rational actors will “speculate” on their optimal store of value, and convert on the fly if needed. Using, you know, computers.

It falls under “padding,” but I can’t resist this moment in which our Felix truly plays his shill card:

The overwhelming majority of dollars in the world are deposited safely and electronically in banks: there’s something weird and self-defeating about the kind of people who keep their savings stuffed under the mattress. In Hollywood, if you show someone counting out huge sums of cash, that’s an easy way for the director to say that he’s a criminal.

Oddly, I actually lived in Cyprus when I was a kid. It’s a dangerous practice for a fido to keep his boilerplate stuffed under the mattress. He’s paid well by the word—the product should be fresh. It’s also dangerous to channel Bulgakov, whom Felix probably hasn’t heard of but can Google:

‘In Sawa Potapovich’s masterly interpretation we have just heard the story of “The Covetous Knight.” That knight saw himself as a Casanova; but as you saw, nothing came of his efforts, no nymphs threw themselves at him, the muses refused him their tribute, he built no palaces and instead he finished miserably after an attack on his hoard of money and jewels. I warn you that something of the kind will happen to you, if not worse, unless you hand over your foreign currency!’ It may have been Pushkin’s verse or it may have been the compere’s prosaic remarks which had such an effect; at all events a timid voice was heard from the audience: ‘I’ll hand over my currency.’ ‘Please come up on stage,’ was the compere’s welcoming response as he peered into the dark auditorium. A short blond man, three weeks unshaven, appeared on stage. ‘What is your name, please? ’ enquired the compere. ‘Nikolai Kanavkin ’ was the shy answer. ‘Ah! Delighted, citizen Kanavkin. Well? ’ ‘I’ll hand it over.’ ‘How much? ’ ‘A thousand dollars and twenty gold ten-rouble pieces.’ ‘Bravo! Is that all you have? […] Where are they hidden?’ ‘At my aunt’s, in Prechistenka.’ ‘And where have you put them?’ ‘In a box in the cellar.’ The actor clasped his hands. ‘Oh, no! Really!’ he cried angrily. ’It’s so damp there—they’ll grow moldy! People like that aren’t to be trusted with money! What child-like innocence. What will they do next? Kanavkin, realizing that he was doubly at fault, hung his curly head. ‘Money,’ the actor went on, ‘should be kept in the State Bank, in dry and specially guarded strongrooms, but never in your aunt’s cellar, where apart from anything else, the rats may get at it. Really, Kanavkin, you should be ashamed: you—a grown man!’ Kanavkin did not know which way to look and could only twist the hem of his jacket with his finger. ‘All right,’ the artist relented slightly, ‘since you have owned up we’ll be lenient…’ Suddenly he added unexpectedly: ‘By the way… we might as well kill two birds with one stone and not waste a car journey… I expect your aunt has some of her own hidden away, hasn’t she?’

Okay, that’s cheap. But it is simply lovely how much our fido loves his loving master:

Because it turns out that financial-services companies are a very important part of any democracy.

It’s because we place so much trust in banks, after all, that they are forced to take on a great deal of responsibility. Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. The population of the entire country, as represented by the government, stands behind bank deposits and promises to honor them even if the bank goes bust. Money, in other words, is a key ingredient in the glue which keeps the social compact together. (What we’re seeing in Cyprus is in large part a demonstration of what happens when that compact starts becoming unglued.)

Bitcoin, in that sense, is anti-democratic…

Dare I suggest that Fido understands 21st-century democracy perfectly? “The population of the entire country, as represented by the government.” And hence, transitively, by J.P. Morgan. I would love to have made it up. Crap, Orwell would love to have made it up.

But there is substance here, or pseudo-substance anyway. The cornerstone of the attack on the kulaks and Kanavkins:

Inflation is bad, but deflation is worse. The reason is that in a deflationary environment, no one spends money—because whatever you want to buy is sure to become cheaper in a few days or weeks. People hoard their cash, and spend it only begrudgingly, on absolute necessities. And they certainly don’t spend it on hiring people—no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.

The result is an economy which would simply grind to a halt, with massive unemployment and almost no economic activity. In a word, it would be a Depression. In order to have economic growth, you need monetary growth as well—and that’s something which is impossible to achieve in a bitcoin-based system. Currencies such as the dollar, with a central bank which can print money at will, have succeeded for a reason. As economies grow, the money supply has to be able to grow with them. And that’s why bitcoin can never really succeed over the long term.

“In order to have economic growth, you need monetary growth as well.” But standing in its way—the Covetous Knight again! A Trotskyist, a hoarder and a wrecker!

Surprisingly, this is perfectly true. Actually, the key to understanding this argument is to understand that everything in it is true—if you look at it from the right perspective. Or at least, the fido’s perspective.

In order to have economic growth, you need monetary growth as well. Why? Because “economic growth” means “increase in the number of monetary units spent by consumers.” In order to increase the number of dollars that consumers spend, consumers need to have more dollars. But is this “real” growth, i.e., more and better products, or “nominal” growth, i.e., just “inflation?” Our hedonics experts will be looking closely at the quality of the products to ascertain this.

At this point, a person actually addicted to the vice of thought might ask: in an economy with a fixed number of dollars, is it possible to have constant dollar spending, for more and better products? I.e., in fido language, zero “nominal” growth, but positive “real” growth? What an odd idea.

But again, Fido turns out to be perfectly right. It is not possible to fix the quantity of dollars in our economy, because the quantity of dollars sensu stricto (that is, liabilities of the Federal Reserve) is vastly disproportionate to the quantity of debt (market capitalization of the financial system). By well over an order of magnitude.

Imagine a Bitcoin economy in which there were only 20 million Bitcoins, but 200 million promises to deliver future Bitcoins. It is easy to see that this debt could not possibly be valued at par. If we started with it valued at par, we would see the effective dilution of the Bitcoin market by a flood of effectively bogus promises. But the market, being a market, would rapidly unravel this scam and devalue the bogus promises—increasing the exchange rate of a real BTC over a bogus promise, and also increasing the exchange rate of a real BTC against all other goods.

At a macroeconomic level, this would constitute a gigantic depression, exactly as Felix describes. The fault would be not on the hands of those who exposed and detonated the debt bomb, but those who built and maintained it. In the dollar debt bomb, continuous monetary expansion is needed to keep the plutonium core stable, which is why Good Professor Ben is lending us $85 billion a month. With this mega-stimulus, spending scrapes along the bottom in a stagnant desultory way. Without it, the core begins to contract, accelerates and then implodes—just as Irving Fisher (who originally thought this thought) explained.

Fortunately, there is no significant debt in Bitcoin. In fact, BTC appreciation is a therapy for the dollar’s debt bomb—because as the “bubble” expands, dollar purchasing power is created out of nowhere. If BTC has the unlikely luck to run to fixation and become the world’s standard currency, San Francisco will be full of dollar billionaires, who will spend these dollars—creating consumer spending, i.e., inflationary purchasing power. It would be too much to say this would be a good outcome for everyone, but it would certainly be a good outcome for those in debt.

Moreover, a healthy macroeconomic system with a fixed currency supply will not create a debt bomb. Debt bombs are created when unpayable debts are guaranteed, formally or informally, by governments who want to profit surreptitiously from seignorage—generally, in the 20C, as part of some scheme to increase consumer spending. USG itself cannot mint BTC. So it cannot dilute the BTC supply with bogus BTC which are half bad debt, half “FDIC put.”

It’s also true that during the transition to BTC, no debt will be produced and there will be no significant BTC financial system. Real debt requires the power to profit by selling future currency for a discount against present currency. In a USD economy in which BTC is rising at 5% a day, or whatever, there is no way to complete this loop.

The “deflation” of BTC against USD is simply a function of the shifting volume of savings between the two currencies. At present, almost all savings are in USD (and friends). As tiny amounts of this energy flow into BTC, BTC goes up like a rocket. Of course, the contest is unstable.

But when the entire savings pool has flowed into BTC, leaving the demonetized USD priced as a financial instrument for its expected return in BTC (i.e., a dollar is a share of stock in USG, which has lots of awesome assets but no cash and no profits), you have an extraordinarily stable financial structure. The quantity of BTC is fixed, by math. The energy in savings is stable, because it corresponds to the real collective desire to defer consumption. Even the debt capitalization is stable, because the quantity of debt depends on the existence of real productive opportunities. I believe quite strongly that in this economy, there would be no such thing as a business cycle.

Sadly, I fear we’ll never know, because Bitcoin is probably going to be killed by the USG. Not really for any good reason, not even in self-defense, but just because it’s easy to kill and bureaucrats like killing things.

This is the best thing about being a mouthpiece for power. Your predictions come true. You argue that the abandoned church next door is a dangerous firetrap, will probably burn down, and should probably burn down before someone moves into it. It burns down. Good, you say! Are you a master thinker? Or just good friends with a master arsonist?

Power creates opinion. If Bitcoin goes from a billion-dollar capitalization to zero, which will happen if Washington so much as squeezes lightly on its neck, it’s a bubble. The past is always perceived as inevitable. Everyone who bought Bitcoin will feel like the world’s biggest chump. How could anyone have thought it was worth something? When, obviously, it was worth nothing?

No, it’s a pity we can’t use actual thoughts as a currency. The quantity is so limited. And always will be. Alas, pseudo-thoughts are everywhere and very difficult to distinguish from the real goods.