Seeking Alpha

Robert Wagner's  Instablog

Robert Wagner
Send Message
Professional Credentials: The reports that I write are my personal research and opinions. They are not associated with any firm or organization, and are not intended to be taken as investment recommendations or advice. They combine my passions of economics, finance, writing and education, and... More
  • Bitcoin Will Never Be A Viable Currency 2 comments
    Jun 4, 2013 10:16 AM | about stocks: GLD

    In this video Michelle Caruso-Cabrera makes the comment that "the Turkish Lyra has fallen $0.02 against the US dollar, if you aren't familiar with currency trading $0.02 is a big move in such a short period of time." As Michelle highlights $0.02 is a big move is currency trading. The Turkish Lyra currently trades at about 1.88 per $1.00, so a $0.02 drop is about the equivalent of a 4% fall in value. The Turkish Lyra has fallen from 1.8 in early to mid-May to about 1.88 to the US dollar currently (an increase represents a decrease in its value relative to the US dollar).

    The reason for that is because a currency is a macro instrument, and by falling $0.02 everything that Turkey exports to the US suddenly became 4% less expensive to US importers, and 4% less profitable to Turkish exporters. Turkish inventories are now 4% less valuable, and export related incomes are 4% less. The opposite occurs to Turkish importers that suddenly saw their costs go up by 4%. I won't even get into the consequences of having oil priced in US dollars on the global market. Small changes in currency valuation are a big deal because they change the entire macro economics of a nation and the globe.

    If a simple $0.02/4% move in a currency can be called a "big move," imagine what the $100+ daily swings in the Bitcoin would do to global trade and the macro economies that participate in it? It simply couldn't function.

    The real problem the Biocoin has is that it isn't designed to be a currency, it is designed to be the ideal bubble forming instrument. It basically is a virtual Dutch Tulip Bulb. Why is the Bitcoin a virtual Dutch Tulip Bulb? Because it is designed to be very rare, in fact the Bitcoin is designed to have a finite amount for all of history. Unlike gold which can be mined, and new currency brought to market, the Bitcoin eventually will stop being "minted." In economic terms the Bitcoin will be a truly perfectly inelastic currency. No matter what the demand for the Bitcoin may be, absolutely no more will be brought to market. The classic example of an inelastic product is heroin, where the government actually takes an active role in limiting the supply, and it takes much higher prices to bring more of it to market. I guess you could also say the Bitcoin is virtual heroin, which might be a better analogy because it is claimed that much of the trade that uses Bitcoin is illegal. We know that to be a fact with the Bitcoin's competitor "Liberty Reserve." For some reason I have a real problem with using "Liberty" in the title of a currency specifically designed for criminals.

    Why then is a limited supply of a currency a bad deal? Conventional wisdom is that the Federal Reserve and its ability to "print all this money out of thin air" caused all our financial problems. The reason is because the conventional wisdom is wrong, very very wrong, and the Bitcoin is designed to solve a problem that doesn't exist. The current "fiat" system where money can be "printed out of thin air" is an "elastic" currency. That by far is superior to an "inelastic" currency like the Bitcoin.

    The current monetary system is guided by what is called the "quantity theory of money." Under this modern system, the money-supply is managed to accomplish two very important and necessary goals, full employment and stable prices. The currency is used as a tool to create an economic environment of stability, where the money supply expands and contracts to maintain full employment, low inflation/stable prices and promote growth. Contrary to the Fed's critics, this is largely a market driven monetary system, as the models the Fed uses are heavily dependent upon market inputs. The key here is that the modern monetary system is designed to maintain price stability, because price stability is essential for the efficient operation of a modern global economy where a $0.02 move can be very disruptive.

    The Bitcoin is designed to be the exact opposite of our current economic system. Instead of being highly elastic, it is perfectly inelastic, with absolutely no ability to expand its output once a certain level of money supply is reached. Instead of being slightly inflationary, the Bitcoin is designed to be highly deflationary. The Bitcoin sounds like the prefect currency if inflation and printing money out of thin air are bad things, and deflation and the inability of the government to print money out of thin air are good things, but they aren't. Those beliefs are complete myths, very well entrenched myths, but myths all the same. A fact holders of gold and SPDR Gold Trust (NYSEARCA:GLD) are now discovering.

    This article highlights the Achillies' Heal of the Bitcoin, its limited supply. The other problem mentioned is that the Bitcoin is an "inflation hedge," which owners of GLD are now discovering isn't too valuable in the current disinflationary environment.

    For one, as a currency of limited quantity-about half of the 22 million bitcoins that can ultimately be "mined" through complicated computer data crunching are currently on the market-it is appealing as a hedge against inflation, said Tyler Moore, a Southern Methodist University computer science professor who has studied bitcoin exchanges. On the other hand, when holders become convinced that value is bound to rise, they tend to hoard their treasure.

    The reason a limited supply of currency is poison for a currency is because currency is needed for commerce. No currency no commerce and the economy shuts down. That is the lesson we learned from trying to adhere to a rigid gold standard during the dynamic growth of the late 1800s and early 1900s, an era that gave rise to the Federal Reserve. Just like a gold standard, when a panic hits, people hoard their gold and take it out of circulation. That then drives the economy into a deflationary spiral and society ends up allowing a currency system to force a Great Depression upon them. That is an insanely high cost to preserve a failed and outdated monetary system, but hey, at least we got the government out of it. Talk about cutting off your nose to spite your face and being penny wise and pound foolish, the Bitcon is both wrapped into one.

    While I'm a limited government free-market conservative, the Bitcoin is a product of the minimal government libertarian/anarchist movement. In my opinion the Bitcoin is based upon a philosophy that eliminating government from every aspect of life is somehow a good thing for society, freedom, the free-market and liberty.

    And there's the rub: The techno-libertarian fantasy of an unfettered digital currency is losing its veil of anonymity and is dependent upon ensuring the appeasement of government regulators. It's enough to make a cryptotarian anarchist blanch.

    I would refer my Libertarian friends to Article 1 Section 8 of the US Constitution, a document they claim they are willing to support with their lives. Article 1 Section 8 enumerates the powers granted to the Federal Government, one of which is the monopoly power to "coin money," and defines counterfeiting as a crime. Managing a national currency is a legitimate role of the Federal Government, much like providing national security, a judicial/legal system, police force, enforcement of contracts and providing necessary public goods and services that would otherwise not be provided by the free market, like roads and sewers.

    The Congress shall have Power To...provide for the Punishment of counterfeiting the Securities and current Coin of the United States....

    Article I, Section 8, Clause 6

    In conclusion, the Bitcoin will never succeed as a viable currency any more than using diamonds, gold or rare art would. Elasticity is critical for any modern currency, and the Bitcoin is deliberately designed to be inelastic on an extreme scale, even more so than gold. The Bitcoin would inject instability and deflation into the markets, and bank-runs would return as a routine and frequent occurrence. Without a lender of last resort, the banking system will simply return to the failed banking system that collapsed during the Depressions that plagued the US prior to and during the Great Depression. The Bitcoin simply represents a monumental step backward not only for monetary and economic policy, but for freedom and liberty. Without a stable currency, tyranny is much more likely and possible. It isn't a coincidence that the Waimar Republic preceded the rise of the fascists. That is something my freedom loving Libertarian friends should remember. Economics and monetary policy isn't a game, as the video above highlighted, a $0.02 move in a currency can be very disruptive. The $100+ daily swings of the Bitcoin are unthinkable in today's relatively stable global economy.

    Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: economy Stocks: GLD
Back To Robert Wagner's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (2)
Track new comments
  • duluoz
    , contributor
    Comment (1) | Send Message
     
    This reads like a student fresh out of intro micro/macro was told to take a position on bitcoin
    8 Sep 2013, 02:49 PM Reply Like
  • rotherton
    , contributor
    Comment (1) | Send Message
     
    The author's knowledge of the Fed, money and banking, business cycle theory, is clearly not very great in his several articles on bitcoin/Fed/politics. Age old ways to justify the Fed, ad hominem, strawman, omission. Google mises.org Panics Before the Fed and read some more before you go about saying the Fed is a crowned jewel of central banks and in a positive way the result of several thousand years of banking evolution. Ridiculous.
    5 Aug, 06:23 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.