mfioretti: fiat money*

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  1. In short: there’s a lot of noise. But there is also signal. To find it, we need to start by defining cryptocurrency.

    Without a working definition we are lost. Most people arguing about cryptocurrencies are talking past each other because they don’t stop to ask the other side what they think cryptocurrencies are for.

    Here’s my definition: cryptocurrencies are a new asset class that enable decentralized applications.
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  2.  For a small but committed group of economists, academics, and activists who adhere to a doctrine called Modern Monetary Theory (MMT), though, #mintthecoin was the tip of the economic iceberg. The possibility of a $1 trillion coin represented more than mere monetary sophistry: It drove home their foundational point that fiat currency is a social construct, and that there are therefore no fiscal limits on how much a sovereign currency-issuing nation can spend.

     To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward. Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

    It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. MMT’s adherents like to point out that the federal government never “runs out” of money to fund the military, but routinely invokes budget constraints to justify defunding social programs. Money, in other words, isn’t a scarce commodity like silver or gold. “To people who’ve worked in financial markets, who work at the Fed, this isn’t controversial at all,” says Galbraith, who, while not an adherent, can certainly be described as “MMT-friendly.”

    According to this small but increasingly vocal cohort of economists, including Bernie Sanders’s former chief economic adviser, once we change the way we think about money, we can provide for everyone: We don’t have to “find” the money to “pay” for universal health care by “cutting” the budget elsewhere. In fact, our government already works that way: Spending must precede taxation, or there would be no dollars in the economy to tax. It’s the political will to spend on certain things, not the money to afford it, that’s lacking.
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  3. We analyzed all these large transactions by following in detail the way these sums were accumulated and the way they were dispersed, and realized that almost all these large transactions were descendants of a single transaction which was carried out in November 2010.”

    “In other words:

    1. There’s no transparency and no outside auditing – as any central bank in a republican democracy ought to have, including the US Federal Reserve System;

    2. There’s evidence that there’s been massive manipulation of bitcoin accounts being performed within the system which frankly smells of some sort of fraud; and

    3. Most bitcoins ever produced have never once been traded, which sets the ground nicely for a pump and dump scheme which can make Bitcoin’s creators quite rich when repeated multiple times.

    And this last point is the most interesting – figure out a digital currency scheme based on some sort of relatively unbreakable cryptographic scheme, which has a large but finite number of keys, say 21 million or so. Devise software to calculate 80% of the possible keys, and do so
    Tags: , , , by M. Fioretti (2013-05-13)
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  4. Goldbugs and bitbugs alike seem to long for a pristine monetary standard, untouched by human frailty. But that’s an impossible dream. Money is, as Paul Samuelson once declared, a “social contrivance,” not something that stands outside society. Even when people relied on gold and silver coins, what made those coins useful wasn’t the precious metals they contained, it was the expectation that other people would accept them as payment.

    Actually, you’d expect the Winklevosses, of all people, to get this, because in a way money is like a social network, which is useful only to the extent that other people use it. But I guess some people are just bothered by the notion that money is a human thing, and want the benefits of the monetary network without the social part. Sorry, it can’t be done
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  5. 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.
    Tags: , , , by M. Fioretti (2013-04-23)
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