James Bullard, President of the Federal Reserve Bank of St Louis, has stated currencies are intrinsically worthless and fragile days after Donald Trump mentioned they are printed out of thin air.
“For my purposes, currency is an intrinsically worthless object that has value in equilibrium only because others are expected to accept it in exchange.
In the theories I work with, there is always an equilibrium where no one chooses to hold the currency, and its value falls to zero. In this sense, currencies are ‘fragile,’” Bullard said.
The academic economist and monetary policy scholar who in 2014 was named as the 7th most influential economist in the world stated that he views “cryptocurrencies of various types as new entrants into the ongoing global currency competition.”
He argued that “publicly” issued currencies and “privately” issued currencies can co-exist. “One type of money need not crowd out the other,” he said. “The private currency facilitates exchange that would not otherwise occur.”
Nonetheless he argues this competition would not be any good based on what we think is a very flawed premise due to a very limited and arguably naturally biased analysis since he is in charge of “public” money.
Competition Bad Says Fed
His argument is somewhat simple. If there are different currencies, they would have different values. This difference in value, sometime artificial due to political interference and devaluation, distracts “from the real business at hand, which is to use the price system to judge and assign value to goods and services globally.”
That’s a very simple statement, but it hides an incredible amount of complexity, including how exactly do you price the price system. As in, how do you judge how much a dollar should be worth either through increasing or decreasing interest rates (money supply) or other mechanisms.
Bullard does not address that point. His focus appears to be effectively solely on attacking cryptos, rather than to offer some sort of illumination of the many problems with both national currencies and international exchanges.
“The global non-uniform currency system features volatile exchange rates. A local non-uniform currency system may have similar volatility,” he said.
That would be volatility between different money. As far as the pricing of goods of any one money, there needs not be any volatility if competition leads to practices that keep the purchasing power of any money relatively stable over decades and maybe centuries.
That aims seems to have flown by Bullard who seems to think cryptos want competition for its own sake, rather than for the aim of creating stable money, far more stable than the dollar or any other easily manipulated currency.
Thus he says “cryptocurrencies may unwittingly be pushing in the wrong direction in trying to solve an important social problem, which is how best to facilitate market-based exchange.”
Wrong direction in his view because “the U.S. is drifting toward non-uniform currency trading arrangements, a system the society has disliked historically.”
Now we’re sure Bullard is a very honest man who would not intentionally mislead the public, but we would expect some care when reaching such strong conclusions, especially when they’re obviously quite skewed in analysis.
Local and National Banknotes
“Historically, the profusion of privately issued currency created an unsatisfactory system.
In the 1830s, 90% of the U.S. money supply was privately issued banknotes.
Contemporaries did not like this system. Currencies traded at different rates at different times and places. There were discount books in each town to keep track of how much each currency should be discounted.
There was a call for a ‘uniform currency,’ which was implemented during the Civil War.”
So says Bullard, arguing crypto usage as a currency would lead to the same system which was undesirable.
He is right that the system was undesirable, but not because there were many currencies, but because each one of them was as badly mismanaged as the other.
In the 1800s, banks issued their own currency, with the value of that currency in part dependent on how solvent the bank was, and therefore just how valuable were the banknotes they issued.
As this was effectively free money for the bank, they issued more and more notes, leading during times of war and crises to very high inflation.
Sometime banks fell and their currency fell with them. The level of mismanagement reached the point where the constitution dictated that only gold and silver can be legal tender.
The very profitable business of printing money out of nothing led banks to argue for a uniform or a national banknote and thus the establishment of the fed.
There was a political “war” that folklore says led to the assassination of a president who was against the establishment of the Fed. The Supreme Court too, citing the horrors of hyperinflation during that local banknotes era, refused to allow fiat dollar to be legal tender. A new president replaced the Supreme judges. And now we have Bullard giving us a very different history.
What in fact happened is that those local bank notes continued to be issued by banks locally as they please as before. The only thing that changed was that instead of each bank having its own paper, they all printed and still do print the same dollar.
The Bank of England has confirmed as much, with commercial banks like Barclays or Citibank creating money out of nothing when they extend a loan. That money is then burned when it’s paid back, but the interest paid on that money very likely becomes central bank money, as in new money.
The only other difference from the old local bank money to the current one is that while previously banks could go under and thus could be punished for mismanaging money, now all banks are guaranteed by the taxpayer.
We saw that in 2008 when trillions were extended to banks, leading in great part to the current stupendously high debt levels of the US government and many other governments, with the US government now paying nearly half a trillion a year in interest payments.
So the old system was not reformed in any substantial manner, but only superficially. With banks continuing to have that same perverse incentive to give out more and more loans – thus print more and more money – because that’s how they make a profit.
Banks moreover continue to go under at times, with that same boom and bust of the 1830s continuing to today primarily because the ability to print money as one pleases is very corruptive.
The idea therefore expressed by Hayek, but now more adaptable to a digital age, is for no man to issue money, but for code to do so.
In his time there was no code in the 70s, but he basically argued that different business should compete to issue money with the market deciding which money is the most “objective” in that it keeps it value over decades.
In this digital age, the market would judge which code does its job of keeping the value of money generally stable where purchasing power is concerned rather than just inflation.
Doing so in a way that serves the “business at hand” is a very difficult task because you’d be designing a movable unit of account that moves only with the aim of being “fixed.”
You’d be taking man out of the equation, and his judgment, and political interference, devaluation, manipulation, mismanagement, and you’d turn money into some sort of science, an algorithmic maths based set of code lines that can not be changed by any one individual or group.
New Crypto Money
Hayek’s view is that this money should grow or decrease with the aim of keeping prices stable where $1 buys you an apple today and next century, no more nor less.
Designing that would be rocket science, but there are other views where money should be fixed, like bitcoin. Bullard says:
“The problem of how to stabilize currency value is not mitigated by commodity-backed money, cryptocurrency or fixed exchange rates.
Under a gold standard, the government had to name the exchange rate between notes and gold, and governments sometimes altered this rate.
With cryptocurrencies, there is a monetary policy encoded in the system, perhaps a fixed volume of “coins.” But the system can also bifurcate, creating two fixed volumes of coins—a process that can happen multiple times.
Fixed exchange rate systems have often collapsed eventually.”
By fixed exchange rates he has in mind very simple things like Tether which are somewhat irrelevant to his argument that monetary competition is bad because tether is, at least ostensibly, basically the dollar.
In regards to the bifurcation of coins, as in a split chain that creates 1:1 a new crypto, that’s an incredibly weak argument for reasons we have seen already.
That being mainly that for money to be useful as a means of exchange it has to be accepted widely. Unless there’s an extremely good reason for why they’d accept both coins at or anywhere near the same level of general acceptance, or unless there’s a very good reason why they’d switch, then the new coin is irrelevant.
There have been plenty of such chain-split coins of bitcoin. The most successful so far is BCH which currently stands at just 2.5% of bitcoin’s market cap. All the other such splits are at pretty much 0%.
Nor would such split necessarily be bad because there is actually no printing of money. If everyone is getting the same thing 1:1, then they all have the same thing. It’s as if it didn’t happen where purchasing power is concerned.
The main point to highlight, however, was in regards to gold as Bullard’s criticism is “the government had to name the exchange rate between notes and gold, and governments sometimes altered this rate.”
With bitcoin you can not alter the rate. A fork can not alter it either because it is one to one. The main problem for bitcoin instead is that you’d much rather spend devaluing fiat or if there was an algorithmic coin that retains value generally over decades, you’d prob still want to spend that because in theory bitcoin’s limited amount should lead to a gradual increase in value in line with general growth once it matures in regards to adoption.
While the main problem with fiat is that it sucks value. Political interference moreover generally leads to the collapse of fiat money, with the current dollar system barely 50 years old.
During that period there has been stagflation, bank collapses, too much printing, too little printing, and generally a system that just about works – mainly to the benefit of bankers and the very rich – because there was no alternative.
Arguably there still isn’t. The current level of tech development can’t easily facilitate a means of exchange as conveniently as fiat, but that might be mainly because hard problems are not usually solved through sudden change.
Instead gradual and incremental improvements and inventions, adopted or otherwise, fully voluntarily and gradually tend to lead to a general increase in well being, productivity, and the overall fairness of a certain system.
Cryptos therefore do not necessarily aim to create a competitive environment for money of the sort where grandma has to exchange bitcoin for eth or litecoin or whatever to buy some milk.
The idea instead is that through the competitive process, a certain money that serves the business at hand would arise, with a probable Pareto 80/20 distribution, with any switches between money likely being very gradual, if necessary at all.
This money would be backed by maths, open source code, and algorithms. Unchangeable by any man or group. Not even the President of the Fed or USA.
It would be real money that serves the producer, serves the family, serves the country and the world, rather than the current subjective money, based on truly thin air, and the whims of the president or greedy bankers.
It would be our money, based on science, not what our children may well think a ludicrous proposition whereby the bank just prints money as it pleases, in the process choosing who can be rich and who stays poor, for if you loan us $1 billion, as arguably banks loaned to Trump, we would be very rich indeed too.