Tuesday, December 12, 2017

Bitcoin is bullshit, Part IV: Who uses bitcoin, amid transaction costs?

Part III was all about how the use of bitcoin in an economy with a functioning government requires volunteering to pay transaction costs, which can't be rational.  What I haven't done, though, and what I won't do, is say that bitcoin will disappear.  Who, then, will use bitcoin?

Does anyone remember some dude named Thorsten Veblen?  In 1899, he published The Theory of the Leisure Class.  Veblen wasn't really an economist.  He was a... [gulp]... sociologist.

Excuse me while I take a big swig of my coffee to wash out the foul taste in my mouth.

Veblen's text is most famous for the concept of "conspicuous consumption."  People buy shit, not because it is intrinsically useful or valuable, but to show off what they have.  There are goods that you consume, not because they are utilitarian, but as affectations.  I'm a pretty utilitarian person, and even I do it.  I don't like that I do it, but I do it.

Conducting economic transactions in dollars will be more efficient than conducting transactions in bitcoin for as long as the government prohibits payment of taxes in bitcoin, and the government will never let you pay taxes in bitcoin (see Part II).  For some people, though, conducting transactions in bitcoin will just be... appealing.

1.  Techno-libertarians.  This is the primary group of people to whom bitcoin appeals.  There is a segment of the population who has a generally skeptical view of government, combined with a positive attitude towards technology and a view that technology will solve problems that government either creates or cannot solve.  Bitcoin is catnip to these people.  If it costs a little extra to pay for shit with bitcoin, they'll do it as an ideological statement.  That's as good a reason as any for conspicuous consumption.

2.  Hipsters.  There is an overlap between techno-libertarians and hipsters, even if hipsters tend towards the old rather than the new, at least in appearance.  Some may find bitcoin appealing simply because paying for things in dollars seems so bourgeoisie.  If it costs a little extra, well then, that's just more conspicuous consumption.  Veblen strikes again.

3.  Anyone trying to break the law.  Remember that efficiency/inefficiency thing?  The whole point of transaction costs is that they apply to any business that has to convert back to dollars to pay their taxes.  What if, and just go with me on this, you are trying to not pay your taxes or otherwise conceal income?  This could be because you are just a tax cheat, or because you are engaged in some other nefarious activity.  Banks, which are federally regulated, report suspicious transactions to the feds.  Bitcoin?  Nope.  That's part of the point.  You can move money around secretly.  If your goal is secrecy, then bitcoin is really appealing.  So, whether you are trying to avoid taxes, move drugs around, or anything like that, bitcoin will continue to be really appealing.  And, any transaction costs wind up being totally worth it.

4.  Speculators.  Group 3 is actively using bitcoin now, and Groups 1 and 2 are potentially growing.  Mostly, though, in order for this to shake out, the speculators have to get the fuck out of the market so that the value of bitcoin can stabilize because, as I wrote in Part I, bitcoin is totally fucking useless to any sensible person as currency unless its value is stable, and even an increase in price, relative to the dollar, makes it stupid for anyone to pay for anything with bitcoin.

Techno-libertarians, hipsters (of a different variety from yours-truly), and drug-dealers.  Basically, anyone willing to absorb the transaction costs either as an example of "conspicuous consumption," or those for whom the cost is simply part of doing business because avoiding government eyes is necessary.  That's your crypto-currency economy in any country with a functioning government.  And notice that part of that is where the government fails!  That's not an accident!

Oh, and notice that I said that this is your "crypto-currency economy," rather than your "bitcoin economy."  After all, bitcoin could be replaced by another crypto-currency!

Still, there is a niche for it.  But, at what price, relative to the dollar?

Nobody is even trying to figure that out right now.  Speculators are just driving up the price, as every buyer looks at the price, and buys figuring they can sell at a higher price to someone else thinking the same damned thing.  That's how asset bubbles work.  Until they pop...  Why?  Because there aren't enough businesses that actually take bitcoin for it to have real use as currency, in part because its lack of stability makes it useless as currency, and it can't stabilize as long as these speculators keep driving up the price because by definition, that upward movement is lack of stability!  And it doesn't even matter if it does stabilize because no government will take tax payments in bitcoin, which will make it intrinsically inefficient anyway.

So, I've just spent four posts ranting about the internal contradictions in the arguments for bitcoin's future as currency.  Notice what I haven't done.  I haven't addressed the arguments that bitcoin advocates use, for the most part.  I pointed out that you can't use the upward movement in bitcoin's price as an argument for its future as currency, but I haven't talked about the basic underlying premise of a non-government-backed currency.

That's worth doing.  Coming soon, but I'll probably delay that because today is the Alabama special election, and I suspect I'll have a lot to say about that tomorrow morning.  I'll swap my economist hat back for my political scientist hat.

Quick take on election day in Alabama

I'll have more to write in the aftermath of today's Alabama shitstorm, but as of today, Moore still has the edge, with a RealClearPolitics polling lead of just over 2 points, and betting at PredictIt putting his shares of winning at over $.70 on the dollar.  There is that Fox News poll with Jones in the lead by 10.  What do we make of that?

What do I keep telling you?  Never look at one poll.  Always look at the average.  Why?  Because if you do enough polls, you'll get a weird one.  Should you assume that Fox polls are biased towards the GOP, and thus that Jones is really way ahead?  Or, should you just factor that poll into the rest of the data?

You should do the latter.  Look at all of the polls together.  All poll aggregators do basically the same thing.  We have a lot of polls.  Most of them put Moore in the lead.  Alabama is a Republican state.  Moore is a Republican.  Yes, he's a child-molesting, idiot demagogue, but this is Alabama.  As I wrote when the news broke, he passed the Edwin Edwards test.  Live girls.  In his 1983 campaign, Edwards said that the only way he could lose is if he were caught in bed with a "dead girl or a live boy."  They don't care about molesting girls in Alabama, and intelligence is a negative in Alabama.  Bible-thumping is a good thing, as far as they are concerned.  Does Moore want to get rid of the 13th-15th Amendments?  Yes he does.  As far as Alabama voters are concerned, that's just awesome.

Oh, and according to his wife (who is not a teenager), he can't be racist, because his lawyer is a jew.

Classic.

But, this is Alabama we are talking about.

The odds favor Moore.  Betting at PredictIt gives him about a 70% chance, roughly.

If Doug Jones wins (30%, according to PredictIt...), I'm going to spend some time tomorrow writing about a dude named Tim Huelskamp.  Maybe I will anyway, with that teaser, but otherwise, default to party ID.  It's fucking Alabama.

That was less quick than the title suggested.  Sorry...

Tuesday music: If you only listen to American music, you just suck

Theme-wise... I got nothin' today.  Fuck it.  Here's a Fareed Haque concert.


Monday, December 11, 2017

Bitcoin is bullshit, Part III: Transaction costs, and the irrationality of using bitcoin

When I left off with Part II, I pointed out that you will never be able to pay your taxes in a country with a functioning government using bitcoin.  Why does this matter?  A little thing called a "transaction cost."

If you listen to the bitcoin enthusiasts, what they will tell you is that it is supposed to make everything go seamlessly.  You can transfer money quickly and without fees.  Awesome, right?  Not quite.

Have you ever traveled to a foreign country?  You know how there are these exchange rates between currencies that you look up, that differ from what you actually pay?  Yeah, it's a thing.  You see, if you are in, say, Italy, and you need euros to buy some trinket on the Rialto, and all you have are dollars, then those currency exchanges can charge you a small fee to exchange your dollars for euros.  You don't actually get the formal exchange rate.  You lose a bit of money in the deal.  The exchange keeps something.  It's a business.  They make money because they have something you need-- euros.  So, you give them dollars, they give you euros, and in exchange for the trade, you give them a bit of extra money, above the formal exchange rate because you need that cash to buy the shit you are trying to buy on vacation.  Whether it is a cash-for-cash thing, pulling money out of an ATM... it doesn't matter.  You lose a bit of money in the deal.

Yup, that's what happens.  The process of exchanging currency has a cost.  It can be a really tiny cost, depending on circumstances and who is involved, and how, but it is a cost.

I get paid in dollars.  If you work in the US, so do you.  If you want to conduct your economic transactions in bitcoin, you need to convert your dollars to bitcoin.  That exchange is a transaction, separate from any purchase you make, and creates a cost.  You want bitcoin.  Someone else has bitcoin.  That means, regardless of the formal exchange rate anyone sees on any market, whoever has bitcoin can charge you just a tiny bit to sell it to you to subsidize the cost of operation.  Why?  'Cuz you want it.  Markets.  That's how markets work.  Right now, bitcoin is increasing in price, so people are trading based on speculation, but as I wrote on Saturday, that is precisely what makes bitcoin useless as currency.  Eventually, it should, theoretically, stabilize in price, at which point you just have to suck up that fee to exchange your money.  Now, maybe you can set up some peer-to-peer commie fuckin' thing, but seriously, people, we're talking about MONEY!  Yes, I'm calling bitcoin "money."  You want it to be money?  Sure, let's go with that.  Once it becomes that, you gotta deal with all the shit that comes along with being money.

So, fine.  You decide you want to buy shit in bitcoin.  But, you get paid in dollars.  You pay a fee, either to someone who has bitcoin to make the exchange, or to someone who runs an exchange to supervise an exchange, but either way, you pay a fee.  Transaction cost.  Why aren't you paying a fee now?  So that you can run the risk of Mt. Gox, of course!  Doesn't that sound awesome?!

(Me, I like my FDIC insurance, thank you very much...)

Anyway, you pay a fee, if in terms of risk of nothing else.  Then, whoever takes your money when you buy something just made income.  If they are operating legally, they need to pay taxes on it.

Remember yesterday's post?  They absolutely need dollars now.  (Assuming they are operating in the US.  For another country, substitute the appropriate currency.)  That means they have to convert back to whatever currency you chose to convert away from.  And, since there is now a legal requirement, someone can really jack up the price on them.  Transaction cost!

So, two questions:

1)  Why the fuck are you converting to bitcoin to do this, and 2) why the fuck are they accepting bitcoin when they just have to convert back to dollars to pay their fucking taxes?

This is intrinsically inefficient.  You've got transaction costs on both ends for no fucking reason whatsoever.

This is the point where bitcoin-bugs make some claim like, "if everyone used bitcoin, there would be no conversion," but there are two points here.  First, you can't have a system where everyone uses bitcoin precisely because of yesterday's post.  As long as the government requires that taxes be paid in their own currency, pays their employees and contractors in their own currency, etc., you can't have a pure bitcoin system, and governments that function and wish to continue functioning will never convert to bitcoin.  Second, "you can't get there from here."  Why not?  Because as long as governments refuse to accept tax payments in bitcoin, it is intrinsically irrational for people to use bitcoin for normal economic transactions.  Whenever they do so, they are volunteering to pay transaction costs.  The process of switching would involve massive numbers of people volunteering to pay transaction costs.  For no fucking reason at all.

The transaction costs of conducting business in bitcoin make the concept of bitcoin completely hypocritical.  It is constructed to be efficient, yet it is the opposite of efficient.  The idea is that you can transfer money instantaneously, freely and frictionlessly.  Economics are not free of thermodynamics, though.  At some point, every legal entity has to pay their taxes, and they will only ever be able to do so in currency issued by the government of the country in which they operate.  Moving bitcoin around may be easy (although even that isn't risk-free), but converting currency will always have costs.  That means conducting business in bitcoin rather than the currency of the country will always be intrinsically inefficient.  Ain't no gettin' around that.  That's the main reason that bitcoin is bullshit.

What does this mean for the use of bitcoin, bitcoin prices, and so forth?  Coming soon, in Part IV...

Brief morning comments on Roy Moore, Susan Collins and the tax bill

I do this periodically when I have brief comments that don't warrant a full post.  Mostly, I'm sticking with my bitcoin rant because we don't have real political news yet today.

1.  The Alabama special election is right around the corner.  Senator Shelby, the Republican Senator occupying Alabama's other seat, said he didn't vote for the child molester.  It won't matter, in all likelihood, nor will the fact that the idiot, demagogic child molester thinks that Amendments XI-XXVII could be abolished to the benefit of the nation.  Current polling:  RealClearPolitics still has Moore in the lead by 3.8 points on average.  If any election is likely to understate a candidate's polling numbers, it is one in which said candidate is a fucking child molester.  We used to call this "the Bradley effect."  If Moore beats a 3.8 point lead by a significant margin, I suggest that we rename this, "the Moore effect."  The betting at PredictIt still gives Moore about a 3-1 edge.  Still sounds about right to me.  Not "right" as in "morally defensible," but as in "an accurate assessment of reality.  Jones could win, but when in doubt, bet on party.  Political science.

2.  Susan Collins has said that even though she voted for the Senate's tax bill, she might not vote for the reconciled version after it comes out of conference if she doesn't get concessions.  Does this matter?  Not likely.  First, the House could always pass the Senate's unamended bill if negotiations break down.  Her vote is cast.  If all else fails, the House will probably do that.  (See the ACA, 2010).  But, they shouldn't even have to do that.  Even if the Senate can't get Collins's vote on a reconciled bill, the Senate bill passed with 51 votes.  They can still lose Collins, and as long as nobody else defects, they still pass a reconciled bill.

Too late, Susan.

Monday morning blues: If you don't love blues, you hate America

I could go with more posts on the money theme (a common theme in blues), but here are a couple for Roy Moore.  I can make a case that the best working band today is the Tedeschi Trucks Band.  I'm not really a Neil Young fan, but the Tedeschi Trucks Band can make anything work, and they've been playing "Alabama" lately, as a statement.  There's a lot of history to that one, obviously, and I will also strongly recommend, once again, the Drive-By Truckers' classic, Southern Rock Opera, but, um... Neil Young can't sing, and never could.  Susan Tedeschi has just about the best voice ever.  That Trucks/Truckers thing is just a coincidence.  Derek Trucks is the nephew of the late Butch Trucks, drummer from the Allman Brothers, and one of the truly great guitarists around today, although this clip doesn't showcase it.  Go spend some time on youtube, and be blown away by Derek's guitar playing, Susan's voice, and the whole band, particularly when they have Oteil Burbridge on bass.

And, just for Roy, here's Stevie Ray Vaughan, with "Leave My Little Girl Alone," from In Step.



Sunday, December 10, 2017

Bitcoin is bullshit, Part II: What you will never be able to do with bitcoin, and why it matters

Today, if you want, you will be able to start trading "futures" on bitcoin the way you can trade futures on commodities like oil.

Fun.

What could possibly go wrong?  Bitcoin proselytizers will tell you that bitcoin's rise in price means that it is the coming thing, but as I wrote yesterday in Part I, even a rise in price, relative to the dollar, makes bitcoin useless as currency.  Still, doesn't that rise in price make you want to go buy a shitload of bitcoin?

Um.  Sure.  Go, get in your time machine, go back to when bitcoin was way cheaper (like, last week), tell yourself to buy a bunch, and then sell it now.

So, go do that.

What?  You mean you don't have a time machine?

Well, then.

And even if you did, if it works anything like time travel in Neal Stephenson and Nicole Galland's The Rise and Fall of D.O.D.O., it still might not be that simple.  (Side note:  fun book).

Still, as bitcoin futures trading opens up, you might think that this is a sign of the normalization of bitcoin.  However, there is a critical thing that you will never be able to do with bitcoin, and it is a big part of why bitcoin is bullshit.

So, um, how's Greece doin' these days?  Remember Greece?  It's that Mediterranean country with finances that are totally fucked.  (One of them, anyway).  Short version, in 2007 and 2008, our economy collapsed, and since we are the center of the world, financially speaking, that spread.  When it hit Greece, it hit haaaaard.  (Yes, I'm oversimplifying.  This isn't the main point.)  A couple of years after the global crisis started, Greece revealed that the government had been cooking their books.  You see, the Greek national pass-time is tax "avoision," as Kent Brockman likes to say.  And, the Greek government being what it was, decided to be complicit, and cover it up, so they just fuckin' lied about how much/little money they had.  Eventually, it all came out, they revealed to the world that they had no fuckin' money, they couldn't pay their bills, couldn't pay their creditors, and Greece went into total financial collapse.

But... it was even worse for Greece than it might have otherwise been.  You see, for a country on its own currency, worst case scenario, you do something that you don't want to do, but can do as a last resort to pay your creditors.  The US government can, as a last resort, quite literally print dollars to pay off creditors.  Canada can print... loonies, or whatever the fuck they use up there, eh?  Any country using its own fiat currency can print money to pay creditors.  It's a bad thing to do if you really have a shitload of bills because... inflation, and if you really have a metric fuckton of bills, literally printing currency causes hyperinflation.  Absolute last resort.

However, the knowledge that a government can do this means that creditors don't tend to worry that the US government will fail to pay bondholders (except when House Republicans started fucking with the debt ceiling in 2011, but that was just political stupidity, not economic necessity).

Remember Greece, though?  This is a story about Greece.  When the crisis hit, Greece was on the euro.  Not the drachma, the euro.  They couldn't print money.  So, holders of Greek bonds legitimately looked at the Greek government's finances, and worried that they wouldn't get paid because they knew the Greek government's accounts were empty, and the government didn't even have that horrible, last-resort option of printing money.  So, interest rates on Greek bonds skyrocketed, sending the country into a fiscal death spiral, such that they needed to beg for money from Germany under whatever shitty terms Germany would give them.  Greece is still fucked because of this.

Back when the "Great Recession" hit, economists Ken Rogoff and Carmen Reinhart put out a paper called, "Growth in a Time of Debt," claiming that if a country's debt-to-GDP ratio crossed over the 90% threshold, DOOM! DOOM! DOOM!  There were plenty of problems with their paper, not the least of which was an Excel spreadsheet error uncovered by a UMass, Amherst grad student doing a replication paper for a Methods class.  (Yes, really!)  However, all of the countries that have experienced serious problems with high debt-to-GDP ratios are countries that don't use their own currency.

Like Greece.

Greece wasn't alone.  Italy went through quite a rough patch, and if you pay attention to the international business news, you see references to the PIGS countries (Portugal, Italy, Greece, Spain), because of the similar underlying economic issues they have faced, and the problems that ensue when you don't borrow money in your own currency.

Basic point:  if a country borrows money in some currency that it doesn't control, it doesn't have options like that last resort of printing money to pay off debt.  Even though nobody wants to have to use it, just having it there means that bond-holders know they're going to get paid, and that makes financial crises like the one Greece faced really unlikely.  That's why the countries Reinhart and Rogoff pointed to as problem countries were all countries that borrowed in some currency they didn't control.  If you control your own currency, that doesn't mean everything is smooth sailing, but you are safe from Greece-style crises.

As long as the government borrows money in currency that it controls.  Any government that borrows money in currency that it doesn't control, knowing what happened to Greece...

That's just fucking stupid.

Solution?  Issue bonds only in currency of your own denomination.  Pay employees only in currency of your own denomination...

And this is vital:  only accept tax payments in currency of your own denomination.  That way, you pay your bondholders in your own currency.  And you are safe from a Greece-style crisis.  Period.

That is why no sane, functioning government will ever let you pay your taxes in bitcoin.

How much of the economy is that?  The proportion of any country's economy that the government takes up, obviously, varies by country.  The thing is, though, that taxes are a portion of every single legal economic transaction.  The government gets a piece of everything.  Or, everything legal, anyway.

It isn't just the size of government.  It is the ubiquity.  So you don't want government to have a piece of the action everywhere?  Tough fucking shit.  It does.  Income taxes, payroll taxes, sales taxes, capital gains taxes, corporate taxes...  That shit ain't goin' nowhere, and it ain't never gettin' paid in bitcoin because policymakers watched what happened in Greece and other countries that saw problems because their debt was denominated in currency they didn't control.  Policymakers won't let that happen anywhere else.  You are either paying your taxes in dollars (assuming you are reading this in the US), or running the risk of imprisonment for tax "avoision" (HT: Kent Brockman).

Now, why does this matter so much?  That will be the subject of Part III!  A little thing called, "a transaction cost."  Hey, if Trump can claim he invented the phrase, "priming the pump," can I claim to have invented the phrase, "transaction cost?"  Anyway, coming soon...  Part III: bitcoin and transaction costs, because...

Bitcoin is bullshit.