On currency

On currency

The value of money is a useful fiction.

As with most fictions, the story that we tell about money helps some people more than others. 

Money, in and of itself, is useless.  Gold, cowry shells, slips of paper with pictures of dead presidents.  The story makes us want these things.  We tell ourselves that these items can “hold value.”  Instead of lumbering about with all the goods we want to barter, we can carry a small purse of coins.  As long as everyone believes the same fiction, we can trade our apples for some coins, then later use those coins to pay someone to help us dig a well.

The story that money has value is most helpful for the people who already have money.

If everyone suddenly woke up from the story, and decided that coins were worthless, the people who grow apples would be okay.  In some ways, it’s less practical to pay people with apples – coins don’t bruise or rot – but it can be done.  Similarly, the people who dig wells would be okay. 

But the people who owned coins would be worse off – previously, the things they owned could be traded for other, inherently useful goods.  And people who had made loans would be much worse off – they would have given away money at a time when it could be used to buy things, and when they receive the coins back, they’ll be worthless.  No recompense for past sacrifice – only loss.

So people with current wealth benefit most from the fiction that money has value.

This is, as far as I can tell, the only real virtue of Bitcoins.  This form of currency is not anonymous – indeed, it works through the use of “blockchains,” a permanent ledger that records everyone who has ever owned a particular piece of money.  Bitcoins are a little like dollar bills where you have to sign your name on it in order to spend it.  And they’re excruciatingly bad for the environment – it takes energy to mint a real-world, metal coin, but nothing like the amount of energy that’s constantly wasted in order to verify the ledgers of who owns which Bitcoin.  Ownership is determined by vote, and the system was designed to be intentionally inefficient so that it’s difficult for one person to overwhelm the system and claim ownership of everybody’s coins.  And it’s unstable – it’s difficult for someone to outvote the system and take control, but not impossible.

Those all seem like bad features.  But Bitcoins are now incredibly valuable – in the years since I explained all these flaws to a high school runner who’d begun investing in Bitcoins, his $500 investment has burgeoned to be worth $24,000.

The only “good” feature of Bitcoins is that the system is designed to reward past wealth.  The total money supply approaches an asymptote – new Bitcoins are added to the system more slowly over time.  If the currency is successful, this will impose a deflationary pressure on prices.  Today, a certain amount of heroin might cost 0.1 Bitcoin – in the future, that same amount of heroin might cost 0.01 Bitcoin.

This deflationary pressure would cause the value of current holdings to increase.  By simply buying Bitcoins and hoarding them, you’d gain wealth! 

But this only works for as long as people keep believing the fiction that Bitcoins have value.  And the more people who buy and hold Bitcoins, as opposed to actively using them as currency, the less believable the story will be.  Anyone who “invests” in Bitcoins is wagering that other people will behave in a way that maintains the fiction, even though the person who is making the wager is actively undermining the story.

When we immerse ourselves in stories, we often need to temporarily suspend our disbelieve, but that particular set of mental gymnastics is too twisty for my mind.

Modern money barely exists.  Before, we spun stories about the value of coins – now, the fiction lends value to certain strings of numbers.  In addition to the Federal Reserve, any bank can create money by making a loan and claiming that a certain amount of currency has been added to one account or another.

This has allowed our fictions to become more intricate.  In 2008, the banking crisis threatened to make wealthy people much less wealthy – they had purchased certain financial assets that seemed valuable, and then these assets turned out to be worthless. 

It’s as though there was a certain new Magic card that everyone assumed was great, and a few rich kids bought all the copies of it, but then people finally read the card and realized it was terrible.  Now these rich kids are holding hundreds of copies of a worthless piece of cardboard.

This would be sad for those rich kids.  But, lo and behold, it was fixable!  If everyone can be forced to believe, again, that the item has value, then it will.  The story needs to be chanted more loudly.  If I paid $50 for this card last week, then it’s still worth at least $50!

That’s what “quantitative easing” was – governments around the world agreed to buy worthless items in order to convince everyone that these items had value.  This way, the wealthy people who had initially bought them wouldn’t have to suffer.

In the years since I’ve been teaching in our local county jail, I’ve struggled to comprehend the disparities between the way we treat poor people and wealthy people who made mistakes.

For instance, stock traders stole $60 billion from state governments across Europe – the trick was to have two people both temporarily own the stock around tax time, then they lie to the government and claim that they both had to pay taxes on it.  Only one set of taxes were actually paid, but they lie and claim two rebates.  Money from nothing!

From David Segal’s New York Times article:

A lawyer who worked at the firm Dr. Berger founded in 2010, and who under German law can’t be identified by the news media, described for the Bonn court a memorable meeting at the office.

Sensitive types, Dr. Berger told his underlings that day, should find other jobs.

“Whoever has a problem with the fact that because of our work there are fewer kindergartens being built,” Dr. Berger reportedly said, “here’s the door.”

They stole billions of dollars, and the question at stake isn’t whether they will be punished, but whether they can be forced to return any of the money. 

By way of contrast, many of the guys in jail are there for stealing $10 or so.  A guy did five months for attempting to use my HSA card to buy two sandwiches and a pack of cigarettes.  Another violated probation when he stole a lemonade – “In my defense,” he told me, “I didn’t even mean to steal it, I was just really fucking high at the time.

Two weeks ago, a dentist visited the jail during my class.  I go in from 4:00 p.m. to 5:30 – at about 4:15, a guard came to the door and barked somebody’s name.

“Med call?” somebody asked.

“Shakedown?” asked another.

The guard looked at the sheet of paper in his hand, then said “Dentist.”  And suddenly six guys started clamoring, “You got time for extras?  I gotta get on that list!” 

The man whose name had been called jumped out of his chair and sauntered to the door.

After he’d left, the guys explained the system.  “You can get dental, like real dental, but you have to put your name on the list and they only come like every five, six months.  So there’s no hope unless you’re gonna be here for a while.  And it’s kinda expensive, you pay like fifty for the visit and another ten for each tooth they pull.”

Apparently that’s the only service – pulling teeth.

“They do good work,” said the older man next to me, “I got these bottom two done here.”  And he tilted his head back and opened his mouth.  But I grew up wealthy – it’s hard for me to assess quality by eyeballing the blank gap between somebody’s teeth.

About twenty minutes later, the guy came back.

“Which ones you have them do?” somebody asked him.

“I had ‘em get these bottom three,” he said, although his voice was slurry because they’d loaded his mouth with novacaine.

“You idiot!  You didn’t have them get the top one?”

“No, man, that’s my smile!  Gonna find a way to save that tooth.”

“Man, see, how come I couldn’t be on that list?  I would’ve had ‘em pull a whole bunch of ‘em out.  Wouldn’t give ‘em no that’s my smile bullshit.”

As it happens, I’d gone in for a cleaning at my dentist just the day before.  And I’ve had braces.  Invisalign.  I suddenly felt rather self-conscious about my own perfectly clean, perfectly straight, perfectly intact teeth.

“So who was it, that lady doctor?”

“Naw, was the Black guy.”

“What?  Fuck’s it matter that he’s Black?”

“Nobody said it matters, it’s just, there’s three dentists, there’s the lady doctor, the Black guy, and then that other guy.  There’s just three, is all.”

“Oh.”

Our man was out eighty dollars after the visit.  Could’ve spent ninety, but he was holding out hope for that last one.  And they didn’t let him keep the teeth. 

I’m not sure the tooth fairy ever visits the county jail, anyway.

On bitcoins and privacy.

On bitcoins and privacy.

I’ve never purchased bitcoins.  Which might seem odd.  The motivation for bitcoins dovetails with several of my political beliefs.  But not all.

For instance, I think most chemicals should be legalized.  The U.S. prescription drug system, because it inflates drug prices, arguably makes people less healthy.  Not everyone can afford medication.  Given that the purpose of this system is to keep people healthy — ensuring that those taking prescription drugs are guided by a trained professional — if it’s not working, it ought to be scrapped.

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Care about drug prices? Check out this piece, in the Wall Street Journal, which accompanied this infographic.

There is, of course, a solid motivation for requiring a prescription for opiates.  Many people have troubles with impulse control.  And for antibiotics: their use, especially incorrect use, makes them work less well for everyone else in the future.  But most of our other restrictions seem unnecessary.  In the realm of recreational drugs, it seems pretty clear that psilocybin mushrooms, and even marijuana, would result in far less harm to non-users than alcohol does.

8419208053_87040ac4a0_oAt the same time, I believe in gun control laws.  Which might seem a little strange — both drug prohibitions and gun control are instances of the government declaring certain possessions to be illegal — except that it’s much easier to hurt somebody else with a gun than a pill.  To my mind, only laws against compounds like GHB — which does have legitimate uses, but is often weaponized against others — are equivalent to gun restrictions.

On the whole, though, I am in favor of a currency that enables drug purchases.  Especially if an inability to regulate consumption caused our government to repeal some of its current slew of minority-cudgeling prohibitions.  It’s a bit tricky, though, to enable one form of civil liberties (buying drugs) from others (buying guns & hiring hit men).

But the main reason why I never purchased bitcoins is that I couldn’t understand them.  I learned enough to be able to describe roughly how I thought they worked, but, based on what other people were doing, it seemed pretty clear that either I or other people were suffering from some fundamental misunderstandings.  Because my education included only the barest smattering of computer science, I assumed it was me who was mistaken.

Well, maybe not.

The first confusing aspect of bitcoins is their meteoric appreciation.  A significant portion of this rise was speculative, the way the price of Beanie Babies skyrocketed despite a lack of intrinsic value.  If you think someone will buy an object from you for twenty dollars next week, why not pay fifteen for it today?  If that person thinks another sucker down the line will pay thirty in two weeks, then of course they’ll pay twenty next week!

The problem being, of course, that eventually the suckers have all the Beanie Babies they need.  Or bitcoins.  Or tulips.  What have you.

Bitcoin_winkdex
And quite an appreciation, too.  Bottom is time, side is dollars per bitcoin.

There is a sensible reason for appreciation.  The current (and eventual) quantity of bitcoins is fixed, which means that, if the currency is working well and many people would like to use it, prices have to become smaller.  If prices (in bitcoins) drop by half, then the supply of bitcoins doubles!  More people can participate in the market.  Of course, since the real-world prices of Canadian medication, or LSD, or murders, or fake i.d.s, will be unchanged, then the conversion rate between bitcoins and dollars has to double.

Because bitcoin transactions can use fractional amounts of money (down to the nearest millionth), then, if the currency survives, I’d expect this sort of change to happen eventually.  This deflation interacts strangely with existing holdings (people who bought in early are suddenly much wealthier), so I’d expect these changes to happen very slowly.  Not to fuel the orders-of-magnitude appreciation we’ve seen.

The other aspect of bitcoins that always confused me is (was?) their supposed anonymity.  Your name is not attached to the account.  But, your ownership is preserved.  I’m out of my depth here, but the way I think the system works is, everyone involved in the system maintains a record of every transaction, and ownership is determined by majority vote.  If most computers involved claim that XXX paid YYY two bitcoins for a service, then those two bitcoins are now owned by YYY.

This transaction log is referred to as a “blockchain.”  Here’s a visual:

Capture
Modified from one of Stefan Loesch’s posts on bitcoins.  His site has many lovely, lucid posts about economics, banking, & monetary policy — including some very accessible explanations of the vices & virtues of bitcoins.  If you’re at all interested in these issues, I’d recommend his description of the problems caused by “ownership by majority vote.”

Which puzzled me.  I simply could not understand how it would be possible to maintain both ownership rights of an ethereal entity like a bitcoin, something you can never see or touch or smell, and also make the system anonymous.  The “blockchains” log everything you’ve ever done with your currency!  To me, that sounded far less anonymous than any physical currency.

So it was with a sense of grim satisfaction that I read John Bohannon’s recent Science news article, “Why criminals can’t hide behind Bitcoin.”  Because, indeed, it is possible to map bitcoin ownership to specific IP addresses (this is akin to a mailing address for any device connected to the internet — not quite the same as knowing a person’s name, but if the feds know a criminal lives at Harbor Hill in East Hills, NY, they’re close to closing in).

Part of the explanation for this seems to be that the people who know about any transaction first are those involved in the transaction.  And part seems to be that, as with any puzzle, solving one section — identifying a few initial addresses — makes it easier to untangle the rest.

If you’re looking for absolute secrecy, bitcoins might not be for you.

Of course, plenty of people are working on other supposedly secretive forms of computer currency.  A developer for the new bitcoin replacement “ShadowCash” (software dudes are not always known for beautiful language, although I’ll admit that “java” is fun to say) is quoted in Bohannon’s article: “I don’t feel people have the right to know, unless disclosed, how much cash is in my wallet, just like I don’t feel anyone should know what conversations I’m having with anyone.”

Now, I’m gung-ho for (nonviolent) civil liberties, but obviously I disagree.  Wealth is not like speech — it is a semi-limited resource that comes from others.  Furthermore, the two fundamental functions of modern governance are protecting property rights (your ownership of a house, for instance, or the money in your wallet) and civil liberties (your getting to be alive).

If I decide to go on the warpath and conquer your home, the government can’t very well intervene unless they have a record that this home is in fact yours and not mine.  Which raises sundry other questions — what chain of events through history led to it being yours? — but unless all these cryptocurrency advocates are as childishly violent as Mr. Ulbricht (creating a platform for U.S. citizens to purchase imported pharmaceuticals seems fine.  Hiring hit men is not), methinks they have a fundamental misunderstanding as to the way ownership works.