The FED's Real Monetary Problem

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Since being
"converted" to both libertarianism and, by extension,
Austrian economics I have developed a passion for money. The monetary
regime lies at the heart of so many symptoms of societal conflict
that studying the nature of money seems axiomatic to me. In our
current mixed economy of Keynesian Shamanism and Monetarist Voodoo
reading through even poor synopses of the Austrian business cycle
was like finding the Rosetta stone. The money promulgated by the
Federal Reserve and backed the full force and aggression of the
U.S. Government could easily be seen as the motive force for all
manner of secondary and tertiary effects, especially after a reading
of Hayek's The
Road to Serfdom
. There is nothing in the FED's arsenal of
monetary tools to combat this problem; the rejection of their basis
for existence.

Since those
moments of awakening I've spent much of my time thinking about how
to inject a new currency into an existing regime without using force
like with the Euro. I was an adopter of The
Liberty Dollar
, which was an interesting idea until the raid
by the FBI in 2007
. It highlighted the growing concern with
the US Dollar; giving people the illusion of a silver-backed currency
while hedging against its own success or failure by buying their
coins and storing them away.

with The Man
were equally predictable; thieves hate competition.
The Liberty Dollar was being persecuted over a broad interpretation
of counterfeiting laws (irony duly noted) while E-Gold was harassed
over their customer's actions, not any actions of their own. The
Federal Government is allowed to run the twin Ponzi Schemes of Social
Security and Medicare but U.S. citizens are not allowed to engage
in commerce with those engaging in similar activities while not
actively engaging in those activities themselves.

In other news,
water is wet.

E-Gold is still
in business, as are others like GoldMoney.
They are all solutions for overcoming one of the real problems with
hard currencies; the physical movement of metal from point A to
point B in a speed of light economy. Unfortunately, they are all
built on the same poor foundation, which the modern banking system
exploits ruthlessly; trusting a third party to manage your property
from a remote, central location. For GoldMoney, this is a feature
not a bug, having vaults located outside the U.S.; a hedge against
potential flight-of-capital diktats issued from Mordor-on-the-Potomac.

I have been
tempted by these systems, but I have not placed funds with them.
I'm willing to believe that many of them are legitimate in both
their intentions and business practices, but I can't afford to take
that risk.

I prefer the
promise of my dogs to someone I've never met.

It's funny
that I have no issue with using PayPal linked to my checking account
but am unwilling to fund a GoldMoney account for the same purpose.
Of course, I can hear Gary North on my shoulder whispering in my
ear like a fiscally savvy Iago saying, "Obviously, you have
a problem with that. Gold
isn't money
." He is right. Because of Gresham's law I value
it more highly than its notional value. Why would I transact in
it, when people will take these
stoopid federal reserve notes
? Gold is insurance against the
depredations of the central bank upon the dollar. It may trade on
the COMEX like a currency, but a medium of exchange it is not. As
this hilarious video shows
, the people of Harvard Square do
not even know what to do with silver being offered to them for practically
nothing; no less conceive of a use for it as a monetary instrument.

This is a warning
to the hard money crowd that a return to commodity money will happen
organically or not at all; an outgrowth of a loss of confidence
in the dollar and the institutions that circumscribe our daily reality.
Without any kind of fundamental shift in mass perspective, I see
no future for a commodity exchange standard that bears any resemblance
to the International Gold Standard.

People are
more trusting of digits than physical gold.

To that end,
I came across something the other day that piqued my curiosity.
It was called Bitcoin. Compared
to the systems mentioned previously, to call this idea a currency
would do violence to the idea of a currency. It is, as of right
now (vers. 0.3.2 beta), an exercise in what a digital currency could
look like that is not dependent on third-party trust or centrally
issued by a monopolistic agent of force.

Quoting from
the FAQ Bitcoin is:

…a peer-to-peer
network based anonymous digital currency. ”… there is no central
authority to issue new money or to keep track of the transactions.
Instead, those tasks are managed collectively by the nodes of
the network.

Yes, but what
is it? In deference to Dr. North again, the answer is simply, "Digits."

But, they are
digits with a twist. New bitcoins are generated via lottery within
its proof-of-work system where the records of previous time-stamped
transactions are
into a chain, which is verified by all the members of
the P2P system. There is planned inflation of a known and slowing
rate up to a point. After that, deflation is built into its structure.
It is currently in this early phase of development. The longer the
chain the more secure the system is by nature of the algorithms
at work. For details, see the
white paper
. They are currently divisible to 8 decimal places.
Transactions can be completely anonymous.

Tom, digits? These are intriguing digits, though.

It's obvious
to see (after translating the geek-speak) that the system was designed
to be a digital analogue to gold and silver mining. The rate of
generation is normalized to a set rate regardless of the number
of people (CPU's) working on it. The cost to generate digits is
the electricity used by the CPU and the opportunity cost of using
your computer for something else. Increasing the network size increases
the rate at which independent verification of the transactions is

How resistant
to attack this is has yet to be seen. There is one
underway right now.
How successful can this be? I have no earthly
idea and could care less. For me watching the rate at which new
ideas are spawned when people are motivated to produce solutions
to ancient problems is what is important.

So, yes, digits,
which I said I believe to be the future of money, sadly. But, these
are digits whose movements are verified by hundreds of incentivized
auditors 24/7/365. Hell, the FED won't submit to a one-time audit
by those for whom they supposedly work! Yet we are loath to stop
using their product.

I see Bitcoin
as a metaphor for the Web itself. It is what happens when people
of common tastes are able to find each other over vast distance
to find their niche in the division of labor. Synthesizing cryptography,
programming and monetary theory into a unique offering could not
have happened without the Web; itself that which subverts attempts
at control as a natural consequence of its own structure. Any success
Bitcoin enjoys exists as a means to an end (improving how humans
interact via mutual exchange), not the end itself (adoption in the
marketplace). All knowledge is fractal; each new exploration implying
a completely new host of questions that need answers… and right
now we need answers.

I know that
the current system is not only immoral but also failing. I'm fond
of saying that the two most abundant things in the universe are
hydrogen and the human capacity for self-delusion. Hyperinflation
always occurs after a mass awakening from the delusion about the
issuer's ability to protect a currency's value. We are flying into
the monetary equivalent of "coffin
and will eventually stall. If, as Gary North has
been saying for years that gold is not money, digits are, then digits
that are designed to be "as good as gold" may be one way
to disabuse us of our delusions.

And, if the
empire does strike back at us for doing so, so what? Someone is
working on that problem as well. It'll be in version 2.0.

23, 2010

Luongo [send him email]
is a professional chemist, amateur economist and obstreperous recovering
Yankee residing in North Florida.

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