ECB paper on Bitcoin and virtual currencies

[lonelyminer (Peter Šurda)]

The ECB is referring to risks associated with price volatility. Sell me a shirt for the market price in. btc. There is no promise that this the shirt will be available for a similar btc price tomorrow next week or next year. For Euros, the ECB maintains approximate price stability. You need central bank intervention to maintain stable prices. This is what they mean by finality and irrevocability of payments.

If they are worried about the price level of Euro, then the only thing they need to do to mitigate it is to conduct open market operations between the Euro and Bitcoin. This is extremely trivial to do. There's very little to be done on the infrastructure, and there are no legal (Bitcoin is not owned by anyone or covered by property laws) or international (Satoshi or the Bitcoin Foundation are not going to threaten to attack the EU if they do it) obstacles. In fact the only institutions that attempt to interfere with the trade between the Euro and Bitcoin are the financial regulators, i.e. other branches of the EU and national goverments (e.g. the German BaFin).

Michael Woodford, a Keynesian and one of the economists Krugman likes, wrote about things like this in a paper called Monetary Policy in a Wold Without Money. I wrote a critique of the panicky views, partially based on Woodford's arguments, for a German online magazine, it was published here: http://www.business-on.de/saarlorlux/alternative-digitale-waehrung-wirtschaftsforscher-sieht-in-bitcoins-grosses-potential-_id14906.html

If they are worried about the price volatility of Bitcoin, the problem with this approach is that it confuses top-down monetary systems (fiat money) with bottom-up monetary systems (commodity money). With commodity money, the function of unit of account is an emergent one, and occurs relatively late at the stage of development, at a very high level of liquidity. Until that happens, the price volatility is irrelevant from macroeconomic point of view.

Fiat money is accompanied by legal tender laws, which force you to use that money in your business accounting for the purposes of taxation. So obviously a price volatility is an issue from the beginning. Furthermore, in order for Bitcoin to be used as a unit of account, it would not only have to reach a much high level of liquidity that it has now to become a unit of account, but also out-compete fiat money to such an extent that people would not worry about violating the accounting provisions of the legal tender laws.

Empirical data also supports the emergent aspect of unit of account of Bitcoin and my argument that it's not a problem. Even though there have been many failed businesses in the Bitcoin ecosphere, as far as I know, none of them failed due to price movements.

[lonelyminer (Peter Šurda)]

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Would it be possible to present evidence to you that would lead you to re-examine this view? After all, the empirical record of central banks is not very favourable.

[molecular]

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Not what you're looking for, but I think the Byzantine Economy was run on a commodity money standard for very long period of time (1000 years) without cycles: https://en.wikipedia.org/wiki/Byzantine_economy

[molecular]

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Would it be possible to present evidence to you that would lead you to re-examine this view? After all, the empirical record of central banks is not very favourable.

A good theory must be theoretically falsifyable. I think he's asking you how that could be done so he can then present a counterexample.

EDIT: increased level of quoting to include quote of DublinBrian which was omitted before.

[Roger_Murdock]

Sorry, we meant to say it's seems pretty balanced as a report to people who know what real life is like.  This is a report meant to be read by people who know and work in banking....

Yeah, when I think of "people who know what real life is like," I think of bankers. Real salt of the earth types, those guys.    But you're kind of making my point. It's pretty good ... for bankers, i.e. still pretty terrible.

...not by people who default to conspiracy theory and end any conversation with "becuz of guvernmint". 

First of all, I've gone literally days without ending a conversation with that phrase. Secondly, I didn't think the history of the Federal Reserve's founding really qualified as a "conspiracy theory" at this point. And frankly, I'm more interested in public choice theory than I am in conspiracy theory. That says that the banking industry, like pretty much all industries, will lobby for and defend policies that restrict competition from new entrants and keep their own profits artificially high.

It is balanced because it highlights pros and cons as they apply to everyday experiences.

Well, I guess it tried to do some of that but it got most of it wrong. The pros of Bitcoin over fiat are that it's more durable (resiliency of distributed networks, ability to "copy" money for security without actually duplicating it), more fungible, more reliably scarce, more provably genuine, more divisible, has radically lower transaction costs, is faster, enables greater financial privacy, is more transparent from a systems perspective, and eliminates counter-party risk for holding and transferring value. The pros of fiat over Bitcoin are inertia (network effects) and the fact that it's the preferred currency of the men with guns.

[lonelyminer (Peter Šurda)]

A good theory must be theoretically falsifyable. I think he's asking you how that could be done so he can then present a counterexample.

I meant his view, not this view. The Keynesians argue that during a depression, there are idle resources in the economy (for whatever reason) and this causes problems. What would persuade cunicula that these "idle resources" actually represent a move towards, not away from, an equilibrium, and that they are caused by the influence of credit on the money supply?

[cunicula]

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Would it be possible to present evidence to you that would lead you to re-examine this view? After all, the empirical record of central banks is not very favourable.

What is the counterfactual here? They may not have lived up to your expectations, but that doesn't mean you'd be better off without them. You did not establish criteria for favorable performance.

Regarding evidence...

Sure, real GDP volatility is a measure of economic stability. The question is whether real GDP is less volatile when countries have a central bank acting as lender of last resort.
Everyone has a lender of last resort now. So I think you'll need historical evidence. Show me data which shows that during the 19th century, GDP was less volatile in countries that did not have a lender of last resort.
The evidence that I'm aware of suggests the opposite.

I posted a paper in another thread about it. Here it is again:

http://www.rich.frb.org/publications/research/economic_review/1990/pdf/er760103.pdf

I will not accept evidence along the lines of (if only x and y had happened), then free banking would have worked better. That is speculation, not empirical evidence.

(I'm not going to talk about the theory of what is really going on... It is much too speculative. Often almost useless in my opinion. I'll prefer to restrict myself to questions one can answer with data. e.g. is GDP less volatile with a central bank? are there fewer banking crises? Do banking crises have greater geographic scope? etc.)

[cunicula]

I dont believe there were recessions as we know them today. As far as Im concerned there was no boom bust credit cycle when we used gold and silver.

Would it be possible to present evidence that would lead you to re-examine this view? If so, what kind of evidence?

Not what you're looking for, but I think the Byzantine Economy was run on a commodity money standard for very long period of time (1000 years) without cycles: https://en.wikipedia.org/wiki/Byzantine_economy

I wasn't aware that we had annual GDP data for the Byzantine Economy. Could you please point me to it.

[molecular]

A good theory must be theoretically falsifyable. I think he's asking you how that could be done so he can then present a counterexample.

I meant his view, not this view.

This totally changes the meaning.

[cunicula]

Empirical data also supports the emergent aspect of unit of account of Bitcoin and my argument that it's not a problem. Even though there have been many failed businesses in the Bitcoin ecosphere, as far as I know, none of them failed due to price movements.

Firms that have liabilities in USD and assets in BTC are going to fail with high frequency. Likewise, firms that have liabilities in BTC and assets in USD will also fail with high frequency.

Bitcoinica got into trouble with this, even though it failed for other reasons. Pirate also expressed concern about this, though he failed for other reasons.

I don't understand why bitcoin would fail to 'emerge as a unit of account'. That is an Austrian economics argument (read bunkum). Neoclassical economic theory supports bitcoin having positive value in equilibrium (though there are multiple equilibria).

Read Kiyotaki and Wright

http://cas.umkc.edu/econ/economics/faculty/wray/631Wray/Kiyotaki%20and%20Wright.pdf

[DublinBrian]

The evidence that I'm aware of suggests the opposite.

I posted a paper in another thread about it. Here it is again:

http://www.rich.frb.org/publications/research/economic_review/1990/pdf/er760103.pdf

I will not accept evidence along the lines of (if only x and y had happened), then free banking would have worked better. That is speculation, not empirical evidence.

The "evidence" you link to is a Central Bank website. That is not a neutral source.

You dont have much credibility, IMO. I see no reason to debate with you.

[cunicula]

If they are worried about the price volatility of Bitcoin, the problem with this approach is that it confuses top-down monetary systems (fiat money) with bottom-up monetary systems (commodity money). With commodity money, the function of unit of account is an emergent one, and occurs relatively late at the stage of development, at a very high level of liquidity. Until that happens, the price volatility is irrelevant from macroeconomic point of view.

What are you talking about here? "late stage of development, very high level of liquidity" "commodity money"

Is this some vision about how we weren't ready for commodity money before due to inadequate development, but in the future we become ready and then it works well.

If not, explain what you mean.
If yes, you should put Karl Marx as your avatar.

[cunicula]

The evidence that I'm aware of suggests the opposite.

I posted a paper in another thread about it. Here it is again:

http://www.rich.frb.org/publications/research/economic_review/1990/pdf/er760103.pdf

I will not accept evidence along the lines of (if only x and y had happened), then free banking would have worked better. That is speculation, not empirical evidence.

The "evidence" you link to is a Central Bank website. That is not a neutral source.

You dont have much credibility, IMO. I see no reason to debate with you.

It is an academic article by a professor at Rutgers university. Economists working at central banks do whatever macroeconomics research they like. (e.g. the economists at the Minneapolis FED only write articles saying that the FED is useless).

If I may quote myself from the first page of the thread:

I hope that people pay attention to the ideas presented in the paper and not just the identity of the author.

I am so prophetic. Yay me!

[molecular]

I am so prophetic. Yay me!

Yay.

[lonelyminer (Peter Šurda)]

Firms that have liabilities in USD and assets in BTC are going to fail with high frequency. Likewise, firms that have liabilities in BTC and assets in USD will also fail with high frequency.

This makes no sense unless BTC is a unit of account, and it at the moment isn't, and as I wrote, it probably won't until we're at the stage where the fiat money system is collapsing due to its internal mismanagement.

Bitcoinica got into trouble with this, even though it failed for other reasons. Pirate also expressed concern about this, though he failed for other reasons.

Bitcoinica had a crappy hedging algorithm, and in fact was unprofitable during the time of high price stability and high liquidity (the exact opposite of what you allege). Pirate most likely did not do any trades whatsoever and was a pure ponzi (the guy has a long history of allegations of fraud and theft).

I don't understand why bitcoin would fail to 'emerge as a unit of account'. That is an Austrian economics argument (read bunkum).

I would appreciate if you read what I wrote, and produced arguments instead of ad hominem attacks. Bitcoin can evolve into a unit of account, but we're far away from that.

Neoclassical economic theory supports bitcoin having positive value in equilibrium (though there are multiple equilibria).

This "multiple equilibria" with respect to Bitcoin is also dubious. With normal fiat money, for example, the stregth of the national economy, monetary policy of central banks, transaction cost difference among forms of money, or demand for credit influence the money supply, but with Bitcoin they don't (and potentially never will).

Read Kiyotaki and Wright

I already read it. I checked my bibliography records and I made four notes on this paper. I agree with it that fiat money is more efficient with respect to storage costs than what has commonly been understood as commodity money, and also that velocity is not a good indicator of "moneyness". I disagree that "beliefs" play a significant role in the selection of money, and also the authors fail to sufficiently appreciate the heterogeneity of transaction costs (a very common mistake for almost all the authors that I read, including many Austrians).

[lonelyminer (Peter Šurda)]

I posted a paper in another thread about it. Here it is again:

They (bank panics, ed.) occurred  more  often  in  the  U.S.  than  in  other  countries.  They  usually  occurred  during  serious  recessions
associated  with  declines  in  the  money  supply  and sharp  price  level  reversals.  The  likelihood  of  their occurrence  would  be  greatly  diminished  in  a  diversified  nationwide  branch  banking  system.

This is consistent with the Austrian view, the bank panics correlate with shrinking of the money supply. Also, branch banking was prohibited in the US in the 19th century.

The Austrians also view the shrinking of the money supply (and accompanying panics) as a move towards, not away from, an equilibrium. So when evaluating central banking based on the number of panics, they reach the opposite conclusion, especially the gold standard branch (Rothbard in particular favoured bank runs as exposing the "fraudulent" nature of fiduciary media). The freebanking branch (White and Selgin), on the other hand, argues that freebanking (fractional reserve banking based on commodity standard) in Canada and Scotland was more stable than US (based on number of panics).

Also, from a logical point of view, lender of the last resort in a fiat money system is just an externalisation of costs. It does not fix anything, it just redistributes debt. No wonder if such a course of action is possible that the debtors view it positively.

EDIT: Most importantly for Bitcoin though, in a system with inelastic money supply (when credit has no effect on it), the whole concept of the lender of last resort makes no sense from the point of view of monetary policy.

[cunicula]

I will not accept evidence along the lines of (if only x and y had happened), then free banking would have worked better. That is speculation, not empirical evidence.

They (bank panics, ed.) occurred  more  often  in  the  U.S.  than  in  other  countries.  They  usually  occurred  during  serious  recessions
associated  with  declines  in  the  money  supply  and sharp  price  level  reversals.  The  likelihood  of  their occurrence  would  be  greatly  diminished  in  a  diversified  nationwide  branch  banking  system.

This is consistent with the Austrian view, the bank panics correlate with shrinking of the money supply. Also, branch banking was prohibited in the US in the 19th century.

As I predicted at the outset, you are immediately heading off topic to dodge the issue.

Point to data which suggests that the absence of a lender of last resort reduces GDP volatility.

If you can't point to any evidence whatsoever to support your beliefs, but still maintain them. Well ... There isn't much use in communicating with you then is there?

[cunicula]

I disagree that "beliefs" play a significant role in the selection of money.

So beliefs about the future of bitcoin do not affect its valuation and use, only its intrinsic properties.
If bitcoin succeeds than litecoin must also succeed since they are almost identical. Right? Or no? Because if the answer is no, then beliefs must matter.

[Technomage]

I don't think that the success of Bitcoin vs Litecoin has much to do with either beliefs or the intrinsic properties. It can be explained fairly well with the network effect. Bitcoin has a strong network effect and similar technologies are at a major disadvantage because of this. They have to be much more than just copies with small changes to overcome this effect.

http://en.wikipedia.org/wiki/Network_effect

[kjj]

If you can't point to any evidence whatsoever to support your beliefs, but still maintain them. Well ... There isn't much use in communicating with you then is there?

This made me laugh.  That's pretty awesome coming from the guy that can prove that proof-of-work will fail by saying it over and over again.