Do hell with Goverment's seigniorage?

[BTCIndia]

Years ago, while I was in my college, I was amazed to learn that in some poor countries whose governments collected very little revenue, not much more than import or export taxes, 'seigniorage' financed a large part of public outlays. In poor countries a chunk of public revenue comes from the government monopoly on printing bank notes. As a consequence, inflation in those countries runs relatively high with government always strugging not to keep more then 2% theoretically. In fact, countries inflation rates can be interpreted as a monetary tax levied by the government on the whole economy. I learned that income from seigniorage, though it still exists, represents a considerable amount of public revenues for goverment.

It is obvious that fiat money leads to seigniorage income for the sovereign, but I think decentralized Bitcoin would not give chance to underdeveloped(technology) countries earn seignorage income.Thinking about Bitcoin design, it allows only those with enough computing power(developed countries) to extract two forms of seigniorage income:

a. In the early years(2009-2016) of Bitcoin, computing power allows the mining of new bitcoins. This is pure seigniorage for them(almost 100% of market value considering it took little resource to mine earlier coin during initial years and recently mined coined would earn them Market Value minus cost of mining a coin i.e $900-$20 approximately). Right now, we're paying seigniorage to government. If we(poor countries) adopt Bitcoin, we'll be paying to same to 'computing countries'. Dicussion needed!

b. When most of the coins have been mined, computing power is going to be used to charge transaction fees on every bitcoin transaction irrespective of border. This is also seigniorage income in the form of an all encompassing Tobin tax beyond the wildest dreams of the proponents of that tax and Bitcoin enthusiast. What if poor countries aren't able to catch on arms race of mining(i.e. future payment processor)?

Is this a design flaw or is it a necessary feature? A monetary system can be sustained only if there are people with the incentive to invest in the maintenance of the system. In the case of fiat money, the sovereign expends considerable effort in preventing counterfeiting. One might think that commodity money like gold does not require such effort. But the historical evidence suggests otherwise:

1. After the collapse of the Roman empire, “within a generation, by about A.D. 435, coin ceased to be used [in Britain] as a medium of exchange ... although many survived as jewellery, or were used for gifts or for compensation.” (Christine Desan, “Coin Reconsidered: The Political Alchemy of Commodity Money”, quoting Peter Spufford.) With nobody having enough seigniorage income to try and maintain the system, commodity money was simply re-purposed to non monetary uses, and Britain relapsed into a barter economy.

2. Christine Desan also points out that a monetary system based on silver was reestablished centuries later by sovereigns who extracted seignorage income by charging a 5-10% spread between the mint and melting points of the metal.

3. On the other hand, Luther and White have several papers showing that after the collapse of the Somalian government, the old currency continued to circulate and local warlords maintained the money supply by counterfeiting the old currency notes to earn seigniorage income.

All this suggests that any form of money (whether fiat, commodity or a decentralized open source money like Bitcoin) needs some form of seigniorage to sustain it.
 How are government in poor countries going to face this challenge?

Basics
Seigniorage is part of public finance and government's meagre earning source like income tax and VAT. If we have to define seigniorage, we can say, it is earning of government for monopoly issuing new notes.

Example:
Suppose Goverment issued 100000 euro new notes and it was given for purchasing Gold of any other company. After one year, goverment sells this Gold and receives 200000 euro due to inflation and increasing the price of gold. Then 100000 euro is seigniorage. In seigniorage, govt. receives profit due to decreasing the value of currency.

Formula of Calculating Seigniorage
Seigniorage= Net profit on producing of new notes and coins

Suppose government produced 100 Euro one note and its cost for printing was just 200 Euro If goverment pays 500 Euro for repayment of his loan, then 400 Euro net profit on producing of new note will be the seigniorage of goverment.

Any thoughts my fellow enthusiast with flag of revolution in hand?

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[BADecker]

In countries without electricity or the Internet, do you think we can transact Bitcoin paper wallets using the abacus?

[Brangdon]

I'm not seeing a problem specific to undeveloped countries. The difficulty of mining will self-adjust until the money raised from mining roughly equals the costs of mining. Then mining pays for itself, but isn't a profit centre. So the undeveloped country isn't losing out by letting developed countries do it.

A monetary system can be sustained only if there are people with the incentive to invest in the maintenance of the system. In the case of fiat money, the sovereign expends considerable effort in preventing counterfeiting.

Are you worried that developed countries will stop mining bitcoin? Surely Bitcoin has that covered, with transactions fees? Undeveloped countries can use bitcoin without worrying about maintaining the currency. (They will have to pay the transaction fees, but so does everyone else, and competition between miners should keep the fees to a minimal level.)

It does mean their government can't use inflation to transfer value from users of their currency to themselves. However, that's a dodgy thing to be doing. Arguably they will benefit more from having a stable, trusted, non-inflationary currency. It's dishonest governments that lose out.

[glub0x]

the minning process is in favor for country with:
1 cheap electricity
2 cheap (educated?) poeple  (to handle mining farms)
3 computer producing country.

which basically is in great favor for asia.

[BTCIndia]

In countries without electricity or the Internet, do you think we can transact Bitcoin paper wallets using the abacus?

Question for question is skepticism of thought.

[BTCIndia]

the minning process is in favor for country with:
1 cheap electricity
2 cheap (educated?) poeple  (to handle mining farms)
3 computer producing country.

which basically is in great favor for asia.

Glub0x,

1. Electricity where is live is very very cheap being 0.06 dollar/ kWh. I see no mining activity right now. Electricity no doubt be most important factor when technology has reached saturation which I think will happen in 2016-2017 when rewards on block will be reduced to 12.5/block. Right, now most important factor is technology which is limited to western countries.
2. Cheap educated people to handle mining farm is false assumption because, as per my limited knowledge all you've to do is run instruments. Even when done on large scale, mines can be managed by few people.
3. Computer producing countries are only few China, Taiwan, South Korea. Most of them are developed. What about Bhutan, Nepal, Laos, India, Cambodia, Malaysia etc. Singapore will always stay tax haven not matter currency is virtual or fiat.

Therefore, I believe your assumption is wrong when you say mining is in favor of Asia.

[BTCIndia]

I'm not seeing a problem specific to undeveloped countries. The difficulty of mining will self-adjust until the money raised from mining roughly equals the costs of mining. Then mining pays for itself, but isn't a profit centre. So the undeveloped country isn't losing out by letting developed countries do it.

I agree with your above point.

Are you worried that developed countries will stop mining bitcoin? Surely Bitcoin has that covered, with transactions fees? Undeveloped countries can use bitcoin without worrying about maintaining the currency. (They will have to pay the transaction fees, but so does everyone else, and competition between miners should keep the fees to a minimal level.)

It does mean their government can't use inflation to transfer value from users of their currency to themselves. However, that's a dodgy thing to be doing. Arguably they will benefit more from having a stable, trusted, non-inflationary currency. It's dishonest governments that lose out.

No. I'm not worried developed countries would stop mining. And you're right dishonest government will lose out. What about honest government in underdeveloped countries struggling to raise their status? Citizens there consider 'honesty' before accepting Bitcoin. What will happen to seigniorage of that country? Won't it affect their revenues therefore injecting greater difficulty for government struggling?

[jbreher]

What about honest government in underdeveloped countries struggling to raise their status? Citizens there consider 'honesty' before accepting Bitcoin. What will happen to seigniorage of that country?

Seigniorage is fundamentally dishonest.

[Gawrav Mehta]

Seigniorage? 

[BTCIndia]

What about honest government in underdeveloped countries struggling to raise their status? Citizens there consider 'honesty' before accepting Bitcoin. What will happen to seigniorage of that country?

Seigniorage is fundamentally dishonest.

What about honest government in underdeveloped countries struggling to raise their status? Citizens there consider 'honesty' before accepting Bitcoin. What will happen to seigniorage of that country?

Seigniorage is fundamentally dishonest.

Money, either minted, printed or digitally created, is used to provide the economy with a means of payment and to generate revenues for the governments to finance public spending. Each government uses seigniorage to provide public goods. The worldwide circulation of a currency(hereBTC) will increase seigniorage and welfare and will result in deflationary rate of to the BTC to mining/stockpiled/issuing people, collectively knows as "developed countries", compared to autarky. In other country, since the tax base is reduced due to the use of foreign currency(BTC), raises its inflation rate of native currency. Luckily, there is a limit on the rate beyond which it BTC cannot be circulated. Under strategic interaction between governments in selecting equilibrium, the developed countries would try to lower the inflation rate to make its currency circulate abroad, while the other country will be forced to lower the inflation rate to sustain its national currency as the sole medium of exchange. Random thoughts!

[Brangdon]

What about honest government in underdeveloped countries struggling to raise their status? Citizens there consider 'honesty' before accepting Bitcoin. What will happen to seigniorage of that country? Won't it affect their revenues therefore injecting greater difficulty for government struggling?

That seigniorage revenue is not free. It comes from devaluing the money held by the citizens. They could achieve a similar result, more openly and honestly, with taxation.

[jbreher]

What about honest government in underdeveloped countries struggling to raise their status? Citizens there consider 'honesty' before accepting Bitcoin. What will happen to seigniorage of that country?

Seigniorage is fundamentally dishonest.

Money, either minted, printed or digitally created, is used to provide the economy with a means of payment and to generate revenues for the governments to finance public spending. Each government uses seigniorage to provide public goods. ...

I don't disagree with what you've posted there. Yes, governments use seigniorage in order to fill the government's coffers with money they use for public good. And, incidentally, for public bad.

But you are sidestepping the real issue.

Seigniorage works by taking (I would like to say 'stealing', but I'll be more polite) a portion of wealth from all of the people. The creation of new money is a very real taking of wealth.

Governments use seigniorage rather than taxation precisely because the overwhelming majority does not understand the mechanics of money. This is an invisible tax. By capitalizing upon the ignorance of the masses, seigniorage is fundamentally dishonest.