Of Bitcoin & the State

Bitcoin is very much in ascendancy. While it has for over three years existed as a decentralised and anonymous electronics payments system and medium of exchange for online black markets and gambling, more attempts to integrate Bitcoin into the wider economic system — most notably the integration of Bitpay with Amazon.com — have brought Bitcoin to the attention of a wider segment of the population. Alongside this, the egregious spectacle of depositor haircuts in Cyprus, and the spectre that depositor haircuts might happen elsewhere seems to have spurred a great new interest in alternatives to bank deposits in particular and state fiat currency in general. Consequently, the price is soaring — pushing up above $140 per bitcoin at the time of writing. Of course, this is still far less than a single ounce of gold currently priced at $1572.

There are many similarities between Bitcoin and gold. Gold is cooked up in the heart of supernovae, and is therefore exceedingly rare on Earth. It has a distinctive colouring, is non-perishable, fungible, portable, hard-to-counterfeit, and even today so expensive to synthesise that the supply is naturally limited. That made it a leading medium-of-exchange and store of purchasing power. Even today, in an age where it has been eclipsed in practice as a medium-of-exchange and as a unit-of-account for debts by state-backed fiat monies, it remains an enduring store of purchasing power.

Bitcoin is an even more limited currency — limited by the algorithms that control its mining. The maximum number of Bitcoins permitted by the code is 21 million (and in practice will gradually fall lower than this due to lost coins). Gold has been mined for over 5000 years, yet there is still gold in the ground today. Bitcoin’s mining will be (in theory) complete in a little over ten years — all the Bitcoins that there will ever be are projected to exist by 2025. True, there are already additional new currencies like Namecoin based on the Bitcoin technology but these do not trade at par with Bitcoin. This implies that Bitcoin will have a deflationary bias, as opposed to modern fiat currencies which tend toward inflation.

Many people have been attracted to the Bitcoin project by the notion of moving exchange outside of the scope of the state. Bitcoin has already begun to facilitate many activities that the state prohibits. More importantly, Bitcoin transactions are anonymous, and denominated outside of state fiat currency, so the state’s power to tax this economic activity is limited. As the range of Bitcoin-denominated merchants grows, it may become increasingly plausible to leave state  fiat currency behind altogether, and lead an anonymous economic life online fuelled by Bitcoins.

So is Bitcoin really a challenge to state power? And if it is, is it inevitable that the state will try to destroy Bitcoin? Some believe there can only be one survivor — the expansive modern state, with fiat currency, central banking, taxation and redistribution, or Bitcoin, the decentralised cryptographic currency.

The 21st Century is looking increasingly likely to be defined by decentralisation. In energy markets, homes are becoming able to generate their own (increasingly cheap!) decentralised energy through solar panels and other alternative and renewable energy sources. 3-D printing is looking to do the same thing for manufacturing. The internet has already decentralised information, learning and communication. Bitcoin is looking to do the same thing for money and savings.

But I don’t think that conflict is inevitable, and I certainly don’t foresee Bitcoin destroying the state. The state will have to change and adapt, but these changes will be gradual. Bitcoin today is not a competitor to state fiat money, but a complement. It would be very difficult today to convert all your state fiat currency into Bitcoins, and live a purely Bitcoin-oriented life, just as it would be very difficult to convert into gold or silver and life a gold or silver-oriented life. This is a manifestation of Gresham’s law — the idea that depreciating money drives out the appreciating money as a medium of exchange. Certainly, with Bitcoin rampaging upward in price — (a trend that Bitcoin’s deflationary nature encourages — holders will want to hold onto it rather than trade it for goods and services. If I had $1000 of Bitcoin, and $1000 of Federal reserve notes, I’d be far more likely to spend my FRNs on food and fuel and shelter than my Bitcoin, which might be worth $1001 of goods and services (or at current rates of increase, $1500 of goods and services) next week.

Bitcoin, then, is emerging as a savings instrument, an alternative to the ultra-low interest rates in the dollar-denominated world, the risks of equities, and a recent slump in the prices of gold and silver which have in the past decade acted in a similar role to that which Bitcoin is emerging into. (This does not mean that Bitcoin is a threat to gold and silver, as there are some fundamental differences, not least that the metals are tangibles and Bitcoin is not).

This means that the state is far more likely to attempt to regulate Bitcoin rather than destroy it. The key is to make Bitcoin-denominated income taxable. This means regulating and taxing the entry-and-exit points — the points where people convert from state fiat currency into Bitcoin.

This is so-far the approach that the US Federal government has chosen to take:

The federal agency charged with enforcing the nation’s laws against money laundering has issued new guidelines suggesting that several parties in the Bitcoin economy qualify as Money Services Businesses under US law. Money Services Businesses (MSBs) must register with the federal government, collect information about their customers, and take steps to combat money laundering by their customers.

The new guidelines do not mention Bitcoin by name, but there’s little doubt which “de-centralized virtual currency” the Financial Crimes Enforcement Network (FinCEN) had in mind when it drafted the new guidelines. A FinCEN spokesman told Bank Technology News last year that “we are aware of Bitcoin and other similar operations, and we are studying the mechanism behind Bitcoin.”

America’s anti-money-laundering laws require financial institutions to collect information on potentially suspicious transactions by their customers and report these to the federal government. Among the institutions subject to these regulatory requirements are “money services businesses,” including “money transmitters.” Until now, it wasn’t clear who in the Bitcoin network qualified as a money transmitter under the law.

For a centralized virtual currency like Facebook credits, the issuer of the currency (in this case, Facebook) must register as an MSB, because the act of buying the virtual currency transfers value from one location (the user’s conventional bank account) to another (the user’s virtual currency account). The same logic would apply to Bitcoin exchanges such as Mt. Gox. Allowing people to buy and sell bitcoins for dollars constitutes money transmission and therefore makes these businesses subject to federal regulation.

Of course, the Bitcoin network is fully decentralized. No single party has the power to issue new Bitcoins or approve Bitcoin transactions. Rather, the nodes in the Bitcoin network maintain a shared transaction register called the blockchain. Nodes called “miners” race to solve a cryptographic puzzle; the winner of each race is allowed to create the next entry in the blockchain. As a reward for its effort, the winning miner gets to credit itself a standard amount, currently 25 Bitcoins. Given that Bitcoins are now worth more than $50 and a new block is created every 10 minutes, Bitcoin mining has emerged as a significant business.

If a lot of economic activity were to move totally into Bitcoin, then the state might react more aggressively, seeking to tax transactions within the Bitcoin network (which may or may not be technically possible given Bitcoin’s anonymous nature) rather than just at the entry and exit points. There are, of course, risks for those wishing to move their entire economic life into Bitcoin — not just Gresham’s law, but transaction risks (Bitcoin has no clearing house, so all transactions are uninsured), and the risk that Bitcoin will be superseded (perhaps via the cryptography being rendered obsolete by some black swan advance in processing power, mathematics or cryptography?)

This current boom, where awareness of Bitcoin is growing considerably and many more individuals are joining the network, may soon be over. It is inevitable that at some stage the number of profit-takers seeking to cash out of Bitcoin into a currency where they can spend their profits will exceed the number of new investors trying to buy Bitcoin. At that stage, the price will fall. Just how much it falls will impact to what extent Bitcoin establishes itself as a decentralised and trusted store of purchasing power.

The last consolidation phase in Bitcoin’s price — between 2011 and 2013 — was not overwhelmingly encouraging, as prices remained far below the 2011 peak for a long while:

bitcoin

Yet they remained far above the pre-2011 levels. And while the 2011 boom was marked by curious scepticism, this boom seems to be marked by the notion of decentralised virtual currency going viral. Due to this increased awareness, it is highly probable that Bitcoin will end 2013 above whether it started it, even if the present prices do not prove sustainable. Ultimately, Bitcoin has no fundamentals (P/E, EBITDA, cash flow, etc) and so is worth what people will pay for it. And as Max Keiser, an early champion of Bitcoin put it:

In my view, Bitcoin has a much better chance of being part of the future of money than Groupon ever did of being part of the future of commerce.

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The Next Industrial Revolution

Large, centrally-directed systems are inherently fragile. Think of the human body; a spontaneous, unexpected blow to the head can kill an otherwise healthy creature; all the healthy cells and tissue in the legs, arms, torso and so forth killed through dependency on the brain’s functionality. Interdependent systems are only ever as strong as their weakest critical link, and very often a critical link can fail through nothing more than bad luck.

Yet the human body does not exist in isolation. Humans as a species are a decentralised network. Each individual may be in himself or herself a fragile, interdependent system, but the wider network of humanity is a robust independent system. One group of humans may die in an avalanche or drown at sea, but their death does not affect the survival of the wider population. The human genome has survived plagues, volcanoes, hurricanes, asteroid impacts and so on through its decentralisation.

In economics, such principles are also applicable. Modern, high-technology civilisation is very centralised and homogenised. Prices and availability are affected by events half way around the world; a war in the middle east, the closure of the Suez Canal or Strait of Hormuz, an earthquake in China, flooding in Thailand, or a tidal wave in Indonesia all have ramifications to global markets, simply because of the interconnectedness of globalisation. The computer I am typing this into is a complex mixture — the cumulative culmination of millions of hours of work, as well as resources and manufacturing processes across the globe. It incorporates tellurium, indium, cobalt, gallium, and manganese mined in Africa. Neodymium mined in China. Plastics forged out of Saudi Crude. Bauxite mined in Brazil. Memory manufactured in Korea, semiconductors forged in Germany, glass made in the United States. And gallons and gallons of oil to ship all the resources and components around the world, ’til they are finally assembled in China, and shipped once again around the world to the consumer. And that manufacturing process stands upon the shoulders of centuries of scientific research, and years of product development, testing, and marketing. It is a huge mesh of interdependent processes. And the disruption of any one of these processes can mean disruption for the system as a whole. The fragility of interconnection is the great hidden danger underlying our modern economic and technological paradigms.

And even if the risks of global trade disruptions do not materialise in the near-term, as the finite supply of oil dwindles in coming years, the costs of constantly shipping so much around and around the world may prove unsustainable.

It is my view that the reality of costlier oil is set over the coming years to spur a new industrial revolution — a very welcome side-effect of which will be increased social and industrial decentralisation. Looming on the horizon are technologies which can decentralise the means of production and the means of energy generation.

3D printers — machines that can assemble molecules into larger pre-designed objects are pioneering a whole new way of making things. This could well rewrite the rules of manufacturing in much the same way as the rise of personal computing discombobulated the traditional world of computing.

3D printers have existed in large-scale industry for years. But at a cost of $100,000 to $1m, few individuals could ever afford one. Fortunately, improved technology and lowered costs are making such machines more viable for home use. Industrial 3D printers now cost from just $15,000, and home versions for little more than $1,000. Obviously, there are still significant hurdles. 3D printing is still a relatively crude technology, so far incapable of producing complex finished goods. And molecular assembly still requires resources to run on — at least until the technology of molecular disassembly becomes viable, allowing for 3D printers to run on, for example, waste. But the potential for more and more individuals to gain the capacity to manufacture at home — thereby reducing dependency on oil and the global trade grid — is a huge incentive to further development. The next Apple or Microsoft could well be the company that develops and brings home-based 3D printing to the wider marketplace by making it simple and accessible and cheap.

Decentralised manufacturing goes hand-in-hand with decentralised energy generation, because manufacturing requires energy input. Microgrids are localised groupings of energy generation that can vary from city-size to individual-size. The latter is gradually becoming more and more economically viable as the costs of solar panels, wind turbines (etc) for energy generation, and lithium and graphene batteries (etc) for home energy storage fall, and efficiencies rise. Although generally connected to a larger national electricity grid, the connection can be disconnected, and a microgrid can function autonomously if the national grid were to fail (for example) as a result of natural disaster or war.

Having access to a robust and independent energy supply and home-manufacturing facilities would be very empowering for individuals and local communities and allow a higher degree of independence from governments and corporations. Home-based microgrids can allow the autonomous and decentralised powering and recharging of not just home appliances like cooking equipment, computers, 3D printers, lights, and food growing equipment, but also electric vehicles and mobile communications equipment. Home-based 3D printing can allow for autonomous and decentralised design and manufacturing of useful tools and equipment.

The choice that we face as individuals and organisations is whether or not we choose to continue to live with the costs and risks of the modern globalised mode of production, or whether we decide to invest in insulating ourselves from some of the dangers. The more individuals and organisations that invest in these technologies that allow us to create robust decentralised energy generation and production systems, the more costs should fall.

Decentralisation has allowed our species to survive and flourish through millions of years of turbulent and unpredictable history. I believe that decentralisation can allow our young civilisation to survive and flourish in the same manner.

The Trouble with Rand Paul

Rand Paul just endorsed a man who is deeply hostile to human liberty.

Perhaps that’s Rand’s idea of playing politics? Come to the table, strike a deal, get what you can. Trouble is, it’s tough striking a good deal when the guy on the other side of the table believes that the government should be allowed to claim — without having to produce any evidence whatsoever — that certain people are terrorists, and therefore should be detained indefinitely without any kind of due process.

That’s textbook tyranny.

Yes, I would have [signed the NDAA]. And I do believe that it is appropriate to have in our nation the capacity to detain people who are threats to this country, who are members of al Qaeda. Look, you have every right in this country to protest and to express your views on a wide range of issues but you don’t have a right to join a group that has killed Americans, and has declared war against America. That’s treason. In this country we have a right to take those people and put them in jail. If I were president I would not abuse this power. But people who join al Qaeda are not entitled to rights of due process under our normal legal code. They are entitled instead to be treated as enemy combatants.

Mitt Romney

Except, if the government had any evidence they were really members of al-Qaeda and engaged in a war against America they could be charged with offenses under current laws and tried in front of a jury of their peers. As was proven when Judge Katherine Forrest struck down the indefinite detention provision of the NDAA as unconstitutional, the real detention targets are people like the ones who brought the case — writers, investigative journalist and whistleblowers: people like Chris Hedges, Noam Chomsky, Daniel Ellsberg, Jennifer Bolen, and Birgitta Jonsdottir.

Rand Paul might have done some good work trying to filibuster the Patriot Act, but endorsing Mitt Romney goes beyond the pale. The NDAA is Romney’s most egregious transgression against liberty, but not far behind are his desire to start a war against Iran, to increase military spending, to start a trade war with China and his belief that corporations are people.

I know I will never agree with any politician on every single dimension of every single issue, and that to some extent politics will always involve compromise. Certainly, I disagree with Ron Paul on some issues. But Mitt Romney’s stances on these issues seem much, much, much closer to Barack Obama than they do to Ron Paul. In fact, he might as well have endorsed Obama for President.

And the Ron Paul supporters are noticing: Rand has probably burnt most bridges to his Father’s supporters now. His Facebook page has seen a huge outpouring of fury:

Just lost a lot of faith in a man I otherwise adored.

You suck Rand! Traitor!

That’s why this country is doomed! Even the person you trust is a sell-out. I’m done with politics, people deserve what they get. Let the country run itself to the ground, and still people will not understand what freedom and self-responsibility is about. People want big gov’t, big brother every step of the way. Well, they got it. The rest of us, might as well try to move to another country or find an island and move there.

I knew I’d never vote for Mitt… Now I know I’ll never vote for Rand.

He has fully sold out to the bankers

Endorsing Romney is tantamount to an utter sell-out of conservative principles.

Did George Washington, Thomas Jefferson and James Madison try to compromise with King George? Or — when it became obvious that they were facing tyranny — did they stand up for the principles of liberty?

I have always been uncomfortable with the children of politicians becoming politicians. Every anointed child feels like a step away from meritocracy. Dynasties are dangerous, because the dynasty itself comes to be more important than the qualities of the politicians. Who would Rand Paul be if he wasn’t Ron Paul’s son? Just another neocon. Neocons often have a few “unfashionable” libertarian or constitutionalist sympathies; look at Charles Krauthammer. But — unlike Ron Paul — the neocon never has the spine to do much about their libertarian or constitutionalist sympathies. They just ride on the establishment steamroller, into foreign occupations, empire building, corporate welfare, and banking bailouts. Into Iraq, and soon into Iran.

Rand Paul just got on the steamroller.

Lao Tzu on Liberty

Regular reader Alister Cyril Blanc reminds me of Roderick Long’s Austro-Libertarian Themes in Early Confucianisman interesting essay that attempts to find the roots of the modern schools of libertarianism (Rothbard, Boaz, Menger) in Taoism and Confucianism.

Long concludes (as I did on Friday) that Confucianism — while certainly not being entirely the same as modern libertarianism — was built up around the (peculiarly unmodern) concept of spontaneous order, and developed the concept that interventionism can be problematic.

Mencius (also known as Mengzi, and Confucius’ student) wrote:

There was a man from Sung who pulled at his rice plants because he was worried about their failure to grow. Having done so, he went on his way home, not realising what he had done. “I am worn out today,” said he to his family. “I have been helping the rice plants to grow.” His son rushed out to take a look and there the plants were, all shrivelled up. There are few in the world who can resist the urge to help their rice plants grow.

Statue of Lao Tzu (Fujian Province)

While Confucianism has some useful concepts, so too does Taoism. Lao Tzu also developed this theme:

The more prohibitions there are, the more ritual avoidances, the poorer the people will be. The more laws are promulgated, the more thieves and bandits there will be. So long as I do nothing the people will of themselves be transformed. So long as I love quietude, the people will of themselves go straight. So long as I act only by inactivity the people will of themselves become prosperous.

Long’s essay tries to compare Taoism and Confucianism in terms of their concepts of liberty and which is closer to modern libertarianism; I have nothing to say on that matter. I am a magpie; as I have explained before I pick and choose whatever philosophy I fancy from wherever I find it. But if we have to make a real contrast, I would bunch Taoism and Confucianism together, and compare them to the various shades of collectivist imperialism, most recently manifested in China as Maoism.

Joshua Snyder elaborates:

Confucius, Lao Tzu, and Sun Tzu all lived and taught in pre-imperial China. In 221 B.C., Ch’in Shih-huang united the various Chinese states into an empire and set about to burn the Confucian classics and bury their scholars alive. The Legalism of Han Fei Tzu, which centered on the totalitarian power of the ruler, replaced the humanistic teachings of Confucianism and Taoism.

The modern Chinese regime, of course, is a strange muddle of imperialism, Maoism, and Confucianism, and I think all of these instincts are in constant conflict (sometimes within one individual) which is why the Chinese regime is such a self-contradictory creature.

On the other hand (and rather bizarrely) here in the West, imperialism is far and away the dominant establishment instinct. That’s why both sides (Romney & Obama) of the 2012 American Presidential election are running on a platform of extending and expanding authoritarian centralist legislation like the Patriot Act, and the indefinite detention provision of the 2011 NDAA.

Confucius or Lao Tzu would reject such things; the more prohibitions there are, the more ritual avoidances, the poorer the people will be. The more laws are promulgated, the more thieves and bandits there will be.

The Meaning of Libertarian

I’ve been giving libertarianism some thought over the past few days. My natural instinct when people attack (most) libertarians and libertarianism in general is to become quite defensive. To me, libertarianism implicitly tends to mean constraining the state to various forms of one function: protecting liberty. Implicit in that is the view that states should never resort to force or violent coercion (“the non-aggression principle”). In my cosmos this manifests itself as non-interventionism (i.e. negative liberty) — unwillingness to intervene in the affairs of foreign nations, in markets, in citizens’ private lives.

We have had years of big, visible interventionist screwups — an Iraq war that left over a million Iraqis dead, economic policies like bank bailouts and quantitative easing associated with growing inequality, etc. So I tend to lean toward the idea that irrespective of the libertarian alternatives to the status quo, libertarian criticism is at the very least a noble pursuit.

One problem with libertarianism (and with all schools of thought based around “liberty”) is that no two people will necessarily agree on what liberty is. Libertarians’ cousins, the liberals tend to constellate their ideas around the goal “protecting liberty”, too. But their version of “liberty” is highly interventionist (i.e. positive liberty): they want to use the machinations of the state regulate banks, to regulate the climate, to regulate markets, to dole out money to the less-fortunate, and sometimes even to intervene in the affairs of foreign lands.

And the really complicated thing is that in the real world most people tend to want some of both; protection by the state, as well as freedom from the state. And different people want different aspects of each — some “libertarians” may want freedom from financial regulations, but may believe strongly in drug testing welfare applicants. Other “libertarians” may want gay marriage rights, but also want Glass-Steagall-style financial regulations. Some “libertarians” may want an end up to corporate campaign financing, and others may say that is an essential aspect of free speech. Some “libertarians” may believe strongly in corporate personhood, while others may say that limited liability is effectively market-rigging.

And even when libertarians agree on what they want to achieve, they often cannot agree on how to get there. Some libertarians want to abolish everything tomorrow, others want a more gradual change. Some want to end the foreign wars and nation building first, others first want to kick people off welfare.

Here’s a Twitter conversation I had yesterday:

For readers unfamiliar with so-called “libertarian” Tyler Cowen’s positions, here’s a primer:

Cowen has been described as a “libertarian bargainer” — someone of moderate libertarian ideals who can influence practical policy making. In a 2007 article entitled “The Paradox of Libertarianism,” Cowen argued that libertarians “should embrace a world with growing wealth, growing positive liberty, and yes, growing government. We don’t have to favor the growth in government per se, but we do need to recognize that sometimes it is a package deal.” Cowen endorsed bailouts in a March 2, 2009 column in the New York Times. He was a supporter of the Iraq War.

Cowen could be fairly described as a raging neocon wrapped up in the language and mannerisms of libertarianism.

I think what most people are missing is that ideology is very often a mask for interests. Wealthy business interests are happy to wear the clothes of libertarianism and appeal to libertarian principles (including even the principles of non-violence and voluntarism) when they want to ask for tax cuts. But they are less willing to do so when it comes to slashing subsidies, or outlawing corporate or government snooping, or preventing wars from which they might profit. They might be happy to preach the doctrine of free markets when their companies are successful, but happy to embrace bailouts when their companies fail.

And that is the problem with ideology. Too easily it can become a tool. Or worse, it becomes a weapon to enforce a party line. And that’s why I cannot in good conscience call myself a libertarian, or a classical liberal, or member of any kind of ideological mass movement. The terms are all quickly hijacked and rendered meaningless. And this isn’t solely a political point: think of musical movements like “punk” and “grunge” and “hip hop”.

So I reject ideology, and instead embrace principles. The key difference is that while ideologies are generalised blanket positions that encompass an entire range of issues, principles apply locally. I accept some “libertarian” views, and I reject others. It seems completely pointless to muddy the conversation by defining myself as a libertarian (or a liberal, or a conservative), thus associating myself with a whole blanket of ideas, some of which I agree with and others that I don’t. It is better to just talk specifically about policies and positions that I agree with, or disagree with.

I disagree passionately with handouts to big finance, with aggressive or imperialist foreign policies, with prohibitionism, with corporate personhood and with large-scale central economic planning. On the other hand, I think that a small social welfare net funded by taxation is a good idea. Does that make me a libertarian? A liberal? I don’t care.

The main problem with this anti-ideological view is that ideological labels are — for most people — a useful shorthand. Nothing will stop the cascade of labels that are thrown around. It’s quick, dirty and easy. But we should be aware that they smudge reality into digestible compartments, at the expense of detail. We should be aware that they are intellectual shortcuts.

Romneythink

Mitt Romney’s campaign is founded on a huge contradiction:

Out of one side of his mouth he claims he wants to balance the budget, and out of the other side of his mouth he claims he wants to vastly increase military spending:

Romney set himself apart on Friday, arguing that a weaker military and a smaller global footprint will compromise America’s leadership in the world.

“The United States should always retain military supremacy to deter would-be aggressors, and to defend our allies and ourselves,” he said.

Romney said he wants to increase the military budget, mentioning specific projects from naval shipbuilding to a missile defense system. It’s a traditional Republican view of defense that was music to this crowd’s ears.

Doesn’t he realise that military spending is already by far the largest component of non-discretionary spending?:

America is already the world’s greatest military spender:

In spite of this, America has struggled to defeat a bunch of Islamist lunatics and goatherders in Afghanistan — the same people that dragged down the Soviet Union. They too committed huge resources and capital to fighting absurd wars of imperial conquest (or should I say “proletarian liberation”) abroad, and subsequently their empire collapsed.

Americans make up less than 5% of the global population, but account for more than 50% of global military spending. America is already in massive debt, and the more America commits herself to policing the world, the bigger that debt seems to get. This situation is totally unsustainable. Cutting back on the imperialism will give America more manpower, brainpower, capital and resources to use at home to rebuild her domestic economy. The only Presidential candidate who talks about that fact — one which is in my opinion surely the most pressing of our time?

Ron Paul.