What Is Money? (Yes, We're Talking About Bitcoin)

Good ideas don't require force. That describes the Internet, mobile telephony and cryptocurrencies.

What is money? We all assume we know, because money is a commonplace feature of everyday life. Money is what we earn and exchange for goods and services. Everyone thinks the money they’re familiar with is the only possible system of money—until they run across an entirely different system of money.

Then they realize money is a social construct, a confluence of social consensus and political force-- what we agree to use as money, and what our government mandates we use as money under threat of punishment.

We assume that our monetary system is much like a Law of Nature: since it’s ubiquitous, it must be the only possible system.

But there are no financial Laws of Nature for money. In the past, notched sticks served as money. In other non-Western cultures, giant stone disks (rai, a traditional form of money on the island of Yap) and even salt served as money.

In our experience, 1) money is issued by a government or central bank (i.e. a currency), and each of these currencies is the sole form of legal money (legal tender) in the nation-state that issues the currency; 2) each of these currencies is available in physical coins and paper bills and digitally as entries in bank and credit card accounts; 3) our currency is borrowed into existence by the central bank or by fractional reserve lending in private banks, and 4) this currency meets all of the utility traditionally required of money:

1. It is divisible into smaller units, i.e. a dollar is divided into quarters, dimes, nickels and pennies, or it is a small unit (for example, the Japanese yen, which is roughly equivalent to a U.S. penny).

2. It is secure, i.e. everyone can’t just print or make their own in unlimited quantities.

3. It is fungible, meaning all the units are interchangeable.

4. It is easily transportable.

5. It has a market value that’s easily discoverable, so buyers and sellers can confidently exchange it for goods and services.

But history informs us that money doesn’t have to be issued by governments,nor does it have to be borrowed into existence by banks, nor does every form of money have to satisfy all five requirements; it’s possible to have multiple forms of money which each serve different purposes.

In other words, our system of money is merely one of many possible systems of money. With the advent of digital cryptocurrencies, the range of monetary systems has expanded greatly.

We tend to look at money as value-neutral and apolitical, but as a social construct, it reflects specific social and political values. As I’ve explained in previous posts, our money is created and distributed at the very top of the wealth-power pyramid.

This feature of our money optimizes the accumulation of wealth and power in the top of the pyramid, and thus our social contract of money guarantees the concentration of wealth and thus rising wealth-power inequality.

To understand why, we need to start with money’s three basic functions.

As a general rule, money is:

1. A store of value (i.e. it serves as a reliable repository of wealth);

2. As means of exchange between buyers and sellers;

3. A tool for recording transactions of credit/debt (i.e. it facilitates recording transactions and keeping track of credits, debts, assets and payments).

Modern-day government-issued currencies perform all three roles. The U.S. dollar, for example, acts as a store of purchasing power, a global means of exchange, and as a tool to keep track of transactions, debts and financial assets.

But in other social constructs, different kinds of money perform different functions.The giant stone disks on Yap (rai) are a store of value, and a means of exchange for high-value items.

But the recording of transactions involving the rai is done in an oral-history ledger: the transfer of ownership of a particular rai is recorded in the community memory, and so the heavy 2-meter-high stone doesn’t have to actually move in physical space to transfer ownership. As a result, a stone rai resting at the bottom of the lagoon is a perfectly functional store of value and means of exchange.

The rai are quarried on another island, and not easily counterfeited. They are not necessarily interchangeable; the value of each one is recorded in the oral record. But since a rai isn’t divisible, or easily transportable, another form of money is used for day-to-day transactions.

The point here is there is no intrinsic reason why the three primary functions of money have to be satisfied by one single currency.

Nor is there any intrinsic reason why one form of money has to be equally tradable for all goods and services. In some cultures, certain forms of money hold symbolic value and are used solely for transactions of symbolic import, for example, as a wedding dowry.

We assume money has been stripped clean of symbolic or moral value, that it has no connection to anything but its current market value. Yet once again, there is no intrinsic reason why money must be stripped of symbolic or moral value. That our money has no symbolic or moral value is entirely a result of our specific social construct.

In cultures with forms of money that aren’t issued by a government, social consensus defines what serves as money and what functions it fulfills.

Which Brings us to Bitcoin

Bitcoin's limitations are well-known: the blockchain/mining consumes vast quantities of electricity, and bitcoin can't be scaled to replace all the credit card transactions in the world. But as noted above, every type of money does not need to perform all the functions of money.

Thus some commentators anticipate bitcoin being used for large, infrequent transfers rather than the purchase of consumer goods and services. Other cryptocurrencies may arise to fill that role.

I recently paid translators in South America with bitcoin. The transaction fee was about $4.50. Clearly, bitcoin functions as a means of exchange.

I made a few dollars of profit using bitcoin for transactions like this last year and I paid income taxes on those modest gains. Clearly, bitcoin is a legal financial instrument that the federal government accepts as the source of taxable capital gains.

For those who don't know the situation in Venezuela, its government has destroyed the value of the nation's currency, the bolivar, which traded at roughly 10 to 1 US dollar as recently as late 2012, when bitcoin was roughly $10.

The black market exchange is now over 98,000 bolivars to the US dollar, and one bitcoin is now worth over 1 billion bolivars. Clearly, bitcoin has acted as a store of value. The resident of Venezuela who traded 100 bolivars for $10 and traded the $10 for one bitcoin how has 1 billion bolivars or $13,000 US dollars.

Clearly, bitcoin is a means of exchange, a legal form of capital that accrues taxable capital gains and it's a store of value. So by the conventional definition of money, bitcoin is money. It's our right to think it a nonsensical form of money, just as it's our right to mock the stone rai, and deride the packages of ramen noodles that serve as money in prisons. But our mockery doesn't change the functionality of these forms of money.

No doubt the conventional wisdom in Venezuela dismissed the functionality of bitcoin in late 2012, just as the conventional wisdom continues to dismiss bitcoin's functionality as money. So who was right, and who was wrong? The believer in the status quo who held onto his 100 bolivars as a means of exchange and store of value , or the independent who traded bolivars for bitcoin?

Good ideas don't require force. That describes the Internet, mobile telephony and cryptocurrencies. Bad ideas require force: that describes the Venezuelan government's management of its currency, and the central bank/central state form of money that dominates the global economy.

This essay was drawn from my new book, Money and Work Unchained, which I'm offering to my readers at a 25% discount ($7.45 for the Kindle ebook and $15 for the print edition) through Saturday, December 9, after which the price goes up to retail ($9.95 and $20).

Read the first section for free in PDF format.


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A Radical Critique of Universal Basic Income

This critique reveals the unintended consequences of UBI.

Readers have been asking me what I thought of Universal Basic Income (UBI) as the solution to the systemic problem of jobs being replaced by automation.To answer this question, I realized I had to start by taking a fresh look at work and its role in human life and society. And since UBI is fundamentally a distribution of money, I also needed to take a fresh look at our system of money.

That led to a radical critique of Universal Basic Income (UBI) and an outline for a much more sustainable and just system of money and work than we have now. To adequately explore these critical topics, I ended up writing a 50,000 word book, Money and Work Unchained.

Universal Basic Income (UBI) is increasingly being held up as the solution to automation's displacement of human labor. UBI combines two powerful incentives: self-interest (who couldn't use an extra $1,000 per month) and an idealistic commitment to guaranteeing everyone material security and reducing the rising income inequality that threatens our social contract--a topic I've addressed many times over the past decade.

UBI's goals--guaranteeing material security and reducing income inequality--are not just worthy; they are essential. The question then becomes: how do we achieve these goals?

The conventional critiques of UBI focus on the practicalities of funding such a substantial universal entitlement. Where will the trillions of extra dollars required come from? Can we pay for UBI by "taxing the robots" or borrowing/ printing more currency?

But a radical critique must go much, much further, and ask: is UBI the best that we can do? If we provide the basics of material security--the bottom level of Maslow's hierarchy of human needs--what about all the higher needs for positive social roles, meaningful work, and the opportunity to build capital?

This critique reveals the unintended consequences of UBI: rather than deliver a Utopia, UBI institutionalizes serfdom and a two-class neofeudalism in which the bottom 95% scrape by on UBI while the top 5% hoard what every human wants and needs: positive social roles in our community, meaningful work that makes us feel needed, and the opportunity to build capital in all its manifestations.

UBI is the last gasp of a broken, dying system, a "solution" that institutionalizes all the injustices of serfdom under the guise of aiding those left behind by automation. We can do better--we must do better--and I lay out how to do so in this book.

A radical critique must also examine the widely accepted assumption that automation will destroy most jobs. Is this assumption valid? It turns out this assumption rests on a completely false understanding of the nature of work, the economics of automation and the presumed stability of an unsustainable global economy.

Read the first section for free in PDF format.

I'm offering Money and Work Unchained to my readers at a 25% discount ($7.45 for the Kindle ebook and $15 for the print edition) through Saturday, December 9, after which the price goes up to retail ($9.95 and $20).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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The Cost Basis of our Economy is Spiraling Out of Control

What will it take to radically reduce the cost basis of our economy?

If we had to choose one "big picture" reason why the vast majority of households are losing ground, it would either be the stagnation of income or the spiraling out of control cost basis of our economy, that is, the essential foundational expenses of households, government and enterprise.

Clearly, both rising costs and stagnating income cause households to lose ground, i.e. their income buys fewer goods and services every year.

I've often covered the dynamics of stagnating income for the bottom 95%, and real-world inflation, i.e. a decline in purchasing power.

But neither of these dynamics fully describes the relentless upward spiral of the cost basis of our economy, that is, the cost of essentials and the foundations of the economy: education, healthcare, energy and labor.

These expenses are pushing the costs of virtually every good and service, public and private, higher in a self-reinforcing spiral. The costs of education are spiraling out of control, stripping households of income as an entire generation is transformed into debt-serfs by student loan debt. The soaring costs of healthcare are a core driver of higher costs in the education complex (and government in general), and to cover these higher costs, counties raise property taxes, which add additional cost burdens to households and enterprises as rents rise.

Rising rents push the cost structure of almost every enterprise and agency higher.

Then there's the asset inflation created by central bank ZIRP (zero interest rate policy) which has inflated a second echo-bubble in housing that has pushed home ownership out of reach of many, adding demand for rental housing that has pushed rents into the stratosphere in Left and Right Coast cities.

Let's look at a few charts that illustrate the relentless rise in the cost basis of our economy:

Do you reckon these two charts are connected--soaring costs and ballooning administrative payrolls?

Student loan debt is soaring above $1 trillion, guaranteeing profits to lenders and debt-serfdom to the students exiting with degrees that are in over-supply, i.e. possessing little scarcity value in an over-credentialed economy:

The echo housing bubbles in many locales exceed the nosebleed valuations of the previous bubble:

And how do we pay for these spiraling out of control costs? By borrowing more, of course:

Courtesy of Lance Roberts, here's a chart depicting how households are filling the widening gap between income and expenses with debt. This is another self-reinforcing spiral of rising costs, as debt accrues interest, adding costs at every turn of the spiral.

What will it take to radically reduce the cost basis of our economy? A fundamental re-ordering that breaks up all the cartels and quasi-monopolies that push prices higher even as they deliver lower quality goods and services would be a good start.


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Stock Market 2018: The Tao vs. Central Banks

The central banks claim omnipotent financial powers, and their comeuppance is overdue.

I will be the first to admit that invoking the woo-woo of the Tao as the reason to expect a reversal of the stock market in 2018 smacks of Bearish desperation. With everything coming up roses in much of the global economy, there is precious little foundation for calling a tumultuous end to the global Bull Market other than variations of nothing lasts forever.

Invoking the Tao specifically calls for extremes to return or reverse to the opposite polarity: this is expressed in the line from Lao Tzu, The way of the Tao is reversal or Reversal is the movement of Tao.

In other words, extremes of bullishness lead to extremes of bearishness, just as the extremes of bearishness in March 2009 (S&P 500 at 667) led to the current extremes of bullishness (S&P 500 2,600).

Translations of this line add color to the concept:

To return is to complete the movement of the Tao.

Reversion is the action of Tao.

Turning back is Tao's motion.

Tao moves by returning.

Cyclic reversion is Tao's movement.

Reversal is the action of Tao.

Polar opposition helps the movement of the Way.

But there is another more subtle interpretation of The way of the Tao is reversal: in this view, only those who have rebelled against the Tao by distorting the natural order of things can push dynamics to extremes. Those who rebel against the Tao by pushing things to extremes will find the Tao will reverse their extreme to the opposite polarity.

Central banks have pushed markets to extremes of liquidity, leverage, moral hazard, low volatility and "the central banks have our back" complacency. We all know they have distorted markets by backstopping losses, buying trillions of dollars in assets, lowering bond yields to negative territory (especially when adjusted for real-world inflation) and making the stock market the signaling device that is supposed to reflect the fundamental robustness of the global economy.

All of these actions pushed against the Tao, and the Tao is about to return to the Bearish polarity. Central banks are quietly trying to back away from their extremes, but it's too little, too late: a full reversal is now baked in, and whatever central banks do from here on will only make matters worse.

Mess with the Tao, the Tao eventually pushes back, and reverses the entire move. My reading of the tea leaves is 2018 is the year the Tao crushes the central banks' manipulated markets. The central banks claim omnipotent financial powers, and their comeuppance is overdue.

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The Path to Impeachment

What constitutes an impeachable offense?

Yesterday in The Internecine Deep State Conflict Moves to Stage Two I suggested that the conflict was heating up, a move confirmed by former Trump advisor Michael Flynn's guilty plea that he lied to the F.B.I. regarding his contact with Russian officials.

The case for impeachment now becomes clear: prosecutors will attempt to prove that Trump made contact with the Russians in violation of the Logan Act, which forbids private citizens from dealing in matters of state with foreign governments.

According to the Wikipedia entry on The Logan Act, To date, only two people have ever been indicted for violating the Act's provisions. However, no person has ever been prosecuted for alleged violations of the Act.

(There are of course other potential charges, which we will learn more about as legal commentators across the spectrum weigh in.)

Question #1: can prosecutors provide evidence that shows beyond reasonable doubt that Trump violated the Logan Act before taking office?

Question #2: is this an impeachable offense? That will be decided by the House of Representatives, which can pass a motion of impeachment on a simple majority:Impeachment of the president, explained.

The case then goes to trial in the Senate, where impeachment requires a 2/3 majority.

Clearly, impeachment is not only a legal process, it is a political process in which partisanship plays a role. The definition of what constitutes an impeachable offense is not well-defined in the Constitution, with treason and accepting bribes being two examples.

It's not too difficult to imagine the Supreme Court being called upon to issue a ruling, given the history of political/legal crises raising issues that must be addressed by the Supreme Court. Examples include the 2000 presidential election/ballot-counting controversy in Florida, and the 1973 Saturday Night Massacre in the Watergate scandal.

Question #3: Can Trump be caught in a lie like Flynn?

It's common knowledge that public figures are often felled not by their initial misdeeds but by the lies and cover-ups issued to cloak the original misdeeds. If prosecutors can pin lies on Trump that are equivalent to what they pinned on Flynn, then we return to Question #2: is this an impeachable offense?

Impeachment has been in the political winds since the 2016 election. Opinions on the likelihood and the consequences of impeachment are of course varied, for example, What’s worse than leaving Trump in office? Impeaching him. (WaPo)

Meanwhile, stories that Trump is becoming increasingly erratic are opening another path to Trump's removal via charges of mental instability: Trump Is Cracking Up (New York Times).

All of which leads to Question #4: to what degree does governance grind to a halt should the crisis become the dominant focus of the nation?

Those of us who lived through the Watergate years recall that the crisis (more a process than an event) crippled governance and policy on many levels and led to sweeping reforms of numerous federal institutions.

Question #5: who benefits from the crisis, regardless of its ultimate outcome? Certainly those within the Deep State who cannot abide Trump at the head of the Executive Branch have accomplished a major goal, which is bringing legal culpability (guilty pleas, etc.) into Trump's inner circle, where maximum damage can be done, up to and including impeachment.

Another camp might benefit from the chaos, seeing opportunity as Trump partisans and opponents wage war on each other.

Clearly, the Trump administration has just absorbed a salvo of torpedoes, and secondary explosions are still cooking off below decks. The goal of the Deep State supporters of the administration can't be mere political survival; the goal must be to reach a resolution quickly enough to maintain some measure of consent of the governed.

The anti-Trump camp knows the damage done by the passage of time: the longer Trump and his circle are on the defensive, the greater the damage inflicted, even if his presidency survives more or less intact.

In my view, the most cogent context is not partisan politics, but the battle for the upper hand in the Deep State. Those of us on the outside of these opaque, for-all-the-marbles battles only see the shadows cast by the media circus; we are left with the unenviable task of attempting to read between the lines of scripted PR spin from every Deep State camp with a stake in the outcome, which means all of them.

Just for reference, here is my first essay on the topic:

Is the Deep State Fracturing into Disunity? (March 14, 2014)

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