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Saturday, April 13, 2013

Bitcoin: An Idea Whose Time Hasn't Come

     Bitcoin is the great White Hope-or Austrian as the case may be. Sumner always says that EMH shows that there's no way to outguess the market-at least in the long term, you may got lucky now and again. However, he himself now looks positively prophetic with his post on Bitcoin  the other day.

    The post was When Bitcoin Crashes:

    . . . .I predict people will say it was a bubble, even though it wasn’t.  The term ‘bubble’ can mean many things, but the sine qua non of definitions includes “rejection of the EMH.”  But the EMH says that bitcoin is very likely to crash.  Why is this so, and why don’t people know this?
1.  We know that market volatility is serially correlated.  Markets that have been highly volatile are likely to remain highly volatile.
2.  Bitcoin prices are super volatile.
3.  The EMH predicts that expected returns are near zero.  Combined with high volatility, this mean the EMH predicts that bitcoin will exhibit large price increases and large price decreases at various times in the future.
When the bitcoin price crash comes, most people will wrong say; “Aha, I told you that it was a bubble.”  But why?
Because they wil have forgotten about their first bubble prediction.  People were calling it a bubble at $2, and again at $30.  Now it’s over $200.  If it plunged to $35 dollars, the bubble predictors will say they were right all along, but they will have been wrong.  They’ve merely remember their bubble predictions, not where bitcoin was when the made the predictions.
[Ha! I wrote this yesterday and delayed posting--that'll teach me.  It's $160 tonight]
But the internet never forgets anything.  And I’ll search and search and expose every phony “I told you so.” I can’t predict where bitcoin is going, but I can predict there will be many false “bubble” claims when it eventually crashes—and it will crash.  The only question is whether it will crash from a price so far above the current price, that it’s still a good buy at $200. $160.
And the EMH says that the answer to that question is; “God only knows.”
Memo to commenters:  All comments telling me why bitcoin is a bubble will be ignored, as they’ll show you missed the entire point of the post.


     In this case, the bubble callers didn't have long to wait. Sumner's answer may have been God only knows, but the very next day we all knew. Bitcoin bubble bursts: Hacker currency gets wild ride!


      Sumner's actual point was the rather engimatic case he makes every so often that bubbes don't exist-according to him though he gets lots of skeptics on this one. If bubbles don't exist how come all these headlines get to say Bitcoin bubble just burst? Besides sometimes he says they don't exist-as the market is rational-sometimes he says they may happen but they don't matter if they do. 

       Bitcoin is an idea that all the Free Banking types and the believers that all we need to stabalize the marekt and economy is the gold standard or a commodity standard, or currency competition relish. Krugman has an interesting post that points out that Adam Smith is not one who would admire such a thing. Smith revolutionzed human thought, being the first real "worldly economist" to use the phrase of Richard Heilbroner
          

     To be sure, his good and close friend David Hume also was very instrumental-between the two men such much of our modern mode of thought was hatched. Smith was ahead of his time in yet another way: all the libertarian types calling for currency competition won't find a friend in Smith who was already calling for fiat money 200 years ago:
     
    "There have been many good pieces written on the dubious economics of Bitcoin; I especially liked this one by Neil Irwin. One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned."

     "Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which — as he pointed out — serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency:
The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country. The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures, and corn fields, and thereby to increase, very considerably, the annual produce of its land and labour.
     "And now here we are in a world of high information technology — and people think it’s smart, nay cutting-edge, to create a sort of virtual currency whose creation requires wasting real resources in a way Adam Smith considered foolish and outmoded in 1776."

     
     The Neil Irvin piece Krugman mentions is excellent. Irvin also links to a hilarious satire by the Onion that one day before Congress Bernane realizes that money is just meaningless scrap of paper-just a shared social illusion-and the U.S. economy grounds to a halt. 

     "What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world's largest economy."

     "Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…" said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all."

     "It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless."

     "According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, "Oh my God, he's right. It's all a mirage. All of it—the money, our whole economy—it's all a lie!"


     It only gets better:

     "As news of the nation's collectively held delusion spread, the economy ground to a halt, with dumbfounded citizens everywhere walking out on their jobs as they contemplated the little green drawings of buildings and dead white men they once used to measure their adequacy and importance as human beings."

     "At the New York Stock Exchange, Wednesday morning's opening bell echoed across a silent floor as the few traders who arrived for work out of habit looked up blankly at the meaningless scrolling numbers on the flashing screens above."

     "I've spent 25 years in this room yelling 'Buy, buy! Sell, sell!' and for what?" longtime trader Michael Palermo said. "All I've done is move arbitrary designations of wealth from one column to another, wasting my life chasing this unattainable hallucination of wealth."

     "What a cruel cosmic joke," he added. "I'm going home to hug my daughter."

     "Sources at the White House said President Obama was "still trying to get his head around all this" and was in seclusion with his coin collection, muttering "it's just metal, it's just metal" over and over again."

     "The president will be making a statement very soon," press secretary Robert Gibbs told reporters. "At the moment, though, his mind is just too blown to comment."

     "I don't even know what we were thinking in the first place," said former banker Nathan Collins of Brandon, MS, as he jimmyed open a door to allow a single mother and her five children to move back into their house. "A bunch of people sign a bunch of papers, and now this family has no place to live? That's just plain ludicrous."
   
     "The realization that money is nothing more than an elaborate head game seems to have penetrated the entire country: In Wilmington, DE, for instance, a collection agent reportedly broke down in joyful sobs when he informed a woman on the other end of the phone that he had absolutely no reason to harass her anymore, as her Discover Card debt was no longer comprehensible."

     "For some Americans, the fog of disbelief surrounding the nation's epiphany has begun to lift, with many building new lives free from the illusion of money."

     "It's back to basics for me," Bernard Polk of Waverly, OH said. "I'm going to till the soil for my own sustenance and get anything else I need by bartering. If I want milk, I'll pay for it in tomatoes. If need a new hoe, I'll pay for it in lettuce."

     "When asked, hypothetically, how he would pay for complicated life-saving surgery for a loved one, Polk seemed uncertain."

    "That's a lot of vegetables, isn't it?" he said.


        

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