Category Archives: Economics

Chained Weighted CPI

Posted on by

Behind the degeneracy of language lies the degeneracy of ideas. Those seeking to corrupt the minds of their fellow man, naturally seek to corrupt the language. One way is to expand the definition of words to include things previously excluded. Another is to coin new terms that presumably capture new ideas, but in reality conceal some truth that could be stated in plain language. Chain Weighted CPI is an example.

An alternative measurement for the Consumer Price Index (CPI) that considers product substitutions made by consumers and other changes in their spending habits. The chain-weighted CPI is therefore considered to be a more accurate inflation gauge than the traditional fixed-weighted CPI, because rather than merely measuring periodic changes in the price of a fixed basket of goods, it accounts for the fact that consumers’ purchasing decisions change along with changes in prices. Because the fixed-weighted CPI may consistently overstate inflation by ignoring the disinflationary effect of quality improvements and new technology, in addition to the substitution effect, the U.S. Bureau of Labor Statistics maintains that the chain-weighted CPI is a closer approximation to a cost-of-living index than other CPI measures.

That sounds wonderful, but it no more of an empirical truth than the claim that vanilla ice cream is better than chocolate ice cream. The word to key on is “better.” That’s not an empirical term. Fred may be better than Joe, in the opinion of Fred’s mother, but Joe’s mother will hold a different opinion. On the other hand, if Fred is taller than Joe, that’s not a disputable opinion. It is an empirical fact. We can measure both men and arrive at the correct answer. Height is not a matter of opinion.

Economists at the BLS may feel one measure is better than the other, but that is meaningless. The rest of us are not living our lives to make the BLS happy. We make our value judgments based on all sorts of personal and cultural factors. We think sports cars and better than sedans, because of the cultural connotations. We may like chicken better than steak, because of personal taste, but the market place thinks steak is better, because more people prefer steak. Speaking of which,  from Investopedia:

For example, consider the impact of two similar and substitutable products – beef and chicken – in the shopping basket of Mrs. Smith, a typical consumer. (Let’s ignore for the moment the fact that the “core” inflation rate ignores food and energy prices because they are too volatile.) Mrs. Smith buys two pounds of beef at $4 / lb. and two pounds of chicken at $3 / lb. A year later, the price of beef has risen to $5 / lb. while the price of chicken is unchanged at $3 / lb. Mrs. Smith therefore adjusts her spending pattern because of the higher price of beef, and buys three pounds of chicken, but only one pound of beef.

The fixed-weighted CPI measure would assume that the composition of Mrs. Smith’s shopping basket is unchanged from a year earlier, and would compute the inflation rate as 14.3% (i.e. the difference between the total price of $14 and $16 paid for two pounds of beef and chicken a year apart). The chain-weighted CPI measure would, however, consider the effect of Mrs. Smith substituting a pound of beef with a pound of chicken because of its lower price, and would compute the inflation rate as zero (because the total amount spent is unchanged at $14).

Now, we can pretend that chicken and beef are interchangeable products, even though they are not. We can also pretend that consumers value both equally, even though we know they don’t. We can also pretend that people value living in a nice neighborhood the same as living in a ghetto. We can pretend that people value walking to work the same as driving, particularly in driving rain storms.  In other words, the mischief potential makes this an entirely worthless method for measuring inflation.

Of course, economists refuse to acknowledge this rather obvious problem. When you bring it up, the response is “how can we know people prefer X over Y and are not just responding to price?” In other words, confirmation of the defect is denial as long as it is in the form of a question. Then they quickly change the subject and lard up their response with meaningless jargon. It is why macroeconomics is not a serious field, outside of some basic observations about human behavior.

Economic Nonsense

Posted on by

I’m fond of saying that economics is closer to tarot card reading than physics on the empiricism scale.  It is not just a pithy put-down. Economics is the one area of practical mathematics where getting the wrong answer is of no consequence. The reason is no one ever gets the right answer. I’m not talking about predicting the future. The future is not written, at least we don’t think so, which means conditions can change between the time you make a prediction and the point in the future being predicted.

Economics, I’m talking macroeconomics, deals is loads of complexity. The economy of the United States is the daily economic activity of 300 million people, plus every country with whom we conduct business. The millions of variables in play makes forecasting problematic. Even long after the fact it is hard to really know how much economic activity took place in a certain place at a certain time. Despite this, economists act as if they possess the ability to accurately forecast the future.

It is not quite superstition, but the guy with the bone in his nose is within hailing distance of the town’s economist. The witch doctor thinks he is tapping into some universal truth that transcend time and place. That gives him the ability to diagnose the present and predict the future. Economics takes the same view. Every human action has some perfect model in the stars that only the economist can see. They can therefore look at current activity and predict the future compared to the world of forms.

Immigration is a great example. To the sane person, it is obvious that the people of a nation hold the exclusive right to determine who can and who cannot enter. To an economist, not such right exists. Any passing opportunist must be free to set up camp because the economist believes it will please the gods of efficiency. The fact that none of them would let you borrow their pencil much less pitch a tent in their yard is dismissed as irrelevant. Economics is modern shamanism.

Here’s a good example of how this weird religion has spread like kudzu across the West. The Scots will decide if they will to remain a part of Great Britain or become independent. From what I’ve read, they will not actually be independent as London will continue to rule their foreign policy. Scotland will become something like Puerto Rico without the rum and fine weather.

To an uncultured ear, that sounds like a reasonable thing. Scotland has been in Great Britain since 1707 and done pretty well as a consequence. If they now think it is better to go it alone, that’s for them to decide. Patriotism, tradition, nostalgia and mere taste are probably the primary motivations for the voters. That’s what sane people should expect. Instead, the smart set says things like this:

I’m against Scottish independence because I’m horrified at the prospect of our country being dismantled. I’d also argue that an independent Scotland is an economic nonsense. I’m not saying a country of 5m people, with a wealth of know-how, couldn’t survive. The problem is that the cultural, historic and commercial ties that bind us are too tight to safely be cut.

They can be symbolically severed, yes, with the creation of yet another expensive layer of Scottish government, with all the special advisers, civil servants and juicy public sector per diems that would bring to Edinburgh’s already cosseted political elite. But as far as the rest of the world is concerned, we’re one entity — a reality that’s prevailed for centuries, long before the 2012 Olympics.

Crucially, Scotland’s still extremely precarious financial services industry is viewed as UK-backed — and that means the Bank of England. The Scottish commercial banks, with their vast liabilities, and still unresolved off-balance-sheet losses, will always physically reside in Britain.

A perfectly good argument against this vote is based in history and tradition. The English can argue that he likes his country the way it is and will not go along with changing it. He may respect the Scots desire for independence, but it is not in the best interest of the British, who happen to be in charge, so they will not permit the vote or Scottish independence. Put another way, the English answer to the Scottish demand can be “No, because we said so. Discussion over.”

Instead, the writer feels it necessary to work through a bunch of pseudo-scientific reasons as to why the maths say it is a bad idea. Everyone in the West is petrified to stand up and say they want what they want because they want it. Cultural pride is so taboo we have otherwise reasonable people claiming the maths are on their side in the same way Druids thought the gods were on their side. The West is slipping into paganism and the economics profession is supplying the shamans. Worse yet, we are slipping into a tyranny of shamans. At least the old priesthoods knew their limits. I say if you see an economist, beat him. He will know why.

More Fraud Book

Posted on by

Facebook sent a notification to all of their users about a new feature. They report 200 million clicked on the link to make a video. That’s a lot of people, but only a fraction of their claimed user base. Given the feature requires very little from the user, they cannot claim that the other one billion users just lacked the time to do it. In other words, 200 million is probably their active user base.

How “sticky” those users are is debatable, but the volume of active users is consistent with other on-line results. People forget that Facebook did not invent social media. It was around for a couple of decades before FB came along. As a result we have a lot of data on it. The people claiming to know about this stuff lack the institutional memory to think about these earlier efforts at social media, but it exists.

Message boards, bulletin boards and so on are a lot like talk radio. That is, you have many more passive users than active users. Talk radio knows they have roughly one caller for every 100 listeners. They also know that the set of possible callers has a subset of regular callers that follows the Pareto principle. That’s how they can tell how many people are listening to a show. If the lines are lit up, they have a big audience.

Message boards will have 90% of their posts from five percent of users. About 10% of users visit daily. The rest drift by weekly and monthly. Back when sites like Scout and Rivals were looking for investors, they would claim user counts that were technically true, but not reflective of active users or paying customers. The ratio was 10:1 free accounts to paying accounts. That’s a different metric, but it reinforces the larger point.

There’s another thing with Facebook. How long are the users on-line? When I had an account, I’d check in most mornings with my coffee. Three minutes later I was reading another site. Mobile users are on the site for brief clips throughout the day, but not enough to be called active users. A billion users logging in for thirty seconds a day is not much of user base when you revenue depends on them clicking your ads.

Add to this the click farm stuff and you have to wonder if Facebook is not one giant confidence game. Even if that is too strong, how in the world can you justify a $165 billion market cap for an ad engine touching 200 million worldwide? Many of those “users” are living in huts or are children with no money of their own. How many are just robots that click on everything? The quality of those clicks count for everything.

Fraud Book

Posted on by

There is no way to check the details of this, but the fact the video has not been struck down the creator has not been sued, suggests it is not a slander of Facebook. Indian is known for hosting click farms and similar scams. One of the weird products of global village is the village idiots are easy to spot. Hindus will patiently sit in click farms, creating fake traffic for web sites. Russians, on the other hand, will never do it. Instead, they are better at gypsy scams like selling fake shoes and penis pills. The Philippines is another great place to setup click farms. The new thing is to setup outbound call center there because most speak English. That’s another job Russians would never do.

Anyway, it is a good idea to be suspicious of Facebook. It is one of those services that is great as long as it is free. If they start charging for it, the whole thing collapses. That leaves advertising, but that’s a limited game as well. Plaster the site with ads and people get turned off. Plus, ads are often the source of malware and most users have ad blockers. Then you have the mobile problem. Microscopic ads on a phone are worthless. The quality of advertising is another issue. Like a most internet advertising, the stuff on Facebook is aimed at the impulsive and stupid.

Now it seems the scam is different. They are getting companies to setup pages and then pay to get traffic to their page. Since no one in their right mind goes to a corporate FB page, they are using robots to fool the companies. It is a clever scam, but an old one. Pyramid schemes often work this way. Psychics have always used plants to trap suckers. They were also caught putting stuff on people’s home pages that was supposedly liked by a friend. It was pretty ham handed and they said it was an error, but no one should believe Mark Zuckerberg. Everything about that guy screams grifter.

Chinese Banking

Posted on by

Few things are as mysterious as Asian business practices. It is a strange combination of complexity and opacity, sprinkled with a heavy dose of dishonesty that is forever off-limits to the Western mind. The word “inscrutable” comes to mind. A good example is right here. In the West, a firm struggling to pay its bills and threatening to default will do so in a very public fashion. If the regulators take over, they perform a public audit, liquidate the assets and pay creditors based on an agreed upon framework.

If the firm goes into bankruptcy, that is also a public process. If a white knight comes in and puts up a bunch of cash, then we learn who it is and why they are coming to the rescue. It is not perfectly transparent, but the public and interested parties will know enough to judge the results. A big part of Western economics is transparency. That does not mean there are no insiders doing inside deals, but we have laws against insider dealings for a reason.

In China, the banking system is a mystery to everyone, including the people in the Chinese banking system. China Credit Trust Co has no money of its own. It sold a product to investors promising a ten percent return on loans to a firm that has no money to repay the loans. That’s not how it was presented, but that is the reality of it. In the West, this is called fraud, but in China this is just how deals are done. They make New York City real estate seem simple.

Zhenfu Energy, desperate for cash, went to private firms to borrow money at rates well above market. China Credit Trust Co appears to have created a product to be sold to retail banking customers to funnel money into the struggling energy company. It was a fraud, but most of modern banking is a fraud. Now that the energy company is defaulting on the loan, China Credit Trust Co cannot pay the retail investors their promised return.

This was all supposed to happen at the end of the month. Today a mysterious and undisclosed white knight has arrived to supply the cash. Everyone knows the white knight is the Chinese Communist Party, but no one will dare say it. It is simply a “restructuring” that papers over the problem for now. A month from now some mid-level functionary will kill himself and everyone will know why, but no one will dare say.

It is no way to run a modern economy, but that’s another thing everyone knows, but no one dares say. Instead, the West looks the other way and hopes those inscrutable Chinese keep buying up the useless paper the credit machines keep emitting every month. At some point, the incompatibility between Asian practices and western practices will become too obvious to ignore. Most likely, it will cost the West a lot to learn this lesson.

Inequality Thoughts

Posted on by

Jim Geraghty has a post up on National Review Online about the “polarization” of the public over politics. Usually what these guys mean by polarization is that the public is not buying what the media is selling them. When a non-liberal shows up on campus to give a speech and is heckled, he is polarizing. When an abortion fanatic shows up at a Catholic college and is heckled, he is courageous. Anyway, the point of his post is that people are mad and it has nothing to do with politics.  I posted this in the comments:

First off, Frank Luntz is probably a sincere person and all around great guy, but his profession is closer to witchcraft on the empiricism scale than it is to science. He makes his living telling the Sean Hannity audience what they want to hear. I don’t want to call him a charlatan as I think he believe this stuff. If he were not performing on the Hannity show, he would be watching it.

Second, income inequality is not just a leftist fad for the political season. Keep in mind that the Left has embraced the modern tools of crowd sourcing. While far from perfect, they are very useful in defining trends. Americans are increasingly aware that the folks in charge live vastly different lives than the rest of us. There’s also a growing suspicion that the interests of the ruling class are at odds with the middle class. A rich tech billionaire moaning about paying his market rate does not go unnoticed.

Third, this is not the first time America has seen this sort of problem. The new robber barons are different in that they are Davos men, cosmopolitan citizens of the world who got rich from global capitalism. Their loyalty to country and culture is nearly non-existent. That makes them seem <i>alien</i> to the hoi polloi. The robber barons of old were men who embraced country and culture.

Global capitalism is a boon to rich people in rich countries and smart people in poor countries. It is a bane to the middle class of rich countries. As a political matter, the GOP has a choice. It can be the party of the middle class and stop chasing after the favor of the plutocrats. This, I suspect, is a lost cause. Alternatively, they can go back to their historic role as accountants to the ruling class. The Left works on reorganizing society and the Right keeps the books.

The narrative says the GOP represents conservatives, by which is meant middle-class white people, but that’s a myth. The recent actions of Boehner and McConnel make that clear. The early embrace of Chris Christie as the choice for 2016 is another clear sign the party would like to be rid of the Tea Party and the other non-conformists. For half a century, the GOP was about defending the public finances and defending against the communists. Otherwise, they went along with whatever the liberal democrats wanted.

A careful reading of history shows that all ruling elites have these two factions. One side wants to charge ahead with all sorts of schemes. The other side wants to tap the breaks and steer clear of trouble.  Otherwise, they agree on most of the important stuff. In modern times, we are seeing the ruling elites move closer, as they begin to define themselves in opposition to the people over whom they rule. In Europe, this is well under way as formerly ideological opposites are now in power sharing deals. The Tories and Labor, for example

The question is whether the people on the outside will go along with this deal. In America, the slow grinding down of the middle-class is not going unnoticed. Europe has all sorts of weird social unrest. People are unlikely to go along with a new system where everyone is relatively poor compared to the ruling elite. Then there is the question of sustainability, as global capitalism rests on the belief that borrowing rates at the top can always be zero.

This can only work if the elites can control capital almost entirely and even then, it is hard to see how that can be sustained. People will first note that “both parties” fail to deliver, while the wealth gap grows ever wider. Then the people notice that voting has no effect on the process. That’s when people start looking for option, usually at the extremes. The Left will search out screamers who promise to rally the fringes against the middle-class whites, while those middle-class whites tart listening to those promising to defend their stuff.

In the end, gross inequality leads to social unrest.

 

The Truth About Bitcoin

Posted on by

Tyler Cowen has yet another post up about Bitcoin. The topic is becoming an obsession with a certain type of libertarian academic. The mere mention of it has them thinking about how great it would if they were John Galt, just without all the hard work and danger that comes with it.  Whenever the topic comes up, they began chanting the all of the usual lines, like they are incantations. The comments sections of Bitcoin stories always have a weird cult-like vibe to them, but libertarianism is pretty much a cult now anyway.

The basic thrust of Cowen’s post is that Bitcoin is like any other commodity. Once a sufficient number of others get into the crypto market, the price for all of these currencies will fall to cost plus some tiny profit. In other words, he sees crypto as something like trading sheep or shiny rocks in the market place. Since the currency has no intrinsic value and there is no authority to set the value, the market sets the value based on utility or popular fads or some large manipulator buying or selling large quantities.

Putting aside my complaints about Bitcoin as a currency, the main problem with these digital-currencies is the same problem we saw in the Free Banking Era. Central governments hate the idea of a currency they cannot easily manipulate. That has been true since Pheidon. If you control the money, you control the people. Naturally, ruling elites will seek to control the money as a top priority. There’s also the issue seigniorage, which is no small thing. Wars have been fought over control of a single mint.

It has nothing to do with economic efficiency and everything to do with order. Order is what allows the best citizens of the polity to rise and remain at the top of the status system. It is also what allows the less talented to live something close to a sane existence. Order is how humans guard against the anti-social fraction that exists in every human population. Despite the fevered dreams of libertarians and anarchists, you cannot have a society without order. There has to be rules and enforcement of rules.

This natural desire for order naturally leads to a ruling class that is the final authority on everything, including the value of money. That authority, in order to be an authority, needs a method to control the people and thus the society over which they rule. Controlling the money is a great way to accomplish this. Controlling land or monitoring individual transactions is unworkable over the long haul.  The cost exceeds the benefit.

One simple way to control the populace is through the coining of money. That makes taxing easier for the authorities and it gives them control of trade and labor. It allows for the authorities to audit the citizenry to ensure compliance. There’s also the issue of seignorage, which has always been an important aspect of rule. Wars have been fought over control of a single mint. Having a bunch of competing currencies works against order and against efforts to impose order, therefore can never be tolerated.

Think about it this way. Let’s say I come up with a digital heroin. That is, a drug that can be transmitted on-line that you load on a flash drive, shove up your bum and get amazingly high for eight hours. Obviously, I’m not getting a lot of takers initially. The lack of customers means I’m losing money every time I make a batch. I manage to get a few takers to try it and begin to build a client base through word of mouth. I hit the same spots at predictable times and sell my digital heroin the old fashioned way.

This goes on for a while and no one is the wiser. The cops don’t care as it looks nothing like criminality from their perspective. The drug gangs don’t care at first because I’m not doing business on their turf. They are unaware of the threat I pose initially. But, they notice a drop in sales eventually as I build my business. Eventually they will figure out that someone is taking their customers. They may figure out it is me before they figure out what I’m selling or it may be the other way around, but at some point they put it together.

The drug gang will have three choices. Obviously, they can kill me, but that will require knowledge they may lack. They may know I exist, but not exactly where I exist. I could have advanced to the point where I’m selling my drug on-line. Drug dealers are not fools and they will recognize their lack of knowledge and see that as a risk in itself, perhaps a bigger risk. Killing me could create unknown problems. After all, I could be part of some much larger enterprise as unknown to them as the magic drug I sell.

The second choice is to figure out what I’m doing so they can either muscle in on my business or come up with a better way to compete. There is a reason we have such an array of street drugs. A clever guy creates a new product and the drug gangs eventually take it over and add it to their portfolio. The same guys controlling the weed sales in one area control the heroin sales too. Maybe they cut their prices or find some way to improve their product. Maybe they invent a new drug that is better than my drug.

The third option is to enlist the state to take out my business. I’m conducting business and that means taxes are involved. It also means a mountain of rules and regulations. My drug may be legal, but not paying taxes on sales is illegal. Not filing for a business license and not abiding by the laws governing record keeping are against the law. If I have employees, then I need to pay them and that means taxes, workplace laws, social security, Medicare and unemployment taxes. As any small businessman knows, there are a lot of rules.

Here we ultimately see the problem with Bitcoin. Disruptive technology is not ignored by the folks at the top of the established order. In the drug example, the established authority is the drug game, which served as a proxy for the state. In the above ground world, the state will defend itself from the threat posed by Bitcoin and they have many tools at their disposal. They also have tanks, planes, missiles and other military goodies. Bitcoin can only exist as long as the state allows it to exist. That means it will have to serve the interests of the state to survive, which brings us right back to where we are now.

End of the Free Money Era?

Posted on by

It is easy to forget that the way things are now is not the way they have always been, which means the way things are now is not how they will be in the future. For instance, the giant book stores that are going out of business never existed forty years ago. For most of the post-war period, there were mall shops to sell best sellers and popular stuff and there were boutique book shops for the stuff aimed at serious readers.

Then with the invention of free money from the global financial system, every town in America suddenly had a massive book superstore. Barnes & Noble started out a rickety old warehouse in Boston. With free money, they built book warehouses all over the country. The story is similar with Borders Books, which started in Michigan. Now, they are going under as people remember that they don’t really read that much after all.

The same is true of casual dining. Thirty years ago, casual dining meant a local joint run by local people, often foreigners. Immigrants could start a restaurant, because it required more labor than capital. They could make it a family business. Then all of a sudden we are flooded with massive chains like Olive Garden and Red Lobster. Now it appears they may be following the path of Borders and Barnes & Noble.

In a move sure to set the culinary world and classy guys everywhere reeling, Darden has announced that it will either sell or spin off its Red Lobster restaurants.

Adding to the devastation, the company, which also runs Olive Garden and other fine-dining establishments, said it will suspend the opening of new Olive Garden locations and slow down new locations for LongHorn Steakhouses.

Why, you ask? Dear God, why??

Because Darden isn’t doing so good. It seems that consumers are turning their noses up at hoity-toity sit-down places like Red Lobster and Olive Garden these days in favor of cheaper chains like Chipotle.

Darden is one of the largest companies in the casual dining industry, with a market value of $6.7 billion, but its core chains have had stagnant growth, according to The New York Times. Last quarter the company experienced a 31 percent drop in net earnings. “The reduced unit growth will lower capital spending by at least $100 million annually,” the company said in a statement.

Red Lobster has 705 restaurants in the United States and Canada and had annual sales of $2.6 billion in 2013, but we guess that wasn’t enough for ol’ Scrooge Darden.

Putting aside the millennial snark from the writer, there could be a bunch of reasons for this that have nothing to do with the economics of chain restaurants. For example, Red Lobster is awful. It’s everything that is wrong with the American diet on the same menu, but made worse somehow. Olive Garden is better, but they tend to be over priced for what you get. Paying $25 for spaghetti seems wrong. In other words, whatever novelty there was to them has worn off and people now realize these places are not very good.

There’s something else going on with big retail. The rise of massive chain stores is due in large part to the credit boom. When you can get money at 2%, you will make different bets than when the money costs 10%. More important, you can make money from things with 2% money that you can’t with 10% money. Big capital projects like restaurant and bookstores can’t exist at borrowing rates at or above historic averages.

Cheap credit allows for a form of pump and dump that cannot exist under normal borrowing conditions. Cheap money allows for massive expansion, where revenue is realized today, but the cost of expansion is pushed off into the future. That draws in more money, allowing the original investors to get their money out with a profit. The chain expands until it runs out of room and then those costs come home.

Interest rates remain artificially depressed, but lending is not as free as we saw for two decades leading up to the crash. Giant corporations can get plenty of credit, but their customers are a different story. The Fed keeps pumping money into the system hoping the clogs eventually break free, but no one know if that will happen, before the consequences of loose money turn up in other parts of the economy.

Even assuming the smart Jews running the global finance system can keep the plates spinning forever, there’s another aspect to this problem. Cheap money allows for cost reductions by eliminating competition. These chain restaurants have killed off the local dine, for example, but rigging the supply chain so they get much lower costs. That works for a while, but there is a natural boundary. Costs never fall below zero.

The free money era feels a lot like a bust out. The boom and bust of giant bookstores, for example, left us with no bookstores. One company, Amazon, now controls 80% of the book business. The boom and bust of chain restaurants is about to leave us with no local restaurants, but soulless chain stores owned by some global capital group. It’s one company operating under a dozen brands, selling the same food.

Bad Bits

Posted on by

Block chain technology could be the great innovation that gets us over a serious hump into a low-work society. Or, it could be a clever idea that has no practical use. That’s thing with technology. It’s often not as useful as people assume initially. Many times the technology ends up in something completely different from what the inventors originally imagines. The microwave over is the best example.

The idea of a digital currency is fine as it already exists to a certain extent. The use of cash has declined, because people now charge everything or use a debit card. That’s an electronic version of your home currency. This is made possible by the vast digital network that allows you to engage in commerce digitally. Specifically, it allows people to convert their currency into a digital representation for transmission around the globe.

One of the primary attributes of currency is portability. Cash and coins are more easily transported than sheep or bales of hay. Converting sheep into coins, means the shepherd can turn his labor into something he can tote to the next village and trade for something produced by some other farmer. Currency makes the value of labor quantifiable and portable, which means it then move around in society as property.

Another primary attribute of currency is it is not easily destroyed. Coins are hard to destroy. If one is damaged, it can be exchanged at the mint for a new one. Similarly, paper money is quite durable. It does not decay over time if properly cared for by the holder. This is the bulk of what the US Bureau of Engraving and Printing does every year. Currency is durable and the replacement of that which is destroyed is predictable and orderly.

In this age, we have figured out how to increase the amount of currency in circulation to keep pace with natural attrition, but also the increase in labor. That’s a long topic that can be debated forever, but in theory, a slowly expanding money supply reflects growing efficiency and growing value of labor. In a perfect world, there would be no inflation and no deflation, as the amount of money would grow and shrink in sync with labor.

That last bit is what gets lost in discussion about Bitcoin. A crypto-currency has a finite supply. The cost of getting the first “coin” is X. The next coin is X plus some small additional amount. The next coin is X plus a slightly larger amount. This continues on at a predictable rate until the final coin is minted. The cost of minting increases with each coin so the cost of minting coin X is less than the cost of coin X+n.

This means the coins increase in value over time. A single currency unit of labor, for example, will increase in value. Put another way, the amount of lawn work I can buy with a currency unit today will be less than I can buy tomorrow. That makes the currency deflationary by design. In times of great technological progress, it will be wildly deflationary. In this way, it has the same defect as hard money. It’s cyclical.

Now we have another big problem with Bitcoin. It is easily stolen. The QR code *is* the money, not the bit of paper on which it was printed. Try stealing a coin on paper currency through the television and see how that works for you. For better or worse, stealing hard money, so to speak, means physically taking to from the holder. There are no special precautions one need take to keep their money safe when it is physical coin or paper.

With Bitcoin, there’s no truly safe place. Worse yet, you don’t know it is stolen, in this case, unless you try to use it. There’s also the problem of the vault where you keep your money suddenly disappearing. If you keep your coins locally and your hard drive fails, you coins are gone. If you store in the cloud and the cloud company disappears, your money disappears with them. Bitcoin is by definition, a fragile storage of value.

Now, this raises two other issues. One is the currency is not self-validating. I can examine a coin or paper and determine if it is real. I do not require a third party. Bitcoin requires validation of each transaction. That third party is a network of computers, but they are not anonymous. To work, they must keep a record of every transaction of every coin. That means the third party tracks your every move in order to function as a validating authority.

Everything about Bitcoin says it cannot be a widespread currency. At best, it can be a short-term transition point. Person X wants to give Person Y money, without using the above ground financial system. Person X then converts money into Bitcoin, sends it to Person Y, who immediately turns it into real money. if you are a drug dealer or a revolutionary, this is useful. To everyone else, it is a pointless novelty.

People Are Not Rational

Posted on by

The main complaint about the field of economics, at least libertarian economics, is that it starts with assumptions not based in reality. The number of references to “rational behavior” or “rational actors” indicates the people into these subjects are powered by wishful thinking, rather than clear-eyed realism. Humans, alone or in groups, are not rational. People regularly act irrationally, even when the rational option is obvious. A good example is right here in this story on the supplement scams:

But surely consumers play some role in the rise of the vitamin industrial complex. Research about the ineffectiveness of vitamins, or worse, has been around since the 1940s, after all. “People over time and particularly people in the United States have been led to believe that vitamin and mineral supplements will make them healthier, and they’re looking for a magic pill,” Dr. Cynthia Mulrow, another of the Annals of Internal Medicine editorialists, tells Reuters.

And the “magic pill” habit may be hard to break, scathing editorial or no. For what it’s worth, here’s the pushback from the supplement trade group the Council for Responsible Nutrition:

The Annals of Internal Medicine editorial “demonstrates a close-minded, one-sided approach that attempts to dismiss even the proven benefits of vitamins and minerals,” says the group’s CEO, Steve Mister. “It’s a shame for consumers that the authors refuse to recognize the real-life need for vitamin and mineral supplementation, living in a fairy-tale world that makes the inaccurate assumption that we’re all eating healthy diets and getting everything we need from food alone.”

All those rational actors economists talk about will look at the mountain of studies on one hand and a collection of con-men on the other and believe the con-men, even though they sort of know they are being swindled. Facts and evidence will play no role. They want to believe. They will listen to goofy celebrities and TV airheads about whole food vitamins and be convinced this stuff is beneficial. The fact that these people are wholly unqualified to talk about any of this stuff will count for nothing.

It’s why much of libertarian economics is absurd. In the very general sense, sure, markets are rational in that they display preferences of the participants. But, there are few unadulterated markets and therefore few truly rational markets. That implicit irrationality is known by the participant, which alters their behavior. People are not moist robots, acting on a simply set of binary instructions. We may be controlled by our code, but it is vastly more complex that the simplified models that come for modern economics.