SnakeOil Salesmen and other illusionists create a story that leads people along a path that their victims want to be true. At the end of the path are disillusion and another story for the ages. BitCoin is based on an illusion and will become an addendum to Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds” available here as a zero cost Ebook.
People want to have a currency free from manipulation and exploitation. BitCoins enthral Libertarians, and Erik Voorhees is no exception. In this article, he makes a convincing case for BitCoin because he wants to believe.
Unfortunately, Voorhees like 99.9999% of the population misunderstands the nature of money because they have come to believe an illusion. Most people think money is a thing that is a measure of value and at the same time it is a thing of value. That is the illusion. Money can have a value, or it can be a thing of value, but we create the illusion that it can be both. We preserve the illusion at great cost.
Money as a measure has no value. It takes on value when we exchange it for something of value. The next time we exchange it, it takes on the value of the thing exchanged. The money measure has a different meaning depending on the context and the reason for the exchange. For one exchange it could be the measure of value of an icecream and for another exchange it could the measure of value of a bottle of water. As a currency money is not a thing of value, but it is a measure. We can and do make money into a thing of value, but the cost of doing so is the cost of the financial system.
The financial system preserves the illusion that money is a thing of value as well as a measure. When there was little money in circulation, it was relatively easy to control the cost, and people found ways to reduce the cost. Gold and Silver coins became lower cost metals, then paper and now electronic tokens. Unfortunately, at the same time, it became easier to forge or create money with value for zero cost, and we now have the ridiculous situation where people can create trillions of dollars in derivatives for no cost and be able to convince people to exchange goods and services with value for zero cost derivatives.
When we turn a measure into the thing we measure we get perverse results. Imagine if we turned temperature into a thing. We would think we could measure temperature then take the temperature as an object and make something else hotter by adding the measure of temperature to the other object to make it hotter. Or we could measure the length of a snake and take the length and add it to a piece of rope and make the rope longer. It is nonsense yet that is what we do with money.
We measure something for value and turn the money value into something of value. The money increases in value without anyone doing anything. We put money into a bank account, and the money increases in value with interest because we leave it there. It is like taking a hot object and putting it into a box and expect it to increase in temperature because we leave it there. It may increase in temperature but only if we spend extra energy making the box hot but the cause was not adding the temperature it was adding the energy. That is what we do with money. We put money into a bank account then spend it to make the money grow but we pretend the money itself increased the money in the bank account. The illusion is that the money made itself grow.
It has become increasingly expensive to preserve the illusion of money as a store of value. Today at least 50% of a nation’s GDP is spent preserving the illusion of money tokens as a store of value. The greatest cost is compound interest and endemic inflation. BitCoin does its bit with the immense cost of electricity to create BitCoins and to maintain them. BitCoin is a store of value while people believe they can exchange it but it is not a good measure of value as it’s price varies widely. How long people can keep up the illusion is unknown, but when it stops, as it inevitably will, it will be spectacular.
The BitCoin bubble will burst as will the financial system bubble of overpriced assets and overpriced financial derivatives and the unnecessary creation of interest-bearing fiat money. Fiat Currencies will survive as a measure of value, but we need to remove the cost of interest and the cost of capital as the way to get a return on investment. One way is to replace interest as a return on investment with more goods and services for the same amount of money. To see how this works read evonomics 101 stable money.