Below is a letter to the editor of the New York Times that I wrote to try to explain why BITCOIN can NOT be a money or currency in our economic system. Apparently the Editor did no like the message for he did not publish the letter. Perhaps people on this blog would like to comment on Bitcoins!
March 1, 2014
To: Letters to the Editor Department
New York Times
TO THE EDITOR:
In his article “The Bitcoin Blasphemy” [N.Y. Times, Match 1, 2014], Joe Nocera implicitly raises the issue of why Bitcoin is thought of as a virtual currency when credit cards are recognized as merely a way of making payment in some form of government money.
What those who are promoting the notion that Bitcoin is some real, if virtual, money fail to comprehend is that all market transactions involving production and sales in any developed nation are organized through the use of that nation’s money denominated legal contracts.
Money (or currency), whether fiat or backed by gold or silver, is therefore defined as that thing that by delivery discharges all legal contractual obligations. Only the government, as the enforcer of contractual obligations, can determine that thing that is legally MONEY, i.e., what thing(s) will discharge contracts under that nation’s civil law of contracts. As Keynes once noted, in a money using, market economy, only the government can write the dictionary as to what is money. Government money has value as long as all residents are law abiding.
Credit cards can facilitate payments but are not money. They can be used for transactions where the buyer promises to pay in terms of government defined money to the credit card company while simultaneously the credit card company pays government defined money to the seller.
Unless the government asserts that the tending of Bitcoins will discharge all legal obligations, Bitcoins cannot be money. Bitcoins are merely something that someone created and has claimed to be “as good as cash” by implying that a well organized and orderly market exists where every Bitcoin can be sold for the currency of a nation in which the holder of the Bitcoin wants to buy something via a legal contract. We require dollars and not Bitcoins to settle legal contracts in the USA. Financial assets such as General Motors stocks are also valued in terms of dollars every day on the Stock Market – but GM stock cannot be directly used to settle a legal contract. Instead GM stock must be sold for dollars when the holder of the GM stock wants to legally pay for the purchase of a good or service. [Stamp collectors also deal in stamps that can be bought and sold on an organized market – but the stamps themselves are not money. These collector stamps have value only because community of users [collectors] have decided to give them value.]
People should have learned a lesson from the crash of the so called “derivatives” financial assets that were sold to the public by investment bankers as being as “good as cash” . These derivatives were never virtual money, though they were created by the investment bankers. When the market for selling these derivatives collapsed in 2007-8, these derivatives became worthless pieces of paper, as even financial writers of the media recognized. The result was a financial panic globally as holders of these virtually assets suddenly realized they were not as good as MONEY.
With the collapse of the Mt. Gox market for buying and selling Bitcoins, when will editorial page writers warn their readers that Bitcoins cannot be money?
from Paul Davidson
What is Bitcoin? According to Modern Money Theory, bitcoin can not be money since it is not accepted in payment of taxes by any government — nor is it issued by any government via the governed purchase of goods and/or services from the private sector. So what is bitcoin in terms of MMT? I do not know what MMT proponents would respond to this query?
For Post Keynesian liquidity theory of money, the answer is clear.
In Post Keynesian monetary theory money is anything that will settle a legal contractual obligation.
And by the civil law of contracts, the government determines what settles a legal monetary contractual obligation.
Thus not only legal tender but also checks drawn on a bank account (but not financial securities such as stocks) can legally settle any legal contractual obligation (since the government regulates banks to assure that bank deposit liabilities are a “tap” issue that is immediately transferable into legal tender). And the government is the enforcer of legal contractual obligations.
Individuals can make all sorts of production and exchange (purchase) agreements among themselves — but only it calls for a money transfer to discharge the obligation, these contracts are not legal contracts. Thus I can agree to cut my neighbors lawn and he can agree to wash my car in exchange — but this agreement is not legally enforceable.
Bitcoin will not remain a liquid asset unless there is an institution [ a market maker] who will maintain orderliness. Read more…
Originally posted on Post Keynesian Economics Forum:
ETELBERTO ORTIZ C., Universidad Autónoma Metropolitana, Unidad Xochimilco, Mexico City
The world continues to watch the ongoing debate on debt and government deficits in the US, with an eye on the impending “sequester”, the conservatives’ equivalent of a “guillotine” on government spending. But, there are two areas of the debate mired in confusion:
1. While the discussion centers on the continued increase in the stock of debt for all levels of the US government and frames the debate in terms of an obvious “imperative” to reduce the debt, it ignores how these cuts would be accomplished and their impact on the overall performance and structure of the economy.
View original 1,019 more words
Vital economic debate is alive and well in Chicago.
Post-Kenyesian economist Paul Davidson recently was invited to the University of Chicago to give a lecture on Keynes’s solutions to current economics crises – solutions that are very much at odds with the traditional approaches associated with Chicago School economics.
In his talk titled “The Keynes Solution: The Path to Global Economic Prosperity via a Serious Monetary Theory,” Davidson discusses the failures of orthodox economics and explores how Keynes would have addressed them. You can watch the lecture and download the video or audio here.
Davidson points to Keynes’s theory of liquidity to explain why laissez-faire financial markets cannot be efficient and do not solve the problem they claim to solve: optimally allocating capital. He also notes that traditional explanations of financial markets fail to explain unemployment or bubbles – phenomena that Keynes studied throughout his body of work. In particular, Davidson cites the failure of risk-management approaches that rely on a stable and knowable future, which is impossible according to Keynes’s idea of radical uncertainty.
Davidson also explains how orthodox theories guide economic policy such as Quantitative Easing (QE). Quoting Keynes on why QE doesn’t stimulate the economy, Davidson says, “If you want to get fat, buy a bigger belt,” before adding that “QE doesn’t help you get fat, but it may help drop your pants.”
In all, Davidson’s presence at Chicago shows that the school that shook up economics in the mid 20th century by thinking outside the box is still pushing the boundaries of economic thinking. Chicago remains a vital center for economic debate. INET applauds both the University of Chicago and Davidson for promoting the kind of healthy economic discussion that is necessary for the economics profession – and the economy – to get back on course. Hopefully more economics departments will follow its lead.
from Paul Davidson
A few weeks ago, I indicated that I had been invited by Jim Heckman to give a talk to the economics department at the University of Chicago. My talk was also publicized in an advance in the Chicago Maroon [University of Chicago student newspaper] via a quarter page advertisement entitled “The Keynes Solution: The Path To Global Economic Prosperity Via A Serious Economic Theory”
In the advertisement was a picture of Keynes at Bretton Woods. The advertisement also indicated that a free box lunch would be provided to all in the audience. [This in an environment that proclaims there is no such thing as a free lunch.] Read more…
from Paul Davidson
After the shellacking the Democrats and Obama took in this November election, it is clear that the old time religion of classical economics will be coming back into fashion. The result is likely to be further economic disaster.
I am not surprised by the failure of the Obama Administration to win over the American people to a progressive economic program. On pages13 to 18 of my book THE KEYNES SOLUTION: THE PATH TO GLOBAL ECONOMIC PROSPERITY – ( written in January 2009) — I compared what I expected of Obama vis-à-vis what Roosevelt did in the first few years of his administration.
I cited a letter written by Keynes and published in December1933 in the New York Times where Keynes warned Read more…
from Paul Davidson
My letter on the Stiglitz review of Robert Skidelsky’s Keynes: The Return of The Master is printed in the May 27, 2010 issue of the London Review of Books.
It reads as follows:
The Non-Existent Hand
Joseph Stiglitz criticises Robert Skidelsky, Keynes’s biographer, for not understanding Keynes’s theory, but in doing so reveals his own imperfect understanding (LRB, 22 April). The basis of his complaint is Skidelsky’s distinction between risk and uncertainty. Risk, Skidelsky explains, exists when the future can be predicted on the basis of currently existing information (e.g. probability distributions calculated from existing market data); uncertainty exists when no reliable information exists today about the future outcomes of current decisions, because the economic future can be created by decisions taken today. According to Stiglitz, this is a distinction without a difference, and ‘little insight’ into the causes of the Great Recession is gained from Skidelsky’s emphasis on uncertainty as opposed to risk.
But this is not what Keynes believed. Read more…