A real world use case for cryptocurrency exchanges

February 13, 2018 § 30 Comments

Every real world economy is filled with real people, and there are all kinds of people in the world. There are always criminals, grifters, scammers, market manipulators, thieves, frauds, and tax evaders.  There are always financially ignorant monomaniacal idealists: people who don’t grasp the difference between reality and their beloved simulations and fictions; people who believe that messy human authority and fallibility can be dispensed with and replaced by machines. There are always substantial numbers of naive gamblers and bagholders, lured into getting fleeced by their own avarice and ignorance.

Cryptocurrency exchanges may represent a natural economic evolution, nature’s way of attracting many of these elements out of the real economy and into a buggy, hackable, scammable, get-rich-quick speculative open source video game.

You can think of cryptocurrency exchanges as a heat sink.  A heat sink is a large thermal mass which carries destructive waste heat away from the parts of a system where that waste heat can do harm.

Cryptocurrency exchanges are like a heat sink, except for stupidity and vice rather than heat: they are economic stupidity-and-vice sinks.  The real economy is doing very well at present, despite what is technically a very long running bull market.  I wonder if that isn’t at least in part because a lot of the insanity which typically accompanies bull markets has voluntarily walled itself off in its own video game world.  A lot of the craziness that we saw in the dot com era has literally locked itself away from reality inside an electricity-wasting computer game, at a cost of less than six billion dollars taken out of circulation.

Some people predict that the price of cryptocurrencies will soon go to zero; that they will shortly be left behind in the dustbin of financial history.  Personally I have my doubts.  I think society produces enough stupidity and graft to keep cryptocurrencies running indefinitely.  They may well stick around for a long time, as the economy’s evolved way of avoiding sepsis from what amounts to an intestinal blockage of greed and stupidity.


Selling infected glass beads to Indians

December 20, 2017 § 171 Comments

In this post I will present an argument that it is immoral to sell digital pornography and/or bitcoin.

Premise 1: It is immoral to sell property for an unjust price.

Premise 2: Context can make particular property more or less valuable; for example, water is more valuable in the desert than in a mountain lake. Call this a context multiplier.

Premise 3: Personal preferences or needs can make particular property more or less valuable to a particular buyer. I like whiskey but I don’t care for wine. Call this a subjective multiplier.

Premise 4: It is possible for particular property to have zero or negative intrinsic value: for particular property to be literally useless or harmful.  (Alternatively, it is possible for the typical and intended uses of a particular kind of property to have zero or negative intrinsic value.  Call this “Premise 4 light”).

Premise 5: When property (or its typical use case: call this “Premise 5 light”) has zero or negative intrinsic value, neither a context multiplier nor a subjective multiplier can make its just price greater than zero.

Digital pornography has negative intrinsic value: its typical use case is destructive to the user.  Unlike paper pornography it has no useful material substrate which enables atypical uses: paper pornography might be used as fuel for a fire, for example, but digital pornography cannot even be burned to produce heat.  Purchasing copies of digital pornography might be justifiable when doing so is part of a plan to destroy it or to attack its production; but this limited warrant to purchase-for-destruction does not justify the sale of digital pornography to purchasers who are likely to use it for its intended purpose.

Pornography has negative intrinsic value because it promotes vice, a false picture of reality, and other disorders in relation to the truth about the good.

Bitcoin is also a digital product which promotes vice, a false picture of reality, and other disorders in relation to the truth about the good.

Therefore selling bitcoin is immoral.  (“Light” version: therefore selling bitcoin to buyers who are likely to use it for its typical use cases, is immoral).

Obviously Premise 5 is doing the heavy lifting here, though Premise 4 may also be controversial.

Arbitrage on the holodeck

May 28, 2017 § 41 Comments

Context and subjectivity are not the same thing.  

Context is objective: water is objectively more valuable in the desert.  It is also more costly to ship water to the desert than it is to use it where and when it is already abundant.

Preferences are subjective, though even preferences are rooted in objective reality.  Preferences are not reducible to nothing but pure subjectivity, because man himself is not reducible to nothing but pure subjectivity.  In the absence of disorder fresh water is preferred over seawater as drink, because the former satisfies the objective needs which give rise to thirst while the latter does not.

Objective truth always trumps subjective preferences. A subjective preference which is contrary to the objective truth is an intrinsically disordered preference.

Prices reflect an equilibrium in preferences between counterparties in the exchange of goods and services. The reason for exchange in the first place is because different objective contexts obtain for each counterparty: the baker has ample bread and few candles, while the candle maker has abundant candles and little bread.  So ten candles are exchanged for a loaf of bread.

An actual exchange represents a preference equilibrium: a subjective meeting of the minds in bringing together two different objective contexts for putative mutual benefit.

But perception is not always reality.


When the controlling preferences of either party to an exchange are intrinsically disordered, the price is an unjust price.  The mutual benefit (or its lack) in any exchange is ultimately an objective property of the actual exchange, not a meeting of minds in an intersubjective preference space.

The idea that ideas can be property is patently ridiculous

May 18, 2017 § 54 Comments

One of the interesting things about patents (unless the law has changed since I filed mine a couple decades ago) is that the invention must be “reduced to practice” before you can even apply for one: you have to have a concrete working implementation before the patent office will even accept your application. And once a patent is granted, what the patent holder actually receives – the patent itself – is a security entitling the holder of the patent to enforceable commercial exclusivity within the jurisdiction of the patent authority.

Similar things can be said about other forms of intellectual property.

So IP doesn’t count in favor of the contention that ideas can be property. It counts against that contention.

As usual liberal modernity requires you to studiously avert your gaze once actual reality starts to come into view.

Yippee ki-yay …

October 26, 2016 § 37 Comments

So called ‘gold standard’ currency is a scrambled mess of confused and opaque financial nonsense, a toxic mix of securities and commodities which poisons the finances of governments and the minds of economists. I’ve explained why fiat currency is more transparent and honest than gold standard currency any number of times. But of course many folks know all sorts of things that aren’t true about sovereign finance, and can’t tell the difference between a financial security and the media upon which it is printed; so they disagree.

Sometimes folks relate better to concrete stories than to dry and abstract explanation of financial concepts.  So in this post we’ll consider a hypothetical situation which will hopefully help the still-perplexed understand why fiat currency is more honest and financially transparent than ‘gold standard’ currency.

Suppose we are on a gold standard currency. The government issues official gold notes and for each gold note there is 1/40 gram of gold stored in the vault at Nakatomi Tower. Each gold note notionally entitles the bearer to 1/40 gram of gold, though in practice almost nobody ever actually turns in the notes in exchange for actual gold. The government accepts the gold notes it issues – and only those gold notes – for payment of taxes.

Hans Gruber and his merry band of faux-terrorists carry out a sophisticated paramilitary assault on Nakatomi Tower. Despite John McClane’s best efforts they escape with all of the gold and McClane’s selfish chunky feminist wife, whose constant whining causes half of the exceptional thieves to commit suicide. McClane reclaims his stolen children and lives happily for a while as a NYC cop, until he is killed in a Black Lives Matter terrorist attack on police orchestrated by the Clinton Foundation in conspiracy with a Saudi Arabian donor — a terrorist attack which gets blamed on Donald Trump, who at the time was innocently visiting Playboy Mansion but just for the articles.

Back in front of your iPad in suburbia, you have plenty of government issued gold notes and a tax bill that is coming due.

Should the government accept the gold notes that it issued from you, even though the gold is gone; or are you out of luck because your gold is in a non-extradition country earning 20%?  Now that all of the gold has been spirited away, is everyone holding government gold notes a tax evader with literally no available legal means to pay their taxes?

If the government should accept the gold notes that it issued to settle your tax bill – even though the gold is gone, the top of the skyscraper exploded along with the heads of numerous Austrian economists, and the Johnsons and their helicopters are no more – doesn’t that tell you that the presence or absence of the gold doesn’t really have much of anything to do with the value of the “gold notes” as a financial security issued by the government?

Gold as medieval cryptographic paper

October 22, 2016 § 32 Comments

An important feature of cryptography is authentication: the ability to verify that a document comes from who it claims to come from and has the authority it claims to have. Authentication is a feature of the medium in which a message is delivered: it is not the message itself.

There are two kinds of financial securities, for present purposes: bearer securities and securities which must be cleared when they are transferred. The latter sort have to pass through a transfer agent who verifies the identities of the parties and the legitimacy of the transfer of rights.  Rights are not technically transferred until the check clears, and if someone is being dishonest we know who they are and can hunt them down.

But bearer securities transfer the rights they represent immediately, with transfer of possession.  They don’t leave a paper trail, and it has to be possible within reason to authenticate them as they are.

Folks are always asking me to speculate about why gold or silver was the printing medium of choice for bearer securities (in particular sovereign currency) for much of premodern history.  Whatever else may be the case, it seems obvious that premodern sovereigns had limited choices of available counterfeit-resistant print media from which to choose.

As for why masses of people tend to think that the value inheres in the print media rather than the financial security it represents, that obviously involves mass psychology about why lots of people  have wrong ideas about something or other. It isn’t as if the mass of humanity has a good track record of being right about politically and religiously charged subjects. Centuries of rampant usury has doubtless contributed to a mass illusion wherein many folks can’t tell the difference between actual bread and a promise of bread, and it is an especially modern error to conflate medium and message. At the end of the day what matters is what is true though, not the results of a popularity contest.

If you find yourself psychologically in need of a reason why gold was a favored medium for bearer securities before the modern age, you need look no further than the development of cheaper counterfeit-resistant print media.  And you should probably work on your own demotic resistance to the fact that a whole lot of the time the great mass of human beings muddle through without really understanding what is going on.

Golden geese laying scrambled rotten eggs

October 21, 2016 § 38 Comments

A fiat dollar is a security issued by the sovereign.  Like every other financial security issued by an institution, fiat dollars grant the owner of the security an economic claim backed by the institution’s balance sheet.  Like every other financial security issued by an institution[1], it is possible to trade fiat dollars for other property in the marketplace.  It is also possible to exercise the specific rights granted by the security instead of trading it: in the case of fiat dollars, to turn it in to the sovereign who issued it for the satisfaction of a particular tax obligation.

The worth of a fiat dollar derives from the financial rights that it grants. Its price in marketplace exchanges represents what other people are willing to pay, in terms of different kinds of property, in exchange for the financial rights granted by the fiat dollar.

A ‘gold standard’ dollar is the same kind of thing.  It is a financial claim against the balance sheet of the sovereign; the financial rights conferred are the satisfaction of debts owed to the sovereign, in particular tax liabilities[2].  The difference is that the gold standard irrationally presupposes that a substantial portion of the sovereign balance sheet must or should be made up of gold — an otherwise not very noteworthy kind of property, property which while fairly durable sits unproductively in a vault where it destroys economic value in the demands that it places on its defense and maintenance against the universal tide of entropy.

Advocacy of gold standard dollars is like advocacy of gold standard capital stock: in essence, it requires than any securities which an institution issues must be printed on gold or must come along with some ratio of gold stored away in addition to the rights granted by the security. Advocacy of gold standard dollars assumes that gold is the only valid kind of wealth, when in fact almost all of the wealth in the world is constituted by property other than gold.  A gold standard involves making a wildly irrational assumption about sovereign finance that we would never make about private finance.  It is as if the stock price of corporations were required to be indexed to the amount of gold that the corporation has stored away in a vault, even though the gold is entirely useless in the company’s business operations and its storage and provision for security constitute a senseless and perpetual drain of resources.

Gold standard dollars are no more rational than requiring by statute that eggs be sold in golden egg cartons, or bundled with certificates entitling the bearer to a gram of gold per egg. Gold standards are literally crazy, a scrambling together of entirely unlike property into a toxic mix.  Folks who simply hate government per se advocate for them precisely because they understand on some level that the gold standard is irrational, debilitating poison.  If you can’t drown the balance sheet of the government you hate by weighing it down with lead, at least maybe you can weigh it down with gold.

But you won’t see them – at least not the more rational ones – advocate for a ‘gold standard’ in the securities that make up their retirement portfolios, or in the goods they buy in the grocery store. An investor with an equity portfolio doesn’t want to require the companies whose stock he owns to carry large quantities of inert and unproductive gold on their balance sheets.  For these folks, the gold standard is an unprincipled exception intended to apply only to government precisely because it is financial poison for the institution which they despise.

The crazier wing of the gold standard crowd isn’t even sophisticated enough to grasp that a gold standard is financial poison.  They like the gold standard because GOLD.  Their attachment is pure unreasoning emotion.  A gold standard is, objectively, a requirement to literally add useless dead weight to unrelated kinds of property.

But better to let the scrambled eggs rot than to give up our irrational attachment to gold.

[1] Absent contractual terms or other legal restrictions to the contrary.

[2] T-bills are just fiat dollars once removed, as stock options are just shares of capital stock once removed: they are not debt, and the sooner you banish the idea that they are debt from your mind the better you will understand them.

The things we know that aren’t true

October 18, 2016 § 49 Comments

Most not-financially-literate people think that sound financial management is about cash flow. This is wrong, even badly so, but it is at least somewhat workable for a household to a first approximation: as long as you keep bringing in more cash than you spend, the wheels stay on.

Institutions are nothing like that. (Even households aren’t really like that, but it kinda sorta works to a first approximation). What is more, what looks like cash flow for an institution like the United States Government, isn’t. So everything you think you know about USG finance is wrong: an illusion created by a superficial, outright false analogy.

In layman’s terms, a balance sheet is an inventory of all of the property that an institution controls and all of the various financial claims against that property. It is impossible to know the financial health of an institution, including whether things are getting better or worse financially, without understanding (under whatever labels) the institution’s balance sheet and the trajectory of its balance sheet; that is, the changes happening to its balance sheet.

In traditional accounting these are reported as balance sheet (at a point in time), profit and loss (over some interval), and cash flow (over the same interval). The first is a fundamental snapshot of the financial state of the institution; the latter two tell us specifically how the institution is changing financially.

Balance sheet is fundamental.  It provides the current financial state of the institution at a particular point in time.  The other two reports tell us what financial changes happened to the institution over the reporting period.

Profit and loss measures (roughly speaking) the gain or loss in ‘equity’, that is, it answers the question (in great detail) “what has happened to the value of all of the property on the balance sheet, minus the satisfaction of all of the remaining financial obligations against that property?”

Cash flow measures the flow of liquid property (“cash and equivalents”): property which can be easily and quickly traded for something else. Cash flow is of secondary importance: you have to keep an eye on it to make sure you keep enough liquid property on hand to pay your bills on time, but in general liquid property is not as productive as other capital so it is best to keep it to a manageable minimum.

People think that USG revenues, expenditures, and deficit  numbers give meaningful insight into cash flow. And many believe that the ‘national debt’ provides meaningful insight into the health of the (nonexistent) USG balance sheet.

They don’t. Intake and outflow of fiat dollars does not constitute cash flow or an approximation of it, and the balance sheet and P&L are a complete black hole.

The reason fiat dollar flow doesn’t constitute a USG equivalent for cash flow — as I have explained many times now — is that we can’t measure the change in balance sheet liquidity of an institution using securities issued by that very institution as a metric. Measuring Google ‘stock flow’ is not meaningful information, in itself, about changes in the health of Google’s balance sheet. And in the case of USG we don’t even know what kinds of things we ought to be using to measure, or what specifically we ought to measure, etc.

That is, we cannot answer the question “what is happening to the liquidity of USG’s balance sheet?” — BECAUSE WE DON’T HAVE A BALANCE SHEET.

We also cannot answer the question ‘what is happening to retained earnings’, or a thousand other pertinent questions.

What we actually have in terms of real information is no balance sheet, no P&L, no cash flow, and some back-and-forth in the institution’s own securities which create the illusion of something kinda sorta similar looking to cash flow as long as you don’t pay attention.

And the biggest danger here is not the things we don’t know. As some wag said, the biggest danger here is the things we know that aren’t true.

There is no national debt

October 18, 2016 § 33 Comments

Everything you think you understand about government finance is wrong. (You aren’t alone: everything that everyone thinks they understand about government finance is wrong. There is literally no way to accurately understand government finance: the accounting framework to do so does not even exist conceptually).

The ‘national debt’ isn’t debt. Debt is when an institution owes some property (actual property or third party securities) to a creditor.  (Institutional ‘owing’ isn’t like personal debt: it is an impairment of the balance sheet of the institution).

USG owing dollars to China is like a company owing shares of its own stock to China. T-bills are more like stock options than notes payable: they represent a claim for the future issuance of USG securities, not a claim against actual property or third party securities.

Dollars are securities which impair the balance sheet of USG. But nobody knows what the balance sheet of USG ought to look like, not even in theory as a conceptual matter, let alone what it actually does look like as populated with sound real world data.

That doesn’t mean ‘everything is fine, go back to sleep’. What it means is that neither the folks who say that everything is fine nor the folks who think we are on the brink of apocalypse can possibly know what they are talking about.

They are just expressing their feelings.

How the desire for ‘hard currency’ is driven by liberalism

November 3, 2015 § 25 Comments

Liberalism can be understood as an ultimately self-contradictory attempt to escape from the messiness of natural human authority; human authority which configures itself in a disorganized, organic, patriarchal cluster of hierarchies. Human beings do often tend to abuse authority when they have it, so moderns are always looking for some way to practice politics by abolishing it: to replace humanity with technical machinery so that babies will be raised as equals free to make their own choices in the loving arms of standard bureaucratic procedures, and the right set of paper documents with just the right clauses written on them will ensure that nobody will be able to lord it over anyone else. Intolerance cannot be tolerated, society must be forced to be free, and no mere human being can be permitted to interfere with the Great Emancipation.

This ends up concentrating power into a monolithic monstrosity responsible for making sure that everyone gets with the program of rejecting authority, imprisoning the human beings who live under liberalism into tiny private cells in the hive where they are forced, good and hard, to be free and equal like everyone else. Those who cannot or will not conform and accept their imprisonment in free and equal cells along with the other emancipated supermen – those who for historical or natural reasons represent the traditional less-than-human oppressor, the Low Man – these Low Men, because they cannot or will not get with the program and accept their fate as superman-snowflakes in tiny cells along with all the other diverse individuals in our free society, tattooed with the signs and symbols of unique specialness along with everyone else – are considered less than human. Ultimately the only solution to the problem they represent is a Final Solution.

I’ve noted before that the modern project is fueled by a relentless drive to deny and avoid messy fallible human authority. Positivism attempts to do this in the domain of epistemology. Nominalism attempts to do this in the domain of language. Liberalism attempts to do this in the domain of politics. Protestantism attempts to do this in the domain of religion. Feminism attempts to do this in the domain of sex and the family. Scientism attempts to do this in the domain of ontology. Utilitarianism attempts to do this in the domain of deontology.

And the drive for ‘hard currencies‘ – for economic value which can be controlled by private individuals and groups on a massive scale divorced from the authority of sovereign governments and the economies which they oversee – attempts to do this in the domain of economics.  As with all of these modernist initiatives, this cannot be ‘accomplished’ without being very careful to avoid seeing the whole picture.  As we saw in the neoreactionary discussion of exit versus voice, the substantive difference between the proposal of ‘exit over voice’ and our current actual situation was to install an emperor who would be put in charge of everything, to make sure everyone got with the program of making ‘exit’ available and to create artisan polities from which the exiting superman could choose in a “free market.”  And in the case of ‘hard currency’ the proposal is to put an Escrow Emperor in charge of economic wealth, so that he can ensure, good and hard, that all parties in the marketplace have equal economic rights which cannot be violated by the decisions of those awful sovereign governments.  As usual, the proposal to undermine the monolithic power of government requires increasing the monolithic power of government. The cure for the disease is a more concentrated and monolithic form of the disease than we already have.

But I am sure that the Great Escrow Emperor in charge of the Big Dragon Hoard won’t actually be a human being subject to human foibles, this time. Those clauses on the papers in the filing cabinet, granting rights to the Big Dragon Hoard, will finally free us from the messiness of human authority.

Where Am I?

You are currently browsing the Sovereign Finance category at Zippy Catholic.