The easy way out [LWN.net]

The easy way out

Posted Nov 6, 2012 16:59 UTC (Tue) by nix (subscriber, #2304) [Link]

Look up the disastrous economic history of Spain after the conquistadors sent their spoils back from South America before you call gold 'non-inflationary'. Gold is just as inflationary, or deflationary, as any other value store -- it is merely that the money supply is controlled by miners (or, in that case, conquerors), rather than central banks. If miners and conquerors had any interest in controlling the stability of the economy, I'd be happier with this. They don't.

The point of money is to substitute for other things in transactions. It is those other things that are the real store of value in any society, and their value is *intrinsically* precisely what humans attach to it. Value is always, necessarily, a human social construct (unless we discover intelligent aliens or build strong AIs). Gold is not magical: its value is also a social construct, but a less conveniently controllable one.

If you think your governments are so corrupt that they cannot be trusted to reliably maintain a stable money supply, then gold (or some other hard-to-control store of exchange value) is preferable to fiat money. Otherwise, fiat money is preferable. In developed countries at present, the latter is very definitely absolutely the case: most of them have independent central banks whose entire raison d'etre is to keep the economy ticking over. (These are the very same independent entities, like the Federal Reserve, that gold bugs like you are constantly damning. Economic cluelessness of stunning magnitude, IMNSHO. The problem with the Fed is not that it is too independent: it's that it is not independent *enough*.)

The easy way out

Posted Nov 6, 2012 19:13 UTC (Tue) by man_ls (subscriber, #15091) [Link]

Not to speak about the dangers of having the economy artificially limited by some external factor. US commitment (and Britain's return) to the gold standard did not help the Great depression; it helped fuel the world crisis by an artificial shortage of circulating money. Deflation and a stagnant economy for a decade were the consequences.

Every time that a bank lends money, in effect it is creating money: as long as the bank is not forced to keep reserves that balance the loan, this "new money" will circulate and fuel the economy. There are some marginal economists (e.g. our own Huerta de Soto) that call for a 100% reserve for every loan; it is another variant of the "let us go back to the gold standard olden days" fallacy. Such a measure would almost certainly lead to a credit crunch of monstruous proportions and paralyze the economy immediately and for centuries. In fact, I sometimes think that the reason why Arab countries fell behind Europe in the 15th century, after having lead the world for a millenium, is that the Quram forbids lending money at interest; while Venetian lenders were inventing modern banking. But I digress...

The easy way out

Posted Nov 6, 2012 19:37 UTC (Tue) by fsateler (subscriber, #65497) [Link]

I am not familiar with Huerta de Soto's work, but full reserve backing has nothing to do with the gold standard or hard money delusions (despite the fact that austrian economists are strong proponents of both ideas). The idea behind full reserve banking is to prevent private money creation, which is inherently unstable. During a boom, private lenders will increase the money supply, and during recessions they contract it. Full reserve backing would seriously reduce this instability. Also, a recession (or even depression) after implementing full reserve banking need not be true.
See the recent IMF paper on the so called Chicago Plan.

The easy way out

Posted Nov 6, 2012 21:12 UTC (Tue) by man_ls (subscriber, #15091) [Link]

Sure, full reserve backing (thanks for supplying the correct term) and the gold standard are completely different. They are both however supposed to be solutions to economic instability and cyclic crises; supported by the same people; supposed to be a return to a golden age where they were common; and are both fringe theories widely discredited by the mainstream. Huerta de Soto even has a transition plan from the current situation to a 100% reserve backing with gold standard. Oh, and both policies would benefit rich people: those with the gold and who don't need loans. That is where the (no doubt entirely coincidental) similarities end.

The easy way out

Posted Nov 6, 2012 22:31 UTC (Tue) by fsateler (subscriber, #65497) [Link]

Well, some people support both, but other people support just the reserve requirements.

Full reserve banking has rarely been implemented, so I doubt it is a return to a golden age where they were common. It also can be argued that the ability to create money induces wealth appropriation by the rich (see the paper I linked). Finally, many Chicago economists (and apparently some economists in the IMF too) believe full reserve banking is a worthwhile idea, so it cannot be that far from the mainstream.

The easy way out

Posted Nov 6, 2012 19:20 UTC (Tue) by dashesy (subscriber, #74652) [Link]

Very true, even in Harry Potter precautions were in place to stop wizards from conjuring gold out of thin air. It seems even Voldemort left bankers independent enough, but again he did not need money.

The easy way out

Posted Nov 6, 2012 21:59 UTC (Tue) by Rudd-O (subscriber, #61155) [Link]

Bankers will fuck you up forrealz if you attempt to compete with them.

Look at how Bernard von NotHaus was called a "terrorist" and put in a cage, just because he minted precious metal coins that were starting to catch on. If someone doesn't accept that was a kangaroo trial... I don't know what is and I assume that person also believes rape is a Gift from God.

You've crossed the line there, mate.

Posted Nov 7, 2012 10:24 UTC (Wed) by sdalley (subscriber, #18550) [Link]

You've crossed the line there, mate.

Posted Nov 7, 2012 14:08 UTC (Wed) by nix (subscriber, #2304) [Link]

He's clearly a very angry man. It's a shame he can't channel that anger into something useful.

The easy way out

Posted Nov 6, 2012 21:55 UTC (Tue) by Rudd-O (subscriber, #61155) [Link]

> Look up the disastrous economic history of Spain after the conquistadors sent their spoils back from South America before you call gold 'non-inflationary'. Gold is just as inflationary, or deflationary, as any other value store -- it is merely that the money supply is controlled by miners (or, in that case, conquerors), rather than central banks.

You'll get no argument from me here.

Still, it bears reminding that the price of gold in terms of commodities has remained quite stable over the centuries. NO other fiat currency has managed to do this feat. NONE.

In any case, while I do own some gold, my currency of choice is Bitcoin. It has none of the problems you cited, and I don't have a religious dogma that my money need have "intrinsic" value for it to be useful, so Bitcoin suits me.

The easy way out

Posted Nov 7, 2012 12:13 UTC (Wed) by robert_s (subscriber, #42402) [Link]

"my currency of choice is Bitcoin"

You MUST be kidding.

If a government like the US decided to destroy bitcoin it could do it tomorrow.

There are many ways someone with the resources of the US could wage economic war on bitcoin, the simplest just being to use the enormous computing and cryptanalysis capability they have to just destroy its value or make the market so volatile it's unusable.

The easy way out

Posted Nov 7, 2012 21:17 UTC (Wed) by Cyberax (✭ supporter ✭, #52523) [Link]

Actually, it won't work because the number of bitcoins is limited by design (with about 25% of total coins already minted).

However, bitcoin markets are slowly destroying themselves just fine - they are a prime example of a deflationary spiral and why it's not good for economy.

The easy way out

Posted Nov 9, 2012 11:03 UTC (Fri) by robert_s (subscriber, #42402) [Link]

It'll absolutely work. The number may be limited by design, but someone with enough computing power could be the one to farm effectively *all* of them as they become available before anyone else gets the chance.

Or someone with enough computing power might cause bitcoin to ramp up their "work proof" hardness, to the point that normal people can't really compete.

And this is totally ignoring the possibility of finding any cryptographic flaws in the algorithms which could make fraud (or "theft" - don't know what you'd call it) easy.

The easy way out

Posted Nov 9, 2012 15:42 UTC (Fri) by apoelstra (subscriber, #75205) [Link]

> Or someone with enough computing power might cause bitcoin to ramp up their "work proof" hardness, to the point that normal people can't really compete.

The bitcoin network is currently doing roughly 25 trillion (10^12) hashes per second. It is the most powerful computing network in the world, so somebody would need to invest a -lot- of money, and a -lot- of power for a -lot- of time to muck with it in any meaningful way.

> And this is totally ignoring the possibility of finding any cryptographic flaws in the algorithms which could make fraud (or "theft" - don't know what you'd call it) easy.

This would be very bad -- and not just for bitcoin, but for everything using ECC.

The easy way out

Posted Nov 11, 2012 1:15 UTC (Sun) by robert_s (subscriber, #42402) [Link]

"This would be very bad -- and not just for bitcoin, but for everything using ECC."

Even with theoretically perfect cryptography algorithms it is *very* difficult to design the surrounding mechanisms in a way that is immune to attack.

I mean even SSL/TLS protocol designers and implementers don't get it 100% right.

The easy way out

Posted Nov 9, 2012 17:57 UTC (Fri) by jackb (subscriber, #41909) [Link]

Or someone with enough computing power might cause bitcoin to ramp up their "work proof" hardness, to the point that normal people can't really compete.

"Normal people" don't have any need to solve blocks. Ramping up the difficulty has no effect at all on most Bitcoin users.

The easy way out

Posted Nov 11, 2012 1:16 UTC (Sun) by robert_s (subscriber, #42402) [Link]

"Normal people" here meaning anyone who isn't the US (or, I suppose, Chinese) government.

The easy way out

Posted Nov 7, 2012 14:18 UTC (Wed) by nix (subscriber, #2304) [Link]

And we're back on topic! (Vaguely. At least it's computing-related.)

Bitcoin is a bad idea, for one reason that has nothing to do with its bizarre hyper-deflationary properties or its pyramid-scheme-like massive privileging of early adopters (who, in a world where Bitcoin becomes successful, do their mining before the supply of currency chokes off and everyone has to start using fractional Bitcoins for everything, the opposite of what happens to early adopters in most currency schemes and an excellent reason for late adopters to be suspicious of it).

It's a bad idea simply because it is utterly dependent on networked computers run by individuals remaining secure: an attacker can trivially steal your keys, and all Bitcoins controlled by them, and as so often with computer security, they only have to be lucky once. Worse yet, unlike with many other consequences of successful system compromises, restoring from backup and fixing the holes won't help you: the money is gone into your attacker's pockets. That this has happened repeatedly, even to major Bitcoin exchanges, suggests that the scheme is unusable by anyone who cares about the security of their money until such time as computer security improves radically.

Bank systems are a similar target in the real world, but at least there they have a non-computer-security-dependent monetary system to depend upon, and have legal guarantees and the like to ensure that if you are defrauded or the bank collapses you will be reimbursed, at least to sufficient degree as not to pauperize you.

I am rather surprised that, post-2008, anyone would consider a non-governmental monetary system worth the risk. Haven't depositor guarantee schemes proved their worth in the last few years? It's not even useful if you want to hide your transactions from the government: it's *much* more trackable than real-world money, and is trackable forever, though tying accounts to humans may be hard.

The easy way out

Posted Nov 7, 2012 15:46 UTC (Wed) by apoelstra (subscriber, #75205) [Link]

> It's a bad idea simply because it is utterly dependent on networked computers run by individuals remaining secure: an attacker can trivially steal your keys, and all Bitcoins controlled by them, and as so often with computer security, they only have to be lucky once. Worse yet, unlike with many other consequences of successful system compromises, restoring from backup and fixing the holes won't help you: the money is gone into your attacker's pockets. That this has happened repeatedly, even to major Bitcoin exchanges, suggests that the scheme is unusable by anyone who cares about the security of their money until such time as computer security improves radically.

The major exchanges that this happened to, have indeed tightened up their security, and there hasn't been a major exchange theft in quite a while. There have been several fly-by-nights, but these have been the same sort of scams that have always existed. The security problem is here because people haven't figured out that they can treat bitcoin as a toy, or as a store of significant value, but -not- -both-, or they'll have a bad time.

The problems you list are still problems for real banks, who deal primarily in database currency. In fact, they have much, much more complexity to deal with because the problems that bitcoin solves cryptographically (transaction verification, double-spending) need to be solved by manual tracking and extensive audit trails. The difference is that the people responsible for bank security (at least in the backend) know what they're doing, while bitcoin security is implemented by hackers with too much free time, many of whom have no knowledge or interest in financial security.

(Eventually, I expect everyone will offload their security to some bank, and just walk around with a bitcoin debit card. So the world would look the same, just with a more efficient backing store.)

> I am rather surprised that, post-2008, anyone would consider a non-governmental monetary system worth the risk.

Interestingly, for many people, the 2008 crash is exactly why they would seek out a system in which the central bank's power is severely limited.

It's interesting that Bitcoin showed up in a thread about software patents, because regardless of your feelings on its politics or economics, it is a -highly- nonobvious and innovative system. But it is unemcumbered by patents, its inventor is unknown except to (maybe) one or two people, and yet it keeps trucking along happily. In fact, Bitcoin is routinely copied and modified in trivial ways, and the resulting systems collapse under their own weight because they do not have the developer power or first-mover advantage that Bitcoin does.

The easy way out

Posted Nov 7, 2012 21:34 UTC (Wed) by Cyberax (✭ supporter ✭, #52523) [Link]

No, the problem is - you can't rob all money in a bank by changing a few numbers in its database. Once the bank discovers it, they'd simply ask the central bank (FRS, ECB, whatever) to roll back fraudulent transactions. That'd probably require quite a lot of phone calls, scrambling for audit trails, court orders - but it can be done.

A real life example - a couple years ago someone tried to do this trick with the Pension Fund of Russia. They've mounted a virus attack on PF's computing system, forcing it to be turned off. Then attackers used faked identity to impersonate a worker of Pension Fund to gain access to Russian Central Bank operations hall and used a forged paper payment order to transfer $30 millions to an account in a small private Russian bank. That payment went through successfully.

However, it was discovered the next morning. Payment was rolled back and police then easily tracked down the attackers.

With bitcoins once your money is stolen - that's it. You can't do anything at all. And even police won't help you, because chances are your attackers are in China or some other nice place with an unfriendly government.

The easy way out

Posted Nov 7, 2012 22:15 UTC (Wed) by nix (subscriber, #2304) [Link]

Not quite. Central banks are not universal transaction stores: they can't roll back arbitrary fraudulent transactions on demand, because they don't know about them. Generally, the fraudster gets away with frauds in the sense that the money is gone -- and too often gets away with it in the sense that the fraudster is never prosecuted -- and insurance, reimbursement schemes, or in extremis the taxpayer repays it or part of it (particularly if this is a massive thing affecting individual depositors). Fraudulent transactions in stock markets are rather different because the stock market *is* a transaction store, and there if detected early enough such transactions can be rolled back as you describe.

In the fraud you mention, the reason the central bank got involved was surely because they were acting as a clearinghouse in that instance, but they certainly do not in general. (Most ECB transactions are with central banks in member states: its recently-gained ability to recapitalize banks directly in extremis was extremely contentious.)

-- N., knew way too much about this stuff once and it was far too complicated to be believed, far more complicated than necessary. Now I work on dtrace which is ever so much simpler: all its complexity has a reason to exist, while banking complexity is mostly NIH and historical contingency :(

The easy way out

Posted Nov 7, 2012 22:52 UTC (Wed) by dlang (✭ supporter ✭, #313) [Link]

at the risk of continuing the offtopic discussion.

Most countries don't have a 'central bank' in the way that some people in this thread are talking about.

In the US, there is one entity that is allowed to create money, but all the banks do their own thing and interact with each other without involving this central entity, except in unusual situations. There is a Government entity that does audits of Banks to see if they are being run in what are considered 'sane' ways by the current policies (and a different Government entity that does audits of Credit Unions)

Backups and records that the other entities keep can do a lot to track down fraudulent transactions, but that is a matter of enlightend self interest (if an entity can't prove what happened, they are liable)

As for bitcoins maintaining a history of transactions forever, that seems to me like a very bad thing.

Imagine that a bitcoin that you get paid was used at some point in the past by a terrorist or druglord. The "asset forfeiture" laws say that governments (not just in the US) can grab any assets that they had. Now you can loose the bitcoin because it can be proved that it went through their hands X years and Y transactions ago.

The easy way out

Posted Nov 6, 2012 21:57 UTC (Tue) by Rudd-O (subscriber, #61155) [Link]

> If you think your governments are so corrupt that they cannot be trusted to reliably maintain a stable money supply, then gold (or some other hard-to-control store of exchange value) is preferable to fiat money.

Well, since these institutions have caused the democide of a quarter billion human beings starved or murdered by people acting under the delusion of "governments", excluding wars, only in the 20th century...

... I am a bit wary of trusting them to "maintain a stable money supply".

It's understandable, right?