Owning a bit of currency

I’ve long been interested in the idea of alternative currencies. Many have long argued that the current status quo of a few “fiat” currencies regulated by central banks for the benefits of government (and the good ol’ boys network), isn’t in the public interest. I posted last year about a system in one US town where local traders have created their own local currency system. I’ve also made several observations about a future Scottish currency, some admittedly a little tongue in cheek. However some recent experiments online with “digital currencies” are worth discussing, as Simon Cox of the BBC reports.

Several groups, many of them libertarians, have within the last few years set up alternative currencies such as the BitCoin, Liberty Reserve, Flooz or beenz. Such currencies would, so the supporters say, be much less prone to interference by either government policy or the hanky panky antics of banks, indeed they would allow independence from both. i.e. People would no longer even need a bank account anymore. Your boss would pay you via a I-phone app and you could then spend it via a digital wallet, something of particular use in places such as Africa, where practically everyone has a phone but few people have bank accounts (and it’s not exactly safe to wander around with lots of cash) and many African countries have extremely unstable currencies.

However many of these online currencies have proven far from stable. Currently of the four listed above only “Bitcoin” is still in business (although a number of others have started up more recently). The dot-com bubble took out the Beenz and Flooz. Liberty Reserve collapsed as a result of some rather serious money laundering charges leading it to be taken down by the FBI. Indeed Liberty Reserve‘s problems have been symptomatic of the problems afflicting all of these alternative currencies.

Bitcoin too has been prone to large daily fluctuations in its value with bubble’s building and market panics (which sort of makes a mockery of its claim to allow independence from government induced fluctuations in exchange rates). There has been the electronic theft of Bitcoins from mobile phones, illegal “mining” of Bitcoins.
And perhaps more worryingly, bitcoin seems to have become a haven for criminals, notably drug dealers, who frequently use the currency to conduct transactions between each other online.

In many respects one could argue that the woe’s afflicting Bitcoin actually serve to counter many libertarian arguments on currencies rather than prove them. I would argue the problems with global currencies at present are a lack of regulation not too much of it. The reality is that the US, UK and Eurozone are in trouble because the relevant governments were asleep at the wheel in the lead up to the financial crisis. They allowed a massive speculative bubble to build, when they should have been intervening (by for example pushing up interest rates or forcing banks to hold more cash in reserve, cracking down on “casino landlords“, etc.) to head it off. But politicians were too afraid of the short term politics (as it would have meant them deliberately slowing down the economy) to do anything.

Similarly the “solutions” to the crisis have been the equivalent of using a band-aid to treat a severed limb. “Quantative Easing” in the UK and US has given some temporary relief but not solved the underlying problems. And QE has ultimately amounted to punishing savers for the crimes of reckless borrowers. Similarly the Eurozone crisis has seen a lack of proper action, and what action has been taken (such as in Cyprus) has arguably made the problems worse in the long term. Indeed some of these actions may have been responsible for building bubbles in “bitcoin” as scared savers sought a way of getting their money out of the firing line.

By way of comparison, many libertarians also favour the gold standard and argue that if economists knew a bit more about it they’d all be in favour of it too. However economists counter that actually they know full well what the gold standard entails, they remember the events leading up to its abolition and that’s why they’re against it! (and that libertarians are poor students of history).

I’m somewhat on the fence about this incidentally, but tend to come down on the side of the economists (even thought there not exactly my kind of people!). Although I did come across this site awhile ago that backed the idea for an energy backed currency (where say every dollar would be backed up by say 10 kWh’s worth of energy).

And similarly Bitcoin and its contemporaries suffers from the same problem, those behind it are letting their ideology run counter to economics. Or as Dr Adam Posen (of the Peterson Institute for International Economics) puts it:

“many of the same right-wing nut jobs who distrust the government viscerally are more likely to believe in bitcoin…it’s those who are angry about being defrauded who are likely to be the ones defrauded again”

Or in another quib:

“…gold is the investment for silly people. bitcoin is gold for people who don’t save…”

The truth is there is a reason why many see the dollar as a safe haven, even thought, thanks to QE, its been weakening in value versus nearly every other major currency since the financial crisis began. But investors are banking on the fact that they believe the US federal reserve will do whatever it takes to defend the stability of the dollar…even if it has to invade countries! (if you believe certain rumours regarding the Iraq war). It’s a case of a dollar in the hand is worth two in the euro bush….and a hundred in the bitcoin hedge!

Unfortunately it would seem that if there’s anything worse than a fiat currency backed up by nothing other than ones trust in “the government”, one has to question how sensible it is to advocate as an alternative a virtual currency that is backed up by nothing at all.