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On the Practicalities of Counterfeit-Proof Physical Bitcoins
fsterman writes "What do you get when you cross physical one-way-functions, a distributed and secure datastore, with physical Bitcoins? A viable alternative currency for micro-nations and dictatorships with hyper-inflation." Whatever your thoughts on bitcoin, it's interesting to think about the infrastructure and production cost of the tokens we use as money more generally.
I don't get it why they keep saying that "if 1 penny costs 2 pennies to mint then we shouldn't make them anymore". Unless the government looks at "printing money" as a source of revenue. Which they shouldn't if you're looking at money as a transaction facilitator and nothing else. What happens is that it costs us 2 penny to mint 1 penny coin that will subsequently change hands via payments several million times before it gets too degraded (physically) and has to be retired. Thus the minting cost per transaction for that penny is actually very small. What you're really paying is the cost of the convenience of having pennies available for transactions, and judged per transaction it ain't looking that bad.
There's already a currency available world-wide, used instead of local currencies of dictatorships. It's also the preferred currency of such nations as Saudi Arabia and other Arab states...as well as Iran. It's called the US dollar.
There are about as many dollars in circulation outside the us as there are here. It's why more nations invest in the US than in any other nation, with treasury bonds. The Euro stinks, and they can't trust the Chinese to not futz with their system.
Now, if we keep going with this default business...
Imagine a digital currency in the form of news articles posted on a website. This currency can be minted out at will by the benevolent dictator who runs the site. As in all healthy economies, currency has been supplied at a rate that matches demand in order to keep the economy stable. On the weekends, for example, demand typically has gone down. Thus, the weekend currency supply typically has been reduced to match.
Imagine, though, that the dictator enacts a new policy that makes The People mad. Grumbling and other political unrest ensue. Noticing this, the dictator tells himself, "The People are revolting." So, he dictator issues a soothing message. That works to some extent but ultimately isn't completely effective, primarily because he doesn't explicitly reverse the unwelcome policy; worse, if one reads his statement carefully, it actually states that the unwelcome policy will remain. Still, the dictator finds The People revolting.
So, in order to distract The People and make them feel richer, the benevolent dictator who runs the site suddenly begins minting out lots of new currency on the weekend. Notably, weekend demand has not increased but has actually decreased due to disruption of the economy caused by the new policy. Yet supply goes through the roof.
As in all such cases where supply of a currency greatly outpaces demand, hyperinflation results. The currency is inevitably devalued. Of course, The People notice this. Rather than feeling richer, hyperinflation makes them feel even poorer, and, ironically, actually contributes to the economic disruption that the benevolent dictator was hoping to ameliorate. The People begin to question the benevolence of their beloved dictator even further.
The dictator soon recognizes the hyperinflation he has created, and realizes that minting out currency is the cause of it. (As Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon.") Yet he keeps minting out currency. Worse, he stubbornly sticks to the bad policy that caused his whole little economy to spiral out of control.
After all, what's the use of being a dictator if you aren't always right?
Even if you think bitcoin is a reasonable path (I personally don't), this concept is pretty bonkers.
It goes on and on about how the there is no number that can be easily faked. Fiat currency counterfeiters with plain old serial numbers can copy a valid serial number and someone bothering to lookup the serial number could be fooled, not so with Bitcoin. Point taken, but the thing is before that has any value, the recipient of the currency must actually verify that data. There is no point in conveying that info in an expensive physical coin, because such infrastructure could just as easily be fed the data by electronic means or even a printed slip of paper. The physical coin aspect of it becomes the tail wagging the dog, an overpriced way of conveying the counterfeit resistant data. If the data is not actually envisioned to be verified at time of transaction, then it's as useless as the serial number on a dollar.
The only thing holding Bitcoin from exploding in many markets is a lack of a physical incarnation.
Incredibly wishful thinking there. Bitcoin has a lot more problems than lack of a physical incarnation. Being outlawed by major governments, at the mercy of speculators without any regulation, and downright vulnerable to an attack by a critical mass of mining resources working together.
rural farmers in 3rd world countries are not going to get a smartphone and a $100/month data plan just so they can accept Bitcoin.
Exactly! But just a few sentences above it says:
anyone with an NFC equipped cellphone can check if a coin is counterfeit.
You've come round full circle to the problem in the first place: You need functioning internet infrastructure (and a long time) to validate a transaction in the secure way. Without that, you could counterfeit any 'bitcoin' based currency just as easily as any other currency.
A viable alternative currency for micro-nations and dictatorships with hyper-inflation."
Another foolish statement. Again, people are incorrectly assuming there is a technological solution to a socioeconomic problem. The failure of such currencies are a symptom, not a root cause. If it were as simple as all that, the citizens could just as easily move around some stable foreign currency. You can't do a safe, 'sneaky' end run around the force that governs a citizenry. So long as they are empowered to prosecute, shut down internet infrastructure, or just send soldiers into the street, no currency trick is going to work in the face of the fundamental problem.
XML is like violence. If it doesn't solve the problem, use more.
I don't see an incentive for them to use Bitcoin over US dollars or some other established currency.
Bitcoin makes that impossible, so the end result will be that those governments will either not use such a limited currency, or will use it up until the point they want to print more where they will then either abandon the cryptocurrency or declare that some other currency must have some exchange rate with the Bitcoins and print more of those.
This, except for that very last part. It isn't possible to tie a non-inflationary currency via a fixed exchange rate to another currency, then inflate that other currency. That is a contradiction. You can do one, or the other, but not both.
Most of the time, the governments in these hyper-inflationary states are printing more money in order to spend more money or to save their own asses, at the peoples' expense. (Just as, to a lesser degree, the U.S. government has.) So they would simply not allow the non-inflationary currency, or abandon it when they saw it didn't suit their purposes.
It's far past time we kicked these adherents of failed and discredited Keynesian theory out of government economics. Sadly, Janet Yellen, new Fed chief, is a staunch Keynesian and a fan of the "new" Phillips Curve, which was demonstrated pretty thoroughly to be wrong about 20 years ago.
We already have stagflation under Obama: high inflation (government inflation figures are just plain B.S.) and high unemployment. If Yellen has her way, we could have high inflation, high unemployment, AND high interest rates.
Be afraid. Be very afraid.
"Even if we could stop inflationary policies, I'm not sure most of us would want to, since it would mean a protracted worldwide economic downturn."
If I may say: I think you've been listening to too many Keynesian economists. The idea that inflation is good is just so much snake oil. The people it benefits are government, banks, and Wall Street. It harms just about everyone else.
HEALTHY markets are zero or negative inflation. Take computer-related equipment: every year, you get more bang for the buck (even when you consider they're inflated bucks). That's called deflation.
For nearly 300 years, inflation was essentially zero in North America, and we had a healthy economy (arguably the healthiest in the world). That changed when the government started meddling. It is ridiculously easy to demonstrate this.
I don't share your stance, which seems overly pessimistic to me. We need to end the Fed, and re-instate a hard money standard. Just those two things would fix many of our ills.
(Re, the Fed: why should we pay interest on every dollar printed? That's just one of the ills it introduced.)
HEALTHY markets are zero or negative inflation. Take computer-related equipment: every year, you get more bang for the buck (even when you consider they're inflated bucks). That's called deflation.
No, no, no. You cannot parcel up "deflation" and "inflation" on a per-market basis, then use that to determine the strength or weakness of a currency.
A deflationary currency is a bad thing; you simply have to remember that an economy thrives on people buying things from each other, and breaks down when they stop doing so. It's a bit more complicated, obviously, but primarily you need to be concerned when people have an incentive not to do so.
Deflation causes a breakdown in this in that it becomes acceptable to get "returns" (i.e. increase in worth) for a currency by simple stuffing it in a mattress. This is very harmful, not least because it's a positive feedback loop; the more people stuffing currency in their mattresses, the smaller the money supply, and the faster the currency deflates. See the Great Depression for an example.
For nearly 300 years, inflation was essentially zero in North America, and we had a healthy economy (arguably the healthiest in the world).
If by "essentially zero" you mean "inflation and deflation of double-digits year over year", I suppose that's half-true. It doesn't make for a stable economy, though. And just for kicks, you should look for all of the "Panics" that happened in 19th century America, you might be surprised at the number and their severity.
We need to end the Fed, and re-instate a hard money standard. Just those two things would fix many of our ills.
This is very, very much not the case. Why do you think the "Great Moderation" happened? Why do you think that not a single nation in the world is using a "hard money" standard anymore?