Monday, July 20, 2015

Gilder on Gold and Bitcoin

When teaching I draw on some famous insights of George Gilder to make points.  He has come out in support of the gold standard, and inscrutably bitcoin.  I read his argument, and post-study, his position is still as inscrutable.

Let's start with his summary, to get to his point:

The likely path of Bitcoin’s advance begins on the Internet
and only later moves to the domains of government
currencies. As it gains momentum, its price will converge
with the price of gold, and Bitcoin will become bitgold.

OK, nothing special there, IF Bitcoin works out, it will be co-opted by governments to replace cash.  Well, that has been the conspiracy theory all along, that it is a government gig, always was.  That Gilder is predicting it will get there is nothing new, but his argument for its inevitability of becoming parallel to the gold standard, and mutually self-reinforcing is new.  He takes 100 pages to make his case, worth reading because it is Gilder, but Gilder usually makes sense.  Not this time.

Let's look at highlights of his paper, but check your premises before you go in.  He does a lot of definition shifting in this piece, unconvincingly.  How do you define wealth, time, money and do you believe the internet is a net benefit? Hang on to those so you can compare and contrast.  he comes at you out of the gate:

Is money a measuring stick that gauges the value of economic
activity? Or is it a magic wand wielded by central banks to
summon new economic growth?
Is money chiefly a source of information? Or is it an embodiment
of wealth that can be created out of thin air.

So he starts with a straw man argument about the definition of money, and offers a false dilemma as an answer.  He is spicing it up with name-dropping.  I told you to hold onto your definitions, because when you compare the standard definitions with his changes, the changes are useless in the real world, and only work in the transformed Gilderneueweltanshauung.  Why not just come up with new definitions for your novel ideas, instead of loading yet another set of definitions on terms economists keep layering up?

Anyway, techies love to think they world started in 1975 when they were born, because they were born, and before that nothing else happened.  So the world is completely new...  and Gilder knows how to rock this conceit:

To understand our current economic stagnation, we need to step
back from the current debate and ask a broader question: What is
money? And in particular what is its role in a new 21st century
information age economy?

That ain't gonna fly with those who've seen both sides of the 1975 divide.  Those of us who actually produce things, as opposed to the false economy David Stockman chronicles, know there is nothing new in the 21st century regarding info and economy, only that thing can move faster, but never better, that attendant to this putative improvement is astonishing waste, not efficiency.

Gilder does ask the right questions, one I have been answering in this blog repeatedly, because it is a premise upon which one proceeds, and determines direction:

The key to understanding good monetary policy is to address the
question: What is wealth, and how is it created? What is the role
of money in the creation of wealth?

And he answers the question:  "Wealth is knowledge."  Hmmm... ok, I certainly have argued a college degree should be in the humanities, but that is not what he means.  He then gives the standard anarchist means for economic development but weaves in his new definition:

Wealth is created by the learning curves that result from a million
falsifiable experiments in entrepreneurship by economic actors in
mostly free market economies.

Well, knowledge comes from the market process that Gilder mentions, and prices as quoted in money, are the signal as to whether your meeting the needs of the market, but please some how connect this to "knowledge is wealth"  No, all that is left behind, we are off to the races.

He goes on to make fairly standard criticism of monetary central planners, and he brings in another important estimation that is new to me:

Meanwhile, Wall Street bank profits, effectively guaranteed by
government policy, return to previous highs. Currency trading to
set the measuring stick of monetary values yields a hypertrophy of
finance. Transacting $5.4 trillion every twenty-four hours, foreign
exchange markets are now scores of times larger and even more
volatile than the markets for real goods and services that they are
supposed to measure. Rather than promoting enterprise, banks
harvest the profits of currency changes, imposing a volatility toll
on businesses that have to hedge all their activities against the
chaos of floating moneys.

Well, this is another example of the waste of the FIRE economy, finance, investment, real estate.  he also notes the trillions the banks have invested to track this valueless false economy activity, all to drain the resources of productive people to bankers.

Next he starts bringing in a Bitcoin conceit to fit in his new definitions:

The theorists of Bitcoin explicitly tied its
value to the passage of time, which proceeds relentlessly beyond
the reach of central banks.

From here he tells us "money is time."  Not time is money, silly, but the opposite!  And until you get that, you'll never get Bitcoin, and you need to get with the program.  The he ties bitcoin to gold:

Bitcoin is a major experiment in new Internet infrastructure,
but gold works the same way in the global economy. Gold can
function as money because it operates outside the financial
economy as an index of the time it takes to extract it from the
earth. Because it becomes more costly and time consuming to
extract thinner and deeper lodes of the metal from more remote
places, gold remains a lodestar amid the monetary turmoil. The
cost of extraction rises almost in proportion to the advance of
mining technology. Gold thus cancels capital and technology and
becomes almost a pure measure of time.

Ugh...  as though there are any similarities between gold mining and video games.  But as long as your brain is dulled by arguments grounded in logical fallacies and shifting definitions, while your brains is mush if you have not maintained your definitions, comes a new definition:

The source of the value of money is time—irreversible, inexorably
scarce, impossible to hoard or steal, distributed with remorseless
equality to rich and poor alike.

There, now it all comes together.  The new definition, its benefits, all to be contemplated at leisure while spending decades unemployed as the economy goes bad and there is not a single thinker on the horizon who can offer a solution.

Gilder cites a fact that perplexes most people.  The general impression is internet sales is what, 50%?, of all retail sales in USA.  It is not.  It has not risen above 6%, lower than what mail order catalog sales were in the 1980s, before the internet.

Although online purchases remain
between six and seven percent of all commerce, Internet
trade is expanding rapidly. 28

The fact of the matter is the internet is merely a self-service checkout option, and explicitly so in the case of internet sales titan Victoria Secret, with 1.5 billion in online sales, generated by 400 million catalogs mailed out a year.  "Order online" sure save VS a lot of money.

As an aside, my sources say 6% of retail, gilder puts it as "all commerce (online stock trades?), which, if his sources are correct, then online sales are negligible in the USA economy.  In any event, the idea that the internet has changed anything, that marketing on the net is a viable means for business development, is utterly delusional, and a very widespread delusion at that, up there with the "earth is flat" and the "sun revolves around the earth".

And Gilder clearly knows this, and points it out, yet he is bothering with a thesis that appeals to an extremely narrow group of very delusional people.  O well...  onward...

Money is the central information utility of the world
economy. As a medium of exchange, store of value, and
unit of account, money is the critical vessel of information
about the conditions of markets around the globe in both
time and space.

In his classic definition reiteration he goes partial, he leaves out "testable, divisible, verifiable," something bitcoin will never achieve, by design.  It is a relative store of value, inasmuch as it is also a commodity, and after spending so much time denigrating the problem of the measuring stick being part of what is measured, he necessarily (to advance his argument) calls "money" the vessel of information (another new definition!)  Prices are signals quoted in money.  Don't make a hash of what is simple and useful.

My best guess is Gilder has crafted a piece in which the necessary gold standard is wedded to the inevitable elimination of currency in favor of some sort of universal bitcurrency, and made it his thesis.  Two problems: no government wants a gold standard and there will always be tallies on other media besides electronic, making the universality unlikely.  Perhaps he is merely trying to entice techies into the gold standard camp, knowing full well bitcoin will never happen.  Who knows.  But this piece is not convincing or persuasive.

Gilder argues for sound money.  Good.  But he is trying to be all "futurist."

But human creativity and surprise depends
upon a matrix of regularities, from the laws of physics to the
stability of money. 38

B O R I N G !  You mean to repeat what Aristotle pointed out, to be interesting something has to be different?  I imagine people with a post 1980 college degree, meaning of less probity than a 1960 high school diploma, may be wowed by such overwrought typing, but spare the educated, if you want to keep their interest.

His ruminations on money are a mess...

Paradoxically, to serve as a store of value, money cannot
be hoardable. If money is not invested or spent, it rapidly
becomes worthless, as no goods are produced that it can
purchase. Time is the quintessential Heraclitean stream in
that it cannot be hoarded. Time is the basis for Say’s Law—
supply creates its own demand, and in one way or another,
depending on policy, savings are always invested.

Money has little to do with a free market economy.  the freer the economy, the more credit is extended by all of the players, not any nonsense regarding the velocity of money.  "Hoarding money" that is to have 100 oz of gold in a vault does not make it worthless, since it may be collateral on a legitimate (non-interest bearing) loan, and in any event is it at least a commodity, and a fairly stable store of value at that.

And as to his quote of Say's Law, someone should gentle point out Say never said anything so stupid (or stupid at all)... the only source for that quote is Keynes.  Sheesh!  Say did have some good things to say, and this is an example of the bad quotes crowding out the good.

Gilder reaches too far outside his ken, and makes beginner's errors:

According to Szabo, velocity is the critical element
differentiating money from commodities. Over the course
of human history, various commodities evolved from mere
consumables into collectibles and thence into wearable décor
and jewelry. On occasion, in a phase change, some of them
became “wampum” and clamware, shells and exchange. Thus
we “shell out clams” to buy stuff.

Or maybe not, he quotes Szabo on this, so Gilder is actually free.  Maybe gilder knows what he is doing.  Anyway, that's not what happened.  Clamshells and whatever else was traded were tallies of who owed whom what. Into the 1830s in the UK credit (non-interest bearing loans) was recorded on tally sticks and stored to be liquidated when the debt was satisfied.  Liquidation in this case was actually burning the tallies, but sadly the fire got out of control and burned down Westminster.  People did not use sticks as money in the UK in the 1830s.  What people have done through history is run tallies, and recorded on all sorts of media.  So Szabo, whoever he is, is kind of an idiot.  But Gilder only refers to him.

He points to the history of New Amsterdam (New York),
where a 17th-century Dutch entrepreneur had his bank
arrange a large debt in wampum. The Indian baubles had
crossed the velocity barrier to become a vessel for indirect
transactions—real money.

As if there was a meeting of minds between the Dutch and the Indians.  Absurd.  But there you have it, a straw man example to support whimsical definitions.

This goes on for 100 pages, satisfying where factual, pleasing when condemning the actual malefactors, but otherwise implausible call to action.

I wonder at it...  such a narrow audience.  Is this a pitch to techies to come over the the gold standard?  Who knows!

Feel free to forward this by email to three of your friends.