(This one is rather long):
We are at an interesting juncture in our understanding of exactly what inherent value a good’s market price represents, whether an intrinsic price exists which cannot be inflated by fiat money creation, and whether the extant view of price-determination, along with the backing ‘economic worldview’ behind it, should be wholly replaced. The replacement of this existing view with a recently-proposed one would have broad implications beyond money that include such things as lending standards, federal environmental policies, ESG investing, and other forms of engineered ‘sustainability’. The concurrent advent of electronic monies makes the portents all the more interesting to ponder.
The prevalent view that economic production and product price-determination are driven primarily by (hopefully optimally) allocating finite or scarce reserves of (material, capital, labor, fixed production, and innovative) resources is turned on its head by the work of two libertarian economists named Gale Pooley and Marian Tupy. This standard view has stemmed basically from looking at “what is” (how much of these resources appear presently available) and asking “what can be done with (produced from) them based on what we know now ?”. It’s loosely analogous to how Marxism looks at the wealth in a country as a rather static pie to be sliced up and served “fairly”. They egregiously ignore that the level of a country’s wealth is dynamic; constantly being regenerated and changed as the innovation within it conjures ever-new means for product and wealth creation. And by removing the incentive and the freedom for people to engage in innovative endeavor, they kill it. Tupy-Pooley regard the creative power of human innovation as the primary power driving economic growth, and their regard for that power is so high that they feel it can overcome the concerns of resource scarcity and depletion (so naturally, its not ever going to be popular among the histrionic global warming/Green New Deal crowd).
Technologist George Gilder is very keen on this idea. He invokes the triumph of Claude Shannon’s Information Theory framework as corroborative evidence of its merit. [1,2,3] Shannon’s work founded the schemes for optimally compressing and transmitting ‘information’ over networks. No matter what amount of random noise is added to the base signal, all of its information content can still be recovered. Since the noise is essentially structureless, it carries no information. Only the addition of new information to the signal will be read as-such by the receiver. Similarly, there are many business activities in an economy that, while perhaps successful, are not genuinely innovative and thus do not add any new level of efficiency or value-producing capability to it on the whole (they do not change its ‘output’). Only ‘disruptive’ innovation (i.e., human creativity) does so.
If economic equilibria are not a supply-demand balance among a set of scarce and now-enumerable resources, then what ?: Tupy-Pooley state that the one truly finite unrecoverable resource we all have is time, thus they posit that properly-founded money is tokenized time. Specifically, they say that the inherent price of anything is the (end-to-end) time it takes to make and deliver it. So regardless how great a leap in utility any new innovation provides to society, its price will eventually settle on a level that represents the time it takes to produce it (if it takes many human lifetimes of work input to make a unit of it, don’t count on it coming to market). The price history for the increasingly dense, complex, and tiny integrated circuits and other computing hardware certainly buttress this view. Even gold has decreased in value as extraction and refinement methods have made it quicker to produce. Tupy-Pooley extend this even to the more sacrosanct environmental resources with the implicit confidence that should, for example, even the deepest petrofuel reserves become depleted, or CO2 unquestionably drive us into an increasingly uninhabitable climate, then human innovative capacity will galvanize around the problem with enough vigor to deliver some way-around it. Gilder is strident that the right way to tokenize time into a currency is with bitcoins, collateralized by the time required by each miner to “mine” a new coin.
The economic precept here is that if the one finite and un-renewable resource that everyone has in their finite life is time, we will always act to maximize its allocation in our productive efforts through creative innovation. The (innovative) postulate is that this is what makes it the proper collateral to back any new type of stable un-debaseable money. It is certainly as defensible of an economic argument as the traditional ones. Hopefully, it will be possible to put it to extensive quantitative empirical testing in the upcoming years. Their’s is an optimistic view which implies that economic productivity enhancement is inherently unlimited. It also implies that the best thing any central bank, climate-management body, food/drug safety agency, or any other institutional ‘public watchdog’ can generally do is to just insure that producers are operating ethically and honestly, and otherwise forget ‘guiding from above’ and leave them alone to work on solving problems. Tupy and Pooley’s book on the subject is due out in 2021.
In principle, monetary inflation could be nullified if employers were required to adjust the wages they pay their employees in proportion to the percentage increase in the money supply caused by QE printing. But since worker salaries are specified in fixed dollar amounts per year, they do not adjust with increases in the general price level (CPI). So the employers end up paying them less in real terms, leaving them poorer. Two simple reasons why Gilder advocates Bitcoins as un-debaseable tokens for time-value are: (1) There is a finite amount of the productive human time resource (life-hours) available on the planet. That amount can be roughly estimated as the average (productive) human lifespan multiplied by the world’s population. (2) Bitcoin mining software is configured so that only a specified, finite amount of coins can be mined. Once that limit is reached for a particular type of coin, no more of them can ever be created. When the total finite amount of time value is represented by an inherently-limited number of coins, the coins will persistently hold the current real value of the time units.
After market trading reveals not only the time-price of every good (the amount of it that a unit of time buys) but also its rate of depreciation (the percentage increase of that amount through time), this depreciation curve will indicate intrinsic market levels for forward interest rates that are immune to monetary inflation: Assume people know they can lend to me with zero risk that I will default on them. Then if I borrow ten units of productive time value and I repay it after after 1 year when it has become worth only nine units, the natural base rate of annual interest is 11.11% (1/9-th), and the lender receives that from me if I simply repay him the notional amount. Clearly this only holds in a deflationary economy where the prices of goods trend regularly downwards, and innovation is so effectively allocated and applied that no supply shortages arise.
However, not all goods are equally subject to ever-cheapening prices resulting from innovation. As long as it continues to require roughly the same number of weeks to grow and finish-process tomatoes or corn for sale, their time-prices will hold steady. When a blight or a weather does causes crop failures and a shortage of those vegetables, the prices of those goods would increase for awhile rather than hold even, and some hedging would be in order. But where such episodic disruptions are absent and innovation can still be winningly brought to bear, time prices will continue to cheapen.
But there is a great dichotomy now in the future of ‘new money’: On the one hand we have Gilder heralding the use of bitcoins as an exchangeable measuring stick of inherent time value; electronic money collateralized by time. On the other hand, we have seen the recent rise of modern monetary theory (MMT) which promotes the instantaneous creation of new money backed by nothing. The former is predicated on the continuing existence of free unconstrained markets which efficiently recognize and respond to the new innovation ‘signals’ that arise in them. The latter is a notion of federal money popular with insolvent governments now, and they seem to be increasingly interested in changing its form from freshly-printed notes to newly-mined Central Bank Digital Currencies (CBDCs). The Bahamas, Cambodia, China, France, the Philippines, Switzerland, Turkey, and Japan are testing or rolling out trial-balloon CBDCs for circulation. dGen, a Dutch think-tank, expects 3-5 countries to have fully replaced their cash with a CBDC by 2030. [4]
As I noted last month, the reasons the EU gave for their switch to a digital Euro sound specious: For example, that a massive ATM hack is a big intrinsic hazard for physical cash, or that cash provides a dangerous vector for the transmission of the dreaded COVID-19 virus. Its becoming more well-known that they are most likely moving that way to eliminate all tax havens, force deposits to remain captive in the banking system, and to track how everyone spends and donates their money. If government puts a single sovereign CBDC in place, outlaws cash and other digital monies, and enacts other controls, the great experiment with time-valued money with its prices driven by innovation will not happen.
The tracking and traceability of CBDC money units has pernicious social implications particularly now that US politics is so much more divisive, extreme, and hazardous than anyone can recall. As soon as it appeared that Biden would likely become president, The left formed a group (‘The Trump Accountability Project’) championed by AOC to blacklist everyone who worked for, supported, or voted for the Trump campaign. This was cheered by CNN and Keith Olberman in a recent and startling YouTube rant (”…these people should be expunged from our society !…”). The most benign use of blacklists has been to slander peoples’ reputations and make it hard for them to find work (e.g., McCarthyism). The most severe (and most common) use of them is to round up the listed ‘dissidents’ into a field to shoot them (e.g. Stalin’s ‘Great Purge’). The list of names is being assembled from the data that social media companies have archived on their users, and from other sources. When people can no longer vote, transact, nor communicate privately, then pluralism, free-speech, and free-choice die. Because those individuals then can no longer think and act independently for themselves without being subject to sanction. Targeting over 70 million lawful people for ‘reclassification’ ? In America ? Ambitious !
Those in government need more control over their people if they are to pull-off fleecing them while not imperiling themselves. The COVID ‘threat’ is being used to suppress people from organizing in groups together (unless your group participates in rioting or other socially-destabilizing activity). The MSM, tech, the deep state, and other players have already given these pols a degree of control that would make Orwell’s head spin. I briefly questioned whether I should continue to write pieces like this, but realized that by-now there is no reason not to: The tech companies and intel agencies already have stored every email, tweet, and post that I’ve ever made, and its likely that Lexa has enabled them to store the conversations I’ve had with my wife in my own home. Since they have shown themselves to be politically-complicit apparatchiks of the left, AOC and others will be able to sanction me if they want to using just the data they already have amassed on me. It’s a done deal.
Governments have already been creating money digitally. The degree of control that a CBDC gives a federal government over its citizens depends upon how the coin mining and ledger network is setup. A single-tier “direct CBDC” configuration affords the government full transparency, traceability, and control. [5] “Altcoins” have been exchanged on the dark web for some time already [6]. If governments do instantiate direct CBDCs to control and track all money and transactions, it will be interesting to see whether such alternative black-market e-currencies continue to exist and whether they can be effectively made fungible (laundered into) the federal e-currency. If so they would proliferate, despite the legal risk, owing to their utility as a haven. Illegal local black markets, replete with ‘street’ lenders, have been common in socialist societies where governments limit the income and the consumption of the people.
If governments fully believed in MMT, why wouldn’t they do away with taxation entirely and just create new money to fund themselves? They have been doing this to an enormous degree, but the question is whether they really believe that it is sustainable or if they are using it as a stopgap measure en route to confiscating the money that people have created and saved by working for it.
The economic repression around the world has been extended further with another round of lockdowns that are unjustifiable based upon the data we now have on the pathogenicity and transmissibility of the Corona virus. It will continue to decimate small business independent entrepreneurs who account for 70% of employment, while further enriching the tech moguls and other elite social architects. State governors’ responses to killing their own local economies is to demand that Washington sends them more freshly-printed vapor money. Joe Biden, one of the most corrupt candidates we’ve seen who was just put into the loading chute for POTUS with what was certainly the most corrupt election, just said the dumbfounding statement that we need to go into another hard protracted nationwide lockdown in order to “resurrect our economy” (and there are many who will believe that). It all feels very Cloward-Piven-ish to me.
Ironically, this driving of more wealth ever into elite hands while driving the working class further towards destitution is serving to propel the popularity of the Marxism that the elite seem to be pushing to economically enslave those workers and to enable governments to default on their debts while keeping their political leaders in power. Let us see whether the lockdowns are taken to the point where many workers become economically debilitated and reliant upon UBI (another newly-popular notion among politicos). At such a point, the people become putty in the government’s hands and may be given no choice but to agree to certain conditions (like taking a weird new vaccine into their bodies) in order to continue to ‘receive their benefits’.
Capitalists can be irritating, but the real ones generally believe in individual independence and in letting everyone chart their own course through life. However, the far left does not believe in ‘live and let live’; they want to control who gets and does what, and they usually keep pursuing that until they have gained total (forceful) control (who knows if they are contented even then). Collectivist Marxism portrays its motivation as the benevolent one of looking out for the little guy, but that’s not what drives Marxist revolutionaries. It is envy and resentment of others who have more than them, no matter how many jobs, products, and services those people may have spawned in creating their wealth. And in diverse societies the lefties’ demagoguery includes dividing the people not only along class lines, but also fomenting resentment along lines of race, faith, sexuality, and other demographic history. The revolutionaries always claim they upon gaining control and power they will ‘heal the divide’ that they just whipped-up in everyone’s minds. I think its always good to check the real track record (history) on that.
As long as you can make a reasonable living its so much nicer just to choose to be happy and not compare yourself to others. And it leaves the future open for the people who are on-fire to make life-improving innovations like balanced budgets, dental floss, electricity, and time-priced bitcoin money. We’ll see.
References
[1] https://gilderpress.com/2019/07/25/understanding-the-tupy-pooley-effect/
[2] https://fee.org/articles/money-in-information-theory/
[3] https://gilderpress.com/2020/09/24/time-prices-are-revolutionizing-economics/
[4] https://cointelegraph.com/news/at-least-3-nations-to-replace-their-currency-with-cbdc-by-2030-report
[5] https://voxeu.org/article/cbdc-architectures-financial-system-and-central-bank-future
[6] https://www.amazon.com/Black-Market-Cryptocurrencies-alternatives-anonymity/dp/1500195618
Christie Associates: Quantitative Analysis & Consulting for Finance and Business. Principal: Steven Christie, Ph.D. 