The Economics Of Bitcoin – Doug Casey Gets It Wrong

from Libertarian News:

Doug Casey of Casey Research recently conducted an interview where he spoke about Bitcoins to Louis James, Editor of the International Speculator.  In the interview, Casey makes a few claims that had me yelling at my computer screen.  It is important to remember that Casey has a vested interest in promoting a gold standard.  His company, Casey Research, specializes in precious metals.  So his analysis of any currency system that is not predicated on metals is obviously going to be somewhat biased.
This particular claim by Casey rubbed me the wrong way:

L: Do they have value in themselves?
Doug: There’s the rub; I don’t see that they do. Bitcoins are just an electronic abstraction. They can’t be used for anything else, nor are they made of something that can be used for anything else. They are like one of those knots in a string that disappear if you pull hard enough on the ends of the string. They are not backed by anything at all. Like government fiat currencies, they are a con game, functioning only as long as people have confidence in them, regardless of whether that confidence is well placed or not.

So Doug, what you are saying is that if gold could not be turned into jewelry, it would not be a money?  What industrial uses does gold have outside of being ornamental?  Sure it has some minor industrial uses such as plating for electronics or a few other obscure things such as radiation shielding on astronaut helmets, but other than that, the vast majority of gold that is actually used in some physical way is nothing more than pretty trinkets.  The trinkets themselves are totally useless as far as improving the conditions of humanity are concerned.
Of course, the answer to my question “what uses does gold have besides being ornamental?” is obvious to Doug, and everyone else, its primary use is to act as a store of wealth and as a trade facilitator.  The market has a need for a trade facilitator which allows the division of labor to take place.  The market has a need for a medium to store wealth.  These market driven needs impart value to gold faaaaaar above what it would normally be valued at for industrial or ornamental uses alone.
Gold is not worth $1600 an ounce today because it can be turned into pretty trinkets or plate astronaut helmets.
The market imparts value to gold because of its properties of divisibility, fungibility, scarcity, and recognizability.  These properties allow gold to act as a store of wealth.  The market also imparts an additional tiny fraction of value to gold due to its industrial and ornamental uses, but these uses are secondary, not primary.  I would argue that gold would still be worth at least $1500 an ounce today even if it had absolutely no uses outside of acting as a money.
Doug goes on to say,

Their main value seems to have been as a speculative medium. Worse, actually, in that they are – or were – based on finding a “greater fool” to pass them on to, for something of value.

Since I’m sure we can all agree that gold is not worth $1600 an ounce today because it can be turned into pretty jewelry, I have to ask why Doug’s statement shouldn’t also apply to gold?  Isn’t the current price of nearly $1600 an ounce due to speculation about the dollar’s solvency?  If gold is not valued at $1600 for its industrial or ornamental purposes, then what is driving its price so high?
Let me put this another way; if people had total faith in the dollar and the dollar was not being inflated, would gold still be valued at $1600 dollars an ounce?  Of course, the answer would be a resounding NO.  It would be NO because if people had total confidence in the dollar they would not bother looking for alternative mediums to act as a store of wealth.  Thus, we can say Doug’s claims about Bitcoins being nothing more than a “speculative medium” also apply to gold in the same sense.
Casey is essentially making the claim that because Bitcoins have no uses outside of acting as a money, they are inherently worthless.  I have argued against this in previous articles and I will repeat myself here.  This is a fallacious argument.  To claim Bitcoins are nothing is like claiming your operating system is nothing, therefore it is worth nothing.  Clearly an inordinate amount of time and resources went into the development of your computer’s operating system.  The time and resources that went into the development of the software constitutes “something”, which is obviously more than nothing.  Software can have inherent properties that give it value in and of itself. In the case of Bitcoins, they are imbued with value by the free market because of the properties they have that allow them to act as a store of wealth and as a trade facilitator.  Those properties which allow Bitcoins to act in this specific capacity are exactly the same properties that gold has which allow gold to act as a store of wealth and as a trade facilitator.  Again, even if gold had absolutely no other uses besides sitting in bank vaults as ingots, gold would still be a money.
The next item I would like to address:

L: …the whole concept of barter is trading in goods and services directly, not via media of exchange.
Doug: Well, barter chits were supposed to encourage trade among those who used them. And they were also a tax dodge, since no official money changed hands. That was a major incentive for using them. But they all dried up and blew away, and the people who wound up holding them had nothing. Sort of like when the Argentine peso collapsed ten years ago. The provinces decided to set up their own currencies, but they weren’t backed by anything either, and they all dried up and blew away as well, leaving those who held them holding an empty bag.

The Argentine peso collapsed because it was inflated to the moon by a corrupt government.  Comparing Bitcoins, which can not be arbitrarily inflated and are not controlled by any government, to the Argentine peso is ridiculous.  I have to assume this is purely Casey’s bias rearing its ugly head.  It is a straw man conjured up to demonize Bitcoins as somehow being vulnerable to the same fate.
Also, as far as I know, the barter clubs that Casey is referring to are still in business.  See here, here, and even from Lew Rockwell’s own website here.  In fact every report I’ve read on them says they are gaining traction.  I haven’t seen an article saying club chits had suddenly become worthless.  I suppose there may have been a few clubs that folded and went out of business, but that is the market making a determination about a specific club, not the chit system in general.   Just like any market driven currency, the chits have value because the market says they have value.
Casey goes on to make much ado about GoldMoney, which he claims meets all the same functional requirements as Bitcoins.  I disagree.  GoldMoney, like e-gold, has a central point of control that can be corrupted or shut down.  The gold holdings can be confiscated and the gold transactions are not anonymous.  Bitcoins have no central control and are virtually impossible to shut down in the same way BitTorrents are virtually impossible to shut down.  Further, Bitcoin wallets can be encrypted, duplicated, and hidden to the point where they are virtually impossible to confiscate.  Further, GoldMoney doesn’t act like a currency in the fact that you can’t directly send your gold holdings to a retailer for goods.
In summary, Casey’s arguments against Bitcoin are weak or misleading.  His arguments, in many respects, can be applied to gold as well.  Casey should rethink his logic before making public pronouncements about the efficacy of Bitcoins as a currency.

Disclosure:
I hold Bitcoins as well as silver.  My silver holdings currently outweigh my Bitcoin holdings by a large margin, so in theory I’m shooting myself in the foot with my silver holdings by writing this.  I personally think there is room for both Bitcoins and metals in this world.  I foresee a day when metals are used like cash for physical transactions and Bitcoins (or another market driven electronic currency like it) are used like check-cards for electronic purchases, with currency exchanges facilitating conversion between the two.
Related articles:

How To Use Bitcoin – The Most Important Creation In The History Of Man

Libertarian Goldbugs Hating On Bitcoin – Free Market Money

The Economics Of Bitcoin – Why Mainstream Economists Lie About Deflation

The Economics Of Bitcoin – How Bitcoins Act As Money

Against The Gold Standard

Chart – World’s FInancial Wealth

from The Victory Report:

Sound money will return, as it always has. When it does this chart will look very different. Keep stackin.
~MV

From Shayne McGuire LBMA:

CLICK IMAGE FOR A LARGER VIEW

Greece Is Europe: The Failure Of The Euro

From Zero Hedge:

It may not matter if Greece is bailed out by the powerful EU economies because they are just one of many problems that the eurozone faces. While George Papandreou's socialist government survived a no confidence vote, they are just postponing the inevitable.  For while Greece may be temporarily propped up with loans, it is likely that they will ultimately default on the massive loans the EU and IMF have poured into it. This may have the unfortunate consequence of spilling over to the other PIIGS and jeopardize the entire eurozone.

The basic problem that the eurozone faces is the unworkability of the monetary system envisioned by the European Monetary Union (EMU). They are now paying the penalty of having a central bank that is subject to political pressures. Make no mistake: the purpose of the EMU was political more than economic, created to foster further political integration of the EU. Looking back on this faulty system the economically powerful countries perhaps regret having given up their monetary independence. It will be they who will pay for it.
The end result of this faulty system, the PIIGS' (Portugal, Ireland, Italy, Greece, and Spain) deficit spending, will result in the euro's devaluation against other currencies, including the dollar. While the printers of dollars have nothing to brag about, the U.S. has the benefit of being the world's reserve currency and having a semi-capitalist country that is still the most powerful economy in the world. The Europeans have not integrated as well as we, and have not achieved that monetary status. With all our faults, the U.S. and its Treasury bonds are still the preferred port in a storm.
What the EMU has created is a Europe loaded up with debt financed by a banking system that has been given almost unlimited credit by the European Central Bank (ECB).
The worst part of the system is that it has given profligate countries an almost blank check to spend. To use an analogy, it is as if the Fed were to bail out all the U.S. states that have spent too much. Greece came into the EU as a corrupt socialist country with a huge bureaucracy and a moribund economy. Their political system, as we can see from the protests and riots, caters to a large public sector that keep voting in politicians who will support their lifestyles. They don't care who pays for their benefits as long as it isn't they.
Contrast this with a well run fellow EMU country, Germany, with a large and productive private sector whose sovereign debt is relatively modest in relation to its GDP:

The socialist PASOK party run by Mr. Papandreou and his father and grandfather before him, ran a political model familiar to Americans: an expanded central government, a public sector that consists of about 40% of the economy, a perpetual majority in parliament that serves their bureaucrat voters, a decline in the economy, massive corruption and tax cheating, and deficit spending to pay for the benefits. Greece ranks 37th out of 43 countries in Europe in terms of economic freedom. They have run up about €360 billion in debt ($518 billion).
To put Greece in perspective, at about 11 million people they are comparable to Ohio, but with a GDP of about $330 billion they are smaller than Ohio (GDP of about $480 billion). Ohio's local and state governments spend about $106 billion per year. Greece spends $152 billion, but it has been running a deficit equal to 10% of GDP (down from 15% in 2009).
Now Greece needs another €100 billion or so on top of €110 already pledged to them by the EU.
This need for a new bailout was a bit of a surprise to many European observers. They didn't count on the intransigence of the socialists and their rather half-hearted attempts at budget cutting. They didn't count on the stagnation of the Greek economy which would further diminish government revenues. They didn't count on the backlash of Greek citizens who are famous for their inventiveness at evading taxes.
The big question about Greece is whether or not they can repay their massive debt even with bailouts.

"Euro-zone governments are still pretending that they are dealing only with a liquidity problem, and that Greece and Ireland will emerge creditworthy from their programs," says Thomas Mayer, chief economist at Deutsche Bank in Frankfurt.

"But what happens if these countries can't return to the capital markets? If more austerity programs are needed, will voters rebel? The message is missing that a country that can't pay its debts must restructure," Mr. Mayer says.

While he survived his no-confidence vote, Mr. Papendreou has to convince his party members to make €28 billion more in budget cuts by July 3 or the next installment of the May 2010 bailout money (€12 billion) will be held up.
The market is betting that Greece will default. Insurance on their debt has gone up more than 47 basis points. Here is the chart on credit default swaps for Greek bonds:

The picture for Greece is grim:

Young people are still the hardest hit by Greece's deepening economic woes, with 42.5% of those between ages 15 and 24 without jobs in March—a sharp increase from 29.8% a year earlier.

The decline in industrial output accelerated in April, falling 11% from the year-earlier level after an 8% drop in March.

Greece has promised the EU and IMF that it will implement €28 billion in fresh spending cuts and new taxes to bring the country's budget deficit below 1% of gross domestic product by 2015, down from 10.5% last year.

Although the final details have yet to be announced, the government is considering several highly unpopular measures, such as new taxes on the poor, an extraordinary 3% levy on all Greek wage earners, new property taxes and cuts in retirement bonuses.

Spending cuts include deep cutbacks in welfare payments and possibly even layoffs in Greece's long-cosseted public sector.

On June 5, 2011 some 100,000 people gathered in front of parliament to protest spending cuts and reforms:

Protesters and even rioters appear every day to confront parliament. This environment will make it very difficult for the Papandreou government to survive to the end of the year.
There is a serious debate going on between Germany and the rest of the EU. You would guess right that Angela Merkel is getting a lot of heat from her fellow Germans about the bailout. The Germans want debt reductions (haircuts) from Greece's bankers. Or at least they would like an extension of the maturities. Which means they don't want to stick German taxpayers with the entire bill.
The ECB and the IMF do not want this because it would amount to a de facto default by Greece. This is not a small problem. It is a huge problem. If it were only Greece, then it would be a minor issue. They are afraid such a default would start a chain reaction of defaults (euphemistically called a "credit event") by Greece's fellow PIIGS, especially Ireland and Spain. The ECB said last week:

The risk of "adverse contagion" from the bloc's sovereign debt crisis, and its interplay with the financial sector, "arguably remains the most pressing concern." European-level efforts to contain the debt crisis "have not been sufficient," and European crisis management has been "fraught with some detrimental shortcomings."

In other words, if Greece defaults, the market for euro denominated government bonds would possibly collapse and the losses would be enormous. Here is a picture of the debt structure of major economies as a percentage of GDP, including the PIIGS:

What is the real fear behind this? The stability (and bailout) of their banks who have invested massively in government bonds of the PIIGS. Here are some charts on banks exposures:

This exposure concerns the ECB and national bank regulators because their banks are highly leveraged:

If these banks get into trouble, who will bail them out? The article from which the above chart was taken (Fortune) likened the problem to Lehman which pre-Crash had 30:1 leverage. The German taxpayers would not only bail out their own banks but also would be on the hook for propping up Greece, et al. If you wish to see a list of the top 40 banks in terms of exposure to a Greek default see here.

So, what will happen?

The problem as I mentioned at the beginning of this article is the European Monetary Union and the concept of the euro itself. All the safeguards of the Maastricht Treaty establishing the European Monetary Union and the ECB have been tossed aside as they try to save the system. The "no bailout" rule, the ECB independence mandate, the prohibition of deficits of more than 3% of GDP, the prohibition of debt exceeding 60% of GDP, the prohibition on ECB purchases of member sovereign debt, have all been ignored during this crisis.

Instead the ECB has been a massive fiat money pumping machine that has served the needs of its client nations to borrow and spend. Here's how it works:

When governments in the EMU run deficits, they issue bonds. A substantial part of these bonds are bought by the banking system. The banking system is happy to buy these bonds because they are accepted as collateral in the lending operations of the ECB. This means that it is essential and profitable for banks to own government bonds. By presenting the bonds as collateral, banks can receive new money from the ECB.

The mechanism works as follows: Banks create new money by credit expansion. They exchange the money against government bonds and use them to refinance with the ECB. The end result is that the governments finance their deficits with new money created by banks, and the banks receive new base money by pledging the bonds as collateral.

This is what the Greeks did and as a result they exported inflation, including price inflation, to the rest of the eurozone. They ran a deficit financed by eurozone banks, the banks were allowed to use the bonds as Tier 1 capital, and the ECB expanded money and credit to accommodate them. The Greeks got something for nothing from the fiat money expansion, exported price inflation to the eurozone, and as prices went up, the suckers at the end of the money chain paid more for the same things.

The costs of the Greek deficits were partially shifted to other countries of the EMU. The ECB created new euros, accepting Greek government bonds as collateral. Greek debts were thus monetized. The Greek government spent the money it received from the bonds sale to win and increase support among its population. When prices started to rise in Greece, money flew to other countries, bidding up prices in the rest of the EMU. In other member states, people saw their buying costs climbing faster than their incomes. This mechanism implied a redistribution in favor of Greece. The Greek government was being bailed out by the rest of the EMU in a constant transfer of purchasing power.

This is a house of cards. The Maastricht Treaty established that the ECB cannot make loans to banks without certain defined collateral. Specifically, for this bailout they can't accept Greece's bonds as collateral if Greece has been declared to be in default. Thus the current argument between Germany and the ECB about haircuts and extensions. Both S&P and Moody's have said they would treat haircuts and extensions as a default. S&P just cut Greece from B to CCC, and Moody's to Caa1. Such ratings are defined as meaning that there is an even chance that Greece will default.

There are two ways out of this mess: default or monetary inflation. They could unwind the EMU and ditch the euro, but that is unlikely to happen in the near term.

My guess is that they will print their way out of this mess. Continental governments have very little stomach for mass unrest since it has a tendency to bring down governments, bring in more radical regimes, and create uncertainty in Europe. They have already pledged another €750 billion in stand-by bailout money to the other PIIGS. That will be used up and perhaps more.

The eurozone powers are crossing their fingers and waiting for something good to happen. With various economic signs pointing down in the U.S. and in the rest of the world, this only puts greater pressure on the euro and their debt problem. This week red flags were raised about the German economy, the powerhouse of the EU. There won't be an economic recovery to save them.

Relying on monetary inflation is a traditional way for governments to get themselves out of debt. A 7% rate ofinflation could reduce the amount of debt owed by these sovereigns by about one-third in just five years.
That is just too tempting for the EU to pass up.

This article originally appeared in The Daily Capitalist.
__________


Related:

What Happens in Greece Is Ultimately Irrelevant

Greece – Salvation by Politicians

Greece Should Return to a Gold Standard

Portuguese And Irish Bonds: Look At Them

Doug Casey on Bitcoin and Currencies

Doug omits another nice feature of bitcoins: both transactions and storing (deposit) are for free, like cash moved by hand -or better.


The standard objection by supporters re: his affirmation that is "backed by nothing", is that its "backing" consist of the work of all the "miners" who spend electricity and investment in hardware to mine and "maintain the integrity of the chainblock", or something like that, which involve warranting the security of the system against counterfeiting. 


Regarding the trust among participants, this is one of the most interesting problems which is finding promising solutions on trading websites, forums and irc channels where participants are "reputed", that is get a score of public reputation by other members according the trades that they realized with them.
Alternatively, there is Clearcoin (not free):




From Gold Speculator:
Author: Doug Casey 

Synopsis: 
Doug discusses Bitcoin, along with its recent crash, as a harbinger of what’s ahead for state-based fiat currencies… especially the U.S. dollar. 

L: Doug-Sama, we’ve had a number of readers ask for your take on this new Bitcoin system. As a person who likes to see the private sector compete in areas that governments try to reserve for themselves, this seems right up your alley – what do you think?

Doug: It’s a sign of the times. Lots of people are actively looking for an alternative to the dollar. I think Bitcoin is a very good thing, in principle. But after the recent disastrous hack, it’s probably a dead duck, at least in version 1.0.

It’s appropriate, however, that we’re talking about Bitcoin – an Internet-driven phenomenon – while you are in Bishkek, Kyrgyzstan and I’m in Beirut, Lebanon, and we’re speaking essentially for free over the Internet. Money is increasingly going to be Internet-related. But first we should explain what Bitcoin is.

L: Sure. There’s a Wiki entry, but the basic idea is that Bitcoin is an online (and therefore digital), non-government-backed currency. It’s not backed by anything, actually, but that doesn’t seem to be a problem for many users. The system has been adopted by a growing number of people around the world in just the last two years. People are used to currencies not backed by anything, so I guess I shouldn’t be surprised, but I am. On the other paw, unlike government currency, the Bitcoin system is based on a decentralized computer system that no single person or entity – including any government – has control over. That’s part of a design to keep the number of Bitcoins in circulation (inflation) strictly in check. So I can see why some people would see Bitcoin as being just like government currency, but better, because it’s supposedly inflation-proof.

That’s the idea, anyway, but in my view, it’s still not money – no more than unbacked government promises are. You can only use them among others willing to pioneer this cyber-frontier, so I really was quite surprised to see them catch on as well as they have. I’ve seen estimates that the market value of Bitcoins in circulation rose to about $130 million before they crashed last weekend.

Doug: Again, it’s quite encouraging to see that so many people are so disgusted with government currencies, and the total lack of privacy in banking. That’s why Bitcoin could catch on at all. But let’s go back to basics, and see if Bitcoin qualifies as money. Money is a medium of exchange and a store of value. Bitcoin may work as a medium of exchange sometimes, but not a very good one, because it’s proving so unstable. It has fluctuated so much in value over its short life that it is totally unsuitable as a store of value. Over 2,300 years ago, Aristotle identified the five essential attributes that are necessary for a good money…

L: It has to be durable, divisible, convenient, consistent, and have value in itself. But don’t forget your own addendum of “can’t be created out of thin air infinitely.”

Doug: Right. Let’s see how Bitcoin stacks up. First, is it durable? As nothing more than ones and zeros on a computer network, it might seem that the answer is no – it’s certainly not as substantial as gold. But a Bitcoin is arguably a lot more durable than a piece of government-issued paper than can be lost, burned, or even fall apart in your jeans pocket if you forget to take it out before doing the laundry. Moreover, since the Internet was designed to be multiply redundant, and even able to withstand nuclear attack, it’s arguable the Bits won’t just disappear.

L: We should point out that the recent problem with a bunch of usernames and accounts being exposed was not a failure of the Bitcoin system itself, but apparently of the physical security of an intermediary business that interfaces between the public and Bitcoin. There’s another attack put together by hackers, not trying to crack the integrity of the Bitcoins themselves, but to get artificially paid by the Bitcoin system for doing computational work. Someone has also released a virus aimed at stealing users’ Bitcoin account information.

Doug: Yes, these are all serious attacks, and there are likely to be others. But it remains to be seen if Bitcoin will survive the crash in value last weekend – Bitcoins had been trading as high as $30 each and dropped to $0.01 at one point. Since Bitcoins rest on nothing but confidence, it’s going to be hard to restore that confidence now that it’s lost. But it’s interesting that the Bitcoins themselves have proven quite resistant to tampering. In short, they’ve shown significant durability. So they pass that criterion.

L: Okay. Divisible?

Doug: No problem there; they’re electronic ledger entries, so they can be divided and subdivided as many times as you like.

L: What about convenience? You can’t spend Bitcoins at a gas station or a village in Africa.

Doug: Don’t be so sure. More and more people are on the Internet these days. We’ve both seen villagers in Africa with smart phones. It won’t be long before most everybody has one. Anyone with Internet access can arguably deal in Bitcoins, so they could potentially be very convenient to use. That’s a lot more people than the number who will take, say, Russian rubles, Zambian kwacha, or Vietnamese dong.

And Bitcoins are certainly consistent; each one has identical properties.

L: Do they have value in themselves?

Doug: There’s the rub; I don’t see that they do. Bitcoins are just an electronic abstraction. They can’t be used for anything else, nor are they made of something that can be used for anything else. They are like one of those knots in a string that disappear if you pull hard enough on the ends of the string. They are not backed by anything at all. Like government fiat currencies, they are a con game, functioning only as long as people have confidence in them, regardless of whether that confidence is well placed or not.

I’ve always said that the dollar is an “I owe you nothing,” and that the euro is a “Who owes you nothing.” With Bitcoins – which no individual can be held accountable for and which have no value in themselves – I’d have to say they are a “No one owes you anything.” It was inevitable, therefore, that the scheme would collapse… at least in its present form.

Their main value seems to have been as a speculative medium. Worse, actually, in that they are – or were – based on finding a “greater fool” to pass them on to, for something of value. The bubble in Bitcoins is, however, just one of many to come as people try to get out of paper currencies in the years to come. With the bubble that arose in tulip bulbs in 17th century Holland, you might at least have wound up with a flower. This time, people just got stung. The message is clear: Get used to bubbles, as governments print up more and more fiat money.

Bitcoin reminds me of the so-called “barter currencies” people tried to start in the U.S. some time ago, supposedly trading units of “barter.” People traded chits, where a barber might charge ten for a haircut, and a lawyer 100 for an hour of counsel. But they were just another paper currency, based on confidence. And, when you’re dealing with total strangers, confidence is hard to come by…

L: Sounds like a contradiction; the whole concept of barter is trading in goods and services directly, not via media of exchange.

Doug: Well, barter chits were supposed to encourage trade among those who used them. And they were also a tax dodge, since no official money changed hands. That was a major incentive for using them. But they all dried up and blew away, and the people who wound up holding them had nothing. Sort of like when the Argentine peso collapsed ten years ago. The provinces decided to set up their own currencies, but they weren’t backed by anything either, and they all dried up and blew away as well, leaving those who held them holding an empty bag.

So, way before the dollar value of Bitcoins stepped off a cliff last weekend, I was telling people who asked me that I didn’t use them and didn’t plan to use them.

Frankly, I can’t see why anyone would, when there’s already an electronic digital currency like Bitcoin but backed with gold: GoldMoney. I should disclose that I’m a small investor in the company. But I have to say that I really do like GoldMoney. It does everything Bitcoin does – or did – but is backed by something of real value: gold. That means it’s not just an abstraction, but an actual store of wealth. The ultimate proof of that is that you can take delivery of your gold if you want to. With Bitcoin, there’s nothing to take delivery of. I don’t understand why anyone would use Bitcoin when they can use GoldMoney, which does all the same things but has real backing.

L: Neither do I. I was quite surprised to see that the idea had actually caught on. I loathe the government currency monopoly as much as anyone, but I wasn’t even tempted to try Bitcoin out, because it wasn’t backed by anything. Maybe it’s simply Bitcoin’s case for being inflation-proof. This gets to your addendum to Aristotle’s five qualities: People clearly placed great value on Bitcoin’s promise to limit circulation to a finite number. The perception among people who’ve forgotten what money really is – which is most people – is that money is only a medium of exchange. In this case, the meme that “it’s better than government paper” created enough perception of value to keep the things in circulation – or did until last weekend. Bitcoin looks more like “Bit the Dust” now. But in spite of its problems, do you still seem pleased with the whole Bitcoin experiment.

Doug: I like the fact it’s untraceable and secret. I like the idea that it was trying to be an alternative to the dollar; it’s great to see people trying to get out of the U.S. dollar. The dollar is a state monopoly of the worst kind. It’s not only the world’s reserve currency for central banks, but it’s become the world’s de facto international currency. If you’re Canadian or Asian or African or South American and travel abroad, you pretty much need U.S. dollars as soon as you leave the borders of your country. Even the euro isn’t much good outside of the eurozone. That something like Bitcoin can gain any traction at all is a real – if early – challenge to the supremacy of the U.S. dollar. This is quite significant. That was probably one thing on Senator Charles Schumer’s warped little mind when he referred Bitcoin to the Justice Department for investigation recently. Schumer is always on the wrong side of absolutely everything.

The U.S. dollar has actually become a major weapon in the hands of the U.S. government now. All bank transactions go through the U.S. SWIFT system. Even the Chinese and Russians, who have no love for the U.S. government, have to use dollars for international trade. They don’t like it. Muslims all around the world are coming to feel that they are enemies of the United States, so they don’t want to use the dollar either. And the more regulations the U.S. puts in place about how money is transferred and used – like FATCA – the harder people will look for alternatives. The U.S. government is treating everyone’s dollars as its personal property. They’re becoming desperate, and desperate governments are especially dangerous. This one is starting to thrash around like a large, stupid dinosaur in its death throes – stay out of its way.

Mohamed Mohatir in Malaysia, following the dictates of the Koran, which I understand states that only gold and silver should be used as money (the dinar and dirham), actually made moves towards establishing a new gold standard. He tried to get other Islamic governments to buy into it, and cut the dollar out of their international trade. But most of those governments – then as now, although things may be changing – are both U.S. stooges and kleptocracies, so they weren’t interested in honest money.

There’s huge and growing appetite around the world for alternatives to the dollar. Bitcoin is a beta version of what’s coming in the post-dollar world. GoldMoney, however, is already a proven version 2.0.

L: So … Investment implications?

Doug: Well, it’s only a question of when, not if, the world will go off the dollar as its international and reserve currency. That has huge implications for the price of gold – and even greater implications for gold-related stocks. It’s also very bad news for the U.S. government itself, which has only the dollar and a bloated military left to prop it up. A third-world-style collapse in the U.S. would have major financial and economic implications, obviously, but also major social and political changes would follow. It will be very, very messy. The U.S. is not a place I want to be when that happens.

That’s why the U.S. government and its media lapdogs have been so antagonistic to Bitcoin, claiming it’s primarily of interest to drug lords who want to use it as soap for their money laundering. They always mention it in conjunction with Silk Road, which claims to allow purchase of any drug through mail order, using Bitcoin as its payment system. I have no problem with that, but it’s a totally impractical idea in today’s world. It’s just an idea intended to scare witless Americans. Frankly, I’m disgusted at the fact money laundering is even accepted as a crime; thoughtless people believe whatever they’re told. It’s not a crime, by any rational definition. But that’s another subject for another day.

L: Well, I’m not surprised the U.S. government should take such action. It already shut downe-gold, and more recently the Liberty Dollar. If Bitcoin really caught on, it would only be a matter of time before they’d try to shut it down too. Even if Bitcoin’s systems did turn out to be government-proof (which I doubt, given what a few criminals have been able to do already), the government could always go after users, punishing anyone caught with a Bitcoin account.

Doug: Yes, that would likely happen. Like Bitcoin, GoldMoney has the unique advantage of allowing transfers of capital anywhere in the world without going through the Fed. That’s a huge plus – although one now has to report ownership of a GoldMoney account to stay within the law, if one is an American. If you’re an American, everything has to be reported to the state today. You have zero financial privacy. But as people become more desperate for alternatives to the dollar, and the systems get better at providing anonymity, more and more people will abandon worthless government paper, one way or another. I have no doubt gold will return to the forefront as money. But in this digital age, people aren’t going to carry much of it around in their pockets – it’s going digital too.

L: Hm. Well, if this is a sign that the end game for the U.S. dollar is approaching, can you say when?

Doug: No. All we can say now, responsibly, is that this Bitcoin flap is an important straw in the wind. There are about seven trillion U.S. funny-money units floating around outside the U.S. At some point there’s going to be a panic, and billions of foreigners are going to try to dump trillions of dollars. It’s going to be a sight to behold. Pity the poor fools who are left holding the monopoly money then – most of them will be Americans, I fear.

L: Besides the obvious ideas of shorting the dollar, going long gold and great gold stocks, is there a way for speculators to play this now?

Doug: It’s certainly worth repeating the obvious, because it’s not obvious to everyone. Gold, though it has gone way up, is nowhere near its top – it’s going through the roof. And the right gold stocks are going to the moon. I believe the gold bubble some people are talking about is just starting to inflate, and it’s going to create a market mania for the record books.

L: You’re singing my song again.

Doug: It’s a bit self-serving, I know, but it also happens to be completely true.

L: Okay then – until next time.

Doug: Next time.

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