The Antisocial Network

Paul Krugman and his umbrellaBitcoin’s wild ride may not have been the biggest business story of the past few weeks, but it was surely the most entertaining. Over the course of less than two weeks the price of the “digital currency” more than tripled. Then it fell more than 50% in a few hours. Suddenly, it felt as if we were back in the dot-com era. Economic significance of this roller coaster was basically nil. But furor over bitcoin was a useful lesson in the ways people misunderstand money and in particular how they are misled by the desire to divorce the value of money from the society it serves. (source: Paul Krugman – NYTimes – 15/04/2013)

What is bitcoin? It’s sometimes described as a way to make transactions online, but that in itself would be nothing new in a world of online credit-card and PayPal transactions. In fact, the Commerce Department estimates that by 2010 about 16% of total sales in America already took the form of e-commerce. So how is bitcoin different? Unlike credit card transactions, which leave a digital trail, bitcoin transactions are designed to be anonymous, untraceable. When you transfer bitcoins to someone else, it’s as if you handed over a paper bag filled with $100 bills in a dark alley. And sure enough, as best as anyone can tell the main use of bitcoin so far, other than as a target for speculation, has been for online versions of those dark-alley exchanges, with bitcoins traded for narcotics and other illegal items.

But bitcoin evangelists insist that it’s about much more than greasing the path for illicit transactions. The biggest declared investors in bitcoins are the Winklevoss brothers, wealthy twins who successfully sued for a share of Facebook and were made famous by the movie “The Social Network”, and they make claims for the digital product similar to those made by goldbugs for their favorite metal. “We have elected,” declared Tyler Winklevoss recently, “to put our money+faith in a mathematical framework that is free of politics, human error”. The similarity to goldbug rhetoric isn’t a coincidence, since goldbugs and bitcoin enthusiasts, bitbugs?, tend to share both libertarian politics and the belief that governments are vastly abusing their power to print money. At the same time, it’s very peculiar, since bitcoins are in a sense ultimate fiat currency, with a value conjured out of thin air. Gold’s value comes in part because it has nonmonetary uses, such as filling teeth and making jewelry; the paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes. Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment. However, let’s leave that strangeness on one side, along with peculiar “mining” process, actually a process of complex calculation, used to add to the bitcoin stock. Instead, let’s focus on the two huge misconceptions, one practical, one philosophical, that underlie both goldbugism and bitbugism. Practical misconception here, it’s a big one, is the notion that we live in an era of wildly irresponsible money printing, with runaway inflation just around the corner. It’s true the Federal Reserve and other central banks have greatly expanded their balance sheets, but they’ve done that explicitly as a temporary measure in response to the economic crisis. I know, government officials are not to be trusted and all that, but the truth is Ben Bernanke’s promises that his actions wouldn’t be inflationary have been vindicated year after year, while goldbugs’ dire warnings of inflation keep not coming true.

The philosophical misconception, however, seems to me to be even bigger. Goldbugs and the bitbugs alike seem to long for a pristine monetary standard, untouched by human frailty. But that’s an impossible dream. Money is, as Paul Samuelson once declared, a “social contrivance,” not something stands outside society. Even when people relied on gold and silver coins, what made those coins useful wasn’t precious metals they contained, it was the expectation that other people would accept them as payment. Actually, you’d expect the Winklevosses, of all people, to get this, because in a way money is like a social network, which is useful only to the extent other people use it. But I guess some people are just bothered by the notion that money is a human thing, and want the benefits of the monetary network without the social part. Sorry, it can’t be done. So do we need a new form of money? I guess you could make that case if the money we actually have were misbehaving. But it isn’t. We have huge economic problems, but green pieces of paper are doing fine, and we should let them alone. 

Acerca de ignaciocovelo
Consultor Internacional

7 Responses to The Antisocial Network

  1. Professor Uziel Nogueira says: Prof PK dixit : “But the furor over bitcoin was a useful lesson in the ways people misunderstand money — and in particular how they are misled by the desire to divorce the value of money from the society it serves.” So do we need a new form of money? I guess you could make that case if the money we actually have were misbehaving. But it isn’t. We have huge economic problems, but green pieces of paper are doing fine — and we should let them alone.” There we go again with Prof PK and his post modern credo of monetary policy. Easy money printing isn’t bad IF it is done by the FED. Obviously, his credo could have some resonance among the illiterate majority of the population. The US, however, is different from the rest of the world. The only military superpower hosting the largest number of people with serious money, a large middle class well trained in finances and a currency that says ‘ In God We Trust.’ Too much printing of the greenback raises alarm among these two groups.

    According to a recent FT article, China’s foreign reserves have reached $ 3.4 trillion in April 2013. To put this amount in perspective. Almost 25% of the total wealth produced annually by the US economy is now owned by China. Should the wealthy and middle class be worried as Ben Bernanke and the FED debases the currency?

  2. Gold prices tumbled 9 percent on Monday, the sharpest drop in 30 years, heightening fears that investors’ faith in the safe haven has been shattered. The steep fall in gold, after a slump on Friday, led a broader sell-off in commodities and stock markets. The Standard & Poor’s 500-stock index declined 2.3 percent — its sharpest one-day decline since early November. Crude oil prices fell to under $90 a barrel, and copper dropped to a 17-month low. The catalyst was disappointment over Chinese growth, which has been a bright spot in a global economy marred by uneven recoveries and Europe’s persistent debt problems. A report on Monday showed that Chinese economic growth unexpectedly slowed to an annual pace of 7.7 percent in the first months of the year, from 7.9 percent at the end of 2012, suggesting that China’s demand for industrial materials would soften. Weak regional manufacturing data in the United States also weighed on the United States stock market, as did the explosions in Boston later in the day. Still it was gold that took the market spotlight on Monday. The price of the metal has been undergoing an extraordinary reversal from a decade-long rally. Since reaching a high of $1,888 an ounce in August 2011, gold has been on a downward slope. The decline picked up pace on Friday, when gold fell 4 percent, officially taking it into a bear market, which is defined as a 20 percent drop from its recent high. The damage worsened on Monday, when the price of an ounce of gold dropped 9.35 percent, or $140.40, to $1,360.60 for the April contract — the sharpest such one-day decline since February of 1983. A number of banks, including Goldman Sachs, have recently lowered their forecasts for gold. But the recent drop has been greater than even the most pessimistic predictions. “We’ve traded gold for nearly four decades and we’ve never … ever… EVER… seen anything like what we’ve witnessed in the past two trading sessions,” Dennis Gartman, a closely followed gold investor, wrote to clients on Monday. The shift in gold’s fortunes presents a moment of reckoning for many so-called gold bugs, who had expected their financial lodestar to continue moving up in response to the Federal Reserve’s effort to stimulate the economy through bond-buying programs. The assumption among gold bugs was that the flood of new money would cause inflation, making hard assets like gold more attractive. So far, though, there have been few signs of inflation taking root even as central banks in Japan and Europe have begun their own aggressive bond-buying programs (…..)

  3. Professor Uziel Nogueira says: Germany repatriates part of its huge reserve of gold kept at the FED’s vaults in New York and gold prices plunge. Coincidence or causality?

  4. PK: I don’t tweet; my Twitter feed comes from a robot that tweets titles of columns and blog posts. I didn’t even know I had a Twitter account until Andy Rosenthal casually mentioned that I had 700,000 followers. Well, now it’s a cool million. Justin Bieber, watch out! In some ways it’s a silly metric. But it does show that someone is paying attention (which is especially nice given the way people on the right are always claiming that “nobody” reads me anymore, which they’ve been claiming for about 13 years).

  5. Professor Uziel Nogueira says: During times of economic depression, unemployment and social stress, people naturally choose hope over reality. The US 2013 is no exception. Many people think the US economy could return to growth and prosperity without pain, austerity. Prof PK and his Keynes solve all problems approach seems to be the answer. The longer the current crisis, the larger the number of tweet followers. The 1 million mark will be easily met in the next few months.

  6. The American economy has generated 30 straight months of job growth. But for millions of people looking for more work and greater income, that improvement provides little solace. In March, 7.6 million Americans who want more hours were stuck in part-time jobs, about the same as a year earlier and three million more than there were when the recession began at the end of 2007. These almost invisible underemployed workers do not count toward the standard jobless rate of 7.6 percent. A broader measure, which includes the involuntary part-timers as well as people who want to work but have stopped looking, stands at 13.8 percent. “There’s nothing inherently wrong with people taking part-time jobs if they want them,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “The problem is that people are accepting part-time pay because they have no other choice.” Even for those who have been able to take advantage of the better job market, the opportunities have not been good. Since the economy began to recover almost four years ago, hiring has been concentrated in relatively low-wage service sectors, like retailing, home health care, and food preparation, and in contingent jobs at temporary-hiring companies. For example, nearly one out of every 13 jobs is at a restaurant, bar or other food-service establishment, a record high. Household incomes have been stagnant throughout the recovery, and actually fell in the latest report, according to Sentier Research. As a result, economists and policy makers have been expressing concerns about not only the pace of hiring but the quality of new jobs as well. “It’s important to look at the types of jobs that are being created,” Sarah Bloom Raskin, a member of the Federal Reserve Board, said in a recent speech. “Those jobs will directly affect the fortunes and challenges of households and neighborhoods as well as the course of the recovery.” While increases in part-time and temporary work can sometimes be an early sign that employers will soon take on more permanent hiring, many workers have been trapped in such jobs far longer than they had anticipated. Part-time work rose rapidly in the recession and early parts of the recovery, and it has not let up much. Today, 19.1 percent of workers say they usually work part time, defined as fewer than 35 hours a week, versus 16.9 percent when the recession started. Essentially all of the gains in part-time employment have been among people who are reluctantly working fewer hours because of slack business conditions for their employer or an inability to find a full-time job (…..)

  7. Professor Uziel Nogueira says: The emerging Brazilian economy is light years from the highly developed US economy. However, the US labor market is behaving similarly to Brazil’s labor market. Hiring in both countries is highly concentrated in relatively low-wage service sectors, like retailing, home health care, food preparation, restaurant and package delivery. In the case of Brazil, low productivity combined with low paid jobs in the services sector cannot lift economic growth that is stagnated while inflation is peaking up. Low GDP growth is worsened by a lack of investment in infrastructure, modernization of agriculture production and industrial manufacturing. Brazil has been importing (cheap) quantities of tomato juice from China.

    Brazil successful economic model of income distribution anchored on domestic demand is over. Unless fixed investment and labor productivity increase substantially, the country will soon be in trouble again.

    In the US, two factors might explain why hiring is concentrated in the service sector. First, industrial manufacturing may still enjoy substantial spare capacity to serve expected demand. Second, US based transnational corporations continue to shift industrial production (and jobs) to rapidly growing emerging markets, particularly Asia. Office work is being streamlined or replaced by machines. In sum, low paid and part time jobs may become a new feature of the US labor market.


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