Tag Archives: What is money

The Repo man goes Basel on funding markets

1/25/2013 Portland, Oregon – Pop in your mints…

We have been remiss in our regular correspondence to you, fellow taxpayer, and we pray you will forgive us.  We have completed and published the first two volumes in our series, called “Why what we use as Money Matters.”  It is our humble attempt to explain, well, why what we use as money matters.  The volumes are currently available on Amazon’s Kindle as wells as in various eBook formats on Smashwords and can be accessed at the following links:

What is Money? – Volume I – Free until February 7, 2013 at Smashwords

What is Money? By David Mint

Of Money and Metals -Volume 2 – Free until January 31, 2013 at Smashwords

Of Money and Metals by David MInt

Our objective in writing the series is to convince humanity of two truths:

1.  That if the activities of the earth are to be in balance with the available resources, money must be something natural, in other words, not debt or a sort of promise or idea.

2.  That Anarchy is an ultimate given, and that Capitalism is the best response to this given.

The governments of the world, as we have known them, are disintegrating, but this will be addressed in our upcoming volumes in the series.

We would be honored if you would give them a read and keep watch for the upcoming volumes, for these ideas are exceedingly important.

Back to finance

While the Fiscal cliff and subsequent fallout have taken a toll on the average working American to the count of 2% right where it counts, there is a something altogether wonderful and dreadful knocking at the door:

Inflation

The wave of inflation that has been on the horizon ever since Federal Reserve monetary policy gave us new acronyms such as ZIRP and QE, appears to be breaking and will soon wash ashore.  Now that it is breaking, the only thing that stands between it and the average working American is some flavor of collective default by the nation’s banks.  Thanks to the programs which are represented by the above mentioned acronyms, this is highly unlikely.

At this point, then, the only entities whose default could cause such a chain reaction are the Federal Reserve, US Treasury, or possibly the ECB.  However, here at The Mint we believe that the tidal waves of cash that have been unleashed may even make the default of one of these institutions manageable.

The Federal Reserve has succeeded in the sense that they have flooded the system with so much cash and have repeatedly stated in no uncertain terms that they will backstop the Treasury and MBS market until the US Dollar’s last dying breath.  While for a time, maturing debt obligations were mopping up the liquidity that the FED was pumping in, most consumers have now moved to extend maturities via refinancing or, on the conservative end, have closed out both cash and debt positions by paying off mortgages with savings which had been “ZIRPed” into dormance as an income producing asset.  This collective action has put the economy in a sort of warped reset where the fiat currency debt monster can run amok for the foreseeable future, with the attendant fatal real world consequences.

Oddly enough, as the FED begins to claim victory over the financial crises which its own policies have made possible, the double whammy of the Basel accords and Dodd-Frank regulatory regimens may eventually eliminate many of the financial institutions which today are household names.

The Repo man cometh

In what is perhaps an unintended consequence, the afore mentioned regulations have given what is known as a REPO contract its walking papers.  In our oversimplified understanding of the matter, for simplicity is a virtue here at The Mint, the REPO arrangement, which is a glorified demand deposit, has allowed banks to hold their client’s funds on their balance sheet as Tier I capital.

In 2017, these arrangements will be forced to be properly classified as demand deposits, and many of the wiser financial institutions, who already have a long way to go to reach the Basel Tier I requirements, are already steering their clients away from these arrangements.

How much capital will this pull out of the banking system?  Nobody knows.  But what is for sure is that unwinding these REPO positions will leave some institutions exposed and unprepared.  They will probably become aware of their exposure via the classic individual financial panic mechanism:

The margin call.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for January 25 2013

Copper Price per Lb: $3.64
Oil Price per Barrel:  $95.88
Corn Price per Bushel:  $7.21
10 Yr US Treasury Bond:  1.95%
FED Target Rate:  0.15%  ON AUTOPILOT, THE FED IS DEAD!
Gold Price Per Ounce:  $1,659 THE GOLD RUSH IS ON!
MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  7.8%
Inflation Rate (CPI):  0.0%
Dow Jones Industrial Average:  13,896
M1 Monetary Base:  $2,397,900,000,000 LOTS OF DOUGH ON THE STREET!
M2 Monetary Base:  $10,501,100,000,000

What is Money? A quest to answer the question of the ages

Be the first to download our latest e-book, free until February 7, 2013:

What is Money?  A quest to answer the question of the ages

It is the first in our ‘Why what we use as Money Matters” series and is available now at smashwords.com, coupon code: PG74U

What is Money?  By David Mint

A Recent Teaching on Money

Our long suffering readers will note that we have been on a haitus.  It has been a busy time, full of classes, exams, and trees falling.  Don’t worry (or worry if you must), The Mint will return soon.  In the meantime, we wish to provide you with what we hope will be a valuable resource.

They are teaching notes from a class we gave recently to a group of interns at True Life Fellowship.  If you are interested in Money or need to teach on Money and don’t know where to start, feel free to use this as a starting point.  Faithful readers will recognize much of the material.  We pray that it will be a blessing to you.

Enjoy and Stay Fresh!

TEACHING NOTES

PART I:  IS MONEY EVIL?

READ DRAMATICALLY:  “So you think that money is the root of all evil?”…”Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?

Francisco d’Anconia, character in the novel Atlas Shrugged, Copyright © 1957, by Ayn Rand:

DISCUSSION QUESTION:  Is money evil?

Money is not evil, what, then, is evil?

Radix malorum est cupiditas – Latin for “The root of evil is greed” – Original Greek “Root for all the evil is the love of money.”

“For the love of money is the root of all evil”

–Paul 1:Timothy 6:10

Greed = Covetousness , “Thou shalt not covet…”

THIS DISTINCTION IS CRITICALLY IMPORTANT!

ICE BREAKER ACTIVITY: The baby is crying, the doorbell is rining, and the water in the bathtub is running over the top onto the bathroom floor, ALL AT THE SAME TIME.  You are home alone, what do you do first?, second? last?  PAIR UP and tell your partner what you would do first and why.

Symbolic internal priority

Baby =  Family

Door = Friends

Bathtub = Money

There is no wrong answer, it is important to understand this about yourself.

DISCUSSION QUESTION:  What type of relationship do you have with money?

 

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PART II:  WHAT IS MONEY?

What is Money?  What is my relationship to money?  What am I to do with the money I am entrusted myself?  How much time should I spend worrying about money?  To Grapple with these questions is to question many things that we take for granted.  It can be an unsettling experience.

We will begin our session with a brief exploration of what is money is.  This is important, and it may be the only time in your life that you are presented with this information.

We’ll begin with a few quotes:

READ DRAMATICALLY

“Money is the most important subject intellectual persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and its defects remedied very soon.”
–Robert H. Hemphill, former credit manager, Federal Reserve Bank of Atlanta

“All the perplexities, confusion and distresses in America arise not from defects in the Constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.”
–John Adams, letter to Thomas Jefferson

“Lenin is certainly right. There is no subtler or more severe means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.”
— John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff

DISCUSSION QUESTION:  What are the attributes of money? 

First, it should operate as a medium of exchange.  Will other people accept this item in trade for something else?  Second, it should operate as a unit of account.  Can the item be easily divided without destroying its value?  Third, it should be a reliable store of value.  Will the item purchase the same amount of goods in ten, twenty, or three thousand years from now as it will today?  And fourth, it should be anonymous.  Can the item be freely transferred amongst parties?

Do Federal Reserve Notes fullfill this definition?  Why not?  BECAUSE THEY ARE DEBT, which by definition can NEVER BE MONEY.  On a societel level, it is the equivalent of a person ingesting sugar instead of protiens.  It may taste sweet and keep you running for awhile, but in the end, it will permanently damage your organism.

QUESTION: So what is money?

After reviewing the attributes above and reviewing all of known human history, we can conclude that, in an overwhelming majority of cases, precious metals, namely Gold and Silver, are best suited to serve mankind in the role of money.  As a medium of exchange, they are universally recognized.  As a unit of account, they are divisible with destroying their content.  As a store of value, Gold and Silver are not easily pulled from the ground and coined for use (they cannot be “debauched”).  And as for providing anonymity, they can be freely transferred.

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PART IV:  HOW SHOULD I MANAGE MY MONEY?

Budgeting – Healthy Habits

Questions to ponder:

Why do you need a budget?

Benefits of budgeting:

  • You have a base of data from which to make decisions.
  • You can isolate expenses and work to avoid unwanted increases and even reduce them.
  • It is an important financial guardrail.

How many here have prepared a budget?  How many use that budget?

Most of us know what a budget is and some of us may even know how we are doing relative to our budget.  I would like to share with you some tips that you can use when creating your budget as well as some healthy habits, which will help you stick to it.

Tips for creating your budget:

Think Easy Maintenance – If you are using a computer spreadsheet, use one you are comfortable with.

Include the kitchen sink – Throw into your budget anything you are currently doing as well as those things you think you may want to do which involve shelling out cash.  Finally add the things you hope you won’t have to do but, if you have to, you will have to shell out cash for them, too.

Be a Conservative – It is better to underestimate your income and overestimate your expenses and to be pleasantly surprised than to assume everything is going to go well and to get shocked when an emergency drains your accounts.

Don’t forget taxes – Whether they be of the sales, income, property, or use variety, taxes are unfortunately a large part of the average American’s budget.  While somewhat difficult at first, you will have a clearer picture of your finances if you record your gross paycheck as income and then record the deductions before net pay as expenses or transfers.  It is a bit painful, but it will greatly help you make some key decisions making in the future.

Or depreciation – Perhaps the most overlooked expense line in a family budget is that of depreciation, or what may be more easily understood as “the wear and tear expense.”  Depreciation is simply recognition that anything, a car, house, etc. deteriorates over time and will likely need repair.  Contemplating depreciation allows you to unconsciously develop a rainy day fund to deal with unexpected repairs or regular maintenance.

Large ticket purchasing tip:  The difference between a good investment and a bad one is often determined at the time of purchase.  Learn to buy large ticket items, cars, houses, etc. out of season (that would be the winter in most places) and be sure to negotiate a price reduction for any major repairs.  This will make your depreciation expense (which is a function of the purchase price of an asset) more tolerable and help you sleep at night.

Note:  Depreciation and asset valuation are part of what I call “balance Sheet budgeting, which we will get into more today.

A note on Health insurance – This is perhaps the fastest rising cost for most families.  Consider focusing on a healthy lifestyle and reducing your health coverage to major medical or other type of high deductible plan.  However, do not give up so much coverage that you risk forgoing necessary treatments in the case of an emergency, you do not want to be faced with a tough life or death decision and have it boil down to finances.

Assume inflation (CAN JUMP BACK TO “WHAT IS MONEY” IF THERE IS TIME AND INTEREST)– Ever since the Federal Reserve took over control of the nation’s money supply in 1913, the US Dollar has lost over 95% of its purchasing power.  In 1971, then President Nixon officially took the US Dollar (and world’s monetary system) off of the gold standard, the decline accelerated.  The value of the dollar continues to decline at a rate somewhere between 2% officially and 10% unofficially each year.  It is important to recognize rising costs as a fact of life and consciously plan to increase your income accordingly.

Which brings us to income.  How exactly does one increase their income at a 2-10% pace each year?

Economize and value your time!

Moonlighting or Self Employment – What can you do to help others when you are not at work?  Would they pay you for it?

Acquire new skills at your present job and constantly seek advancement, which in most cases will increase your chances of getting a raise or promotion.

Passive income – For most, passive income is not an option until we collect social security or can draw on a 401K or other retirement plan.  This is why you save, but it will not fill your income gaps while you are younger and working.  However, the concept of passive income becomes very important when considering…

Investments – If you have some input as to how your retirement money is invested, it is best to choose investments that provide a growing stream of passive income.  That is, investment in companies which make real things which people want and are willing to pay for.  If there are no good alternatives, the next best thing to do is to purchase gold or silver coins and to take possession of them.  Store them in a hidden safe on your property.  Gold and silver will hold value against a depreciating currency and have the added advantage of incurring no maintenance costs or taxes while you hold them.

Jesus’ words on money –

Full text from NIV:

Paying the Imperial Tax to Caesar

 15 Then the Pharisees went out and laid plans to trap him in his words. 16 They sent their disciples to him along with the Herodians. “Teacher,” they said, “we know that you are a man of integrity and that you teach the way of God in accordance with the truth. You aren’t swayed by others, because you pay no attention to who they are. 17 Tell us then, what is your opinion? Is it right to pay the imperial tax[a] to Caesar or not?”

 18 But Jesus, knowing their evil intent, said, “You hypocrites, why are you trying to trap me? 19 Show me the coin used for paying the tax.” They brought him a denarius, 20 and he asked them, “Whose image is this? And whose inscription?”

 21 “Caesar’s,” they replied.

   Then he said to them, “So give back to Caesar what is Caesar’s, and to God what is God’s.”

 22 When they heard this, they were amazed. So they left him and went away.

http://www.biblegateway.com/passage/?search=Matthew+22%3A15-22&version=NIV

“Give to Caesar what is Caesar’s and to the Lord what is the Lord’s”

With this statement, Jesus recognizes that everything is God’s, and at the same time, that God recognizes private property in dealings between men.  This is often a point of confusion. 

He also creates an eternal separation between a person’s soul and their money.

Additional Healthy Habits:

Debt elimination – Check your budget to ensure that you have a surplus with which to pay back the debts (via depreciation line or an operating surplus), if not, make adjustments (belt tightening, if you will) until you do have a cash surplus.

Start paying back the smallest debts first.  Paying a debt off will help you build momentum and create habits in order to pay off bigger and bigger debts as you go along.

A great resource for this is Gary North’s “Deliverance for Debt” Debt reduction course.  It is free and you can subscribe via email.

http://deliverancefromdebt.com/

Stealth Saving – Pay an extra $5 to $10 on utility bills each month.  After a few months, you will have a free month of utilities.

Open a separate savings account which you do not see online, etc.  Fund this account first every month.  Make it difficult to access, open it at a seperate bank from the one that you normally bank at.  This will force you to think twice before using it.

Pay cash for items – There is something about cold hard cash that makes you think twice about spending and helps solidify the limit on how much you can spend.  Cash disappears, plastic doesn’t!

Keep the change – Pay cash for items and accumulate the change throughout the day.  At the end of the day, dump it in a 5 gallon water bottle.  When it is full, take the money to the bank and go on vacation.

80 – 10 – 10 plan – This is mentioned by many and the general idea is that you live on 80% of your income, save 10% and tithe (give to your local church) 10% of your income.  This seems logical but…

Why tithe?  Apart from the numerous Biblical references, tithing is not one of the Ten Commandments.  So why do it, especially when you are in debt?

Tithing, apart from helping keep the lights on at your local church, has the incredible habit forming benefit of forcing one to focus on their income.  God knows that you can spend all day in a defensive position, cutting costs and desperately clinging to maintaining what you have.  This is an expense focus.  It has many benefits in the material world, but it is worthless in God’s Kingdom.

God wants you to have an income focus.  “What can I do to serve others that is most highly valued by them?” should be the question on your mind.  Remember, “The greatest amongst you shall be servant of all.” 

Tithing forces you to focus on your income first, which will naturally get you focused on serving others rather than maintaining and increasing your own possessions.  It may seem strange, but serving the greatest number of people has the unique benefit of increasing one’s blessing.

God has made his creation perfect, and the economic laws are eternal and He can be trusted.  Seek first the Kingdom of God and His righteousness, and all of these things shall be added unto you.” (Look for versre)

Additional resources:

The BibleDaily study of God’s word will give wisdom in guidence in every area of your life, finances included.

Mint.com:  A free expense tracking software which accesses your online bank account information once you give it permission

Turbotax.com:  An online income tax calculation tool.  There is a charge to file your taxes with the software.  Tip:  To avoid the charge and get the benefits of a free tax advisor, use turbotax to calculate your taxes, then copy the information to a paper form and mail it in.  This is a great way to be aware of changes in the tax code without having to do hours of research.

Dailyreckoning.com:  A great resource for alternative investments.

APMEX.com:  An online precious metals dealer which sell gold and silver coins at reasonable prices.

deliverancefromdebt.com:  Gary North’s debt elimination course mentioned above, free of charge.

Questions?

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PERSONAL STORY ON MONEY

I was first unsettled by this same question in a class on Monetary Policy at the Universitat de Barcelona in the Spring of 2004.  The professor held up a small jar full of shredded green paper and asked us if we knew what it was?  The answer, it turns out, is that the jar was full of $50,000 worth of US Dollars that had been removed from circulation and destroyed.  Simple enough, right?  Dollar bills wear out, you have to replace them.  However, her (the professor’s) point was that what we use as money does not exist in a real, tangible sense.  It is an invention created to meet the policy demands of the fiscal and monetary authorities.  It is an invention that can be created and destroyed at whim.

I was taken aback, trying to catch my breath!  She went on to  explain that Corporations, businesses, etc. are simply “money machines” which strive to minimize money inputs and maximize money outputs.  The difference between the inputs and outputs is what we call profit.  This is obvious enough and it was logical that she would share this insight with our MBA class which was being trained to manage said Corporations.

Something in my mind short circuited in trying to reconcile the logic of a Corporations’ reason for existence being to create money and then seeing that same money end up shredded and destroyed in rather large quantities.  The motor of my mind was so seized up that I managed to miss nearly every question that day on a pop quiz that tested our knowledge on “What is the proper reaction, in terms of monetary policy, to various economic data points?  Should you move to increase or decrease the money supply?”  The questions I did answer correctly were likely due to my misunderstanding the question (I was still learning Spanish and Catalan) rather than any grasp of accepted policy remedies.

In retrospect this day was the day that completely changed the way in which I viewed US Dollars, Euros, and all other paper currencies of the world.  You see, I was answering all of the questions about monetary policy using the assumption that the monetary authorities wanted to maintain the value of the currency that they were managing.  I was dead wrong.  So if they are not trying to maintain the value of these currencies, what are they trying to do?

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PART V:  WHAT DID JESUS SAY ABOUT MONEY?

THE WORD

“Be not deceived.”
— Jesus and Paul in the New Testament

Jesus, during his ministry, talked about money more than any other subject EXCEPT for the Kingdom of God.

QUESTION:  What does Jesus teach about money?

Give to Caesar what is Caesar’s

Jesus Christ speaks with authority.  As such, his words often astounded and confused those, whom in the days when he physically walked the earth nearly 2000 years ago, had aligned both their activities and mindsets with the authority of this world.  An authority which works to suppress the knowledge of the Living God.

The first passage that we will investigate is related in Matthew 22:15-22, Mark 12:14-17, and Luke 20:21-25.  It is focused on what appears to have been a brief verbal exchange between Jesus and a group of spies sent to ask a question of him by the religious authorities.  It appears to take place in courtyard of the Second Temple in Jerusalem around the time of the Jewish Passover, which today is celebrated at the time of year that is known as Easter in the Christian tradition.

Interestingly enough, it seems that people 2000 years ago were as eager to avoid paying taxes as they are today.  In an attempt to catch Jesus advocating for tax avoidance, the religious leaders, who wanted to get rid of Jesus, send spies to trap him in his words.

In response, Jesus not only foils their attempt at trapping him, He provides the world with a simple monetary concept with wide ranging consequences.  He challenges the spies not on whether or not it is right to pay taxes, but rather on what they are using as money.

When asked whether or not it was right to pay the Roman Imperial tax, Jesus stated the obvious, “give to Caesar what is Caesar’s.”  Given that the coin used to pay the tax belonged to Caesar (the Roman Emperor) to begin with, it should be no problem to simply give it back to him when he asks for it.

The obvious yet staggering implication is that money and coinage given by an Emperor may at some point be demanded back by that Emperor, therefore it is foolish to accumulate money and coinage issued by an Emperor as a store of one’s wealth.

Jesus’ response cut to the heart of monetary theory by questioning not what they were doing with their money, but what they were using as money.  The people’s choice to use the Emperor’s money had enslaved them to the Emperor in a way that no army or jail master could, and they were eager for a way out.

In those days, Emperors had made a habit of declaring themselves gods and demanding allegiance.  The Jews were peculiar in that they refused to recognize these imposters and instead steadfastly worshiped the Living God.  However, the Jews also had become accustomed to conceding certain aspects of their allegiance to the Emperor in an effort to survive as a people.

Jesus, with a simple statement, challenged them to get off the fence, for the fence would one day be burned down and they would have to make a clear choice between ultimate allegiance to the Emperors of this world or to the One True Living God, who alone is worthy of glory and honor and praise forever and ever.

Today, circa 2012, it is customary for most people exchange their labor for paper or digital currency issued by the Emperor.  For most, it appears to be a matter of survival.  Yet some 2000 years ago, Jesus sternly warned us against this.

Why would Jesus have opinions on what we use as money?  Jesus knew that a person’s heart would be where their treasure was.  One day, God’s people would be presented with yet another ultimatum which would require them to assent forever throwing their lot in with either the world’s system or The Living God.

When and how would this ultimatum present itself?  What form would it take and what would be the price for holding steadfastly to The Living God?  The answer to these questions had already been partially revealed to Daniel some 600 years before, and was going to be completely revealed to John on the Isle of Patmos some 70 years later.

BIBLE PLAY:  PARABLE OF THE Parable of the Unforgiving servant Matthew 18-21-35

But love your enemies, do good to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be sons of the Most High, because he is kind to the ungrateful and wicked.
— Luke 6:35

READ BIBLE TEXT – CHOOSE CHARACTERS, ACT, REFLECT

When JESUS came to declare the year of the Lord’s favor, the Jubilee, He not only declared FORGIVENESS OF SINS, but also the FORGIVENESS OF DEBTS.

FORGIVENESS:  AMISH STORY?

Thank you for your time.

Are Bitcoins Money? The concept of digital currency and the desperate need for a Free Money supply

5/9/2012 Portland, Oregon – Pop in your mints…

We would be remiss here at The Mint if we did not enquire and make an honest attempt to understand the phenomenon of bitcoins.  Bitcoins, according to wikipedia, are units of a peer-to-peer digital currency.  They are a purely digital attempt to solve the eternal problem of what to use as money.  Are they to be trusted?  Lets take a look.

First, we must look at them from a purely conceptual standpoint.  Are they money?  Yes, bitcoins, as we understand their operation, meet our pure definition of money in the sense that they are not debt.

However, they have a rather severe limitation in that universal or even regional recognition as money in exchange and convertibility to other forms of money could prove elusive.  This is a psychological barrier that theoretically could be overcome, however, it is difficult to assume that a majority of persons would, in time, learn what a bitcoin is and then take the time to sign up for and monitor a bitcoin account.

The market penetration for bitcoins could be as large as the number of internet and mobile phone users in the world but would more likely be similar to that of banking customers who use online and mobile banking services.  In other words, those who are comfortable storing a portion of their wealth in a digital media.

Given the barriers to recognition and acceptance, at this point, bitcoins are probably best thought of as a share of stock in an amorphous payment clearing mechanism whose business model consists of the free exchange of its own shares of stock between account holders and the constant validation of transactions and subsequent logging of ownership of said shares.

These shares, then, would need to be converted into a local currency to be of use outside of the realm of bitcoin account holders.

The validation of the exchange and the logging of ownership of the bitcoins must be done by someone for the bitcoins to maintain their integrity and therefore any value which others may attach to them apart from a fickle monetary premium which is, at present, compromised by the barriers of recognition and convertibility refered to above. 

This validation is currently undertaken voluntarily by the bitcoin account owners themselves and is accomplished by the users offering their resources, in the form of computer processing power and the use of computer hardware and electricity which makes the processing possible, to the greater bitcoin network for this purpose.

In return for the computer processing power and use of hardware and electricity which they dedicate to these processes, the bitcoin account owner receives a quantity of newly created bitcoins in exchange for the completion of a set quantity of computing (read bookkeeping and auditing functions) completed.  These newly issued bitcoins serve to dilute the overall stock of the existing bitcoins. 

The process of bitcoin creation realized through computer processing is refered to as “mining,” a name which is a fairly accurate description of the way in which bitcoins come into creation, even though the process more resembles accounting than strip mining.

As of this writing, we understand that mining bitcoins on a small scale is not profitable, which in layman’s terms means that the cost of the electricity needed to perform the computer processing involved in mining is greater than the amount of bitcoins which would come into existence as a result of the computer processing performed. 

This calculation is naturally expressed in dollars as we are not yet aware of a utility company which accepts bitcoins as payment for electric bills.

It would then follow that bitcoin creation would slow as long as this price relationship exists.  We will ignore, for the sake of simplicity, the fact that a great deal of bitcoin “mining” is done via bots which use the electricity and computer processing capacity of unwitting hosts, which makes mining profitable for some at the expense of others, and simply state that bitcoin creation, on net, is currently a losing proposition.

The fact that the mining of bitcoins is not profitable should make the existing bitcoins more valuable in the future as the stock of bitcoins will either cease to be diluted will be diluted at a lower rate.  This would theoretically cause the value of bitcoins to increase until it again became profitable to “mine” them, which in turn would lead to an increased rate of dilution of the bitcoin stock and lower relative value in exchange, etc.

In this sense, the economics of bitcoins is similar to that of mining precious metals.  Another similarity that the bitcoin has to precious metals is that theoretically there is a logarithm which ultimately will place an absolute limit on the number of bitcoins in existence.  The logarithm places a mathematical limit to the stock of bitcoins in the same way that nature places a theoretical limit on the extractable amounts of precious metals which can be used as money.

However, bitcoins have a distinct disadvantage to precious metals owed to the fact that bitcoins require constant bookkeeping and auditing to maintain the integrity and therefore value of the bitcoin as money.  Precious metals, on the other hand, do not rely upon administrative functions to maintain their value and rely entirely upon their relative value in trade.

Further, we must assume that the bookkeeping and auditing needed to maintain the integrity of the bitcoin will increase exponentially as bitcoin production approaches its logarithmically imposed limit, just as the incentive to perform these functions (mining, as it were) continues to diminish.

Given this inevitable dynamic, it is unclear if the integrity of the system can be maintained once the incentive to maintain the integrity of the system, which is currently supplied by the ability to “mine” bitcoins, is removed. 

Having said all of that, it is now time to point out the obvious flaw in the bitcoin model, the flaw which lands bitcoins squarely in the realm of equity and makes them unfit for long-term use as money:  The threat of competing digital currencies which would surely come into existence if the bitcoin were to gain widespread popularity and acceptance.

Even with the digital checks and balances on production which are mathematically built into the bitcoin model, the bitcoin, like gold, silver, seashells, and fiat currency, fails to completely solve the happy problem which has no solution:

That the infinite increases in trade due to the increased division of labor in the world will require money and debt markets with the flexibility and dynamism that only a completely free money supply can offer.

Gold and silver may hit physical limits, bitcoins may be limited by logarithms, and debt based fiat currencies tend to collapse upon themselves.  This is proof that none of them, by virtue of physical and psychological limitations, completely fulfill the role of money for man.  They were never meant to.  

The determination of what will serve as money must be left in the hands of the people who are involved in trade.  Left to their own devices, we would be amazed at the speed and efficiency with which the problem of what is money can be solved.

In other words, let those engaged in trade decide what is most suited as money at a given time and allow them to trade with it without hindrance.

For it is not the costs associated in the production of a monetary unit which remove value from the economy, rather, the administrative burdens, unnecessary conversion costs, and the rigidity of an imposed monetary unit which deals mortal blows to trade and consequently the ability of all humans to flourish to the greatest of their abilities. 

Unnatural restrictions on the money supply, which solutions like bitcoin attempt to solve, are devastating to trade.  The destruction wrought by monetary hegemony should surpass hunger, poverty, and climate change as global concerns, for allowing a free money supply to operate would serve to eradicate all of these problems and their symptoms, namely social unrest, terrorism, and health care crises.

Imagine.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for May 9, 2012

Copper Price per Lb: $3.70

Oil Price per Barrel:  $96.42

Corn Price per Bushel:  $6.41

10 Yr US Treasury Bond:  1.84%

FED Target Rate:  0.16%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,589

MINT Perceived Target Rate*:  0.25% AWAY WE GO!

Unemployment Rate:  8.1%

Inflation Rate (CPI):  0.3%

Dow Jones Industrial Average: 12,835

M1 Monetary Base:  $2,275,100,000,000

M2 Monetary Base:  $9,832,700,000,000

Of Money and Metals Part III – Debt: The Barbarous Relic

1/19/2012 Portland, Oregon – Pop in your mints…

{Editor”s note: The following is a continuation of the series “Of Money and Metals.”  Please click here to view the Part I and Part II

As the world descended further into depression which eventually led it into the Second World War (Editor’s Note:  It should come as no surprise that the only two World Wars have come after the declaration that debt is money), The Keynesian adherents clamored for more debt as the only answer to the world’s economic ills.

What Keynes and his Harvard trained legions fail to comprehend is that the only permanent cure for an economic depression is to allow each individual to declare what he or she will use as money and allow market participants to coalesce around what at that time is best suited for the role of money.  For balance sheet recessions, such as the one the world is currently experimenting, are merely symptoms of a rigid money supply which has failed to keep up with the demands of a dynamic economy.

Under current theory, the government sacrifices the dynamic economy in the name of preserving the “integrity” of the monetary system.

When it is quite obvious that it is the monetary system that has failed, the government’s response can only be seen as idiotic at best.

What makes the situation of the past 100 years even more untenable is that money, instead of operating as a lubricant for economic activity, is more like concrete.  Such is the inherently destructive nature of debt as money. 

For the only rule with regards to money which is imposed as a matter of natural law is that debt cannot ever be money.  It is a concept so clear that it escapes most academics and government officials.

Now, the Keynesian indoctrinated readers of these words are no doubt dusting off the “silver bullet” of Keynesian theory:  That gold, which is widely held as the logical alternative to the “debt is money” insanity, is a “barbarous relic.”  In layman’s terms, Keynesian theory holds that any attempt to limit the money supply via natural means, the most popular being a gold standard (fixing the price of gold in terms of monetary units) will cause a deflationary spiral which will bankrupt the entire world.

The former "Barbarous Relic" - photo by Toi Mine courtesy of Wikimedia Commons

Even Adam Smith argued that the mining of metals for use as currency was essentially a lamentable waste of resources.

We could not agree with them more.  The limited amounts of gold in the world make it wholly unfit for everyday exchange.  Gold, rather, is generally agreed upon to be the most perfect savings vehicle that the world has yet discovered.

So Keynes, despite promoting a theory which sacrifices the yang (savings) and glorifies the yin (debt) is right after all?  Not quite…

Using the same logic with which the Keynesian so adeptly slays the gold standard, it quickly becomes obvious that by declaring that debt is money is not only a violation of natural law, it makes debt, rather than gold, the new barbarous relic.

Debt has a distinct disadvantage to gold in that it can be quickly and completely destroyed.  Once it is assumed by the majority that a certain debtor will not be able to make good on their debts, the debts owed by the debtor, and any money in circulation which is either directly or indirectly related to the existence of these debts, is destroyed.  For debt, at its base level, is a figment of the imagination until it is settled in real terms by the delivery of money in settlement of the debt.

It would hold, then, that debt, the new “barbarous relic,” is exponentially more dangerous than gold when used as money.  The reasoning is the following, while the quantity of debt in the world can be suddenly and permanently reduced, the quantity of gold, which is admittedly difficult to increase, is at the same time extremely difficult to decrease.

Yet even given the strong advantage of gold over debt as money, it is obvious that both the Keynesians and the gold bugs are sadly mistaken in formulating their ultimate solution to the eternal problem of the money supply.

When it comes to determining the proper money supply, Adam Smith’s invisible hand of the market can be seen slapping both Keynesians and gold bugs silly!

For the problem with declaring anything, be it gold, debt, or white elephants as money, has nothing to do with the fitness of gold, debt, or white elephants for use as money, rather, it lies in the act of the minority attempting to dictate what will be used as money by the majority.

Money, in a general sense, is a good of the highest order.  There is nothing in nature which states that gold, silver, seashells, or anything else must be used as money.  The historical association of gold and silver as money is the result of their superior fitness for the role of money.  It is simply a product of the collective wisdom of mankind, gleaned from experience as free exchange and the division of labor began to bring order to man’s chaotic surroundings.

However, just because gold and silver were superior in their role as money in the past does not necessarily mean that they enjoy some sort of divine designation as money.

Gold and Silver, like all things occurring in nature, are in limited supply.  The fact that they occur in nature gives them a distinct advantage over debt (which is simply a promise to pay in the future) in that debt, which is theoretically in infinite supply, quickly loses value against scarce real goods due to the fact that debt, in theory, enjoys an infinite supply.

Anyone can make promises to pay in the future, it is the function of debt markets to determine what those promises are worth today.  Ironically, the value of debt today is perilously tied to speculations about the money supply, which is in turn dependent upon the issuance of debt.  Thus, declaring debt as money provides the economy with yet another hindrance in that the debt markets are increasingly disconnected from their noble origins; the debtor’s perceived productive capacity.

It is clear that mankind is in a perilous predicament.  Will we take hold of the simple answer, which lies in free banking and free determination of what will serve as money?

More to come…

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for January 19, 2012

Copper Price per Lb: $3.80
Oil Price per Barrel:  $100.41

Corn Price per Bushel:  $6.06  
10 Yr US Treasury Bond:  1.97%

FED Target Rate:  0.09%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,657 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  1.50%
Unemployment Rate:  8.5%
Inflation Rate (CPI):  0.0%
Dow Jones Industrial Average:  12,625  

M1 Monetary Base:  $2,167,800,000,000 RED ALERT!!!  THE ANIMALS ARE LEAVING THE ZOO!!!
M2 Monetary Base:  $9,805,600,000,000 YIKES UP $1 Trillion in one year!!!!!!!