Joakim Book
– May 31, 2021 @ American Institute for Economic Research
As a once-devout environmentalist, I have a T-shirt with a slogan heavily used by activists. Often credited to the Abenaki Alanis Obomsawin, it speaks directly to our modernity-hating followers in the Church of Climate:
When the last tree is cut, the
last fish is caught, and the last river is polluted; when to breathe the
air is sickening, you will realize, too late, that wealth is not in
bank accounts and that you can’t eat money.
Only a little derogatory we might say: yes, it took monetary
economics many centuries of hard work and laborious testing to figure
out that we indeed cannot eat money. Though – and this is the
Earth-shattering point – we can trade other things for stuff we can eat, and money is a civilizational-changing vehicle for that, as it moves value both across time and place. The political battles over Britain’s Corn Laws
in the 1840s featured many debates over what today would be called
“food sovereignty,” with the conclusion that crops can better be grown
elsewhere – and ever since, Britannia has relied on the rest of the
world to feed her, in exchange for the goods (but mostly services) that
she provides them.
The Exchange Rate Risk of Monetary Networks
It is hard to be a consistent fan of Nassim Nicholas Taleb, the author, public intellectual and former trader, as the quality
of his written and spoken word fluctuates as much in value as the
cryptocurrency he loves to lambast. He has written astonishing books,
particularly the ones included in the Incerto series – of which The Black Swan and AntiFragile might be the most well-known. On the negative side, he has said a number of remarkably inane things about the pandemic, and like Elon Musk, he’s also done a one-eighty on bitcoin: from an eager fan and promoter, to a hostile critic.
Mixed bag, in other words.
In a series of tweets
and much-shared comments on social media, Taleb hit both Bitcoin and
libertarians, insisting that mutually beneficial trade is of nobody
else’s concern (I am unable to find references to them, as Taleb has
long since blocked me, but I’m sure the reader is more than capable of
finding some stark Taleb-rant on why bitcoin is terrible). He writes
that for a person to purchase consumption goods with bitcoin, she must
have an income in bitcoin; but for her to receive (parts of) her salary
in bitcoin, the employer must receive at least some bitcoin in revenue;
and the seller of consumption goods must obtain at least some raw
materials in bitcoin.
Of course, this is terribly wrong; yet, he’s also profoundly right – in an almost trivial way.
Unless currencies are fixed against one another or redeemable in the same outside money,
purchasing and selling items in a currency different from the one in
which you pay your expenses or earn your incomes exposes you to exchange
rate risk. This is trivial, and obvious to anyone who has ever spent
time in another monetary network from their own (or tried to buy/sell
something from those monetary networks). If my incomes are in dollars,
but my regular expenses are in euros, the exchange rate between euros
and dollars changes on a daily (or hourly) basis my real purchasing
power. Most international travelers or multinational corporations don’t
mind much since these fluctuations are usually quite small, can be
insured against via efficient and deep financial markets, and often
reverts themselves over time: companies pocket currency windfalls one
quarter only to face currency headwinds another.
In this sense, bitcoin is just another monetary network, with
exchange rate risk to incomes or purchases of goods and services in
other networks. Much to the ire of bitcoiners and libertarians alike,
Taleb has a point: when you opt into any monetary network, you’re not
just making an isolated transaction between yourself and whoever sold
you the money, but a bet on the future exchange rate of that money
vis-à-vis other items.
Money, long known to monetary economists from
Cantillon to Mises, has the strange property that it’s acquired not
to be used and consumed, but to be given away later. That means when I
give up valuable goods and services – electricity when I mine bitcoin,
my time and labor when I work for it, my entries in another monetary
network (dollar or euros) when I buy it on an exchange – for a place on
the global ledger that is bitcoin, I am not just giving up
these resources, but making a gamble on the future state of that
network.
I am acquiring a risk that, firstly, I won’t be able to use the
token for something I desire, as the seller of that good or service
must also accept my bitcoin; and secondly I don’t know at which exchange
rate I will receive that good or service. (This holds even if I just
trade it back for dollars later.)
The sneaky comment that underpins Taleb’s entire argument arrives at
the end of his rant: for all of us to make transactions in bitcoin – be
paid in bitcoin, or be able to pay others in bitcoin – “requires a
parity bitcoin-USD of low enough volatility to be tolerable and for
variations to remain inconsequential.” The key word is ‘tolerable,’ as every monetary network faces these same issues.
As above, travelers to Mexico (pesos) or France (euros), or
multinationals purchasing inventory from Brazil (reais) or China (yuan)
accept the inherent current risk because they judge the benefits to
outweigh those risks.
Acquiring and holding bitcoin also exposes individuals and companies
to exchange rate risks: between what you’re giving up for fiat currency
today and what goods and services your future self wants. For the
dollar, that risk is usually quite low and ostensibly at least quite predictable: at 2% inflation a year, you know that $100 will get you about $98 worth of goods this time next year and about $96 the next. But, says the monetarily conversant bitcoiner, you don’t
actually know that: you’re entrusting that prediction to an
increasingly aggressive and increasingly fickle board of Federal Reserve
Governors. It also depends on what your future consumption bundle looks like:
if you’re looking to buy a computer, cell service, or clothes, you’re
probably fine just holding the $100 bill; if your future consumption
includes college expenses, medical care, or a house, not so much.
If we assign high enough probability that these Governors won’t
deliver on their promise, and take into account their counterparties in
an even more spending-prone Treasury, what a “tolerable” volatility is
might be quite a lot. Lots of people who hold bitcoin indeed deem the
risk of government mismanagement to be larger than the risk that their
bitcoin holdings get them fewer goods and services when they finally
convert them into consumption goods.
What’s so ironic here is that the very bitcoiners
who detest being pushed into stocks or commodities for long-term
monetary savings (the only vehicles left when cash holdings just slowly
depreciate), don’t have a problem being pushed into even riskier
exchange rate risk down the road. Bitcoin’s exchange rate is unanchored in the sense that we can’t make a decent prediction as to where it’s going to be forty years hence – in contrast to how an NGDP target would or the classical gold standard did.
Sure enough, objects the still conversant bitcoin theorist, the
supply is capped and the demand is infinite, so the price must go to the
moon – but what ensures that? You need a very cynical view of government and an inability of creative markets and progress to overcome them for the argument to make sense. And you’re still
making the goldbug’s mistake: For decades, goldbugs like Jim Rickards
and Peter Schiff have said that gold is immutable and will keep its
value, because in a hundred years’ time that gold coin will be exactly
the same as it is now. Physically, yes, but not economically. What
matters for the holder of gold is what gold gives him in that far-off future. What a risk-averse time-traveling saver is after isn’t something that is physically
the same as what he put in, but economically the same – and that’s
pretty impossible, as economies, values, and production technologies
change.
When bitcoiners rant against the horrors of forcing people into
investment vehicles they are ill-equipped to manage or understand, they
miss this fundamental aspect of our monetary economies: price risk and
currency exchange risk does not disappear. By introducing a new outside monetary commodity (i.e. without counterparty risk, where your monetary surplus is nobody else’s liability)
you ensure that – bar hacks and loss of private keys – the bitcoin
saved away today remains the same number of sats when financing future
consumption. But you do not ensure that those same number of sats will purchase the retiree the goods and services equal to, or above, the savings.
You cannot eat bitcoin, or dollars, or bank balances, which means
that whatever vehicle you use to move value across time has an exchange
rate risk. Many bitcoiners’ mistake is to think that their preferred
asset avoids this; Taleb’s mistake is to think that others can have a
different view of government than him.
Joakim Book is a writer, researcher
and editor on all things money, finance and financial history. He holds a
masters degree from the University of Oxford and has been a visiting
scholar at the American Institute for Economic Research in 2018 and
2019.
His work has been featured in the Financial Times, FT Alphaville,
Neue Zürcher Zeitung, Svenska Dagbladet, Zero Hedge, The Property
Chronicle and many other outlets. He is a regular contributor and
co-founder of the Swedish liberty site Cospaia.se, and a frequent writer at CapX, NotesOnLiberty, and HumanProgress.org.
Get notified of new articles from Joakim Book and AIER.
Print
Michael W. Green