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Overall I like the article, but a few points of disagreement: 1. The US dollar has intrinsic value. That intrinsic value is that the US government accepts it a

by darawk 9y ago

Overall I like the article, but a few points of disagreement: 1. The US dollar has intrinsic value. That intrinsic value is that the US government accepts it as payment for taxes. Regardless of what currency you conduct your business in, the USG accepts its cut only in dollars. That creates intrinsic demand for dollars, and links that intrinsic demand directly to the US GDP. 2. Bitcoin also has intrinsic value. That intrinsic value stems from transaction fees. It costs bitcoin to move bitcoin. International value-transfer is a service that has been around for a long time, and there is a market in it, so we can derive its value (or at the very least, that its value is non-zero) from the existence of demand for that service. Global value transfer has value, the Bitcoin network offers that service, and accepts payment only in Bitcoin. That is intrinsic value. 3. "Yes, this check could fail, but that possibility is still better than Bitcoin’s complete absence of any check on inflation." Bitcoin's core problem is not inflation. It's deflation. A fixed-supply currency is likely to suffer from deflationary spirals and subsequent crashes. I suppose you could call those crashes 'inflation', but that's not generally how the word is used. 4. "So here lies the fundamental difference between the dollar and Bitcoin: The supply of bitcoin is fixed, but the demand is beholden to uncontrollable market forces and speculator whims. That means that unlike the dollar, the value of BTC can never be stable, because there is no means regulate the supply to keep the value consistent from moment to moment.". Yes, that is the standard econ. argument in favor of central banks. It's not a new idea. But the actual evidence for its truth is surprisingly weak. Economies existed long before central banks, and indeed, they did have boom and bust cycles. However, it's not all that clear the central banks have really helped matters much, despite what they would like to think. Now, i'm not a total skeptic of central banking. I think its possible that they're adding some value, but i'm skeptical that it's as much as they think, and that the economy wouldn't find a way to function smoothly without them.

deleted 9y ago
[deleted]
andrewla 9y ago
> That intrinsic value is that the US government accepts it as payment for taxes That can be argued to be an abstract utility for the US Dollar, but it is not an argument for the value (or "intrinsic value", whatever that means) of the US dollar in that the value of it is what determines the tax obligation. That is, if I own taxes on a non-USD transaction (say capital gains for BTC sales), the amount of those taxes is dependent on the value of USD. There's no forcing function -- if USD is valuable, I owe fewer dollars, if USD is cheap then I owe more dollars. There's no net demand. To summarize -- tax obligations create no net demand for USD, thus are not a factor in the value of USD. The exception to this is things like fees and (in the short-term) specific value taxes (like property taxes). These are not a significant factor in US government revenue, so I think we can safely discount them, although many municipalities rely on them to a greater degree. I don't understand why this tired old meme keeps getting circulated -- it makes me want to write an angry letter to David Graeber. I think it's an interesting thesis for the origin of money, as early taxes were more like fees, tariffs, and tolls rather than ad valorum, and serves as a useful counterpoint to the Mises regression theorem, but stating it as a fact for the current state of things rather than a historical vestige requires a gross misinterpretation of the facts.
- darawk 9y ago
  > That can be argued to be an abstract utility for the US Dollar, but it is not an argument for the value (or "intrinsic value", whatever that means) of the US dollar in that the value of it is what determines the tax obligation. That is, if I own taxes on a non-USD transaction (say capital gains for BTC sales), the amount of those taxes is dependent on the value of USD. There's no forcing function -- if USD is valuable, I owe fewer dollars, if USD is cheap then I owe more dollars. There's no net demand. In what sense is there no "net demand"? There is a fixed (at any given time) amount of USD in circulation. People will need that USD to pay taxes. That is the demand side. Where is the supply side to make it net zero?
- jganetsk 9y ago
  The idea that taxes create a demand for currency (and hence the value) is explored at depth in Modern Monetary Theory: http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-...
- voidmain 9y ago
  I really think you have this wrong. At the least, you need a better defense of your position. Assume for the moment that the number of USD in circulation is fixed. (Presumably we agree that if the government prints or retires currency they can change the value of USD, so let's remove that as a factor). For the sake of argument let's say there are 10^13 USD at all times. Every year America produces some amount of real income. Let's just call that 1 A, measured relative to some fixed basket of goods. And let's say the government collects .2A in taxes. Now, you are saying that the value of USD is not constrained by this situation. Suppose that almost everyone switches to cryptocurrency and 1USD = 10^-16 A. Then at tax time Americans have to come up with 0.2A=2x10^15 USD which is 200x more than actually exist. So people will need more USD than they have and will have to bid the price up. Thus, given a fixed money supply and that the government doesn't literally instantly spend every tax dollar, there is a floor on the value of the USD proportional to total tax collection (and thus to the size of the economy being taxed).
  - voidmain 9y ago
singlow 9y ago
The problem I have with your criticism is that the word intrinsic has too many definitions to be useful for communication. Even within economics it means very different things when applied to companies vs. stocks vs. options. In this context, not a specific technical use, my best understanding of intrinsic would be the value of something apart from any external forces or interest (extrinsic value). The intrinsic value of gold comes from its usefulness as a material, or from its attractiveness, not from the fact that it is accepted as a means of exchange. The fact that a US Dollar is accepted by the US Government for payment of legal debts is an extrinsic factor, just as its general usefulness for exchange of goods in the market is extrinsic. Intrinsically it has as much value as any other pretty piece of paper. However I can see that there is a worthy distinction to be drawn about US dollar vs. Bitcoin in the recognition of the former by the US government and other parties. I just don't see intrinsic as the best descriptor for that quality.
- darawk 9y ago
  Ya, you're right. I wish there was a word that meant the thing i'm trying to articulate. Intrinsic is closest, but you're right, it's imperfect. I think intrinsic is actually more appropriate for btc than for usd, though, since Bitcoin's use for transaction fees is actually intrinsic to its nature.
patrickg_zill 9y ago
I would add that USD currently must be used to purchase oil, so the petrodollar demand should be added to the pay-your-taxes demand. Some might argue the petrodollar side is more powerful than the pay-your-taxes side.

by darawk 9y ago

deleted 9y ago

[deleted]

andrewla 9y ago

> That intrinsic value is that the US government accepts it as payment for taxes That can be argued to be an abstract utility for the US Dollar, but it is not an argument for the value (or "intrinsic value", whatever that means) of the US dollar in that the value of it is what determines the tax obligation. That is, if I own taxes on a non-USD transaction (say capital gains for BTC sales), the amount of those taxes is dependent on the value of USD. There's no forcing function -- if USD is valuable, I owe fewer dollars, if USD is cheap then I owe more dollars. There's no net demand. To summarize -- tax obligations create no net demand for USD, thus are not a factor in the value of USD. The exception to this is things like fees and (in the short-term) specific value taxes (like property taxes). These are not a significant factor in US government revenue, so I think we can safely discount them, although many municipalities rely on them to a greater degree. I don't understand why this tired old meme keeps getting circulated -- it makes me want to write an angry letter to David Graeber. I think it's an interesting thesis for the origin of money, as early taxes were more like fees, tariffs, and tolls rather than ad valorum, and serves as a useful counterpoint to the Mises regression theorem, but stating it as a fact for the current state of things rather than a historical vestige requires a gross misinterpretation of the facts.

darawk 9y ago
> That can be argued to be an abstract utility for the US Dollar, but it is not an argument for the value (or "intrinsic value", whatever that means) of the US dollar in that the value of it is what determines the tax obligation. That is, if I own taxes on a non-USD transaction (say capital gains for BTC sales), the amount of those taxes is dependent on the value of USD. There's no forcing function -- if USD is valuable, I owe fewer dollars, if USD is cheap then I owe more dollars. There's no net demand. In what sense is there no "net demand"? There is a fixed (at any given time) amount of USD in circulation. People will need that USD to pay taxes. That is the demand side. Where is the supply side to make it net zero?
jganetsk 9y ago
The idea that taxes create a demand for currency (and hence the value) is explored at depth in Modern Monetary Theory: http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-...
voidmain 9y ago
I really think you have this wrong. At the least, you need a better defense of your position. Assume for the moment that the number of USD in circulation is fixed. (Presumably we agree that if the government prints or retires currency they can change the value of USD, so let's remove that as a factor). For the sake of argument let's say there are 10^13 USD at all times. Every year America produces some amount of real income. Let's just call that 1 A, measured relative to some fixed basket of goods. And let's say the government collects .2A in taxes. Now, you are saying that the value of USD is not constrained by this situation. Suppose that almost everyone switches to cryptocurrency and 1USD = 10^-16 A. Then at tax time Americans have to come up with 0.2A=2x10^15 USD which is 200x more than actually exist. So people will need more USD than they have and will have to bid the price up. Thus, given a fixed money supply and that the government doesn't literally instantly spend every tax dollar, there is a floor on the value of the USD proportional to total tax collection (and thus to the size of the economy being taxed).
- voidmain 9y ago

singlow 9y ago

The problem I have with your criticism is that the word intrinsic has too many definitions to be useful for communication. Even within economics it means very different things when applied to companies vs. stocks vs. options. In this context, not a specific technical use, my best understanding of intrinsic would be the value of something apart from any external forces or interest (extrinsic value). The intrinsic value of gold comes from its usefulness as a material, or from its attractiveness, not from the fact that it is accepted as a means of exchange. The fact that a US Dollar is accepted by the US Government for payment of legal debts is an extrinsic factor, just as its general usefulness for exchange of goods in the market is extrinsic. Intrinsically it has as much value as any other pretty piece of paper. However I can see that there is a worthy distinction to be drawn about US dollar vs. Bitcoin in the recognition of the former by the US government and other parties. I just don't see intrinsic as the best descriptor for that quality.

darawk 9y ago
Ya, you're right. I wish there was a word that meant the thing i'm trying to articulate. Intrinsic is closest, but you're right, it's imperfect. I think intrinsic is actually more appropriate for btc than for usd, though, since Bitcoin's use for transaction fees is actually intrinsic to its nature.

patrickg_zill 9y ago

I would add that USD currently must be used to purchase oil, so the petrodollar demand should be added to the pay-your-taxes demand. Some might argue the petrodollar side is more powerful than the pay-your-taxes side.