Can Bitcoin Help Defeat the Wealth Alchemist

A couple of weeks ago I came across this Bitcoin idea (see video below).  But, it wasn’t until I read an article in this week’s Economist magazine that featured Bitcoin that I decided to take a closer look.  I’ve long wondered whether or not technology would be able to keep Wealth Alchemist at bay and I was heartened by this quote from the Economist:

Legally, Bitcoin exchanges are subject to the same regulations as ones trading commodities. For example, an exchange must report any transaction above $15,000, a policy meant to stem money laundering. For the purposes of taxation, meanwhile, reimbursing somebody for a product or service in BitCoins is treated as barter. The tax code makes provisions for such practices, though, admittedly, they can be tough to enforce.

This has not stopped some American politicians from expressing grave concern about the virtual currency. Charles Schumer, a prominent Democratic senator, has inveighed against it, claiming it is just what drug dealers have been waiting for. All the clever cryptography means Bitcoin dealings are difficult to trace. But not impossible.  According to Bitcoin’s defenders, its users may be more difficult for a government agency to pinpoint than someone paying with a credit card. But they are easier to catch than those using cash.

Moreover, any drug trade involves sending physical products to recipients. Authorities already track many packages sent by groups under investigation. When it comes to physical delivery, the method of payment is irrelevant. Another worry, for the authorities at least, is that, in theory, a Bitcoin account cannot be frozen. But, like cash, Bitcoins can be nabbed by seizing the computer on which they are stored.

I’m sure that Sen. Schumer concerns about Bitcoin extend to more than just drug dealers using it, but rather that ordinary folks may use it to escape the prying eyes of government . . . especially the Internal Revenue Service.  That would sends chills up the spines of Wealth Alchemists everywhere.

Admittedly, it seems I am a bit late to the party when it comes to Bitcoin.  Yet, as an Austrian economist, I’m fascinated by the opportunities the web brings to witness the evolution of alternative institutional arrangements in a rather quick fashion.  It also doesn’t hurt that Bitcoin is also operating in a area that Austrians feel have been manipulated by government, for their own benefit, for far too long–currency.

As such, I’m going to delve into this Bitcoin phenomena to see if Austrian theory is in any way useful to understanding its evolution.  Perhaps Bitcoin, like many of its predecessors, flames out or maybe it finally hits on the right recipe for success.  In either case, it will be educational to watch and I’ll do so publicly via Wealth Alchemy when I find something interesting.

However, my attempts to understand the Bitcoin economy from an Austrian perspective will be limited by my ability to practically participate.  Put simply, I need my own Bitcoins.  You will notice in the top, right-hand corner a “Bitcoin Plus Miner” widget that will allow you, the reader, to add computing power in my quest to mine Bitcoins.  Simply hit the “start” button and a mining we will go.  It will not slow down your computer as it uses only spare capacity, but if you have concerns check this out at the Bitcoin Plus website.

Of course, being an economist I don’t expect you would do this out of the kindness of your own heart.  So, I’ve activated a portion of the program that will give you a kick-back on any of the Bitcoins you create–note that you will have to open an account at Bitcoin Plus to retrieve them.  If I understand the code correctly, it looks like a 30 percent kick-back.  With Bitcoin Plus taking 15 percent, I’m netting 55 percent.  Definitely not a “get rich quick” scheme 🙂

I’ve already been Bitcoin mining at the Bitcoin Plus website and, with about 8 hours run-time, I’ve mined 0.001106 Bitcoins.  According to Bitcoin Plus, one Bitcoin has been worth about $7 so I’ve earned about eight-tenths of one penny (rounding up).  I’ll keep you updated on my Bitcoin progress as my computer pretty much runs 24-7 anyways so I might as well use the down-time in some productive manner.

For liberty’s sake, let’s hope this works out . . . we don’t need any more “Quantitative Easing” bailouts.

Economist Walter Williams and His New Book

George Mason University economist Walter Williams recently released his new autobiography, Up From the Projects.  This sure does bring back memories for me.  In fact, I would have never gone to graduate school at GMU were it not for Walter Williams.  I heard him on the radio subbing for Rush Limbaugh one day and that’s when I decided that GMU was for me.  It was the only school I even applied to.

Naturally, I made sure I took his micro course right out of the gate my very semester.  Not only was his class awesome, but, more importantly, I also met my future wife for the first time in his class.  She has a funny story about that . . . but you’ll have to ask her to get it 🙂

Hat tip to Coordination Problem

The Decapitalization of America

Main Bay 2
Creative Commons License photo credit: SmithGreg

Kevin Dowd and Martin Hutchinson have a report published by the CATO Institute titled “Easy Money and the Decapitalization of America” which is a succinct account of many of the major strategies used by Wealth Alchemist.  I particularly like their Austrian account of the economic ills created by repeated bubbles:

Federal Reserve monetary policy over the past 15 years or so has produced bubble after bubble, and each bubble (or each group of contemporaneous bubbles) is bigger in aggregate and more damaging than the one that preceded it. Each bubble destroys part of the capital stock by diverting capital into economically unjustified uses — artificially low interest rates make investments appear more profitable than they really are, and this is especially so for investments with long-term horizons: that is, in Austrian terms, there is an artificial lengthening of the investment horizon. These distortions and resulting losses are magnified further once a bubble takes hold and inflicts its damage, too: the end result is a lot of ruined investors and “bubble blight” — massive overcapacity in the sectors affected. This has happened again and again, in one sector after another: tech, real estate, Treasuries, and now financial stocks, junk bonds, and commodities — and the same policy also helps to spawn bubbles overseas, mostly notably in emerging markets right now.

We also have to consider how periods of prolonged low (and often sub-zero) real interest rates have led to sharply reduced saving and, hence, to lower capital accumulation over time. U.S. savings rates have fallen progressively since the early 1980s, falling from nearly 12% to a little over 6% by the end of the decade, bottoming out at 1.4% in 2005. It then recovered somewhat, but even after the shock of 2008, the savings rate rose in 2009 to only 5.9% — well below its long-term average of about 8% — and the most recent data suggests that it is now declining again.

Even without federal budget deficits, it is manifestly obvious that such savings rates are inadequate to provide for the maintenance, let alone growth, of the U.S. capital stock (or, for that matter, its citizens’ desires for a secure retirement): the U.S. economy is effectively eating its own seed-corn. Now add in the impact of federal budget deficits of around 10% of GDP and we see that the deficits alone take up more than the economy’s entire savings, without a penny left over for investment. It then becomes necessary to supply U.S. capital needs by foreign borrowing — hence the persistent and worrying balance of payments deficits — but even this borrowing is not enough. Hence over the long term, low interest rates are decapitalizing the U.S. economy, with damaging long-term implications for its residents’ living standards: in the long run, low interest leads to low saving and capital decline, and they in turn lead to stagnation and eventually to the prospect of declining living standards as America ceases to be a capital- rich economy.

Not to put too fine a point on it, savings have been suppressed for close to two decades, preventing the natural accumulation of capital as baby boomers have drawn closer to retirement, while much of the country’s magnificent and once unmatched capital stock is being poured down a succession of rat holes.

Do read the rest.  Oh, I also very much like their title of their recent book: “Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System”