The Flinchum File

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When I took my first course in economics, I was lucky to sit between old high school buddies.  On my left was Bobby Brontosaur, while Ty Rannosaur sat on my right side.  We were taught that money was (1) a medium of exchange, (2) unit of account, and (3) a store of value.

Our professor never said that bitcoin was a medium of exchange, but it is!  Bitcoin can be used to buy all the heroin you want or pay a ransom for a loved one.

He never said that bitcoin was a unit of account, but it is!  You can measure the value of a kilo of heroin in terms of bitcoin.  Of course, the number of bitcoins is a moving target.

Likewise, he never said that bitcoin is a store of value, but it is!  Of course, that store of value may last only ten minutes before it soars or plummets.  Valium anybody??

While bitcoin has some loose relationship with our definition of money, I agree with my fellow dinosaurs that bitcoin is dangerous.  It is not because bitcoin can be confused with “money.” Bitcoin may be a threat to our monetary system.

The amount of money in the country (“money supply”) has a big impact on the economy.  An increase in money supply without an increase in products to buy will cause prices to rise.  That is the primary reason for the Federal Reserve Bank.  They control the supply of money in this country.

While supply of bitcoin is theoretically limited (trust me, they say), there is no limit on the number of crypto-currencies.  Nobody is even sure how many crypto-currencies are out there.  Experts quibble that there are at least 1,000 new crypto-currencies and may be as many as 1,500, but nobody is sure! During the Revolutionary War in the U.S., states were printing their own currencies.  Just imagine how confusing that was!  Too many currencies is a glue in the wheels of the economy.

True-believers argue that the stock market is worth $28 trillion, the government bond market is worth $20 trillion, and the gold market is $7 trillion.  That makes the $180 billion market for bitcoin too tiny and benign to pose any systemic risk.  Of course, that ignores the other crypto-currencies and, more importantly, it ignores the multiplying effect of futures contracts.  The market-backed securities market was also relatively tiny, when it nearly took down the United States economy in 2008/9.

While I suspect the associated  blockchain might be a real innovation, I am totally confident that additional currencies are not, especially any unregulated currency!  A common currency in Europe (the euro) has been a good thing for them.  Imagine each country reviving their old currencies again!  It would be crazy . . . my dino-buddies agree!

Terry Dactyl

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