(Read on Medium)

Lately, we’ve suddenly been hearing a lot about Modern Monetary Theory (“MMT”) in the mainstream media. It could be that with the election of Alexandra Ocasio-Cortez to congress, MMT’s star will rise with hers as she is reportedly an adherent and possibly views MMT as a means to fund her Green New Deal.

As we see below, MMT has been around for some time, having come out of the Chartalism school in the first half of the 1900’s and was made into MMT in the early 90’s by Warren Mosler, apparently after a “long steam” with Donny Rumsfeld, who then referred him to Art Laffer (creator of the Laffer Curve). MMT mostly flew under the radar until around the time of the Global Financial Crisis and is now clearly spiking into public awareness.

To the casual onlooker, MMT may sound a lot like standard-issue Keynesianism, the idea that the Government can and should run deficits to smooth out the business cycle.

The big difference is this: Keynesians believe that the deficits should be run to stimulate our way out of a recession or financial crisis, after which there will be some kind of return to normalcy, when deficits will matter again .

To MMT-ers there is no return to normalcy, this is the The New Normal. Deficits don’t matter and the Government can’t go broke because they can issue money in any amount required. We’ll look at how they rationalize this below, but suffice it to say now that Keynesians and MMT-ers are not synonymous and even Paul Krugman has had his criticisms of it:

it would be quite likely that the money-financed deficit would lead to hyperinflation.

The point is that there are limits to the amount of real resources that you can extract through seigniorage. When people expect inflation, they become reluctant to hold cash, which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.. Do the math, and it becomes clear that any attempt to extract too much from seigniorage — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed. This would not happen, even with the same deficit, if the government can still sell bonds.

We’ll revisit his point that if the government attempts to extract too much from seigniorage that it will ignite an inflationary spiral. For now let’s make sure we know what we are dealing with when it comes to Modern Monetary Theory…

How to Understand Modern Monetary Theory

When I was in high school I had a physics teacher once tell me how when he was a kid he thought he should be able to hook up the outputs of a generator and a motor to each other and have himself a perpetual motion machine. For some reason it didn’t work and trying to understand why was what got him into physics.

The more I learned about MMT the more it seemed to be the same thing, in an economic sense and I have frequently made this quip expecrting MMT-ers to call it a strawman or point out some fundamental element that I’m missing but instead they usually confirm that I have it correct in broad strokes.

MMT-ers believe that currency is nothing more than an economic scoreboard or tally, and any government that denominates it’s own currency can never go broke because they can always create more currency. Of course, as Weimar Germany, Hungary, Yugoslavia and more recently Zimbabwe and Venezuela have all found out, you have to watch out for hyperinflation.

The MMT magic bullet for this is… taxation. Through taxation the government can drain excess liquidity from the system while printing as much currency as it needs to fund its projects and as long as the total value of currency printed doesn’t exceed the productive capacity of the economy as a whole. Thus:

This diagram is from “Diagrams and Dollars: Modern Money Illustrated” by J.D. Alt. After methodically taking the reader through how the old monetary system works, where the government has this HUGE untenable debt burden and is constrained by budgetary limitations, we arrive here.

The national debt is still present, but it has, through philosophical transmutation, been transformed by Alt into a “Net Spending Achievement” as measured by the “National Savings Clock” (formerly known as the “national debt clock”, or “Doomsday Clock”):

“the difference between what the FG plans to spend in a given budget-year, and what it plans to drain away in taxes, is “Net Spending Achievement”….imagine, for a moment, how our political discourse might change if everyone understood the discussion was no longer about the size of our national “budget deficit” but, instead, was about the concrete goals of our annual “Net Spending Achievement”….

We do NOT want a “balanced” budget—or, even worse, a budget “surplus”! What we want (as long as price inflation is under control) is the largest and most effective “Net Spending Achievement” we can envision.

“Entitlement” and “Discretionary” budgets do NOT have to compete with each other for a fixed pot of Dollars. As long as price inflation is under control, whatever Dollars are necessary can be allocated to the “Net Spending Achievement.”

MMT-ers believe that since our currency is actually comprised of debt obligations that government deficit is required to form net private savings:

Therefore:

• government spending creates private goods and services
• taxation drains excess liquidity and controls inflation
• the government can never go broke

For this to work, it would posit a pretty powerful central planning government that knows all (and if so, why can’t the government control inflation via price controls and eliminate taxes altogether?) and has the inhuman self-discipline not to overissue currency in a crisis (I guess, under MMT, there will be no further financial crises).

Oh, I almost forgot, under MMT there is also the jobs guarantee. So anybody who wants a job would be guaranteed to have one, at a living wage, by the government.

That’s MMT in a nutshell.

It’s ascent into its newfound economic fashionability is simply the latest episode of a long history of the pursuit of alchemy.

The Holy Grail of Government: Unlimited Spending With No Restraint

Government being overwhelmed by debt and constrained as a result is as old as history itself. In the 14th century King Philip of France was so indebted to the Knights Templar, and absent some clever rationalization that would transform his debts to them into money itself; he did the next best thing. He suppressed the order and had their leaders burned them at the stake. His debts were thus cleared but he had also disincentivized future borrowing. Another way would have to be found…

What governments really want is a way to either A) bribe the populace to keep voting for them or B) as this Epsilon Theory article laments, fund one or another of their incessant wars from an inexhaustible supply of credit or funding:

Modern Monetary Theory – which is neither modern nor a theory – is a post hoc rationalization of political expediency and power-expanding action.

It makes us feel better about all the bad stuff we’ve done with money and debt for the political efficacy of Team Elite.

And all the bad stuff we’re going to do.

At its core, Modern Monetary Theory is an argument that would be wonderfully familiar to every sovereign since the invention of debt. It is essentially the argument that significant sovereign debt is a good thing, not a bad thing, and that budget balancing efforts on a national scale do much more harm than good. Why? Because there’s so much to do and so little time for the right-minded sovereign. Because it is fundamentally unjust for the demands of private lenders to thwart the necessary ends of the sovereign, and it is politically difficult to finance those ends through tax levies on a fickle citizenry.

MMT is the sovereign-friendly justification for deficit spending without end.

Historically, this argument has been used by sovereigns to support wars without end.

(emphasis in original)

When you take a step back and comb through financial and economic history, amongst the wreckage of worthless fiat currencies from our past (note that 100% of all previous fiat currencies became worthless), we find hints and precursors of what is being rebooted as Modern Monetary Theory

Bear in mind that “Net Spending Achievement” neologism as we follow the rise and fall of the Austrian fiat regime in the 1700’s…

Unlimited National Debt?

A new phenomenon was occurring throughout Europe. Royal debt was being transformed into national debt. What had been the personal debt of the monarch was becoming the burden of the nation, payable by the people. And many central banks were created to administer this debt through paper money.

Austria provides one of the best examples of this new way of thinking. The First Bank of Austria was founded in 1703, with the express purpose of funding public debt by issuing paper money in exchange for deposits. With too few deposits, and too many notes, the bank and its currency failed.

In 1759, Count Sinzendorff, a prominent Austrian official and renowned financier, went a step further and suggested that government debt be brought to all the people, not just the depositors. He issued Austria’s first paper notes for general circulation, as a loan instrument with interest coupons attached. The new money was well received. Impressed by the expansion of commerce when more credit was made available, the government authorized a second issue of paper bills in 1769, and a third in 1771. Yet this prosperity did not last long. As excessive new issues were printed, they provoked a panic in 1797. The next decade was no better. Austria became embroiled in wars, spent heavily and ended up with a currency that lost over 90% of its value.

— (from Fiat Paper Money by Ralph T. Foster, emphasis added)

The idea that money is nothing more than an economic scoreboard or tally was advanced by John Law when he was trying to devise a method for Scotland to stave off bankruptcy, which he expounded upon in his book “Money and Trade” (“Money is the Measure by which Goods are Valued, the Value by which goods are Exchanged, and in which Contracts are made payable” – quoted in Fiat Paper Money).

Scotland never adopted Law’s ideas, and in their own currency machinations went bankrupt and ceased to be an independent country 1707 (ibid). Law moved onto France, continuing to promote his monetary theories, at one point declaring to an astonished room of aristocrats that he had discovered the secret of alchemy: “I can tell you my secret. It is to make gold out of paper” (ibid).

Even the MMT proposal to use taxation to control inflation is nothing new and was tried in New York in the late 1700’s, stability seemingly achieved by the New York Assembly having strict laws on their books limiting the amount of paper notes that could be issued. It’s not really clear what happened to this currency as it overlaps with the period when British laws were barring the colonies from issuing their own paper currencies and the subsequent segue into the revolutionary war, and the advent of the Continental (which eventually collapsed in a hyperinflation).

The Ascent of the MMT Narrative Today

I first became of aware of MMT when I used to read Business Insider back around 2010 or so and Joe Weisenthal, one of the most vigorous proponents of Cullen Roche’s “Pragmatic Capitalist” site, and he would unfailingly repackage anything Roche wrote on BI. Fast forward to today, and Roche seems to have backed off his MMT evangelism, or is at least a lot more nuanced and rigorous in his examination of it. 

The next time I came across MMT was in David Golumbia’s book “The Politics of Bitcoin”, wherein he seemed to think that what we have today is MMT. I can see why people would make that mistake, and Roche notes that as well in the article I just linked. Golumbia’s book (which I deconstructed in detail here) also criticizes the economic truism that inflation erodes purchasing power as wrong, and an example of right-wing conspiracy theory.

I mention that here because that is an idea that  Weisenthal also glommed onto back in his BI days, and while it isn’t yet, I fully expect this notion to be embraced by MMT adherents as this ideology is relentlessly pushed mainstream (the TL,DR of this idea is that a dollar doesn’t lose purchasing power when you issue more dollars if you put it into a bank account and earn interest on it. I debunked this thoroughly in my review of PoB. It’s one of those “not even wrong” notions in that  it’s economically incoherent).

Now that Modern Monetary Theory and Democratic Socialism have found each other, we have to look at why it’s such a dangerous combination.

The Problems with Modern Monetary Theory

Most of the articles I’ve seen decrying MMT hone in on it being inflationary, full stop. Which is true. No government has the discipline to not bribe the populous with either other people’s money or “made up” pixie dust that they convince everybody to pretend is money.

Beyond that, there are numerous failings with MMT including the fact that calling debt something else, like “national spending achievement” doesn’t make it not debt,  but does lose sight of what debt actually is. 

When you think about it, all debt is the pulling of future value into the present. If it wasn’t, if you had present value on hand and the willingness to trade it for what was desired, there would be no debt incurred.

As I observed recently, when you rack up debt you are either borrowing or stealing from the future. The difference is whether you plan to pay off the debt (borrowing) or if you plan to perpetually roll it over (stealing). MMT is structurally and by design, the latter.

MMT says debt  (err, sorry, National Spending Achievement) can expand perpetually and inflation will not occur provided it doesn’t expand faster than the value in the private economy (which assumes central planners can actually measure that accurately ) and any excess liquidity is drained off via taxation.

Like all fiat monetary schemes, you can make a theoretical case for it working. I once called MMT the elevation of circular reasoning to an art form, and Austrian economist Bob Murphy emphasizes that MMT relies upon “accounting tautologies”.

In practice, governments will always promise entitlements today at the expense of consequences tomorrow, so the monetary base will always expand and as each crisis is postponed, over time this dynamic will accelerate. If the monetary base happens to be credit (read: “debt as money”) then remember what we said debt is: future value, consumed today.

Under MMT however, when things go bad, they will get very bad. Here’s why:

Money started as hard currency, so it was near impossible to lose faith in it, and it would only happen as coinage was debased or replaced with fractionally backed paper notes.

After Bretton Woods, money, or the worlds reserve currency was “backed by the full faith and credit of the US government” and for a few decades at least, that seemed “good enough”. Although there have been panics and the overall trend is toward less confidence in the current monetary regime and the USD as world reserve currency is openly acknowledged to be in its waning days. It’s a matter of “when” not “if” even in polite company.

Under MMT there is no more pretence that the currency has any intrinsic value – it’s an economic scorecard and nothing more. The system would work as long as confidence held for the system itself, not any faith in the currency. If any cracks appeared in the system, i.e. inflation accelerated or taxation crept too high, I submit that any speed-wobble in confidence would lead to a dramatic and sudden, disorderly reassessment. A panic. It would be a genuine “life imitates The Onion” moment.

[ Read on Medium ]

Paul Krugman took time out from his European vacation to write why he’s a cryptocurrency skeptic. This is not surprising given who he is and what his positions have been over his career. Most of the orthodox criticisms against cryptocurrency  I covered previously in my “This Time is Different: What Bitcoin Isn’t” and “What Bitcoin Actually Is” series. But it’s worth recounting how one could easily take many of these criticisms against Bitcoin, search and replace “bitcoin” or “cryptocurrency” for “US dollar” and come out with are more applicable criticism of the modern fiat money system.

“Cryptocurrencies, by contrast, have no backstop, no tether to reality. Their value depends entirely on self-fulfilling expectations — which means that total collapse is a real possibility. If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless.”

This is more or less a truism that can be said about any fiat currency. Krugman seems to not notice, or care, that for most of recorded history, most currencies were either hard currencies (gold, silver, etc) or hard backed. Elastic, fiat currency, worldwide has only been around since the 70’s, and here’s Krugman complaining that it’s Bitcoin that has a tethering problem (or lack thereof). Further,

“In normal life, people don’t worry about where the value of green pieces of paper bearing portraits of dead presidents comes from: we accept dollar notes because other people will accept dollar notes. Yet the value of a dollar doesn’t come entirely from self-fulfilling expectations: ultimately, it’s backstopped by the fact that the U.S. government will accept dollars as payment of tax liabilities — liabilities it’s able to enforce because it’s a government.”

But people do lose faith in both currencies and governments. There have been 21 hyperinflations over the last 25 years.

It’s happening right now in Venezuela, where the inflation rate is on track to hit 1,000,000% by the end of the year, and Turkey may be next up.

Cryptocurrencies, meanwhile, are tethered to math. While in Krugman’s own words, fiat currencies can be created out of nothing:

“Instead of money created by the click of a mouse, we have money that must be mined — created through resource-intensive computations.”

Yes, that is entirely the point. In a recent Peak Prosperity podcast Chris Martenson quoted Charlie Munger’s observation:  “show me the incentives and I’ll show you the outcome”.

Krugman wonders “What problem does [Bitcoin] solve? I have yet to see a clear answer to that question.” Maybe we can clarify things by starting with the outcome: the fact that cryptocurrencies are here and as the data shows, steadily gaining traction, and then work backwards. (By gaining traction I’m not even talking about price action of any given cryptocurrency, I mean usage-based metrics like transaction volume, active addresses, hashing power, etc)

When we work backwards we can arrive at what the incentives were that gave rise to this phenomenon. When we do so we’ll understand that they didn’t spontaneously arise out of whim, they came about for a reason, and those reasons are the problems that crypto solves.

Crypto’s 7 Mothers of Invention

1) The custody problem

The custody problem is what we can call any situation where your wealth can be confiscated from you without your consent. I mean this in a sense distinct from outright criminal activity. All assets, crypto or not, have vulnerabilities to theft. Ostensibly we have legal recourse under our justice system to seek redress and punish wrongdoers. That isn’t the custody problem, the custody problem is when, for whatever reason, money or assets that belong to you are taken away in a manner that is then deemed to be “legal”.

A key example of this was the Cyprus Bail-in, which was the first time Bitcoin started making headway into the public consciousness, where it quadrupled in value  when Jeroen Dijsselbloem described what was about to happen as a template for future bank recapitalizations across the Eurozone. People began to realize two things:

A) maybe central bankers around the world weren’t able to control the economic destiny of the Universe, and

B) next time some banks blew themselves up they were going to be recapitalized with depositor funds.

Other events followed, from “bail-in” language being introduced in legislation from Switzerland to Canada, to MF Global imploding to the chagrin of unit holders who found that their accounts had been rehypothecated from under them.

Suddenly cryptocurrencies were looking like an idea whose time had come, so long as one holds their private keys themselves (cryptos understand implicitly: not your keys = not your coins).

2) The capital control problem

This is related to Problem 1, only instead of your being stripped of your wealth through confiscation or rehypothecation, you get trapped inside a system you have no control nor lattitude, or else chased into assets you’d otherwise not want to be invested in.

Cryptocurrencies slip through capital controls with ease. I was having a hard time wondering what Krugman was talking about throughout his piece about how hard and expensive and slow it is to do Bitcoin transactions, and yet, you can move hundreds of thousands or even millions from address1 to address2 for a few dollars in timeframes ranging from seconds to hours.

Meanwhile, wire transfers, still, to this day scare the living crap out of me every time I have to send one because it takes as long as a week just to find out that it hasn’t arrived and nobody has any fucking idea where the money is. Sure, it’ll get wound back, eventually. But that doesn’t exactly strike me as frictionless. These aren’t edge cases either, anybody in business knows this happens often enough that you end up worrying about it all the time.

China is a great example of a totalitarian police state with ubiquitous state surveillance, an absence of civil liberties and capital controls. Ironically, China is also one of the giant sources of hash power for crypto mining.

3) The dilution problem

It bears repeating what Krugman likes about conventional money: you can create it with a mouse click. Well you can’t. The Fed can. The money centre banks can. That’s a pretty sweet deal, if you own, run or are otherwise comfortably cozy with a bank or the Fed.

Most of us aren’t, so what happens to the rest of us is that we have to compete with the privileged few who get direct access to this freshly minted money. Only we don’t get to use freshly minted money, we have to use our own money, that we actually earned, somehow.

The stock market bubble, tech unicorns, the entire fracking industry, it’s all built on money centre banks receiving freshly minted money and ramming  it into private equity, investment banking, venture capital, and financialization – in other words, blowing up asset bubbles that have had one singular, defining effect that will take generations to unwind: acute wealth inequality and the decimation of the middle class.

If you don’t believe that this is a problem let’s take a single example of this dynamic in action. Yesterday, as I started writing this, Apple became the first company in history to achieve a trillion dollar market cap. One of the largest shareholders in Apple, is the Swiss National Bank. The SNB became one of Apple’s largest shareholders through it’s Swiss franc stabilization regimen. That’s where they print Swiss francs out of thin air, sell them for Euros and then use those Euros to buy up assets, including shares in companies, including Apple. Here we have the microcosm example of central bank money printing contributing to currency debasement and asset bubbles in one shot. This isn’t an outlier, it’s the way the system is constructed right now.

Every dollar that gets printed dilutes the value of every dollar we worked for, earned or saved. As I remarked previously 

“debt-based inflationary money creates a treadmill economy, which perniciously pushes assets up the wealth inequality ladder, as the Plutocrats on top spend their compounding wealth on buying up assets, while the lower tiers (the non-super rich) must continually and incrementally spend more of their purchasing power on staying alive.”

Cryptocurrencies by contrast are inelastic, deflationary currencies. Price volatility aside, which I think can be ascribed to it still being early days for crypto, the overall effect is that units gain purchasing power over time. As I noted in my earlier series on Bitcoin, there’s nothing wrong with a deflationary currency as long as you’re not using debt for money.

( I expanded on this a lot more in my review of David Golumbia’s Politics of Bitcoin book, wherein he attempts to dismiss any criticism of inflation as far-right extremism but even a cursory examination of his thesis shows beyond a doubt: inflation erodes the currency, either quickly or gradually, whereas crypto-currencies demonstrate anti-fragility and gain value over time)

4) The consensus problem

What I mean by “the consensus problem” is that consensus should describe a state where all affected parties to a transaction or a system should be voluntarily consenting to participate. There’s a problem when things are structured such that some participants are favoured, say by receiving freshly minted money before the effect of that new money dilutes everybody else’s purchasing power or by artificially holding interest rates below their market clearing values for over a decade thus rewarding debtors at the expense of savers.

The consensus problem arises when we’re forced to play a game that’s rigged against us, whenever the people in charge of the state or the money supply take it on themselves to change the incentives, give those closely affiliated with themselves preferential treatment or more generally pick winners and losers.

With cryptocurrencies, consensus is voluntary and participatory to the extreme. Nobody takes part in a cryptocurrency ecosystem with a gun pointed to their head. Then if people don’t like the direction something is going they can just “fork off” and go their own way with things. A good example of this functioning in a perfectly smooth and rational manner was the Bitcoin Cash fork of Bitcoin Core, or even Ethereum Classic’s fork from the Ethereum Mainnet.

Sure, there may be intense animosity between the rival factions, they didn’t go their separate ways because the affection and camaraderie was too intense. But they each took their irreconcilable differences and decided to try to run things in their own way, and from there the market forces take over. Not a single shot was fired not one bomb was dropped.

This is what a free market system actually looks like.

5) The “BUMMER machine” problem

When Krugman talked about how clunky and expensive transactions were he was probably referring more to day-to-day commerce and ecommerce activity than in moving larger sums of capital around. I hear a lot of people complaining about that, but when you drill down I can’t find many complaining about it that have actually ever done a cryptocurrency transaction.

I walk around with a couple of wallets on my mobile device and I routinely use them to spend crypto, at conferences, or even on websites. It varies, sure maybe in some cases the wait for confirmations will take longer than a credit card transaction, but again, early days.

Further, I remember having to wait for GIFs or songs to download, nevermind HD streaming over the wire. Things get faster. Remember, we’re dealing with a guy who figured the internet wouldn’t have much more impact than a fax machine so his take on technology isn’t the most prescient.

But one thing the Internet economy has been pining for since the very beginning is a viable system for micropayments. Online credit card transactions isn’t it, neither is PayPal or anything where you have a minimum transaction size measured in dollars and transaction fees larger than what a micropayment would be. Micropayments will drastically change the dynamic of the internet economy. If you read Jaron Lanier’s Ten Arguments For Deleting Your Social Media Accounts Right Now (excellent read, highly recommended and I will be reviewing thoroughly in my next post), he calls the current ad driven internet ecosystem “The BUMMER Machine”, which breaks out into 6 parts under the following mnemonic:

A is for Attention Acquisition leading to Asshole supremacy
B is for Butting into everyone’s lives
C is for Cramming content down people’s throats
D is for Directing people’s behaviour in the sneakiest way possible
E is for Earning money from letting the worst assholes secretly screw with everyone else
F is for Fake mobs and Faker society
— Jaron Lanier “The BUMMER Machine” in “Ten Arguments For Deleting Your Social Media Accounts Right Now”

BUMMER puts a point to that Munger observation: “show me the incentive, I’ll show you the outcome”. When the incentives are attention, clicks and eyeballs, the outcomes are dumpster fires of clickbait, ubiquitous tracking and invasions of privacy.

Cryptocurrency systems like Brave are bringing micropayments closer to reality and that will disrupt the ad-based revenue models of Facebook, Twitter and Google as much as Uber disrupted the cabs or Ebay disrupted the pawn shops. It’ll be a wrecking ball, and that wrecking ball will demolish the BUMMER Machine.

6) Execution problems

The plot lines in the latter half of The Big Short, the dramatized version of the Micheal Lewis book once the hero protagonists were no longer being laughed out of offices as cranks and were now vindicated by their predictions coming true, they found themselves with a new problem:

Their counter-parties were flaking out on them.

During that same period legendary short-seller https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpg Cohodes encountered similar issues when the financial institutions arbitrarily hiked his margin requirements despite his being on the right side of his trades as the companies he had bet against were imploding. Despite his short thesis being bang on, the hi-jinx forced him out of his trades to the point he had to wind up his hedge fund.

When it comes to banks as counter-parties they seem to operate by a “heads we win, tails you lose” playbook. With blockchain platforms like Ethereum and EOS we get financial instruments, or rather smart contracts which have guaranteed execution built-in. There wouldn’t be any changes to the rules after all parties sign with their keys, when that happens, all bets are on. No matter what.

Thus, derivatives would not be created without proper collateraization or if they did, the consequences of that would be borne entirely by the counterparties involved.

Krugman might argue that precludes creation of synthetic derivatives that a lot of the banks today rely on. But again, that’s the point. If toxic derivatives nearly destroyed the entire world economy in 2008, then wouldn’t you describe a system that makes proliferation and amplification of those instruments impossible as having solved another problem?

7) The moral hazard problem

Moral hazard is when somebody passes on their risk to somebody else, without that somebody else knowing, or willfully accepting that risk. An example would be when a bank gets itself into trouble and then gets bailed out by the government or the taxpayer, or gets recapitalized through a bail-in.

When the current imbalances, built up over 10 years of ZIRP and NIRP come home to roost and the next financial crisis hits, when the government bails out the parties again or opts to confiscate yours and my wealth to recapitalize a failed system, it will be another example of moral hazard. They make the stupid policy decisions and enforce them, at our expense; and then we get to pay for it when it all implodes.

We’ve already seen the equivalent of insolvent banks and had several financial crises within the crypto-currency space and moral hazard wasn’t much of an issue.

When Mt Gox failed, it went down and that was it. It was blinking bright red warning lights for months and anybody who was paying attention acted on it and anybody who didn’t got wiped out. Karpele didn’t get a bailout out of which he paid himself a handsome bonus. Gox was put into bankruptcy and Karpele found himself facing some questions and courts around the world. This is the way it was supposed to work.

To sum it briefly, as I observed in my review of  Politics of Bitcoin:

“Bitcoin is a movement born from protest. If the people behind it thought that the monetary system was fairly structured, that those who control it exercise legitimate power to the benefit of wider society and that an egalitarian democratic ideal was at work, functioning largely as intended; then nobody would have bothered to invent it.”

In other words, if cryptocurrency didn’t solve anything, it wouldn’t exist.

At the very least, crypto-currencies can protect us from the problem of policy makers taking advice from academics with zero real world experience like Krugman and enacting policies to implement their hare-brained economic models….