Wednesday, July 11, 2012

Is Store of Value enough?

I'm still deep down the Bitcoin rabbit hole, and I've been thinking about its "store of value" and "means of exchange" properties.

I wonder: if Bitcoin is used as just a store of value and nothing more, could that be enough?

Imagine it is years in the future, when the generation of new bitcoins has slowed to a trickle.

As a pure store of value, bitcoins would function as I-owe-you tokens. People who wanted to store value would buy bitcoins from people who were done using them to store value and needed some cash to buy something.

The value of a bitcoin would be a function of how many people wanted to store versus spend. If everybody decided at once they wanted to spend their money instead of saving it they would find no buyers and the price would drop to zero.

If lots of people had lots of extra money that they wanted to store (and they decided bitcoins were a good place to store it) the price of bitcoin would go up.

I'm not an economist, but I would guess that the desire for a good place to store value is pretty steady. I base that on the recent behavior of US Treasuries; people want a safe place to park their money so much that they have actually driven the inflation-adjusted interest rate on many Treasuries negative ("investors" are paying the US government to hold their money for them).

Bitcoins are a pretty darn good store of value; they don't take up any space, you can back them up, you can protect them with a password, you can split them up and store them in a lot of different places, and when you want to spend them you can do it from the comfort of your barcalounger using your cell phone.

You can even store them in your brain if you want (my brain is too flaky, I try not to store valuable things in there).

I can imagine that once they grow up bitcoins could have a lot of value purely as a store of value, even if they never take off as a currency used for everyday purchases.

I'm sure the overall demand for "store of value" goes up and down, but it looks to me like it is counter-cyclical-- when the economy is bad, people take money out of things like the stock market and put it into things like T-Bills or gold.

If bitcoins are used only as a store of value in the future, then we should see their value going up during recessions and down during boom times.

If they're used only as a means of exchange then we should see the opposite.

I hope they'll be used for both so they'll have a mostly steady value regardless of what the economy is doing.

DISCLAIMER: I've been saying this for a couple of years now, but it is still mostly true:  Bitcoin is an experiment-- only invest time or money in it that you can afford to lose!

Monday, July 09, 2012


There was a discussion on the Amherst Town Meeting mailing list a while ago about paper versus plastic versus cloth grocery bags, which poked my "skeptical" and "libertarian" buttons.

"Skeptical" because I think much of the debate over paper versus plastic is driven by the "natural must be better" fallacy.  Plastic comes from nasty, icky oil, and so must be worse for the environment than paper, which comes from beautiful, majestic trees.  Cutting down beautiful, majestic trees to make paper is evil, too, of course, so we should all re-use organic hemp shopping bags.

"Libertarian" because the idea of Town Meeting deciding what the best way of bringing my groceries home just rubs me the wrong way; we'll all have different opinions on how much we value saving the environment, convenience, hygiene, cost, and signaling our environmental bona-fides by schlepping around filthy, tattered, disease-ridden reusable bags.  (I'm skeptical of the idea that reusable bags are dangerous due to germs, but I respect that some people are genuinely worried about that)

So I was please to run across this thorough, data-driven study of plastic versus paper versus cloth bags on the environment:

As far as I can tell, it's not a fluff piece sponsored by the Plastic Bag Council of Wales-- the study was sponsored by the Environment Agency, "a British non-departmental public body of the Department for Environment, Food and Rural Affairs and an Assembly Government Sponsored Body of the Welsh Government that serves England and Wales."

Looks like if you use your cotton bags more than 130 times, and you just throw out your plastic shopping bags, then cloth is better than plastic. I use ours probably twice a week, and they seem to last 3 or 4 years (about 300 or 400 re-uses), so definitely in the better-for-the-environment category.

So policy-wise, a disposable-bag-tax to encourage use of re-usable bags would be the smart thing to do.

Unless that means more people drive a little farther to Stop and Shop in Hadley instead of Big Y in Amherst, of course. I'd bet gasoline usage getting to the store is hundreds of times more damaging to the environment than what kind of bag you use. Charging 25cents for parking at the grocery store would probably be even better public policy.

PS: I generally don't like collecting things, but make an exception for reusable bags-- we've been collecting them from trips overseas. The little cloth bag we got from our stay in Yungaburra is my favorite, although the big re-usable plastic bag from Paris is probably the most functional. Travelling by airplane is absolutely terrible for the environment, though...

Thursday, July 05, 2012

Big Picture Demographics

What is really happening when we "save for retirement"?

Well, it means you don't spend money you've earned right now, and, instead, do something else with it. Either you invest it (give it to somebody else, hope they do something productive with it, and share the gains with you) or you convert it into some asset (cash, gold, rare paintings) that you hope will keep its value.

Investing is great for the world; old cranky people lending their money to young, not-yet-cranky people to encourage them invent new and wonderful stuff makes the world a better place. "We" should do more to encourage it.

Saving cash under your mattress or storing gold or paintings in a vault increases the price of those things in the short run and might encourage governments to print more money, gold miners to dig up more gold, or painters to produce more Collection-Worthy artworks. None of which makes the world a better place (well, not for me, anyway, I'm a cretin who doesn't appreciate Fine Art).

And, of course, if the trend reverses and lots of people are try to sell that stuff to pay their grocery bills the price will fall. "Saving money" this way is a Ponzi scheme; you've got to assume that there will be enough people in the future who will be willing to work for you if you give them pieces of paper (or metal or canvas and paint) that you were willing to work for years ago.

I wonder how much of the global financial crisis and economic doldrums is driven by simple demographics-- by older people in developed countries (or their pension fund managers) deciding that they will save money for retirement in "safe" investments like government bonds or gold rather than "risky" investments like the stock market. I'm pretty sure I remember reading that we get more risk-averse as we get older, and the financial crisis seems worse in places where the population is aging most (Japan, Europe, the U.S.).

Unfortunately, the worse the economy gets the more likely we are to collectively "take fewer risks" and do really stupid-for-long-term-growth things like pay interest to banks on the cash they park at the Federal Reserve.

If I believed our governments were capable of making smart investment decisions maybe I'd agree with the Keynesians and be cheerleading for another big Stimulus-- "You're collectively getting older and stingier, so We will just do what we know is best for you and take that money you're sitting on and invest it in make-the-world-a-better-place stuff.  Trust us, we pinky-swear we won't waste it on unproductive projects that make our political constituents and donors happy."

Is anybody happy with how that worked out last time around?

So: if big-picture demographics is a big part of what is driving economies into the ground, what should be done?

Seems to me an easy answer would be to convert Social Security into a system that actually invests the tax receipts in some productive, economy-expanding activity (bonds, the stock market, venture capital, whatever) instead of the government writing IOU's to itself and sticking them in a drawer somewhere. I'm a "wisdom of crowds" type of guy, so I'd prefer that individuals make the investment decisions (or decide who gets to make the decisions for them).

But I'd settle for an appointed or elected Panel of Experts investing the money and getting paid oodles of money based on how well or poorly their recommendations did after a decade or two.