In this excerpt from The Production of Money, Ann Pettifor looks at the bitcoin craze, the challenges of transforming the economy away from fossil fuels and how to maintain independent central banks.
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The bitcoin mania
Bitcoins have introduced millions of people to a currency that appeared from nowhere and is, apparently, ‘cryptographic proof’. Whereas private banks can create money by a stroke of the keyboard, the creation of bitcoins involves vast amounts of computer processing power. This power is capable of deploying a complicated algorithm that approximates the effort of ‘mining’ coins.24
The bitcoins so mined have become the new gold and bitcoiners the new goldbugs. This new currency (which claims to be a commodity) is a form of peer-to-peer exchange. Its life began in the murky world of Silk Road, an online black market on the deep web, and has generated a great deal of excitement. It was created by an unknown computer scientist – the first bitcoin miner. It is now used for international payments, but also for speculative purposes. Like other virtual currencies, bitcoin has theoretical roots in the Austrian school of economics. Its advocates are keen followers of Friedrich von Hayek, and cite as inspiration his book, Denationalisation of Money, in which he calls for the production, distribution and management of money to be left to the ‘invisible hand’, so as to end the oversight of regulatory democracy.25
There are two things striking about this new currency. First, its creators (who are computer programmers) have apparently ensured that there can never be more than 21 million coins in existence. (Although bitcoins can be divided into smaller units: the millibitcoin, microbitcoin and satoshi. Satoshi is the smallest amount, representing 0.00000001 bitcoin, one hundred millionth of a bitcoin.) Bitcoin is therefore like gold: its value lies in its scarcity. The potential shortage of bitcoins has added to the currency’s speculative allure, leading to a general rise in its value. However, the volatile rises and subsequent falls in its value have made it unreliable as a means of exchange.
It is tricky for traders to have to regularly adjust prices upwards or downwards when trading goods and services. Second, this money or currency is not buttressed by any of the institutions named above. Its great attraction to users is precisely that it bypasses all regulatory institutions. Indeed, its usage appears to be based on distrust. One commentator notes that ‘bitcoin was conceived as a currency that did not require any trust between its users’.26
Equally, its scarcity means that, unlike the endless and myriad social and economic relationships created by credit, the capacity of bitcoin to generate economic activity is limited (to 21 million coins). The currency’s architects deliberately limited the amount of bitcoins in order ostensibly to prevent inflation. In reality, the purpose is to ratchet up the value of bitcoins, most of which are owned by originators of the scheme. In this sense, bitcoin miners are no different from goldbugs talking up the value of a finite quantity of gold, from tulip growers talking up the price of rare tulips in the seventeenth century, or from Bernard Madoff talking up his fraudulent Ponzi scheme.
However, some have hyped up the technology used by bitcoin – blockchain, a distributed database or ledger – and argued that it could revolutionise the distribution of wealth and provide transparent accounts of transactions. We should treat these claims cautiously. In a recent blog, Financial Times journalist Izabella Kaminska argued that financial technology fads follow a pattern similar to new music designated first as ‘hip’ and ‘cool’ but which then fades and becomes ‘so last year’. In the same way, for her as an investigative journalist, Blur (bitcoin) evolved into a love of Radiohead (blockchain).
But Radiohead (blockchain) was adopted too quickly by those who then compromised the likeability of the entire Indy genre (cryptocurrency). It was time consequently to turn to drum and bass (private blockchains). But drum and bass was being cross-polluted by Indy rock enthusiasts (cryptocurrency enthusiasts) so it became time to embrace something totally radical and segregated, i.e. go backwards to an ironic appreciation of Barry Manilow abandoning all refs to modern musical phenomena (Distributed Ledger Technology).
Which puts us roughly at the point where cheesy revivalism should be turning into a general love of the all time provable greats (old school centralised ledger technology, but you know, digitally remastered). Suffice to say, there is some commentary emerging to suggest we are indeed in a phase transition and what’s cool isn’t the blockchain anymore but rather the defiant acknowledgement that the old operating system – for all its flaws – is built on the right regulatory, legal and trusted foundations after all and just needs some basic tweaking.27
In 2016, $70 million worth of bitcoin was stolen from customer accounts held at Bitfinex. As Kaminska writes, that ‘should give the banking industry pause for thought with respect to adopting blockchain and bicoin-based financial technologies’.28
Speculators have periodically inflated the value of bitcoin to delirious heights. As always, the winners are those who sell just before the bubble bursts. In the absence of democratic oversight and regulation, the losers are always robbed.
Credit, consumption and the ecosystem
Environmentalists rightly want to restrict forms of economic activity, in particular apparently limitless consumption – and I agree wholeheartedly with that aim. Indeed, it is my view that it is ‘easy money’ that fuels ‘easy’ shopping; ‘Easy Jet’ and with it toxic emissions. So management of the credit-creation system is vital to society’s attempts to limit consumption and toxic emissions. Environmentalists who try to limit consumption by ignoring the links between consumption and easy money are doomed to failure, in my view. Since the liberalisation of finance in the 1960s and ’70s, bankers have aimed credit largely at pre-existing assets (such as land and property) and at consumption on which they can charge high rates of interest (think of the rate on your credit card). It is critical to note that both the US and UK economies are now largely based on household consumption.
Before credit cards became universally available, and before political and central banking authorities freed up bankers to provide credit for any type of shopping expedition, consumption was constrained. So yes, society must limit its obsession with easy money, ubiquitous credit (or, rather, ‘debt’) cards and excessive and unnecessary consumption. And bankers must be constrained in their ability to lend money at high rates for activity that does not generate income for the borrower – i.e. consumption – or for other income-draining activities, such as nose jobs and other cosmetic surgeries for which there is no medical necessity.29
At the same time, human-induced climate change represents a major threat to a liveable future. Transforming the economy away from fossil fuels will require wisdom, intelligence and muscle. Above all, it will require a great deal of finance, for example to transform the transport system, erect flood defences, retrofit ageing housing stock, or to make buildings more energy efficient. Such investment will, however, generate employment and other economic activity. Employment in turn will generate income with which to repay the credit or debt. The fact is that carefully managed and regulated public and private credit will help finance vital de carbonising activities. The small, individual pools of money from savings accounts, credit unions or crowdfunding would be woefully insufficient for the Herculean task of transforming the economy away from fossil fuels.
Donald Trump and ‘helicopter money’: the economic, social and political consequences
It is also not acceptable, in my view, for central bankers or government representatives to be granted money-printing powers without clear, transparent checks and balances. Like the power private bankers exercise, central bank ‘helicopter drop’ powers are immense. They will have distributive consequences, and these will be difficult to predict. There are other consequences. Providing funds directly to citizens could for example, encourage them to shop for goods from abroad, worsening trade deficits. Other imbalances could occur.
These are impacts that have economic as well as social and political consequences. Therefore, given that we are discussing a publicly backed institution (the central bank, nationalized in the case of the UK), elected governments ought to be in the driving seat. At the same time, for public accountability reasons, the relative independence of the central bank must be maintained. The reason for relative independence, accountability and transparency is not complicated: helicopter drops are very likely to be open to abuse. As someone who has worked in African countries where politicians are known to have corruptly diverted public resources, I consider transparent checks and balances on politicians, government officials and central bankers to be vital.
Lord Adair Turner, in a Project Syndicate column ‘Helicopters on a Leash’, drew attention to this central issue: the risk that allowing any monetary finance will invite excessive use.37
But in addressing the issue, Turner cedes even more power to central bankers by proposing that they are ‘given the authority to approve a maximum quantity of monetary finance if they believe doing so is necessary to achieve their clearly defined inflation target’.38
There are two problems with this attempt at regulating the creation of finance: the first is the one outlined above, that technocrats will make critical decisions about the scale of finance available to all or some sectors of the economy. Second, the notion that ‘inflation targeting’ would once again be used to inform central bank decision-making is a truly backward step. Inflation targeting has long been discredited because pre-crisis central bankers focused myopically on inflation targets to the detriment of other indicators, in particular employment, but to the advantage of creditors whose assets (debt) are protected by inflation targeting. I am no defender of the private finance sector, as anyone familiar with my work will know, and I am also strongly in favour of capital control. But under the far-from-perfect existing monetary system, domestic bond markets act effectively as intermediaries between a government and its central bank.
The process of a government offering bonds to the public and private markets bidding for those bonds, places transparent space and publicly accountable transactions between a government and its central bank. It is the bond market that keeps governments honest. Of course investors can and do profit from this process and cream off gains, but losses are also possible. And as QE has proved, central banks working with willing governments can exercise huge influence over the bond market, and over the price and yields of government bonds. The fact that over the recent past global bond markets have played the role of ‘master’ in relation to subservient governments and central bankers is because both governments and central bankers have abrogated their power to restrain capital mobility and to manage this market. They have been negligent of the wider public interest, and left management of bond markets and the monetary system to a process described as ‘globalisation’ and to the anarchic ‘invisible hand’. But we know that bond markets can be subdued, and can play a more passive role than they have in the recent past.
Just how subdued was evidenced in 2015 and 2016 when investors paid the German government for the privilege of lending it money – largely because of weaker, and riskier economic conditions in Europe brought on by incompetent economic policy-making and ideologically driven political decision-making. The monetary operations of the European Central Bank (ECB) also played a role. Investors were willing to pay to lend to Germany because economic conditions and returns on capital in Europe, and indeed the world, were so insecure, they believed capital would be more secure invested in a German ‘bund’.
The Production of Money is now 20% off, and don't miss all the titles on our economics book list, featuring an introduction to Thomas Piketty’s Capital in the Twenty First Century, and Cédric Durand's Fictitious Capital.
24 Izabella Kaminska, ‘When Memory Becomes Money; The Story of Bitcoin so far’, Financial Times blog, ftalphaville. ft.com, accessed 3 April, 2013.
25 Friedrich A. Hayek, Denationalisation of Money: The Argument Refined, London: The Institute of Economic Affairs, 1990.
26 Jonathan Levin, ‘Governments will struggle to put Bitcoin under lock and key’, The Conversation, theconservation.com, accessed 27 November, 2013
27 Izabella Kaminska, ‘How I learned to stop blockchain obsessing and love the Barry Manilow’, Financial Times blog, ftalphaville.ft.com, accessed 10 August, 2016.
28 Izabella Kaminska, ‘Day three post Bitfinex hack: Bitcoin bailouts, liabilities and hard forks’, Financial Times blog, ftalphaville.ft.com, accessed 12 October, 2016.
29 A short Google search reveals that one cosmetic surgery company offers rates of 16.9 percent on loans to finance a ‘transformation’ in one’s looks, transforminglives.co.uk, accessed 6 June 16.
30 See Ulrich Bindseil, Monetary Policy Operations and the Financial System, Oxford: Oxford University Press, 2014, p. 84.
31 The Federal Reserve Bank of Minneapolis, Discovering Open Market Operations, 1 August 1988, minneapolisfed.org, accessed 2 June 2016.
32 Frank van Lerven, ‘A Guide to Public Money Creation’, Positive Money, May 2016, positivemoney.org, accessed 2 June 2016.
33 Ibid., p. 19.
34 Ibid., p. 22. My emphasis.
35 Ibid., p 23. My emphasis.
36 Ibid., p. 27.
37 Adair Turner, ‘Helicopters on a Leash’, Project Syndicate, 9 May 2016, project-syndicate.org, accessed 2 June 2016.
38 Ibid., pp. 2–4.