Bob & Izzy: Monero, Dash and Protecting Your Car

Rather than call it 'Reader Q&A', I've decided to use my 'Bob & Izzy' convention to share some thoughts spurred on via email exchanges with readers. I hope you enjoy.

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Bob: Hey Izzy - I hope you’re right about Monero, but what about Dash?

I know that Dash’s privacy features aren’t as good as Monero’s, but the it seems to be growing still.  I watched some videos too and they make it look like they are the ultimate privacy goal. Finally, some guy on youtube says that big investors don't want to get involved in monero because of it's reputation of being involved with criminal activities. What do you think?

Izzy: Hi Bob,

As you know, Dash was the first major privacy focused coin to gain traction. However, just like Bitcoin has proven itself vulnerable on the privacy front, Dash has similarly shown itself to fall short of providing privacy security/fungiblity. It’s for this reason that it has largely been abandoned by the ‘Darknet’ community in favor of Monero. Despite this, Dash has spent a lot of time and money on marketing, and I think that’s what you’re seeing now.

There really isn’t a question as to which offers better privacy - Monero wins hands down. Given this, Dash reminds me of ‘the Club’ that people used to use to lock their cars. In case you’re not familiar with it, the Club was an anti-car-theft device that for a time was hugely popular in the U.S. It was a bright-red tempered steel rod you would lock to the steering wheel to make turning the wheel (and driving it away stolen) seemingly impossible.

"The Club" in action.

But eventually, car thieves outsmarted ‘the Club’. They realized they could just cut the steering wheel and slide the unopened Club off.

For a long time people still bought and used ‘the Club’ because they felt like they were ‘doing something for security’ and it made them feel good. Eventually though, people realized that car thieves could get through the Club's security. But this took time - and was often a painful process for those who learned 'the hard way'.

Before Dash enthusiasts get upset by my 'Club' analogy (hopefully they have't already), Dash vs Monero is of course different. Dash still has some security that is far more complex to circumvent than just 'cutting the steering wheel' (along with other features)... but in terms of providing fungibilty like Monero does, it ultimately falls short and exposes users to risks. When ‘the audits come’  (in whatever fashion they do, as I described in the earlier piece) people will quickly realize that anything *other* than full security/fungibility still leaves them vulnerable. Remember, markets are voting machines in the short term, but weighing machines long-term.

As far as the notion that ‘serious investors’ will stay away from Monero  because it’s used by people doing illegal things - this is something that was said about Bitcoin, then Dash, and now Monero. Time has shown, and will continue to show, that there is no merit to the argument.  All it takes is for a few ‘larger’ crypto investors to realize they are at-risk in Dash, and the shift could happen quickly. As more people shift for everyday use, the percentage of 'illicit' users will shrink, and it will be a moot point.


Cheers,

Izzy

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An Economist's Take on Bitcoin and Cryptocurrencies: It's a Giant Scam and the Mother of All Bubbles

Bitcoin has climbed over $10,000 (when I first drafted this post last week, it was at just $8,200). The cryptocurrency market now appears like a full stock market of fake stocks, with a market cap of $245 billion (update a week later: $345 billion), more than 1% of the capitalization of the US stock market. My take on bitcoin is the standard boring economists' take: bitcoin and other cryptocurrencies are the mother of all irrational bubbles. The South Seas Bubble, Tulip Mania, the Nifty Fifty, and the dot.com bubble were all similar. And, if you'd listened to me (and us economists), you're continuing to live in relative poverty as your friends get rich, with money and wealth coming out of nowhere and millionaires minted overnight.

Pictured here with Nobel Prize Winner Robert Shiller,
fortunate to experience a balmy -7 degrees in Moscow. He
also believes that bitcoin is in a huge bubble.

Despite my view that this is a standard bubble, I tried to buy bitcoin last summer (back at the bargain price of $4,000...), in part because I wanted to see how easy it was to use bitcoin to send money back to the US from Russia. After all, the logic behind bitcoin is that it is a super easy, cheap and fast way to send money. Exactly what I needed. The difficulty I went through in trying to purchase bitcoin only confirmed my worst fears of why I think it is a scam/ponzi scheme. Part of the problems I faced were no doubt specific to me, as a US national living in Russia. Many bitcoin exchanges are country specific, and didn't like my Russian IP address. Others did, but required a lot of information, including a picture of my with an ID, and also a picture of me with a bank statement with my home address (in the US) written on it. I ended up never getting approved, and never got a straight answer from some of these exchanges on why not. Probably, they are just minting money so fast why should they invest in customer support.

But all the information required, even if I had been approved immediately, kind of shoots down some of the logic. If I'm a drug-dealer looking to accept payment in bitcoin, I'm still going to have to provide a lot of information to the exchanges. And, while my troubles may have been unique, bitcoin isn't that easy to use. Your grandma isn't going to be buying groceries or trading bitcoin anytime soon. Indicative of the inconvenience of buying bitcoin, there is a closed-end investment fund which traded on the stock-market that owns only bitcoin, and was recently trading at twice the par value of bitcoin (see Figure below). That is, people who wanted to buy bitcoin in their brokerage accounts were too lazy to cash out their accounts and buy bitcoin directly, so they paid double the price to avoid the hassle.

Grayscale Bitcoin Investment Trust

In addition, the fees associated with buying bitcoins in Russia using rubles, sending them to myself in the US, and then converting them back into dollars are at least an order of magnitude larger than just buying dollars using my currency broker, and then sending money to myself directly. The total cost of my normal fees for doing this set of transactions run about $25 for a $10,000 transaction using the banking system and my currency broker. By contrast, I'm told the bitcoin broker in Russia charges 3%, and one in the US (Coinbase) charges 2% per transaction (maybe this is now 1.49% for Coinbase users in the US, although it looks as though they charge 4% to fund an account using Visa/Mastercard), plus whatever the bitcoin miners charge (perhaps .2%?). Even the miner's fees are calculated in a super non-transparent way. It's probably that way for a reason. 

Theoretically, some other problems with bitcoin is that there is free entry. Anyone can create an infinite amount of cryptocurrency out of thin air. The marginal cost is zero. The saving grace is that there are network effects -- a currency becomes more valuable the more people that use it, and so it will be tough for other cryptocurrencies to displace bitcoin. However, that can't explain why there are thousands of cryptocurrencies with huge market caps. Only 1-2 of these will ultimately be the victor, and bitcoin is likely to be one of them.

Another issue with bitcoin/cryptocurrencies long-term is that if they ever did replace actual currencies in everyday transactions, governments could really lose out. The Federal Reserve would lose control over monetary policy, for example, and to the extent cryptocurrencies enable drug smugglers and hackers and others to evade the authorities and paying taxes, this should be something which governments will have a real interest in illegalizing. Thus, there is no endgame where bitcoin replaces the US dollar, the Chinese Yuan, or the Euro as the primary currency of a major economy. It is simply too volatile, and there will be nothing to stabilize its value.

The real economic argument for bitcoin is not that it actually provides cheap transaction fees, but rather that it is a really good scam/meme. It's techy, it's complicated, and few people understand it. Those who spent the time to learn how it really works then become part of the cult and evangelize over it. It could be compared to the spread of a religion: If many people very fervently buy into it, it could be a bubble that lasts a long time. This is the optimistic case for bitcoin. There are a group of Japanese in Brazil who went to their graves believing that Japan didn't lose WWII, and it was just US propaganda that suggested otherwise. The bitcoin true believers/dead-enders may hold bitcoin until the day they die, giving it a positive value for a long time to come.

Or, it could be more like the spread of a disease (I'm stealing this from Robert Shiller). To grow, the disease needs a lot of new people to infect. Once about 20-30% of the people are infected, it's growth will be at a maximum. But, over time, there are fewer and fewer new people to infect, as most people have had the disease, and the rate of new infections crashes. Bitcoin may not be so different -- the early adopters buy in, sending the price up. The higher price means more news, and is a positive feedback loop as the mainstreamers start to buy. Doubt creeps into the minds of naysayers, who might have believed it to be a scam initially, but now see the price soaring, against their predictions.

Usually the moment to sell is after almost everyone who is a quick adopter has already adopted, the median person has too, and the moment at which people who are typically late adopters start to invest. At that point, the economy will run out of suckers, and the price will start to stagnate and fall. Legend has it that Joe Kennedy sold his stocks in 1929 after a shoeshine boy started giving him stock tips. An older family member of mine was day-trading tech stocks in the 1990s, and then bought a condo in Florida in 2006. This person is my bellwether.

Given this may be a reason to buy in the near term, before the late adopters get wind (and, damnit!, why didn't I realize early on that this was a good scam!), be warned that just as the positive feedback loop works well on the way up, and it can work in reverse on the way down. A few bad days, and panic selling can ensue. Once it crashes, a generation of people could be so turned off by crypto they'll never touch it again.

What crypto does is settle the debate over whether fundamentals drive stock prices and exchange rates. I gave a talk at LSE a few weeks ago on my research on exchange rates and manufacturing, and someone stated their belief that exchange rates are driven by fundamentals (monetary policy) and so it was monetary policy which drove my results and not exchange rates, per se. However, as we see with bitcoin, which isn't driven by any kind of fundamental economic value, as it pays no dividends and has high transaction fees, bubbles can happen and markets aren't that efficient. (OK, even if you believe in bitcoin, how much do you believe in Sexcoin, Dogecoin, or "Byteball bites", the latter of which has a market cap of a cool $187 million...) There is never going to be a day when everyday people use "byteball bites" to buy groceries.

It also shows another reason why governments might want to tax windfall profits or large capital gains at a higher rate. Those profiting from cryptocurrency are incredibly lucky. Their "investments" don't leave any reason to deserve favorable income treatment relative to wage income. Stock market earnings are similar. Luck is involved just as much as skill.

Lastly, though, let me state my agreement with others that government-sponsored electronic currencies are probably a thing of the near future. If an electronic currency allows every transaction (or most transactions) to be traced by the government, it can cut down on illegal activity, narcotics, and tax evasion. A government could really very easily broaden the tax base, and raise more revenue while cutting taxes on law abiding citizens. This will probably help developing countries (like Russia) where tax evasion is rampant the most. I guess this will happen soon. Greece should do this and leave the Euro system (but not the EU!). Obviously, a digital currency also solves the problem of the zero lower bound on interest rates, reason enough to do it. Were I the Autocrat of All the Russians, I'd have implemented this already.

In any case, I don't want to give anyone investment advice. I have no clue what will happen to the price of bitcoin, although that should be a warning. I hope none of my friends miss out on the huge boom as bitcoin goes from $10,000 to $100,000 just because they read this. Just be for-warned that what goes up must come down. If you do ride the wave up, think about taking something off the table and try to remain diversified. (That goes for the US stock market too, which also now looks quite overvalued...) Once your parents start to buy bitcoin, that's probably a good time to cash out.

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Feilslått kritikk av SSBs makromodeller

Nedbyggingen av Forskningsavdelingsens makroseksjon burde aldri ha skjedd

Kjetil Storesletten, professor ved Universitetet i Oslo, har skrevet at SSBs makroforskere ikke har «kontakt med forskningsfronten». Den offentlige debatten gir inntrykk av at de ansatte i SSBs makroavdeling er «forskere» med hermetegn og driver med «hjemmesnekrede modeller».

Makroseksjonen i SSB har 19 prosent av de ansatte i forskningsavdelingen, men har vært involvert i 26 prosent av de internasjonale publikasjonene siden 2016. Samtlige er på nivå 2. Makroseksjonen utsettes utvilsomt for fagfellevurdering og er åpenbart i forskningsfronten.

Likevel ble nesten alle forskerne der fjernet eller gitt administrative oppgaver. Ingen andre i forskningsavdelingen ble rammet så hardt. En litt spesiell belønning for fremragende forskning der altså.

Rapporten som foranlediget det hele er ikke fagfellevurdert. Det bærer den preg av. I rapporten har Storesletten og professor på BI, Hilde C. Bjørnland, begge internasjonale kapasiteter på DSGE-modeller, et vedlegg.

Vedlegget fremstår dessverre som ubalansert. Argumentene florerer til fordel for slike modeller som Storesletten og Bjørnland liker. Argumenter for store makroøkonomiske modeller finnes ikke.

Det kan se ut som Storesletten og Bjørnland ikke har forstått SSBs oppgave. SSBs mål er å gi gode prediksjoner og politikkanalyser. Modeller som utvikles med tanke på publikasjon har en annen målprioritering. De skal bringe vår forståelse av grunnleggende økonomiske mekanismer opp på et høyere nivå.

For å oppnå dette må forskerne pålegge modellene en rekke restriksjoner. Forventninger skal være rasjonelle og de skal være så enkle at mekanismene kan identifiseres. Disse hensynene er viktigere enn prediksjonsevne. Men det er vanskeligere å tilfredsstille mange mål samtidig.

I Norges Bank har man nå fjernet antakelsen om rasjonelle forventninger til boligpriser i NEMO-modellen. Befolkningen som bor i denne modellen driver ikke lenger med kompliserte utregninger av fremtidige boligpriser for at de skal være konsistent med hele modellen. I stedet bruker NEMOS innbyggere nå det enkleste anslaget av alle; at årets boligprisøkning er det beste anslaget på neste års. Det gir bedre prediksjon.

At modellene skal være mikrofunderte på alle bauer og kanter er en tvangstrøye som kan komme i veien for prognosekvaliteten. SSB selv har en langt mer praktisk tilnærming. Mikrosammenhenger brukes der det bidrar.

Mikromodeller som DSGE er nok bedre på det de er bygget for, og de har egenskaper som de internasjonale tidsskriftene liker. Men at disse modellene også skal være best på prediksjon blir litt som å selge en mirakelkur.

Generelt vet vi at SSB har ganske treffsikre prognoser. Fagfellevurderte studier som viser at DSEG gir bedre prediksjoner enn store makroøkonometriske modeller finnes så vidt jeg vet ikke. Hadde Storesletten og Bjørnland visst om slik forskning kan vi vel anta at det ville vært viet stor plass i rapporten.

Siden Storesletten og Bjørnland ikke vet om ny forskning som støtter at DSGE gir bedre prognoser, får dagens SSB-modell skylden for store prognosefeil på 70-tallet. Av og til er intet argument bedre enn et dårlig argument.

SSB-ledelsen opptrådte uansett uansvarlig ved å ramme byråets leveranser til Finansdepartementet «over natten». Tolv av tjue medarbeidere skulle bort. Hver modell skulle administreres av én person. Sykefravær og jobbskifte ville skapt problemer. Det ville ikke være nok ressurser til å vedlikeholde KVARTS. All utvikling ville stoppet opp. Alt sammen uten å vite sikkert om DSGE faktisk gir bedre prognoser.

Den avgåtte direktøren Christine Meyer har i ettertid påstått at idéen var å skille operasjon og forskning på modellene. Men ingen ressurser lå inne til slik forskning. Meyers forklaring stemmer ikke med fakta.

Finansdepartementet er imidlertid ikke uten skyld her. Makroseksjonen beregnet som kjent at Frps alternative statsbudsjett ville gi lavere rente. Kanskje kan det ha skaffet makroseksjonen fiender. Enkelte i departementet har i alle fall gitt Meyer klar støtte i kampen for DSGE.

Den største feilen var at ledelsen bygget ned de eksisterende modellene før noe annet var på plass. Meyer kuttet av benet til den ene ridderen før hun skulle sende dem i tvekamp.

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Interpreting the yield curve

There's been a lot of talk lately about the flattening of the yield curve, what's causing it, and what it portends. In this post, I describe a simple "neoclassical" theory of the yield curve and ask to what extent it serves as a useful guide for our thinking on the matter.
 
Let's start by defining terms. Let I(m) denote the yield (market interest rate) on (say) a U.S. treasury bond with maturity m. So, I(1) denotes the yield on a one-year bond and I(10) denotes the yield on a ten-year bond. The slope (S) of the yield curve is given by the difference in yields between long and short bonds. In this example, S = I(10) - I(1).

Here's what the yield curve looks like for the U.S. since 1961.

Normally, the slope of the yield curve is positive. But occasionally, it turns negative -- an event that is called yield curve inversion. Market analysts care about yield curve inversion because the event is frequently (though not always) followed by a recession (the shaded bars represent recessionary episodes).

The graph above plots the nominal yield curve. Economists frequently stress the importance of real (inflation adjusted) interest rates, which I will denote R. Because there is a ten-year Treasury-Inflation-Protected Securities (TIPS), we have a market-based measure of R(10). Let me compute     R(1) = I(1) - P(1), where P(1) denotes expected year-over-year inflation. Let me use the year-over-year change in core PCE inflation as my measure of P(1). That is, I am assuming that over the short-run, the market expectation of inflation is roughly last year's core (trend) inflation rate. Since TIPS data is only available since 2003, here is what we get:
 

The nominal and real yield curve share the same broad pattern. This is consistent with what we would expect if inflation expectations are stable. Note the slight bump up in the nominal yield curve following the November 2016 presidential election. Since then, both yield curves have been flattening--the real yield curve more so than the nominal curve. Does this mean we are heading for recession, or at least a growth slowdown? And if so, why? To answer this latter question, we need some theory. [Warning: what follows in blue is wonkish. If you are not a wonk, skip the blue section--some intuition follows.]

Consider this simple model economy. There are three periods (the minimum number I need to generate a yield curve). The economy is closed and is populated by individuals with identical preferences for consumption over time, c1, c2, c3. That is, people care about their material living standards over the course of their planning horizon. If people like to smooth their consumption over time, then the following representation of preferences serves to capture this idea W = u(c1) + u(c2) + u(c3), where u(.) is an increasing concave function. For simplicity, let u(.) = log(.). To make things even simpler than they need to be, assume an endowment economy so that the real GDP is expected to evolve according to y1, y2, y3. Finally, let Rij denote the real rate of interest between periods i and j. Then the equilibrium real interest rates are given by:
R12 = y2/y1
R23 = y3/y2
R13 = square root of (y3/y1)

Let me now explain in words what this model implies. First, the model predicts that real interest rates are proportional to expected economic growth. The economic intuition for this is that if incomes are expected to grow more rapidly, then in an attempt to smooth consumption (that is, bring future income back to the present) people will want to save less (or borrow more). The decline in desired saving (increase in desired borrowing) results in upward pressure on the interest rate until the bond market clears.

The slope of the yield curve in this model economy is given by S = R13 - R12. This is roughly the ratio of expected long-term growth (y3/y1) relative to expected short-term growth (y2/y1). Thus, a positively-sloped yield curve in this economy is symptomatic of a bullish economic outlook (growth is expected to accelerate). Conversely, a negatively-sloped yield curve is symptomatic of a bearish outlook (growth is expected to decelerate). The interpretation offered here of the flattening yield curve is that expectations are turning increasingly bearish--people are cutting back on planned consumption, increasing their desired saving (reducing planned borrowing)--all of which serves to put downward pressure on long rates.

As with all simple theories, it would be wrong to view this as "the" explanation for the yield curve. At best what the theory does is highlight certain forces that may be at work in the real economy. Whether the forces identified are quantitatively important is an empirical question. Nevertheless, I think the model offers a good place to organize our thinking on the matter.

A conventional view among economists is that the Fed has little or no control over long real interest rates. If long-rates are declining because of an increasingly bearish sentiment, then there's little the Fed can do about it. But what justifies the recent policy of raising the short-term rate? The model above suggests that the Fed is simply responding to market forces--the market "wants" higher short rates and the Fed is simply accommodating this want. I'm not sure this is the best way to think about what's happening. One thing missing from this simple model that may be important to consider is the liquidity premium on short-term government debt. Is the current Fed policy affecting this liquidity premium and, if so, what effect is it having on real economic activity? I'll try to address these and other questions in future posts.


Postscript 11/27/2017 Some further thoughts. ***********************

Consider a world where real economic growth remained constant, i.e., y2/y1 = y3/y2 = y4/y3 = ...
In such a world, the yield curve would be perpetually flat. In a world where output fluctuated around a constant trend, the slope of the yield curve would be zero on average. (I am abstracting from inflation risk, etc.)

In reality, the yield curve is usually positively sloped. It seems unlikely that the explanation for this is that investors are perennially bullish (in the sense of expecting accelerated growth). There are other factors that may impinge on bond yields at different horizons and hence on the slope of the yield curve. One such factor is the liquidity premium attached to short-maturity debt. If the short bond in the model above is valued for its liquidity (and if liquidity is "scarce" in a well-defined sense that I don't have room to explain here), then the market yield of the short bond will be lower than what is dictated by "fundamentals." In other words, short bonds will seem very expensive. If this is the case, then the yield curve may be positively sloped even if the growth outlook is stable (instead of bullish).

To the extent that the Fed can influence the liquidity premium on bonds (and there is good reason to believe it can), then raising the policy rate in the present environment would serve to diminish the liquidity premium on bonds. In the model economies I know of where such a liquidity premium exists, eliminating it actually stimulates economic activity. This is because liquid bonds, to the extent they are used as exchange media, actually complement investment spending instead of crowding it out (as is the case in other models that abstract from the liquidity services that bonds provide).

The interpretation in this case is that raising the policy rate is reducing "financial repression," which is likely to offer modest stimulus. This policy action in itself will have no measurable impact on inflation and the associated flattening of the yield curve is what we would expect if growth prospects remain stable (the flattening yield curve does not necessarily portend recession).

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'Goodbye to Ripple' - Postscript

So now, something more of an actual blog.

When I finished my ‘Goodbye to Ripple’ article, I posted it in three places. First twitter, then on reddit and finally xrpchat.com. The latter two were where I posted my initial ripple valuation article in what feels to me now like ages ago. Even though I knew I wouldn’t be making many friends for saying so, I felt an obligation to share my reversal forthrightly in all those places.

When I didn’t get any emails notifying me of a forum response from xrpchat, I assumed no one really cared – but I was happy to stumble across the thread today. (I had thought my email notification was turned on). On the whole, there was a really nice discourse (with a few ad hominems thrown in for spice) that I’m bummed I missed. If anyone’s interested though,I have a couple of thoughts. i'll post this link as a response to that thread forum.

I have no animosity towards ripple. I think it’s actually very cool, and clearly hugely valuable. To be able to create a multi-billion dollar business from scratch is amazing. There are clearly some incredibly talented and I’m sure cool people working at Ripple. But my question is one of valuation – why $9 billion, and not $4 billion? Or $1 billion?  Show me the math. Exactly how does it all translate into the XRP coins themselves needingto be worth more than they are currently worth?

Most people (not all) have conceded that Ripple is not about being ‘money’, but a functional tool. In that case, we ought to value it on that metric – how much value is being created, and to where does it accrue?

Let’s use some numbers.

$207 trillion annual market size

assume evenly distributed, that’s about $500 billion moving a day.

There are 86,400 seconds in a day. Again, assuming smooth distribution if XRP was 100% used as transfer medium in the market, every 5 seconds (on average) it would have to move about $30 million. If we assume it needs that FULL balance to be held in 15 different currencies, that’s a required market float of 30million x 15 = $450 MILLION (that’s million with an M). Heck – let’s say that we’re off by an order or magnitude somehow and multiply by 10. Now we’re back to billions - $4.5 billion – or less than half the current capitalization.

Is there a fault in that example? I honestly don’t know. I just spent 5 minutes working it out and have had a couple of glasses of wine. My point is, talking about value being created and that same value accruing to the benefit of the actual coinsis talking about two very different things. It’s the same thing as a company you might love, but whose stock is awfully priced.

There may still be possibilities for Ripple to justify its current value. If people want to believe  - that’s great. I would never tell someone to not go with their gut or intuition. You might be right. Lots of things could happen – even some I don’t want to mention because I don’t want add to the creation of new (possibly half-baked) hopes on a coin (and then feel obliged to explain myself) that I’m less focused on these days.

So to respond to one of the bloggers, maybe it’s not goodbye ripple, but a shift in the conversation. If any of you folks are interested, the coin I’m focused on now is Monero, and I wrote a 60 page tome (but I swear it feels like 30 when you read it!) on my blog about money and bitcoin, and now a monero piece. In any case, I wish you all good luck.

Izzy

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The Bitcoin Flaw: Monero Rising

The Bitcoin Flaw: Monero Rising

By Izzy Otomakan

Follow @cryptoizzy

I recognize the irony that barely a few months after I shared The Power of Money: A Case for Bitcoin I am now releasing this piece - critical of Bitcoin. I wrote TPOM largely because I was fed up with people and institutions claiming Bitcoin was a fraud, ponzi scheme or bubble. It is none of those things. It is however, in a critical respect, over.

Bitcoin has been beaten[1].

We don’t need to wait any longer for further evidence of this fact.[2]There is sufficient evidence now. At this point, what we see playing out is largely pantomime - as governors of the status quo introduce more mechanisms to increasingly neuter Bitcoin and enforce control over it – whether the general public is aware of it or not. Bitcoin has been compromised as the standard bearer for cryptocurrencies, and the wound is mortal.

I recognize this may sound outlandish, so please allow me to explain.

No matter what anyone may try to convince you of, the single most historic purpose of blockchain hasn’t to do with smart-contracts or disruption of the wire-transfer industry. Those are elements of secondary importance at best – and in proportional value to the larger purpose, pale by comparison. The historic purpose of Bitcoin is that it strives to be the highest quality money[3],and as such enables modern society to peacefully and effectively throw off the shackles of a corrupted system of unsound money that poisons everything it touches.

I spent time in The Power of Money discussing the 3 elements that are required for something to be successfully used as money. These may have been familiar to many already exposed to modern academia’s core economics curriculum. But this is where I went wrong.  There are other rules necessary for ‘sound money’ besides those three. Thankfully, it wasn’t long before I was informed of my oversight by several in the Monero community[4]. I had missed a critical element that contributes to something’s ‘moneyness’ and this makes all the difference. Whether it was intuition, luck, serendipity or some combination that I included an addendum which discussed a cryptocurrency which contains this feature I don’t know – I’m just glad that I mentioned it. 

This 4^th attribute of sound money is fungibility, and is an aspect that while subtle enough to escape notice (as it did with me), is also critical to determining whether a money is ‘sound’ or not. The repercussions for money not being fungible are significant, despite potentially being delayed for a time. But first, a definition:

Fungibility is a feature of money which declares that any transactional unit of the money is entirely indistinguishable from any other transactional unit of the money.

This has never really been a problem when using physical things like gold as money. After all, gold can always be melted down, and carries no recoverable history in itself to tell you where it’s been or who has held it.

But what if I could tell you with 100% certainty that a particular gold piece was kept by Napoleon Bonaparte as a good luck charm? That gold piece would surely be worth far more than the ‘average other’ gold piece that had no such impressive history. In a similar vein, what if I told you that another particular gold piece was used to launder drug money across the U.S.-Mexican border? Once the novelty of its association wore off, you might realize that because that gold was used in committing a crime, government officials could seize it at any time. You might in this case value it lower than an otherwise unburdened gold piece. 

What these two examples show is that if a unit of money has an identifiable history associated with it, it can be 'different' from other units that don't share that history. As such, different units of a single money type may have significantly different values associated with them. For a money to attain fungibility, it cannot contain a history of its use. This definitionally means that all transactions (current, past, and future) using the money must have the ability to be truly anonymous. Which leads us to a critical point:

In order for money to achieve and maintain fungibility, it must maintain its anonymity.

Many people get nervous at the notion of anonymous money - feeling that it somehow implies that they will be viewed as engaging in criminal behavior. This is a due to a misunderstanding that may be addressed and corrected. We are not seeking anonymity of money for any purpose other than to ensure the currency is fungible. It has nothing to do with wanting to buy drugs or launder money. Anonymity is a purely technical requirement for money to actually be fungible – and without the trait of fungibility, the soundness of the money is imperfect and ultimately doomed to fail.

And this is where Bitcoin’s flaw presents itself.

Bitcoin, when it was launched, did have some measure of anonymity, and by extension, fungibility. It’s method for achieving this though was anonymity by obscurity – namely, no one was expected to try and figure out how to connect real-world people with public key wallet addresses – certainly not once the transactions began to become complicated. Your privacy was kept by the ‘needle in the haystack’ approach – namely your transaction of hash codes (the needle) was to be lost in a sea of other codes (the haystack).

But that has changed.

There already exists technology to ‘decipher’ the public blockchain – and it’s getting more accurate with each passing day. For those at the helms of government (and money) institutions, they sit in a sea of associative information. Everything from names/addresses of Coinbase users to geolocation’s of those same people’s whereabouts (by tracking cellphones) to voice and facial recognition algorithms - all ensure that the ability to attach names and details to most Bitcoin transactions (or similar-types of blockchain) are but a matter of time. All it takes is one vulnerability in the information chain for someone’s digital identity to be compromised, opening up entire financial (blockchain) histories to be deciphered.

How would you feel if you were required to print, in legible block letters, your full name on every dollar bill before you spent it?

I’m guessing not very excited by the prospect.

Now what if I told you that in addition to your name, it was also your home and email addresses?

A little weirder, right?

Although it’s not advertised, to those with the proper technology– this is basically what can happen when transacting in Bitcoin. Do not be lulled into a state of false security by the fact that these abilities to ‘decipher the blockchain’ haven’t been made widely known. It takes only a little bit of research to realize that the identity security of Bitcoin (the ‘anonymity by obscurity’ feature) has been compromised.

For those who would seek to undermine cryptocurrency as an alternative to Fiat, it is not in their best interests to announce to the world that they have ‘cracked the code’. Did the British announce to the Germans in WWII that they had solved the mystery of the ENIGMA encryption machine? Of course not. In fact, they hoped that the Germans would continue using the ENIGMA machine, as so long as this was the case the British could maintain a strategic advantage.  

Why Monero?

Currently, there are a handful of  coins that claim to be private or anonymous. There are also functions like coin-mixers that serve as anonymizing services. Do not be fooled into complacency with these – they all have limitations, and this essentially comes down to a critical difference between Monero and these other coins.

All traditional blockchain coins (Bitcoin, Ethereum, Dash, etc.) create transactions that are born  as public and broadcast to everyone. If you want to have a private transaction in those coins, you start with a public transaction, then do stuff to it to make it private. Unfortunately, anything done can either be undone, or at the very least identified as having had‘something’ done to it.  

Either of these is all that is needed to destroy a money’s fungibility. For instance, if you send your Bitcoin to a ‘mixer’, either the mixer itself could be compromised (in which case the coin’s history is recovered) or at the very least the coins you get out are easily identifiable as having gone through a mixer (and you the owner – and the new coins themselves - are identified as having used a mixer). It would take only the stroke of a pen to institute a ‘tax’ on any business that accepts coins that have passed through mixers at any point in their history. Given the nature of Bitcoin’s blockchain, this would be relatively easily enforced, and isn’t even the nastiest version of how this could play out badly for users.

You may be asking now, whether there is simply a system upgrade or ‘new fork’ that could ‘fix’ Bitcoin in this regard. The answer unfortunately, appears to be no.  Bitcoin’s lack of fungibility is something deeply embedded in its core operating structure. While we should ‘never say never’, even aside from the fundamental technical limitations – the political ability to achieve such a fork is at best remote. Government hasn’t yet really imposed its will on Bitcoin, or more specifically, the highly centralized miners who would need to be ‘brought in line’ - but that they would try and do so is practically a given. When this political reality is combined with the seeming impossibility to technically achieve such an ‘upgrade’ (for Bitcoin, Ethereum or the like), the prospects look grim.

Monero though, is different. In Monero, each coin transaction is born anonymous– never even existing anywhere in the system as anything else. If you want to make your transaction public, you can – but you need to take steps to make this happen. No other coin exists with this functionality, and it all stems from a brilliant methodology called ‘ring-signatures’ (which I won’t go into here). While other coins are attempting to copy Monero in this regard, they cannot help but fall short, as this is built intothe core Monero architecture.

What This Means for Bitcoin’s Price (and Monero's)

I don’t expect Bitcoin to stop going up in price anytime soon – and I’m quite OK with that. Bitcoin is currently the standard-bearer for Cryptos, and is probably the coin that most ‘newbies’ will first buy while they are learning about crypto. As a Monero investor, I’m happyfor people to invest in Bitcoin, as I know that sooner or later, the money they invest in Bitcoin will come to Monero.The reason for this is simple:

The audits are coming.

Anyone who thinks that law enforcement, tax authorities, and the full apparatus of the state has ‘given up’ on Bitcoin is kidding themselves. We know as a matter of fact that state sponsored agencies are tracking virtually every aspect of our modern life, and that they increasingly have the means to track Bitcoin transactions at their disposal.

I don’t know what form ‘the audits’ will take – but when they begin, and people realize that their Bitcoin transactions make them vulnerable to any number of problems, people will transfer – potentially en masse – to the coin with the undeniably best form of anonymity, and hence, fungibility (e.g., Monero).

What are some of the possible types of ‘audit’ that may come? I’ll suggest just two to give you an idea (in addition to my earlier comment suggesting a ‘tax’ on coins that have passed through mixers). There are, no doubt, many more possibilities which would at the least cause a headache for holders, and at worst – significant losses.

There is of course, the simple tax audit. As most of the tax rules surrounding Crypto have yet to be written, and considering that it is in government’s interest to maintain a tight grip of control (not to mention get a piece of the now nearly $200 billion pie) we may expect simple tax audits – especially for those with large value balances. These audits may range from casual to predatory. While I do not advocate for tax avoidance in any way, it would be unrealistic to not expect people to do everything they can to avoid paying taxes (never mind if they perceive the tax-process as in any way troublesome, unfair or harassing).

Then there is ‘Civil Asset Forfeiture’. In most states in the U.S., if money is suspectedof being used in a crime, then authorities can seize it. How sure are you that the Bitcoin in your wallet are beyond suspicionof ever having been used in a crime? Remember, we are talking about their entire history of its existence, not just recently or while in your possession. If there is even the suspicion of this having happened, then you could in theory receive a demand notice that you hand-over your Bitcoin to government authorities or face further penalties.

So back to the header of this section – what it means for prices: whether it happens slowly or ‘all at once’, when people begin realizing that holding a money that doesn’t have fungibility exposes them to all sorts of risks, some portion of them will sell their Bitcoin (and ETH, etc.) and swap into a coin that provides these features: Monero. As such, while at the time of this writing Monero is only about 1/50^th the market value of Bitcoin, it could over time reach a far higher ratio. This may take considerable time, or very little. The recent action we’ve seen in Bitcoin Cash vs. Bitcoin shows just how quickly the tide can turn. But unlike the BTC vs BCH debate, BTC vs Monero isn’t a debate at all – its settled science. One is fungible and protects holders – the other is not, and exposes all holders to the risks of unsound money. As such, if Monero were to ‘inherit’ the market cap of Bitcoin today, it would appreciate in value by more than 50 times, and put it on surer footing for long-term success than a money without fungibility.

A Few Concluding Thoughts

While there are other benefits to Monero, I will not address them here with the exception of one  - as it relates to the need for privacy (away from criminal use cases) and so supports the adoption case quite strongly. Bitcoin, and any non-private coin, will be increasingly troublesome to adopt for businesses. After all – do you as a business owner want everyone in the world to be able to see how much money you have and when/where you move it? In Bitcoin, if anyone has your wallet address (say from doing a small transaction with you), they can see exactly how much money you have in total – never mind track the money from that point on. While there are many complicated hoops you might ‘jump through’ to avoid this situation as a business owner, you could do just one – adopt Monero – and rest easy. 

Secondly, if you haven't yet done so, I highly encourage you to read  The Power of Money: A Case for Bitcoin . While I will make an edit at the beginning to note that this piece (on Monero) is effectively the successor coin, all the arguments made about Bitcoin can (and should) be extended to Monero.

Finally, as always, constructive feedback is welcome. As I think I've made abundantly clear via my about-faces in Ripple and now Bitcoin, I am not shy about admitting I am wrong. If I have erred in any part of this analysis, I genuinely appreciate being corrected along with an explanation. It was just such a correction to TPOM that facilitated my understanding of fungibility and Monero.

---

[1] Sorry Ethereum, this applies to you too - and pretty much all other cryptos that derive a portion of their value from striving to be ‘money’ (as opposed to business use cases).

[2] In some regards, I am far ‘later to the game’ than the many Monero supporters whose direction has been invaluable to me. Nevertheless, I, like all people, need to understand things in a way that makes sense to me– hopefully this piece will help others in the same way.

[3] I explain the concept of moneyness, and why Bitcoin satisfies its criteria (even better than gold in ways) in The Power of Money.

[4] By the way, the interactions I’ve had with Monero supporters (in stark contrast to other coins) have been amongst the most thoughtful, polite and insightful I’ve received. Those who understand Monero tend to realize that it’s only ‘a matter of time’ before their day in the sun comes, and that seemingly makes for much calmer and coherent discourse.

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Secure Angular4 with Keycloak Role or Group

Demo template is available for sale for $50. You can send payment via skype at: czetsuya@gmail.com

This article will be an extension of an existing one: http://czetsuya-tech.blogspot.com/2017/10/how-to-secure-angular-app-using.html.

Normally in the front-end side (Angular), we are only concern whether a user is authenticated or not. Authorization whether a user has enough access to a given REST resource is configured in the api side. But what if we want to secure the front-end urls nonetheless? One of the many solution is to create a guard and either add an authorization code in canLoad or canActivate. In this article we will deal with canLoad, as we are lazy-loading our modules (please refer to Angular documentation for more information).

In this particular example, we are checking for the group claim tied to a user. Role would also do, but I normally used that on the REST api side.

Here are the steps:

1. Create a permission-guard model that we will use when defining the route

   export interface PermissionGuard {
       Only?: Array string>,
       Except?: Array string>,
       RedirectTo?: string | Function
   }
   

2. Add the route in your app-routing.module.ts file, and define the Permission model in the data attribute.

   {
           path: 'dashboard/employee',
           canLoad: [AuthGuard],
           loadChildren: 'app/module/dashboard/employee/employee.module#EmployeeModule',
           data: {
               Permission: {
                   Only: ['employee'],
                   RedirectTo: '403'
               } as PermissionGuard
           }
       }
   

3. In our keycloak.service, add the following methods. It checks if a user is a member of a group specified in the PermissionGuard.

   static hasGroup( groupName: string ): boolean {
    return KeycloakService.auth.authz != null && 
   KeycloakService.auth.authz.authenticated 
   && KeycloakService.auth.authz.idTokenParsed.groups.indexOf( "/" + groupName ) !== -1 ? true : false;
   }
   
   static hasGroups( groupNames: Array ): boolean {
    return groupNames.some( v => {
     if ( typeof v === "string" )
      return KeycloakService.hasGroup( v );
    } );
   }
   

4. Going back to the auth-guard.service, let's modify the canLoad method to process the authorization. In here we use the previously defined method to check if the current logged user is a member of an specific group.

   canLoad( route: Route ): boolean {
    if ( KeycloakService.auth.loggedIn && KeycloakService.auth.authz.authenticated ) {
     this.logger.info( "user has been successfully authenticated" );
   
    } else {
     KeycloakService.login();
     return false;
    }
   
    this.logger.info( "checking authorization" );
   
    let data = route.data["Permission"] as PermissionGuard;
    
    if ( Array.isArray( data.Only ) && Array.isArray( data.Except ) ) {
     throw "Can't use both 'Only' and 'Except' in route data.";
    }
   
    if ( Array.isArray( data.Only ) ) {
     let hasDefined = KeycloakService.hasGroups( data.Only )
     console.log("hasDefined="+hasDefined);
     if ( hasDefined )
      return true;
   
     if ( data.RedirectTo && data.RedirectTo !== undefined )
      this.router.navigate( [data.RedirectTo] );
   
     return false;
    }
   
    if ( Array.isArray( data.Except ) ) {
     let hasDefined = KeycloakService.hasGroups( data.Except )
     if ( !hasDefined )
      return true;
   
     if ( data.RedirectTo && data.RedirectTo !== undefined )
      this.router.navigate( [data.RedirectTo] );
   
     return false;
    }
   }
   

5. An additional bonus is having a directive that we can use in the UI side to hide / show an element when a user is either a member of a group or not

   import { Directive, OnInit, ElementRef, Input } from '@angular/core';
   
   import { KeycloakService } from 'app/core/auth/keycloak.service';
   
   @Directive( {
       selector: '[hasGroup]'
   } )
   export class HasGroupDirective implements OnInit {
   
       @Input( 'hasGroup' ) group: string;
       @Input( 'hasGroups' ) groups: string;
   
       constructor( private element: ElementRef, ) { }
   
       ngOnInit() {
           if ( KeycloakService.hasGroup( this.group ) ) {
               this.element.nativeElement.style.display = '';
           } else {
               this.element.nativeElement.style.display = 'none';
           }
       }
   }
   
   

Questions:

1. What is 403? It's an additional route to redirect when a user is not authorized.

   { path: '403', component: ForbiddenComponent },
   

Note: This article is inspired by ng2-permission.

Demo template is available for sale for $50. You can send payment via skype at: czetsuya@gmail.com

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Bitcoin is a failure as a currency

Bitcoin shares none of the properties that characterize a well-functioning mean for payment or storage of wealth.

The internet flourishes with amateur economists with weird economic theories on why Bitcoin will become a world currency. The common denominator is that they lack basic knowledge of economics.

For example, bitcoin fans have a strange fascination for gold. They are obsessed by the idea that everything was better when the money supply was determined by the amount of gold in the vault of the central bank. Since the supply of Bitcoin is given by its algorithm, it is apparently perfect as a world currency.

But when was the last time you used gold to pay for something? That the supply is fixed does not mean something is a good medium of exchange. Rather quite the contrary. When the central bank stabilizes its currency, the bitcoin community views it as a conspiracy and manipulation. But it is this exact manipulation that makes conventional currency far more suitable for exchange than Bitcoin or gold.

Since 1950 gold volatility relative to consumer prices has been six times that of the dollar.

When prices increase too much, it means that the value of dollars fall relative to goods and services. The Fed then stabilizes the real value of goods and services by increasing the interest rate. This immediately reduces the amount of dollars in circulation, which in turn limits the decline in dollar value.

The Fed and other central banks do this because the population primarily want a stable currency, not an erratic one. Very few people like the idea of a checking account where the balance can halve or double without notice. This is the exact reason the gold standard was abandoned. It inflicted unnecessary damage to the economy by imposing volatility and harming growth. It was an obvious dead-end.

Another bizarre idea is that Bitcoin must increase incredibly much in order to cover the rising demand for it as a medium of exchange. The market value of Bitcoin is now less than a tenth of the amount of American notes and coins in circulation. Since there is a given amount of Bitcoins available, the increase in transactions cannot be covered by issuing more coins. The only solution is that Bitcoin must rise in value to insane levels.

But the Bitcoiners do not understand the very obvious inconsistency in this argument. If Bitcoin against all odds were to rise so much, it is completely implausible that the owners would start spending those dear coins on a hotdog on 7-11. Those who at this time do not own Bitcoin, probably do it for a reason. It is therefore difficult to envision that many outside the choir will adapt it.

The large fluctuations, the enormous increase in value and lack of a stabilizing mechanism makes this currency completely useless as a means of payment or for storing wealth. In contrast to stocks, Bitcoins yield no dividends. If it does not become a means of transaction there exist no good reason why it should have any value at all. Nevertheless, it is trading for more than $8,000. Bubbles do not come any cleaner than this.

Economics-101 could also have helped Satoshi Nakamoto, the obscure inventor of Bitcoin. The first thing an inventor of a new world currency should check out is the required capacity. With a quick search on the internet Nakamoto would have learned that there are two-three hundred billion currency transactions worldwide annually. Bitcoins crumbles by a decimal of a percentage of this.

This development bug led to a split in August into a new currency Bitcoin Cash, with more capacity. A short while ago, the SegWit2x split was canceled. It is common knowledge that the original Bitcoin does not have enough capacity to become a new world currency, but the community is unable to agree on what to do with it.

Block chain technology is a very promising technology, but Bitcoin is not a promising currency. For a cryptocurrency to be a stable, secure and acknowledged medium for exchange, the platform must include a credible institution that automatically stabilizes it. I propose the name “Central Bank”.

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Tyler Cowen on Central Bank Cryptocurrencies

I enjoy reading Tyler Cowen and have learned a lot from his columns. So before I criticize his most recent effort, I want to thank him for all his fine contributions! Unfortunately, I think he drops the ball a little bit on his most recent effort. No worries--we all do sooner or later. What follows are some thoughts that came to my mind as I read his most recent article entitled "Cryptocurrencies Don't Belong in Central Banks." My (unedited/uncensored thoughts are recorded in blue...Tyler, take note: "uncensored"= risk-taking central banker!) 

Should central banks embrace cryptocurrencies, or even pioneer their own? In a nutshell, no. Crypto assets are an unusual innovation, still in flux and often poorly understood. Trying to centralize them in a bureaucracy is exactly the wrong way to go. 

"Crypo assets are an unusual innovation" -- this is a claim that makes little sense without first defining what is meant by the term. Most people have in mind some notion of a distributed (shared) append-only ledger of information updated and maintained by members of a community through some consensus algorithm that makes use of cryptography in securing information. I'm not sure how "unusual" this idea is where fintech is concerned (advances in information management systems have been happening for a long time). And, as I explain here, the concept of distributed ledgers updated via communal consensus is an ancient idea. 

"Trying to centralize them in a bureaucracy" makes no sense at all if the very concept depends on a decentralized record-keeping arrangement. And in any case, a central bank that experiments with such a protocol is not "centralizing" all crypto assets--just its own crypto asset. What is inherently wrong with this? The fact that a central bank is a "bureaucracy?" 

Yet China’s central bank claims it is working toward a blockchain-based digital currency. Singapore has already experimented in this direction. The phrase “Fedcoin” is sometimes bandied about, though I’ve seen no concrete sign of the U.S. Federal Reserve jumping on this bandwagon. In its recent quarterly review, the Bank of International Settlements asked central banks to consider whether cryptocurrencies might make sense for them.

The "Yet" beginning the paragraph does not belong there. It presumes we've accepted the premise laid out in the previous paragraph which, as I have suggested, makes little sense. 

Central banks, however, are intrinsically conservative bureaucracies. They shun bad publicity, and they don’t like to be “out there” ahead of the curve. They don’t want their names connected with potential mishaps -- because they value their credibility and their political capital so highly. That’s appropriate, because central bank independence is typically fragile.

Almost everyone shuns bad publicity. No one wants their names connected with potential mishaps. It's not that central banks don't like to be "out there"--it's that they are usually prevented from being "out there" by government legislation. Of course, central bankers should be "conservative" in the sense of respecting the legislation that is designed to govern them.  

Given that background, (which is wrong) should we foist a new and potentially risky responsibility on them? Central banks will feel some anxiety at having to manage a crypto project. (central bankers will always feel anxiety). To conserve their political capital, they will take fewer risks elsewhere, such as unorthodox monetary policy or larger balance sheets. (what justifies this bald speculation?) Yet the response to the 2008 financial crisis shows a certain amount of central bank risk-taking is needed. (those conservative central bankers again, I guess). I’m worried about central banks taking on unnecessary risky projects, thereby rendering them too cautious in other areas. (there's no need to worry about this in my opinion.)

 An additional reason for skepticism stems from the nature of crypto assets. The word “cryptocurrency” is far more common than “crypto asset,” but it’s a misleading term. Bitcoin, for instance, is used only rarely in retail transactions, and for all its success it isn’t becoming more important as a medium of exchange. Bitcoin thus isn’t much of a currency in the literal sense of that term. There is a version of bitcoin, Bitcoin Cash, that changed the initial rules to be better suited as an exchange medium, but it isn’t nearly as popular. (I don't disagree, but I also don't understand the point of this paragraph.)

If you think of these assets as “cryptocurrencies,” central bank involvement will seem natural, because of course central banks do manage currencies. Instead, this new class of assets is better conceptualized as ledger systems, designed to create agreement about some states of the world without the final judgment of a centralized authority, which use a crypto asset to pay participants for maintaining the flow and accuracy of information. (Good, I agree with all this.) Arguably these innovations come closer to being substitutes for corporations and legal systems than for currencies. (Except that in monetary theory, we understand money as a ledger -- a record-keeping system. See, e.g., Kocherlakota, 1998). 

Put in those terms, an active (rather than merely supervisory) role for central banks in crypto assets is suddenly far from obvious. Consider other financial innovations: Does anyone suggest that central banks should run their own versions of ETFs or high-frequency trading? Is there a need for central banks to start managing the development of accounting and governance systems?

Um, yes, yes, and yes. Central banks are already like bond ETFs (assets are bonds, liabilities are reserves and currency). High-frequency trading--like Fedwire, you  mean? And I'm not sure why better accounting and governance systems should not be employed by central banks if it makes sense for other institutions?

Finally, bitcoin and other crypto assets are still in the midst of rapid evolution, with basic questions still unanswered. Should bitcoin “fork” to allow for greater speed in processing transactions? Is the future going to favor bitcoin, the Ethereum platform, or something else altogether? How many initial coin offerings make economic sense, as opposed to being bubbles? Should initial coin offerings be used to fund startups? How many crypto assets should survive in the long run? Can blockchains be used to record and settle the transfer of property titles? Are there any circumstances when it should be possible to revise transactions on a blockchain?

Yes, there are always questions concerning the outcome of fintech. This has been happening for hundreds of years. What is the point of stating this obvious fact and why should the prospect of evolving information technology discourage central banks from experimenting with it? What if such an attitude was adopted when email first appeared on the scene? 

In general, I think the central banks in the world’s developed economies have done a pretty good job. But consider a simple question: Would any central bank have had the inspiration or taken the risk of initiating the bitcoin protocol in the first place?

Let's assume that the answer to this question is no. The only thing that follows from this is that we should not rely on central banks as our only source of fintech. But we already do not have such a reliance. So what is the point being made here? Let's experiment away, I say! 

Well, maybe not. My own sense of the discussion concerning central banks and cryptocurrencies is that people are confounding two conceptually distinct issues. 

The first issue is whether central banks should open the digital component of their balance to the general public (say, the way the U.S. Treasury does at https://www.treasurydirect.gov/). And why not? After all, central banks allow anyone in the world to hold the paper component of their liabilities. This idea is actually very old--it is related to the question of whether a central bank (or post offices) should permit people to open book-entry utility accounts.  This remains a good question and there are many issues to sort out, including what impact such an innovation would have on banks. But it has nothing to do with "cryptocurrencies" except to the extent that cryptography is used to secure communications--something that is already widely employed.

The second issue is whether central banks should issue "digital cash." The digital reserve money associated with the scheme in the paragraph above is not cash-like in the sense that it is not a bearer instrument. People have to identify themselves when they open accounts at the U.S. Treasury. Presumably, they'd have to do the same thing if they opened up a digital money account at at post office or central bank. Digital cash is something more akin to paper money. As far as I can tell, the technology to create digital cash has been around for a long time. That is, there is nothing technological that prevents a central bank (or anyone) from issuing numbered accounts (think of the good ol' anonymous Swiss bank account, for example). Even PayPal could issue digital cash--if it was legally permitted to, which it isn't. So, the question here is whether a central bank should issue digital cash. The wallet-to-wallet debit/credit activity could be done in-house via a central book-keeper, or the activity could be delegated to some third parties (e.g., Bitcoin miners). I don't really see central banks getting into this business, but they will have to think about how private-sector digital cash may impinge on their ability to conduct monetary policy. (Note: the innovation with Bitcoin is not digital cash per se, rather the innovation has to do with P2P digital cash--debit/credit operations that do not rely on a central book-keeper.)

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A comment on "The Long-term Decline in US Manufacturing" by Jeff Frankel

Jeff Frankel guest posts over at Econbrowser about "The Long-Term Decline in US Manufacturing"

The theme is a familiar one on this blog. He posts some interesting data, and I agree with him about the determinants of the long-run decline.  He shares my "favorite" graph:

However, I also had a few other thoughts:

(1) If you extrapolate forward on the US Man. Emp. as a share of total, it becomes negative within several decades. Obviously, it can’t be negative, and thus the slope needed to flatten out at some point. Instead, in the early 2000s, it looks to have been below trend. By contrast, the pace of decline for agriculture did flatten out. But, since there is no clear counterfactual, I’m not sure this series tells us that much, in the end. Another problem is that the sudden loss of 3 million manufacturing jobs may have been part of the reason for the slow growth in overall employment after 2000, which is the view of Ben Bernanke. If Detroit loses 80% of its tradable-sector jobs, and as a result, 80% of its retail and government jobs, then it’s share of tradable-sector jobs wouldn’t change. Then we could conclude that the loss of manufacturing jobs is not what hurt Detroit.

(2) I think it would be good to separate factors affecting the long-run decline as a share of employment, which is mostly fast technological growth and to a lesser extent sectoral shift toward services, and factors affecting the level of manufacturing employment in the early 2000s. The recent decline in the level, which happened alongside the trade deficits, is probably what the public is more concerned with. Trade really does seem to be a dominant factor in the collapse of the level in that period. And the shock does seem large enough to have had macro effects and helped push the economy into a liquidity trap, as Ben Bernanke seems to think.

(3) If you do another international comparison, between US manufacturing output as a share of world output, things don’t look as good. Especially vis-a-vis countries like Germany and Korea, much less China.

I agree with Jeff that protectionism now isn’t the right policy solution. However, US-China relative prices have been set in Beijing for the last 30 years, with China having a clearly undervalued exchange rate during much of that period. Why wouldn’t we have been better off with a free trade regime, with prices set by market forces? Also, if you believe prices matter, why wouldn’t this undervaluation have caused a decline in tradable sector jobs over this period? And, after a long period of the US being overvalued, why do you think the US tradable sector wouldn’t be smaller than it would have been otherwise?

I discussed these issues on this blog previously, and on my own blog:

http://econbrowser.com/archives/2014/08/guest-contribution-the-cause-of-secular-stagnation-relative-prices-trade-and-the-peoples-republic-of-china

http://douglaslcampbell.blogspot.ru/2017/11/did-rise-of-china-help-or-harm-us-lets.html

http://douglaslcampbell.blogspot.ru/2017/05/is-us-manufacturing-really-great-again.html

Lastly, Brad Setser links to an interesting NYT article on the new rise in China's protected automotive industry. It's a great reminder how the US and China do not have free trade in practice, but also to the extent which the Chinese government has internalized Hamiltonian infant-industry protection.

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