Coppola in Knots: Understanding How Bitcoin, In Conjunction With John Nash’s Ideal Money, Serves As a Solution to Helene Rey’s Mundialian Dilemma Juice Follow Apr 22, 2018 · 18 min read

Interesting twitter conversation yesterday starting with this tweet and blog post Gerard references:

His blog has 3 parts, the intro, the body, and the conclusion. The body explains different knock offs of bitcoin such as Bitcoin Clashic:

Bitcoin Clashic (BCHC) is a piece of Internet performance art in the wake of the recent Bitcoin Cash protocol upgrade, whose site is a cut’n’paste from Bitcoin Cash. It’s got a Twitter, because Bitcoin Cash fans are even easier to troll than regular Bitcoiners, and a GitHub. Its whois is registered to 1337 Services LLC, which is incorporated in St. Kitts & Nevis, coincidentally the (passport) home of Roger Ver of Bitcoin Cash.

The intro is:

Ever since Bitcoin Cash launched a “free money for existing holders!” fork, others have come forth, lured by the prospect of making an alternate cryptocurrency that anyone might care about in 2017. The standard motivation to make an altcoin being, per chapter 9 of the book: “you might get rich too if you start your own magical Internet money!” There have been Bitcoin forks before, particularly when the transaction clog first started kicking in around mid-2015. These didn’t operate as separate full-history forks — their aim was to take over as the main Bitcoin protocol: upgrade by forking. However, none achieved sufficient miner adoption. Bitcoin XT was launched by then-core developer Mike Hearn in mid-2015 with an 8 megabyte block size, to increase exponentially with time. Bitcoin Classic launched January 2016, offering 2 megabyte blocks. Bitcoin Unlimited, around the same time, offered block sizes determined by miners, starting at 16 megabytes; it was supported by Roger Ver, the main advocate of Bitcoin Cash. (Bitcoin Unlimited futures still exist and have a trading volume.)

The outro/conclusion is this paragraph:

One of the things a full-history fork encourages is to buy and hold the root coin in the leadup to the announced split, so you can get the free money. This attracted at least some crypto enthusiasts to buy more Bitcoin Original in advance of the now-called-off SegWit2x fork, in hope of it turning out to be a fork of value given it had non-negligible miner support. (Thus showing once again that, like all things and their opposite, full-history forks are actually good news for Bitcoin.) SegWit2x futures are of course still trading, with a price above $0 and a trading volume above $0.

My understanding of this is its a backhanded suggestion that creating alternative cryptocurrencies adds to Bitcoin’s money supply and since Frances Coppola “liked” his tweet, but without specifically saying she endorses the implication/assertion, I decided to invoke the “impartial spectator”:

So apparently I have not understood the thesis. It is apparently not ‘that you can inflate the supply of Bitcoin in a meaningful way simply by cutting and pasting the code’.

Invoking the impartial spectator usually causes the offending party to want to publicly defend:

So, as I understand, there is an implication here that Frances doesn’t necessarily defend Gerard’s blog, whatever his point is, although again Frances seemingly refuses to directly state this.

I continue to invoke the impartial spectator:

Gerard goes on to confirm what I feel his thesis is:

And we begin to understand what it is some people don’t understand about the nature of bitcoin and why it is different than any of its possible competitors:

Frances confirms she sees no difference between the supplied units of bitcoin and any crypto-currencies created thereafter:

Although its true crypto-currencies are in the same group that is different than traditional money, there is a special reason why bitcoin is different:

Frances begins to allude to this:

And we enter dialogue on the subject of Ideal Money, a scenario in which the world lands on an international value standard….

There is a relevant point to be made here in that Keynes proposal for the Bancor is an akin result to my argument for using bitcoin as the basis for John Nash’s proposal for Ideal Money such that “ This newly created supranational currency would then be used in international trade as a unit of account within a multilateral clearing system — the International Clearing Union — which would also have to be founded.”

But Keynes made the mistake of designing his “currency” as a pleas to the superpowers of the world at that time to adopt this “strategy” out of cooperative altruism etc. This is not the nature of Nash’s proposal:

It seems Frances thinks I believe Keynes created the Euro:

Moving on we can understand that there is a reason the gold standard served us well but there is also reasons why a gold standard does not solve our emerging global economic problems:

Frances seems to agree there are limitations but doesn’t yet know the significance to the reason why gold WAS favored:

Nash points out using the USD or the British pound as a basis for an international settlement unit is not as favorable or apolitical as gold:

Can the impartial observer discern the implied value judgments that “others do not necessarily agree” with:

Moving on we observe some of the limitations of a gold standard notably that changes in technology could dramatically affect the reliability (and therefore predictability) of the supply trend:

So we can start to understand there is a more favorable basis and a less favorable. But that isn’t what we have now:

Here is a special point. Nash suggest an even better basis would be an ARRAY of commodity prices. Then it would be even less singular than just using gold. He quickly jumps to the problem of this. If a miracle energy source was discovery you could have unforeseen supply gluts thus massively and negatively affecting the bias of such an index. The index could be adjusted over time but this implies an “adjuster”, a political role, which the intention was to remove in the first place:

And here we arrive. The very most special part about bitcoin that makes it like gold in the most meaningful way that we use gold as an inflation hedge versus unstable currencies:

If there is a massive discovery in energy the cost to produce bitcoins is dramatically reduced and thus there is greater profit to be made. More miners would join the network to mine to reap this profit and the hashrate would increase. In turn the difficulty adjustment algorithm will kick up the cost to mine a bitcoin. It would be a misconception to suggest bitcoin’s supply is simply fixed per time. Rather it is this difficulty adjustment mechanism that makes sure that increase the amount of miners doesn’t cause more bitcoins to be mined at a faster rate.

(If I have made a mistake here whether economically, logically, or syntactically, etc., please let me know. The above paragraph is critical to our solving the problem of our global economy we should want to both correct it and understand it.)

Bitcoin solves the problem that Nash outlines with respect to this ICPI which is his proposal to the solution to a global problem most of us don’t otherwise know exists.

In this sense we can understand, perhaps, how Satoshi’s “blunder” of creating a money that is inelastic is really Nash’s genius:

And some people feel that genius is crazy:

So we move to a possible scenario to understand a special counter strategy central banks might use against a “bitcoin price mooning” event:

Frances doesn’t understand what I am about to show:

And Gerard also doesn’t know what I am about to show:

It seems perfectly reasonable to state a premise as a hypothetical and I tend to think the impartial spectator would agree:

Gerard feels such a scenario as a hypothetical is “incredibly stupid” and that “this entire thread is dumb as heel and a waste of neurons”:

A congressional research report on Bitcoin also discusses this exact possibility and alludes to the same scenario and so I tend to feel the impartial observer will sympathize with yours truly:

The Federal Reserve conducts monetary policy to affect the flow of money and credit to the economy in order to achieve stable prices, maximum employment, and financial market stability. At Bitcoin’s current scale of use, it is likely too small to significantly affect the Fed’s ability to conduct monetary policy and achieve those three goals. However, if the scale of use were to grow substantially larger, there could be reason for some concern. Conceptually, Bitcoin could have an impact on the conduct of monetary policy to the extent that it would (1) substantially affect the quantity of money or (2) influence the velocity (rate of circulation) of money through the economy by reducing the demand for dollars

Nonetheless I remove the premises:

The response is unintelligible AFAICT:

Didn’t get a response but I remind him:

What do I “show”?

Frances and Gerard suggest banks could/would never try to peg their currencies to a mooning bitcoin. But we have to understand why it would be mooning. To understand this we can look to a speak that was recommend as a read by Frances to me during our exchange, Helene Rey.

Let us do the world a favor and take 16 minutes to understand the problem of the global economy from her view, or rather a possible problem:

(That video serves as a nice summary of a more detailed explanation of this lecture)

Rey terms the scope of her observation the “global economic cycle” and in particular she points out there are asymmetries in the balance sheet of the US between the assets and the liabilities. Furthermore this observation suggest that in times of a crisis there are different implications between the US’s economy and the other countries of the world (with a caveat that the US has the most data to observe).

In her view, and she has spent a lot of time collecting relevant data, the US functions like a world bank and she observes, not necessarily that a crisis is inevitable, but that it is very possible. The stage is set for a run on the US as a world bank.

This is the problem she observes and suggest that we might start entering dialogue and considering how we might prevent his.

Loosely put she believes the IMF might renew and revamp its role as a liquidity provider for the world. I tend to share this view to some extent.

I am not sure what Frances contention with Keynes is. Sometimes we get confused with ends versus means. And I am certainly not deeply educated on this subject but as I understand Keynes meant to address the problem of international settlement, as does Rey.

And Keynes proposed the bancor and that:

This newly created supranational currency would then be used in international trade as a unit of account within a multilateral clearing system — the International Clearing Union — which would also have to be founded.

This is why the IMF was created, not necessarily because of Keynes bancor proposal but as a resolution to the bretton woods conference in which the solution was for the US to serve the world US dollars as an international settlement unit that was to be ultimately pegged to gold.

As Nash stated this is not a stable situation which is not disputed since we broke of this standard in an event called the Nixon shock.

This is all very related to an author Saifedean Ammous who recently released a book called “A Bitcoin Standard” in which he toutes “sound money” and tries to destroy Keynesian theory (mostly with ad hominems). What Ammous doesn’t acknowledge is that Keynes, from the Nashian view, was calling for a solution that would inspire central banks to print sound money.

But the result of the Bretton Woods was a rejection of an such ideas relating to the implementation of the bancor. Instead the US chose to control the peg themselves which introduces the political role Nash’s proposal FORCIBLY removes.

What Has Been Shown?

Bitcoin can clearly serve as the basis for John Nash’s Ideal Money and in that there is no changes to bitcoin required. That is to say it might not serve as a good coffee purchasing money (although it might!) but there is no limitation in regarding to it serving as a crisis hedge in case Rey’s scenario of a run on the US as the defacto world bank happening.

This is why it’s so important to understand how and why the difficulty adjustment makes bitcoin “gold-like” but gold-like from the NASHIAN view.

I hadn’t realized Frances had asked me to give her space with the argument (and the impartial observe might agree I am obsessive with the proposal for Ideal Money) so I had already asked the most important question and point that was getting to….(the tweet below is not in the proper timeline but is relevant nonetheless)…

When Frances and Gerard cannot see that printing alternative cryptocurrencies is not the same as adding to the supply of bitcoin IN THE MEANINGFUL SENSE of bitcoin serving as an apolitical basis for our legacy state money systems, it is EXACTLY this point here that they have missed:

Apparently this was a trigger:

Nash’s writing is intelligible enough it seems:

Unfortunately, for this cause Nash purposefully obfuscated his proposal for fear of government reprisal:

The script or plan for my talk linking the “ideal money” with the choices and actions of “thrift” or “savings” by persons or by “economic agents” was influenced by concerns that it would be wise not to speak too incautionsly of “the Keynesians” when the times are such that massive public opinions maybe supporting actions by which a state administration can act without going through the parliamentary processes to write new legislation. So in the rush of political campaigns and elections (for example in the USA) it is difficult to sell a national monetary policy which, if followed consistently on a “long run” level, would result in the specific nation state existing as if on a higher level of economic civilization. (For example, Sweden and Argentina might be usable, over a long time comparison, to represent comparable “economic civilizations”.) Therefore, I had arranged for 2012 to talk more cautiously in relation to whatever would impact with “the Keynesians” and with the political interest relating also to the scholarly factions allied with (or forming) “the Keynesians”. And this caution carries over naturally to 2013 also. ~public note from John Forbes Nash’s university homepag

That is to say the point I have made about the comparability of bitcoin and gold that gives bitcoin a special Nashian quality, is not encapsulated in his 8 page lecture (Nash gave left us many talks and multiple writings and papers to parse).

A Relevant Thesis

It seems later that (last) evening Frances posted a blog with the exact thesis I feel Gerard had implied which from my perspective is a lack of understanding the Nashian observation of the value and therefore purpose of bitcoin (specifically why it has an inelastic supply when traditionally this has been shown to be not perfectly useful).

She does a brief and basic treatise on the formalization of money theory which is helpful enough. And begins a tirade against “bitcoin maximalists”:

Anyone who has debt is in deep trouble when the value of money is rising, because the value of the debt rises too

But this doesn’t speak to bitcoin maximalists since they would counter their debts are infiat and their wealth is in bitcoin. So their wealth grows and their debts get easier to pay off.

Here Frances does outline that there is a perfect money equilibrium using Irving Fisher. The basic idea is that money serves a population as a type of lubricant and as the economy or output of the economy naturally grows in a stable fashion there is a great demand for money. If the money supply doesn’t grow with the economy then the economy will suffer:

Irving Fisher, who was no monetary dove, had some pretty harsh words for this:

But, in practice, general over-production, as popularly imagined, has never, so far as I can discover, been a chief cause of great dis-equilibrium. The reason, or a reason, for the common notion of over-production is mistaking too little money for too much goods.

Fisher shows us that when there is too little money in circulation for the amount of goods & services produced, and no more M can be produced, the result is economic depression. I do have some sympathy for those who say “just fix M, and let P and Q sort themselves out”. But there is another, better, way — and that is to allow M to respond to the demand for money.

Here Frances and Nash are in agreement, except for the implication that bitcoin, having an INELASTIC supply, should pose as a problem or lacking solution or our global problem. To simply say “we need a money supply that is elastic to the demand for it and bitcoin is inelastic therefore bitcoin is irrelevant, is to miss the Nashian observation of why bitcoin is like gold.

Frances continues to frame her inquiry and observations from the question of whether bitcoin can be ideal money if its supply is not elastic rather than considering that bitcoin, in conjunction with John Nash’s proposal, might serve as a solution to the possible impending problem outlined by Helene Rey. And in doing so Frances continues to make the mistake that creating more alt-coins add to either the supply or the diminution of bitcoins purchasing power in any meaningful way:

Money must have velocity, or it cannot function as a medium of exchange. When money is so scarce and illiquid that its velocity falls towards zero, people create new forms of money for transactions. This is what is currently happening in the cryptocurrency world. As Bitcoin becomes more illiquid and less usable as a medium of exchange, people are turning to other cryptocurrencies. In fact they are creating them. Lots of them.

It must be interesting to note this is the very thesis I caught her bookingmarking as previously shown in this article.

And it can hardly be denied this is her point as she most perfectly states it:

One of the unintended consequences of the complete lack of regulation in the cryptocurrency ecosystem is that there is unlimited money creation.

And re-asserts it:

…all a cryptocurrency user has to do is produce a bit of code and a white paper, and hey presto there is a new coin. Even if individual coins have issuance limits, the fact that new cryptocurrencies can be created without restriction means there is effectively no limit to the money supply in the ecosystem as a whole.

What is quite puzzling is how newly copy and pasted crypto-currencies all of a sudden count as the supply of money but the ACTUAL money we use does not:

This is in stark contrast to the fiat currency system, where central banks at least try to limit the creation of money by commercial banks, though not always successfully. In the cryptocurrency world, no-one even tries to control M.

Note the last sentence there, and keep in mind the novelty of Satoshi’s difficulty adjustment which either raises or lowers the cost to generate bitcoin depending on the demand for the currency units (therefore putting on throttle on a possible oversupply):

In the cryptocurrency world, no-one even tries to control M.

And we return to the strange notion that bitcoin’s supply is not finite because we must count all other crypto-currencies as the sum total of all coins (but not include actual money such as the Euro or the USD etc. in the sum):

Both Mises and Hazlitt said that M is the sum total of the money created by all money creators in the economy. By analogy, therefore, for the cryptocurrency ecosystem, M is the sum total of all coins, not just Bitcoin.

Bitcoin’s supply slows over time and Frances admits this and then suggests the aggregated prices of crypto-currencies are hyper-inflating:

Bitcoin itself is inflating more slowly than it did two years ago, because the block reward has halved, but the cryptocurrency ecosystem as a whole is hyperinflating. Unsurprisingly, so are its prices.

One year ago a bitcoin cost about $1000 (USD) and today, although there has been a market crash from $20,000 bitcoin is attempting another upswing and is currently at $8900.

If we look at the market cap of all of the crypto-currencies together aggregated from coinmarketcap.com we can see a gain from $25 billion to $400 billion USD over the last year.

What definition of hyperinflation is Frances using?

Things get stranger:

Ever wondered why cryptocurrencies are valued in dollars?

As an economist I wouldn’t want to be caught dead saying this. It is obviously preference in which currency we describe our prices in. And it certainly cannot be said that we only price bitcoin in dollars. I’m canadian and with my peers we are often interested in the CAD/Bitcoin price. We are however also interested in the Bitcoin/USD price as well as the USD/CAD price etc.

In China the Yuan/Bitcoin price would be quite relevant as well as the USD/Yuan and the USD/Bitcoin etc.

I have no idea how Frances wouldn’t know that. But it allows her to continue to build an argument that does not fit the use-case that bitcoin is being held for right now:

Exuberant coin creation is made possible by a wholly irrational belief that there will be enough US dollars to enable everyone who has bought into this hyperinflationary ecosystem to cash out at its vastly inflated prices. Whatever Bitcoin maximalists may claim, the cryptocurrency ecosystem’s anchor is not Bitcoin, it’s the US dollar. And it is not Bitcoin’s “sound money” that enables cryptocurrency prices to rise to dizzy heights, but the assumed backing of the Federal Reserve for the faux dollar liabilities being created. But the US taxpayer has not agreed to support this system, and is highly unlikely to do so. At some point, there will be a reckoning.

There is some aspect that is relevant and reasonable. If we want to suggest that the US functions as a world bank then we might suggest that anything piggy-backed on the USD is subject to problems with the soundness of the USD. But there is nothing unsound in using bitcoin as a crisis hedge against such a scenario (just as people hold gold for the same reason).

It is not the faith in the exchange price or the purchasing power of the USD that causes a bitcoin maximalist to hodl bitcoin rather quite the opposite. That the exchange price isn’t necessarily a secure reflection of the value and that the purchasing power of the USD (and/or the quantity of it depending on the scenario) is not at all guaranteed is exactly why bitcoin maximalists hold and tout bitcoin:

We Arrive

Frances is still stuck on the definition of money trying to justify a view that was never argued by the creator of bitcoin:

Secondly, setting a hard limit on the supply of money does not prevent inflation, if people can respond to the restricted supply by creating alternative moneys. Note that I am using the Austrian definition of “inflation” here. If you evade a hard limit on one kind of money by creating another kind of money, you have increased the money supply.

Going off on a rant about how bitcoin cannot be Ideal Money, even though its creator never claimed it to be:

It is surely better to allow M to adjust so that prices remain stable, than to keep M fixed and allow prices to swing wildly

Frances is not speaking to mine or Nash’s argument and I hope this is clear now to the impartial observer.

A strange quote here, the suggestion that we can dampen the demand for money and have a favorable economic result:

Finally, influencing the demand for money is a pretty good way of managing inflation. After all, if you can dampen demand for money, people will be less likely to create alternative moneys to evade a hard limit.

I don’t understand this because the demand for money comes from favorable economic growth.

We return to the false assertion that there is any meaningful sort of hyperinflation in the bitcoin space and that it pertains to bitcoin’s ability (or her assertion of inability) to serve as a basis for international settlement:

Rather than pretending that the only “true” money is Bitcoin and ignoring the growing evidence of out-of-control inflation in the cryptocurrency ecosystem, perhaps Bitcoiners could give some thought as to how the demand for coins can realistically be managed so as to prevent a disastrous crash when US dollar support for their ecosystem is withdrawn.

She asserts when the US support is withdrawn the system will crash, but the assertion from the Nashian perspective is that in a situation of crisis that Helene Rey describes might happen— namely a run on the US as our world bank — it is exactly this “alternative savings” device, bitcoin, that will allow citizens to find a safe haven.

And from this, we can see, there is no meaningful inflation for bitcoin. Bitcoin’s finite supply and difficulty adjustment algorithm allow it to perfectly serve as a crisis hedge even for nations as a whole and their central banks (to use as reserve).

Why the Witch Hunt!?

Firstly I object to the phrase. I awoke today to notifications from the same person that seemed to get offended from me “spoon-feeding” her “Nash”. But I was really trying to explain to her what she doesn’t understand. And I cannot understand what I was supposed to stop doing that she is not doing back to me and to others. Her twitter undertitle is:

If you don’t want me to correct your facts, get them right

Someone asks, of Helene’s possible scenario of a run on the USD:

I misunderstand it seems:

I get corrected:

And return to my thesis:

I get corrected. There wouldn’t be enough bitcoin:

:)