Philipp Bagus. In Defense of Deflation.

The Telegram channel BITCOIN TRANSLATED has published a translation of Philipp Bagus’s book The Defense of Deflation (as usual, I have moved the text to my own site to avoid broken links). The translator is Sergey Soltys. I haven’t read the book yet; once I do, I will post a review. But I shouldn’t delay your access to the reading just because I haven’t formed an opinion on the text yet. Usually, if libertarians translate something on their own and put it in the public domain, it means they consider the work to be worth it.

Arguments about the shortcomings of bitcoin. What do you think?

I feel that this article pointed them out as accurately as possible.

Anal Magician

The article was written on 17.03.18 shortly after the crash from historical highs. Let’s review the arguments from the perspective of the years passed.

1. So far, this is pure theory, not proven by practice

Bitcoin is believed in by adepts of ancap and AES, others don’t need it. For most, the state is fine, and anarchy is not fine.

True. There is no point in trying to persuade. They will come themselves when life forces them.

2. “Solvable problems” are made up

Blockchain is inconvenient as a real estate registry, etc.

True. The bottleneck is the mechanism for confirming the truth of the information stored in the blockchain. The maximum amount of information about the non-digital world that can be entrusted to a blockchain is a certification that an event took place no later than the addition of such-and-such a block to the blockchain. It’s like photographing a person with a newspaper to certify that they were alive at the time the newspaper was published—it’s possible, but it’s using a newspaper for something other than its intended purpose.

3. Irreversibility of transactions

Examples are given of handing over bitcoins under duress without the possibility of return.

With the same success, one could shake out a PIN code and cash out a bank card. Large sums in bitcoin are not hard to protect, for example, via multisig. It works no worse than additional confirmation of bank transactions. The problem is contrived, unlike the problem of blocking bank accounts.

4. Cryptocurrency payments: expensive and slow

Fast and cheap on-chain payments are a vanishing luxury, the infancy of the technology. Those wishing to stay in the game need to master second-layer protocols.

5. Unsuitability as a medium of exchange

The exchange rate is unstable.

Those for whom it is critical can use stablecoins, and convert small amounts into fiat immediately. There are plenty of tools.

6. Unsuitability as a means of long-term investment

The author is not talking about what one might think based on the headline, but about the fact that bitcoin’s capitalization is small, and if one invests a large sum, it will be impossible to withdraw it within a reasonable timeframe without crashing the rate. That is, it is about low liquidity, not long-term price trends.

True. With the current capitalization, medium capitals are entering bitcoin—large ones still cannot.

7. Blockchain as a noose for the economy

Deflation is harmful.

For hard money, this problem does not exist.

8. Blockchain democracy is worse than existing systems of separation of powers

A Belarusian explains to Russians that the state system of checks and balances works perfectly, while bitcoin’s mechanisms for ensuring decentralization are somehow dubious.

Incorrect. Bitcoin’s decentralization is stable because it is beneficial to everyone. Every participant has something at stake: funds invested in miners, in the bitcoins themselves, in maintaining a node, or in software development—an attempt at dishonest play leads to losing those funds. This is how the creators of bitcoin cash manipulated the price and suffered losses.

9. Inequality and market manipulation

There are whales in the crypto market who control serious amounts; they are capable of playing with prices.

I can offer my old posts on this as an answer: one, two, three.

10. Technology does not save from collusion

For various small cryptos, things like a 51% attack are relevant.

All the worse for small cryptos. Bitcoin has already passed the stage where it could be attacked for a reasonable amount of money.

What is the result?

Cryptocurrencies lost the first round; work on mistakes is necessary. The demand for crypto-anarchy ideas will fall; the “straight guys” choose centralized solutions.

From the height of the past two years, no loss is visible. Bubbles burst, the viable strengthened. Centralized solutions may be useful for small payments, but decentralized ones do not tolerate haste, and solid gentlemen prefer them.

Epitaph for TON

When I was asked a year ago whether TON had any prospects, I, as “smart Masha,” reasoned about the network effect and other technical and economic challenges the project needed to overcome to stand a chance—and generally demonstrated my skepticism. The reality turned out to be much simpler and more hopeless: the project was simply banned.

For this very reason, in a recent post about Bitcoin’s rise, I pointed out that Bitcoin’s dominance among cryptocurrencies seems to me to be the only viable scenario. Not because “helicopter money” flowed into Bitcoin, as Grigory Bazhenov tried to present my position, but specifically because Bitcoin is invulnerable to regulators. They can curb its penetration, they can pressure the exchange of Bitcoin for fiat—but they are unable to destroy it. Even if the NSA manages to find and imprison the real Nakamoto—what would that affect? At most, a heap of Bitcoins would be dumped onto the market, but the market would swallow them without choking. However, sanctions against Durov, Zuckerberg, or Buterin are indeed capable of seriously affecting the projects they lead. This link turned out to be the weakest. This is the Achilles’ heel of any potential “Bitcoin killer.”

Of course, all the software developed as part of Durov’s project is open source, and it has already been launched under the name free TON, but it lacks the very network effect that was the main bet and the killer feature of TON—Durov officially stated that he would not support such projects, which means the new free crypto has no hope of being integrated into Telegram.

But every cloud has a silver lining. It was precisely thanks to my review of TON’s capabilities that I became acquainted with Lightning—and I continue to recommend everyone use it. Over the past year, it has become much easier to use, and while the Lightning manual used to take up a separate page on my site, now it is a short paragraph on the donations page.

Durov created a great achievement—VK. It was taken away. He created an even greater one—Telegram. It took off, but it didn’t seem like enough to Pavel. He reached for the greatest of all, and it is not his fault that it didn’t work out. But what is truly bad is that now Durov will have to cover the losses at the expense of Telegram. I hope he has learned lessons from the VK case and will try not to ruin the project.

Money, a continuation of the discussion

I am grateful to Grigory Bazhenov for continuing the discussion about the future of money. Cross-posting on Telegram is a somewhat autistic format for conducting a conversation, but what can you do—it’s a quirk of the platform.

Consumer inflation in the USA.

Here is my quote from our discussion in the YouTube comments:

If people are sitting at home in quarantine, then the production of consumer goods and services will decrease one way or another. Meanwhile, governments are proposed to subsidize people’s lost wages, meaning they will have money to go to the store, but goods will appear there in smaller quantities. In other words, either the government regulates prices, as already announced in Russia, and gets a shortage, or it doesn’t regulate, and gets price increases.

After some time, I read in a post by the authoritative Americanist Dudakov:

The forecasts of economists, who predicted that after the epidemic the USA and other Western countries would experience a jump in consumer inflation for the first time in 40 years, are coming true.

The spike in meat prices served as an illustration there, but the problem is much broader. I had not read the economists’ forecasts mentioned by Malek, and I made my own forecast based on the simplest logic. To be fair, I thought governments faced a dilemma—regulate prices or accept their growth. It turned out that Trump resorted to a third option—direct directive management of production.

However, the assumed rapid recovery of developed economies will most likely lead to the fact that prices for temporarily underproduced consumer goods will return to values close to pre-crisis levels. So, on this relatively unimportant issue, I see little sense in debating for long.

The role of Bitcoin

My original question to Grigory was formulated as follows:

How will an economy behave in which money created in a fractional reserve banking system and money that does not provide for fractional reserve circulate in parallel on comparable scales?

I am not an economist, and I was interested to know the opinion of professionals about how the behavior of a system with the proposed parameters would look. Alas, instead of an answer, I received assurances that Bitcoin’s capitalization today is too small, its volatility is too high, it cannot be used as money, it is poor as a hedge asset, and so on. In short, I was told about today’s Bitcoin, not about a hypothetical situation in which its capitalization has already reached values comparable to the money supply of global reserve currencies, or at least gold.

Well, for now—yes, I fully agree that Bitcoin is more volatile than gold, that it is a poor hedge asset, and that its liquidity is lower than that of the dollar (although on the global market, Bitcoin’s liquidity is much higher than that of the Russian ruble). Today, the role of Bitcoin is less an instrument for short-term speculation and more an instrument for long-term investment. For someone who bought Bitcoin five years ago, it doesn’t matter much how much today’s rate jumps, because they have been firmly in the green for a long time. Similarly, for today’s buyer, it doesn’t matter much at what price they buy if they intend to hold Bitcoin for at least five years. They will be in the green anyway. If Grigory disagrees with this statement, it would be interesting to read his arguments.

However, even in that unlikely situation where the long-term trend of the BTC/USD currency pair turns from growing to horizontal or even falling, Bitcoin retains its significance as digital peer-to-peer cash—that is, value that can be passed from hand to hand via communication channels without using unreliable intermediaries such as state-regulated banks or transfer systems. However, my question to Grigory concerns only that hypothetical situation where the capitalization of BTC and the volumes of trade in it have already grown significantly—not the current picture, which we already know.

Unsecured obligations and fractional reserve

Separately, there is a post by Artem Seversky stating that money is an anti-commodity, and that issuing loans from own savings is inefficient, and it is much more sensible to issue loans with money created out of thin air. I see no reason to forbid anyone from giving others unsecured obligations; it is quite enough for me that secured and unsecured obligations cannot be confused, and beyond that, let market mechanisms work.

For example, I can use Bitcoins in settlements, and if I receive a Bitcoin loan, it is only because the lender actually had those Bitcoins on hand before kindly lending to me. Or I can issue my own ancap-tokens, tie their price to a single commissioned article—and sell tokenized obligations for creating texts to anyone willing in exchange for consumer goods. This would be an unsecured obligation, but what does fractional reserve have to do with it? Fractional reserve is if someone buys a hundred of my tokens and issues a thousand of their own, with an obligation to exchange them for mine upon first demand.

Franklin looks at the gypsy physical Bitcoin as an unsecured obligation

Bitcoin’s Ascent

I rarely initiate public discussions myself; far more often, I publish reactions to my own texts and answers to those reactions. But not long ago, I couldn’t resist. In the video Money printer go brrr on the FuryDrops channel, Grigory Bazhenov attempted to present the basics of macroeconomics regarding the money supply, the workings of the money printer, and the money shredder in fairly popular terms. The video suggested that the Federal Reserve pumping trillions into the economy would not lead to inflation, but would merely compensate for the decrease in the multiplier.

In the comments, I inquired how the presence of a factor like Bitcoin—where the user chooses whether to operate within full reserves or turn to centralized intermediaries whose multiplier may be greater than one—would affect this entire model. I also predicted consumer inflation in the USA. The discussion was quite long; it’s better to look at the thread under the video yourself. There, Grigory Bazhenov and Artem Seversky objected both to the applicability of Bitcoin as money and to the possibility of inflation in a shrinking US economy. Artem even wrote a separate post about how money, by its very nature, means unsecured obligations and therefore can only be based on fractional reserves; otherwise, the economy stalls.

What do we see literally two weeks later. Consumer inflation indeed spiked in the USA. Using Trump’s helicopter money, people actively bought Bitcoins; this is evidenced by a beautiful graph showing the share of deposits of exactly 1,200 dollars (the amount paid to all US citizens) arriving at the most popular American crypto exchange, Coinbase, immediately after citizens received gifts from the federal treasury.

Finally, yesterday the Bitcoin price, as I promised on March 16, the day the price dropped to 4,400 dollars, shot up, and if anyone failed to buy in over the past month and a half, they must be feeling sad now. Though, it wasn’t the most suitable time for investments.

Finally, during this time, it has become clear that one should not pin hopes on corporate cryptocurrencies like Libra or Ton: they are too vulnerable to the ill will of regulators. Therefore, Bitcoin still looks like the only alternative money for a bright stateless future, and I feel sorry for clever economists like Grigory Bazhenov, who consciously try to distance themselves from this future: after all, you might find that there is simply no suitable place left for you there.

Bitcoin. A new video from Libertarian band

The second episode of the third season of our favorite series by Libertarian band has been released. The third season, dedicated to the mechanisms of a stateless society, began with the criteria for the stability of anarchy. We examined several of them, chose one, and settled firmly on it. Bitcoin is an excellent illustration of how this criterion works.

We briefly went through the history of money and described why Bitcoin emerged, why it was created in this specific way, and why it is an excellent tool for a stateless society, without which, of course, things would have been significantly more difficult for us in the wonderful Ancapistan of the future.

What do you think about the recent drops in bitcoin and gold? The most interesting thing is that right now all investors are rushing to buy US government bonds as the most reliable in the world in the event of a crisis. How do you comment on this?

Sea King

Bitcoin is a digital asset designed to perform the function of money, and it indeed possesses a number of properties inherent to good hard money. It is not surprising that among those who actively use Bitcoin, there has been a supposition that it is an excellent safe-haven asset, and that in the event of a financial crisis, money would flow specifically into it. As for gold, it is a safe-haven asset with a centuries-old history, and the fact that it would rise during a crisis was not subject to any doubt whatsoever.

Nevertheless, let us recall how gold behaved during the previous crisis. From March to November 2008, while the mortgage crisis was gradually turning into a financial one, the price of gold fell: everyone needed dollars specifically to plug the holes. And only when central banks began to compete in who could lower interest rates faster and buy up more junk papers did the resulting excess of dollars lead to a two-year rally in the gold market, during which its price reached an all-time high.

Gold in the last crisis: first down, then up

Currently, we are at the very beginning of the crisis. Just like last time, everyone is first running to the dollar. But, unlike in 2008, when quantitative easing was far from immediate, there was no delay in pumping the economy with fiat this time. On the other hand, it must be noted that immediately before the start of the crisis, the price of gold was close to all-time highs, as central banks had been actively buying it for several preceding years. It is possible that a number of countries will now feel the need to sell part of their reserves, and this will put pressure on the price. Thus, on one hand, many new dollars suitable for buying gold will appear in the market, and on the other, there will be a lot of gold sold from reserves. It is impossible to predict with certainty which of these opposing factors will be more significant over a horizon of up to a year. Further on, of course, the factor of the growth of the dollar mass will outweigh it, and gold will begin a new rally.

Today, Bitcoin is gold for geeks. Institutional investors have not yet had a chance to properly enter, and by their standards, the liquidity of this asset is completely negligible: the daily trading volume of Bitcoin is some measly thirty billion dollars, which is essentially nothing by the standards of stock and currency exchanges. Therefore, even a very modest sell-off of Bitcoin is capable of seriously dropping its price. But conversely, even very modest investments from the “big players” are capable of seriously heating it up.

In addition to the fact that the global economy will soon be flooded with dollars and other fiat, the reduction in supply will inevitably influence the price of Bitcoin: there are less than two months left until the halving. Therefore, if you have free fiat, now is a great time to enter Bitcoin. If there is an opportunity to take a fiat loan for about three years, investing that money in Bitcoin could also prove to be an excellent decision. Of course, one should not take microloans for this purpose.

In conclusion, I will comment on why buying US government debt may be more attractive than buying dollars. Purchased dollars sit in a bank, and a bank is an unreliable thing during a crisis. Bonds, however, are registered directly to the investor, and therefore the risk of their loss is incomparably lower. The liquidity of US government bonds is quite comparable to the liquidity of the dollar. So, there will be people willing to hold them even at a negative interest rate, although this seems counterintuitive.

Radically reworked the donations page

Today is a day of serious upheavals: the Russian government has resigned, the US Congress has sent impeachment documents for the president to the Senate, and I have completely rewritten the donations page.

Since the project is anonymous, collecting donations for it has its specifics: money mostly arrives in bitcoins, but I have been repeatedly asked to provide the possibility of payments in fiat as well. Rejoice, a method has been found, and the description is provided.

Topping up a Lightning wallet has now become very simple, fast, and cheap, managed by a new concise Telegram bot.

Previously, various ways of acquiring and using crypto were described across as many as four different pages; now all key things are grouped directly on the “Donations” page, and only the purchase of bitcoins has been left as separate text just in case as an optional supplement.

Libertarianism ex machina

Bitarch, Ancap-tyan

In many plays staged in ancient theater, an unusual technique for resolving character conflicts was often used — “Deus ex machina” (“God from the machine”). It consisted of the sudden appearance of a new god-like character on stage at the end of the work, who had not been mentioned previously in the performance and had the ability to quickly resolve the heroes’ problems. Simply put, external forces solved the heroes’ problems without delving into the essence of the conflict. This technique is suitable not only for works of art, but can also be useful for political transformations aimed at the destatization of society.

Let’s look at any libertarian public page on social media, chat, website, stream, podcast, or channel. What will we see? Most likely, an endless discussion of the same topics — how libertarian courts work, who will build roads under ancap, contractual slavery, abortions, the agency of children, nuclear weapons, drugs, the Austrian School of Economics versus Keynesianism and state planning, minarchism versus ancap, ancap versus panarchy, territorial communities versus ECUs. Often, this boils over into an endless holy war, where people spend many days in a row defending their point of view.

But the thing is, if you argue endlessly among yourselves and spend all your resources on it, you won’t achieve much! And is it even necessary? Perhaps there exists a single universal recipe for how to resolve all these problems at once and spend our scarce resources for the benefit of the movement?!

Yes, it exists and is found in the very nature of the state — a stationary bandit can conquer a society only when the balance of violence potential (BVP) is disrupted, while when this balance is maintained, a stateless society exists quite stably, as proven within the methodology of neo-institutionalism. You can hear about this briefly and clearly in the first part of Alexander Auzan’s lecture “Evolution of the Stationary Bandit.” After the formation of centralized coercive structures (the state), movement in the opposite direction toward a decentralized society becomes impossible without applying external effort to the system (this pattern is analogous to the second law of thermodynamics: heat will not spontaneously transfer from a colder body to a warmer one).

If we restore the BVP, the costs of initiating violence become higher than the costs of defense, and the territorial monopoly of the state simply disappears. Beyond that, everything else simply doesn’t matter! Of course, it is better to know the answer in advance as to who will build roads or how to determine the agency of children, but even without that, people will have no choice but to solve this without the state. It simply cannot exist when the BVP is maintained. If you are a programmer or simply know Boolean logic, you understand well: after calculating the value of the first operand in a conjunction (&&), you don’t need to calculate all the other operands if it is FALSE, as the result of the conjunction will be FALSE anyway. Or for a disjunction (||), you can skip calculating the other operands if the first is TRUE, because the result will be TRUE anyway.

It follows that a sufficient condition for the transition to libertarianism is merely bringing the violence potential in society to a more uniform distribution. As you have probably already guessed, this can be achieved by creating and spreading tools for the doctrine of deterrence (DD).

The advantage of this approach is that the development, production, and implementation of DD tools into wide use can be carried out by a much broader circle of people than those currently involved in political campaigning and protest actions. Co-opting techies who can assemble a drone, a blinding laser, or other interesting tools from freely available parts to fight the regime is far more promising in terms of expanding the protest base than limiting recruitment to humanities scholars and economists who are well-versed in the nuances of ideology. Even more useful is the involvement of engineers and managers capable of organizing the mass production of such items, which is also a very numerous category. It should also be noted that semi-cottage production or writing a software product is easily hidden from the state and is therefore safer than attending rallies, which serves as an additional stimulating factor.

When reliable, mass-produced, and inexpensive tools for deterring aggressors are available even to a grandmother, it won’t be long before the “market decides” the fate of the state. After the deus ex machina does its work, all of today’s theoretical disputes about how to organize under ancap will abruptly move into the practical plane. We observed something similar relatively recently, when economists argued about whether it was possible to return to the gold standard in the era of fiat money, and then Satoshi arrived, and now instead of the gold standard we have the bitcoin standard. That’s it, the subject of the dispute has vanished; the agenda is now the widespread practical implementation of private hard money.