The strange convergence of Bernanke, Hayek and Bitcoin … Every time Federal Reserve Chairman Ben Bernanke opens his mouth, the markets move. But few could have guessed that in an offhand remark he would add legitimacy to the Bitcoin, the virtual currency that competes with the American dollar as a reserve currency and an international trading medium. Yet that is what he did when he held out a friendly hand to the notion of fantasy currencies in a letter to the Senate Committee on Homeland Security and Government Affairs. Understandably, this improbable endorsement from the guardian of the mighty dollar sent the value of the Bitcoin soaring. – Reuters
Dominant Social Theme: Maybe bitcoin is the future of money after all.
Free-Market Analysis: Bitcoin is making its way forward as digital money. Perhaps, as we have speculated, it has been chosen to anticipate other such currencies and to be controlled if possible.
This opinion piece from Reuters explains the possibility of this control and also makes a stirring case for regulation of bitcoin.
Again, we are not surprised. The endorsement of Ben Bernanke may come as a shock to some but it is in line with what must happen if bitcoin is to become a favored digital currency.
Here's more from the editorial:
Until recently, the Bitcoin was seen as a novel, experimental, somewhat piratical cyberspace Monopoly money that has proved useful in moving money around the world without the hampering and costly help of banks, which slow things down, waste days while the cash lingers in limbo, and take a hefty slice of every transaction.
Bitcoin's headiest moment was as the currency of choice of the Deepnet black market website Silk Road, which sold everything from crack cocaine to child porn, and was closed down by the FBI last month. Bernanke sees far beyond the illicit uses of virtual currencies as a means of paying for contraband or shuffling hot money around without being traced.
He believes they could become an ingenious means whereby the globalized market in legitimate goods and services can work more efficiently without the dead hand of the banks. The Fed chairman told the Senate Committee members, who are anxious that something outside the control of Congress will be used as a currency for criminals and terrorists, to think before consigning Bitcoin and similar monetary confections to oblivion.
Forget money-laundering, he wrote, "there are also areas where [virtual currencies] may hold long-term promise." Bernanke's guarded welcome to virtual currencies as an ingenious innovation that will liberate world trade seemed like an aside, but his glancing approval may ultimately prove a revolutionary step in both economics and politics.
Competing private currencies have long been seen by free market economists as the holy grail. So long as the state governs the price of money through interest rates and insists that only one currency can be used in a geographical area, there is no chance of approaching a truly free market. Friedrich Hayek's stunted Austrian economic notions may have failed to prevent the Keynesian revolution in macroeconomics, but his broader political vision of a world where untrammeled commerce replaces state-run, community-accountable institutions regulated by democratic bodies remains potent among conservatives.
Before the Civil War there were a number of other competing currencies in America, all of which went by the board. When they collapsed they took with them the savings of Americans who misplaced their trust in them. Without sufficient assets to maintain the currencies' value, there were quotidian runs on banks and sudden bankruptcies that made honest people destitute overnight.
If we are about to witness an explosion in competing currencies we can expect similar collapses and the human tragedies that will accompany them. Hayek looked at only the bright side, where ideal currencies kept pace with each other and goaded each other through healthy competition to maintain their value and keep inflation at bay. But as we have seen from the events of 2007-08, even the best laid plans of bankers go awry.
When things go wrong, banks desert their customers. And who picks up the pieces? Why, the elected government, of course, for it alone is responsible for the welfare of its people. Only effective regulation can ensure that banks entrusted with our money will be there when we need to withdraw our cash.
We have seen what happens when there is a lack of regulation: bankers take rash risks that threaten the whole world with penury. The same applies to virtual currencies. Without a framework of rules, virtual currencies will leave their customers vulnerable. Caveat emptor is not a smart enough response to the prospect of currency collapses.
Virtual currencies will only catch on if they are thought to be honest and reliable. And the only way of ensuring that is to treat them like conventional banks. As Ronald Reagan would put it: trust but verify.
We have quoted at length because the editorial makes so many predictable points. In fact, Hayek did suggest competing currencies, as Congressman Ron Paul has also suggested. But Ron Paul believes that gold and silver would probably emerge as the money of choice.
What is even more predictable about this article is that it suggests that bitcoin can only be seen as reliable if it is properly regulated. It uses pre-Civil War money as the example of why this needs to be.
But the problem with this is that it leaves out the real reason that competitive money was a questionable system at the time. In the case of banks' competing money, municipalities routinely demanded that banks purchase local government bonds before receiving banking franchises.
Also, many banks were not allowed to have more than one branch, which made the banks woefully subject to runs and general weaknesses. In other words, the problem with pre-Civil War banking was its lack of real laissez faire.
The larger issue, of course, is Bitcoin itself and whether it is being used as a kind of Trojan Horse currency to control the advance of digital currency generally. We have already stated that this may be so for several reasons.
First of all, we suggested that bitcoin might have been created by Western Intel as a way of anticipating a wave of electronic currencies birthed by the Internet. Might as well get the problem out in the open, so-to-speak.
Our main reason for this suspicion was the truly incredible bitcoin backstory. Supposedly the bitcoin concept originated with a Japanese inventor who called himself Satoshi Nakamoto. Satoshi deposited directions for bitcoin on the Internet, and the rest is history. Satoshi, dramatically, has never been heard from again.
We also suggested that bitcoin wasn't as secure as those involved in its operation believed it was. The anonymous facility that bitcoin employs is called TOR, short for the The Onion Router.
The Pentagon's DARPA was involved with its creation, which is kind of ironic considering that those using Bitcoin are counting on TOR to provide anonymity against various official facilities. TOR obviously didn't save the founder of Silk Road who was just arrested for abetting drug trafficking.
And, according to Wikipedia, recent attacks on Freedom Hosting users show TOR vulnerabilities in servers and web browsers, which is part of what we had suggested initially.
Finally, there is the issue of gold-as-money and the attitude of bitcoin users that its success thus far is proof-positive that precious metals are old-fashioned and that digital currencies will render them deservedly obsolete. We disagree. It's naïve, as gold and silver have been used as money metals for millennia.
Again, we are not surprised by Bernanke's fondness. It seems to us that Bitcoin is being manipulated on many levels by the same group of top money men that controls central banking.
Bitcoin has been attacked, subject to congressional hearings and now endorsed by Ben Bernanke, which sent the price soaring. All of this could be seen as legitimate … or not.
The editorial states: "If we are about to witness an explosion in competing currencies we can expect similar collapses and the human tragedies that will accompany them."
But this, too, is untrue. Surely we have already seen the tragedies. The central banking era is full of them. Central banks have a money monopoly and they use it ruthlessly to inflate assets and then participate in their downfall. People lose everything and the cycle starts again.
It is only kept afloat by its monopoly and by the government's use of force to ensure that central bank dictates regarding the price and volume of money are enforced.
Anything that breaks up this monopoly is positive, in our perspective. But unfortunately, bitcoin may be utilized to perpetuate the monopoly rather than to reduce it. Other currencies then will be subject to the same regulatory strictures now being developed for bitcoin.
Presumably we could discuss forever the occurrence of bitcoin and its evolution. Was it merely the first evolution of digital currency or was it put in place as a kind psyop to develop a currency that could then be subject to discussion, regulation and enforcement?
Inevitably, we know what we are rooting for, which is the emergence of bitcoin as a truly untouchable digital currency that finds its own market path without the heavy hand of central bank supervision.
The method that the power elite follows is all too predictable by now. They use false flags to get ahead of a trend and then attempt to steer that economic or sociopolitical trend toward a destination with which they are comfortable.
We need to observe the evolution of bitcoin further to see if this paradigm is now in place and if it will be utilized elsewhere as electronic currencies gain popularity.
We hope the best for bitcoin even as we are concerned about something worse.