This is meant as a warning to TPN members about a financial “fad” that I view as a complete and utter scam, which you may be solicited to “take advantage” of. From my own experience and that of a few friends, it seems that an unsolicited “info-mercial”-type email is being sent around the web to people whose email addresses are on lists indicating an interest in hard money, or fears about the dollar, or who are otherwise deemed targets for items of financial/investment interest.
The scam is about a new “currency” called BITCOINS, pitched as an “e-currency” free of the problems which plague fiat paper money. BEWARE. It’s doomed to implode, probably in the not very distant future. It’s a “Ponzi scheme,” its success to date being due entirely to the same factors that make a chain-letter successful (to the early birds) and a disaster (to the late-comers).
The perps have most recently resorted to invoking the prestige and reputation of the famous inventor Thomas Edison, likening their “invention” to the final, perfected version of a monetary idea Edison once had, but finally eliminating any slight flaws it might have had, by virtue of the new technology of the world wide web, which was not available to Edison when he came up with his “brilliant” monetary “invention” almost a century ago.
RUN FROM THIS AS YOU WOULD FROM THE PLAGUE.
I’m writing this only because the scammers’ pitch is aimed at people who understand the perils of fiat paper money, and of gov’t induced depreciation of the currency. Let the liberals get wiped out by this. But I’d hate to see my intellectual and political allies be weakened in any aspect of their ability to carry on the same battle I want to see won.
The following is intended to arm you against the seductiveness of the info-mercial that’s currently scouring the web for new victims, buttressed by a slick, flawed, despicable reliance on Thomas Edison’s name, and whose message seems specifically designed to hit the hot buttons of conservatives and/or free market advocates:
Edison's idea was not new, though it had a few superficial bells and whistles which gave it some appearance of being "different" from very similar schemes which had preceded it. If it had been implemented, it would have been a disaster. Edison was a brilliant man, but he jumped to conclusions too quickly in attempting to translate his brilliance from inanimate objects of nature, to an arena where human nature, free will, choice, and the ability to completely reverse one’s behavior are inherent to the nature of the subject being examined.
Pieces of his scheme were actually adopted as part of the Gov't's crop loan program for a few decades (ie, some of the identical ideas embodied in Edison’s scheme were adopted, though they were not specifically taken from Edison). The USDA operated on some of the same assumptions made by Edison and crucial to the success of his plan. Edison’s plan was to use crop commodities in the creation of a new currency to be backed by them, which he erroneously thought would stabilize both the currency and the prices of the commodities, thereby assuring farmers of a reliable income and the rest of us of a reliable currency. The USDA’s attempt to stabilize crop prices by a means similar at root to Edison’s, at a "fair" price to farmers, backfired, as anyone who really understands the longer term cause-and-effect relationships of the most basic laws of economics could have predicted (and did predict).
What had been intended to provide a stable "floor" price for farmers created in practice a "ceiling" instead. The designers of that program overlooked at least one of the same things Edison's plan does: that every economic "action" induces "feedback" forces in the OPPOSITE direction. Attempts to enforce a given supply or demand or price or production rate, etc., rather than give a free hand to ALL the factual, real-world causes-and-effects which these different factors have on each other, will ALWAYS fail, and MOST OFTEN produce an effect which is the precise opposite to the one intended.
Enforced price ceilings end up establishing floors in practice, and the attempt to establish, by force of law, a floor to certain prices will instead create a ceiling they cannot rise above.
We saw this not only in the decades-long administration of the USDA's price-support or crop loan program, but in Nixon's brief attempt at price/wage ceilings, in India's attempt to place ceilings on prices, even in Caligula's ancient Rome where his regime's death penalty for violating its price ceilings were ineffective at making them do anything but exacerbate the very problem they were intended to alleviate.
There is a saying (two, if you include it’s flip side) in the markets that “The best cure for high prices is high prices.” (And that the best cure for low prices is low prices.) Both are absolutely true.
When, at a certain price level, consumers want more of an item than producers are making, supplies start to dwindle, local shortages or delays in obtaining the item occur, and the price begins to rise. The higher price forces some consumers to tighten their belts and reduce their consumption, while simultaneously SENDING A SIGNAL to producers of what’s going on out there, namely, that consumers WANT MORE PRODUCT. The higher price offers producers a higher profit, they pull out all stops to produce more, and when that larger supply hits the market, they find they can’t sell THAT much quantity at the higher price, so they soon have to lower the price right back down again. PROBLEM SOLVED, quickly, efficiently, and fairly, without the use of coercion. Meanwhile, new production lines have been set up, and future production will proceed at the NEW HIGHER LEVEL, without any significant increase in the price, except for that temporary period needed to send the right signal to producers.
When, at a certain price, consumers are no longer buying as much of a good as producers are making, inventories of unsold amounts start piling up. The most efficient manufacturers start lowering their prices to induce consumers to take the excess inventories off their hands. The LEAST efficient producers cannot make a profit at the lower prices and must either become more efficient or go out of business. Pretty soon consumers are gobbling up the good at its cheaper price, but production has been reduced, so inventories become smaller and smaller. Prices rise again, but (without gov’t interference) they will in such a case usually NOT go all the way back up, but settle at a level LOWER than before – because the industry as a whole has become so much more efficient through having “pruned out” the “deadwood” of wasteful, inefficient producers. PROBLEM SOLVED. Production and consumption are back in line, prices are back to where they started from OR LOWER, consumers are getting the product at the same or lower price, and efficient producers are now the ONLY ones in business, so they can make the same or even more profit from selling a smaller quantity of the same good.
Any FORCEFUL attempt to interfere with prices will result in BLOCKING THE TEMPORARY SIGNAL THE MARKET NEEDS TO SEND OUT, IN ORDER TO CORRECT THIS NATURAL CHANGE FROM THE PREVIOUS STATE OF AFFAIRS, a change of the type that is always happening in all aspects of our lives, not just in the economy. Such benighted activity as the belief that forced manipulation of prices, if done by a nice government with no financial interest in the outcome, will help the situation, are as helpful as stopping your child from crying by stuffing a gag down his throat.
There have been no exceptions to the operation of this inescapable logic (except temporarily once in a while, when fads or erroneous beliefs of people in the marketplace are operating, until reality's response becomes too powerful for them to escape from any longer, and the error they’re making then quickly erases itself, after having caused a little or a lot of harm). When such a mistake is ENFORCED FOR A LONG TIME by law, the accumulated damage can become enormous. This occurred with the farm program, Nixon's price/wage ceilings, and every other such attempt in human history. More recently the mortgage meltdown was the result of an attempt to enable purchases by those who could not afford the total price of a home purchase, by effectively lowering that price or cost via MANDATED lower interest rates. By now almost everyone has suffered. The originally intended beneficiaries of the policy are homeless again – and in debt. Plus, millions of others have been forced into the same fate unnecessarily.
This fallacy (that good can be accomplished by forcefully “managing” or manipulating prices with good intentions) was ONLY ONE of several flaws in Edison's scheme. The same flaw is exhibited by the Bitcoin scam, in spades.
When you are tinkering in metallurgy the metal doesn't bite back at you. When you are tinkering with human nature, it almost always does. (If you do that in the area of economics, then strike out the word "almost" in the previous sentence. You will ALWAYS fail.) Sometimes, the failure remains hard to see for a long time, but eventually the devil has his due.
[Historical side-comment: SKIP THIS IF YOU LIKE. IT'S LONG, AND IT'S JUST AN ILLUSTRATIVE EXAMPLE FROM THE DAYS OF NIXON'S PRICE CEILINGS.
Republicans USED to be the party of free markets. Under Nixon, that characteristic had not yet been discarded as fully as it has been since. Republicans knew price controls don’t work. So they tried to “fool mother nature” by puttiing the ceilings on the permissible PROFIT rate in various industries rather than directly on the price. But – as we all should know – “you can’t fool mother nature.” (You can’t trick water into running uphill by using fun-house mirrors to trick the water into thinking up is down.) Because there were no limits imposed DIRECTLY on price itself, this left futures market prices free to go where the market dictated. They rose steadily throughout the period of Nixon’s ceilings. In fact, for reasons too long to detail here, profit controls had the effect of MAGNIFYING the awful consequences of simpler price controls. Futures thus were a kind of “escape valve” for some of the upward pressure on prices added artificially by the government’s controls, serving the function a “black market” serves under direct price controls. Prices for most commodities soared, but by much less than they would have if not for futures markets, because they offered a means for people in truly desperate need of a particular commodity to obtain at least some of it at that high price, whereas in the absence of futures, many people in such a circumstance would have been unable to get it at all, and would have suffered far worse consequences than having to pay a high price. I remember trading in the lumber and crude oil markets at that time. It was amazing how much ignorance there was even amongst the supposedly sophisticated traders in futures markets, who make most stock market traders look like tyros. When the Price Commission would see its policies failing, their response was to strengthen the policies, thereby compounding the problem instead of removing it. They would announce a new, more stringent control on, say, lumber prices. The market would go “limit down.” I and my co-worker would buy. Before day’s end it would turn around and go limit up, then much higher in succeeding days. It was like taking candy from a baby. That’s how few people understand basic economics. This was NOT rocket science, but something quite simple and very straightforward. Yet it would repeat itself time after time. Shows you how hard it can be for our species to learn or face up to an unpleasant or unwished-for lesson. (Which is also a partial explanation for why we have an Obama for a President.) Well…. the grand finale to this was the time when Nixon’s whole policy was abandoned. Same ignorance of economics prevailed. The gov’t ended controls on lumber prices. “What? NO LIMITS on how high it can go????” Tons of people surged in to buy, the market opened higher that day, set a NEW RECORD HIGH price, then promptly went limit down, and repeated that for many days thereafter. IE, when the government FREED PRICES TO RISE, that very same DAY the world saw the highest prices it would ever see again for MANY YEARS, as the price of lumber then went into a massive, persistent DECLINE begun at the moment the government gave them the OK to rise.
The market partiipants in crude oil weren’t quite as astute. When controls were lifted from crude oil and gasoline, they too opened higher, but they also closed higher. It was only on the following day that THEIR massive decline began. In other words, within 24 hours of REPEALING the attempt to keep prices down, they began to go down with a vengeance – after about a year of steadily rising while the government’s plan to lower them had been in effect. It was an INCREDIBLY dramatic proof that whenever the FORCE OF GOVERNMENT is applied to an economic problem, it will almost invariably make that problem worse.
Let that be a lesson to anyone who trusts in the ability of the government to handle matters having to do with economics – or the modern day “economists” who advise governments from their academic chairs in that subject. As a BTW, I testified at a price commission hearing back then. I was 24 years old at the time, and faced 9 PhD price commissioners with my testimony that essentially told them that (in not exactly these words) their policies were insane. This was the experience which gave birth to my idea – still held today -- that it’s a reliable rule of thumb to assume that the greater a person’s formal education in economics, the more prestigious his degrees and accomplishments, and the more renowned he is his field, the LESS WELL he understands his subject.]
Back to BITCOINS: They are a scheme to control the SUPPLY of a created-out-of-thin-air nothing, and thereby manage its price. They are described as a new “currency,” but when you cut through all the rationalizations, spin, misinformation, and outright lies of their adulating sponsors, they are nothing more than a game of musical chairs, played with invisible chairs that everyone is required to believe will be supplied, somehow, before the music stops. They are FAR LESS even than a fiat currency without its fiat. They are ELECTRONIC NUMBERS in tiny magnetic bits on computers. They don’t even have the approximately 1/20th of a penny’s value that the paper in a $100 bill possesses. And . . . there is no government power to force others to accept them from you, such as the legal tender laws which serve to keep our dishonest monetary system on life support while it dies very slowly, via currency depreciation. Thus, when BITCOINS die, it will be quick, devastating, and very vicious.
This is a true Ponzi scheme, based entirely on the "greater fool theory." IE, that even the foolishness of paying an exorbitant price for something worthless is "wise" if you can find a greater fool than you are, to buy it from you for a still higher price. THAT is the sole reason for the "success" of bitcoins -- to date. You will be told that its price is determined "by the market" and that its supply is strictly controlled. Well, I have a rare, strictly controlled supply of used toothpicks for you, and I only add one toothpick a week to that supply. Wanna pay me a fortune for 'em? They're in VERY limited supply, you know, and I'm not a government but a PRIVATE SECTOR entrepreneur. Limited supplies lead to higher prices in the free market. NOW are you interested?
The signs that that Ponzi scheme is beginning to unravel are already showing very visibly. And so the current large holders of bitcoins, and the promoters of it who have "cashed in" on the scam, are eager to keep it going as long as possible, so they can make one last attempt to get the vast numbers of individual small investors to stampede into the scheme in order to dump their own holdings on the public and leave the small investor holding the leaky bag that they now own -- before its entire artificially manufactured "market value" has leaked out.
Remember the “beanie baby” (was that the name?) craze, during which people paid $thousands for intentionally “low production” tiny stuffed animals because of their artificially created “shortage?” That’s bitcoins, only when the bubble bursts, you won’t even have a cute little stuffed chipmunk to commiserate with – just a computer printout of a number that refers to absolutely NOTHING that exists anymore, because it never really existed in the first place.
Beware bitcoins. They are every bit as unsound a scheme as the famous tulip bulb mania in Holland a few hundred years ago. There is going to be news of a total bust of the bitcoin mania on the financial front pages, in the not too distant future.