Is Bitcoin money?
EconomicPolicyJournal.com asked a bunch of economists whether Bitcoin was money. The vast majority discussed the “medium of exchange.” One wacko mentioned the medium of account:
Scott Sumner: I would say “no” or at least “not yet.” The most important aspect of money is its role as the medium of account, or numeraire. As long as most wages and prices are denominated in dollars rather than bitcoins, then it is not money. Bitcoins will be money if and when the CPI is reported in terms of bitcoin prices.
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7. October 2013 at 08:06
What did the other economists say? Anything interesting or creative? I agree with Sumner, myself.
7. October 2013 at 08:10
Sorry, I put that up too fast, a typo and no link. It’s been fixed.
7. October 2013 at 08:26
I dunno, I understand that being an MOA is an important aspect of many different types of “money” but I find that limiting the definition of money to that which serves widely as a MOA is narrowing the concept too much.
I see money as anything that gets its value not from its intrinsic utility but from the ability for it to be traded for other things. MOE is also too narrow a definition in my mind because you can trade in things that carry enough intrinsic value to be worth it’s price (when bartering for example).
In my mind money becomes money as it’s usefulness as MOA or MOE pushes its price relative to other things far above the price it would go if it wasn’t used as MOA or MOE.
7. October 2013 at 08:42
My answer would be that the question is poorly posed. When we talk about money as medium-of-exchange, we should be talking in terms of ranges and not along a rigid money/non-money axis. All assets have a degree of moneyness, or exchangeability, and bitcoin is located somewhere along that scale. The best way to find out where it sits would be to get a market price for bitcoin’s moneyness and compare it to other assets’ moneyness.
But I also agree with Scott on his unit-of-account point. Fed reserves are truly unique because they are used to define the unit in which prices are expressed.
7. October 2013 at 08:43
What do you mean by “most wages and prices?” Take a scrip-like virtual currency, sponsored by a single company, like Microsoft’s xbox points. You can “buy” video games and such with them, and so the prices of all of these items are quoted in xbox points. But obviously they are not useful outside of that sphere. Would such a limited use mean that it is not money?
7. October 2013 at 09:02
It’s certainly obvious from the responses that Scott is at the lonely end of the MoA vs MoE debate.
7. October 2013 at 09:36
Follow up question on the MOE side: would you include Bitcoins in M1, M2, etc?
I think that it might be similar enough to an individual money market account to count in M2. You can make some payments with it, but there are going to be transaction costs with converting it to cash. The value of a share in USD is going to be volatile in both cases if money funds are forced to float rather than pegging 1 share = 1USD.
7. October 2013 at 09:58
Scott, at what point does a numeraire become money? Bitcoin might have been money, but only on the silk road, where it likely transacted and intermediated relative prices.
7. October 2013 at 10:34
$100 billion a year in food stamps is printed…it that money?
7. October 2013 at 10:50
Don’t you mean when NGDP is denominated as Bitcoin prices? 😀
7. October 2013 at 11:43
Is there some threshold?
7. October 2013 at 11:45
What I mean is, CPI reporting isn’t an essential metric, as only USD is used for that, yet there are many other currencies considered money.
So presumably, we’re looking at some threshold, arbitrary it seems, which is not a very good measure of a concept.
7. October 2013 at 11:51
Scott,
Off topic, but check out John Cochrane’s latest post:
http://johnhcochrane.blogspot.com/2013/10/dupor-and-li-on-missing-inflation-in.html
John Cochrane:
“New-Keynesian models act entirely through the real interest rate. Higher government spending means more inflation.”
I think Cochrane expressed himself somewhat unclearly. What he meant to say is:
New-Keynesian models generate fiscal multipliers *greater than one* at the zero lower bound in interest rates through the impact of higher government spending on inflation expectations. In such a context higher inflation expectations means lower expected real interest rates, which causes households and firms to bring consumption and investment foreward due to intertemporal substitution. This is precisely how New-Keynesian models produce estimates of fiscal multipliers greater than one (i.e. why the change in aggregate expenditures is greater than just the increase in government spending).
Is this true of all New-Keynesian models?
Well it’s true of:
The Zero-Bound, Zero-Inflation Targeting, and
Output Collapse
Lawrence J. Christiano
March 2004
When is the Government Spending Multiplier Large?
Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo
December 2010
Optimal Monetary and Fiscal Policy in a Liquidity Trap
Gauti B. Eggertsson and Michael Woodford
September 2006
Is There a Fiscal Free Lunch in a Liquidity Trap?
Christopher J. Erceg and Jesper Lindé
July 2010
Simple Analytics of the Government Expenditure Multiplier
Michael Woodford
June 2010
Just for starters.
So it may not be true of all New-Keynesian models that produce such estimates, just all of the most important ones.
I normally disagree with Cochrane when he argues that demand plays a limited role in business cycles.
However in this particular instance Cochrane deserves to be applauded for pointing out the fact that New-Keynesian estimates of large fiscal multipliers are the result of the implausible assumption that the only channel of the Monetary Transmission Mechanism is the Traditional Interest Rate Channel.
And based on the evidence presented by Dupory and Rong Liz (the subject of Cochrane’s post) if this assumption is true then the fiscal multiplier of ARRA is very unlikely to have been greater than one.
P.S. Of course, since the assumption that the only channel of the Monetary Transmission Mechanism is the Traditional Interest Rate Channel is contrary to standard undergraduate textbook Monetary Economics (e.g. Mishkin), the fiscal multiplier is *zero* given an independent central bank will always and everywhere choose to offset fiscal policy.
7. October 2013 at 12:10
Now, what would be entertaining is for Scott to cover the practical problems of a Bitcoin economy. In a Bitcoin world, the maximum supply of money is fixed, but money can be destroyed completely, by someone just losing their wallet without a backup. I don’t even know if we could have central banking in this situation.
7. October 2013 at 12:24
Scott,
Also off topic but here’s what Matthew Yglesias said today:
http://www.slate.com/blogs/moneybox/2013/10/07/handbury_watanabe_and_weinstein_on_inflation.html
“These three economists say they’ve assembled “the largest price and quantity dataset ever employed in economics.” Sadly this fully operational dataset does not allow them to destroy entire planets…In my view this is a key part of the fussy and not politically interesting case for a nominal GDP targeting policy from central banks. The rhetoric of inflation targeting has us accustomed to the idea that CPI or PCE adjusted numbers are “real,” while nominal figures are perhaps ghostly or fake. But in fact nominal quantities can be measured much more rigorously and uncontroversially than inflation adjusted ones.”
Actually I think Yglesias greatly misses the point.
Economists like Goodhart and Posen have repeatedly criticized Nominal GDP Level Targeting (NGDPLT) because in their opinion it is inappropriate for monetary policy to target a variable that is not nominal. (Somehow the fact that NGDP is *nominal* GDP never seems to make them stop and think how incredibly stupid they sound when they say that.) That is, by their reckoning, NGDP is simply real GDP (RGDP) plus inflation, and in their opinion inflation is the only true nominal variable.
My point is, given the inherent difficulties involved with measuring inflation (which is really an attempt to measure the rate of change in the aggregate price level of a *real* quantity) surely people would realize that inflation is really a *quasi-real variable*, and the only true nominal variables are the ones with the word “nominal” in front, such as nominal GDP.
7. October 2013 at 14:19
Saturos, Yes, NGDP.
Mark, Both posts are excellent, as usual. When are you gong to get your own blog? We need you.
Everyone, The question “what is money” is less interesting than “what is money in macro models of the economy?” And the answer is that money is the MOA in any model that pins down nominal aggregates. It’s quite likely that money will also play the role of MOE. But the MOA role is sine qua non.
When a significant number of workers are have labor contracts denominated in bitcoin, then we need to consider it in our macro models. If not, then not. Bitcoins may still be interesting for other reasons, but not the issues I’m interested in (NGDP and business cycles.)
7. October 2013 at 15:01
“Mark, Both posts are excellent, as usual. When are you gong to get your own blog? ”
I would troll it. 🙂
7. October 2013 at 15:46
“I don’t even know if we could have central banking in this situation.”
Bob, that’s the problem with the Bitcoin advocates. They see central banks as the root of all monetary evil. I saw one in an online forum assert that inflation is a given in all fiat currencies. (I’d love to see him explain why Japan had 15 years of deflation.) And I doubt that most of them would understand how bitcoin could experience inflation if there was a collapse in demand for it.
There is a new player in digital currencies called Ripple that could help decrease the amount of disequilibrium between supply and demand in bitcoins. Ripple basically allows for the digital equivalent of private bank notes so you could have, in theory, fractional reserve banking for bitcoins. Ironically, the bitcoin advocates are spreading FUD about Ripple because they think it’s a competitor and don’t understand its complementary nature.
7. October 2013 at 18:14
I’ve said it many times before: The medium of account character of money derives from its medium of exchange character.
Sumner agrees:
“The most important aspect of money is its role as the medium of account, or numeraire. As long as most wages and prices are denominated in dollars rather than bitcoins, then it is not money.”
Wages and prices arise due to money exchanges, not tabulating one’s wealth in terms of a particular commodity. Wages is money exchanged for labor. A price is a sum of money exchanged per good.
7. October 2013 at 18:24
Billionaire hedge fund manager Julian Robertson:
“I think we’re in the middle of a kind of bubble market, where it’s going to take something bubble-like to happen to prick the bubble and will probably have a pretty bad reaction to the breaking of the bubble,” Robertson said. It “probably will not [happen] right now, and somehow I think we’ll wallow through the political and fiscal crisis we have in front of us and then we’ll sort of see what happens,”
http://www.cnbc.com/id/101092520
7. October 2013 at 18:37
why do you use italics? Do you think that they give your comments some sort of significant meaning that they otherwise wouldn’t have?
From my perspective your comments appear to be nothing more than the ejaculations of a narcissistic, masturbatory type of individual… Sorry if that causes offence, but that’s simply my impression from the way that you write and the things that you write. Just a heads up, for your info.
7. October 2013 at 18:57
“why do you use italics? Do you think that they give your comments some sort of significant meaning that they otherwise wouldn’t have?”
Considering the quality of readership, yes.
“From my perspective your comments appear to be nothing more than the ejaculations of a narcissistic, masturbatory type of individual… Sorry if that causes offence, but that’s simply my impression from the way that you write and the things that you write. Just a heads up, for your info.”
I’m sorry for your lack of self-esteem, and your need to insult in order to quell your weak psychological mindset.
7. October 2013 at 19:06
I’m sorry you feel that your comedic masturbatory ideology has some value..
Go ahead a jerk away if you want to, I’m just trying to let you know how it looks from the outside. It’s not pretty.
7. October 2013 at 19:08
Phillipe:
I’m sorry you lack the intellectual capacity to think about and respond to my arguments, and feel compelled to insult.
It’s obvious you have nothing of value to offer.
7. October 2013 at 19:46
Prof. Sumner,
Check this out! (Via Yglesias on Twitter)
“Privately, Mr. Stein and two other governors, Jerome Powell and Elizabeth Duke , were a driving force behind efforts to limit the program’s growth, according to people involved in the deliberations. All three supported Mr. Bernanke’s efforts to charge up a weak economy but were uneasy about the program’s potential side effects and the growing size of the Fed’s holdings.
Mr. Stein, a Harvard finance professor, focused on the risk that the Fed might stoke a new credit bubble. Mr. Powell, a former Wall Street executive, talked at meetings about developing a “stopping rule” for the program to ensure the Fed’s portfolio of securities didn’t get too big. Ms. Duke, a former banker, was likewise wary of making an unlimited commitment.”
http://online.wsj.com/news/articles/SB10001424052702303442004579121204086268362
7. October 2013 at 19:58
Geoff,
I’m really sorry you think that your arguments have some value.
It must be difficult for you to have such an artificially inflated sense of self-worth, and at the same time have so very little of substance to back up that belief…
7. October 2013 at 20:27
XBox points are still typically converted back in one’s head to dollars, like how you would typically convert prices in a foreign currency to dollars if you were only in the country for a little bit. Nobody thinks instinctively in terms of Bitcoin.
Another way of putting it, there needs to a stable “base” currency behind all prices and wages. Anything could be quoted in terms of bizarre things like number of Happy Meals, but it’s always much more convenient to have a core anchor for what’s considered cheap vs. expensive without dealing with individual units which could fluctuate and leave you without bearing for evaluating prices.
7. October 2013 at 20:27
“I’m really sorry you think that your arguments have some value.”
They must have value to you, because you’re taking the time to respond to them, despite the fact that the content of your responses is totally devoid of any substantive argument.
“It must be difficult for you to have such an artificially inflated sense of self-worth, and at the same time have so very little of substance to back up that belief…”
I feel sorry for you having such low self-esteem.
7. October 2013 at 20:47
“Wages and prices arise due to money exchanges, not tabulating one’s wealth in terms of a particular commodity. Wages is money exchanged for labor. A price is a sum of money exchanged per good.”
Very little of wages or prices remains true money for very long. 99% of transactions will be deposited into a bank where maybe 8% will be cash and the rest will be backed by long-term, hopefully safe assets. For most people, even that 8% doesn’t last very long as the deposit gets spent on goods or spent into investment assets. Fractional-reserve banking strikes people as odd because they have an idea that there’s cold hard cash in the vault for every dime in their deposit, but even in the short-term the market wants to earn interest.
You could call stock or bond investments zero-reserve banking, assuming you can sell out, although nobody thinks in those terms. In general, most people would be shocked how little true, cold hard cash is part of the nominal trillions of dollars of assets out there.
So why does the value of cash itself matter so much when it’s such a small part of most people’s assets? People reflexively think that it’s because their wealth will be devalued, but that doesn’t really make sense. If you own 20 gold bars, you still have 20 gold bars after 10% inflation. Halving the length of a meter does not make all buildings twice as tall.
On the other hand, if you own the right to flat interest payments, then it does affect the real value of your wealth. That’s what killed banks in the 70’s, not inflation but unexpected inflation while borrowing short and lending long. If inflation is unpredictable enough, it essentially makes any fixed interest rate finance unsustainable and everything has to be variable rate in one way or another to keep interest rates somewhat constant in real terms.
Higher inflation also has higher menu costs and more financial overhead to try to earn interest on any money that comes into your hands as soon as possible.
But the issue that you’re getting at is the value of the dollar has a deep, systemic effect which transcends the actual effects listed above. You’re holding on to the idea that halving the meter makes buildings twice as tall. But doubling the value of a dollar will not in fact double the value of your salary or your home or your investments. A building has to actually be twice as tall and your salary has to be twice as big in real terms for that to happen. Units won’t get you there.
8. October 2013 at 02:36
How many of the current holders of bitcoins use them as media of exchange?
Obviously, bitcoins would be worthless if no one would accept them as payment for goods or services.
However, given the rapid appreciation of bitcoins in the past couple of years, I would think there are a lot of people holding bitcoins as a speculative investment.
8. October 2013 at 04:11
What this shows is that market participants can be completely mistaken about how monetary policy works (QE as crack addiction) and yet still the market can react rationally: http://www.economist.com/blogs/freeexchange/2013/10/monetary-policy
8. October 2013 at 05:15
Thanks Travis and Saturos, I have new posts.
8. October 2013 at 10:57
So only what the majority uses is money? Thats the worst definition of money Ive heard so far. Who is this idiot?
8. October 2013 at 12:05
Can you complete transactions with it? Is it held for no other reason? Then it is money, just an MoE not an MoA.
8. October 2013 at 15:55
[…] by keokq [link] [1 comment] …read […]
8. October 2013 at 18:00
Lornezo, It depends on what you are trying to explain. If you want to explain NGDP, I’d stick to money that is also a MOA.
8. October 2013 at 19:18
Yes, I was going to add: if you want to claim it is not a macro-economically important form of money, I am completely cool with that, because clearly it is not.