Tuesday, January 30, 2018

A recent tweet by @stevesalaita

Ratting out neighbors, coworkers, or classmates to ICE is a terrible thing to do.  Fascism has never been able to function without this sort of eager complicity.

Friday, January 26, 2018

The Fatal Weakness of Cryptocurrencies

The New York Times ran an article on the 21st of January expressing concern about electricity consumption by computers engaged in creating new Bitcoin currency, a process called mining. The article explains in non-technical terms why mining is integral to the Bitcoin process. It notes that other cryptocurrencies, such as Ethereum, Ripple and Stellar have been designed to reduce the massive energy requirements to mine Bitcoin. There is already a large amount of material on cryptocurrencies on the Internet, so there is no point in repeating the work of others. My interest is why cryptocurrencies have arisen.

Their advantage is security and anonymity, attributes that facilitate the sale of narcotics and other contraband on the Dark Net.

The downside of cryptocurrencies is that they have no official status anywhere in the world and are therefore not legal tender. No one is required to accept them in payment. Most importantly, no government will accept them in payment of taxes, fees, or fines. Money owed to the government must be paid in the coin of the realm. This is a serious drawback to widespread use and puts cryptocurrencies in the category of artificial currencies, like time dollars, Ithica hours, green dollars, and even frequent flyer miles.

Moreover, whereas these currencies have virtually none of the characteristics of the official currency, transactions in many of them are taxable by the Federal Government as income. I have no doubt that at some point in the near future, the IRS will issue an opinion letter (if it has not already done so) finding that Bitcoin transactions can be a taxible event, the same as though the transaction was made in the official currency.

Since Bitcoin transactions are anonymous, an IRS audit would be unable to determine the value of a transaction in cryptocurrency, nor would it reveal exactly what was being sold or purchased. This would protect small, casual transfers, since the investigative cost would vastly exceed the amount to be recovered.

If the sums transferred were large, however, the IRS would have at its disposal the extensive array of techniques that it has always possessed for catching tax evaders. The first method that comes to mind is a net worth analysis, in which they compare your declared income against changes in your net worth. Suppose you declare an income of, say $50,000. Then an IRS agent, noting that your zip code is located in a posh neighborhood, drives by your house and sees a five million-dollar mansion with two Rolls-Royces parked on the side. This will cause him to inquire as to how you manage to live in a five million dollar mansion and own two very expensive autos on a $50,000 annual income. [1]

If you have no reasonable explanation for the disparity between your income and the increase in your net worth, the agent will dig further to see where the money is coming from. He may not be able to lay his hand on the actual Bitcoin, but he can ultimately discover what you have spent and the source of your legitimate income. A large gap would be strong evidence that you concealed part of your income. In fact, the only way to truly conceal your Bitcoins is to never convert them to cash or property.

But I digress. My interest is in the economic factors that are driving people to use Bitcoin and why it should be now. Part of the reason is that the computing power to make the technology work has only recently become available, and the mathematics of the blockchain is relatively new. Also, dealers in contraband needed a reliable, anonymized and secure system of payment that concealed it from law enforcement agencies.

But another factor also was present: governments and central banks have been imposing austerity for approximately seven years. What that means is that governments have been cutting taxes on the wealthy and corporations while making cuts to the safety net and other expenditures that benefit the public. Corporations and wealthy people spend less than ordinary folks, simply because they already have what they need and can buy whatever they want out of their current earnings, as well as the income from their investments. Corporations have not been inclined to make capital investments anywhere close to the scale they have done in the past, preferring to either retain the profits, distribute them to shareholders, or purchase their own stock.

When the economy tanks, as it did in 2008, the proper governmental response is to lower interest rates and increase the deficit by spending more money than it takes in. The deficit will not cause inflation so long as production remains substantially below capacity. In the case of the 2008 crash, however, interest rates were close to zero, so the usual monetary remedies were to no avail. It’s called the zero bound, for obvious reasons. Briefly, governments engaged in deficit spending, and it stimulated their economies, as textbook economics would predict. But then, there arose in the U.S. and the EU an austerity fever that put pressure on politicans to cut spending and raise taxes. Paul Krugmen wrote a good article in the Guardian on this subject.

When a sovereign government (note that the members of the EU have no control over their currency) spends more money that it collects, it increases the amount of money in circulation, and conversely. Austerity lowers the money supply and reduces demand.

Businesses and banks have learned how to avoid the effects of austerity by creating new forms of money. In the 1960s, it was unquestionably the credit card, essentially a device to facilitate borrowing, and therefore increasing currency in circulation. Banks create money by lending it, which is a subject for another day[2].

In 1932, President Franklin Roosevelt took the U.S. off the gold standard. Without the constraint of gold (governments were expected to back their currency in gold) the U.S. could create as much money as it needed to stimulate the economy, and things started becoming better almost immediately.

In 1970, President Nixon took the dollar off the Bretton Woods agreement and allowed its value to float. This move helped to staunch a serious balance of payments problem.

Is it possible that these new forms of currency are another response to austerity? History has shown that when there is insufficient currency to handle ordinary business transactions, the system will find new forms of liquidity. The process can be disruptive. The same goes for inflation: people will find a way to avoid the losses incident upon an increasing supply and a declining value of money. Artificial currencies, however, are fragile so long as they do not have official status under federal law.

Keep in mind that governments perform their function by spending money and then taxing it. Without taxes, we would be faced with inflation that can only be stopped by not creating any more money. Cryptocurrencies break that oscillation of spend-tax-spend-etc[3] that all governments engage in. That is why I believe that Bitcoin and the other cryptocurrencies will ultimately go out of use. Governments simply cannot tolerate another issuer of money that it cannot tax.

  1. You might have a legitimate reason. You could be living in the servants’ quarters and performing maintenance work.  ↩
  2. See How Bank Lending Really Creates Money, And Why The Magic Money Tree Is Not Cost Free  ↩
  3. The government must spend money before it can tax it.  ↩

Monday, January 22, 2018

Thad Cochran’s Legacy

Editorial Preview

Thad Cochran’s Legacy

Senator Thad Cochran has health problems. This is hardly a surprise; any 79-year old will have health problems, whether they be physical or mental, or both. In Cochran’s case, it seems to be both. He has shown signs of mental impairment on the floor of the U. S. Senate1 and recently had to take medical leave.

Cochran, who is now the longest-serving member of Congress, with 44 years in Congress, 39 of them as a senator, has been quietly sitting at his Senate desk, usually watching, occasionally assisting, in the transformation of the United States from something approximating a republic to an oligarchy. He invariably voted in lockstep with the Republican Party (like the recent abominable tax bill that no one had even read prior to the vote) and has been rewarded richly over the years for his loyalty.

On the positive side, there is no doubt that he has faithfully taken care of his constituents when they had problems with the federal government.

Like most of his Senate collegues, Cochran is not a man of vision2. Mississippians obviously like him, but when I take an informal poll, none of his supporters are able to tell me specifically what he has done, other than sponsoring some legislation to help farmers. It seems that voting for Cochran has become a habit, not a careful choice.

I cannot think of a single instance in which Cochran has stood on principle against the dictates of his party or the prejudices of his voters. His votes in the Senate have always been cast in favor of the rich and powerful and against the poor and vulnerable. In Mississippi, that’s the easy path to staying in office.

Cochran was “very proud” of the fact that as senior senator he inherited the seat of Confederate president Jefferson Davis3.

Unfortunately, he reflects the attitude of those Mississippians who have always voted for him. Mississippi has remained near the bottom of the nation in almost every measurement of quality of life, including income, education, health, and crime. Our state has retained its position at the bottom of the ladder because we cannot imagine a different world than the one we now inhabit, except perhaps a world in which the clock has been turned back. We vote for candidates devoid of vision of what we can do if we only put our minds to it. I can’t think of any significant attempt Cochran has made in 44 years to raise Mississippi from its place at the bottom. Our state desperately needs leaders of vision that can say with George Bernard Shaw “You see things; and you say ‘Why?’ But I dream things that never were; and I say ‘Why not?’” But we vote down candidates who say “Why not?”

What else can one say? Cochran has been a place-holder, a chair occupier, a man with the ability to make a significant contribution to his nation and state but didn’t. His political principles, as shown in his legislative record, follow the prevailing legislative winds. He is a polite, courtly man who has accomplished little for nation or state. He is now showing signs of senility, and it is time for him to step down.

He should have been gone long ago.

  1. See 79-year-old GOP senator “disoriented” and voting wrong after medical leave in Vice News, Oct 19, 2017

  2. Vision is an idea of what things will look like if one persists in an undertaking or project. I am not aware of any ideas from Cochran as to what we (or he) should be doing now to create a desirable future. Perhaps he does have a vision that he knows people will reject, because what he has done in Congress has been devoted to bringing about a neoliberal world. It is not a pretty future unless you are in the top 0.1%.

  3. Cochran’s pandering to the racial prejudices of white Mississippians is sickening. A slave owner himself, Jefferson Davis presided over a bloody civil war prosecuted for the sole purpose of preserving the ownership of black slaves by white masters. He wholeheartedly defended an evil institution that would have never existed if it wasn’t highly profitable. The cause of the South was never about honor, not even remotely. It was land and slave labor.

Thursday, January 4, 2018

A City (or state) Bank for Mississippi? Check out North Dakota.

I have recently been reading about the Bank of North Dakota, unique in the United States in being owned by a state. It is not a member of the FDIC, but its debts are backed by the full faith and credit of the state. Mississippi could greatly benefit from such a bank, provided that it is ensconced in the text of the Mississippi constitution1 and insulated to some degree from raids by our Mississippi legislature, which has throughout its history shown itself to be frequently irresponsible, if not outright corrupt.

The Bank of North Dakota was established in 1919 by an act of the legislature2. It is prohibited from competing with local banks, but authorized to make loans throughout the state, with the earnings being paid over to the state treasurer. All state funds, including the “float,“ that the state receives and holds before disbursing must be deposited in the Bank.

The bank has been a success. During the crisis of 2008, it experienced few problems.

It would not be impractical for the City of Jackson to establish a municipal bank in which to keep its money. This is a concept that has been tried and proven. Like the Bank of North Dakota, it would be prohibited from competing with the private sector banks. State or city funds deposited in the bank would earn interest to be paid over to the state or city. Moreover, the bank could loan money for undertakings that benefit the public.

Considering our legislature’s eagerness to take away Evers Airport from the city’s jurisdiction, the likelihood of the Mississippi legislature allowing the city to start a municipal bank is very small. Hopefully, we will enjoy in the near future a more civilized and less racist legislature that will look favorably upon projects that benefit the citizens of Jackson, as well as its surrounding counties.

  1. There might be trouble under §258, Mississippi Constitution (1891, as amended). In addition, I could not find any statutes giving the state or its political subdivisions the power to establish such a bank.  ↩

  2. Chapter 6–09, 6–01, and 54–17 ND Code  ↩