On Moneyness, Seigniorage, and finding linguistic common ground

Jia Yung Lee tells us in a blog post that:

"Until the Crypto community takes feedback from “outsiders” seriously and make efforts to improve the onboarding process of new users, the Crypto community will continue to be an echo chamber."

He's not wrong. And in the spirit of that piece comes a remarkable blog post which I was very happy to see and read through, namely JP Koning's piece "Is fiat money to blame for the Iraq war, police brutality, and the war on drugs?". You might think at first that a public coin afficianado like myself would dislike the message here, but you'd be wrong. As Jia Yung Lee points out, when we find a fundamental difference of vocabulary and understanding, this is an opportunity to improve our narrative. Let's take it and dive right in, shall we?

JP Koning immediately lets us know that he is working from a somewhat different framework of economic vocabulary when he tells us in his first sentence that "fiat money" means irredeemable banknotes. If we extended this to include not only M1 but M2 (e.g. dollar valued bank accounts) this would be a perfectly good definition a decade ago. However, people started using publicly issued currency (like bitcoin) and referring to "fiat" as privately issued currency. With Koning's definition of "fiat", bitcoin is most definitely a fiat currency, which is consistent with his definition, however it is not the way the majority of folks are using the word today. "Fiat" might be better defined as irredeemable banknotes which are issued privately. Maybe we should be more careful about using this word. To make things more clear we should refer to currencies like dollar, yuan, and euro as "privately issued fiat" rather than just "fiat" to avoid misunderstandings.

In fact the essay is just brimming with contradictions in language. It makes it very difficult for someone in modern finance using public systems to figure out what context his statements are correct in. It's worth the effort.

For example, consider his statement "US seigniorage is relatively small."

This probably seems rather a shocking falsehood to people following most financial and geopolitical commentary today. That's because the narrative today is often focused around how "The dollar is the world's reserve currency" and has given dollar issuers "exorbitant privilege" and how the economy is about "not fighting the Fed" etc. Reading Krugman's pieces in the Times or hearing modern investment reports make it seem like US dollar seigniorage is the most important driving force in the current economy. Well it turns out he isn't talking about just dollars, but specifically about a somewhat unclear subset of the economy, and even then only in a specific aspect of the accounting.

Consider his statement: "Central bank seigniorage in both the U.S. and other developed nations is a very small part of overall  government revenues". One might be tempted to say that because all U.S. revenues are in dollars, and every single dollar is issued (by the central bank) with the power of seigniorage, then ALL revenues are seigniorage, making his statement absurd. However this is a higher level argument than what is being considered. If an issuer creates one million dollars in a corporate or individual account, clearly an act of seigniorage, and then pays a tax from some of this to the government, then this tax is not considered as seigniorage in Koning's analysis. While we might debate the utility of this measure, it is at least consistent. Similar to CPI, it might not mean much on its own but we can compare it to itself in other years. In fact many of economic indices share this property.

The bulk of Koning's analysis comes from some data published by the Office of Management and Budget, apparently a PR branch of the white house. Already we have something of a disconnect between the "outsiders" narrative and the public coin users narrative, as for those used to dealing with public currency we look for verifiable numbers. For example, the amount of BTC which was issued in January or that changed hands on chain in February are examples of numbers which can be verified by looking at the public record. After getting used to this advantage of triple entry accounting, the kind of numbers Koning is using lose their shine.

The main data from Konig's article

But why not take a look? After all, we should accept feedback from "outsiders".

The first thing we notice when downloading the data from the source is that what Koning labels as "Federal Reserve" above is labeled as "Other" in the source. Does "Other" mean "Federal Reserve"? Well lets assume he's right. [Edit: Table 2.5 lists the composition of "Other" which is does indeed include the label "Federal Reserve"]

Even if we accept that, we notice some other things missing. What about sales of treasury bonds? What about deficit spending, where did that money come from? Should these numbers add up to the total budget? Probably not, as this is just a certain subset of receipts used by the Office of Management and Budget.

However, it's not worthwhile to nitpick these results here. The author has a couple good points that public coin users should pay attention to:

  1. The issuance class is not the official US Government.

This is perhaps more obvious in the US where the central bank (so-called 4th branch of government) is not officially part of the government. While the currency issuers may in effect control the government, they aren't the elected officials - and elected officials cannot necessarily count on their support. While we might be overwhelmed by "money printer goes brrrr" memes and the like, we don't actually know how many funbucks are being issued. Who knows, maybe it's a lot less than we think. And maybe only a small part of it goes directly to the treasury or white house.

2. Ending seigniorage doesn't mean an end to abuses of power

Koning is entirely correct that using public coin won't necessarily mean there is no more war on drugs, prison industrial complex, overpriced military hardware, etc. For example, there exist fiat regimes which don't do all these abuses of power - so privately issued currency doesn't necessarily lead to these abuses. One could envision a benevolent monarch scenario where the power of seigniorage was used for solely for good. Furthermore, long ago there were governments without absolute seigniorage - who still did stupid stuff.

The point is that we should be careful with our language here. If we say that garlic cures covid19, we will seem like crazy fools. However if we say that garlic can boost the immune system and help fight against viral illnesses, we suddenly become very rational indeed. Similarly, we shouldn't say that removing counterfeitable money will end racism and ecocide. There will always still be bad guys. The political point of using public currency is to make it harder for bad guys to abuse power by taking away their ability to print money for themselves in arbitrary amounts in private.

"Sorry, but buying bitcoin or gold in the hope that it somehow defunds these activities by displacing the Fed is not a legitimate form of protest. It's a cop-out."

Even this last point has some truth to it. An "exit" from the system is kind of a cop-out. Financial means are not the only ones with which one can effect change. However, I don't know if many people will consider his post as the final word on what kind of protest is legitimate. If we enable the bad guys to take all our assets by accepting their tokens as money, it's not clear that holding up signs or writing letters will help our causes. The contrary position also has its merit.

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