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Libertarian Sheep: Made to Be Sheared by Bitcoin

Written by Gary North on December 5, 2013

This week, a perfectly named Bitcoin market called Sheep Marketplace went down, taking $100 million of the sheep’s Bitcoins with it. It announced this.

Sheep is down

We are sorry to say, but we were robbed on Saturday 11/21/2013 by vendor EBOOK101. This vendor found bug in system and stole 5400 BTC — your money, our provisions, all was stolen. We were trying to resolve this problem, but we were not successful. We are sorry for your problems and inconvenience, all of current BTC will be ditributed to users, who have filled correct BTC emergency adress [sic].

I would like to thank to all SheepMarketplace moderators by this, who were helping with this problem. I am very sorry for this situation. Thank you all.

This morning, I received an email from someone named Mike. He is a perfect example of the sheep to be sheared.

Mike does not like my articles exposing Bitcoins as a digital tulip mania. He decided to put me in my place.

The problem with people who have never read an economics book carefully is that they pick up the jargon, but they have no knowledge of the actual logic of economics.

I received an email from a stranger yesterday. It began, “Gary.” At that point, I knew it was from a some 20-something kid. Adults do not begin a letter to a stranger with his first name.

It began:

I’ll try to be brief.

He failed.

Since gov’t fiat usurped the place of real money, fiat now functions as money and we call it money. You call it money. You keep saying dollars are money. Do dollars fit the regression theorem? I think not, except by way of cannibalizing gold. But that’s been a done deal for a long time, so we call all this stuff money now.

I have written about this in 2004 in my article on the de-monetization of gold.

This kid does not understand the basics of arguing. When you write to someone who writes 7 articles a day, you should figure that he has written something on the topic you are raising. When you tell him that he doesn’t understand something on which he has written for 50 years, you should first do a Google search. But kids who begin letters with the author’s first name are not skilled in debate.

Bitcoin is a market response to gov’t fiat. It’s a decentralized fiat, a people’s fiat if you will. It rides the dollar just like the dollar rode gold. It uses dollar values for economic exchange just like the otherwise worthless fiat dollar used the whole price history of gold/silver economies.

First, there are hardly any economic exchanges made with Bitcoins. There is almost nothing offered for sale. Second, the only thing that most people are buying with their hard-earned dollars are Bitcoins. It’s a tulip-mania bubble. Third, because the price of Bitcoins is highly volatile, no one can make calculations about its value tomorrow. This is why Bitcoins are not money. Bitcoins are no more money than tulip bulbs in the Netherlands in 1636 were money.

It’s bootstrapping itself in a hampered, gov’t controlled market. It’s a way to use fiat against gov’t fiat.

The government’s fiat is good for $14 trillion per day in transactions. Its fiat has been operating since 1914. A price denominated in the dollar conveys information. The entire nation’s economy is based n this familiar information. This is the basis of the division of labor. Prices change maybe a percent or two a year. So, the dollar is money.

Bitcoins are not money. The two fiats are not comparable.

The fact that the issue of bitcoins is limited to 21 million makes it more attractive than continually depreciating gov’t fiat.

More attractive to whom? Not to 100 million households who use dollars.

The test of all this theory is the market. The kid mistakes his own rhetoric for the market. The market for Bitcoins is tiny. Every new entry forces up the price, which destroys the crucial feature of money: its price predictability in exchange.

It gains value by siphoning value – just like all gov’t fiat does.

This is gibberish. It is not analysis.

Yet all these modern currencies are tied to gold in some way, having built on that foundation. If Bitcoin builds on the gov’t fiat foundation, which itself is built on gold, and siphons off value as gov’t fiat siphoned value, then how is it not money in the sense that you are using the term for the dollar?

It is not money because it is not being used in exchanges. You cannot buy much with it except illegal drugs and computer programming.

The government shut down Silk Road for drug dealing. The Sheep Market soon followed.

We don’t have a free market, so what’s the point in applying a free-market test to alternative currencies in this climate?

I see. Economic analysis cannot apply to anything but a free market. This therefore means that it cannot apply to anything in history, because we have never had a free market. This kid uses economic logic to deny economic logic.

As I said, people with a cursory knowledge of economics do not know what they are talking about. All they have is jargon.

Bitcoin might fail miserably if a free market were restored, but in the absence of one isn’t it just another fiat money? How does the fact that it’s not issued by a gov’t mean that it isn’t money? You seem to be saying that dollars and euros and pesos are money, but a non-gov’t fiat is some sort of scam! Something doesn’t add up in your analysis.

If you are confused about the logic of monetary theory, then of course monetary theory does not add up for you. The fault, dear Mike, does not lie in monetary theory. It lies in you.

Tell me, if the gov’t of Bananaland had issued Bitcoin, would you then call it money?
Apparently you would. You’d probably praise them for coming up with a way to prevent a fiat money from inflating into infinity! And that’s why you need to re-think your position.

This kid is not much better at the rhetoric of contempt than he is at economic analysis.

You can’t say gov’t fiat is money but private fiat isn’t.

We have an entire civilization operating in terms of fiat money — a civilization that is marked by compound economic growth. But this kid defines away this reality. In his word, all fiat monies are equal. The play-pretend money of Bitcoins and the monetary system that supports an entire civilization.

If you want to make your point stick about the regression theorem, then you should stop referring to the dollar as money. Then you’d maintain a pure intellectual standard of what money is in a free market, but wouldn’t have much to say about how to resist the fiat tyranny with crypto-currency.

The libertarian movement, like all movements, has a majority of people who do not know the logic of their movement. Pareto’s law rules. About 20% really do understand. About 60% have some vague understanding, but they cannot articulate it. About 20% do not know up from down.

Mike is in this latter group.

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19 thoughts on “Libertarian Sheep: Made to Be Sheared by Bitcoin

  1. Mike Stallings says:

    I am the person who wrote to Mr. North. I have responded to him privately and have apologized for foolishly greeting him by his first name without knowing him personally. I think the crux of the issue is that Mr. North refers to all government fiat as money even though it is not a commodity, was implemented by force, and cannot possibly satisfy the regression theorem. Therefore, I claim that a private system of fiat may also become "money" in that sense if it attains a wide enough adoption. I don't believe there is any other substantive difference between our points of view. He allows that government fiat can be money, but denies that we can create a private alternative fiat which might, at some point, fill the same space as government fiat as a competitor.

  2. So Volatile says:

    the problem with this debate, is no one can agree on the definition of money or currency.
    I have a problem with this…." the crucial feature of money: its price predictability in exchange."
    why does added volatility make something not money? or even not currency? nature is in flux, sometimes violently, why should money/currencies be any different.
    money is hard first and foremost, and paper dont count as hard, hombre.

    is gold a fraud because it fell from $1933 to $1179 in 2 years?
    is US $ a fraud because it went from 0.99 C$ to 1.06 C$ in 6 months?
    volatility is the norm, especially in the midst of arguably the greatest economic crisis in history.

  3. So Volatile says:

    Gary north says this in his " re-monetization of gold" article….." Money is the most marketable economy. Gold is therefore not money. You have to buy gold from a specialized broker. "

    my questions to north- are you not mistaking currency for money?
    do you see currency and money as the same thing?
    is not gold money and US$ currency?

  4. 1. Bitcoin, no matter how you analyze it, is in an early phase. Even if it ends up shooting sky-high, it's probably going to have dips as well. Anyone that isn't prepared to deal with extreme volatility should buy something else.

    2. The $ is an electronic currency, too, and hackers steal $ every day…it's so common, it isn't news. The fact that some site didn't have good enough security means nothing about the security of Bitcoin itself.

    Really, you keep making arguments that emphasize how little you know about Bitcoin.

  5. I find it interesting that Ron Paul seems to have a different viewpoint on Bitcoin and crypto currency in general. He was recently quoted as saying that Bitcoin could destroy the dollar if people start using it.
    The fact is – people are USING it for making purchases, and the number of businesses who accept it is growing VERY rapidly.

    I'm a long time physical silver investor, but these crypto currencies offer something extremely important that physical gold and silver can't… Virtually instant transactions anywhere in the world. Tulips never offered anything so vitally important.

    Anyone who doesn't understand the necessity of that in modern commerce is living in the past. The problem has been that up until recently, you couldn't make these transactions outside of the evil banking system.

    As far as theft is concerned, it's a fact of life – it always will be. It doesn't matter if it's Gold, Silver, Fiat, or bitcoins. The solution is due diligence and taking personal responsibility to protect your assets. We ABSOLUTELY DON'T want that protection to be forced upon us by another party – ESPECIALLY government. If they can control it for your "protection", they can also confiscate it at their leisure. When they decide to steal your assets they do it at gunpoint and threat of imprisonment. There is no way to even try to protect yourself.

    That is the vital issue at state here.

  6. All very interesting, but the most pertinent question to me is this. How do you know the Sheep Marketplace was robbed? Not why do you think, but how do you KNOW. Answer: You don't. Maybe the Sheep decided now was the time to get out of this mania and cash out into "real money." Looks like a wonderful way to run a scam to me.

    And what are those who lost their money, whether they call it dollars or bitcoins, going to do about it? Go to the cops? Good luck with that.

  7. "First, there are hardly any economic exchanges made with Bitcoins. There is almost nothing offered for sale."

    Dr. North, I have long appreciated your writings on free markets and economics, but the above comment sounds pretty darn silly to anyone in the bitcoin world.

    Things I have bought with Bitcoin in the last year: ice cream, plane tickets, hotel reservations, rent, presents, books, gift cards (Amazon, TGIFridays), all sorts of foods from restaurants, all sorts of drinks from bars, cufflinks, web hosting services, domain name registration, silver, gold, newsletters that have done more research on btc than it appears you have, chocolates and other tasty treats, a laptop and extra charger, among plenty of other things.

    Moral of the story: people can (and quite often do) buy lots of things, other than $'s, with Bitcoins.

  8. GabeCoin, "can buy" is not the same as "offered for sale".

    Also, because you can buy a variety of things with Bitcoin does not mean the percentage of exchanges completed with Bitcoins is significant overall in comparison to say, gasoline purchases, thus: there are hardly any economic exchanges made with Bitcoins.

  9. Charles Lewis says:

    Absolutely. More transactions take place by people trading off their food stamps. Bitcoins are not only insignificant as a percentage of total commerce, they are terribly dangerous. Bitcoin.org warns that you should only have in bitcoins what you can afford to lose, that they should be seen as a high risk asset.

  10. New School Posse says:

    More powerful computers and new hacking strategies could bring down Bitcoin in the future. Bitcoin exchanges have been hacked. How could anyone know the level of risk that such threats pose? At least gold and silver do not face such existential threats.

  11. New School Posse says:

    Your response shows a lot of civility, Mike.

  12. Cryptos will be the next mania and are an alternative to this self destructing slave system. Right now, that's all that matters. Having railed for years about the profligacy of .gov and paper money's ultimate destruction, one would think Mr. North would be a bit more tolerable of Crypto currencies as they blaze an alternative path. It's an interesting debate, but IMHO everyone should at least be considering Cryptos. Frankly, I trust this new framework going forward quite a bit more than the next crop of politicians coming our way and their ability to be responsible with my $.

  13. Problem with "private sector Fiat money" is how do you make it into "legal tender"? Upon what basis will the money be accepted in a market?

    Mike, your heart is in the right place. I just don't believe that you've thought this all the way through. I think that a private sector currency based upon commodities might be useful someday.

    Private sector fiat currency? I don't buy it.

  14. The volatility of these encryptions imposes heavy vulnerability onto bitcoin. You're a news report away from losing your shirt.

  15. Mike Stallings says:

    The government controlled fiat monetary and financial system is a multi-trillion dollar market begging for competition. Trouble is, they will shut you down if you go the conventional route and simply establish a gold-backed digital currency. They've shut down two of those so far that I can recall. They also shut down Liberty Dollar which was physical coins and notes.

    Bitcoin was designed so that it does not have a single point of failure. It's a distributed network. It has no offices to be raided and no gold or certificates to be seized. Now, any private person or group can issue an alternative fiat currency at par. The way that works is you take $1 and issue 1 Zoobuck (or whatever). You keep the dollars in reserve in order to provide liquidity. You essentially become a bank of sorts. In case there's a run on your currency, you have it backed with dollars. Yest, it's fiat "backing" fiat, but at least it's stable from day to day because the dollar market is so large. At some point you could back with gold as well, partially or otherwise. But while this scheme avoids the problem of volatility, it is completely exposed to government control and regulation, and will likely be shut down at the point it is perceived to be a threat to the establishment. The reason it is a threat is that if Zoobucks were run well, it would gain value versus the dollar over time because the dollar is designed to lose value over time through inflation. At a certain point of wide adoption, it would cause a run on the dollar. The government would crush it long before that point.

    Bitcoin takes another route. It does not issue denominated units backed by a single company responsible for its issue and management. It issues valueless tokens in a distributed network which allows the network to grow and the token value to grow and become strong long before the authorities know what's going on or have any reasonable way of shutting it down. The price for this design is volatility since value must come from speculators and backers/investors who see the long term value of the entire system. When people trade their fiat for BTC, they're transferring value from the world's system into one designed for the people. It's a way of voting against the world's system and empowering the people. This process rewards early adopters – a hard pill to swallow for some. It was hard for me to swallow too since I have all the same expectations of an alternative currency that I'm sure Mr. North does. But the problem is, we don't live in that world. It won't happen that way.

    Bitcoin is already accepted by the market, but it needs to grow. INo one can reasonably expect instantaneous market penetration or equilibrium pricing. It's in the early adoption phase, and it requires continued price discovery as well as continued adoption. The problem with Mr. North's criticisms is that he neatly disposes of Bitcoin on the basis of the price volatility. But I don't see that that's a factor in the long term. Even a severe crash would not wipe out the network or the protocol. The cryptocurrency cat is out of the bag. The genie is out of the bottle. Crypto will be used to transfer value in this way no matter what happens. It's a technology that will advance on its own merits. The features it has are undeniable. What is its ultimate value to society? We don't know yet. But to just simply dismiss it as a scam or as a temporary mania is to me an extremely myopic and ill-informed view that takes no account of the underlying technological value of cryptography and peer-to-peer networks. I believe P2P has tremendous potential for all kinds of networks, and cryptography is a formidable tool in the struggle to be free. To be able to transfer value instantly and securely with a reasonable amount of privacy and ease is certainly a value society needs and wants to be realized.

  16. Charles Lewis says:

    The risk/reward ratio of messing with bitcoins is simply off the scale. I predict more reports of "thefts" and people losing their entire investment, er I mean speculation.


  18. Charles Lewis says:

    A 770 account? Sounds like whole life insurance. No thanks. in fact, double no thanks.

  19. I find it interesting that you are blasting this "20-something" for his lack of writing etiquette, then attacking him for spouting off jargon while lumping nearly ALL LIbertarians into one group of ignorant people who you claim to be "Sheep". This is a common tactic of writers and talking heads these days, but it's not often successful in conveying a thought. You don't like what someone is saying or how they say it, so instead of explaining CLEARLY what it is you're disputing, you attack the person and other things that aren't even relevant to the discussion. "Strawman" comes to mind…. Also, for some reason, you think that your writing career means that he owes you some sort of bow or that perhaps he should kneel and kiss your ring. You too are a man and are capable of folly. As well educated as you are and as well versed as you may be, insulting a man and an entire political party is not a way of gaining followers or converts, especially when it's coming from the other sub-party who is making a contention for voters within the Republican Party.

    Lastly, I think you may be missing the attraction to bitcoin for many people who are eyeing it's potential. It's not about buying illegal drugs or software for many of it's potential users. It's about taking back something that was yours to begin with. It's about NOT allowing the government to control the value of money by pandering to private enterprise. It's about freedom. If that means that people are readying themselves to be sheared… Perhaps your own sheeply appearance is given away by the big eyes and teeth that you have peeking out from under your costume. Perhaps the wolf is hoping that the sheep don't realize there are too many of them for the shepard and his dogs to contain.