Comment by syspec
4 years ago
I completely agree with you, but I’m wondering if you could help me debate the counter argument: “The same is true of stocks, if people decide to stop putting money in, no money comes out”
It comes up whenever I make a point similar to yours above, and I haven’t had a good answer for it
Stocks represent a share of a productive asset - the (presumably successful) underlying business. That business includes capital goods and other assets having intrinsic value themselves, and also the value created by organising them together. The profits can be distributed as dividends, or used to grow the asset (buy more machines or whatever).
Of course speculation muddies the waters, but you can see how important annual accounts etc are - to ensure the business really has the value it is being ascribed.
Right. So exactly the same is true of stocks when it comes to trading existing stock. The key difference is the creation of stock - IPOs. The company uses that money they get from the IPO and invests it into the business, which results in profits, which they give out as dividends. There's no such mechanism in cryptocurrency.
Unfortunately the other side has a good response to this - if the dollar value of buybacks+dividends exceeds the dollar value of IPO's, then you end up with the same problem that Bitcoin is in, where it's a net loss system. That seems to be the case[0]. This is not a well known fact.
Ultimately this comes down to the fact that we don't have a stable velocity of dollars, and an unstable velocity that results in more dollars chasing less more goods produces speculative bubbles that must eventually crash and create recessions.
All investments, including all currency, whether it be stocks or gold or bitcoin or dollars, is inherently valueless. The only time you can calculate the value is when you actually are extracting utility. You can then work back from that to determine who produced that value.
[0, Figure 5/Figure 8]: https://www.yardeni.com/pub/buybackdiv.pdf
Regarding stable velocity. If we had negative interest we would have it. Then all that monetary expansion nonsense could be over and we could get on with our lives without cursing some evil businessmen for being morally reprehensible so we have a scapegoat.
I don't know what the natural interest rate such as to get a stable velocity, and it would not be static but would change with changes in the economy, but I don't think it would be negative unless we were already deep within a recession.
And do be so quick, there's always another issue to simplify! Can we get base 12? Can we get a carbon tax? A land value tax? Voting reform? I can go on all day here...