I paid my income taxes. I paid them with dollars. Not gold. Not pesos. Not euros. Dollars. Because if I tried to pay with one of those other things, the government would have refused to accept my money. And if I didn’t pay, I would go to jail for tax evasion (unless I was General Electric or Goldman Sachs, in which case they’d apologize to me for the mistake of asking me to pay my taxes).
The fact that the government will only accept tax payments — or any other payments — in dollars, and will pay its bills only in dollars, gives an inherent utility value to dollars. 1/3rd of the U.S. economy is government taxing, borrowing, and spending. And every bit of that is transacted in dollars, because dollars are all that the government will accept or disburse.
So anyhow, Bitcoin has been in the news lately. First because one of the biggest bitcoin “banks” collapsed, likely wiping out all the bitcoins stored there, and second because of the media circus surrounding Newsweek supposedly discovering the founder of Bitcoin, who had remained anonymous for years.
But governments won’t accept or spend bitcoins. That’s 1/3rd of the US economy, and more of most other Western economies, off limits to bitcoins. Furthermore, the supply of bitcoins is woefully inadequate to substitute for dollars. The total value of all bitcoins in existence is around $8.3 billion dollars. That’s less than 1% of the circulating cash or cash equivalents (M0 money supply) in the US economy.
Given all of this, I see no reason why Bitcoin won’t go the way of other “alternate currencies” that have arisen over the years. These currencies have value only if the current holders of the currency can convince new suckers to buy their holdings, in a typical Ponzi scheme setup. But eventually you run out of suckers and the whole Ponzi scheme collapses.
The reality is that government-issued fiat money has value because government forces its extraction and acceptance at gunpoint. That is, it has power behind it, especially in a world where the most critical resource of all, oil, is denominated in dollars. Alternate currencies do not have such backing from people who possess tanks, bombers, and nuclear missiles, and thus will at best be constrained to niche status, at worst will collapse and leave the final buyers in the Ponzi scheme left holding worthless currency that they cannot spend on anything necessary to life and limb (such as, say, taxes, since you go to jail if you don’t pay them).
But the cyber-libertarians continue trying to ignore that nasty reality thing because in their universe of pink unicorns and cotton candy trees things don’t work like that. Well, in this universe, power flows from the barrel of a gun. Just sayin’.
- Badtux the Monetary Penguin