F.A.Q.

FAQs related to the economics articles on this blog:

1. No interest is paid on bitcoin. How is that new, since no interest is currently paid on cash, either?

Cash (paper money and coins), while legal tender, is not the main form of what is widely considered money; electronic bank accounts are. Interest should never be paid on what is widely considered money. Interest has to do with offsetting credit risk; a risk which is non-existent for the bank account owner, since people demand government guarantees on whatever it is that is widely considered money. Interest paid on a government guaranteed account operates as a reverse net worth tax (as does interest paid on sovereign debt and municipal bonds). The more money that is in a bank account the more credit risk the government is assuming, for which the account owner receives more interest! Lending among private parties, and the functioning of what is widely considered money, should operate completely separately.

After transition to a national bitcoin model, the main form of money ownership would be electronic bitcoin, which by definition incurs no credit risk and pays no interest, so this problem is solved.

2  Wouldn't a national Bitcoin imply an exclusive endorsement by government, and be a complete misunderstanding of Bitcoin? For example why would anyone want to be tattooed (metaphorically speaking) with a bitcoin address?

The national bitcoin model is where the government designates a specific bitcoin system as national legal tender, and all bank accounts are transferred out directly to the account owners' own electronic storage.

The national bitcoin model, unlike the original bitcoin, would solve the problems of stolen or missing private keys, and recordkeeping, as explained in Legal Tender based upon Bitcoin. Without these problems being solved, even at the expense of losing some anonymity, bitcoin will never have the widespread acceptance to be usable as a national currency. Here's a good test for whether a bitcoin system can become a national currency: A person with a bitcoin account worth $10,000 dies in a fire which destroys all his computers, storage and files. A relative knows that this person had a bitcoin account. Can the bitcoins be recovered? Can a record of the last three years of transactions, including the counterparties to those transactions, be reconstructed? The original bitcoin system cannot handle this task. Yet computers are ideally suited for tracing stolen data, recovering lost data, and record keeping, so it is not a stretch to envision a national bitcoin system designed to handle these situations.

The original bitcoin model would still be around, for those who want anonymity. Some think there is no need for government to designate a legal tender; that the free market can determine what is money. Say, a combination of the original bitcoin, and physical gold and silver. This may not be viable long term, as I illustrate in this video titled: Decentralized Barter A Tower of Babel?

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3. With a national bitcoin system, in order to earn a return you must invest your money. Why not just use the original bitcoin model, where deflation will make it's value grow?

That deflation is just a temporary phenomenon. Investors in the original bitcoin would artificially see the value of their earlier bought bitcoins increase as the use of the limited supply of bitcoin is spread among more and more people. There would be no more deflation after the number of people using bitcoin reaches saturation. With the national bitcoin model, the use of bitcoin would already start out widespread, so there would be no deflation. In that case, it would only be the free market that would influence whether people invest, save or spend money.

4. A 10% Bitcoin tax while fiat money becomes non taxable... Doesn't this create barter scenarios that are full of loopholes?

Coins and paper money would not be any more fiat than bitcoin. The overall size of the money supply, including electronic (bitcoins) and physical (coins and paper), would be fixed. Taxes would be scalable with no government borrowing allowed. The income tax as we know it would be eliminated; replaced by a 10% transaction tax combined with a net worth tax on registered assets.

For electronic transactions, a national bitcoin model could be programmed to automatically collect the transaction tax, along with doing away with some existing loopholes. For example, the loophole that still makes it difficult to tax out of state sales. And, in many states, the arcane laws that exempt gold and silver from sales tax, at least for transactions over a certain dollar amount.

As for barter transactions, including those involving physical currency, these are much harder to track. They make taxes very difficult to collect, and the cost of collection uses up much of the tax money collected. For physical money (coins and paper), simply taxing its conversion into and out of bitcoins would cause its use in the underground economy to be self-limiting. The only loophole would be where the same "piece" of physical money passed through many hands before being spent at a business or converted to bitcoin. This loophole would become less common over time by the shrinking supply of physical currency, and offset by the additional taxes collected on conversions to and from bitcoin. The only laws in this area would be ones that are inexpensive and easy to enforce. Activity which can not realistically be regulated would be left alone; the numbers involved not being enough to be a threat to the tax system.

5. You predict that fiat currency will transition to Bitcoin over the fullness of time, but historically don't currency changes happen swiftly?

The debt problem is growing exponentially, and as one goes further out on an exponential curve sudden corrections can occur; such as a collapse, like with the breaking of a stretched rubber band. The current bitcoin system, if it grows, can further bring the crisis to a head. The government debt problem must be solved before the adoption of a national bitcoin model.  Some combination of write-offs and monitization (money printing) are needed to completely eliminate the debt. Then, the national bitcoin model could be introduced, transferring bank account balances to customer's own electronic storage. Bitcoin and physical money would co-exist, and overall the money supply would be fixed in size. The physical money supply relative to bitcoin would probably shrink over time, but physical money would still have its uses.

6. How did you get the idea to tax the acquisition of paper money and coins?

I wondered how it would still be possible for people to leave hotel room tips, and drop money in charity boxes, with an all-electronic currency. At first I thought private businesses could sell tokens or computer printable coupons. The people buying the tokens or coupons could pay the transaction tax when acquiring them, and then when they leave tips or, say, pay panhandlers, there would be no need to collect taxes as they had already been collected in advance. Then I realized that we already have coupons and tokens, in the form of paper money and coins, and that it would be much more confusing having private businesses produce these items. We could still involve private businesses by paying them a commission out of the transaction taxes collected when they exchange physical currency into electronic currency, and vice versa, for their customers.

7. Don't we still need banks, with their huge safes, to store paper currency and coins?

Once electronic currency becomes the only form of legal tender, and exchanges into and out of physical currency are taxed, the use (and therefore the supply) of physical money will greatly diminish over time. Retail stores are already handling and securely storing much of the outstanding physical currency. Also consider their numerous retail locations and experience with ATMs and over the counter cash dealings with customers. Part of the fee collected for maintaining bitcoin could be used to establish a hotline for resolving (rare) bitcoin issues.

8. Your 10% transaction tax looks similar to Herman Cain's 9-9-9 tax plan. Wasn't that plan criticized for being too regressive?

A plan that relies entirely on transaction tax would be regressive. The 9-9-9 plan is very similar to a transaction tax only tax system. There is the 9% tax on sales, and when individuals and business are assessed 9% income taxes that allow very few deductions, it is similar to a 9% tax on receipts.

In the PieEconomics system, the transaction tax is balanced with a net worth tax, which is the only type of tax that does not reallocate wealth. If the PieEconomics system becomes too regressive, the transaction tax rate can be decreased relative to the net worth tax rate.

9. Isn't having a system of sovereign debt and municipal bonds (even if it operates as a reverse net worth tax) better than having governments print money outright and creating lots of inflation?

Any interest paid on government insured bank accounts, and government bonds (including municipal), operates as a reverse net worth tax. The larger the balance in the accounts, the larger the subsidy.

Governments never need to borrow money, since they can simply print it. Borrowing money creates inflation just like printing it does. Example: Government borrows $1,000 from Peter, and pays it to government contractor Paul. Peter still enjoys $1,000 of wealth from his government bonds. Knowing that he has $1,000 in government insured funds, he may decide to spend other money for a vacation. He can even sell or borrow against the bonds in order to spend for the vacation. In addition to this $1,000 of wealth that Peter still has, an extra $1,000 has been added to the system by the payment to government contractor Paul. This is the same $1,000 of extra wealth that would have been added to the system had the government not borrowed any money, but simply printed the $1,000 paid to government contractor Paul.

10. Don't loans to government at least have a payback date, while direct money printing doesn't?

New loans replace old loans. More than that, government spending (and debt) has been increasing over time; in fact, exponentially. Direct money printing, in contrast, would result in less inflationary spending by government, since no interest would be paid out. This is explained further by economist Martin Armstrong on page 4 of his article subtitled: We Print Bonds-- Not Money.

11. PieEconomics allows direct money printing only within the constraints of a balanced budget. By forcing a balanced budget, would PieEconomics bring about austerity and depression?

Forcing a balanced budget, without making any other changes in the current system, would bring about austerity and depression. The net worth tax changes all of this, by freeing up funds in a way that does not redistribute wealth. Furthermore, PieEconomics creates a timely feedback loop resulting in transparency and popular empowerment. Feedback occurs as follows: (1) Direct money printing together with a balanced budget immediately determines who gets taxed for each dollar the government spends. (2) Then, direct voting on issues by the people enables timely resolution of any taxpayer outrage (through changes in government spending priorities). There is currently an initiative to "let the people vote" on issues; see Gerald Celente's DirectDemocracyNow.

12. How can PieEconomics help to alleviate the record and increasing amount of wealth disparity?

The exponential increase in government spending has not reigned in the record amount of wealth disparity; in fact, the disparity is increasing, foreshadowing the need for even more borrowing by government. Excessive concentration of wealth often leads to a lack of transparency, which enables rampant corruption.

We should not add to this record wealth disparity by leaving out the net worth tax as a tool, or by paying out government insured interest which is in effect a reverse net worth tax.

13. Isn't a big part of the reason wealth disparity is increasing, the fact that technology is making many jobs, such as in manufacturing and banking, obsolete?

Technology is making many jobs obsolete by improving efficiency, which should translate into improved living standards for people; not the opposite! We are approaching a paradigm shift regarding employment, and this is another example of why enabling direct voting on issues by the people is essential. This enhanced form of democracy and resulting transparency would help expose and eliminate waste, fraud, and abuse as we relentlessly (and, perhaps unavoidably) approach the singularity.

14. Is PieEconomics capitalist or socialist? How is a net worth tax not socialism, with its redistribution from the wealthy to the poor?

All government spending by definition redistributes wealth, whether under PieEconomics or any other economic system. As for whether more spending is distributed to the poor, middle class, or wealthy, PieEconomics with its enhanced democracy leaves that choice up to the voters.

Wealth reallocation debates, often highly charged, may delay government spending, but cannot be allowed to delay or interfere with an otherwise simple and scalable taxing structure automatically keeping the budget in balance. Therefore, any wealth reallocation should only occur through government spending; and not at all through taxation. This redistribution of wealth caused by government spending is completely independent of any taxes (including net worth taxes) which are raised to pay for such spending.

As for redistribution of wealth caused by uneven taxation, this does not occur with net worth taxes. This makes sense, since it is a form of net worth tax, inflation, which kicks in naturally when not enough taxes are collected to cover government spending. But natural taxation (inflation) only taxes money (and fixed income investments). Because it omits taxing other asset classes such as real estate and stocks, inflation redistributes wealth. If we were to extend this natural form of taxation (inflation) to tax all asset classes (not just money), this net worth tax would not only be natural, but also neutral in that it would not redistribute wealth.

This natural adjustment that is the net worth tax is similar to the situation where a company dilutes its own stock by issuing more shares. Each individual share of stock becomes worth less than its former value, but each and every share of the company is diluted by the same percentage. Theoretically, when a net worth tax is assessed, each and every dollar of wealth in the economy is trimmed in value by the same percentage, and the relative wealth of each taxpayer remains unchanged. (For a given amount of total taxation raised within a system, anyone who pays a tax within the current tax system that is less than what would be required within a net worth tax system is automatically increasing his wealth relative to other taxpayers.)

So, the taxing structure of PieEconomics is capitalist, since wherever practical it tries not to reallocate wealth.  As for government spending choices, PieEconomics promotes enhanced democracy, so that any capitalism/ socialism leanings would reflect the vote of the people. In any event the exponential ramp in technology as we approach the singularity may eventually render the capitalism/ socialism model obsolete.

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