Ever wonder why Euros depict hypothetical bridges as artistic imagery rather than real architectural bridges?
“Conceptually, virtual currency schemes (i.e. Bitcoin) could have an impact on price stability and monetary policy if they affect the demand for the central bank’s liabilities and interfere in the control of the supply of money through open market operations.”
A Report On Virtual Currency Schemes – European Central Bank, October 2012
How would alternative virtual currencies, such as Bitcoin, cause price instability to happen according to the ECB?
According to the report, Bitcoin would destabilize prices if and when “they substantially modify the quantity of money”, “have an impact on the velocity of money” or “there is an interaction between virtual currencies and the real econonmy.”
Quantity of Money:
Let’s check the progress of Bitcoin so far. In regard to the impact on the quantity of money, according to the ECB report “there could be a certain impact as a result of the exchange rate, even if the money supply remains stable.”
Let’s see, according to that Hitler parody video ( parental guidance suggested: http://www.youtube.com/watch?v=alc0gG0u48M ), that first pizza cost $180,000 in Bitcoins as measured at their $18 price peak to-date. Today Bitcoins trade at better than $10 each. So much for stability in the exchange rate and you can thank the central bankers for their impact on the money supply of so-called “real currencies.”
Velocity of Money:
In regard to the impact on the velocity of money, the ECB report states; “It is not clear at this stage how the technological innovations presented by virtual currency schemes might affect the velocity of money,” and the report continues by explaining that velocity will largely depend on the number of “consumers willing to pay with these virtual currencies and merchants willing to accept their payments.” In the traditional terms of the bankcard industry this is the parallel growth of issuance and acceptance which were exactly the challenges facing Dee Hock when he proliferated the VISA (BankAmericard) Network. From Dave’s perspective, this is all about friction. (addressed here: http://tradewithdave.com/?p=11735)
Dave has written at length about the low friction of models such as the Coincinet ™ and their ability to reverse Gresham’s law. The ECB’s report go so far as to state that Bitcoin’s “theoretical roots of the scheme can be found in Austrian school of economics” (see top of page 23) while also stating that the system fails to satisfy Ludwig von Mises Regression Theorem. This issue was the basis for the Keiser-Jaitly-Woods-von Mises smackdown which Dave elaborated on in these 5 blog posts (http://tradewithdave.com/?s=mises+regression)
Here’s the real kicker from the ECB’s report if you ask Dave. “A widespread substitution of central bank money by privately issued virtual currency could significantlly reduce the size of central banks’ balance sheets, and also their ability to influence the short-term interest rate.”
That statement probably is most disturbing and makes Dave quite suspicious as to just who is behind this scheme. Bitcoin comes along at a quite convenient time when a solution to shrinking the Fed’s balance sheet while simultaneously reducing friction would solve many of the perceived problems with the current system. In what Dave has described as the global roll-up plan, the ubiquitous nature of virtual currencies would be beneficial to the central banks for the deleveraging of the divorced half of the currency which satisfies the double coincidence of wants. In a ZIRP environment relative to that particular 1/2 of the divorced currency system that Dave has written about endlessly (http://tradewithdave.com/?s=divorced+currency), a truly “sterilized” form of currency no longer needs to be capable of sending a market signal relative to interest rates. That high velocity convenience money has no yield and this is consistent, in Dave’s opinon with Michael Woodford’s comments on the lower zero bound and the Chicago Plan. That form of currency is a eunuch of immaculate deception and that’s just what they’re looking for (http://tradewithdave.com/?p=9534).
Virtual Currencies Impacting The Real Economy
I must admit that I laughed when I read this. Like we have a “real” economy. The ECB report acts as if virtual currencies impacting “real currencies” and the “real economy” is something that may occur in the future. If it’s not already happening then why is Bitcoin featured in The Economist Magazine, the subject of an in-depth ECB report and why is Senator Chuck Schumer so up in arms about Bitcoin being used to purchase illicit drugs via websites such as SilkRoad? Is the drug economy not part of the real economy and when people exchange United States Federal Reserve Notes for illicit drugs is this in some manner different than the exchange of Bitcoin for illicit drugs? Does the use of Bitcoins in some way make the illegal drug purchase more illegal than if U. S. currency was used? Dave would suggest that any interaction, no matter how small or insignificant is real interaction and that in the same way that the single flapping of a butterfly wing can be the cause of a hurricane, a single idea introduced at the right time and the right place can change everything.
How does a project with no central backing and one that threatens vested central bankers (price stability and interest rate setting) at least according to their own report, get such high visibility as inclusion in the clearly Rothschild controlled Economist Magazine and the arguably Rothschild control European Central Bank report? Now that’s a good question. If you know the answer to that one, maybe you should drop Dave an email.
Here’s a link to the full report from the European Central Bank: https://docs.google.com/file/d/0BzihvCJLQ1X3M1ktY1pnWm9vLW8/edit?pli=1