A Network Analogy for Currency

Continuing my recent currency posts, I want to provide an analogy for what Bitcoin is as I understand it. This analogy may exist elsewhere on the web. To those authors who’s ideas I may be infringing upon it is not intentional and please notify me so that I may give the appropriate credit.  I read a great deal and don’t know where ideas come from, weather inside or outside my head.

Bitcoin is not so much a currency as it is a network protocol where the number of packets that can be exchanged grows at some fixed rate to a defined maximum. There are rules for how the packets are exchanged on a peer to peer basis to ensure that packets aren’t duplicated or lost. This is the genius of Satoshi Nakamoto. This is what he created. In this context the lines with what Bitcoin can become are very blurry. As I understand there are portions of the original source code that leverage the network analogy. Continue reading

All Fed Action is Distortionary

In this post I want to introduce some thoughts on why the actions of the Federal Reserve are distortionary, why the creation of money within the shadow banking system is more organic, and propose a more formal definition of inflation or deflation of the money supply.

Milton Friedman identified that the point of introduction of money into the economy benefited the person who introduced it the most, with its effect lowering as it spread further into the economy. Here the money being introduced isn’t aware of the overall size of the economy. It thinks based off of its one interaction that I am worth such and such and as it interacts more and more with the larger economy it begins to poses more information about the action that it can induce. Continue reading

The Price of Gold and the Federal Reserve

I read a Zero Hedge article on the price of gold and the removal of gold form bullion banks. What was not made very clear in that article was why there is a depression in the price of gold along with increased demand. Using a statistical economic framework, I think there is a correlation. First, I need to begin by borrowing from Hayek’s theories on money. The key point here is that private money created is indistinguishable from specie or reserve notes issued by a central banks. This is a cornerstone of the fractional reserve banking system. I don’t even really want to call it that name, because the phenomena is not necessarily a construct of man, but rather man’s response to statistical economic laws.

We create money as a means of exchanging action–utility. This money that is created has its value determined through exchange. In a sense the money introduced becomes aware of the economy and the economy becomes aware of the money. This can be represented in a statistical economic sense using Langevin diffusion. This is a method of stochastic sampling, like what is used in methods of numerical quadrature, such as Markov Chain Monte Carlo.  In the economy, certain individuals collect some of this money as a society begins to accumulate wealth, we call them bankers. Continue reading