To hold Bitcoin is to keep a secret and to trust the internet.
I remember a time in 2012 when many big-bank economists predicted that the Philippine peso would remain a shooting star at around P42/$ by year-end. The peso then was a ‘darling’ currency, having nicely recovered from a low of about P49/$ in the wake of the Financial Crisis of 2008. Little did the bank economists know that there would soon be a literal u-turn; the peso shortly began its doldrums to where it is today at P53/$. It hasn’t been a pretty sight for the responsible authorities at the central bank.
Historically, the peso was initially pegged at P2/$, but it would go through a series of devaluations in the 1960s through the 1980s. It strengthened in the post-martial rule era to an uncomfortably overvalued level of P26/$ under the Ramos administration before being hit by the 1997 Asian financial crisis. According to the noted economist Cielito Habito, the peso has since 1998 been subject to market forces, especially the movements in and out by foreign funds in our local capital markets. The peso can be said to have been ‘unwanted’ in 1999-2004 when it fell from P40/$ to $56/$. The peso was again a strengthening currency through most of 2005-2012, punctuated only by a relatively brief downturn in 2008. In a sense, the ‘bad news’ we see today and looking back to 2012-13 is a re-run of the earlier turn-of-the-century episode.
Is it TRAIN only?
A fair amount of blame is laid by some commentators on the recent tax legislation (TRAIN, or Tax Reform for Acceleration and Inclusion act.). That can’t be the whole story, given that we can date the peso’s weakness from 2013. Moreover, it’s not easy to see a link between politics and the fortunes of the peso. Under the Estrada and Arroyo watch, the peso fell and then rose; but under the Aquino administration, it rose and then fell. It is possible that under the Duterte administration, the peso would fall and then rise. Still, it’s also fair to say that the new excise taxes and the run-up of oil prices in the world market have triggered an ‘After you, Alphonse’ effect in the pricing strategies of local oligopolies. That wages do not seem to have kept up with consumer prices is a nascent problem.
There are, to be wary, many stories about currency valuations. Gustav Cassel inspired the theory that a currency will tend to move to equalize the prices of traded goods. This Purchasing Power Parity Theory underlies the Economist magazine’s famous Macdonalds burger indices. It also helps to explain today’s peso fall as attributable to the fact that local inflation is 4.6 percent per annum, while the US inflation rate sits at 2.8 percent.
The balance of payments is a nice accounting way of conjuring up the tea leaves of supply and demand (for currency) to get to the underlying story. Our economic managers do this when they say that the peso is weak because we’re importing more for public infrastructure, we have to pay for more expensive oil, and we see hot money outflows that follow interest-rate differentials or shifting sentiment regarding the export earnings of the local economy.
But the exchange rate is still and also the price of an asset, and the value of a currency today reflects the markets’ best guesses of its future value. The supply of currency is nonetheless under the control of its issuer, the central bank. The issuer knows, more or less, what it wants to do, but is constrained by a need to be fair to the money-holding public. Accordingly, central banks gain credibility when their currencies are stable in the exchange markets, and when domestic inflation is low. The latter consideration has given rise to inflation targeting as good practice, something that the Bangko Sentral has adopted. We can safely guess that today’s BSP will keep a close watch on the money supply to achieve its inflation target of 4 percent (as against the latest data of 4.6 percent).
As to the stability of the peso rate, it also seems safe to believe that the BSP will not intervene to move the peso exchange in any direction, other than to counter unusually ‘wrong’ market sentiment. In other words, the BSP may ‘lean against the wind,’ but only against weak winds. I would guess that in the two months of March and April this year, the BSP did a bit of leaning against the wind.
What to expect
Will the peso then continue to weaken? Yes, if foreign investors keep fleeing, if inflation were to become uncontrolled, or if export trends deteriorate. These are three big ‘Ifs.’ Caveat emptor.
or how to think about Bitcoin.
In the end, there is no free lunch when we talk about transactions cost.
Consider Bitcoin as a digital equivalent of gold. We don’t know the price of gold a hundred years out because we reckon that price in terms of fiat, and there’s no way we can predict what central banks will do. We could try to measure the value of gold in terms of man-hours, but still that won’t work because we have no idea what technological advances will take place (that’s in the realm of the unknown unknown), or even which fiat currencies will be around to use as a benchmark.
Ergo, we won’t know what the price of Bitcoin will be a century hence. If we don’t know that, then we don’t know what’s the ‘correct’ price of Bitcoin today. This is just a consequence of using a present-value calculation (the uncertainty on the proper discount rate is not even material).
What we do know is that Bitcoin has had a run-up in price because the players behave like a collective Ponzi. Imagine if the Ponzi players got enamored with gold the way they have with Bitcoin. Not so far-fetched, is it?
There is a difference, of course. Gold is a commodity with ‘intrinsic’ value as jewelry. Unless humans suddenly decide gold has no worth at all, the jewelry component will set a floor to the gold price.
Bitcoin, once mined, is just that: a digital bit sitting in a thousand computers. You can’t eat it, wear it, etc. You might argue that it cost a miner $1,000 to get his Bitcoin, but that’s just sunk cost. It doesn’t guarantee a price that the next guy will pay.
But an even greater difference is this. Anyone else can cook up his Bitcoin wannabe. If he succeeds, then you have an ‘alt coin.’ If you cook it up from an existing alt coin, it’s called a fork. Theoretically, you can then have an infinity of forks and alt coins. In practice, you need a society of nuts willing to see a particular alt coin as money. How many in this society? I don’t know, but a good guess is 1 million. With global population at 7.6 billion, we might have 7,600 alt coins. No wonder, every Ponzi-loving geek goes out to try his luck. Lots of suckers out there still.
What this means is a ceiling on the Bitcoin price, analogous with the floor on gold. Where is that ceiling? Only the god of Ponzis knows. Individually, alt coins including Bitcoin will fluctuate according to the vagaries of sentiment. If an alt coin’s underlying ‘consensus’ mechanism, which is human psychology and not a matter of algorithms, gets compromised, that alt coin will crash. Kindleberger wrote the books on manias and crashes, and he would say that all assets are susceptible.
Can Bitcoin have a floor? If you start from zero, and if everybody deserts you, that floor is zero. (How many penny stocks have come to naught?)
Can Bitcoin (or any alt coin) have a stable non-zero equilibrium price? Bitcoin started out billed as an alternative to fiat, and perhaps it may run a very long run equilibrium if, collectively, Bitcoin users are convinced that their Bitcoin is worth a certain (stable) amount of fiat. This would be paradoxical. You end up holding Bitcoin as just another form of fiat. As it is, the transactions cost of using Bitcoin is on par with that of fiat. So, why bother?
Unless, of course, you think you can still play the Ponzi.
The pleasure of company
“I want only the pleasure of your company.” How often have you heard that? And did you believe?
The idea that people socialize to ‘do business’ is accepted, even needed. But there are times when with no particular agenda, time is definitely not money. Time would be more like a ghost of precious moments seeping through the interstices of events we demarcate.
Did prehistoric man with only stones for tools sit around wondering about time and where it went? Did he learn to write because somehow he wanted time to stop? “Carpe diem,” goes the saying, but the thinking day resists. It passes, and gets rated good, bad, or so-so. Most days are writer-block days.
And then came the Internet. We’ve now got mail but then it also got filled with spam that we now have to filter. We Google but then Google tracks us. We Facebook, and without us wanting it, advertisers stalk us. Walt Kelly got it right: We found the enemy, and it is us.
What to do? Can we befriend our collective social selves? Can we carve out human conversations in private digital spaces? There is something to going back to pen and paper, and the mailman; or to meeting up in cafés that feel like Paris. Better yet, we embrace the idea of organizing a bunch of friends who think of dining as more than just filling up a calorie tank; the venue would be, as Hemingway called it, a moveable feast. Don’t forget to bring manners.
Why do we have tombstones and obituaries? Why do we not just talk? Of course, at a funeral, we have eulogies, i. e., we talk.
Still, talk is ephemeral, like time and our memories. The latter, as we age, get scrambled, and writing is a kind of preservative. It’s as though, with some kind of reification, we manage to live beyond the expiration dates on our memories. And certain transitions literally demand a handing over of memories. Institutional memory is ideally a perpetual motion machine.
But what happens when we write and no one reads? Is it the same as if we talk and no one listens?
Whatever did happen to E. F. Hutton? (The one with the slogan: ‘When Hutton talks, people listen.’) My guess is that slogans come and go, sales talk goes only so far, and stock market bubbles don’t last. I would, for sure, be lucky predicting The Stock Market Crash of 2018. Unlucky speech or writing gets forgotten.
Victor Hugo wrote about revolutions at different levels of perception. In Les Miserables, one such revolution came down to asking, ‘Do you hear the people sing?’
Perhaps change is why songs are written, and the good ones last. When things haven’t really changed, the songs of that era become forgettable.
In sum, we have tombstones because we want to be remembered well. Your tombstone ought to say, ‘She had a style and wrote or sang a good song. You too can sing it, softly. People will hear it and sing it too.’
It’s ok to be wishy-washy on Bitcoin. A couple of economists can get away with it.