Cryptocurrencies: The future of Bitcoin and its peers

The Bitcoin logo

Bitcoin is a name that most people have heard of. You might not have heard the term "cryptocurrency" or the names of other examples such as Litecoin, Peercoin or Dogecoin. Cryptocurrency refers to any currency type that uses cryptography to ensure the verifiability and in most cases, anonymity of all transactions. Bitcoin was the first modern cryptocurrency, but there have been many others. In fact, creating a new cryptocurrency is so easy that the proliferation of them is getting a bit out of control. A new currency introduced this month, for example, only has 42 possible coins that can be mined--an homage to Douglas Adams' Hitchhiker's Guide to the Galaxy comedy / science fiction series of novels. These vanity and joke currencies began after an Internet meme was turned into the only semi-serious cryptocurrency, "Dogecoin," which refers to the misspelling of "dog" often used on Web sites such as reddit.com.

So, is this just a silly and short-lived flurry of activity? Will Bitcoin and all it's silly ilk die off?

Let's get over Chained CPI

By Aaron Sherman

In the United States, we tie a number of entitlements programs like Social Security to inflation. This means that as goods become more expensive, those benefits go up. This makes good sense if you want those entitlements to adapt to the economic conditions (whether or not wanting that is a good thing is beyond the scope of this article). So, you may have heard of this thing called "Chained CPI" which some politicians argue amounts to a plan to cut Social Security benefits.

That's nonsense, and just so that you know where I'm going with this, anyone who says that is lying to you. Want to find out more, or are you already plotting my death because I'm clearly one of those people? (hint: I'm not)

Stocks don't get "punished" for missing estimates

You see it all the time, "so and so got punished for missing estimates." It's especially common in the press relating to a specific market segment, but isn't strictly a finance publication. The other day I saw this in numerous articles about Google. Here's what one Android Web site had to say:

Stocks -- or, more accurately, investors -- always react to quarterly results. Analysts keep detailed models of their expectations, and the average of these models is known as the “consensus estimate.”  If you miss consensus, as Google did, you get punished.

This is exactly wrong. There's no punishing going on.

Why physical stores are better than online

I don't like online stores, but I love them. Until recently, I couldn't figure out why this was. I love the convenience and I feel like I get a better deal online than I do in a store, but for some reason I have this very low-level desire to go to a store to shop instead of loading up Amazon, eBay, Google Music or what-have-you. Why is that?

The other day, it finally occurred to me, and when I saw Tim O'Reilly's recent post about publisher ecosystems and the closing of Borders I thought I should post my thoughts on the topic. I suspect that many people love physical stores for the same reason, but can't quite put their finger on why.

Ok, so short answer: physical stores have a greater selection.

Yes, I understand that that's absurd, but it's actually true in a sense. The online stores that I use tend to have vastly larger selections. In fact, the smaller and more specialized they are, the larger their selections are within those niches. The Paizo store, for example, has the broadest supply of Paizo Publishing products that I know of (kind of obviously). So, why would I go to a store to look for the Pathfinder Roleplaying Game Core Rulebook? Well, I wouldn't, but when I want to browse, that's another story.

Browsing online is fun, in that I can navigate through items quickly without having to stoop over and look at the bottom shelf or otherwise contort myself to find cool things, but there's a shift in the power dynamic. In a physical store, the vendor puts everything they want to sell out on the shelves. Sometimes they might put out dummy items (like empty DVD cases), but in terms of browsing, I have everything right there to look at, and I can look at whatever I want, regardless of what the vendor wants me to buy (e.g. what has the highest margin, or what wholesale vendor they're trying to bump up to a larger order size). Sure, they can strategically place items in end-caps and on eye-level shelves, but ultimately I'm going to look where I want for what I want.

In an online store, the vendor decides what I'll see unless I do extremely specific searches. There might be items that they have for sale that, due to a desire to steer customers elsewhere or oversight, I'll never see. In fact, I can't know what all the books for sale on Amazon are at any given time. There's no master list that I know of, and certainly no wall of titles that I can just glance over and let whatever grabs my eye do so.

It's this subtle shift in the power dynamic where the online retailer isn't required to show me everything that's "on the showroom floor" that I instinctively dislike about online shopping. Maybe the last book on the end of the bottom shelf was just the one I was looking for, but would never have remembered the title or author.

Of course, when it comes to books, I can pick up a book in a bookstore and glance through the entire thing. Online, vendors simply can't get publishers to agree to such a thing (heck, they never would have agreed to it in physical stores if customers were willing to buy sealed books... but they're not).

Oil and Gold: What will the end of fossil fuels bring?

I just came across Charles Stross's posting about the end of fossil fuels boding the end of space exploration (or at least a massive slowdown).

I have to disagree, but the topic brought up a lot more thinking about fuel and our economy than it did about space, at least for me. The man he's quoting calls the end of fossil fuels an, "unprecedented transition," but of course, it's not. Our original fuel (and building!) material of choice was wood. When wood ran out (understand that when we talk about a resource "running out," we mean that it became difficult enough to use that it was no longer the ideal source) we moved on to a combination of iron and oil. Interestingly enough, this lead to a massive explosion in both out economy and technological growth. One could argue that if wood were a much more rapidly replenished resource, we might not have had a space race, or at least it might have come much later.

So, what will the end of fossil fuels bring? We can't really know, but one thing it won't bring is the end of our desire to expand, learn and explore. Will that be in space, or will we decide to go to the bottom of the oceans or into the Earth's crust first? I don't know. We have a lot of 3-dimensional territory to explore and exploit. What I do know is that running out of oil will be a fast process when viewed in the long term, but probably slow enough that we'll transition to something new, just as we did before.

The Tea Party Recession

So, phrases like "there is a lot of forced liquidation" and "it's only one rating agency; if others follow that would be a bigger problem," (from The Wall Street Journal) are making me grind my teeth today. This is not because the economy is breaking in a fundamental way that we have not seen in my lifetime, but because, and I say this with a fondness for conservatism as an ideal, this entire fiasco is a politically manufactured event that resulted from, as Sen. McConnell put it, placing the number one priority on making sure Obama is a one-term President. I'm not saying the Republicans wanted to trigger a depression, which we might be on track for, now; but I am saying that you don't set a political goal as priority number one as the country slowly extracts itself from a recession.

Let me also be clear that I wasn't entirely against the idea of using the debt ceiling as a wedge. We've known for over a decade now that we needed to control certain elements of our spending that were out of control, and instead of controlling that spending we increased it over the last 10 years and instituted a series of deep revenue cuts which magnified the problem. Then, when recession hit, we spent our way out of it, further rubbing salt in the wound. We needed a political wedge, but when a reasonable plan, or at least an excellent start to one was worked up by Boehner and Obama, that should have been where we planted the flag. Yes, we still needed more work, but it was the first time I'd heard someone admit that we needed "both parties taking on their sacred cows." That quote is from Obama's address to the nation. Boehner was, at one point, willing to discuss such a radical plan, not because it was good politics for either party, but because it was good governing and the kind of compromise that benefits the nation.

The Tea Party, however, forced his hand. A compromise could be seen as Obama "winning," and first-term Tea Party Republicans would almost certainly be in jeopardy in their first re-election bids. They would never sign on to such a deal.

Revenues were a sore point because many had signed oaths that they would not raise taxes, and even closing tax loopholes was seen as a violation of that pledge, regardless of the fact that massive tax cuts constituted a defacto increase in spending which it was impossible to account for without pillaging critical services.

Now, we have S&P saying that Washington's unwillingness to address revenue shortfalls was central to their downgrading U.S. debt. I've addressed, previously, why such a move was disastrous and why it was critical that we avoid it. Yet, here we are. The Tea Party and revenue oaths brought us here, and there's no contingency plan. In a decade or two, we'll recover from this. We might see very hard times until then, but we'll recover. Americans are resilient in the face of adversity, but I just wish we hadn't been forced into that adversity in the first place.

I'm a moderate who really lives on the Democratic side only by virtue of a handful of social issues. And yet, here I am: forced to view the current batch of Republicans as, quite literally, the enemies of the value of my currency. I would really like them to think about that, but I doubt it's going to happen.

There's a pattern to the Obama Presidency. Health care legislation was an omen. Obama compromised deeply out of the gate, scuttling the plan for a single-payer system on-par with Canada or the U.K., where health care costs are around half of what we spend in the U.S., per capita, for far less coverage. Instead, he proposed an extremely conservative, market-driven, insurance-based approach where existing insurance companies would control most of the system (for an excellent, point-by-point rundown of the health care legislation, see PBS's breakdown, which I've discussed previously in early 2010). So, what did conservatives, knowing that health care is actively bankrupting the U.S., do in response? They pledged to repeal this icon of socialism (!), with no alternative plan for the future of health care in the U.S., which would return us to a state where we would be the only wealthy nation that didn't have a comprehensive approach to health care.

The pattern is that Obama tries to compromise, but the goal of his opposition isn't legislative. Whatever line he draws in the sand, no matter how deep into conservative territory it is, that is the battle line, and Republicans are not allowed to cross it, even if they would have done so before Obama got there. That's not governing. That's not even effective politics. It's just mindless antagonism.

As a result, there's only one thing to call the resulting recession (or depression or whatever this becomes): The Tea Party Recession. This is the outcome that the Tea Party fought for. This is the tearing down of the status quo that they desired. It might well achieve the goal of Obama being a one-term President. We might end up with President Romney (essentially the architect of the heath care plan we ended up with) as a result. But ultimately, this economic result must be the sign that they carry along side their other political slogans. They need to own this result because they fought for it.

As a side note, we're not going to solve this problem until we reform voting in the U.S. Plurality voting (where everyone gets to vote for one option and the largest number of votes for any one option wins) is broken. It's been demonstrated mathematically and in practice that it forces a two-party system. If we want to get away from polarizing politics, we need strong parties that represent the spectrum of views held throughout America. We need to dump our polarizing voting system and institute something like an approval voting system (where everyone votes for every option they like, and the largest number of votes for any one option wins). There are other options to be sure (from Instant Runoff Voting to much more esoteric systems), but which option we choose isn't the concern. Changing the voting system is not a solution, but it's the right first step. If we did that, the Tea Party would be a vocal fringe that the Republicans wouldn't be saddled with. There would actually be a Socialist Party on the left, and compromising with centrist Democrats wouldn't be seen as a slippery slope toward the far-left, because there's a political buffer there.

The next step, of course, is to change the way we seat members of Congress, but a more party-representation model is probably not going to be helpful until we first address voting.

So... can we start working on this? Can we move the ball forward now that the current system has been proven poisonous?

Budget Control Act 2011: A quick read (part 1)

Here's some points that come immediately to mind on reading the text of the compromise bill that's being pushed to end the debt ceiling fiasco (for which I seriously hope there is a price to be paid for everyone in Congress who decided that political points were important enough to hold a gun to the economy over):

• SEC. 251. ENFORCING DISCRETIONARY SPENDING LIMITS. / (a) ENFORCEMENT /(1)
  SEQUESTRATION: This appears to be a cut-and-paste from an existing law.
• (3) MILITARY PERSONNEL: I'f I'm reading this right, the idea is that, should the president use existing authority to exceed set spending levels to pay military personnel, there's an automatic debit against all other segments of government. An interesting idea. In practice, I'm not sure how it will work.
• Then there's a lot of implementation detail including who reports the numbers to whom.
• (A) EMERGENCY APPROPRIATIONS; OVERSEAS CONTINGENCY OPERATIONS / GLOBAL WAR ON TERRORISM: This section seems to exempt budgetary items that Congress and the President agree on labeling as being for military contingencies and the "War on Terror". Which, in practice, probably means the military budget is off the table. That probably renders much of this legislation fairly toothless for anything but reducing entitlements.
• CONTINUING DISABILITY REVIEWS AND REDETERMINATIONS: It looks as if this section sets hard-caps on how much Social Security expenditures can grow by, effectively applying a tourniquet to the failure of the Social Security Trust Fund (funny story, that trust fund was already spent by forcing it to buy U.S. Bonds, so had we refused to raise the debt ceiling, and had to choose whose bonds to pay off... Social Security would have been one of the parties hoping they wouldn't get defaulted on). The hard-caps on Social Security growth are 623 million in FY 2012, 751 million in 2013, 924 million in 2014, 1.1 trillion in 2015, 1.2 trillion in 2016, 1.3 trillion in 2017, and 1.3 trillion ongoing each year through 2021. There's a similarly large amount that's specified as a cap on fraud and abuse control expenditures.
• (D) DISASTER FUNDING - This section sets some guidelines on what disaster relief is, how to measure what a reasonable amount of money to spend on it is, and exempts that amount from automatic adjustments.
• This bill says that it replaces and repeals "Section 275 of the Balanced Budget and Emergency Deficit Control Act of 1985"
• Also that, "Sections 252(d)(1), 254(c), 254(f)(3), and 254(i) of the Balanced Budget and Emergency Deficit Control Act of 1985 shall not apply to the Congressional Budget Office." That might be a formality of replacing that law, but more reading would be necessary to determine that.
• (d) EMERGENCIES IN THE HOUSE OF REPRESENTATIVES: Interestingly, this section locks in a definition of expenditure increases which includes revenue reduction (e.g. tax cuts). This is a good thing, as it's impossible to control costs without including a measure of what the available funds are and how they are constrained at the same time.
• (e) ENFORCEMENT OF DISCRETIONARY SPENDING CAPS: This section basically says, "you have to comply with these rules, or your bill can't even be debated."
• SEC. 106. SENATE BUDGET ENFORCEMENT: If I'm reading this right, the Senate Committee on the Budget needs to submit a balanced budget. So, perhaps (and I'm not 100% on this), the preceding sections deal with the laws that set out exceptional conditions under which the budget can be modified, and this section sets out the requirement that you have to start balanced?
• TITLE II—VOTE ON THE BALANCED BUDGET AMENDMENT: This section just says that there needs to be a vote in the November-December timeframe on a balanced budget amendment. The only thing that scares the daylights out of me, here, is that the "join resolution" is essentially rammed through as a matter of procedure. What does this mean? It means that no matter what the House and Senate pass titled, "Joint resolution proposing balanced budget amendment to the Constitution of the United States," a joint resolution has to be formed. In theory this is a normal part of lawmaking where the House and Senate versions are merged, but this section strips out some of the controls over how broad and sweeping that reconciliation can be, and how much control anyone has over what goes into that "compromise." In theory, nothing new can get tucked into it, but in reality, there's no real controls here, and we're talking about our Constitution! The states still need to ratify whatever mess comes out of Congress, but there's no chance to edit the Amendment after this stage.

OK, that's it for now. I'll try to digest the rest late tonight or tomorrow.

Why defaulting isn't an option

I was in a hotel room tonight, so I found myself channel surfing, and Bill Maher was on. His guests were trying to understand the urgency of the debt ceiling crisis (a crisis that exists only because our politicians choose to make it a crisis). Several times they got confused, with one guest arguing that it didn't matter if we defaulted for a short period, because it would just trigger increased interest rates, which the Fed could just turn around and modify.

His confusion surrounds the imprecise use of the term, "interest rates." There are a lot of interest rates that the government interacts with. One of them is the prime lending rate, which is the rate at which banks loan money (it's actually a starting point which can be modified by circumstances, term, etc.) The prime lending rate is based on the rate that banks will charge each other for a loan, called the federal funds rate. This rate is currently 0-0.25%, which means that banks are essentially loaning each other money without or with very low interest, allowing prime lending rates of approximately 3.25%.

That's the number that Bill Maher's guests were talking about, but it has nothing to do with the debt ceiling crisis (at least directly). To understand why, we need to look at a second type of loan: treasury bills are IOU notes that the government writes over short periods of time. An investor buys one of these T-bills for some amount less than they are worth and in 3 to 12 months depending on the T-bill, they "mature", meaning that the government pays off the investment at its face value. So, if you bought a $1000, 3 month T-bill for $990, you would make a $10 (1%) profit in 3 months when the government paid it off.

The rate is based on a number of factors including supply (the amount the government wants to borrow) demand (the amount investors want to invest) and the risk that the note won't be paid off. In the case of the U.S. government, that risk is considered to be as near to zero as it is possible to get in the realm of investment. Because U.S. government debt is considered the standard for low-risk investment, much of the market is geared toward treating the T-bill rates as a baseline.

A change to that baseline (e.g. because of a single default) would radically change the investment landscape in a way that we can't fully know, because it's never happened before. This is because investors (not the Fed) would not be willing to buy T-bills at the same rate. So, what's wrong with a higher interest rate on our debt? Well, for starters, it means that all of our current projections for the federal deficit over the next several years would rocket up. What's more, all of the large, institutional investors (including nations) who buy U.S. debt would have to scramble to determine if it even made sense any longer, or if they should be buying someone else's debt, possibly reducing demand, and further driving up interest rates. The impact of this on the value of the dollar, inflation and other aspects of our economy is a matter for debate, but it would likely produce a shock wave through every aspect of the economy.

Ultimately, the U.S. would continue to find buyers for its debt, but not before the market had to absorb a fundamental shift in its underlying assumptions at a time when we're just coming out of a major recession. Such economic turmoil at a time like this would be very likely to trigger a return to recession or worse. It could also destabilize investment firms, causing another wave of failures. During the last wave of failures, we relied on the U.S. government's excellent credit rating to borrow funds to see us through the crisis. That, of course, would be changed this time around.

So, as you can see, the "interest rate" on T-bills is very different from the Fed-controlled federal funds rate, and the lack of concern showed on Maher's program is just the result of a misunderstanding about how much impact this process could have. I'm no economist, and I'll admit to ignorance on some of the details, here, but what's important to understand is that ignorance is the basic problem, here. We just don't know how bad this would be because it's unprecedented. We just know that it's a pretty awful idea, and there's no excuse for not paying our bills.

How To End the Recession: Print Money

The recession is retreating, but most analysts suggest that lingering unemployment and other results of the downturn will take years to work their way out as the economy rebounds. I have a simple, one-step solution to this problem: print new money. (more...)

Free and Open Source Software: Why It Works

In a recent exchange on Slashdot I made the assertion that free software was possible because of the lack of manufacturing costs. I'd like to elaborate on this because it's critical to non-technical people understanding why free and open source software (FOSS) exist and why it's possible to do things in the software world that have comparisons only in the print publication world, and even then have economies of scale that cannot be compared.

In the 1970s, a man by the name of Richard Stallman decided that he had had enough of software that he couldn't modify. He was a brilliant "hacker" in the old MIT sense. He loved to tinker with software and hardware and make it do exactly what he needed, not what a manufacturer told him it should do. This kind of inventive tinkering was the heart of the electronics revolution of the two generations that preceded Mr. Stallman. It was nothing new, but something had changed. In the age of radio or aerospace, engineers could tinker on their own to a certain extent. Math has always been free and parts for many enthusiast projects related to electronics were within reach of the average person. Now, however, Richart Stallman and others of his peers were discovering that they could distribute the products that they developed to a world of collaborators and users without either having to manufacture anything or rely on the expertise of the recipient to reproduce results (e.g. to build their own electronics). Software could be moved electronically over networks that were comparatively cheap in relation to any other product and still retain its full utility without re-assembly.

At first, this process was still only applicable to savvy computer professionals. Software was often shipped in source code form to save space and improve portability, but as networks became faster and platforms more universal, these concerns dropped away. By the 1990s, free software was in use by many who had no technical understanding. The advent of the World Wide Web put these products in the hands of millions and allowed them to find them easily without retail distribution. Anyone using the Firefox browser is a testament to this.

There is another dimension as well. Companies began contributing to FOSS. Why? They all had their own reasons. Red Hat was founded on the distribution and support of FOSS as a business model, and what they found was that there was a large and lucrative market in giving software away for free and absorbing minimal manufacturing and distribution costs while providing optional support services. Even the costs involved in contributing to hundreds of these projects directly (and founding many) was not a barrier to their financial success because of the economies of scale.

Google, on the other hand, used FOSS for their infrastructure and found that contributing to these projects allowed them to develop software for their proprietary use more rapidly than their competition while creating large amounts of good well. Google Code is a tool used by Google and hundreds of developers to coordinate their efforts of FOSS. Similarly, IBM has used FOSS to leverage their vast stables of programmers and develop products as well as provide professional support services.

All of these companies contribute to FOSS because the costs that they save themselves and their competition do not dramatically impact anyone's bottom-line, and free them to consider their core competencies. It is because of the order of magnitude lower manufacturing and distribution costs of software, enabled by the Internet and earlier communications media, that have transformed this industry and continue to do so. Now that bandwidth costs have come down, even larger media are beginning to be impacted. Music and video sharing are a growing sign that the free software model may be ripe for those industries as well, which have only recently begun to seriously interact with electronic distribution.