[ExI] Dollar mining

[Rafal Smigrodzki]

On Fri, Nov 29, 2013 at 4:32 PM, John Clark <johnkclark at gmail.com> wrote:

> I am saying that prices, which is what you're so worried about, is equal to
> the money supply which is all you want to talk about, TIMES  the velocity of
> money which you don't want to talk about because it is the product of about
> a zillion independent factors, DIVIDED  by the quantity of things produced
> which you also don't want to talk about because it is the product of a
> bazillion QUITE different independent factors. MV=PQ may be true but is
> useless in predicting what P will be next year if you don't know what V or Q
> will be next year. It's as useless as the Drake equation is in figuring out
> if ET exists because we don't know what values to stick into the equation.

### So you are backpedaling a bit, previously you claimed that recent
lack of large scale inflation in the US is proof that money supply is
not the driving factor in inflation. Good, you are getting closer to
reality.

Now, of course the equation of exchange is much more useful than the
Drake equation, since M, V and Q can be estimated using various
proxies and measures. As I wrote previously, relative price stability
in the US despite increased M means that V, Q or both have changed to
partially offset increased M. The question is, what happened?

My guess is that the main factor is foreign, predominantly Chinese,
demand for dollar-denominated securities and real estate. The bubble
economy in China makes the local elites scared, and since they sell us
a lot of stuff, they end up with a lot of dollars which they exchange
for securities rather than spend on our domestic market. This means
high demand for our debt, therefore low interest rates but no pressure
on our consumer prices. Both Q and V are affected.

There is a similarity between USG money printing and bitcoin mining:
Both the Fed and miners produce commodities whose primary value is
scarcity and
customary fungibility - of course, the Fed's product has more of a
head start (since August 15, 1971) and the fungibility of bitcoin is
still developing - but both can be (still and already, respectively)
be used to get real stuff for nothing. The Fed is truly our goose that
lays golden eggs (or maybe green ones). Of course, the dollar-making
machine is in government hands, which means idiots and knaves are in
charge, and they are now in the process of breaking it by running it
too hot, while the bitcoin is on autopilot, so it should not be
vulnerable to this particular issue (but could be brought down by
others).

We have to remember that our (American) financial windfall depends on
the dollar being a lesser evil as a means of accumulation compared to
other options (euro, gold, Swiss franc, stocks, etc.). There are
definitely some tipping points where we could find out how a partial
demonetization of our currency feels like.

Rafal