Governments and large institutions are becoming increasingly negative on the crypto-currency markets, as they grow to significance within the overall world economy. Yet crypto-currencies are only the tip of the iceberg. Even as modern communications technology has enabled governments to snoop, pry and punish with unprecedented efficiency, so it has brought new means for individuals to render themselves independent of both government and dinosaur large institutions. In the long run, it’s my bet that individuals will win out.
When the Internet first gained popular acceptance, the general view was that it would be a liberating force. “Information wants to be free” was the universal mantra, as people expected authoritarian states to be shaken by the availability of worldwide sources of information.
That was hopelessly naïve. Authoritarian regimes set up structures like China’s “Great Firewall” so that information reached the great majority of their people only when they wanted it to. A small minority of skilled hackers found their way round restrictions, but in a country as vast as China, their effect has been minimal. China is now a much more effectively authoritarian society than in 1995.
As the Internet developed, controllers moved in. In 1990 we would have considered it absurd that some remote third-party company, perhaps the producer of a fax machine, would have the impertinence to control and censor the content of a fax we might wish to send. Today, the equivalent on YouTube or Facebook is considered commonplace; if we wish to use these ubiquitous conveniences, we must accept their monitoring by offensive politically correct nannies, who will accept content that would have been considered impossibly obscene a century ago, but censor any sentiment that happens to conflict with the fashionable Marxist pieties of the moment.
Given the unsavory connections of the FANGS, I think it entirely reasonable to have as little as possible to do with them. You will not find me on Facebook or Twitter, although at present giving up Amazon, that universal convenience of modern life, may be a step of political protest too far. Still, as President Trump said this week, the loss-making U.S. Post Office could usefully take a more militant negotiating position against the company, thus dinging its profit margins and power, and providing some welcome relief to overburdened U.S. taxpayers.
From all accounts, it is not only FANGS who get above their station to monitor our communications. Governments also, using statutes designed to allow them to steam open the envelopes of correspondents known to be plotting mischief, instead collect at least metadata and very likely data itself from all our communications. If we encrypt our more sensitive missives, such as instructions to our bank, governments have the power to break the encryption; indeed the supine and consumer-hostile Internet companies left “backdoors” in their systems to allow the spy agencies free access.
In this context it is not clear what effect the new magic of “quantum computing” will have. In the short run, governments will be able to use their superior quantum computing firepower to break into even the most secure communications of ordinary people. Given governments’ proclivities to misbehave, this is a truly frightening prospect. Over the longer term, however, what quantum computing gives it can take away, and it seems likely that the ever-declining cost and increasing power of tech equipment will allow consumers eventually to have quantum-computing-proof encryption systems, which even governments will be unable to break. Provided there is not then some other magical wizardry that disrupts the balance between spooks and citizens, privacy may once again make a modest advance.
Of course, many people do not care much how empowered the government and private companies are to snoop into their lives. The best-selling product on Amazon this Christmas was the Echo Dot, a device which records everything you say in a room, in return giving information, obeying simple commands, providing robotic conversation, instructing “smart” devices and playing music. In return for these fairly marginal benefits, the Echo Dot user is prepared for Amazon to have access to its conversation and habits on a 24/7 basis. For such consumers, freedom will be very quickly lost, though one is tempted to think they would not know what to do with freedom if they had it.
Crypto-currencies bring this creative tension into the economic and financial sphere. Originally, money had a real value, whether of gold or silver, or of the numerous alternatives to gold and silver that have been used through the ages. Gold and silver currencies were also anonymous as far as their issuing governments were concerned; a government had no means of tracing the movement of individual coins. What’s more, consumers had the option of melting down the coins in their pocket into bars of silver or gold (most sensible societies allowed this, if only because policing it was nearly impossible). Such currencies, with a market-determined bullion value, un-traceability and the ability by consumers to melt them down (and, in some systems, to bring ingots into the mint to be coined into currency) had great flexibility and allowed consumers great freedom and autonomy.
Modern fiat currencies, until 1931 used only as temporary substitutes for “real” money by countries in financial difficulties, have since World War II dominated the global economy. In the 35 years after World War II they were highly inflationary; since then most but not all governments have restrained themselves sufficiently to prevent inflation galloping to infinity. In the last decade, governments have apparently achieved the previously unthought-of feat of simultaneously avoiding inflation and keeping interest rates below zero in real terms. The smug self-congratulation of the leftist central bankers who have achieved this has been nauseating to behold; they have done so at the cost of destroying the economy’s capital allocation process, thereby wrecking productivity growth, but this reality has not yet dawned on them.
Government fiat currencies tilt the balance far towards the sides of the snoops and away from consumers. Notes have serial numbers, so can be traced, and bank transfers are equally traceable. Currencies have a value set by their governments and no intrinsic value at all; consequently, governments can at any time withdraw a series of notes from circulation, as India did in 2016, thereby removing the wealth of disfavored classes who hold them. Initially, it was possible for consumers to hide their wealth in foreign banks, but government have through international agreements broken the secrecy of Swiss banks, and left few reliable opportunities to do this. Finally, governments can as in Venezuela inflate their currency ad infinitum when they want to, thereby impoverishing their citizens; under a bullion system any such attempt would result in money simply disappearing from the marketplace.
Crypto-currencies have at last offered consumers an alternative to fiat currencies. A few years ago, I suggested that consumers might unilaterally adopt the gold standard to get out of the straitjacket of government-controlled money. Now they seem to have found an alternative way to achieve the same result. If a crypto-currency is truly anonymous, so that its transactions are secure from prying by governments (Bitcoin itself does not offer this feature) then for consumers, it potentially offers many of the advantage of gold and silver currency. There are still problems; the crypto-currency’s blockchain must be secure from subornation by hackers or insider groups, it needs to be made secure from excessive monetary creation, and its value needs to fluctuate far less wildly than cryptos’ values have so far.
You may think cryptos’ explosive growth in value is a feature, not a bug, but until it ends it will prevent them from being used for any significant volume of real world transactions — think of the Buyers’ Regret of the individual who bought a pizza with Bitcoin in 2010! Essentially, Gresham’s Law mandates that during the current stage of bubble inflation, crypto-currencies will be driven out of the market as mediums of exchange, however superb they may appear as stores of value.
Nevertheless, the technology exists to make crypto-currencies secure and anonymous, and to prevent them from being controlled or hijacked by bad guys. The only difficulty then becomes their excessively fluctuating value. I am loth to predict markets, but you may remember the South Sea Company, to my mind the most accurate precursor of the crypto bubble, survived after its wild ride up and down in 1720 as an income stock from 1721 to 1853, during which period its share price was admirably stable. To be truly a useful long-term part of the global economy, a similar evolution must occur to the price swings of a modest number of crypto-currencies, which have the necessary anonymity and security.
Government agencies will forever be snooping among their citizens, using the excuse of “international terror” or whatever other scare story can be used to justify their intrusions. Many consumers will react dopily to these attempts, buying the Echo Dot happily to facilitate the monitoring and control. They are essentially happily swallowing the “soma” in Aldous Huxley’s Brave New World, and may be happiest doing so.
For the rest of us, not happy to exist as controlled Epsilons, at least not when the controllers have such god-awful social, economic and political values, crypto-currencies have come as a revelation. At last there is a tool in the economic sphere to match the encryption we use in the information sphere, and, for some of us, the gun we keep under the bed. “Trust, but verify” said President Reagan; experience has shown that where governments are concerned he was altogether too confident in the first of those admonitions.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)