Economic misconceptions of the Keynesian world

Supply and demand is still very much in charge of most prices.

I’ve been reading a lot of Noah Smith lately. I discovered his newsletter when he posted a candid Twitter thread about feeling alienated from the West-coast liberal scene. In his thread, I saw a common Seattle eye-sore: the dreaded “In this house we…” sign (then chuckled at the obvious hypocrisy of the NIMBY sign next to it).

Noah Smith 🐇🇺🇦 @Noahpinion

There has always been an element of political performativity in educated liberal culture (and in other American subcultures), but it was tolerable and even pleasant in moderation. But then it sort of took over everything, often in grossly annoying and hypocritical ways.

At the end of the thread, he says he wishes to escape somewhere. After fleeing Seattle for Phoenix, it’s safe to say I agree.

Much to my surprise, upon reading his work, I realized that we disagree, philosophically. That is, like Paul Krugman, Noah Smith is a Keynesian economist. But unlike Krugman, Smith doesn’t immediately evoke cynical-piece-of-shit vibes.

And that’s good. We need more understanding in this world. Which means that I need to follow his example, and do my best to steel-man his perspective. He has done the same for Bitcoiners. (Before going any further, buy a subscription to Noahpinion!)

To catch you up quickly, I have been an annoying comment-bomber. Noah, if you ever read this… I’m not trying to be a troll. I’m trying to figure out how to make my words match my intentions, and convey my knowledge and opinions without judgment. It’s hard, especially for a newbie. (That was true when I originally wrote this, but I’ve lost faith in Noah’s good faith when it comes to monetary policy and inflation.)

Anyway, that’s a very long introduction for me just to say that I consider Noah Smith to be a relatively honest broker, albeit with some obvious blind spots. (Unlike, say, Captain Word Vomit and his band of merry shills.)

Nevertheless, while Smith may be my favorite Keynesian (there’s no competition), he still suffers from a childlike naiveté when it comes to the perceived benevolence of government policy.

At a minimum, if governance during Covid is any indicator of trustworthiness, we must reconcile with the fact that the State— at every level— has overstepped its boundaries, and done so with consistent hypocrisy. Covid has been a generous benefactor to state power.

You know those people who would rather die than live in captivity? That’s me. I’m here to tell you that you may have all of the most high-minded ideals, and support reasonable and well-intentioned policy reforms aimed at saving idiots exactly like me. But that doesn’t make them righteous or right.

If your governance strategy requires me to donate any of my time (even as little as 2%) without my consent, then debating the righteousness of any policy whatsoever is out-of-order. You must first defend reappropriating my means to your ends.

Monetary policy has been the most intractable monopoly of all time. (Will the real anti-trusters please stand-up…?) When it comes to money, statists don’t even remember what it’s like to attempt to reach human consensus using persuasion. People like Elizabeth Warren and Anthony Fauci believe they’re better than us. Unfortunately for us, whether they are worthy of the trust placed in them is largely irrelevant; they have real power. And, in practice, might makes right.

What should I do when my concerns are continuously ignored by a government that grows like cancer? Vote harder?

Every super-duper-inclusive American who has ever told a libertarian to “move to Somalia if you want anarchy”… look around at the country you inhabit, and understand that it is you driving the culture of distrust. If you’ve ever been frustrated by economic policy, understand that Keynesians have been driving it for decades. If you are upset by a fairly obvious lack of upward mobility, perhaps you’d better examine the role fiat money plays in all of this. If you’re disappointed in the present results, it’s best to look in the mirror before blaming libertarians for your follies.

Do you think it is going well? If so, great! You may be one of the many beneficiaries of the status quo. But that doesn’t make it right for the rest of us.

Opting out of an exploitative system does not make me a rent-seeker. Dumping my fiat does not make me a speculator. Storing food does not make me a hoarder. Taking back the power over my money does not mean I’m trying to establish myself as the “new aristocracy.”

And fuck anybody who says so. You are out of order. I would never force anybody to live their life according to my values, and I do not intend to let anyone impose their morals on me. Just the same, I respect the dignity of any person who respects mine.

My choice to buy Bitcoin is almost certainly better informed than any act of Congress in the last 20 years. Let’s get into why, and I’ll be sure to point out any misconceptions of economic misconceptions that I notice.

Misconception #1:
Cash is a form of long term savings

Here’s Noah Smith (emphasis mine):

“Inflationary” simply means that the dollar’s value — in terms of real useful commodities like bread, gasoline, and doctor’s appointments — goes down over time. The Fed targets a 2% inflation rate, and usually inflation stays fairly close to that numbers (though not right now). This is why a dollar is less valuable than it used to be— $1 dollar in 1913 was about as valuable as $30 in 2022.

To many Bitcoiners, this represents an injustice. Why should unaccountable, unelected bureaucrats in distant Washington, D.C. get to devalue your hard-earned cash? To these folks, Bitcoin seems to represent individual autonomy, because the Fed doesn’t get to decide how much your money is worth. And the idea that Bitcoin appreciates rather than depreciates over time seems to value personal frugality and probity, because it promises that people who work hard and save money will be able to keep the fruits of their labors.

But this idea rests on a fundamental misconception: The idea that cash should rise in value over time. In fact, cash was never meant to be a form of long-term savings.

False.

Here Smith falsely conflates the idea of “saving” with “nominal appreciation”.

That’s an interesting leap of logic. Why would he make that leap? Is it because, deep down, he knows that without nominal appreciation you are by definition losing purchasing power to inflation? Probably.

…but what’s that got to do with Bitcoin?

Consider a world where cash goes up in value over time — where simply because you stuffed some money under a mattress, you can afford more and more of society’s production every year. This sounds like a pretty good deal, right? In fact, it is a good deal — too good, really. In this sort of deflationary world, you’re getting wealth for nothing — society is continually transferring you more and more of the fruits of its labors in exchange for you doing absolutely bupkis.

If money earns a positive real return over time, that return doesn’t represent a reward for hard work done; it represents a freebie. A handout. In economic terms, this is called “rent”.

Here Smith seems to be saying that Bitcoin shouldn’t appreciate—in dollar terms— because he considers it to be “rent”. Talk about conflating a moral argument with an economic one…

In fact, the reason why Bitcoin appreciates in value is a little thing called supply and demand. There are more dollars chasing fewer bitcoin. Just like more dollars chasing scarce pizza, this results in higher dollar bids for Bitcoin.

QED. This argument is a straw man.

I think we would all be hard pressed to find anybody dumb enough to treat US dollars as their long-term savings vehicle. If that cash is denominated in Bitcoin though, it makes sense to me to hold onto it—and accumulate more!—while this brand new asset goes through its once-in-history monetization phase.

You may not find Bitcoin’s use cases particularly compelling. You may not find Bitcoin to be a particularly effective store of value. You may believe that Bitcoin’s volatility makes it a particularly lousy money. You may believe that Bitcoiners are guilty of extrapolative thinking. You may believe that Bitcoiners are delusional, or wildly overestimate the odds of a Bitcoin standard replacing the fiat standard.

That is all wrong, but of no real consequence.

Yes, the modal retail investor is dumb money compared to the modal investment professional. There is a continuous information asymmetry that makes it hard for typical retail investors to succeed. But I would argue that most people, investors or not, are smart enough to avoid holding fiat currency, either as cash or in a bank account.

It doesn’t really take a lot of knowledge to see the abuses of trust that have become rampant in our government. These breaches of trust are most frequently driven by a shocking level of incompetence.

They don’t necessarily understand how, but they know the government doesn’t pay for anything. Like, ever. And they may be fuzzy on the distinctions between million, billion, and trillion, but they roughly know that roughly, a couple shitloads have been spent recently. And they’ve been following along as multiple administrations have now considered minting a $1T coin to “pay” down the debt, and muscle past any fiscal hawks holding the line on whatever today’s debt ceiling is.

It’s helpful when people point out that they “could be wrong, of course” or that they “run the risk of straw-manning”. That’s true, you could be wrong, or guilty of straw-manning. My goal is to avoid focusing on petty distractions of labels, and attempt to actually communicate. And those acknowledgements seem to say, “Hey, I’m trying to come at this in good faith, but know I’m not perfect.”

Fair enough. One cannot be expected to have a perfect track record understanding beliefs that are so alien that they automatically seem suspicious, particularly in today’s climate of precipitously declining trust. I’m certainly no exception. Seemingly every human who gains power continuously raises the bar in demonstrating their lack of trustworthiness. I will try to set a better example, starting now…

Noah Smith’s first point is a total straw man!

People who can afford to save don’t use fiat currency because it does not hold its value, let alone avoid the continuous siege of inflation. And if you can’t afford to save, then you’re spending cash as quickly as it comes in… like everybody living paycheck to paycheck.

Misconception #2: Scarcity creates value

Here’s Noah Smith:

Much of the crypto world is based on the idea that the way to make something valuable is to make it scarce. This is one of the basic theses of Bitcoin — the idea that because the total number of Bitcoins will ultimately be algorithmically limited, Bitcoin will rise in value over time.

Again… supply and demand. The world is awash in dollars while Bitcoin is provably scarce and in high demand. What else, except appreciation in dollar terms, should you expect for Bitcoin?

Nothing! Bitcoin’s price will continue to appreciate compared to fiat because fiat will continue to be printed until it becomes worthless. Supply and demand is Satoshi’s NumberGoUp® technology in action.

Here’s Noah Smith to back me up on this point:

Some sloppy high school economics teachers might tell you that scarcity creates value, as a way of debunking the old utility theory of value. But in fact what creates demand is a combination of usefulness and scarcity — it’s how scarce something is relative to how useful it is, on the margin.

That’s just a wordy way of saying “Value is determined by supply and demand”. Simply restricting the supply of something doesn’t automatically make it valuable, because demand might be zero — this is why while some kids’ drawings become famous expensive NFTs, your own kid’s drawings are highly unlikely to command any positive price in the market.

QED. Bitcoin’s value is determined by how scarce it is relative to marginal demand. That’s why it’ll keep on going up and up and up compared to our monopoly money.