How money and banking cause the wealth gap

In my campaign to save the world by spreading the word, I am quoting a passage from Life After The State (which I also quote in Bitcoin: the Future of Money?). It describes the way our modern system of money and banking (electronic, debt-based, fiat currency combined with fractional reserve lending) perniciously redistributes wealth from the many to the few:

Imagine a tiny economy. There are 20 people in it. Of these, ten each have $1 in cash, so there is $10 in the entire economy. The other ten people each have a house – these are the only assets in the economy and are each priced at $1. People quite happily buy and sell these houses for $1 each. If more houses appear in this economy, but the amount of money stays finite, the cost of houses will fall. But let us assume for now no new houses enter the economy.

One person – Mr King – is suddenly able to magically create another $10 from nowhere. He decides to go out and spend some of this new money. He buys a house for $1, which the vendor is happy to sell because, based on the knowledge the vendor has, that is the fair market price. Except that it isn’t because there is no longer $10 in the economy, but $20. At $1 the vendor has sold his house too cheap – and he has received devalued money in exchange.

Mr King then decides to outbid the others and offers $1.50 for another house. This vendor is delighted, sells, probably feeling rather clever, and makes off with $1.50, but even he has sold his house too cheap. Mr King, meanwhile, is developing a nice little property empire. The other vendors hear houses are now trading for $1.50 and now expect that price, which Mr King is happy to pay. In other words, house prices are gradually rising to reflect the new money in circulation.

There are some big losers in this process – the people who each had $1. The purchasing power of their money is now no longer enough to buy the house they were previously able to buy. Ultimately, their purchasing power will halve because there is twice as much money in circulation. They haven’t acted imprudently in any way – they haven’t even acted – yet they are made poorer by this process of other people creating new money.

What about the people owning houses? How have they done? Eventually, houses prices in this economy will rise to $2 – there are ten houses and $20 in circulation. The price of their houses should rise to reflect this extra money in circulation, so – as long as they didn’t sell – they come out even. They might think they are richer because their house now costs $2, but this is a delusion: it is the same house. They have just survived the inflation, nothing more. If, however, they were one of the early vendors who sold for $1 or $1.50, now they cannot afford to buy back the house they previously sold. They are ‘priced out’ and poorer.

Meanwhile, Mr King has done extremely well. He benefits, of course, as the recipient of a load of newly created money. But he was also able to buy houses for $1 and $1.50, before they rose in price to reflect the new money in circulation, so, with his houses now valued at $2, he profits from the asset-price inflation too. Wealth, which was originally spread evenly through our tiny economy, has insidiously transferred from cash-holders and those who sold their houses early to Mr King.

As a consequence of this process not only has wealth transferred, but those operating in our tiny economy no longer focus on making things. Instead they look for signs of future money creation and speculate on those signs, because there is more money to be made that way.

Sputnik with George Galloway

I’ve always been a huge fan of George Galloway, so it was a pleasure to be invited onto his TV show, Sputnik, this week.

Here we are banging on:

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Nice to meet you George – thanks for having me on.

Bitcoin: the Future of Money end-of-term report

This is a quick school report on Bitcoin: the Future of Money?

Overall, I’d say it’s done pretty well.

The feedback from readers has been very nice indeed.

Matt Ridley made it his book of the year in the Times.

It got some very nice reviews. A beauty in the Spectator from Michael Bywater, another very nice one in Moneyweek from Dr. Matthew Partridge and, probably the best of all, from James Delingpole in the Mail on Sunday.

It was also well received in the blogosphere. I particularly liked this one from Otto Rock over at IKN.

I suppose peak pleasure came on New Year’s Eve, when it pipped the economics book of 2014, Thomas Pikkety’s Capital in the 21st Century, to go top of the economics’ best-sellers. At one stage that day it even got the top of the entire business and finance section and to number 6 in non-fiction. Not like I was watching or anything. (The explanation was that Amazon had run a promo that day, so the glory was short-lived).

My biggest and probably my only stinker came from some bod in the Economist (it doesn’t say who to protect the writer’s safety). He/she didn’t even call the book by its name, but just slagged it off, quoting out of context and having a go at me for things I didn’t say. It then praised another book on Bitcoin for things I did say, before I gave up reading, out bored.

God it must be frustrating being a politician, particularly Nigel Farage, as this straw-man stuff happens to them all the time.  No wonder they’ve have all become so bland and beige. 

So there we go. It hasn’t got me on the telly, which is one of the reasons I wrote the thing, but overall it’s pretty good. The story it tells is a good one, so even if the world moves on from bitcoin, it’ll remain a good read.

Apologies if this post comes across as a vanity project. It probably is. But I wanted to get a record of everything down somewhere.

Was Satoshi Nakamoto a sociopath?

I was amused to read the following passage in M.E. Thomas’ Confessions of a Sociopathwhich I just finished last night:

‘I use Britishisms when I can remember to do so. I have noticed that other sociopaths do this as well – there are several whom I know to be Americans who internationalize their language and their cultural references, the result perhaps of their natural instincts to obscure and befuddle. It’s not enough to try to keep your personal information out of reach. One must also actively poison the well with disinformation.’

Of course, we all know Satoshi was an active user of Britishisms probably with this same very purpose to mislead people about his identity.

But the idea that he was a sociopath has never, to my knowledge, been considered. I don’t think he was, by the way. But it would explain his meticulousness.

Interesting, no?

For more on Satoshi and who he is, you need, of course, to read this.


Six easy steps to getting started with Bitcoin

1. Go to Blockchain or Coinbase and get yourself a wallet. All you need is an email address and password. You will then be told your wallet address. Copy it.

2. You now need to deposit some money.

If you are in the US, you can do this directly through Coinbase. Deposit $20.

In the UK, you should go to Bittylicious. Paste your wallet address where it says “bitcoin address”. Now deposit £20.

There are different exchanges for elsewhere in the world. I can’t list them all. Sorry.

3. Get a friend to do the same.

4. Practise sending each other small amounts of money.

5. Go to a café that accepts bitcoins and buy yourself a coffee.

6. Well done. You’re now part of the revolution.

7. I know I said six, but this is the most necessary step of all:  read my book.