The rapid rise of interest in and use of “virtual currencies” like Bitcoin has been astounding. It probably won’t surprise you to learn what the established masters of the worlds’ monies say: Bitcoin is disruptive!
Heavens.
Bogdan Ulm, writing on Bitcoin Trader, noticed the concern in Ireland: 
“Virtual and digital currencies can challenge the sovereignty of states,” says Gareth Murphy, senior Central Bank of Ireland official. At a recent digital money conference in Dublin, he mentioned that rivals are interfering with a bank’s ability to sway the price of credit for the entire economy. Murphy warned that there might be considerable threat to the finances of a country if increasingly more transactions for services and goods fade away from the tax system due to the use of crypto currencies such as Bitcoin.
Now, it’s worth mentioning that there are many economists — from a long tradition — who have denied the necessity of anyone acquiring the ability to “sway the price of credit for the entire economy.”
Separate bids and offers for credit (loaning money with interest) can be seen as signals of competing evaluations in the economy. There are tremendous forces pushing interest rates to align, and when they do (or don’t), their alignment (or lack thereof) sends important additional information to market participants about both the present and the future.
But when anyone (say, a central bank) presumes to corral all interest rates into a “coherent plan,” much of the useful meaning of signals gets lost, or jumbled, and the economy gets (inadvertently?) programmed for boom and bust.
So, when I hear that modern digital currencies could prevent central banks from “doing their business,” I wonder if, perhaps, this is not a good thing.
This is Common Sense. I’m Paul Jacob.
6 replies on “Central Banks Losing Control”
Economics is so screwed up that society needs to re-learn exactly what money is because it has forgotten. Most of us grew up with “the almight dollar”. That currency is fading into the history books as the global “reserve” currency. Russia, China, Iran, Brazil, India are actively seeking a way around using the dollar in international transactions. Why? Because of the manipulations of the Federal Reserve of the United States. Bernanke is systematically destroying the dollar in a stupid attempt to make us competitive with Chinese labor. He WILL drag us down to their level not them up to our level. If people understood this do you think this is what they want the Fed to do with their life savings? The ramifications of their manipulations of every price, everywhere will explode in their faces one day. Here’s David Stockman on the subject:
http://davidstockmanscontracorner.com/exposing-crony-capitalists/
The price of credit should not be a “one size fits all” answer. Individual persons have different tolerances for risk and different goals.
A negative consequence is those people who would have supplied credit IF the interest rate had been 1% higher. Instead that possible deal never happens because that lender and that borrower are not “allowed” to make that deal.
Money is nothing more than an efficient means of exchange, the development of which was necessary to replace extremely inefficient direct barter.
Sovereigns and nations have never in history been able to resist the temptation to debase and inflate every fiat currency in history. We are seeing it again now.
The development of Bitcoin is nothing more than an offer, from the marketplace, to replace a system which has again become corrupt and failing.
Those presently “in control” of the national fiat currencies will detest, and seek to destroy, the competition. They will fail.
Gold, silver or other commodities could reemerge as the standard.
There is only two questions to be answered regarding “money” of any kind or national brand, what can it be exchanged for today, and what tomorrow. With fiat national currencies the answers are clear for today, while it is the issue of tomorrow which cries out for and will create alternative.
The internet, universalization of the language of commence and the effect disappearance of national borders is driving the need for a new medium of exchange.
It is now clear to all who look that the US can no longer be trusted to seek anything but its short term and parochial interest.
Necessity is the mother of invention and the Fed is creating the necessity for Bitcoin or other alternative.
JFB,
Agree with all you say. There is another concept of money you don’t mention though. It is also supposed to be a store of value. The fed is destroying this but everything you may choose to do with your savings, your wealth, involves whether or not your store of value is being preserved. But in debasing the currency the way they are, if you hold anything in dollars, your savings get destroyed.
But it doesn’t stop there. In creating rigged and phoney markets, they are sending bad signals to everybody as to what something is worth. Bonds, stocks, property will all suffer because one of the fundamental laws of economics is supply and demand. If you destroy currency, disabling a consumer from being able to afford a product, you also destroy the demand side of the equation. They are systematically destroying our ability to afford propped up prices for houses, medical care, education, food, gas, and basically everything else. So the end result will be a gigantic mismatch between supply and demand resulting in a crash in revenue/profits of providers.
This money printing campaign will end horribly because this is all because they won’t allow the market to determine prices and clear the debts. This would have been over a couple of years ago if they would have let the market clear debt in normal fashion like Paul Voelker did in the ’80s. But now we will go through a 10 year process of zombie life at the very best. But we may also get the clearing of debts when political events intervene and prove the real insolvency of the Western world. This is because all of what they have been trying to do is treat insolvency, everywhere with liquidity.…on a massive scale.
Someone in banking is making money! I earned $.06 last month on an average balance in checking of $5000. Wow! Wow? I walk into the local branch we use and see 8 – 10 employees. I can feel confident knowing that it is my money that is helping pay their salaries!? Hogwash!
I agree with Mr. Jacob that central banks shouldn’t be setting interest rates, and that the free market does it better.
I’d like to add to Rick’s 2nd comment. When the Fed reduces the value of the dollar (and it’s worth only about 3% of the value it had in 1970) it increases the value of your property (land, improvements, gold, stocks, etc.) such that you have to pay capital gains taxes on goods that haven’t increased in value, but its price has (aka. inflation). This is another means via which government steals from or “taxes” us. Consider, if the government devalued the dollar so that everything doubled in value, people will be paying 15% taxes on the capital gains, essentially losing 7.5% of what you have.
This is in addition to the loss of value of your savings in CDs, money markets or the bank (where you end up with only 50% of the value you started with).
But I think the worst part, is how manipulation of interest rates, leads to inefficient investments, that wouldn’t have occurred in a free market. I recall reading about a boom in big building construction near the peak of bubbles (e.g. the Empire State Building which opened in 1931 just as the bubble popped, and which wasn’t profitable until 1950). And we now have a similar boom in large buildings and projects around the world. Like the Empire State Building (which was called the Empty State Building for some time) expect many of these buildings to have very low occupancy for some time.