EconBuff Podcast #28 with Ryan Mattson
Dr. Ryan Mattson talks with me about cryptocurrency. Dr. Mattson walks us through what cryptocurrency is and how blockchain technology works. We discuss how the blockchain verification works, and Dr. Mattson explains how the mining process is decentralized. Dr. Mattson argues that cryptocurrency is money as it serves the functions of money. Finally, Dr. Mattson outlines key challenges to cryptocurrencies in becoming the principle medium of exchange for the economy, and we explore what the impacts of cryptocurrency might be on monetary policy
Photo by Kanchanara on Unsplash
Transcript
Stitzel: Hello and welcome to the EconBuff Podcast. I'm your host, Lee Stitzel. With me today is Dr. Ryan Mattson. Ryan is a Research Associate at The Center For Financial Stability and Professor of Economics at West Texas A&M. Ryan welcome back.
Mattson: Thanks great to be back.
Stitzel: So today, our topic is a very exciting topic. It's cryptocurrency. This is what everybody's been waiting for you to talk about. Everybody's been waiting for this episode. You know, I have people email the podcast and say: you know, what you really need to do is cryptocurrency. You know, I have students in my class that say: oh, you know, I love your channel. When are you gonna talk about Ethereum? And I said: what's Ethereum? So…
Mattson: [Laughs].
Stitzel: So here we are. So Ryan, just start us off nice and simple. What's cryptocurrency?
Mattson: Sure. So cryptocurrency is a kind of digital money that imitates a cash transaction online. So the idea is that you get a secure and credible transaction that is at least/has some level of protection, in terms of anonymity. And this is done through this really amazing piece of technology called the Blockchain. And the Blockchain --- I really want to stress how central this is, because you can do more than just currency and money with this. You can do legal contracts. You can do potential financial issues. I think, you know, D5 would be another great episode at some point. But let's focus on Bitcoin. The Blockchain is basically a decentralized history of transactions. And what this does is it allows for making it difficult for people to counterfeit the money that's involved in that transaction. And it verifies that the transaction did indeed take place. So if you were going to sell me that nice chessboard in the background there, we would need to verify that, you know, this transaction took place; and you received M amount of money from me, and I received X amount of goods from you. And this verification system is really, actually quite astounding in what it does. Because it's, sort of, well no, it sends this out to a bunch of other computers that verify all at the same time in a decentralized network [that]: yes, this transaction took place. Ryan gave M amounts of money to Lee for X amounts of goods. And this is a really important piece of plumbing. Because this kind of transaction --- if I were to write you a check for, say, the chess board ---again, what that would do is: that would go from my bank (let's say I'm working with Amarillo National Bank and you're working with Happy State Bank); but that check would have to be verified at The Dallas Federal Reserve and through The Federal Reserve systems. That'd be a centralized ledger, and would, of course, you know, they have an electronic system for. It's very, very fast now as well. But instead of, you know, a lot of different computers verifying this at the same time, you would have one centralized location verifying it. And this decentralization of this ledger, this history, really is fantastic, because it can help keep counterfeit from happening. So I can't say: well, I paid Lee M, but then go back and, you know, maybe take out a certain amount of M during the transaction (or copy a certain amount of it, which, you know, whether you're printing paper or sending out electronic signals and messages --- counterfeit happens). So this slows that counterfeit. But the money supply, in the case of Bitcoin then, is much like any other money [and is] tied to a number of transactions made, the speed of those transactions, and the number of users. And Bitcoin, especially with the original paper by the (I'm not sure how to say it the fancy word for fake names) pseudonym...
Stitzel: Yeah, pseudonym.
Mattson:…what was this beautiful bit of computer science, I'm sure. But as we'll talk about later on the podcast, [it[ did no favors for the economics of it. The money supply is, in a certain way, flawed in Bitcoin that I'm sure we'll get into. But that's kind of the basics of it that we have. We have this transaction verification going on online. You and I don't need to know each other. But there is now a ledger that has been verified, and verified by numerous sources using this algorithm. And it really is quite fantastic.
Stitzel: So if somebody says to me: what's cryptocurrency? [Then] a suitable answer is: it is a record of transaction history, or a history of transactions?
Mattson: Yes.
Stitzel: That's very --- there's something elegant about that.
Mattson: Yeah. Money is this very interesting thing. You know, a lot of people think of money in terms of: a good, a piece of gold, a piece of paper, [or] a checking account.Money is not a good. Money is not a commodity. Money is service. And specifically for types of services, I stress in my class [that] it has to be: a medium of exchange, a store of value, a unit of account, and a speculative instrument. So you can exchange goods for it. You can hold on to it. It's durable. It keeps that store of value. In your mind, you understand how much it's worth. And also, you can gamble with it. And these are four very important aspects…of any money --- whether it's gold, whether it's fish hooks, whether it's, you know (they're Polynesian tribes that are said to have, you know) these giant stones where you own a certain [amount] of…
Stitzel: Certain amount of Yap [Rai stones on the Island of Yap], right?
Mattson:…Yap, yeah. And I think, you know --- if we're going to go with poetry on [it], I think [we should bring up] former Minneapolis Fed President [Narayana] Kocherlakota. One of his famous papers is Entitled Money Is Memory. So we --- what money provides is this record of that transaction of a value between people. It really is. I'm a monetary theorist. So you can say: well, I'm a monetary economist. I'm not a very good theorist. I'm a monetary economist.And so, you know, it really digs down into this issue of how we are exchanging things, because money takes us out of the world of barter. And the world of barter is an awful, horrible place. You don't ever want to do barter unless, you know, you're having fun with it. But generally for an economy as large as ours, we need a stable medium of exchange, [a] store value, [an] unit of account, and [a] speculative tool.
Stitzel: So when you say you don't want to be in barter --- that's at the economy level?So just clarify that. I don't think, [reiterates] I don't think either you or I mean, you know, [that] there's anything wrong with bartering with your neighbor.
Mattson: Nah.
Stitzel: But you don't want an economy based on that, right?
Mattson: No.
Stitzel: So I love the definition that we're working with. That's great. And it's probably good to drill down into some of the details there. One of the questions I was going to ask is just the classic question. Is cryptocurrency money? You've already kind of taken that on --- head on. Do you have anything to add? You know, just evaluate the arguments that people would put forth on either side saying: it is or isn't (it isn't money). And do you want to distinguish between currency and money at all?
Mattson: I don't want to distinguish between currency and money. Currency, to me, is highly liquid --- low to no interest. But it's not the only form of money. Your checking account could have a certain interest rate associated with it. It's also very liquid, but maybe not as liquid as cash. Your savings account is not --- well, it's liquid these days [with a] slightly higher rate of interest. Money market, mutual funds, overnight repurchase agreements, commercial paper, [and] all these things could be counted as money as the Center for Financial Stability does with its Divisia Monetary Aggregates. So you can, you know, big M money can be many different things --- so long as they function as this medium of exchange, store of value, speculative tool, [and] unit of accounts definition. Is cryptocurrency money? Absolutely!Absolutely, without a doubt! The question is: is it a good money?
Stitzel: Right.
Mattson: And that's really kind of drilling down to, I think, getting to the heart of the matter here of, you, know what do you want your money to do? If you want your money to be a stable medium of exchange and store a value, then you want something like the dollar --- which is very well regulated by The Federal Reserve. They have an inflation target to get that price stability. And that maintains it as this medium exchange, because you know what a dollar is worth. I know what a dollar's worth. We both agree on that. If the day ever comes where you and I disagree on the value of a hundred dollar bill, then The U.S. economy is in trouble. But also, we can stick that hundred dollar bill somewhere and just wait it out. And it will maintain a certain amount of value. Of course, inflation will eat a certain amount. But we know how much that inflation rate is going to be. The Fed's targeting 2%. So, you know, over a certain amount of time, it decreases in value. A cryptocurrency, so long as it's stable and serves as a medium exchange, yes is a money. But it also is a money in its speculative form which, I think, is where Bitcoin, I think, inadvertently shines. I think, Bitcoin is the/is one of the biggest victims of the law of unintended consequences this century. What Satoshi Nakamoto created was very much in line with approximating, not quite getting there, but a Friedman Money Growth Rule. And this is an idea from Milton Friedman that money should grow at a constant rate. What Nakamoto did is had money grow to a constant level --- 21 million [and] that's as many Bitcoin as there will ever be in the world (at least according to the algorithm) --- and it will slowly, slowly get there, and [then] kind of slow down in that money creation. So it's not really a Constant Money Growth Rule [because] it's changing. And this approximates kind of the idea of mining for gold in a way (but not really) because, you know, we, you know, gold for example --- we think there's a set amount. You know, maybe in Ancient Greece they thought there's only this much amount of gold in the world. And then they discover: ah well, we've now got a trade route…into India or China where there are more gold mines. And now we have this amount. And then people figure out: well, we don't need the actual gold [but] just the pieces of paper. And you have money, upon money, upon money, and more of this divorce from a commodity and into a pure service. So…
Stitzel: So you brought up the idea of mining. Tell us what mining is and how that's working and…and why is it that there can only be 21 million Bitcoins in the world.
Mattson: Well so that's the limit set by the mathematical algorithm --- that there is a limit of 21 million. And the miners --- and this again, this is another piece of brilliance here [that] the miners --- actually are the verifiers. When you are mining for Bitcoin, what you're actually doing is: you're taking these blocks of transactions that have been made. So you and I make a trade, and that goes out to the miners who verify the transaction. Their payment for these verifications is: they are entered into kind of almost this bit of a lottery. You could get some Bitcoin if you finish this block. You might not get some Bitcoin if you finish this block. But that's their incentive, that they can get Bitcoin as they verify these transactions. And that was very, I think, creative on Nakamoto's part to incentivize verification outside of just saying: O.K. we're going to have this verification system, and pay these people fees as they verify things (much in the same way we pay The Federal Reserve for its services to verify these transactions that go on in our banking system).
Stitzel: I don't think people think about, you know, verification of transaction histories as, like, a central thing that underlies money. So, you know, I think you're bringing a new idea here. So I like that quite a lot. And so, I think, when people think mining, right, they're thinking about, like, finding Bitcoin. But you're actually talking about something a little bit different. And so what happens is --- and again, I don't understand what a Blockchain is, and, you know, probably not very many people really do, but so when --- you say multiple people are verifying…these transaction histories? Is that what's going on with the mining? Is you could almost --- again, I'm speaking a little bit out of ignorance here --- but your/multiple people verify the same transaction?
Mattson: Yes. Yes. You're decentralizing it. It goes out. Instead of there's like one place and, you know, The Dallas Fed and Washington D.C. or The Federal Reserve Board, instead it goes out to whoever has a computer that's dedicated to verifying, and encrypting, and decrypting these transactions. So that the mining aspect, and I get to use air quotes on the video now “the mining aspect” of this…you kind of do find it. You kind of do mine it, because you're providing this service. And you're paid for that service. And the way you're paid is through monetary creation. The Bitcoin that the miners are paid is Bitcoin that is not yet or has not yet been in circulation.And as they go through these eras --- when Bitcoin reaches certain blocks every 210,000 blocks (remember these blocks area ledger of transactions)…that they have, you know --- it's encrypted. Miners decrypt it, verify, encrypt it back up, [and] it's in the ledger. As we get to these different eras, then the reward for these miners is going to cut in half. So if they get Bitcoin in era one for this, you know, verification service by era 2 it's 25. And then by era 3, it's further down. We're now in the middle of, I believe, era 4. I checked this morning [and] I want to say they're verifying block 680,000. And the next, I think, the next one is (let's see here, well, I guess) era five [which] would be 210,000 times five (because I can't quite, but we're not quite halfway there).
Stitzel: Sure.
Mattson: It should be sometime in 2023-2024 when the next halving happens, unless a lot more people use Bitcoin. Here's the other thing about that that's interesting --- because you and I will measure time by our days, and our minutes, and our hours. One of the fascinating aspects of Bitcoin is actually we could reach those eras later or sooner depending on how many more transactions are made.Bitcoin could speed up quite a bit if we get, I don't know, better computing power. It was a --- quantum computing is the --- general idea [that Bitcoin could speed up if there is] better computing power or a lot more people using it at the same time. And that is going to --- that may speed up the times at which these eras are hit. And then, of course, the times at which the payment for these miners may go down. But, I think, that, you know, one thing to watch is: if Bitcoin ever gets into a period of high frequency trading. Because the time is very different from, you know, you and I. I pay you a hundred dollars, and that happened on April 23rd. And you exchanged at this. This is, you know, this verification happened within this block, at this at this particular time here. But you could get more and more blocks at faster and faster rates (or slower I guess).
Stitzel: Yeah. So, I think, several things come to mind there actually. So one thing is that you're doing a half-life sort of thing. So are you ever getting to the actual 21 million Bitcoin? Or… You think that that’ll…actually be? So the idea of the half-life payment out of the new coins, you know, should make you reach that limit? You slow down as you get to the limit right?
Mattson: There's a distinct --- and this is where it's actually not a Friedman Money Growth. Well, Freidman Money Growth will be to say, it grows at 2%. It will always grow at 2%, and we just let it grow at that. At this point it will grow at 2%, or 1%, or 0.50,%, or 0.005%, [or] 0.00005%. But at some point, you reach 21 million. At which point then, well, what do the miners do?
Stitzel: That's what I was going to ask next.
Mattson: And that's always, you know, that's the question that comes up in class. What do the miners do? Well, at that point what will need to happen is: the miners have to transfer over to being verifiers (to being paid certain fees in order to verify these transactions). Now I want to say that that's not going to happen until 2040 or 2044 (or you can look that up when). But it's not supposed to happen for another 10-20 years maybe.
Stitzel: But again, that's based on the transaction… rate we're observing now?
Mattson: Right. But it could happen. And this is all based on not Blockchain itself. There's no reason at all that that we should have a Mining Growth Rule. There's no reason at all we should have a 21 million limit. Just because it's, I mean, it's arbitrary. It's just trying to approximate the way that say a commodity like gold would be used --- mined, taken out, refined, and then used as money. We've long since abandoned that as money, which makes Bitcoin interesting because it's both extremely new and extremely primitive.
Stitzel: [Laughs].
Mattson: And that's, you know --- I know I'm gonna get in trouble for saying Bitcoin's primitive. But the Money Growth Rule is actually, yes, very primitive compared to the kinds of growth rules that you could have, that we have with the dollar for example. You can approximate dollar growth based on a Taylor Rule, what The Federal Reserve is doing, and targeting interest rates. You could have, you could do it…
Stitzel: Wait a minute.
Mattson: Yeah.
Stitzel: You told us in a previous episode The Taylor Rule works until it doesn't so...
Mattson: Yes. Well, all rules work until they don't.
Stitzel: [Laughs]. And even the Money Growth?
Mattson: Same is true for money growth, which is interesting also, because that means that Bitcoin has no discretion. There is no Central Bank of Bitcoin. In fact, there's, well O.K. I guess, there are Bitcoin Banks kind of now, or bank-like systems. But we can get into that in a second. There's no Central Bank of Bitcoin that meets and says: well, the Bitcoin economy's in a recession [and] we need to pump money in. Or Bitcoin economy is too hot [and] we need to take money out.
Stitzel: Right.
Mattson: This is a completely rules-based approach.
Stitzel: Right.
Mattson: We have done approximately what Friedman had suggested --- of basically having a computer program as the central bank. And that's what's fascinating about this Bitcoin Growth Rule. Now Ethereum [ETH], Ripple [XRP], [and] my personal favorite Dogecoin [DOGE] --- they all have…
Stitzel: That's everyone's favorite.
Mattson: Yeah. …various different Money Growth Rules that you can apply to it. There's nothing that says you can't have a different Money Growth Rule. This is just the one that was chosen for Bitcoin.
Stitzel: Hmm mmm. O.K. that's fascinating. Because one of my next questions is (which you've talked about) was Bitcoin, you know, made by [a] specific person and run a specific way? What's going on that there are so many cryptocurrencies, right? You've mentioned several there. I'm sure if we go and look we can find…I have no idea how many there are. You have a sense of how many there are? [Are] we talking about…
Mattson: Oh.
Stitzel: 20?
Mattson: Oh.
Stitzel: Or 100 or a 1000?
Mattson: Dozens and hundreds, right?
Stitzel: O.K.
Mattson: I mean, here's the thing. What we've done in monetary service --- [it] has been a monopoly for as long as we've had a Federal Reserve, right? You know, you can go back to certain areas in The United States. There was something called The Free Banking Era, where there was, kind of, more competition of various monies. You can go to pre-Civil War days where it seems like, you know, each state had their own type…of currency. But the issue is: money seems to have this natural monopoly aspect to it.
Stitzel: Well, so let's talk about that.
Mattson: Yeah.
Stitzel: Are there economies of scale there?
Mattson: Yeah. There's certain economies of scale with that, and there are transaction costs. It's a lot easier for me to think in terms of one…money rather than several. I have trouble. I am an economics professor, and I have trouble with exchange rates. But if you talk to students or professors who come from, let's say, Mexico, or Brazil, or Argentina, or Africa, or East Asia, where they've had to think in terms of two, or three, or four different currencies ---- it's almost second nature to them. You can learn it. But it's just easier if it's one and it's accepted. Because then if I come in and say: hey Lee, I'd really like to buy that chess set for 200 pesos.
Stitzel: [Laughs]. I’m getting hosed.
Mattson: At first if you don't know pesos, you're like: hey 200?
Stitzel: 200! That sounds like a lot. 200, yeah!
Mattson: All right.
Stitzel: Getting hosed.
Mattson: I have a good number --- 500 yen. I mean you know we don't know…
Stitzel: What?
Mattson: We think it.
Stitzel: Say that again.
Mattson: 500 yen.
Stitzel: 500 yen. Yeah. See yeah, and I don't have any idea. Euros I can kind of do.
Mattson: Yeah.
Stitzel: The question is: how many Bitcoin is it worth?
Mattson: Some small decimal at this point.
Stitzel: Yeah. It's weird, right? So, like, there's a (which I forget) --- there's some application that I use and the advertisements are…for Coinbase. Which we could talk about Coinbase [because] actually it's an interesting company, but...
Mattson: It went public this past week. Yeah.
Stitzel: Oh is that right?
Mattson: Yeah.
Stitzel: I missed that. I had caught [that] there, [that] they had some controversy several months ago. But their advertisement says: sign up for Coinbase and you'll get $5 of Bitcoin. And it just --- like I couldn't explain to you how hilarious it was that they used the unit of account, that is The U.S. dollar, to explain how much Bitcoin you're getting, right?
Mattson: Well.
Stitzel: So like, why didn't they write .000005 Bitcoin, or whatever that number was?
Mattson: Well, because .00005 Bitcoin may be worth (I don't know) let's say $20 today. But in two weeks it could be worth 2,000. You know, it's extremely volatile. And this is where Bitcoin fails on the unit of account --- now great store value and great speculation, right? If I wanted to --- sorry, actually full disclosure here --- I've been watching Bitcoin…now since 2012. I have never been tempted to buy it -- have never. I've been sitting on the fence with this for eight years, just as an academic exercise [and] loving the whole concept and…the theory behind it. Finally this [I] morning broke down and bought some Bitcoin, mainly because I'm thinking: well, I think the price is going to go up. I'm not going to spend that Bitcoin, because let's say I bought (I don't know) $15 worth of Bitcoin this morning. And let's say tonight, you know, it's pizza night. I'll hang out with my kids, and we'll order a pizza. But let's say I order a pizza with my $15 Bitcoin. And then next week, it turns out that Bitcoin I spent on a pizza, [it] is now worth $150.Some, you know, much larger amount. People will grab it and they'll want to hoard it. And that makes it a very, very poor medium of exchange. Because right now everyone is speculating on it. Everyone is using it as a store of value. And while that is apart of the monetary service, it's failing in a unit of account. Because it's --- I can't think in Bitcoin anyway. The price fluctuates so much.
Stitzel: There's something…
Mattson: It’s failing its medium of exchange….
Stitzel:…weird about Bitcoin. Sorry.
Mattson: Well, yeah. It's failing it's medium of exchange and unit of account.
Stitzel: Yeah. So I want to talk about both of those things --- the first thing is as unit of account. It's very weird to me that it's, like, there's a fundamental flaw in the design --- that it is expressed in so many decimal points. That's just, like, counter to the human [mind].
Mattson: Well, yes and no.
Stitzel: I'm just saying we like round numbers.
Mattson: Yeah. Yeah. And as a macro-economist, you know, levels don't matter --- it's the growth rate.
Stitzel: [Laughs]. Right.
Mattson: You know, we may/it may be that Bitcoin, you know --- once we reach 21 million [that] it finally settles in (I don't know) seven to eight decimal places over. People get used to that. People get used to these changes in the levels. What we're feeling viscerally with this is: the growth rate in the same way that, you know, if you're experiencing a large bout of inflation --- you feel the price changes viscerally. It's not that milk is, you know, $4 a gallon. It's that milk was $2 a gallon the week before. It's that change, and it's that increase that may or may not be keeping up with your wages. So this is going to be, you know, for Bitcoin, kind of, the opposite direction here. If we're feeling this growth rate, in this value [and] in this speculation, the level of it --- like, I bought [and] I can think about how much I bought in Bitcoin this morning in dollars (I honestly, I don't know what it was in, because I saw, like, the third or fourth decimal and stopped there and, like, all right, fine, whatever) --- it's all in dollars and this is also part of the way it was designed. I kind of want to circle back to my statement that this is the worst victim of the law of unintended consequences this century. Nakamoto designed this to be a pure medium of exchange. And I know that, because when you read the paper he doesn't create a banking system. In fact, it's something that was not supposed to be there. Now the idea then is that you don't speculate on it [and] that it maintains its value. And actually, the opposite happened to it's failing from its initial purpose. On the other hand, it's succeeding greatly in being a great, you know, gambling tool. That speculation going on right now, and has been going on for the past (where are we now) 12 years of Bitcoin, (it's 2009-2010, yeah 20 years of Bitcoin) has been actually the major aspect of it; whereas, the initial desire of creation was a stable medium exchange. That's what the Money Growth Rule was supposed to give; and instead, it's giving this very speculative tool. So oddly enough, when you loosen up that money supply --- if you go with just a Friedman Growth Rate or even a Variable Growth Rate --- you could stabilize the price much better; and it'd be a great medium of exchange, but it'd be a really boring speculative asset.
Stitzel: I don't see much speculation in in currency, right?
Mattson: What's --- we we've gone back and forth on some things for --- what's the [Friedrich] Hayek quote about? [That] the role of economics…is to demonstrate…
Stitzel: The curious task of economics is to demonstrate to men how little they know about what they imagine they can design. Yeah. Yeah. Money goes perfectly in there. Yeah. So that's very apt. So let's circle to the medium of exchange thing then --- because of this is good transition point. So I have my Bitcoin, and I'm a crazy person. And I'm like, you know, what I'm buying pizza tonight with Bitcoin? Can I even do that? Like, how many [reiterates] how many places? What am I paying for in Bitcoin? Like, I get that if you get in certain places on the Internet. A good…example [would] be, like, people that have, like, podcasts or something. And then you have, whatever, a patrone [regular customer] or something, right? And then [you have] a subscriber only page [with] an extra podcast content or something like that. Those…people can ask for Bitcoin. And that, you know, that works great. But I can't go to Best Buy and be like: I need to replace my microphone, [so] let me drop some Bitcoin here. So what are we talking about scale-wise, as for, just if I wanted to use it as a medium of exchange?
Mattson: You could. You could. And I've, you know, and you and I we’re both located in the Texas Panhandle. We like cash over here. So I think that in terms of Amarillo, for example, you won't find many places that would accept Bitcoin. Maybe you would. Like for example, I can't (I am 90% certain I can't) pay for my pizza with Bitcoin. But I think in larger metropolitan areas[like] San Francisco, London, [and] New York City --- yes! I --- back when it was, you know, add like a $100 to a Bitcoin…it seemed to me [that] I heard more about people using it to purchase things as a medium exchange. These days --- I don't know. I would certainly love to be paid in Bitcoin. I don't want to spend in Bitcoin.
Stitzel: Yeah. So the menu cost idea just jumped into my mind. Because so if big if a Bitcoin is a $100, then I go over to Pizza Hut and it says: you know, a 1/5 of a Bitcoin [is] 0.2 per pizza (per large, extra large pizza or whatever). If I come back the next Friday, and now Bitcoin is $200, what? How are they how are they adjusting? Seems like the menu costs must be very high.
Mattson: It would. It, you know, I think we're used to thinking about this in terms of the hyperinflation. I think we're used to thinking about the menu cost idea in terms of, you know, Pre-World War II Germany where barrels of Deutsche Marks couldn't pay for groceries. Or we can talk about Zimbabwe or Venezuela [relating to] the other more recent hyperinflations, where people are having to, like, change the prices as the…day goes on. It'd be the same problem but in reverse. It's a hyperdeflation. You have to constantly be aware of what these price changes are. And that's what makes it very difficult as a medium of exchange, that increases those transaction costs. So that is where, you know, in terms of behaving as a money [and] behaving as a currency --- it's just not working out very well.
Stitzel: So I'm --- I would really love to know what, you know, Pizza Hut in Canyon, Texas is going to do with Bitcoin if I were able to pay. Like, as you said: if I go to San Francisco and I have some Bitcoin, and I, you know, and I go and hit up (hopefully I'd go to a different restaurant in San Francisco, but suppose I go to) Pizza Hut --- I'm really curious what they're doing. Like, it just seems like the business model is so predicated…on the dollar that they have, you know, where…
Mattson: Well.
Stitzel:…they adjust the revenues, and we put these in different places, and deal with our costs. And it's like --- now you have this extra thing of, like, Bitcoin. Now businesses are engaged in speculation? What's going on there? It's --- I don't know that you know; because, I don't know if that is a question that's even…
Mattson: They possibly could. I'd actually --- I would be more worried about what managers and cashiers do. Because if I was a manager or a cashier, what I would do is say: O.K., this customer A has paid in Bitcoin. And I would take my --- here's O.K. --- $15 [for the] pizza. Here's the $15 for it, and then I'd take the Bitcoin. You know, that's something as a company I might be/they may want to look into something like that. I know that can't be easy, but of course people find a way.In terms of, you know, when the company gets Bitcoin --- companies issue commercial paper [and] companies hold certain assets in savings. I wouldn't be surprised if they have some kind of repository. We got X amount of Bitcoin, [so] let's stick it over here. Elon Musk made a big splash by saying that Tesla is going to accept payment in Bitcoin.
Stitzel: So why not? Why not accept payment in silver? Or gold?
Mattson: Well…
Stitzel: O.K., can't I?
Mattson: Well…
Stitzel: Can’t I run over with a, you know, minted coin and be like, you know, the price of silver [is] somewhere in the ballpark of $30 bucks?
Mattson: Well…
Stitzel: $30 an ounce? Like, I want two extra large pizzas. So…
Mattson: Bitcoin’s going to…
Stitzel:…Ryan and I can have lunch after this episode. Like, here's a silver coin --- then they're probably not taking that so…
Mattson: Well, Bitcoin is going to be easier to trade than a silver coin. You have to find a silver trader, you know. And there's a car dealership you may not know. But as a car dealership, you have a computer. And hey, we've got this Bitcoin traded. And that's a very low transaction cost than converting it to the dollar as quickly as you want. Along the southern border between the U.S. and Mexico, you'll find a lot of stores on both sides will accept both pesos and dollars. Because it's very easy for them to exchange that currency --- if they need to, or make change in that currency, or do that. So I again, I really want to stress [that] Bitcoin has lowered these transaction costs of exchange rates. And that makes, you know --- I think I alluded earlier to this issue of, you know, the history of free banking; where you are (I think I said free money, but it's free banking) [witnessing] different banks with different currencies competing with each other. That was very expensive in the 1890s, because they'd have to hold certain amounts of gold, [in order] to back up their silver, [in order] to back up the script that they were issuing. We went to, you know, the greenback, and the dollar, and central banking, and The Federal Reserve. [Why?] Because it was much cheaper for one large company…to provide that script.
Stitzel: Economies of scale.
Mattson: Economies of scale. And Bitcoin, I mean, think about the phone systems. When I was young (I'm old enough to where I can still remember these) there were rotary phones with land lines…
Stitzel: I remember those too.
Mattson:…that went in. You know, you had to kind of like to leave the room. And, you know, your parents wouldn't hear you talk on the phone. You had to, kind of, leave the room…with this wire attached to it. And there was one phone company. And now there's, you know, this thing…Which is beat up and cheap --- remarkably cheap actually --- compared to telephone [and] what cell phone service used to be.
Stitzel: And it's different than mine.
Mattson: And yes.
Stitzel: Which is the important part. Because…
Mattson: We can still communicate. I can still call you on that phone. And so this modern service, which has this high fixed cost to entry --- I mean, if I wanted to start Brian Bucks 20 years ago --- I'd have to get, you know, a printer. I'd have to work with making sure that counterfeiters didn't get there. I'd have to establish my credibility. If you have a crypto that can demonstrate through Blockchain that it is credible [and] that is secure --- you know, Bitcoin advertises anonymity (which O.K. fine), but I think (I don't know in the time of social media) I'm not so sure people are so concerned about anonymity anymore.
Stitzel: That's weird, right?
Mattson: It’s…
Stitzel: Somehow I want my currency to be anonymous, but I'll put what I had for dinner on my…Facebook tonight? But, you know, and that's what's (there is something) weird about the entire online experience. And this isn't really, maybe, the time or place for this conversation. But it's weird to me how Bitcoin, like, cryptocurrencies --- it fits in there. I mean, you even talked about like Dogecoin, right? So for those if those that aren't familiar --- there's a very famous meme that's the Doge meme. And it has many, many variants by now. And now it has a cryptocurrency named after it. And what the backstory is there --- I don't know. My guess is: it's somebody on the Internet that had the capability of making cryptocurrency, and thought the Doge meme is funny, and so they made that. But, you know, you see this…
Mattson: The beauty of competition.
Stitzel:…weird competition. Do what?
Mattson: The beauty of competition.
Stitzel: And I do want to make that point very strongly. But let me finish this thought really quickly: is [that] we see these this weirdness of people doing things online that you and I/we would just (it would never even, we would) never even think of doing this. So…my brother sends me this Instagram post, and it's --- I think it's probably staged, right? But there's a…young lady, and she's with her boyfriend. She said: oh, you know, he surprised me with these flowers for my date. And then they, like, broke up later that night. And she's filming herself crying, you know. And I'm like, this one's probably staged. But, like, we observe that kind of thing. Like, why are you putting on Facebook? Why is that the catharsis that you want? And not call your friend on the phone and…talk to her? Or, you know, go over to your parents house and, like, actually have real human connection, you know, which [is] ironic; [whereas], you and I are recording this over Zoom, like, but I'd rather be in person talking to you.
Mattson: Sure.
Stitzel: But this offers a certain --- this offers a certain benefit.
Mattson: Well…
Stitzel: So, you know, call me a hypocrite. That's fair.
Mattson: Well, yeah. Here's the thing. And I see where you're going with this. And so I --- and I love this idea. And I want to drag it back to currency.
Stitzel: Do it.
Mattson: Imagine how people felt when paper money was first introduced.
Stitzel: Oh good. I was coming to that. So…
Mattson: O.K.
Stitzel:…so, very good. Very good.
Mattson: Yeah. You know, you've been --- you know, imagine you've been dealing with these gold or silver or copper coins. And, you know, hey, they're tangible. And you know what? They will survive trips across the desert.
Stitzel: Exactly.
Mattson: Some guy is handing you a paper…a piece of paper saying: well, this paper's worth 2 of those gold coins.
Stitzel: Yeah, the hell it is? Right?
Mattson: Yeah. Yeah. And which is something that you and I --- you know, if it's the right kind of paper --- immediately [are] like: oh thank you.
Stitzel: No problem.
Mattson: We don't think about it. In fact, we prefer the paper to the coins these days, right? And now we have these little plastic cards which, you know, I remember my grandparents kind of sniffing at. And I still, you know --- oh just credit, you know, card? No! We don't want to do these cards, especially because for some reason…
Stitzel: Really?
Mattson:…the credit cards were too close to debit cards. So they didn't want debit cards.
Stitzel: O.K.
Mattson: And you even have people arguing --- you know, budgeting gurus talking about: oh, you all need to be doing you’re your budgeting in cash with envelopes, right?
Stitzel: Yeah. Yeah. Yeah.
Mattson: Which maybe, you know, for my generation, [it] works. But for someone, for some of my students and their generation, they've grown up with this.
Stitzel: Well so let me interject that. Because I've said this on the pod before.
Mattson: Yeah.
Stitzel: I'm familiar with exactly this envelope system type thing. And the idea is like: oh, there's like a physicality of the paper. And it’s, like…painful to hand it over or something. My mind has that, like, exactly backwards. So, like, [when] you're talking about your students, you're actually talking about me. Like, if it's money…
Mattson: [Laughs].
Stitzel:…[then] it's meant to be spent. And if…it's the card, then I'm, like, thinking about: O.K., what's…in my account? Am I going to be able to afford this pizza, right?
Mattson: Exactly.
Stitzel: So, but what's interesting is --- and I want to get to this. I think you're going there, so I apologize if I’m… if I'm cutting you off a little bit. But suppose you did come up and say: hey, I want this chess board, right? And you gave me silver coins. Like, if you gave me silver coins of an appropriate value, [then] I take it.
Mattson: Yeah.
Stitzel: And if you said: I want the chess board, and you gave me hundred dollar bills in the right amount, [then] I'd take it. And if you came up and said: you know, here's a Bitcoin, [then] I'd probably take it. I'm pretty indifferent. And in fact, I, sort of, they're not --- they would all work for medium of exchange in that sense. But I would value them for different reasons almost, right?
Mattson: Yeah.
Stitzel: So it's like --- if you get the silver, I mean, that has properties that we might (like, if say I) think inflation's coming or something, [then] maybe I want to be in something that isn't the dollar. If I'm --- I'd take the Bitcoin, because I'd have fun speculating that just like you…just like you did whenever you bought your [Bitcoin]. Did you buy Bitcoin? Or did you buy one?
Mattson: I bought Bitcoin.
Stitzel: O.K., so you bought the classic.
Mattson: I did. I went classic…
Stitzel: And then, but if you gave me $100 bills, [then] I'd take it, [and would] probably end up [putting it] in the bank, you know. So…and then that would be just as…like, you described --- just as something that would transfer.
Mattson: Well.
Stitzel: So what's your reaction to that?
Mattson: So money, like I said, since it's a service --- what you have is some substitutability between different kinds of money. My debit card is linked to my checking account, so I'm writing a check but not writing a check anymore, right?
Stitzel: Yes.
Mattson: If I'm holding onto cash, it's very different from than holding on to that piece of plastic card. And then on top of that, you can go even further and say: well, there's a savings account, a money market, [a] mutual fund and go further and further, kind of, up. Because when The Fed releases a certain amount of money into the system, banks take that, and they generate more monetary service with it. When you deposit, say, those hundred dollar bills --- that I gave you for the chess board, [and] when you deposit that --- in the bank, the bank takes that and it loans it out. And [the bank] --- it gets a certain return of interest, in terms of the dollar, based on its lending. And [so now] you've generated, from your deposit, much more than a hundred dollars worth of monetary service. Bitcoin was designed --- and it doesn't have to be like this, but this is how it was designed, Bitcoin was designed --- to not have that fractional reserve…banking system. Bitcoin was designed so that money growth from financed by debt would not be available. Of course, people found a way around that with the exchange rates and the foreign exchange rate (but the exchange rate trading and things like that). But I still have yet to see a bank form [or form of banking] that pays off an interest in Bitcoin…that is not linked to Bitcoin dollar gains or Bitcoin euro gains. I could be wrong on that. I'd love to hear about that in the comments --- if people have those for YouTube. But that is a severe problem. Because one of the reasons we moved on from the silver and the gold was there just was not enough silver and gold to do it. So we brought these pieces of paper. And at some point, it got easier to just have these little pieces of plastic connected to little ones and zeros. And Bitcoin is just an example of that next step of, you know, where this service of transfer of wealth is going --- where this monetary service is going. And I think that that's incredible to watch.
Stitzel: So there's some different camps there that get at exactly what you're talking about. So there's, I think --- there's a camp of people that are like: gold and silver, it has intrinsic value; [whereas], dollars don't have that, [and] Bitcoin doesn't have that. And then, I think, there are people that are like: [they like] something physical. Fundamentally, that's what I want. I want the gold or the silver.The paper dollars have it. But this one-zero in the bank thing doesn't really make me very happy. And Bitcoin's not real.Right? And then there are people that are like: what I don't like is this expanding monetary base. So, like, give me gold, or silver, or give me Bitcoin [because] I don't like the U.S. dollar. It is like different people have different criticisms. How would you evaluate some of those different camps if you will?
Mattson: So, I mean, for the gold standard usually you have an economics [where] we separate out between commodity money and fiat money, right? Fiat money, that's to say that fiat money has value --- because people say it has value…whether it's a central bank, or government, or the money holders who use it. I like to tell my class the story of Peter Pan. [Have] you ever been to the play Peter Pan?
Stitzel: I don't think so. No.
Mattson: O.K. So, you know middle of the play, it's great take your kids. [During the] middle of the play, Tinkerbell is hurt by Captain Hook, right? And then, you know, you've got to clap in the audience to keep Tinkerbell alive. And you gotta clap. You gotta believe. And, you know, the actor/actress is like: oh, you have to believe. And so I'm there with my daughter and, you know, we're clapping. And the audience isn't really clapping along, and then Tinkerbell dies. No. No. I’m kidding. O.K.
Stitzel: I was gonna ask. It never works out that way.
Mattson: Tinkerbell comes back to life. This is very much how fiat money works. It only survives because you believe it does. It’s…we give it that value. So what they would argue then is that gold has some intrinsic value that makes it special from other forms of money. And I disagree with that. My counter to that is: the only reason that gold has value is because it's shiny and we like it.There's no other animal in the animal kingdom that goes around and is like: wow, gold, you know, I'm going to sit on the [gold] --- well, you know, I guess there are dragons, but they're not really --- that's mythical.
Stitzel: I think there are. You know, there's some birds and monkeys that like shiny things.
Mattson: That like shiny things? Yeah.
Stitzel: But they don't trade in it. So…
Mattson: They don’t. Yeah. Yeah. So, you know, for me I would argue that all money is fiat money. It's money because we give it that value, because the money then is a service.
Stitzel: O.K., so let me play devil's advocate for a second. First of all, I love the Peter Pan analogy there. Because if Tinkerbell dies, [then] the show is over; [whereas], much like if we no longer believe in the currency, [then] the show is over.
Mattson: The show is over. Yeah.
Stitzel: Let me play --- I don't even know if I'd say --- devil's advocate, but [also] let me propose a counter, right…which is the history by now of gold and silver as functioning as money and currency. It's so long [of a history]. It's not intrinsic, but it's extremely stable. Like even to this day, like, people trade some in silver and gold…maybe not serving the same function like precisely.But like, I could imagine, you know, some post-nuclear war future where we're right back to gold and silver… you know, assuming the mints didn't get nuked or something. I don't know exactly how that would play out.
Mattson: Well, so those commodities are... Yeah.
Stitzel: But they're subjective, and [the] marginal value of that is very, very high, because it's very, very entrenched. What do you make of that as a counterpoint? Or…
Mattson: I would say, you know, in response to that: you know, the reason gold and silver were so useful as money is because they didn't go bad. You could melt them down, and you could create more of them. You could imprint it for credibility. You can't do that with things like eggs or you know chickens. And it's very difficult for an egg to be a store of value because it goes bad, right? There were certain properties of gold and metal that didn't make it valuable. There's just like --- there are certain properties in paper that make it valuable as a money.So, you know, in terms of [a] post apocalyptic world, yeah I mean, if we don't have a printing press, [then] yeah. I'd say: definitely we'll go right back to gold and silver, assuming it's not irradiated, right? That might be…
Stitzel: Yeah. There are other properties there. But isn't that part of what makes money so interesting --- is this nature of (I think it should open your eyes a little bit once you start thinking of) money as a service and then evaluating the different properties? Because this is what I do whenever I teach the money section is: I talk about what are different things that we see used as money, right? And everybody goes immediately to dollar bills and coins, right? And…usually I'll have some clever students bring up gold and silver. And now they might even mention: is Bitcoin money, right? And then we have a discussion about that. You know, but then you can talk about things like the [Rai] stones of the Island of Yap. And you can talk about, like, money --- that you can't, right? There's, so there's a story about the [Island of Yap]. I guess I should tell the Island of Yap story (unless you want to do it).
Mattson: No. Go for it.
Stitzel: So the idea here is: there's this island, and they have these particular types of stones, and they all agree that that these are the money, and these are the currency, right? And so if I want to come buy one of the chickens out of your flocks, and I bring you the stone, and then now you have the stone, and we all agree it that it's yours. And then there's a big stone up on the hill, and so that's my stone. And I want to buy this hut that you made, and so we trade. Now that's Ryan stone. And the community's small, and everybody knows that's Ryan's, and it used to be Lee's, and now it's Ryan’s. So but now the hut is Lee's, right? And there's the, you know, (what's the word for that there's a) story, probably a bit of a folklore, right? They're transporting one of the stones across the islands --- kind of a crescent shape thing; [whereas], the boat sinks [and] now your stone that you just got from the house is at the bottom of the ocean. [However] it turns out that doesn't deter us at all. The collective consciousness [of the island] knows… that that’s Ryan’s stone at the bottom of the ocean.
Mattson: Still there! Yeah!
Stitzel: Yeah. So when now you want to buy an, you know, the entire flock of chickens from someone else --- you just say: hey, that's Steve's stone down there now. And all goes on. That's very much like the ones and zeroes…of the Bitcoin (or even just the banking system). But so comment a little bit for us on this discomfort that some people get of: like, Bitcoin it's, like, all in the Internet.If the power goes out, [then] I don't have access to my money --- which…you know, is also true of my credit card. So there's…more similarities there than I think we recognize.
Mattson: Well so, you know, adopting a new way of viewing things is always hard. It's always difficult. We are used to (we have) a lock-in effect, right? We're used to what we grow up with. And I can understand where it would be difficult too. You know, I have trouble with it sometimes as well sitting down and saying: O.K. well, if yeah, if the power all goes out, then I don't have it anymore. Well if the plumbing goes out, [then] you don't have a toilet anymore either. If the heating goes out, [then] you don't have warmth in your home. If, you know, there are many other things that, you know, if that catastrophe happens, [then] you've got bigger problems than whether or not you can do a medium of exchange at the grocery store.
Stitzel: That's a pretty big issue though.
Mattson: It's yeah. It's a pretty big issue. But the system that we have with the electricity that we have available to us, with the data that we have available to us, the ledger and how cheaply we can record these, you know, (for lack of a better term) [deals with] instantaneous contracts for purchase. [By the way], I love the Island of Yap story because it's all about property rights and contracts. The stone only serves as, you know, a link between what I can see and then what I can feel here. With Bitcoin, you know, those people who grew up with computers probably have a better connection to it than I would. Because I'm --- I still remember the days of, you know, America Online when that first…you know, really came out and kept getting all these little floppy disks in the mail. I still, you know, remember those days before computers were necessary for school.
Stitzel: Yeah. I mean, I remember going to the library to get access to the Internet, right?
Mattson: Yeah. Yeah. I teach with PowerPoint. And I know that, you know, I know a few of my colleagues --- you know, they love the chalk and talk method much more. And I love that too. But I love that I can fix PowerPoint mid-lecture. If there's a typo on my slides, I can do that. I think, you know, in the time when Milton Friedman was lecturing, he had to/he would have to send that for transparencies. He'd have to that [and it] was extremely expensive. So if there was a mistake in there, he couldn't fix it. I have a very low transaction cost to fixing my slides. Of course, if the electricity goes out, then it's done, right? Then I've got a, you know, hope that there's at least enough light for the white board. And maybe there's a dry erase marker that actually works. We've lowered these transaction costs. We've lowered the transaction cost of money from, you know, melting down gold and forging it into a coin, with such and such emperor's face on it, to a few clicks of a button. And that is so great because I know everyone jokes about cigarettes in prison.
Stitzel: Yeah.
Mattson: But do you know where that joke comes from?
Stitzel: Well, that is an example that I discussed, right? So if you have prisons or prison camps…
Mattson: The Radford Papers.
Stitzel: Yeah, sorry. Go ahead.
Mattson: Part of that Radford Paper (and that's in there) that very few people talk about --- of course, everyone talks about cigarettes in prison, right, [because] it's durable [and] you can exchange it --- but what Radford also…
Stitzel: Yeah. Also easily divisible, is the interesting part.
Mattson: What was that?
Stitzel: Easily divisible is the interesting part.
Mattson: Easily divisible. Yeah.
Stitzel: You know, one of the things about a, like, a silver or gold is this idea of clipping. So I was asked to speak to a high school group to, kind of, cap off their econ class. And I said: yeah, no problem. [Let me] see your syllabus, right? And there's like an entire month of the class on clipping coins. And I went: what am I looking at? When is the syllabus from, right? And…you know, it's just one of those things where, you know, I don't know where I got the syllabus. There are lots of good things about the syllabus too. I don't make it sound like it was…a farce of a class. But it's just, like ---- that's an issue from a different time. I wouldn't teach that in Econ 101 today. But that's a divisibility problem.
Mattson: But I'd say that's also important. Because O.K. the use of the cigarettes improved overall welfare in the prison. The use of money made everyone better off.So the use of gold, [and] the evolution from barter to gold, made everybody better off. The evolution to buy metal, silver, [and] gold made everyone better off. The evolution to paper currency, to bonds, [and to] treasury bills [made everyone better off]. You know, you if you really want to get broad with it, you can talk about maybe even equities and credit cards as being a form of money (although a lot of people debate that). This new transaction method --- this Blockchain, this crypto, I mean just outside of Bitcoin even --- is a vast welfare improvement for society. Now I don't think it's going to be: it's a revolution [and] we're all going to change the way we see money. No. This is all very much based on old monetary theory. Money is behaving the same way it behaved in the 1400s-1500s --- when we changed over to, you know, gold pieces, to paper, etc., etc. But it will marginally improve all our welfare, in that it decreases the transaction costs [when] making exchanges. And I think that, you know, on one hand I don't want to say that: oh, Bitcoin is (I don't want to be part of the Bitcoin cultists who say that this is) just going to change the way we think of money, and then it really doesn't. But what it does do is: it makes those transactions cheaper and easier, so that overall welfare can improve. It's one of those --- you know, we always like to talk about bad news, right, in the media. I think you and I have talked about the --- [that] we give the, what was it --- The [Hans] Rosling Exam?
Stitzel: Yes.
Mattson: The Gapminder Exam?
Stitzel: Yes.
Mattson: Where you give an exam and you ask people: are people more poor, are we more unequal, [and] are health outcomes worse? And it seems like, you know, 2 out of 3 students are going to tell you: yes, we're worse off. People are living shorter lives. But in reality, we're living longer lives, [and] we're living healthier lives.You can argue that in, you know, distinct countries maybe inequality is growing or not. But all the measures, at least from the World Bank in the U.N., show global inequality itself has actually been going down (along with poverty). And you feel free to check me on that. Maybe I'm wrong. But that was how it was, at least back in, you know, just after the Great Recession even. The lesson from Rosling, right, is this optimism idea.Another person, mainstream person, that people would be familiar with [would] be like Steven Pinker, [who] makes these type of arguments, right? Of just like…we get caught up with the minute to minute, Wait. What you said is this, right? It's the growth rate not the level, right? And so things aren't growing fast enough for us, even though they're positive, [but] not good enough. And then we forget to step back once in a while and see what level we're at. So that's an excellent point. So I want to go back one step, because you brought up durability which, you know…again, like, reminded me of the distinct nature. So you can't go out in the backyard tomorrow and find a piece of Bitcoin that somebody dropped --- which probably is a feature, not a bug. If -- you're not going to find any paper currency that's 100 years old laying around, because that's going to have to have been preserved. In fact, one of the things The Federal Reserve does is destroy old bills that have been ripped, or torn, or whatever. But man, you'd be over the moon if you stepped out [on] your back porch tomorrow and your daughter was digging in the garden and said: you know, dad what's this? And it turned out to be a gold doubloon or something, right?
Mattson: Yeah. Yeah.
Stitzel: So any comments about the durability nature? Because in a weird way, Bitcoin is both more and less durable than paper money.
Mattson: Right. Yeah. So yeah, I can't say that I'll find a Bitcoin lying around. I guess what you could say --- because there's that story of the guy who, I guess, threw away his laptop seven years ago…that had his Bitcoin wallet password. And he is desperately seeking his laptop in the town dump...because I want to say it's worth, you know, hundreds of thousands of dollars now. Yeah. You know, obviously he would have electricity in the computer to do that. And a gold doubloon can last and last and last. The issue with the gold doubloon I would again say: is this transaction cost? Yes. My daughter dug it up, and [now] how wonderful that is! Now I gotta find a trader. Now I gotta find someone who trades with it. I gotta find a way to value it. And these transaction costs are still extremely high. They're billions of gold maintained.
Stitzel: Of course, the value of a gold doubloon is probably worth it.
Mattson: Yeah. Yeah. But the durability is still there. But the durability, in terms of store of value, you know --- if I was say/let's say was pirates (because I like pirates). Anyway let's say, you know, the pirate who buried that ---- he's long dead, so that durability doesn't do much for him. And with Bitcoin, you know, the durability of Bitcoin does a lot for us up until, you know, we run out of electricity…or things like that. And that's why, you know, money (you/we were talking about, you know, [that the] Taylor Rule works until it doesn't [and] money) as a new exchange, store of value, [and] unit of account --- it's [also] going to work until it doesn't. And it may be at some point that we get enough Bitcoin out there, and it's so accepted that suddenly as a speculative tool it's not worth as much. And now, it becomes a better medium of exchange. That's what I keep hearing anyway --- a lot of people saying: give it more time. It'll be a more stable medium exchange once it gets closer to 21 million.
Stitzel: It was sort of odd. I actually talked to a couple [of] people after church. And more than one person told almost the same story that you're describing --- where somebody had bought some Bitcoin, and it was years ago, and they forgot their password. And, you know, one version of the story went --- you know, this is like people telling stories about people they knew, so this isn't a…news story, but this is this is word of mouth story being passed around [but] one story --- was somebody helped him lookup their password or something and figured it out. And then the other story was, you know, some ridiculous sum of money that would now be worth a $100,000 or whatever it was. And they haven't been able to figure it out. And so that money's just gone. And the person relaying the story to me was like --- and the person who lost that money is like --- surprisingly O.K. with it. Like, it doesn't seem like a real… $100,000 to them.
Mattson: Well, you know, if let's say, you know, back in 2011 when I first been looking at this --- well, I want to say Bitcoin was worth what maybe $200-300 for one Bitcoin. You know, if I went out and bought a $100 worth of Bitcoin back then --- O.K., I've put this value. [And] oh darn, I'm out $100 bucks. And let's say I wait 10 years. Don't --- I live under a rock for 10 years.And I come back. Oh wow. That hundred dollars that I spent way back then is now worth tens of thousands. And I've forgotten the password, and I can't get to it anymore. Well honestly, yeah I'm going to be O.K. with that. Because really, what I lost was that $100 back then.Yes. I have the opportunity cost of, my goodness, these tens of thousands here. But a lot of times, I don't think we feel those opportunity…costs as strongly, especially on the margin. And this goes back to that old economic principle --- people make decisions on the margin.I made a decision on the margin to invest that $100 in Bitcoin back in 2011. I'm not feeling on the margin that loss…of tens of thousands of dollars. I could understand that. Yeah.
Stitzel: So I want to get to two more questions.The first is: we've talked about the electricity thing. We've talked about mining. We've talked about the computing power. I'm not real familiar with this, but I've seen this idea floating around of, like, the literal, like, carbon footprint…of the mining and the problem. Because you've talked about transaction costs being very low, and this…
Mattson: Yes.
Stitzel:…whole process being more efficient. And almost from a consumer side, I think, there's a lot of truth to that. Do you have any sense of, like, this other idea? Well O.K. --- we're --- as we're mining 21 million Bitcoin (and there's all these other currencies that come out) --- is the computing problem, is that a real deal?
Mattson: The computing problem's a real deal. Absolutely! And this is where, you know, again, those transaction costs are low up to a point. And these transaction costs, of course, will change. I want to say there's a particular measure on from Coinbase and I usually download the data off of Quandl. I'm going to go ahead and check that. But there's a transaction cost in terms of miners revenue versus the cost that they face. And you can measure this. And this goes up and down violently. Right now, for example, it is [violent, and] Bitcoin has never been this expensive to mine. So they've had this very large increase in transaction costs, and that may gum up the works. And the exchange may not be as fluid or as easy. You might find, you know, like, your computer buffering, right? If you're ever watching Netflix [and] you see the little buffer thing --- [you are] like: ah crud! We may get into that. We --- Bitcoin right now, I think, recently reached a trillion in market capitalization.
Stitzel: Really?
Mattson: So if you want to think about Bitcoin in terms of a GDP of an economy --- that market capitalization is kind of close to it. And so we have a huge amount of power going into [and] trying to account for those trillion dollars in transactions. The U.S. economy alone is $20-21 trillion dollars a year.So you would have to massively scale up the electricity use to get to Bitcoin replacing the dollar. And then think about: O.K., Bitcoin replacing the yuan or the euro. I don't see it as a replacement. I don't think it will get there. And I think before it gets there, you know, The Fed is already very interested in Blockchain technology.
Stitzel: Yeah! Where's The Fed coin? That's coming, right?
Mattson: Yeah. That's coming down the pipe. That's definitely coming down the pipe. If The Fed does that…
Stitzel: But that's not speculation on your part. Haven't I seen [an] actual discussion of that?
Mattson: On?
Stitzel: An actual Blockchain coin that The Federal Reserve is gonna run.
Mattson: Yeah. Yeah.
Stitzel: All right. Everyone's literally in the works.
Mattson: Everyone's looking into it. The ECB (The European Central Bank) is looking into it. Because, you know, like, we were using that transaction between you and I about buying the chessboard. If The Fed can decentralize the verifications…
Stitzel: The Fed decentralized --- that's an oxymoron isn't it, right?
Mattson: Well, decentralized-centralization [or] centralized-decentralization.
Stitzel: It's weird, right? I mean it's weird.
Mattson: But if The Fed can use it, [then] they'll use it.And that would potentially --- if we solve this power problem that would cut a lot of costs for them. Or it might, you know, even they can just vary things and incorporate Blockchain in a way that does not use so much power. There's a lot of invention that can come from this ledger, from this memory, [and] from this durable service that crypto provides. And I think that, you know, we're gonna hit a wall with the electricity needs of it. But like with any other resource, we're gonna find some way around it. I mean, this is, like --- we, you know, I think you and I have talked before about --- the [Simon-Ehrlich Wager] Ehrlich bet back in the 70s, right, where you had this question of environment…
Stitzel: And recap that for us.
Mattson: What's that?
Stitzel: Recap that for us.
Mattson: So that this was, you know, the population bomb question, right? That the population --- and I want to say was it was Dr. Ehrlich, right? Do I have that name right?
Stitzel: I can't remember.
Mattson: The idea is that population will continue to grow exponentially, and will run out of resources. And well, first of all, the population is ---- yes, we've reached 7 billion. But, you know, it's actually slowing down too. And our resources are still growing. The population bomb didn't happen when he thought it would. So we, you know, we have these kinds of things where we reach a point ---- an inflection point. And it becomes really profitable for someone to figure out how to…change this.
Stitzel: And that's a huge….
Mattson: It becomes really costly to not change it.
Stitzel: That's a huge point.
Mattson: Yeah.
Stitzel: So the problem with an idea like the population bomb, right, is that idea is predicated on population growth is exponential and resource production is linear. And so at some point it has to outpace and so on and so forth.But that ignores. And I think this was a huge problem with a lot of the reaction to things in the pandemic is we're like: oh, if the growth rate of the virus is, like, this [then] da, da, da, da. But people will react to that…and change their behavior, right? And so I'm setting aside the different type of policies that we would want to encourage or discourage [certain] types of activity. Just set all that aside for a moment. Pretend the government fell down the stairs and didn't do anything. People would still react to what it is that's happening around them. And it might be too late, it might be too early, it might be too little, [or] it might be too much. But the point is that they'll react. And it'll almost certainly be in the right direction in many cases, right? But so, a population bomb problem ignores that behavior, right? That there will be, at some point, a lower incentive to have kids, for example, that will actually change the population rate through normal human behavior. And then the other idea --- and I think this is important for a lot of things, right? This is Matt Ridley's work --- The Rational Optimist, right? Which is --- when you have a situation that calls out for a solution, [then] you have a situation that calls for people to find those solutions. And the bigger the problem is, right --- [and] this is why like I would be, sort of, like lukewarm on climate change. For example, you know, I wouldn't say that it doesn't exist. I'm just not very worried about it. And the reason I'm not very worried about it is because I think those solutions are on a path to get us to people wanting to solve that kind of thing…long before it ends up with the kind of world ending type of problem. Maybe that's a topic for a different episode. But I think it's important too. And I don't want to trivialize climate change, because…
Mattson: No. No. No.
Stitzel: I think that's an enormous issue with a lot of nuance. And I would absolutely love to discuss that at some point.
Mattson: I think we're both being very optimistic here. And given…and given the history, we have some reason to be optimistic because at these potential inflection points, there has been a change.There has been a technology development. There has been a change in how things are done --- institutional changes --- and of all kinds. And so I, you know, I think the point that we're both getting at is: yes, we have this problem within cryptocurrency that it takes a massive amount of power. And it will take a huge amount more of this power…to bring it to a larger scale.But I think that and I don't know what it is.
Stitzel: Sure.
Mattson: Whether that's, you know, people talk about quantum computing. Maybe someone just finds a cheat within programming that allows it to use less power. I mean, the thing about wheat, what, was the invention (somewhere in the early 90s or late 80s) that allowed for us to get four times the grain harvest out of wheat. These things do happen. We do find these incremental technologies.
Stitzel: The golden rice ideas and stuff like that.
Mattson: That can come up. So I think that, yes, it's a problem. I do also think, though, that a lot of people are working very hard to solve this problem. And I think it --- I think it will happen.
Stitzel: Trust and human ingenuity. Absolutely. So this is a perfect transition into the last thing that I want to talk about. We're over an hour now. There is this part of the Bitcoin milieu, right --- that is it's decentralized. And it --- here's all these problems with The Fed, right? Like, some of my listeners are going that Ryan Mattson said he's a show for The Fed, right? And he's even trying to advocate for Bitcoin being centralized.
Mattson: I like that idea.
Stitzel: Yeah. You like The Fed. Talk to me about this idea of the decentralization of Bitcoin. Some people are even out there saying Bitcoin has succeeded. I don't think there's much case for that in terms of replacing, in replacing it. But I am an economist. I like market solutions. And I think even at a political level --- decentralization is often a really good idea. And so there's an appeal to me about a free-banking type of atmosphere that gets us to…a solution. So one of the things that I like to teach (and I think is very important to understand) is that monopolies sow the seeds of their own demise. Because there's a high level of profitability people want to find ways around that, right? You mentioned on the phone earlier that's textbook 101 example. I can --- I, you know, I can --- recall on the list of 12 other things. I think we're seeing that in real time with Internet provision, right, and like, the natural monopoly of wires in the ground. So why not Bitcoin doing the same thing and replacing currency? And let's have decentralized currency. Let's have Bitcoin, Ethereum, Dogecoin, Ryan Dollars, you know…and Stitzel Bucks. Let's do it. Why not? Or…
Mattson: Well, so why not? Why it may not happen. One thing we have the electricity barrier, right? Or the --- so we've covered that. So I'll move on.
Stitzel: yeah…
Mattson: Then second of all, you know, are we going to be O.K. with being able to hold all these currencies in our head and this value (which I would say in the 1890s was a very big problem)? Today --- not a big problem, because my phone can do that. I can say I'm going to pay this amount of Bitcoin. But let's say that the vendor only takes Ethereum. Well shoot. We can have automatic exchanges going on. I don't even have to think about it. I can think in Bitcoin. He can think in Ethereum, and then we move on with life. We've lowered that transaction cost. So that's one ---- so two potential roadblocks here. {The first one being] the electricity use. [And the second one being] whether people can adopt it at these low transaction costs. And the third one is going to be the strategic reaction of The Fed. The Fed has a big incentive to incorporate this technology. And if Bitcoin has a flawed Money Growth Rule, (as I've argued that it does) and The Fed has a better Money Growth Rule, then The Fed, you know, would go towards that --- hey, dollar stable medium of exchange. I know what the dollar is worth. All we've done is we've changed the plumbing of it. All we've done is we've taken out the wires to the telephone. So the natural monopoly that we have in The Federal Reserve could maintain its dominance simply based on other aspects of money. But the technology that is changing these things --- they're lowering these transaction costs where multiple kinds of money out there is not that huge a deal anymore. But I also think there is a strong credibility argument. And The Federal Reserve is very concerned about its credibility. Because again, you know, Tinkerbell. You got to keep Tinkerbell clapping. Or you got to keep clapping or Tinkerbell is going to die. The Fed is very, very concerned [about] it's credibility. I think we in a previous podcast about modern monetary theory, talked about credibility of The U.S. government and its debt. Yeah. Money has to be…
Stitzel: Or a future episode.
Mattson: Yeah, or a future episode. Money has to be credible. It has to be believed in. And The Federal Reserve has a big head start with that. The U.S. dollar has a bighead start. Bitcoin has been around for 10 years and has a reputation for volatility, which makes it a great speculative asset. But I see no scenario in which it can replace the dollar totally. It can augment the dollar. It can be a nice competitor with the dollar --- for people to go back and forth with. But we're talking about --- you know, if we're talking about --- a very large competitor versus a very small competitor who maybe cannot scale up as much as they would like to. So why not [then], you know, why not move over to Bitcoin? Because we'll hit a wall with electricity. We'll hit a wall or power needed to verify. We could hit a wall with whether or not people can exchange it in multiple different circumstances. And we'll also hit a wall with the strategic decisions of The Federal Reserve, and The European Central Bank, and The People's Bank of China, and all these other central banks that have a very large vested interest in defending the credibility and use of their currency.
Stitzel: Yeah. So I'll take a couple of points here and get your reactions. First thought is if you have a situation where you have a monopoly and true stable competition arises --- that's a good thing. So even if they don't rise to the point of being, but it becomes widely accepted, and it's just performing, [then] like definitely [it’s] almost certain to be a good thing. We've talked about The Fed as a monopoly [with] the U.S. dollar being this natural monopoly --- if you switch out plumbing, [then] the nature of the natural monopoly [and] the centralized transaction history that you were talking about --- you're laying the groundwork for moving away from that. And if The Fed becomes just one coin, among all the other coins, [then] they could lose. So I, you know --- which I'm not (yeah, I guess I'm not) crying about. But, you know, maybe some people who are advocates for The Fed would. And then, of course, you elegantly laid out the case for why there may not be a wall with electricity, or there may be. But if you are talking about --- I'm almost uninterested in the like physics of the problem. Because even if that proves to be insurmountable, there will almost certainly be a lateral solution to that kind of thing. Thoughts about any of those comments?
Mattson: Sure. The lateral solution --- I agree with. And I think that, you know, the three problems I laid out can definitely be there. I think maybe the problem that I overlooked, that I think I've mentioned to before, is the absolutely Fatal Money Growth Rule of Bitcoin. There is almost zero flexibility in, specifically, Bitcoin when it's compared to the dollar. And I think that that economic misunderstanding at its creation has led [to] its --- it's a time bomb [and] at some point it's going to go off. Ethereum and some of the competitors that I've seen --- and I guess this is where I become the evil proponent for things other than Bitcoin there --- I think that they have a competitive edge in[somuch as that] I think aspects such as decentralized finance, contract verification, [and] other things [contribute so] that [it] makes its use more a lot more varied more diversified. More diversified. And could make them more stable in the long run. You know, we with the --- there are two kinds of --- problems, yes, that you're talking about here. We have the physics of it, which we've discussed, I think at this point, in depth. With Bitcoin specifically, I think also the problem of it is money rule --- which again, I think is a fatal misunderstanding of Friedman's work. I think that will lead to the eventual death of it. Now when that's going to happen, I couldn't tell you. I wouldn't know. But probably sometime after it hits 21 million and we start to see some of the lack of flexibility with it.
Stitzel: So if you have competition though…the Money Growth Rule is a thing on which the different currencies can compete. So you can solve the Money Growth Rule problem in a way that a centralized monopoly currency cannot. Because the monopoly currency has to get that right. If it doesn't, we pay the consequences. Period. Full stop. That's why they want discretion, and they don't want a Taylor Rule at The Fed, even though they act like it's/they're behaving by the Taylor Rule 90% of the time.
Mattson: Sometimes they do. Sometimes they don’t. Yeah.
Stitzel: Yeah. They do until they don't. But suppose Bitcoin got it wrong, but Ethereum gets it right? Problem solved. So, you know, I'm not attached to Bitcoin as a thing. But the idea of competition infiltrating money --- it's a pretty powerful idea. So I'll leave you this. You can play us out with this. Do you think --- suppose the physics problem gets solved. And who knows if we end up with Bitcoin itself, or a series of competitors. Do you see any reason to think that even with the decentralized verification process, [that] there are still some kind of economies of scale? Or other reasons to think that we end up with a monopoly? Ethereum just takes over everything and, you know, The Fed is doing its best to deal with Ethereum head on. And one of the things that could solve that --- and I don't know, I'd have to think about it, I don't know which way this would go. If you're having a problem of the unit of account --- that can be addressed, actually, by somebody else providing another service which is…here's an app that you just use. It's a wallet for coins of some type, and it just does all the calculation for you…[and] gives you that information. I mean, you'd have that on your Apple Watch and be done with it. So comment on those things to play us out.
Mattson: So I think, you know, I think everyone's going over to Blockchain. I think at the end of the day, or at the end of the century, that's just going to be the way things are. And whether or not the dollar maintains a natural monopoly on monetary service, it's going to depend more on their Money Growth Rule and the economics of it, rather than the computer science aspect of it. Better money tends to attract money users. And people will abandon monies that are too inflationary. And I think at some point people will abandon monies/the monies that are too deflationary. We have yet to see that happen. Of course, Bitcoin's extremely deflationary right now and people are flocking to it still. That will all depend on how we use money and how much flexibility money is given. Bitcoin is too strict to survive. The dollar is flexible enough to survive. Now it'll probably lose market share, I think, to things, to Ethereum, to Ripple, to Dogecoin, [and] to things like that. I think if we tie money too much to this kind of gold standard idea [and] if we don't allow for a certain amount of flexibility --- whether through rules or discretion (you would have flexible rule you could have rigid discretion), [then] I think those monies are going to be the ones that do not compete in the future. So whether the dollar can maintain its flexibility and usefulness in the face of other competitors, [then that] will determine whether it can continue.
Stitzel: So you kind of touched on a topic that maybe we should have, [and that should have] been a framework [wherewith] we should have been talking about all along. There is a lot in monetary policy talking about: does good money drive out bad, or does bad money drive out good?
Mattson: It certainly does [talk about that].
Stitzel: That's certainly a play here. And I didn't think about that until you just said that. So maybe that's something I should have been bringing up all along.
Mattson: A new podcast, right?
Stitzel: Yeah. So can you tell us the good money drives out bad story versus bad drives out good really quickly --- just to set that up, since you've actually touched on that?
Mattson: Yeah. Since I've touched on it. And I'm sorry. I'm gonna have to refer to my class notes, because I've been teaching on this, and there are different……ways I've been teaching it. So I'm going to be sure I get it right.
Stitzel: We were talking about ideas.
Mattson: For the Gresham's Law is that bad money drives out good money. That's the idea with Gresham's Law --- that you have two coins that are used in a simple economy. One is pure silver and the other is half silver/half tin. And then the idea is: people are going to hoard the one that they can tell, right, [that] this one's pure silver, [and] this one's [not]. [And they’re] saying O.K.: they're gonna hoard that silver one and try and spend the other one, right? So then that medium of exchange is then going to be corrupted by this bad money that goes out. And people will lose faith in it. Tinkerbell's gonna die, etc., etc. There is a counterpoint to this which I've seen referred to as Thier’s Law of good money driving out bad money. And this is where I want to be careful. Because as I've seen it, what I would actually describe it as: stable money drives out less stable money...
Stitzel: Hmm mmm.
Mattson:…or volatile money. So this is, you know, the kind of that question of: you know O.K., if we have Bitcoin, [are] people gonna hoard Bitcoin, and then maybe spend in dollars? And then we'd have, you know, the dollars kind of driving up Bitcoin because Bitcoin's too valuable? Or are we gonna have people converting to dollars as the medium exchange because it's much more stable? And then, you know, keeping? Like I said, this is very difficult to deal with, and kind of conceptualize (at least for me anyway). If we look at Argentina or Venezuela, there should be very high demand for something like cryptocurrency, because their currency is so unstable. Whereas Bitcoin, even in all its deflationary volatility, is much more stable than these other currencies. And that's evidenced by people who are moving over to hold their store of value to store that. So we could have the Venezuelan story, where the boulevard is just now flooding out, because people want to get rid of it, and then hold on to Bitcoin. Or we could be in this situation where: O.K., we can talk about it from this this sense then as well, because Bitcoin is providing that store of value better. It begins to drive out the inflationary money, because then people are going to be using that for the monetary service of stored value. That there's a lot. And maybe we should do another podcast...
Stitzel: Yeah. We can talk about it.
Mattson:…where we've got more time. I would argue that money has to --- a good money has to --- satisfy those four things that I mentioned of: the medium of exchange, store value, unit of account, [and] speculative tool. And those monies --- that's what people are looking for. If a money fails these four things, then it will eventually be driven out. And people will stop using it. Economies dollarize because their local currency doesn't work. Zimbabwe in the end, after the hyperinflation, dollarized. Many people in Venezuela use dollars as a savings and store of value there as well. There are certain countries --- Ecuador was one example that just said: O.K. forget it. We're using the dollar as our currency. People want stability. People want to know that this $15 is going to be able to purchase that $15 value worth of pizza, and it won't, you know, go too far up or too far down at any given point in time.
Stitzel: My guest today has been Ryan Mattson. Ryan, thanks for joining us on the EconBuff.
Mattson: Thanks for having me Lee.
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