Friday, November 22, 2013

Peter Schiff on Intrinsic Value: Is His Analysis Flawed?

During his analysis of bitcoin versus gold, Peter Schiff states that gold has intrinsic value and that bitcoin does not.

Several commenters to the post charge Schiff with failing to understand subjective value theory, that is, they charge that according to Austrian economic theory, value is subjective based upon the value scale of individuals and not something inherent in a good itself, and that  Schiff is ignoring this.

Trace Mayer emails:
Would really appreciate some of your critiques on the economics I try
to apply. It seems Peter's argument about 'intrinsic value' is pretty
flawed from a subject value theory. What do you think?
Technically, those raising the question have a point. But I am not sure it blows a hole in Schiff's overall argument. Notice also that in his argument  he says we exchange dollars because we know that we have to pay taxes with them. I don't believe this is correct, either. In my view, if taxes were abolished, ceteris paribus, we would all still be using paper dollars as the medium of exchange. Schiff brings up taxes because he needs to justify how paper dollars have "intrinsic value," to make his intrinsic value case against Bitcoin.  However, when it comes to valuation, for gold, paper dollars or Bitcoin, as the post commenters and Mayer make clear, it is all about subjective valuation.

That said, there is a big difference between Bitcoin and gold, and I believe this is really the point Schiff was trying to make, although he did it in a very sloppy manner.

The point being that if for some reason people do not value gold any more as an alternative money or hedge against depreciating paper money, it would still have value. That is, there would still be demand for gold as jewelery, in the dental field and as a conductor of electricity. The gold price would not drop to zero. It has in otherwords, maintained its regression theorem link to its pre-money use.

On the other hand, Bitcoin has no such pre-money use link. If Bitcoin for some reason is no longer valued as a alternative money, its value can drop to zero. There is no other use for Bitcoin. Indeed, it is worse than fiat paper money from this perspective because unlike paper money it can't even be used as wall paper or toilet paper.

Further, since Bitcoin does not bring anything new to the money game, it is, as Svhiff says, a type of tulipmania----this doesn't mean it can't last for a very long time, but it is gimmicky. It provides no levels of privacy in daily use--both cash and gold do this much better. Indeed, of the three, Bitcoin is the most trackable.

As far as convenience, credit/debit cards, for daily use, provide pretty much the same convenience as Bitcoin. The one area that Bitcoin has a sleight edge is in transaction clearance. But you are giving up a lot of privacy for this feature (and price stability).Further, I expect that eventually a dollar electronic currency will emerge that will supersede credit/debit cards, that offer the same transaction clearance capabilities as Bitcoin, and then Bitcoin will have zero edge.

Thus, outside of sizzle, there really isn't much there. As a matter of fact, given the sporadic crackdown by government on the edges of Bitcoin, it is not clear where the vulnerabilities are for Bitcoin holders because of government regulation.

As I have stated before, the Bitcion spike appears to be run by some very sophisticated pump and dump artists. It is always difficult to determine when this type of run will end, but when it does, there will be massive losses.

34 comments:

  1. Is Trace Mayer a sophisticated "Pump and Dump" artist? Or just grounded in a better understand of monetary science, cryptography, and peer-to-peer networks than EPJ or Mr Schiff?

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    1. Just how do you get the idea I am referencing Trace Mayer?

      In case you haven't noticed a couple of hedge fund operators have been talking up Bitcoin. This has nothing to do with Trace, idiot.

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  2. Wow, Wenzel! Looks like you are actually starting to use your brain. I give it 6 months before you come all the way around. I'm glad to see it. I always thought you were just slightly less hard headed than Peter. Cheers!

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  3. It has value of a payment system. What other system let's you transfer $100,000 from China to the USA in seconds with no fees? Does that not have value?

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  4. By intrinsic value Peat means non-monetary value.

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  5. > Bitcoin has no such pre-money use link.

    Bitcoin monetizes the internet. The existence of the network itself is Bitcoin's pre-money use link.

    > If Bitcoin for some reason is no longer valued as a alternative money, its value can drop to zero.

    That would imply that a better digital currency has come along, wouldn't it? Just like the dollar and gold don't look so great compared to the superior Bitcoin.

    Seriously, do economists and investors like Schiff just lose their ability to think and reason when it comes to new money paradigms? We're in the middle of the largest paradigm shift in living memory with regard to how money is moved around the world and between people and the Wenzel and Schiff are stuck somewhere in the 1980's.

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    1. Bitcoin could easily lose its value was a currency without a new digital currency coming along. all it takes is off a sophisticated enough counterfeiting method.

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    2. Unless one can break the laws of mathematics and physics, Bitcoins can't be counterfeited.

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  6. Unrelated Comment:

    Whoa, did you see your $1 million nickel investment article from 2011 made a comeback Bob? Any idea how that happened?

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  7. Replies
    1. hahaha good one. Yea I think most of the bitcoin advocates tend to be younger and therefore are all about the digital age. Not to say bitcoin cant help the liberty movement a bit, but its much too volatile for my liking. The point of exchange is to benefit, and you cannot benefit if your medium of exchange changes in value by the hour, therefore causing massive distortions in your exchange calculation and therefore allocations of your money stock(and furthermore time preferences).

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  8. Here's an example of an anonymous transaction between Alice and Bob (no relation to Bob Wenzel):
    Alice wants to sell Bob her toaster for 0.01 BTC. Alice and Bob each create new anonymous bitcoin addresses. Bob then sends Alice 0.01 BTC from his new anonymous address to Alice's new anonymous address. No identity info has been revealed though the ledger is public.

    Bitcoins do have value Mr. Wenzel. You just don't value what properties they offer.

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  9. Thank you to all the bitcoin believers. I am stocking up on my gold and silver, and while the price valued in dollars has waned(as of now), whatever the money paradigm or currency shift, there will always be a counter-demand of those units into gold and silver. 0.0 in my bitcoin wallet, ???? in my physical gold and silver holdings.

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  10. Peter Schiff states that gold has intrinsic value; Is His Analysis Flawed?

    Yes. For the best commentary on this, see Gary North:

    http://archive.lewrockwell.com/north/north952.html

    “Notice also that in his argument he says we exchange dollars because we know that we have to pay taxes with them. I don't believe this is correct, either. In my view, if taxes were abolished, ceteris paribus, we would all still be using paper dollars as the medium of exchange.”

    We would be using paper SOMETHINGS as the medium of exchange – and that paper SOMETHING would be greatly influenced by whatever medium the government required for payment of taxes.

    There is no doubt that the requirement to pay taxes in a specific unit of measure will increase demand for that specific unit of measure. The government requirement to pay taxes in the unit of measure of ITS choice increases demand for the unit of measure of ITS choice.

    As an aside, I believe the carbon tax was the Trojan horse through which a global currency was to come about, at precisely the time the dollar system was collapsing in 2008/2009. It seems the discovery of a few naughty emails put a crimp in that plan.

    http://bionicmosquito.blogspot.com/2012/06/more-on-death-of-green.html

    Finally, as we are dealing with pseudo-Austrian monetary issues, let’s tackle the fallacy of the dollar being an elastic standard; as ALL value is subjective, all units of measure are elastic from a value sense. However, as a unit of measure, the dollar as a unit of measure (NOT a unit of value, as there is no such thing) is as constant as any other unit of measure – a dollar always equals four quarters, a hundred pennies, twenty nickels, or ten dimes.

    http://bionicmosquito.blogspot.com/2013/02/a-bird-in-hand.html

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  11. Perhaps intrinsic value is a detraction for a money (currency). While you want currency to maintain its value you do not want people to store their wealth in currency.

    i.e., people in India and China often keep a significant portion of their net worth in gold. That capital is unused, sterilized. No one can start a business with it or buy a productivity enhancing machine or expand an already successful business with it. Holding gold so you can have a dowry for your daughter removes so much capital from productive investment.

    A currency that not only holds its value (no inflation) but that does not appreciate or have other uses would be used only for transactions. If you wanted value growth or appreciation you would lend or invest your currency. It seems to me that is the ideal situation as far as incentives applying to the average person

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    1. loans come from savings numbnuts. hoard away.

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    2. " No one can start a business with it or buy a productivity enhancing machine or expand an already successful business with it."

      Yes, they can. Why wouldn't they be able to? They simply exchange it for local currency.

      " It seems to me that is the ideal situation as far as incentives applying to the average person"

      Aside from the fact you tip your hand in your desire to control the behavior of others, the problem is that you assume that people would simply pack away their savings forever, which is simply untrue.

      "Holding gold so you can have a dowry for your daughter removes so much capital from productive investment."

      This highlights what I was saying about your desire to control others. What if someone highly values getting their daughter married to the right person in some societies? Who are you to say they shouldn't? You are also assuming those people wouldn't have other money to invest in other areas. All in all, your arguments are not well thought out and parts of them troubling in your desire to control others.

      "loans come from savings numbnuts"- Anon @ 6:14, I only wish that were completely the case...that's the insidious part of fiat currency/central banking. You can loan out money with little actual savings.


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    3. Anon @ 6:14 Why be a jerk and call him "numbnuts?"

      Hoarding implies that the person is not saving the money in a way that it can be lent out.

      However, the argument made above doesn't hold water.
      Walter Block explains it better than me in Defending the Undefendable, pages 112 -115 or so. The book is free.

      http://mises.org/books/defending.pdf

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    4. Hoarding implies that the person created more value (and got paid for it) than consumed. This surplus is made available to others, and will partially be used as capital. When the money is hard, increase of productivity caused by advances in technology and spread of new ideas will tend to increase purchasing power of "hoarded" money. Put these two observations together and you will see that hoarding is basically a passive investment (of the surplus wealth created by hoarder) into the whole economy.

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  12. Intrinsic value = a competing use for money that takes it our of circulation and investment. how is that good?

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    1. Have you read "What has Government Done to Our Money" by Rothbard?

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  13. Bob, why would people use dollars anymore if taxes (and I assume legal tender status were removed) ? If all restrictions were removed wouldn't everyone probably start to use gold and silver?

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    1. I don't agree with Peter that current money use is supported by its use/requirement to pay taxes. It might be a contributing factor, but it's much more involved than that, I, like you, would include "Legal Tender" laws, in that they are forcing everyone to accept it.

      If we didn't have legal tender laws and people weren't taxed on the appreciation of gold/silver I suspect we'd already see a movement back towards these instruments as tender in the mainstream.

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  14. "The point being that if for some reason people do not value gold any more as an alternative money or hedge against depreciating paper money, it would still have value. That is, there would still be demand for gold as jewelery, in the dental field and as a conductor of electricity. The gold price would not drop to zero. It has in other words, maintained its regression theorem link to its pre-money use." .....Game, set, match.

    I love the hearts and minds of the bitcoin crowd but once the state sinks its claws into the bricks-and-mortar side of the bicoin market people are going to wish they better grasped the enormous difference between a "currency" and "money".

    as for the dollar, its very simple. people use it because there is a figurative gun being held to their heads. The state has pegged it to how much you value your life and freedom.

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  15. Bob's critique is spot on from a technical perspective. I think Peter meant that it has intrinsic value in that it is something that is materially real as opposed to something that requires entire networks of massive complexity for it to gain its [marxist 'value']/[liberal-technical 'use'] (as pointed out by BTC Defender First Class AnonymousNovember 22, 2013 at 6:40 PM). Gold is elemental; it exists according to the same basic laws governing atoms. This is such a fundamental/philosophical difference that it is difficult to express it in scientific language.

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  16. Bitcoin=bubble and bitcoin=world altering paradigm shift are not mutually exclusive. Housing, tech stocks were in bubbles, the collapse of which heralded the end of neither. Houses are still useful and tech companies still innovate. Bitcoin could crash to 5$ but the changes crypto currencies may bring could still be epic.

    Imagine wealth that is easily transferred and can't be confiscated. A huge finger in the eye of leviathan even if not totally secret.

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  17. I never said that the ability to pay taxes in dollars gives dollars intrinsic value. I clearly said that paper dollars have no intrinsic value. However, since I am required to pay taxes, I need those dollars despite the fact that they have no intrinsic value. Bitcoins do not have that advantage. They have no intrinsic value and can not be used in payment of taxes. Bitcoins can only be used to trade for other goods, and only if people continue to accept them in trade. Given the huge losses many later adopters are likely to suffer, and the wide daily price swings, I expect the number of people willing to accept them to drop sharply.

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    1. Peter later adopters in bitcoin suffer no losses. As demand for bitcoins rise, if people value the properties of bitcoins, their purchasing power also increases. There is no need to convert bitcoins to dollars or any other currency since at a certain point when, if, demand rises it will be generally accepted. If you are arguing that bitcoins are not a wise speculative investment then I agree.
      Also by the time bitcoins are generally accepted governments ability to taxes will probably severely diminished since can't exist anymore without "money-printing".

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    2. Peter-

      One of Bitcoin's intrinsic value is that you can easily hide wealth from the government. This assumes that one uses Bitcoin correctly and not go through an exchange that requires your ID.

      Like it or not, hiding wealth from governments is an increasingly desirable thing.

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    3. Peter said: "However, since I am required to pay taxes, I need those dollars despite the fact that they have no intrinsic value." Well since you desire them in order to pay taxes --- this means that you value them. They are valuable to you and also to others, therefore they have intrinsic value.

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    4. I don't think you understand what "intrinsic value" means, Anon @ 9:56.

      "When early formulators of economic theory grappled with the value concept, many if not most of them began with the assumption that a thing has value in some intrinsic manner. They thought of value as a quality similar, for example, to the pigment of a red pencil — a quality embodied in the pencil itself so that, if you threw it out the window, the pigment was still embedded in it; if you lost it forever in the forest, the pigment was still there intrinsically."
      An Introduction to Value Theory, by F.A. Harper
      http://mises.org/daily/2422

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  18. You compared FRNs (credit/debit cards) for their transaction clearance and their privacy vs. Bitcoin. But what about the fact that Bitcoin can't be counterfeited and FRNs are counterfeited in massive amounts? Isn't the non-counterfeitability of a currency important???
    .

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  19. Intrinsic value is not established because something is tradable.

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  20. I think the real rub is using the phrase "intrinsic value" as opposed to "non-monetary uses." Nothing has intrinsic value as shown by many Austrians. If there is no one in the world that values something then the value of that thing is zero. But I think the rest of Peter's analysis is spot on. Gold has non-monetary uses that created the value for it before it was adopted as money. Both bitcoin and paper dollars have only monetary uses so their value is totally dependent on their use as a medium of exchange. If we for some reason returned to a barter economy, unlikely as that is, gold would still be valued for exchange, bitcoins and dollars would not. If the internet was destroyed or killswitched by the government gold would still be valuable and bitcoins would not. If the dollar bubble deflates then gold will still be valuable and dollars will not. So, in my view Peter's analysis makes perfect sense. I agree with both Peter and Bob that people using bitcoins or dollars as stores of wealth, which is one of the properties of a money, are going to be rudely awakened.

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