Cryptos Fear Credit


Yves here. Merhling makes an observation about how cryptocurrency fans view the world that is so basic that I could slap my forehead for not seeing it this clearly myself.

By Perry G. Mehrling, a professor of economics at Barnard College in New York City. Originally published on his website

Proposals for monetary reform, whether mild or radical, are always and everywhere informed by some underlying theory of money.  A week ago I spent two days talking with a group of technologists and lawyers–perhaps I should say digital coders and legal coders–and pressed them on this point.  Chatham House rules prevent me from associating views with actual people, but the views themselves are the important thing.

So far as I understand, and it is important to emphasize that there was not consensus on the details, the technologists see themselves as creating a form of money more trustworthy than that issued by sovereign states, more trustworthy because the rules of money creation (whether proof-of-work or proof-of-stake or whatever) limit issue to a fixed and finite quantity.  Scarcity of the tokens today, and confidence that scarcity will be maintained in years to come, are supposed to support the value of the tokens today.  Importantly, no such confidence can be attached to state-issued money; quite the contrary states are seen as reliable abusers of money issue for their own purposes.  Cryptocurrency is digital gold while fiat currency is just paper, subject to overissue and hence depreciation.

From this point of view, current holders/users of cryptocurrency are just early adopters.  Once everyone else realizes the superiority of cryptocurrency, they will all want to switch over, and the value of fiat currency will collapse.  The (fluctuating) prospect of that eventual switchover shows up today in the (fluctuating) exchange rate between crypto and fiat (as here).  And the (fluctuating) prospects of different cryptocurrencies shows up today in the (fluctuating) exchange rates between different cryptocurrencies (as here).  According to the theory, one of the cryptocurrencies will be the future global currency, replacing the dollar, but no one knows which one.  People who got into Facebook at the beginning are all multimillionaires; early adopters of the future global cryptocurrency will be too, but which one will it be?  That’s what the lack of consensus about the details is all about.

One of the most fascinating things about the technologist view of the world is their deep suspicion (even fear) of credit of any kind.  They appreciate all too well the extent to which modern society is constructed as a web of interconnected and overlapping promises to pay, and they don’t like it one bit.  (One of my interests these days is “Financialization and its Discontents”, and I dare say that the discontent of the technologists is as deep as that of the most committed Polanyian, but of a completely opposite sort.)  Fiat money is untrustworthy enough, promises to pay fiat money are doubly untrustworthy.  One way around the problem would be to require full collateralization of all such promises, maybe even using so-called “smart contract” technology to ensure that promised payments are made automatically, basically an equity-based rather than debt-based system.  In effect, we have here a version of Henry Simons’ Good Financial Society, but with peer-to-peer cryptocurrency taking the place of his 100% reserve money.  Simons was of course responding to the global credit collapse of the Great Depression; the cryptos are responding instead to the more recent global financial crisis.

I view all of this through the lens of the money view, which places banking at the center of attention, views banking as fundamentally a swap of IOUs, and views money as nothing more than the highest form of credit.  It is view developed not so much around a philosophical ideal but rather as a way of making sense of the operation of the world as it actually exists, outside the window as it were.  In that world, the payment system is essentially a credit system, in which offsetting promises to pay clear with only very minimal use of money.  And prices arise from the activity of profit-seeking dealers who absorb fluctuations in demand and supply by standing ready to take any excess onto their own balance sheet, relying on credit markets to fund the resulting inventory fluctuations.  One can imagine automating a lot of that activity–and blockchain technology may well be useful for that task–but one cannot imagine eliminating the credit element.  Credit is not a bug, but a feature.

This point of view draws special attention to the place where markets are being made to convert one cryptocurrency into another, and especially the place where markets are being made to convert cryptocurrency into so-called fiat.  Someone or something is making those markets, and in so doing expanding and contracting a balance sheet, in search of expected profit (see here for example).  Cryptos fear credit, but I suspect they will soon discover that credit is a feature not a bug, and that will require them to re-examine the implicit monetary theory that underlies their coding.  To date, technologists seem to have felt that they have nothing to learn from the operation of the existing monetary and financial system, as their disruption is intended to replace it with something better.  But from a money view standpoint, it is the institution of credit that is the real disruptor, which is fundamentally why it is feared, by cryptos and also by the rest of us.  The answer, as Bagehot long ago taught us, is not to eliminate credit but rather to manage it, and “Lombard Street has a great deal of money to manage”.

Print Friendly, PDF & Email


  1. Wukchumni

    Limited edition cybercash eerily reminds me of another strictly limited edition of the 1970’s, when inflation was the bogey man and hard assets had their day…

    The Franklin Mint pumped out tons of mostly sterling silver medal collections in the 70’s, and initially for a number of years, it was the best thing since sliced bread, and some of the earliest ones were worth 10-25x issue price on the secondary market. But then 60 Minutes (when it had teeth, ha!) did an expose on them and that was that.

    Every last bit of it is strictly worth the silver value currently, so it did have that to fall back on, but what kind of cushion will cybercash have when the magic carpet ride is over?

    1. Arizona Slim

      I remember the Franklin Mint very well. It was on Baltimore Pike (U.S. 1) and it was just a few miles away from where I grew up.

      It was such a powerhouse that it recruited one of my neighbors, a world-renowned direct mail expert, to move from the Midwest to PA.

      Well, guess what. Neighbor didn’t stay at the Franklin Mint for very long. He left a few years later and became a very successful consultant. My father considered him a role model for consulting. Dad went in the same direction after his company started downsizing in the late 1970s/early 1980s.

      As for the Franklin Mint, well, take a drive down Baltimore Pike. Place has been out of business for years.

    2. fledermaus

      The whole crypto fad is like investing in baseball cards. Rare cards will always go up in value right until interest wanes.

    3. Susan the other

      Yes. After Jamie Dimon dissed Bitcoin, one of them saying logically that he just couldn’t understand why simply manufacturing scarcity can be valuable, etc along came Christine Legarde saying it is too early to discount a useful purpose for crypto currencies because they can be used globally via the internet between parties making small transactions, etc. And at the same time Macron was touting the idea that the EU should make the euro a fully functioning-EU-wide sovereign currency for all things EU-fiscal. Macron sees the beauty of a sovereign fiat currency bec. – as in this essay above – fiat itself is a very valuable thing even though it is only another idea. Valuable in its usefulness. Some are also saying that cryptos will never be very useful unless they are backed by the state! OK then. Sovereign crypto? I heard Lloyd Blankfein is designing a crypto platform, details later I assume.

    4. Tomonthebeach

      YES! I have some FM oriental plates that I bought because they were pretty and look nice on my dining room wall. I will part with them to the first person who will offer me $10K each for them, or $35K for all four. They are in mint condition.

      I would stash bitcoins but I do not have an invisible drawer to keep them in.

  2. flora

    How is the crypto currency economic model any different from the neo-classical economic model which eliminates banks, money, and debt from their models ? Is crypto currency neo-classical economics in new clothes?

    1. ScottS

      Do I misunderstand the situation, or has it not recently come to light that alternative crypto currencies can be spun up at will, or split off the main BTC blockchain? What value does BTC have if literally anyone can clone it? And there’s nothing that can be done on the monetary policy side to control it, and no sovereign that collects taxes in BTC, so no inherent demand.

  3. Enrique Bermudez

    Where the crypto advocates lose me is that they seem to fail to account for the fact that traditional political entities have a monopoly on offical violence/use of force AND (critically) are hand in glove with the tech industry borg.

    Thus, should it be perceived at a sufficiantly high level that the prima intra pares of cryptos will take away (meaningfully) the ability to print money to fund iteration 800 of the Afghanistan troop surge…. a word, please, Mr. Google/Paypal/Facebook. And then no more access to anyone’s store of Bitcoins.

    I think this scenario is much more realistic than the one these Crypto-advocates are (often literally) selling.

    1. clinical wasteman

      Yes (thanks Enrique) , the crypto-fans’ willingness to ignore aspect this has confused me for a while now. Unless they’re quite sure that cryptocurrencies will turn all socio-economic life entirely upside down, the alternatives would seems to be: a) swift destruction of anything that even looks like threatening the fiat money/sovereign police hookup, and/or b) benign indulgence where the ‘crypto-‘ prefix means no more than ‘harmless/negative added value gimmick-‘, like a single-store gift voucher or any other token ultimately denominated in traditional police-backed credit money (eg “Brixton Pound”).
      Not just because states have so much firepower to use and generally prefer violence to disorder, but because the competing claim of a non-trivial cryptocurrency would threaten not just the form of existing wealth but its status as wealth; command over real things and actions would be scrambled. And at least as things stand now, the owners of the traditional wealth are also the indirect owners of the firepower.
      I agree with Mehrling that the future-oriented nature of credit/money is wilfully ignored in ‘peaceful crypto-transition’ fantasies. But the stakes — and the relation to Enrique’s point about states’ military/police protection of existing wealth — are clearest if it’s remembered that future-oriented credit/money claims are ultimately claims on someone’s labor, i.e. “legal tender” (=promise of violent enforcement of the right) to command this or that human-made thing or human service (or exclusive disposal of some ‘natural resource’ exchangeable for either).* Money implies violent enforcement of the universality of those claims, because it always takes a whole history of violence to get the work done in the first place.

      *Yes, Marx passim, beautifully synthesised by Harry Cleaver in the introduction to ‘Reading “Capital” Politically’ (Autonomedia & sundry other publishers, 1970s-present), but also orthodoxy — “classical”, not “neo-“, as Michael Hudson might insist — straight out of Adam Smith.

  4. Synoia

    limit issue to a fixed and finite quantity = Inherently deflationary
    Once everyone else realizes the superiority of cryptocurrency = Leap of Faith
    and the value of fiat currency will collapse = No settlement of taxes then?
    whether proof-of-work or proof-of-stake or whateverr = Energy Intensive
    …or whatever = Magic? Digging a ditch?

    How well read are these people? Have any of them read about MMT? Or Keynes? Or understand counter cyclic Sovereign spending?

    That in a trade deficit economy, which by definition is 50% of the world’s aggregate economies, the sovereign must balance the books?

    They desire deflation? So today’s private debts become more burdensome over time?

    Actions have consequences. Have they deeply considered their desires?

    Why not just return to the gold standard?

    1. dk

      My observation is that tech folk generally ignore energy and infrastructure costs of their activities (the base operational costs of the computational “ether” as a whole… which is huge). They don’t bear most of these costs directly, and disequitable displacements of value reach them as general economic instability they experience personally, which they do not associate with their own work activities.

    2. PKMKII

      The libertarian techbros who sing the praises of crypto are basing their view on two problematic biases. One, as thinking of money from the standpoint of people who already have a lot of it and not from a macroeconomic perspective. Two, that of money as being inherently a commodity, as opposed to an exchange medium. So they think, hey, if this commodity I’m holding increases in value (practically meaning, they can buy more stuff with it), then that means I’m doing better financially, which means if everyone had crypto they’d all do better! So they ignore issues like its effect on debtors, deflationary death spirals, and the necessity for a currency to be stable. Which also goes a long ways towards explaining why the emphasis has been on crypto as a get-rich-quick investment scheme, with the replacing of state fiat money as a more abstract argument.

    3. Wisdom Seeker

      Synoia, your claim that “limiting issue to a fixed and finite quantity” is “Inherently deflationary” is false, or at least rests upon a flawed assumption.

      A fixed quantity would only be deflationary in a world with expanding resources. The actual earth has finite resources. Until we succeed in launching new branches of civilization off-planet, there are inevitable conflicts between interest-based credit systems (which cannot remain stable without perpetual growth of the credit supply), and physics-based real-world economies (which cannot grow forever).

      The exploration of alternative methods of trading and payment suitable for a finite planet seems like a worthy challenge. I don’t think cryptocurrency is the answer since the scarcity is entirely artificial (the “solution space” for digital tokens is infinite, even if any given system has a finite limit). Also, the generation of the digital tokens is fundamentally a waste of energy.

      1. Synoia

        As the adaption of bitcoin spreads, demand drives the price up. Each bitcoin therefore affords the owner more purchasing power. A bitcoin purchased for $400 could purchase 20 meals at $20 each. Today that bitcoin is worth $1300 and can purchase 65 meals at $20 each.

        The fact that bitcoin has a finite supply (21M) assures that your purchasing power increases as long as demand is stable or expanding.

        Deflation, or rise in value of the “cyber coin” is built into the system.

        1. Wisdom Seeker

          Hmmm. I was not talking about the adoption stages of bitcoin (or any other currency), but rather the long term nature of the currency. The comment to which I replied was not referring solely to adoption either.

          In a stable economy one only needs a stable amount of currency. If the supply of currency increases relative to the underlying economy, that’s inflation. If it decreases that would be deflation.

          Taking your approach regarding adoption, one could just as easily argue that cybercurrencies are inflationary (or equivalently, doomed to eventual worthlessness), because there are an infinite number of possible cybercurrencies which can be constructed and they all compete with one another. While any individual “currency” might have limited supply, the overall supply of that class of token will inevitably grow. Bitcoin cannot be deflationary because if the tokens become too valuable, that will lead to the issuance of competitors. This is happening now. In fact, one suspects that the proponents desire state adoption of their scheme, precisely in order to suppress such competition and thus lock in their ever-growing digital “profits”.

          1. Yves Smith Post author

            Your premise is false, even if you are thinking only in terms of manufactured goods.

            You can have increased economic activity without increased resource use through efficiencies and productivity gains. We are massively wasteful plus companies tend not to want to be told what to do (in terms of switching to low resource-consuming options) even when there is no cost or even a net benefit. One famous example was a couple successfully sued McDonalds in UK to stop using styrofoam clamshells for its burgers because they weren’t biodegradable. McDonalds fought it tooth and nail, falsely claiming they had no good alternatives.

            When they lost, they started using paper containers. They did every bit as good a job of keeping burgers nice and hot and didn’t cost McDonalds any more than their styrofoam.

            Similarly, municipal water systems waste about 30% of their water due to leaky pipes. Most of them could be fixed very cheaply.

            And the mix of “production” can also change from high to lower resource consuming activities. More people in US cities are using bikes for short trips rather than cars or public transportation than five years ago.

              1. Yves Smith Post author

                They may want to bypass the tax man, but the IRS pays bounties for whistleblowers who turn in tax evaders. All sorts of people rat cheats out: ex employees, vendors who have been stiffed, ex spouses and lovers. And for the higher end ones, the IRS also takes notice when people’s lifestyles are markedly out of line with their reported income.

                1. Jan Krikke

                  Yes, but what most people seem to miss is that governments can’t survive if they lose control of money. They will react one way or another. China banning IPOs is just the beginning.

            1. Wisdom Seeker

              Yves, you make a good point, and I am wholeheartedly behind the idea that humanity needs to get wiser about using available resources more effectively with less waste. I would argue that technology on a finite planet will also have finite limits, although it will take longer to achieve them. But more importantly, I think you overlooked the idea that the same technological/productivity advances that lead to “increased economic activity without increased resource use” also lead to more efficient production of cryptocurrency tokens. So my point stands that cryptocurrencies are not inherently deflationary.

          2. Ro

            This framing does not acknowledge private sector net savings desires, and the paradox of thrift, and the potential for debt-deflationary dynamics in a financial economy. There is more to inflation/deflationary dynamics than full resource utilization, even as that aspect can create inflationary pressure (as can issuance of multiple ‘monies’, as you point out).

            Moreover, financial (GDP) growth is nominal – you can have nominal GDP growth solely on the basis of a services industry where people give massages to each other, or sell each other poetry they compose on the spot. Neither costs real resources or has a terminal limit to growth potential.

      2. jsn

        Per your last sentence, I suspect crypto currencies contribute more to global warming than they do to the real economy, they exist entirely as waste energy in a sector of finance that destroys more real wealth than it creates. They’re just an “innovative” new way for parasites to wrest plunder from one another while making pollution.

        While I agree with what I think you are saying about reconceptualizing the distribution of essential goods outside the market economy to make the most of the finite resources of the earth for all of its animal and plant inhabitants, within the confines the credit money world “outside the window”, Synoia is correct about the deflationary nature of fixing the quantity of money: it’s not a physical thing, it’s an agreement, tally of points, a score, and if you fix the score every time anything changes in the field being scored you have to re-negotiate the distribution of points across the field.

  5. djrichard

    Regarding the term: credit. You can still have credit in a 100% fractional reserve system, right? That would be a conventional savings and loan model.

    In which case, the issue isn’t so much credit as it is currency creation. In a fractional-reserve lending system, the currency is naked shorted into existence. Obviously crypto currencies don’t allow that, the point that is being made in this article.

    But the anti-fiat guys are also against government-based fiat, e.g. the Lincoln greenback. In many ways that’s even more anathema to them than fractional-reserve-based fiat. Go figure. Their fear seems to be rooted in what happened to the continental dollar and the french assignat. But the thing they need to be reminded of was that those currencies were counterfeited out the ying-yang by the Brits (and others) as acts of war. And of course that the continental congress didn’t have power of taxation to remove the continental dollar from circulation to recycle it.

    Anyways, back to fractional-reserve-based fiat. As mentioned, it’s naked-shorted into existence, just like how naked shorting of stocks work. For a good description of that, see But there’s one key difference. In naked shorting of stocks, the game works only if the price of the stock is continually driven lower, in which case a naked shorter can exit their position (pay off their loan of naked stock) with the same stock at a cheaper price. But if price goes up, then the naked shorter has the same problem as conventional shorters: whether to hold tight, or whether to blink and unwind their position. If the float of stock that has been naked shorted into existence keeps unwinding, then the “float” continuously shrinks causing the price to increase even more. So the people who exit their positions later are in for deeper pain. Same thing with fractional-based currency, except with one difference: there’s a mechanism to prevent that unwinding, there’s a mechanism to prevent that float from shrinking. And that mechanism is the Federal Reserve.

    So when there’s little-to-no-demand at the liquidity pump for new debt, no problem, the Fed Reserve will simply lower the cost for new debt. And if that’s not working, no problem, the Fed Reserve will simply buy up assets to not only prop up prices, but to put a “put” under the market. That the Fed Reserve will do whatever it takes to make sure that their pump doesn’t go in reverse (so the float of currency doesn’t shrink).

    During these times, it’s risk off, party on, BTFD. And that’s what we’re seeing now. Even in normal times it’s understood that the Fed Reserve keeps a “put” under the market. Since at least the 1960s, a tell on when to exit the market is when the yield curve is inverted: when the 13 week treasury yield > than the 10Y yield. It so happens the 13 week treasury yield tracks the Fed Funds rate. Assuming the 13 week treasury anticipates the Fed Funds rate (which is what I’ve seen as of late), this means the indicator on when to get out of the market is fully under the control of the Fed Reserve. It’s equivalent to them removing the punch bowl. So again, during these times, the market seems to rapidly converge to: risk off, party on, BTFD.

    What’s that about the market climbing a “wall of worry”? It’s a lot of bull if you ask me. The “wall of worry” is simply risk-off people talking their book. But to be honest, it’s the only thing that slows the inflation of the float of currency down, so it’s not as fast as what was happening in the Weimar republic. The Weimar is what you get when there no longer is a wall of worry – and the party is not open to just the big playahs, but to the little people as well. The Fed Reserve prevents this from happening simply by removing the punch bowl. And whoever gets out late (the little people) experience more pain.

    In the US today (and probably most western markets), the little people have experience enough pain that they’re more or less permanently in risk off mode. But the big playahs are still playing it. And for them, it’s risk on, party on, BTFD.

    BTW, I’m not a crypto fan. But I am a fan of 100% fractional reserve lending. And I’m a fan of government-based fiat as a way to grow inflation in a way which is limited to what’s needed based on population growth (rather than bubble growth).

    1. clinical wasteman

      Please accept cheap seats applause for the fractional fiat money-naked shorting analogy. But the … generative organ, so to speak, scandalously revealed in the naked short shock is: labor (hypothetical & therefore to be forcibly extracted in future).
      Minor detail: Assignats were notionally backed by confiscated feudal land, but even the revolutionary Committees of 1793-4 were packed with lawyers and therefore way more scrupulous about legal title than about, say, conscript war casualties. (Then again Robespierre immediately opposed the switch from social to geopolitical war, and never really changed his mind even while he and Saint-Just organizing defensive ‘victory’. Michelet seems to think R.’s revulsion at colossal waste of conscript/sans-culotte life was one reason for the Committees’ ruthlessness with the Girondins insisted on exporting war. And Cambon, more or less the inventor of the Assignat, told the post-Thermidor homunculi: “Do you want to know why I had to ruin you? I wanted social war. You made it political.”)

      1. clinical wasteman

        Apologies: please read “and clerical” into “feudal”. In case of objection, please contact my legal team: Mssrs. Clootz, Chaumette, Babeuf & Desmoulins, Gare du Nord.

      2. djrichard

        I’ll take the applause, even from the cheap seats, lol. Thanks!

        There’s an expression that Yves and Lambert use that I think fits here: code = policy. Well the same is true for the Fed Reserve. The original post notes how the crypto currencies are technology driven. Well at the end of the day, the Fed Reserve mechanism can be decoded as a technology solution as well. It works virtually the same way as naked shorting of stocks does.

        In which case, what is the policy going to be of the Fed Reserve? Well, it would be the same policy as somebody who is in the naked shorting business if there was a broker that stock shorters had to go to to borrow stock into existence. Remember, naked shorting is a fraud, but let’s run with it assuming there’s a business model there, because obviously the Fed Reserve has. So a broker in the naked stock shorting business would want to make sure that their business model doesn’t go bad for themselves, and therefore would make sure that they have repeatable business with their customers, that their customers can generate a recurring business model from it. If the customers’ trades unwind causing them to blow up, well that’s not good business. And so the same is true of the Fed Reserve. In my opinion, all policy flows from that.

        And that’s not only with respect to the Fed Reserve itself, but also with respect to the Fed Reserve’s channels to market as well (the banks). Their policy is to find new places for parking more and more debt. Which requires a cash flow to be pledged, which to your point is usually pledged by labor. Whether it’s in the consumer market (joe consumer pledging more of his cash flow to buying assets) or the corporate market (corporations pledging future earnings), which they can use as basis for extracting cash, oftentimes on the back of labor (especially when an LBO is involved).

        Alternatively, it can be parked in assets pledged by asset inflation, where debts are continuously replaced by newer bigger debts. But that’s only meant for the big boys, to keep the deflation monster at bay. If Joe blow consumer/ employee thinks they’re going to go independent and be playahs in these bubbles they’ve got another thing coming. Because it’s these wanna-be playahs that are foam for the runway when the Fed Reserve needs to take the punch bowl away. Fair is fair after all. The Fed Reserve wouldn’t need to pull the punch bowl away if the little people just stayed on their reservation.

        Which it so happens is what’s happening now, the little people are staying on their reservation now. Which means we have the goldilocks economy now don’t you know. So there’s no reason for the Fed Reserve to pull the punch bowl away. Yay! Or as they say on ZH, BTFD bi***es!

    2. HotFlash

      Whew! It will probably take me all week to look up these references, but meantime, may I say thank you to Yves and your erudite salon of commenters.

    3. todde

      Do you think there is ever a case for the monetary base to be shrunk, regardless of population growth/decline?

      1. todde

        I’ve often that interest free citizens loans would be a good way to match money supply with population growth.

        Everybody gets a loan when they are 18 or 21 at zero interest and then pay it back as an extra ‘tax’ over ten years when they hit a certain age.

      2. djrichard

        I assume the Fed Reserve would think that’s a no go.

        When we had the collapse in 2008/2009, I have to admit my mind-set was like Andrew Mellon’s during the depression


        That would have certainly shrunk the monetary base. There was a lot of discussion at the time about how much bad debt there was that needed to be cleared out. As Michael Hudson will say, “debt that can’t be paid, won’t.” So my take would be to let it go: let the weak hands lose, let the strong hands win. And then the inflation engine can start over again, with real organic demand for debt, in contrast to what we have now (which is closer to the zombie economy like what Japan has as we followed in their footsteps).

        There was a lot of argument against this in that there would be a lot of people on the streets. But I figured that that’s what the Fed Gov is for. But that would require a Fed Gov that was ready to step in in a big way. And the Fed Gov is leagues away from doing anything like that.

        I remember there was a poster on Marketwatch who went by FDRallOverAgain who speculated that Obama was being groomed for this very purpose, that he would be engaging in government spending on an FDR-scale to resuscitate the economy. How wrong we were, lol.

        1. todde

          There isn’t much of a fiscal policy anymore.

          As for what should have happened in 2008, I would think it would have been to put the banks in receivership and fund them only enough to remain solvent.

          But we have a horrible ruling class that didn’t allow that to happen.

  6. Mbuna

    There are a lot things in this post that I think are quite accurate but some of conclusions reached I cannot agree with. As a cryptocurrency convert who personally knows some experts in the field I can say quite emphatically that no one I know believes that “one” of the cryptocurrencies is going to become the global currency. To the contrary, all of us hold a similar view that most developed countries will have their own national cryptocurrency that will replace their current paper money including the US. I want to cite a podcast in which Dr. Pippa Malmgren (Presidents Council of Economic Advisors for Bush and Obama (?) talks about this in startling (to me) fashion. The podcast is short so please indulge me
    Similarly none of us are suspicious of credit per and se and I would suggest that Mehrlings conclusion about this attempts to put “cryptocurrency fans” in a box by default. The group he visited is far too small for his observation to have any general accuracy.
    I also take issue with this money view statement- “It is view developed not so much around a philosophical ideal but rather as a way of making sense of the operation of the world as it actually exists, outside the window as it were.” He is expressing a purely idealist view here and this is understandable because the real world proves he is in fact touting a philosophical ideal because it allows him to avoid the actual financial world reality that everyone has to deal with- corruption, manipulation, dishonesty and the simple fact that the financial system as it currently is simply doesn’t work for the vast majority. This statement “Cryptos fear credit,…” is simply appalling.
    (In comparison, I would suggest that Dr. Malmgren is a realist and Dr Mehrling is an idealist). I would like to suggest a couple of things for Mr. Mehrling (and a lot of other people too!)- have look from a different perspective (Simon Dixon CEO, Bank to the Future)
    and get out of your ivory tower environment a bit more.

    1. Jim Haygood

      [Mehrling] is expressing a purely idealist view here.

      That’s being charitable. Some of us would describe it as a purely expedient, status quo view: fiat currencies may rattle and carom like popcorn, with an unlucky few (Zim dollars, Venezulan [sic] bolivars) actually blowing up into oblivion. But There Is No Alternative — credit is a feature (despite its five-thousand-year history of periodic meltdowns and jubilees) and this is the best of all possible worlds.

      What credit junkies such as Perry Mehrling can’t admit is that our post-1971 plunge into the flamboyant depravity of “full fiat” was a last desperate doubling down on keeping our credit-driven Ponzi economy afloat. More and more debt produces less and less GDP groaf, with the past decade being the most pathological yet. But when you’re addicted to debt, all you can think about is finding the next fix and rigging your needle to mainline it — AHHH, all better!

      Bubble III is the last best fling before we go supernova into the Mehrling Meltdown.

      1. PhilM

        Mehrling is not a credit junky, Jim. He is an academic, not an advocate–a quick look at his linked piece and you can see that. He is describing the system as it exists, and pointing out that cryptocurrency is a new medium of exchange that is taking the place of gold: something that can work as conveniently as credit-based money, yet still have the virtues of gold, meaning it can be both a store of value and a medium of exchange, without being “credit.”

        Cryptocurrency is nothing short of revolutionary. The real question is whether it will survive the confrontation that Enrique describes above, the one with the same sovereign entities that destroyed the gold standard. See what China is doing now, for instance.

        1. jsn

          The relationship between power and money is given far to little attention, thank you for raising it again here. Money serves the powerful regardless of its type, and on the rare occasions when the powerful understand something of their power and have a modicum of humility to care for those who lack it, whether through fear or genuine caring matters not, money works for the rest of us.

          Those violence prone entities that defend the systematized human polyglots we call States, in who’s absence technology deteriorates quite quickly, will tolerate crypto games until those games threaten the interest of those defensive capabilities, at which point they go on offense until we’re all paying taxes again in the currency they choose to use to motivate us with. Life without government will be life without crypto-currency when the libertarians achieve their nirvana.

    2. Yves Smith Post author

      Your comment is substantially ad hominem. And you also straw man Mehrling. He made clear his comments were based on extended discussions with influential cryptocurrency promoters. and lawyers. The Chatham House rules remark implies it was at a conference or private gathering. The fact that others may have different views does not invalidate what Mehrling is saying. In context, his “global currency” remark means “reserve currency” since he refers to replacing the dollar. So your single currency comment is also a straw man.

      Moreover, Mehrling is the antithesis of your assertion that he is a mere academic. He knows vastly more about how payments systems work, both now and historically, than anyone in the crypto crowd, I guarantee. And unlike them, he also understands the macroeconomy implications. It is the crowd that you hang with that is blinkered.

      And you are

      1. Mbuna

        “He knows vastly more about how payments systems work, both now and historically, than anyone in the crypto crowd, I guarantee. ” Payments systems work until they don’t and there is a historical record of this discussed by Dr. Malmgren which is one of the reasons I cited her podcast. Additionally your above statement only further waves more “academic” stuff in my face. I stand by my assertion that his argument is purely academic. Dr. Malmgren is talking about real world solutions to existing problems. Dr Merhling does no such thing. I question who is blinkered here.

        1. Ro

          “Dr. Malmgren is talking about real world solutions to existing problems”

          Please. Bitcoin was launched with a screed against “fractional reserve banking” and fiat money, and the entire space has been dominated by attempts to get “beyond” the alleged flaws of “human” based currency systems by, to paraquote the Winklevii twins, “putting faith in mathematics” instead.

          In addition, almost none of the “solutions” proposed in the cryptocurrency space actually deal with the issues in the financial sector today. I agree that national government-issued cryptocurrencies are likely to be the future, but with the exception of a few players, like eCurrency Mint, the idea of a “state based cryptocurrency” has been anathema to the goals and vision of the cryptocurrency community.

          More generally, Yves is correct: most cryptocurrency experts are coders and/or financial market participants with little experience thinking deeply about the structured underpinning money, finance, credit, etc. They are typically more interested in why their fancy new product is “gamechanging” than why it is, in fact, closer to old wine in a new bottle.

    3. PhilM

      You have to read the link in his post to Mehrling’s background work to have any idea how wrong you are. He is anything but an “idealist.” He is providing an interpretive framework that is useful to construe and describe exactly how the systemic exploitation that this blog has documented for a decade manages to continue, and why it will continue to continue: because financialization is now how global society is organized–not merely economic activity, but society. You are no longer a social entity to the world, outside of your relationship to credit institutions.

      I give you Equifax. That’s not even a national disaster, it’s an international disaster, and it makes Mehrling’s point even crystal-clearer, if one needed additional examples of how financial relationships now actually constitute society. How is that “idealistic”? It’s truer and darker than a funeral bell for the civic virtues of the entire world.

      1. Mbuna

        I’m thinking there are differences in context and definition with both you and Yves here so I think it would be good for me to define what I mean by idealist and academic vs realism. So lets start with this sentence you wrote- “He is providing an interpretive framework that is useful to construe and describe exactly how the systemic exploitation that this blog has documented for a decade manages to continue, and why it will continue to continue:” The entire sentence and its meaning just screams “academic” to me because it does not promote any action for change. Your point about it being an interpretative framework simply means that you and (hopefully) he wishes someone else will be spurred into action by it and that is exactly why this is academic!!! For me someone who is a realist will at the very least discuss concrete changes and possible solutions and more than that act on those ideas and this is the difference between an idealist and realist in my book. Mehrling puts out ideas and unless he will foment change he will remain an idealist only.

        1. PhilM

          I’m sorry, Mbuna, but I think you are mistaken. An idealist, at least in current parlance, is someone whose naivete renders his work and thought too detached from real-world applications to be of use. That by no means applies to Mehrling. His work has many real-world applications. The fact that he leaves final conclusions and exhortations up to the reader and the world at large is what makes him a true teacher. It is, by definition, what makes him worth reading, in a world where everyone has to “take a side” and “give an order” and “propose a solution,” almost always in the service of some bandwagon ideology. In that world, there can be no objectivity, not even an attempt at it, because all thinkers are required to serve some cause or other. At its worst, that was the dynamic of “communist science” under Stalin: nobody was allowed to think independently of stated agendas.

          Another distinction you are looking for is probably “theoretical” versus “applied” research. Again, there is no room for criticism here. Mehrling’s work has validity in both worlds. If he could give advice, he would say, “buy Bitcoin, or Ethereum, or a basket of cryptocurrencies.” And sure enough–Goldman is doing that. Those idealistic guys! They’ll never get rich, eh?

          Not everyone who contributes does so with a placard, sandwich board, or protest march. The truly great work gets done first by people who think, who ask questions, present a way of thinking about things, and let people think for themselves in return. That is great teaching in the Socratic tradition. It’s why places like Williams, Swarthmore, and Amherst are rated, year after year, the best colleges. That kind of learning differs from indoctrination and training, which is what people who don’t go to small liberal-arts schools too often encounter. They think that, because they can learn to recite other people’s opinions, because they can chant and browbeat and recite the cant of the current political trend, that they are “realists.” In fact, they are useful idiots.

          Have you noticed that nowadays, every single human communication presented in the mainstream media is couched as an imperative, an exhortation, a command to think or feel a certain way? How everyone seems to want only someone to tell them what to do–to “promote action for change,” in your words? You see none of that crapified, enslaving idiom in Mehrling’s work, because he is thinking–not spending his time telling you what to think. That is what makes his work valid, and his speech trustworthy. In sum, that is what makes him, and people like him, worth listening to: because his product is exactly the opposite of the mindless (at best) or predatory (at worst) advocacy that is the great curse of this entire generation’s “communications.” Where action is critical, there is one great dictum: “if you don’t know what to do, do nothing.” It is clear that in politics and economics, right now, very few people in America actually “know what to do.”

          This blog abhors mindless advocacy: it stands against it in every post. I cannot speak for the population here at large, as my opinions do not reflect theirs in general. Yet, in my experience, people do not get much traction here, nor influence many other people, by suggesting that a brilliant theoretician who explores profound ways of understanding global change and presents his thoughts using accessible, perspicuous prose, is somehow not doing enough because he doesn’t tell you how to solve the world’s problems.

  7. PhilM

    This is great stuff. Congratulations to the site’s maintainers. Mehrling’s piece that is linked is also superb. And the comment chain is interesting: djrichard’s observations are pure platinum.

    At last, somebody doing the Polanyi thing to money. So much better than the way MMT is usually presented–it always seems to come with a spending agenda, trying to “defy the settlement constraint” by using the inflationary back door:


    (Mehrling, quoted from his linked article)

    The idea of cryptocurrency as the new gold is exactly right, in that there is, after all, still gold around, the good old-fashioned gold bug kind of gold. In Mehrling’s view, I gather, the gold standard had to go: it was constraining the financialized-society-pyramid that Mehrling describes at the top as well as the bottom. Commentary in the thread that certain cryptocurrency costs are externalized seem to me off the mark, as most of the costs of gold mining have been externalized for millennia.

    1. PhilM

      By “had to go,” I mean Mehrling believes (I think) that sovereigns had to dispense with it. Again, impressive how Mehrling is so detached; I think he is a historically informed philosopher of politico-economics in the tradition of Polanyi, which is really the highest praise I can give. Mehrling has the objectivity thing down, which only comes with profound historical study. It reads a bit like Tocqueville–describing how democracy is coming, whether we like it or not, so better to understand it before it hits you upside the head; and, all the while, striking a clear objective tone in describing what it is that aristocracies do better than democracies, and vice versa.

      1. Wisdom Seeker

        “Mehrling has the objectivity thing down, which only comes with profound historical study.”

        Disagree. Someone who had the “objectivity thing down” would be more careful in his writing. For instance, he would provide more context for his “two days of observations” – size of group? influence level of members? what makes this group a representative sample, as opposed to the filling for a strawman argument?

        Anyway, in my experience one cannot get to objectivity through historical study. Historical datasets are too sparse and rife with biases.

        1. PhilM

          Sorry to say this, Seeker, and it’s not personal, but you do not understand what historical study is. It is apparent that you have not done it, and probably you have not even seen it done.

          People who have studied and understood history at the graduate level, and possibly only those people, and likely only some of them, have any sense of the vast variety of human experience. The study of history is not by any means limited to the accumulation of a “dataset,” useful as that is. It is what one learns by trying to write history, not by reading it, that shapes understanding and appreciation of human activity.

          I stand by my advocacy of historical study as a unique tool for human understanding. History is about learning to sift biased sources in the search for some realistic narrative that explains how things happened and what is was like for the people at the time. To undertake that quest over and over again in the search for something like a truth that applies to all people, as manifested differently in a thousand times and places, with experiences values that were just valid for them as your experiences and values are to you, and yet completely different from yours–that is the study of history.

          I have to laugh at people who think their experience embodies “diversity” because they have a couple of different ethnic groups around them, some representative quota of ethnicities or sexes. That’s not diversity; that’s a bunch of different skin colors and languages from people who all live in the 21st century, and who therefore have broadly similar experiences and expectations of the world (unless they grew up in a box). All those rainbow people with differently-phoneme’d last names are using a cell phone: diversity, hah. To experience true diversity, read 30 top-notch scholarly narratives of different parts of the world before 1900, and correlate them with volumes of primary sources from the time. Then you will know diversity. That’s history.

          I don’t know why you expect some kind of scientific methodology in what is essentially a field-report such as Mehrling’s quick post here. It is not a master’s thesis, it’s a communique from an interesting venue; it is journalism as rendered by someone with superb understanding of the field he’s talking about. We, all of us here, were lucky to get this, which is why I am vociferously disputing the critics whose carping might lead this person to judge us not worth his time. He did not have to share his experience: he did so only because he likes to teach, I believe, because I know his type.

          1. Wisdom Seeker


            On the contrary, the study of ANYTHING is based entirely on datasets. I don’t mean digital numbers here. I’m talking about the input data that goes into the analysis.

            I believe most experienced historians – and I have read quite a bit though I lack a graduate degree in the subject – do understand that historical “input data” is very frequently subjective (or as I said above, “rife with biases”) and limited in quantity (or as I said above, “sparse”). It’s extremely difficult to draw objective conclusions even in the hard sciences. In a social science with limited and frequently non-objective data, it’s even harder. (In the social sciences, there are not that many time-tested reproducible objective results, even for living subjects who can be studied in real time!)

            Also, even if Mehrling had the objectivity thing down (as you put it), it certainly wasn’t demonstrated in his “field report” “quick post”. But no one is perfect all the time.

      2. aj

        By “had to go” he means that it was holding the nation back from achieving the goals it had set for itself. “Money” is an abstract construct that should rightly be used to forward other, tangible goals (like rebuilding infrastructure–*cough* Puerto Rico *cough*) Failure to do real, tangible, good things to improve society because we’ve decided to artificially limit something we made up in the first place, is the epitome of stupidity. Creating a technologically advanced means of doing the same thing, is just piling on more stupidity.

    2. Wukchumni

      One thing that gets all mixed up during the Gold Standard era, is that there were Gold Certificate banknotes, Silver Certificate banknotes, National banknotes, Legal Tender banknotes, Federal Reserve banknotes, United States banknotes, and one or 2 others i’ve forgotten, that were all circulating as legal tender up until FDR pulled the plug on all that glitters. The money wasn’t constrained by the amount of gold to back it up in terms of issuance, aside from Gold Certificate banknotes.

      1. Mel

        In my go-to book, The Many Panics of 1837, Jessica Leppler makes a point early on of mentioning how much paper was involved in running a gold-standard world economy. The fact is, the velocity of gold is not that high. It’s difficult to transport, only 25 years after Napoleon, trans-Atlantic shipping was still risky, and the consequences of losing a lot of gold on the trip across would be horrific. There was a lot of paper tracking where the gold would be, come the day it got to where it belonged; until that day, the paper had to be the de facto money.

  8. aj

    Slightly off topic, but I had the distinct pleasure of taking Mehrling’s Money and Banking course back in the early days of Coursera when it was offered for free (If I’m not mistaken I think they charge now so enter at your own risk). Anyone looking to gain a thorough understanding of the modern monetary system should look into it. Mehrling is a great teacher and knows a lot about the topic. I had previously read a lot of MMT literature–mostly from Randy Wray and Stephanie Kelton over at New Economic Perspectives–but Merhling filled in a lot of the gaps for me regarding the actual process of banking. Very enlightening. His course, or one like it should be required in any business school. Sadly they are not.

    1. Oguk

      +1 I am currently taking this course on Coursera (it’s still free if you “audit” or $50 if you want a Coursera certificate). So far I think his approach largely reinforces the MMT tradition (though he acknowledges both chartalism and monetarism as traditions we can learn from – one of his favorite frameworks is the swing between discipline and elasticity), while explaining the nuts and bolts of payment systems, eurodollars, risk swaps, money market and capital markets etc. He makes explicit in “the money view” what’s missing from most academic economics, that perfect liquidity is an idealization that doesn’t exist, and how markets are made in practice. I think it’s especially ironic to see him as an ivory tower academic. He may not be a perfect leftist, I dunno, who is, but I find his approach very helpful.

      I think Mehrling is right on about the central problem with cryptos, which IS the same problem as gold: it’s provides an inflexible (or insufficiently flexible) supply of money/credit, and running a national or international money system based on it will ultimately mean the rule of austerity. You don’t have to believe the system we have now is the best we can do to see that. Maybe crypto advocates see this and come up with something, but he (and I) am not seeing it.

  9. Jim

    In Mehrling’s “Financialization and its discontents,” he argues that the problem confronting social analysis “is not so much to find the social in the money grid–the money grid is already social–but rather to understand the dynamical operations of that grid on its own terms.”

    By the end of his essay he characterizes his money view (the linked institutions of money, finance and banking plus the processes of settlement and market-making) as the fundamental infrastructure of modern financial society.

    He then succinctly lists some opposing frameworks:

    “….a wide range of proposals for reform begin analytically from some conception of what money really is or (should be) and conceive of credit as a rather dubious superstructure built on top. Among those who identify the problem as coming from money, some dream of a world of essentially private money anchored in the real by means of recommitment to a gold standard, or maybe embrace a new digital Bitcoin standard, while others dream of a world of essentially public money anchored in the real through the taxation power of the nation-state. Among those who identify the problem as coming from credit, some dream of a private debt jubilee that would absolve private debtors of their obligations while others dream of what would in effect be a public debt jubilee, through helicopter money or monetization of outstanding public debt.

    Do the MMT advocates on this site agree with his characterization of public money anchored in the real word through the taxation power of the nation-state–as a dream or is it still simply a description of reality?

    1. JTFaraday

      “public money anchored in the real word through the taxation power of the nation-state”

      I agree with your feeling that something is not quite right here. Feels a little antique to me.

  10. SeanL

    I’m not convinced its debt aversion because the original tally ledgers on which the philosophy of cryptos/blockchain are based upon were debt ledgers. What ‘cryptonians’ are adverse to is inter-mediation and the possibility of a fractional reserve. They are also adverse to ‘three-body problems’ having a strict preference for 1-to-1 transactions. Essentially the idea of a bank doesn’t exist in a crypto-universe only exchanges – where there can be 1-to-1 trading of debt obligations like the old tally sticks.

    Interestingly (ironically?), inter-mediation and 1-to-n transactions are necessary/used to create anonymity.

  11. Wisdom Seeker

    I’m not a cryptocurrency owner or even a fan of the concept, but as a critique this article has a lot of problems. Thanks to Lambert’s nice link to “Logical Fallacies and the Art of Debate“, here are some of Prof. Mehrling’s logical errors:

    First we have the construction of the straw man:

    “A week ago I spent two days talking with a group of technologists and lawyers…” Representative sample, or not?

    “there was not consensus on the details” – so why does the remainder of the article proceed as though there was?

    “From this point of view, current holders/users of cryptocurrency are just early adopters.” – What about the other points of view, from the non-consensus opinions of the other members of the non-representative sample population?

    and again … “According to the theory, one of the cryptocurrencies will be the future global currency, replacing the dollar, but no one knows which one.” (1) “The theory” is the standing up of the straw man… What about the other theories, from the non-consensus members of the small group? or from the rest of the people thinking about the issue?

    “People who got in… at the beginning are all multimillionaires; early adopters of the future global cryptocurrency will be too, but which one will it be? That’s what the lack of consensus about the details is all about.” – Note how the “all about” claim reinforces the straw man, making it seem like there was consensus about the other details, just not about who would win the get-rich-quick race. In fact, as pointed out by other commenters, there are many other issues about which consensus is also lacking.

    Next the author sets out to demolish the first straw man… with yet another straw man, an idealization of today’s credit system:

    – Author neglects to mention the essential element and fatal flaw of financialism, which is that since no one works for free, every financialized “swap of IOUs” involves the extraction of a small slice for the credit middlemen (and women)… and thus is no longer “fundamentally” just a “swap”.

    “It is view developed not so much around a philosophical ideal but rather as a way of making sense of the operation of the world as it actually exists.” – except that by neglecting the fatal flaw, the version of finance just presented IS idealized. And it also somehow manages to perceive “the world as it actually exists” without the existence of all the bankers (not to mention scammers) who have made the business of “swapping IOUs” (for a small slice of fees) into a lucrative tax upon the genuine wealth produced by the rest of society.

    “In that world, the payment system is essentially a credit system, in which offsetting promises to pay clear with only very minimal use of money.” – and, apparently, no skim, no corruption, no identity theft, no fraud and no need for an expensive regulatory regime to prevent such minor flaws.

    “prices arise from the activity of profit-seeking dealers who absorb fluctuations in demand and supply by standing ready to take any excess onto their own balance sheet…” – thus presenting an antiquated, 1900s notion of the role of dealers. The presence of flash-crashes and other liquidity-starvation events in today’s actual markets shows that such “profit-seeking dealers with inventory” are too rare, relative to the vast number of tradeable securities that now exist.

    “One can imagine automating a lot of that activity…but one cannot imagine eliminating the credit element. Credit is not a bug, but a feature.” (1) There’s no need to “imagine” the automation of financial transactions, since that’s a trend that has been ongoing since at least the advent of the abacus, and has been intensifying over the lifetimes of nearly anyone currently alive… (2) Historically, credit might be a feature of the current system, but it’s also demonstrably a monster that, historically, too often (perhaps inevitably) grows too large and creates massive economic calamities. Credit drives the boom and bust cycle, and there’s good reason to fear it.

    “Cryptos fear credit” – the straw man reappears, and now with a nickname! With such a Pollyanna-ish (rather than Polanyi) view of credit and finance, no wonder the author can’t understand why “Cryptos” (ad hominem?) “fear credit”. As though no one else might have reason to fear it!

    “…operation of the existing monetary and financial system, as their disruption is intended to replace it with something better. But from a money view standpoint, it is the institution of credit that is the real disruptor,” – here’s a fallacious shift in meaning for the term “disruptor”. By definition the “institution of credit” cannot “disrupt” business as usual, since it IS business as usual. Though it can certainly be disruptive in other ways.

    “The answer, as Bagehot long ago taught us, is not to eliminate credit but rather to manage it” … (1) This is a case of Argumentam ad Verecundiam, appeal to authority. Bagehot might have been right, but he wasn’t right just because he was Bagehot. Why is the answer to “manage” credit, rather than eliminating it? (2) In this case a good case can be made that Bagehot was wrong, or at least overoptimistic. It’s demonstrably true today that credit is NOT being properly managed. At best, for a sustainable financial system, one is required (mathematically) to manage long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production. While frequently ignored, those terms are in the Federal Reserve Act for good reason. But one need only look at credit to GDP ratios, size of derivatives balance sheets relative to size of central bank balance sheets, or any other credit-sustainability metric see that credit is NOT being properly managed. Given the global scope of the problem, the perverse incentives at work, the fundamental limitations of human nature, and the wide array of failed historical precedents, one must doubt that it CAN be properly managed.

    ” and “Lombard Street has a great deal of money to manage”.” This extension of the Bagehot quote adds nothing to the argument, but does toss in another logical fallacy, Argumentam ad Numeram; appeal to numbers. It doesn’t matter how much money there is, if Lombard Street (and it’s sibling streets in other nations) cannot manage it all. In fact, while “a great deal of money” might sound impressive, “more” of something problematic is usually worse.

    Overall one can see that the entire piece is an Argumentum ad logicam, an “argument to logic”, which destroys the evil cryptocurrency straw man using the idealized credit-is-just-swapping IOUs straw man. But this argument to logic fails, because the existence of flaws in one straw man does not invalidate the much broader swathe of ideas seeking to rectify the obvious flaws of today’s credit system and its management. And one really wonders what those other “non-consensus” views were, and whether some of them have real merit.

  12. Tim


    Really? I believe in the usefulness of crypto-currency as a parallel non-liability form of money, another diversification, crypto gold as they say, but not to replace sovereign currencies, are the majority of cryptocurrency investors that nuts?

    1. Yves Smith Post author

      There is some diversity of thinking among crypto promoters. However, quite a few want it to be money (medium of exchange), and not just (effectively) crypto-gold, as in a store of value. I know they were set back (and pretended not to be) when the IRS ruled Bitcoin not to be money but to be an asset and therefore trading gains are taxable events.

      1. PhilM

        Yes. That is a huge deal. That’s the main way they keep gold down. Indeed, they tax gains on gold at income-tax rates.

        1. Yves Smith Post author

          I hate to tell you but this is not “to keep gold down”. The IRS also treats holdings of foreign currencies that way, except it’s way too hard to track at the tourist level so they don’t bother with them, just with traders and investors. This is utterly consistent with their stance on financial assets. If you invest in jewelry, as opposed to buy it as personal property and happen to sell it at a profit (trust me, virtually nevah happens since you buy jewelry at retail and sell it at wholesale, and most people are lousy at getting decent prices at wholesale to boot), you’d also be taxed on the gains.

          1. PhilM

            What’s more, I was even wronger than you are calling me out for. I was under the impression that gold was taxed at income rates, but it’s consistently treated with other collectibles in the capital gains category.

            It was a stupid but honest mistake–I think I read the bad information on a notorious website pushing gold back in the 2010 time frame and never bothered to correct.

      2. milesc

        Early stages, but a bipartisan bill has been introduced to treat Bitcoin/cryptocurrencies in the same way (i.e. transactions under $600 exempt –

        Of course Bitcoin is a global currency/commodity/whatever-you-want-to-call-it. US tax treatment does not prevent Bitcoin being or becoming money.

        Also, genuinely curious: though you do not seem to need it, and your oddly anti-crypto stance arguably would not attract it, were you or are you any nearer considering accepting Bitcoin or any other form of cryptocurrency in your fundraiser (even if indirectly through a no-brainer, very low/zero fee, zero effort payment processor like BitPay)? Has your own opinion softened at all over the years?

  13. Nathan Tankus

    A few general points. I’m genuinely perplexed by a lot of the opinions floating around here. Multiple readers seem to think that Mehrling has an “idealized” view of credit. idealized compared to what? Right or wrong Mehrling thinks he’s describing the system as it currently works. He certainly never argues that the credit system don’t break down. I think that readers are being exceedingly uncharitable to this blog post. Mehrling’s whole work is about how credit systems work and if you are unsatisfied with his answer you could at the very least take a glance at his blog which is linked above. In all honesty, if you think a one sentence reference to Bagehot is an “appeal to authority” you just don’t know very much about the history of credit debates or Mehrling’s work. Mehrling didn’t write this post with the Naked Capitalism audience in mind, he wrote it for his own so he’s assuming background familiarity with the general history of credit debates.

    In general, I’m bewildered at what exactly Mehrling’s critics are offering as an alternative besides “maybe technologists have secret good ideas Mehrling is repressing!!!!” (as an aside, Mehrling’s presentation is consistent with a number of other reporting on intellectual thought around Bitcoin including David Golumbia’s excellent book. It’s unclear why readers think this post is such a radical misrepresentation)

    Now there is an alternative to both the Bitcoin “full collaterialization” or “100% reserve” view. That alternative would be the massive and direct restriction of credit in the economy along with massive deficit spending by the U.S. government. but many of the same readers who are attacking Mehrling’s view of Credit as “idealized” are even bigger haters of “fiat money” (hello Haywood!). “Wisdom Seeker” doesn’t seem to have a high opinion of massive government deficit spending maintaining existing credit payment although that is less clear to me.

    It would be interesting to have that debate but as always with the anti-Post Keynesians among the Naked Capitalism comment section I never know exactly what’s being offered as a realistic alternative model of both how the world works and how it aught to work.

    1. PhilM

      Well, some are being uncharitable, but others, like me, are being effusively enthusiastic. If you please half the audience around here, you’ve won.

      While I am as frustrated with “the stupid” as everyone else is, I acknowledge that a good half the time, I’m “the stupid.” Reviewing the comments in this thread, I found it extremely stimulating and informative, and the responses to the outside of an academic environment, it is unusual to find such a thoughtful and balanced audience for a work. The rest is just the risk of putting anything at all on the internet. You could debut Tintern Abbey on the internet, and somebody would complain that it’s neglecting the scenery of western France, which is just as beautiful.

      1. Nathan Tankus

        Sorry I didn’t mean this to be a dig at the Nakedcapitalism commentariat as a whole! I even appreciate the anti-Post-Keynesian commentators who have gotten me sharper over the years. This was just a challenge to that small subset of those who comment (which is an even smaller subset of nakedcap readers)

  14. Ro

    As someone working in the legal regulation of digital currency space, a few links people may find useful:

    A white paper I wrote on the macroeconomics of digital fiat currency with eCurrency Mint, who have developed a cryptographically secure technology platform for a bearer-instrument, invisible ledger form of central banking digital cash:

    This technology has been tested in back-of-house central banks around the world, as has rolled out publicly in Senegal:

    For some background on the topic/state of the field:

    And in particular, JP Koning’s work:

    I’d also suggest this piece by Sarah Jeong on some of early cypherpunk history of the crypto movement, as well as the tendency of decentralized networks to develop quasi-centralized and systemically important mega-nodes, such as banks in the regular payments ecosystem, and exchanges in the bitcoin system:

    As well as anything by Angela Walch, particularly on the importance of legal fiduciaries (and their absence from many cryptocurrency narratives) in managing systemically important payments infrastructure:

  15. Kate

    Great article by Mehrling. He’s so good at explaining complex concepts in an easy to understand manner.
    I would agree with some commentators above that crypto currency is a massive waste of precious energy resources or in other terms our carbon budget. AFAIK crypto currency consists of two main components, the mining which results in a coin being created and stored in your digital wallet and the payments system which is a distributed ledger. The scarcity of coins that results from the algorithm is basically going back to the gold standard. Those days werent as hunky dorey with countries not being able to respond to financial crises as well. So I have no idea why the crypto crowd wants to go back to an older but worse system. As for the distributed ledger, one can see it basically being developed as an alternative to the current visa/mastercard oligopoly or to automate away clearing departments of large investment banks. I dont see cryptocurrency of any kind become the final means of settlement because as compared to its alternative, the fiat currency, its too expensive to create. Moreover, what’s to stop a credit system being developed on top of cryptocurrency? Its the excessive amount of credit that’s the problem, not the underlying means of settlement.

  16. Charles Peterson

    Inflation in credit money systems isn’t a bug, it’s a feature, and essential in keeping the system stable in the long run. Credit money serves multiple purposes, including transactions and tax paying, but also, real concrete investments in building real things, like houses and factories. Inflation is the essential way of bleeding off the malinvestment that didn’t go anywhere. It’s inhuman, costly and ultimately unproductive to have debtor’s prisons. Inflation is also the primary incentive that keeps things moving forwards.

    Digital goldbuggery is no better than the real kind. If there’s no fear of inflation, there may not be much incentive to take the risks that concrete investments always really require. So, people sit on their stacks of gold and nothing gets built. The net result of that isn’t inflation in the normal sense. The ultimate result of goldbuggery is collapse and hyperinflation, because in the end, since nothing of value is actually being built, everything collapses.

    All this bad religion stems from the foundational myths of capitalism, the supposedly individual choices and creations. The deeper truth is that everything is deeply connected and all production is social production.

  17. ChrisAtRU


    They are digital “metallists” … and as we all know:

    “Metallists are from Mars, Chartalists are from Venus”

    Good time to revisit Pavlina Tcherneva’s wonderful chapter on Chartalism.

  18. Patrick Dugan

    Good post, thoughtful framing.

    I think there will be a complementary role between state-fiat and crypto forms of money. A raft of crypto-eurodollars backed on the equity basis would be a buffer of resiliency for the debt-fueled economy, and the degree that debt does not outperform the inflation it generates, the reserve currency will appreciate, ironically feeding speculative profits to the speculators leveraging with money borrowed by going long the derivative that makes the crypto-eurodollar possible.

    Seems like hey, maybe a less toxic relationship than some of the crazier ones from my 20s, maybe more toxic – but a relationship.

    Maybe the person you meet after the dust has settled on the toxic relationship will come in the form of Mutual Credit, which is socially decentralized allocation of credit – with or without basket commodity backing – that will be verifiable and fungible thanks to blockchain transference.

Comments are closed.