2.  Given this (proper) definition of Capitalism, I doubt any Austrians, libertarians, or other free-market advocates would disagree that Capitalism is a dismal failure — due exclusively to the governmental component.

3.  A free market economy cannot exist when the blood source of that economy — its money supply — is owned by a centralized government, and any competition is strictly forbidden.

4.  When banks become “too big to fail” they are no longer private entities. When a government steps in to financially support an institution, it becomes — by definition — an extension of that government.

5.  Our current economic malaise is not a product of market failure. It is a product of government failure.

BitCoin is a fantastic idea, but its days are — unfortunately — numbered. The biggest problem I see is supply: Only 21 million BitCoins can ever be minted (and this is not mathematically debatable). As such, at some point in the very near future, demand is going to cause the currency to explode in price (relative to other currencies, commodities, et cetera), and when that happens, there will be no realistic way to use it.

Think about it: all it takes is one eccentric billionaire — or hell, even one risk-taking a-list actor, athletic super-star, or experimental super-model — to take an interest in BitCoin, and the party is over. Sure, for those of us holding it, it will be a boon, but how will other people use it? If one BitCoin goes for $100,000, how realistic is it going to be for you to buy a cup of coffee with it? What are you going to do? Pay .00001 BTC? That’s kind of awkward. And calculating the tip makes me feel a little queasy.

I have no doubt that someone is going to step up to the plate soon to make BTC transactions simpler and faster. And sure, that will help things a little. But for now, I see BitCoin as little more than a store-of-value — much like gold; yes, it’s valuable, but what can you do with it?

On another note, since my last article about BitCoin, there has been a tremendous amount of speculation on the Internet about my connection to its founder: Satoshi Nakamura. I want to take this moment to explicitly say that I have absolutely no connection to BitCoin — other than my curious fascination with its implications. It’s true that my book did predict something like BitCoin — years before it existed. But that connection is purely coincidental; I’m simply not intelligent enough to have come up with the real thing.

www.PacoAhlgren.com

Disclosures: Paco is long gold, Bitcoins, and oil. He is short U.S. Treasuries.

In 2009, an enigmatic figure known only by the (almost certain) pseudonym Satoshi Nakamoto invented an algorithm that would become Bitcoin. Here are the reasons why I believe the new currency (and its offspring) will destroy government fiat currencies forever:

1. The U.S. and other governments will soon make Bitcoin illegal. This is incontrovertible: the Federal Reserve is a semi-private institution whose owners benefit every time a dollar is used. They are self-interested human beings, and there’s no way they’re simply going to let a private currency destroy their monopoly without a fight. Alas, the U.S. can criminalize Bitcoin until the end of time, but it won’t stop anyone from carrying (or sending) it offshore, and using it places where it is welcome. Which brings me to my next point:

2. Never in history has it been possible to put all of one’s wealth on a digital storage device (laptop, cell phone, thumb drive, et cetera) and walk out of the country. You want to stop me from using Bitcoin? You better destroy all forms of digital storage, because that’s the only way you can prevent me from using the currency. As long as I can find someone willing to take dollars for bitcoins in the U.S., nothing is going to stop me from leaving the U.S. with my Bitcoins. Do you think you can criminalize domestic exchange of Bitcoins? Really? Isn’t that what you tried to do with Marijuana, Heroin, Crack, Cocaine, LSD, assault rifles, Cuban cigars, and prostitutes? How’d that work out for you? You really think I can’t get Bitcoins? Or some other crypto-currency?

3. Bitcoin is just the beginning. Remember Napster? Remember how everyone freaked out about music piracy? Remember how the government shut down Napster, and all its imitators? Did that stop anyone from getting free digital music? No, it didn’t. If anything, the government — in all its wisdom — made would-be file sharers more savvy; instead of using a centralized model like Napster, these users simply changed the rules of the game — going peer-to-peer. Now, instead of having one monster to fight, the government has millions and millions it has to kill. And it’s not working.

Another example? How about online poker. The geniuses in Washington decided to criminalize the online gambling industry — which was, by the way, pumping billions of dollars into a struggling U.S. economy. So what is the response? You guessed it. Bitcoin. Gambling sites are redirecting their energies to offshore sites where U.S. citizens can play poker to their hearts’ content — converting their dollars to Bitcoins, and funneling resources out of the country. Great job, Washington. This is what happens when sycophantic, fatuous morons get elected and assume the role of “thinking.”

4. Some would argue that Bitcoin is nothing more than an unregulated, private fiat currency — backed by nothing. I would argue much differently. Fiat currencies have, to this point, always been issued by monopolistic, bureaucratic governments. Even when those currencies were backed by gold — a policy that all but the rarest governments abolished decades ago — the supplies of such currencies were still subject to the whimsical decisions of only a few. More often than not, the currencies represented mounds of debt, and destructive monetary policies that kept up the illusory trend of growing asset prices through mild inflation.

Because Bitcoin is strictly peer-to-peer, however (pay attention, because this is important), it is essentially “issued” by every single human being who transacts in the currency. Only 21 million Bitcoins can ever be minted, and of those, less than half have been minted. What this means is, as the demand for Bitcoins increases, it will appreciate in value — making it a more realistic and accurate deflationary currency. In other words, Bitcoin is finite, and as demand grows, so will its value. And because it is decentralized, this means every Bitcoin is worth exactly what two interested parties agree upon, at the time of the exchange. The currency is owned only by the person who possesses it — there is no bureaucratic third-party government participating in the transaction by manipulating the supply. And what that means is that every single Bitcoin is backed by the assets and/or debt of every single participant in the market. That does not sound like a fiat currency to me.

So while the U.S. (and every other country) is up to its eyeballs in debt, its currency will eventually reflect as much — especially considering that the government can simply print as much as it likes. But Bitcoin is not represented by any such entity or policy. It belongs only to its users, and that is true “full faith and credit.”

5. What happens when the U.S. criminalizes Bitcoin? Won’t the price fall? The answer is yes, probably. But it won’t go away, because it represents something we’ve never seen before. Bitcoin is a way for people to move their wealth without any detection, whatsoever. Never before could  you put $1 million dollars on a cell phone and leave the country. But you don’t even have to leave the country; as long as you can find a bank somewhere that will accept Bitcoins — and there are a lot of them — you can send your money anywhere without the transaction being recorded. For the first time in a long time — maybe for the first time ever — your money can actually be yours. Governments can no longer tell you what you can and can’t do with your cash. They can’t make the rules. And that scares the hell out of them.

You can attach any sort of deontological morality stance to this contentious issue you like. But you cannot stop people from acting in their own interests, and I doubt very seriously the government’s ability to prevent people from hiding their money any way they can. Oh they’ll try, but this time, the authoritarians are out of their league — not because of a lack of sophistication, but because of a lack of resources. Simply put, the government simply does not have the jurisdiction or manpower to find and destroy Bitcoin; it’s too easily hidden, and extremely portable.

Some people say that the advent of the Internet is the biggest achievement in human history. That may be true. But as revolutionary as it has been, nothing is going to change the game like the privatization of currencies. Without control of the money supply, governments cannot dictate anything. This may be the purest form of democracy the world has ever known, and I — for one — am thrilled to be here to watch it unfold.

www.PacoAhlgren.com

Disclosures: Paco is long gold, Bitcoins, and oil. He is short U.S. Treasuries.

Your government would have you believe that prices — on the whole — declined for most of 2009, and have been increasing at only a snail’s pace since. The metric the government uses for determining this aggregate rate of change is the consumer price index — or the CPI.

And, as usual, your government is lying to you.The Federal Reserve doesn’t want you to know that the CPI doesn’t include to extremely critical items: food and energy. And why does the Fed not want you to know this? Because the Fed knows that it has been printing money and easing credit faster than any other government in the history of the world — literally. The Fed knows that the only way to postpone the dollar’s collapse is to create a measure of inflationary price movements that doesn’t accurately reflect what’s really going on. The government has chosen to exclude energy and food prices from the CPI because they claim these items are more volatile and sensitive to external influences. They claim that the only way to account for true price changes is to exclude food and energy.

Consider this excerpt from an article that appeared a while back in USA Today — just as the debate about coming inflation began to heat up:

“When consumers think of inflation, they often focus on prices of things they buy regularly, such as food and gasoline, which have been going up significantly in price this year.

“But when economists, including Federal Reserve officials, talk about inflation, they often focus on a measurement of price pressures called ‘core’ inflation. Core inflation excludes costs of food and energy goods, the very items that are the most visible prices for most consumers…

“The theory is that food and energy prices historically have been subject to wild swings. Therefore, to get a better gauge of the underlying trend, you should cut those items out.”

Now let me ask you this: why does the government’s primary metric for gauging inflationary price movements include the word “consumer” in its title, if the government is going to exclude the most important and widely used items by consumers in the economy? In other words, if energy and food are the things consumers purchase most — why would the government exclude these items from the CONSUMER price index?

That makes absolutely no sense. The Fed is acutely aware of the fact that inflationary price increases always manifest themselves first in the commodities a society uses most — today, those are food and energy. The Fed doesn’t want to admit that prices are increasing; such an admission would mean that all the absurd and destructive policies the government has been implementing over the last three years are absolute failures. But the numbers don’t lie, and the numbers are telling us that the policies are failures.

I’ll say it again: using the CPI as the source of its claim (excluding food and energy), the government wants  you to believe that prices fell for most of 2009, and have only been moving up slightly ever since. So let’s look at what the prices of food and energy have done during that time:

- Since 2009, corn has more than doubled in price.

- Since 2009, coffee has more than doubled in price.

- Since 2009, oats have more than doubled in price.

- Since 2009, wheat has more than doubled in price.

- Since 2009, pork has more than doubled in price.

- Since 2009, milk has almost doubled in price.

- Since 2009, orange juice has almost tripled in price.

- Since 2008, oil has more than tripled in price.

- Since 2010, rice has risen by more than 40%.

- Since 2009, soybeans have risen by more than 40%.

- Since 2009, butter has risen by more than 40%.

- Since 2009, beef has risen by more than 50%.

These figures are not open for debate; they are part of a factual public record — easily obtained by anyone with an Internet connection. So the next time you start to believe the shameless lies your government is foisting on you regarding inflationary price pressures, take a deep breath, get in your car, and drive to the grocery store. That should leave you with no doubt as to exactly how much inflation has taken hold of our economy.

www.PacoAhlgren.com

Disclosures: Paco is long gold and oil, and short Treasuries — all through leveraged ETFs.

Case in point: the housing market. It has become popular — among the most vociferous of the spoiled brats — to blame Wall Street for the housing woes that have driven our nation, and the world, into the depths of economic malaise. But Wall Street is nothing more than a tool the government used to mollify voters: we will guarantee loans, and we need you to foist these loans on the American people — whether they’re qualified or not.

Thus began the longest protracted era of easy money in American history. If you were breathing, you could borrow money to buy a house, and Uncle Sam stood ready to guarantee the loan. Suddenly every single spoiled brat with enough energy to extend a hand could own a home. And what, exactly, does Wall Street have to do with that? We’re going to vilify mortgage lenders because they did what the government gave them permission to do?

Today, a piece came out in the York Times, describing the federal government’s plan to reduce the amount of money it would guarantee on homes in wealthy areas. And the spoiled brats are furious. Here’s my favorite sentence in the article:

“…buyers and sellers are wondering why they should be punished simply for living in an expensive region.”

I had to read the passage several times, just to make sure I wasn’t missing a pronoun or a conjunction that would have dramatically altered its implication. But I hadn’t. Apparently, if you want an expensive home, and the government won’t guarantee the loan, you’re being punished.

Thomas Jefferson would be so proud of the nation we’ve become.

www.PacoAhlgren.com

Disclosures: Paco is long gold and oil, and short Treasuries — all through leveraged ETFs.

“As Richard Cantillon noted in his Essay on Economic Theory, enslaved humans usually produce for their masters about half the amount of finished goods that freed slaves produce for themselves. The great trick of the world’s elite may therefore have been to yoke the rest of us into debt slavery, without us realizing it, to feed their insatiable greed for power over the rest of us and to extract wealth from the rest of us, thereby avoiding Cantillon’s half-production trap, and thereby avoiding the need for they themselves to be in any way useful to anyone else.”

www.PacoAhlgren.com

Disclosures: Paco is long gold and oil, and short Treasuries — all through leveraged ETFs.