Response to Karl Denninger’s BitCon

Karl Denninger wrote a post back in April called BitCon, which was about why he believe that bitcoin won’t work. Jon Matonis offered a great response, but I wanted to elaborate in more detail on a few places that Jon may not have addressed.

Time preference and money supply

First let discuses time preference and social time preference. As Karl stated in his essay below:

“Time preference is the ability to choose to perform a service or sell a good now but obtain and consume the other part of the transaction for yourself later.  With a perfect currency time preference has no finger on the scale; that is, the currency neither appreciates or depreciates over time against a reasonably-constant basket of goods and services.”

Generally this is true. If we want an ideal currency for all economic functions we would want a currency that no matter where we are in time 1 unit of perfect currency will always get us 1 unit of the same goods and services at a later date. So one piece of gold will always get you 3 cows and a bull–today or in 50 years, it does not matter when the good are bought. This allows for there to be an unbiased time preference—that is, it does not matter if we buy it now, or later. The thing with Bitcoin is that it is a commodity that acts like money–so you are not using it for all of the same functions as money. Specifically, debt with a deflationary commodity is a poor idea considering that it is just going to become more valuable over time, thus increasing the real value of the debit over time. So bitcoin has a time preference that is skewed towards savings due to the restricted, fixed supply. Whereas, fiat currencies have a bias toward debt because of it’s inflationary features.

Now Karl seems to think that Fiat currencies violation of time preference to bias it towards spending (investing) today, rather than saving for later, is beneficial—and for his world view, it is. To the creditors of the world, and thus 95% of the entire economy, inflation is good because they can lend out money today, and know that it is going to worth less when it is repaid, so they may charge interest to make up for that. Furthermore, very large amounts of capital can be created using debt because it money that doesn’t exist yet today–your social time preference helped you make the choice that you would rather have a large amount of money today, in exchange for the promise that you will pay off more money that you borrowed overtime. The benefit of this model is that you are skewing time preference towards today, in the assumption that through lowing lending rates, people will borrow more money today, invest it, and thus spur the economy today and create more wealth later down the line when you are repaying that original loan. And because the government really wants growth today, they will smudge the interest lower than what it really is to try to spur the economy.

The issue with this is that the fundamentals of the market are the same–nothing has changed except for the capital within it. That means that people that are taking advantage of low interest rates are not actually investing smarter, they can just lose more because there is less interest to pay back over time–so their risk is lower, but the investment is not smarter. When the economy is already struggling, investors are not making smarter investments–they are simply making more risky investments, who’s risk has been mitigated for the time being by the government. This then causes for what we saw in the 2008 sub-prime mortgage crisis–lots of seemingly low-risk investments (because of governmental guarantees in the housing market) that are very profitable for a year or two, but then become disastrous when no one can pay.

This is all caused by the government’s hand in monetary policy that distorts the interest rates and lending, and thus time preference, which causes for poor decisions because of these distortions. 

Why bankers and government fear deflation.

Deflation can be worse than anything, and that is not because deflation is bad, it’s because deflation and debt together are very, very, very destructive. The deflation we saw in the 1930s was caused by the velocity of money collapse, and thus the value of the few dollar circulating increasing in value, increasing the value of all money—INCLUDING DEBT because the monetary base shrunk. So when deflation occurs your $400,000 mortgage is now getting more expensive over time, so you are fighting a losing battle. In these cases, many people give up, default, and pass the buck on to the bank. The bank now has a piece of property that is getting more expensive that it already cannot sell–and this is happening with many mortgage holders at the same time, and so the bank is put in a position where it will most likely fail–unless it is bailed out.

So the trade-off becomes that if we NEVER want deflation, particularly from the collapse of the velocity of money, than we will need to expand the money supply by the same ratio as the percentage drop in the velocity of money. Then as the velocity increases again, we can contract the money supply. Put some money out there, pull it back in later, and we’re all good, right? The problem is that the velocity of money isn’t exact—it’s a guesstimate. All of this expanding and contracting isn’t going to be right on the money, so there is going to be some degree of deflation or some inflation. Because the current monetary model favors debt by having inflation, the Fed world rather error on inflation, rather than deflation. The problem with this is that sucking in the money supply can create serious problem such as a spike in interest rates, which then means that current short-term debts can’t be serviced and we are into an economic crisis all over again.

Why governments and banks love inflation

Most people do not understand that money is a mode of exchange, NOT storage of wealth. This is why 50% of all stocks are invested in by the top 1% of wealth holders—because they understand this idea, and have money to invest—the other 99% does not. In fact, 3 out of 4 people in the United States today live paycheck to paycheck, and so biasing money to lose value over time is effectively a way for the government to create a hidden tax through inflation—or as Karl put it, to steal from you.

This creates a system where the poorest people have the least amount of opportunity to exit the poverty trap. Because of the educational and economic barriers towards investing—the poorest people cannot even accumulate capital to then invest, nor do they have the educational resources to do it well.  This puts them at an inherit disadvantage that makes the startling growth in the wealth divide much more expected. This is a very serious issue considering labor earnings are at an all-time low, corporate profits are at an all-time high, food stamps are at an all-time high, and all of the economic gains of the last 50 years have vanished in the last five. This is creating a system where the poor get poor and the rich get richer by design. It is getting so extreme that people cannot exit the poverty trap from generation to generation. And it has a lot to do with the money in their pockets becoming worth less every day.

As being a society that exists within this inflationary system has taught people to waste money and be consumers, rather than to save for tomorrow. This is because throwing your money away today on a shit investments, rather than to save and wait for the right opportunity to come, is less profitable because you are not allowed to have your own time preference. If you try to hold fiat money, you’ll simply watch it evaporate away from inflation. Damned if you do, damned if you don’t.

Now not only is this model reinforcing poverty, but it is also systemically unsustainable because of crony capitalism. When the money supply is expanded, some gets that new money for free, and those happen to be those who are closest to the Fed. These are companies like Goldman Sachs, HSBC, Barclays, and UBS just to name a few. Not only are these companies afforded extra-judicial powers that essentially make them immune to the law, but they are also given free money for it. I cannot think of a more perfect example of crony capitalism and corruption.



Karl continues his rant stating that the properties of a good currency should make it self-validating. As bitcoiners we can tell pretty quickly if someone sent us a coin or not—as we know how the software works, unlike Karl. Furthermore, we understand it is impossible to forge. It cannot be done—that is part of the beauty of the system. We also understand that the record in the blockchain is protected with cryptography, so getting proof that someone ‘owned’ the address is next to impossible–you’d need the private key. This means that security and privacy are features of the currency, rather than protections it needs to be afforded from the State.

New $100 bills. They cost a little more than 12 cents to produce.

This has a very, very, very important implication. It means that the total utility of the monetary system never bleeds it value from security risks, as the United States Dollar does. Bitcoin has 0% counterfeiting, while the U.S. has about $55 million worth of counterfeit bills floating around. This also does not factor in the cost of needing to replace bills, as the U.S. had to do with $100 bills because of Super-Ks. In fact, the new $100 bills cost about 60% more to produce, a direct cost that users of the currency must bear. Bitcoin will always expend 0 on fraud combating, whereas the U.S. and other Nation-States will always have to spend money on combating fraud.

Karl also points out how waiting for block confirmations currently takes too long, and hence it cannot work because no one wants to wait for 10 minutes. As true as this may be we are already seeing entrepreneur resolve this issue with green addresses, and other entrepreneurial developments. It is an issue, but it is being resolved by market forces. This is in addition to that all of the points that Karl makes about double spending can just as easily be applied to a checking kiting. People can write several checks from one account with no money, and because there is time between when the check is cashed, and when it clears the account, they are ‘double spending’. And just like with banks, as much as an issue as check kiting may be, several procedures have been put in place to mitigate it as much as possible.

State-sponsored theft and terrorism

Karl believe that State-sponsored theft and terrorism is a good way for the economy to work. Several times throughout the article he lets it be known that he thinks anyone who evades the tentacles of the state for any reason, deserve to have violence inflicted upon them, their wealth stolen from them, and their liberty seized from them. Unlike Karl, I understand that the State must justify its power—Power does not justify the State. Simply because the governments can ‘legally’ threaten me with death for refusing to use their shit currency, does not mean I should use their currency. Quite the opposite—I should question why they need to use violence to make me use their currency.

Here is the difference between myself and Karl: I know that violence is wrong. Period. Karl believes that it is justified when it comes from the Fist of his Master, The State. Men like Karl do not need to understand why the State is all-powerful—they simply believe it and lick the boot heels of their oppressors, without even a thought towards if what they are doing is right, wrong, or otherwise.  These are the same men that will say nothing when people are being dragged to the gallows. They are the cowards that enable The State by refusing to acknowledge that they can refuse participating in deplorable, detestable, disgusting, and illegal acts.

The panoptical world that Karl lives in is so powerful that he cannot even see that societies exist outside of the state, and they are growing rapidly. In fact the stateless economy, also known as the black market is the second largest economy in the world with more people participating in it, than in the ‘official’ markets. It also poised to grow faster, and more robustly, and include more people than any other economy by 2020. Karl won’t even see this as being legitimate economic activity that could have a use, so he just rejects it, as he rejects the idea of non-violent currencies.

Karl is so concerned with money laundering and illegal transactions that he fails to see that these are concepts made up by The State, for the State’s benefit. A transaction can’t be ‘illegal’ in and of itself—it is just a transaction. Same with money laundering, it is just the movement of money, nothing else. Karl doesn’t even think about this, the State says it’s bad, and Karl says yes.

This is the problem with many experts like Karl. He would rather tell you how it is, while dismissing the facts, rather than to have facts explain what is occurring. Instead of acknowledging that bitcoin is a very real currency (because it can be used for real exchange todayand has been for years), and that it is functioning despite being stateless, he simple dismisses it. No explanation required if you just shove your head in the ground.

Ponziing and Preference

Karl also points out that early bitcoin adopters are rewarded the most like a pyramid scheme. This is true, but this is how technological innovation works! Someone invents superior technology that outdates the old, then they create a business destroying the old model; this is how Apple, Facebook, and Google all became successful—by creating economic efficiency that outdates the previous model. Furthermore, Karl forgets to point out that in state-based monetary systems, those closest to the state, profit the most despite doing nothing to earn it. They just lobby and then take their 5,900% to 77,000% return on investment in lobbying.

Karl continues on his diatribe with nonsense about entropy. In seeing that bitcoin is a successful currency with deflationary features, the entropy that Karl speaks of is simply part of the deflationary aspect. In fact, most bitcoin have never been moved, or are ‘lost forever’, and yet bitcoin is still working as a currency and storage of wealth.

One of the points that really grates on me is this:

“the benefit of seigniorage comes with the responsibility for it as well, and it is supposed to be bi-directional.”

Yes! This is 100% true and why bitcoin is succeeding.

The federal government benefits from seigniorage, which many people in this country do not like, and so they are choosing to disengage it. There is punishment for not using the dollar, so until recently there has been no opportunity to compete with the governments monopoly on currency. Until now.

Government have not responsible managed our currency and economic system, and people are no longer trust the government and are opting-out of their monetary system. That is a choice that people can make because they can avoid the Fist of the State coming down upon them through the pseudo-anonymity that digital currencies offer.

People are making this choice because they no longer trust their governments–people see them for the tyrants that they are. Again, and again, and again, we see that government lie to their populations about how the money supply is managed. And again, and again, and again we see inflation destroy the middle class of nations around the world. How many times must they reduce us to absolute poverty and despotism until we realize that is just what States do. Steal from the weak and give to the powerful—that is what they do.


Karl Denninger is a statist who can only see the world from that perspective. He cannot even imagine that people could be intelligent enough to organize outside of the state and create a monetary system that is far superior to anything the state can provide. This is because of the natural functions of the state, and what it does. Karl believe in that vision, I do not.

2 thoughts on “Response to Karl Denninger’s BitCon

  1. I was planning to write a response to him, but I was going to wait until one year from that post.

    Response would consist of a graph of the exchange rate with arrow pointing to the exchange rate at the time he wrote it ($92.70)

    I wonder if we’ll be over $1000 by 2014-03-31.

    • Either way, it’s going to be embarrassing later on that he has that out there. It reminds me of Krugman’s piece about how the internet would have no impact beyond that of fax machines.

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