Physicist proposes huge walls across Tornado Alley (Wired UK)

Physicist proposes huge walls across Tornado Alley (Wired UK).

Probably one of the crazier ideas I’ve come across these days. But for the sheer lunacy of it, it’s worth sharing.

Tao, from Temple University in Philadelphia, unveiled his proposal at the American Physical Society meeting in Denver. According to his analysis, the walls would slow the movements of air in the region enough to prevent tornadogenesis.

“If we build three east-west great walls, one in North Dakota, one along the border between Kansas and Oklahoma, and the third in the south in Texas and Louisiana, we will diminish the threats in Tornado Alley forever,” he said. The walls in question would be 300 metres high and as long as 160 kilometres.

More here

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Starbucks in China, or how reading the Atlantic can make you dumber

To say that I’m no expert on China is a grand understatement. To be honest, I have no clue about China at all, at least no more than your average white Canadian middle-class schmuck who thinks that nee-howing the hostess at the local Emerald Palace is the apex of worldliness. I can probably find China on an unmarked world map with fair accuracy, and I know that Beijing is the capital city, but beyond that – sorry.

So, having that cleared up, I will now proceed to call bullshit on a cute little story that appeared in the Atlantic just a few days ago (and two days earlier in the Wall Street Journal), according to which a Starbucks grande latte costs about $27 in Beijing. Once the price is adjusted for national income.

Before I continue, I want to point out that the original WSJ article was quite good. It lists a number of political and economic reasons why coffee in China is so relatively expensive. That was interesting. And informative. I expect as much of WSJ reporting. Had I read only the WSJ article, I wouldn’t have bothered with it any further.

However, the Atlantic article was bad. Really bad. In fact, it was so bad that if you have read it, you are currently a little dumber for it than you were before.

Let’s take this step by step.

According to the Atlantic’s Matt Schiavenza, Chinese per capita income is about $7,200, while a cup of name-brand hot milk with a shot of overly bitter coffee costs $4.80. Since US income per capita is about 5 1/2 times greater, Mr. Schiavenza multiplied the price of joe by 5.5 and – voila: we have $27.

That’s cute. But it’s also wrong.

I have no idea where Mr. Schiavenza has his numbers from. Seriously. No idea. According to the World Bank, Chinese GDP per capita in 2012 was $6,091, not $7,200 – as claimed by Mr. Schiaveza. The funny thing is that the earlier story in the WSJ pegged the average national income at “about” $7,500. I have no idea where that number comes from, either – but it seems obvious Mr. Schiaveza felt uncomfortable with it, and reduced it by $300. I have tried to find the source for either of these numbers. I really tried. I even went to Wikipedia, which lists nominal GDP per capita according to three different sources, but none of which come even close to $7,200 – never mind $7,500. I then went to the Wikipedia page on “per capita income,” which lists a bunch of additional measures, such as GDP (PPP) per capita, GNI (Atlas Method) per captia [???], and GNI (PPP) per capita, but those numbers are totally different again.

If any of my handful of readers could point me to where the WSJ got its numbers from, and which source Mr. Schiavenza used for his article, I would be truly grateful. Because, for now, I’m utterly mystified.

Ok, moving on: according to the World Bank, US GDP per capita in 2012 was $49,965 – a whopping 8.2 times more than China’s middling $6,091. Which means that Starbucks grande lattes in Beijing cost the equivalent of $39.38, not $27. Which means the Chinese must be even crazier than either journal suggested.

Ha, those weird Chinese!

But, wait a minute. China is a really big country. I mean, really big. It has 40 times more people than Canada – and since nobody knows how many people live in Canada, that’s about four times as many as in the US. And it’s also really large, just a smidgen bigger than the US of A – including Alaska and Hawaii.

And just like in Canada – or the US – not everybody in China makes the same money. You think income inequality in the US is bad? Well, it is. The top 10% of Americans make about 16 times more than the bottom 10%. But in China – they make almost 22 times more. And that’s if you believe all the high-rolling Chinese report their income honestly.

The top 10% of China are about 130,000,000 people – that’s more than four times the population of Canada. Try to picture this: four times as many people as live in all of Canada constitute the top 10% of income earners in China.

Or try this one: two years ago, there were more than a million millionaires in China. China has more billionaires than Russia. And only the US has more billionaires than China. Ok, almost four times as many. But, I think you get my point: there are a huge number of really, really rich people in China.

Even more interestingly, there are a number of cities in China where people make good money – even by US standards – on average. Measured by Purchasing Power Parity (look it up), average income in 2011 in Beijing was 19,854 – about the same as in Pensacola, Florida. And there are at least four Starbucks in Pensacola – for about 52,000 people. Beijing has maybe a dozen – for 20 MILLION.

Average income (PPP) in Guangzhou is about $23,700, about the same as the Fort Collins–Loveland, Colorado Metropolitan Statistical Area (damn you, United States Census). Fort Collins has about 147,000 people and just about a dozen Starbucks. Guangzhou has about 10 MILLION people and about a dozen Starbucks.

Start seeing a pattern here? If not, let me help you out: there are Chinese cities that have more people than most US states, but have fewer Starbucks in absolute numbers than almost any fourth-rate US town – there are more Starbucks in Detroit than in Beijing.

In China, there are about 850 Starbucks cafes. In the US? 13,279. 16 times as many. But it has less than a quarter of China’s population. So, while in the US, there is one Starbucks cafe for 23,453 people, in China there is one Starbucks cafe for 1.56 million people. That means that, per capita, the US has 68 times as many Starbucks cafes as China. Even if you adjust this number for income, that is: divide the excess number of Starbucks cafes in the US by the income ratio (8.2), the US still has 8.32 times more Starbucks than China per capita of people who make about the same amount of money.

Wait… this is interesting…

Starbucks coffee in China costs about 8 times more than in the US, relative to average income. However, there are also only about 1/8 as many Starbucks in China for every consumer with the same average income as an American. This means that if in the US there were as many Starbucks as in China, relative to population and income, there would be only about 1,600 Starbucks cafes, not 13,000. Or put differently, Starbucks would have to have at least 7,000, not 850, outlets in China before reaching the same level of outlets relative to the population that can afford going there. And for these people, the cost of Starbucks coffee relative to their income is the same as for Americans.

See, all it took to figure out that the entire argument so far was bullshit is a few minutes on Google, and a pinch of logic.

Which Mr. Schiavenza clearly lacks, or else he wouldn’t have written this howler:

With the rise of e-commerce—and more frequent foreign travel—Chinese consumers have begun to feel that they’re paying too much for simple pleasures like a cup of coffee.

Never mind the fact that Mr. Schiavenza provides absolutely no evidence for this change in consumer opinion – other than his expat friend. What I would like to know is this: what on earth does e-commerce have to do with coffee? When is the last time you ordered your grande no-foam soy latte through Amazon? And how likely is it that your average globetrotting, coffee-sipping nouveau riche Chinese will spend time exploring cheaper coffee alternatives while in New York, London, Paris, or Frankfurt?

This is just a stupid argument.

But, there’s more.

Here’s where it gets tricky, and here is where the Atlantic article really went out of its way to make you a little bit dumber.

I’ll walk you through it.

Schiavenza writes:

Most cities in the country have coffee shops that provide a roughly similar cup of coffee—and similarly comfortable atmosphere—at much lower prices. How does Starbucks make it work?

I doubt this. In the original WSJ article there was a chart – also included in the Atlantic – that broke down the various cost factors for Starbucks’ coffee:

Notice how almost all these costs are outside the control of Starbucks? With the exception of the profit margin – 18% – I don’t see much room for significant cost reductions if you wanted to run a coffee store with similar atmosphere and quality coffee. Where would you cut, dear reader? The rent and store operating expenses? There goes the atmosphere. The raw materials? There goes the quality.

I really would love to see those places in Beijing and Shanghai with “roughly similar cup of coffee—and similarly comfortable atmosphere—at much lower prices.” Having lived in, and visited, a number of major cities in North America and Europe, I have found that if you want a really good cup of coffee in a nice atmosphere, you pay about the same as you do at Starbucks. You can get cheaper, but you’ll compromise either on the atmosphere or the quality of the coffee. I have had excellent coffee at highway rest stations in Germany, though you really can’t compare that to a well-run Starbucks in terms of atmosphere.

But what does our Atlantic writer provide as the real reason?

One major issue is culture.

Ah… yes… That mysterious Chinese culture. Of course. Let’s see how that goes:

Since the Chinese economy opened up to import products in the late 1970s, these goods acquired a certain cache with image-conscious consumers. “Traditionally foreign products were regarded as better-made, higher-status, and simply nicer,”

I may be going out on a limb here, but I don’t believe that back in the late 1970s the idea of Western products being of better quality than Chinese products was much of a stretch. Considering the Chinese had just gone through decades of social upheaval, wars, and communist mismanagement – it would have been shocking if Western products had not been of better quality. That’s not a weird Chinese culture thing, that’s an economic development thing. Countries with lower levels of economic development generally produce products of lower quality. That’s almost a tautology.

Why am I belaboring this point? Because I’m ticked off by the implicit presentation of the Chinese as stupid dupes. Wanting better products is not some weird Chinese cultural thing. It’s a universal human thing. You work hard for your money. You want to spend it on things that give you as much utility and pleasure as possible. Europeans are like that. Americans are like that. Well, except for those who ‘buy American’ out of principle. That’s just dumb.

In any case, let’s move on:

Fei Wang, a Washington, DC-based consultant who grew up in Wuhan, told me. “A person’s social standing was defined by the objects they own.”

Oh – fascinating. Those weird Chinese… defining their social standing by the objects they own. Amazing. Tell us more about those exotic strangers.

Far from acting as a deterrent, high prices actually enticed customers who wanted to show off their new affluence; put another way, purchasing a good like a cup of coffee at a premium was a good way to obtain “face” in business or personal relationships.

Ah… that mysterious Chinese concept of “face”. I’m kind of disappointed the scare quotes around the word weren’t amplified by including 面子 in brackets. Because in the US or Canada, nobody would even think about impressing a business partner or anyone else by inviting them to a fancy restaurant or coffee place. No, here, in our rational Western society, we don’t care about such superficiality at all.

And Starbucks had the good fortune of entering the country at a time when coffee drinking became fashionable among hip, young Chinese consumers.

What a coincidence. How fortunate for Starbucks they just happened to enter  the Chinese market when the Chinese started to take a fancy to coffee. What a lucky, lucky company.

Please excuse me while I smack my head on my desk.

There. Better.

Eventually, though, Chinese customers may decide that a latte is just a latte—and the no-name place down the street is more than good enough.

Right.

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How much Electricity does Solar Power generate?

I’ve spent quite some time and effort on calculating the space requirements of wind power installations during my time at the Canadian Nuclear Association. The fruits of my labor can be found on pages 13 and 24 of the Canadian Nuclear Factbook (the numbers are actually not quite correct, they greatly favor wind by assuming a pretty unrealistic utilization rate of 25%).

However, calculating wind is easy. Turbine manufacturers are more than happy to post the capacity of their machines online, and there’s also a lot of data available on the productivity of various wind farms, both in the EU and North America. The rest is simply geometry.

Solar power installations are trickier. There are far more variables in terms of the technologies used and the local geography. Also, solar power manufacturers seem far more coy about the generating capacity of their products, at least as far as their websites are concerned. I think the reason is that the technology simply isn’t that straightforward.

However, there are the occasional nuggets of good data that can be used to extrapolate some of the data I am interested in. For example, in this recent post by the US DOE, we find the following data:

Mesquite Solar 1 taps into 300 days of sunshine each year to generate 150 MW of clean electricity — enough to power about 30,000 homes.

Let’s break this down:

According to SW Energy, annual electricity consumption for per household is just above 11,000kwh. www.swenergy.org/publications/factsheets/AZ-Factsheet.pdf

If this facility can provide power for 30,000 households, it must generate at least 330,000,000kw/h annually.

Since the anticipated output of Mesquite Solar 1 is to be  about 330,000,000 kw/h, this means that even in an ideal location like the Arizona desert, a solar power facility can be expected to operate with at about 25% utilization.

 

 

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This & That

_DSC0186_DSC0026Ottawa River InukshukSpiekeroog EveSpiekeroog Shells 2Baumtroll
Spiekeroog Shells 1Norden TreecoupleRusted ChainFading Rockssun through leaf
leaf on leaf

This & That, a set on Flickr.

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Wind or Nuclear?

One nuclear reactor generating about 1GW of electricity per year requires about 1 sqkm of space, including the facility, and a safety zone. It provides electricity for 700,000 people (assuming 13,000kwh per year per capita).

To generate the same electricity, you need at LEAST 4,375 wind turbines, and an area of 325 sqkm. That’s assuming some very idealistic factors about capacity factors and availability. The more wind you have in the system, the more windmills you actually need per unit of energy required.

Let’s assume 320 million Americans: you will need at least 460GW electricity per year. If you were to provide that electricity exclusively from wind, you would need about 12.7 million turbines, and 952,000 sqkm of wind farm (the capacity factor at this rate of wind penetration needs to be at least 25, probably more, but let’s be generous) – about 10% of the total land area of the United States. Or an area almost 30% as large as India.

The material requirement for each of these turbines in terms of concrete, steel, rare earth metals (for the generators), the amount of roadways for this wind farm, the amount of labor, supplies, etc. etc. to keep the farms in good shape and updated is absolutely staggering. I don’t have the numbers for that, unfortunately.

Total cost, at $1.5M per installed MW (current numbers, which would actually increase if demand for wind turbines were to go up significantly): US$17 TRILLION

IF you were to provide the entire supply of electricity with nuclear reactors, you would need approximately 700 reactors at 1 GW each. Space requirement: approximately 800 sqkm – less than 1% of what is needed for wind. You would also need orders of magnitude less supplies, infrastructure, or labor.

Let’s assume a 1GW nuclear reactor costs about $2.5 bln, or $2.5Mln for each installed MW. Total cost: $1.4 trillion. About 8.4% of what the wind project would cost.

Anybody still think wind makes sense?

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Tree of Life

I think I have made up my mind about Tree of Life – it’s a good movie. I’m not sure yet that it is a Great Movie, but it certainly is a Good Movie. It’s visually beautiful. And from what I have read, that beauty was accomplished with almost no CGI, except for one scene involving dinosaurs, and even that somehow managed not to be stupid (I can’t think of a movie with dinosaurs that wasn’t laughable).

There is almost no dialogue. Some of the best scenes don’t involve any words at all. The torrent of mixed emotions and confusing thoughts running through the head of a young boy as he seriously contemplates murdering his own father is conveyed by nothing more than effective framing and to the point facial expressions. The traumatizing breach of trust between two brothers is beautifully foreshadowed and then realized without a single word being spoken.

The visual metaphors are clear, but not heavy-handed. Malick is not beyond using conventional movie tools, but in his hands they do not feel cheap and manipulative. The soft light of the scenes set in the protagonists memories make sense, conveying not so much the wistful adulation of the past, as they are meant to underline the uncertain reliability of childhood memories.

Flashbacks are too often an easy cheat for mediocre storytellers who cannot think of a better way to flesh out the inner life of the protagonist. But Malick doesn’t use flashbacks to explain the actions of his protagonist in the present. Jack’s adult self (Sean Penn), whose childhood is at the narrative heart of what little there is of a story, doesn’t do much more than ride up and down an elevator, walk into a meeting, talk on his cellphone, and look at a tree between towering high-rises.

None of which matters much, accomplishes anything, conveys any tension or expectation, and all of which could be done just as plausibly by somebody whose childhood was free of any worry, and whose relationship with his father was cozy and warm. (If Malick has anything to say about our childhoods , it is probably that as long as we weren’t beaten to a pulp on a regular basis, sexually abused, or caught up in a warzone, we’re probably going to be alright and turn into normal functioning adults.)

The banality of the present day in The Tree of Life is probably not accidental – all the drama, tension, and even beauty seems to be part of our past, and rather than being a precise recollection is more the result of personal myth-making. It is unlikely that Mrs. Obrien (Jack’s mother, played very beautifully by Jessica Chastain) was as quiet or demure as Jack remembers. At least one of his memories show that she was quite capable of standing up to Jack’s father (Brad Pitt), though Jack can’t hear what they are saying to each other, and seems not too interested in finding out. As if children ever really care why their parents are fighting – it’s not what matters to them.

The most curious scene of all comes towards the end, and here Malick is far less clear as to where reality ends and imagination begins. Are we witnessing Malick’s personal vision of life after death? Is Jack simply allowing his thoughts to drift into the weird fantasy world where everything that’s bad is washed away, and while hardly a plausible paradise, it nonetheless provides some kind of wistful comfort?

Since Malicks timing is so spot-on throughout the film, the overlong, overly repetitive structure of that scene cannot have been a slip of judgement. I’m not entirely sure what it was meant to convey, but maybe that will reveal itself on a second viewing.

The end of the film neatly closes the visual circle, with glorious imagery and beautiful sounds. Life will end, eventually. Our species will pass away somehow – just like the dinosaurs before us. Strangely enough, it does not feel depressing at all, at least not to me, and I generally resent this particular aspect of reality. Instead, it feels alright. Just the way it should be, and not because humanity is damned and deserves no better, but simply because that’s the way it is.

What’s also quite surprising about the Tree of Life is the music. Music is normally the bane of movies. Too often, it points out the obvious. Weeping strings when one should be sad, pounding bass when one should be tense, shrill disharmonies when one should be afraid. Most directors seem not to have enough faith in either their directing abilities or the intelligence of their audience to let the logic of the story and what is on the screen determine the emotional response. Yes, music is necessary to set the mood – that’s just how our emotions seem to work – but like soy sauce on sushi, there is a point at which it becomes too much and assaults our senses, rather than stimulate them.

The music in Tree of Life is big. It’s powerful, it’s dramatic, it’s emotional. But oddly enough, it never feels too much. It works with the images on the screen, and even thought it is often very loud, it always feels just right. And in a few brilliant scenes, the music tells the story in harmony with the images and actions of the people we observe. I can’t think of many directors who have been able to work with music as effectively as Malick does in Tree of Life. Maybe Leone or Kubrick, but to compare Malick’s use of music in Tree of Life to either of them does injustice to all.

And as for commentators who compare Malick’s cinematography and narrative ambition to Kubrick, they are right at a technical level, but it should be pointed out that there is none of Kubrick’s vicious sneer and contempt towards humanity to be found in Tree of Life. If anything, Tree of Life may be an inadvertent rebuke to the philosophy of Kubrick: yes, life is short and cosmically futile, but it does not necessarily have to be empty and obscene.

Instead, it can be beautiful.

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Bitcoin and another radical Idea on Money

Strangely enough, I stumbled on Bitcoin only a few days ago while checking up on one of the stranger blogs I read from time to time. If you are not familiar with Bitcoin, now it’s about time to become familiar with it.

Funnily enough, it took me only about 10 minutes to be sold on it – simply because I have spent the last three years thinking about the question of how one could create a currency with a fixed base so as to completely eliminate inflation – as well as deflation.

I think I had come up with a rather decent solution, given that I don’t know much about coding, cryptology, networks, or anything else that would actually be required to implement it. Please take the time to read it – not because I want to propose it as an alternative to Bitcoin, but simply because it will make it easier for you to understand why I am so damn impressed by Bitcoin. I thought my system was pretty clever – but it doesn’t hold a candle to Bitcoin.

Here’s my idea:

The basic idea of my system was to have somebody who produces useful products issue a limited number of digital tokens along with their products (similar to Canadian Tire money, but with the difference that after issuing x number of tokens, the issuance would stop).

People would be free to use these tokens to redeem for the company’s products, as well as freely trade them among each other. Every transaction of tokens would go through the company’s central computer, and the company could – and probably would – deduct a tiny fraction of of every transaction as a fee.

My expectation was that the tokens would eventually used by people to buy products other than those manufactured/sold by the issuing company, and thereby broaden the range of goods that can be purchased for it. While still ‘backed’ by the issuing company’s goods/services, the currency would increasingly be ‘backed’ by the goods/services of everybody else who is using the currency to buy goods/services.

The issuing company would take a cut of every transaction, and since the currency would become good for the purchase of goods/services other than those produced by the issuing company, it would be able to use the currency as a profit generator in its own rights.

Eventually, an entire ecosystem of monetary relationships would build around this currency, and it wouldn’t even be necessary for the issuing company to produce goods and services anymore – if enough people are ‘backing’ the currency with their own goods and services, it would make no difference if the original ‘backing’ disappeared. In fact, the original issuing company would be much better off to no longer bother with the nonsense of providing goods and services, but simply focus on continuously improving technical accessibility of its money system, making sure that people can use it with as little effort as possible.

The entire system would probably be based exclusively on electronic transactions, though it is conceivable that somebody would in fact issue bank notes denominated in this money. In case you haven’t noticed, the ‘tokens’ have more in common with physical gold or silver than what we currently think of as money.

All currently existing money systems have a built-in bias towards inflation, since the only way for the issuing body to make a decent profit is a) seigniorage b) old fashioned banking services, and c) inflation – and more often than not, all three at once. Governments generally engage in a) and c), with the predictable result that eventually, the currency will collapse into worthlessness.

The ‘genius’ – if I may be so immodest – of my system is that it creates a money system where the issuing body has an incentive NOT to inflate the money stock, since it makes a profit on every transaction. Inflating the currency would, in the short run, create additional profits, but – why kill the goose that lays the golden egg? In fact, as the currency grows in usage, and the value of each unit increases accordingly, inflating the currency would cut profits.

A company issuing such money would likely develop a way of proving that it is not inflating the currency, which would not be too hard, since it has a very close tap on the total amount of base money floating around: every transaction goes through its central server, and it knows exactly who has how much of the stuff.

[Yes, privacy folks are going to flip out at this point. However,the goal of my system is not to satisfy privacy needs, but the need for having a monetary system that avoids blowing up the economy every few decades (if you’re lucky), and going out of style every century or so (if you’re lucky).

There are simple ways for people to add privacy functions to the system – such as private bank note issuance based on this money – but accepting those bank notes would be economically risky for the same reason that accepting bank notes denominated in gold or silver is risky: the issuing body has every incentive to inflate the currency. That risk could be mitigated by those banks continuously publishing their verifiable holdings in the base currency (which is tracked by the base issuer in any case) as well as the total amount of issued bank notes. I’m not going to belabour this point anymore – anybody with a basic understanding of how markets work can figure out the rest.]

What most excited me about my idea was that it creates a monetary systems governments would be interested in running themselves: the prospect of getting a definite cut of every transaction in the economy should make every finance minister drool: imagine 1% of every monetary transaction goes straight to the coffers of government. Every time anybody buys a candy, a computer, a car, a house, stocks, life insurance, or what have you, the government gets 1%.

Rather than having our money at a bank, we all would have an account on the government’s central server, and a debit card to go with it. We could, of course, have bank account for investment purposes, too. But we wouldn’t need to. And saving money would be easy – all you have to do is not spend it, and as the money grows in value (which it would without inflation), you have more wealth.

The system would also get around the stupidest argument in favour of inflation ever since the first gold smith figured out fractional banking: matching the amount of money to the growing economy. In my system, it would be easy to ‘split’ the money every once in a while to avoid a world in which you need to pay 1/1,000,000 of a money unit to buy a chewing gum. All the issuing authority has to do is multiply all holdings by the desired factor, and – abracadabra, you are back to dealing with sensible amounts. This would probably happen once in a generation, assuming a steady 2-3% growth in productivity.

Some funny things would happen to how we do certain things. For example, when you borrow money, you might find terms of “10 years”, or “5 years”, rather than %. Rather than paying the lender principal plus interest, you simply promise not to pay it back earlier than 10 (or 5) years from now. If you do pay it back earlier, you’ll have to pay a penalty, of course. But, money system build on a fixed base would create a daily vivid illustration of time preference even for the dimmest consumer.

There would also be no need to legally separate deposit banking from investment banking: all banks would be investment banks, because why bother with a debit account at a bank when the government provides it basically for free (except for that transaction fee, of course).

Banks would find themselves in the ugly world of free market competition (a place they haven’t been to for a long time now). Risk would be fully internalized, because they wouldn’t have the deposits of unwitting customers to play with at no risk. Instead, banks would have to compete for people to entrust them with their money for risky investments, while the cash of more cautious folk would be safely tucked away in the central server.

Since money no longer uses value through inflation, there wouldn’t even be much need for ‘investing’ to protect against inflation (which is pretty much the best people can hope for these days – profits are a mere mirage for all but the well-connected or lucky ones).

There would be a significant slowdown of high-risk investment, parasitical investment, and the fraudulent shenanigans that so disrupted the economy in recent years, because financial risk – as I mentioned already – would finally be internalized by those engaging in it.

That’s bad news for the wizards of finance, and the first-in-line profiteers of central bank inflation policies, but its good news for for consumers, and honest folks in general.

And even more beautifully, the system would benefit governments:

- tax evasion would become really difficult (all transactions go through the central server, remember?), nor really necessary (the government is making so much money on the whole transaction business, it can probably slash a lot of taxes and still grow at a steady pace).

- Money laundering would be really, really hard to do for the same reasons. (Governments may continue to issue some cash tokens for practical reasons, thereby reducing these advantages somewhat but – given the increasing spread of handheld digital devices, there really is not much need for that.)

The system could be implemented with relative ease (economically), by converting all current assets and liabilities denominated in a country’s currency, and transferring them to the central server. Yes, this is very vague in terms of defining money, and care would have to be taken to avoid converting derivatives into assets/liabilities. Derivatives should remain derivatives, and let the banks deal with the fall-out. I’m not enough of a finance specialist to sort this all out, but – there is no reason to assume it would not be possible. In the short run, it would leave all the illegitimate advantages gained from the current system in place, but I’m fine with that. It’s not supposed to be a tabula rasa proposal. It’s more about long-term viability.

Yes, this is a nightmare scenario for civil libertarians and privacy folks, and Christian millennialists will have a field-day, but again: this is a proposal for a sustainable monetary system, not a general utopia. It’s no good ranting about ending the FED and such things if you don’t provide the entrenched interests with a practical alternative that provides the same benefits, with less downside.

The ones most opposed to my scheme would be the oligopolistic banks, of course, and their half-witted helpful idiots in and outside of academia (the acolytes of brilliant fools like Keynes, Samuelson, Galbraith, which today include the likes of Mankiw, Krugman, and pretty much the whole lot of public economists, with few notable exceptions – almost none of whom go anywhere near monetary theory).

In any case, what does this have to do with Bitcoin? Well, a number of things: most importantly, Bitcoin shares with my system the most important economic feature: a fixed base for money. One significant problem – not fatal, just inconvenient – is that it does not seem to provide for ‘splitting’: in the long run, a solution will have to be found to deal with the problem of paying 1/1,000,000,000,000,000,000 BTC for a box of matches. This could be achieved through the development of currencies that are based on BTC, but provide more granular units.

The differences, however, are most striking and make me believe that in the long run, BTC is probably the way things should, and will, go: there is no central authority at all. Nobody can muck around with the money supply (provided the code and structure for BTC is practically invulnerable to attack). It’s not just that there is no incentive to inflate, it’s not possible.

In the long-term, transaction costs will go down to the absolute technical minimum (verification providers will find themselves in a very, very competitive market – this alone may become one of the most powerful forces driving the development of ever cheaper processing technology, with chip developers trying to get a cut of the transaction market). Rather than have government change the costs to accommodate foolish fiscal policies, the costs will be determined solely by the cost of providing the service.

It is entirely possible to develop a banking system around BTC: think of BTC as having more in common with gold rather than commodity-based currencies or fiat money, and consider the insecurity of storing ‘wallets’ on your own hard-drive.

A minor draw-back of BTC is that it can and will deflate – there is no possibility to prevent the loss of BTC units over time. The total amount will slowly erode due to accidental or intentional deletions of stored BTC units. This in turn will make the need for effective ‘decimal point management’ more pressing over time. I’m sure there is a technical solution to this, but I’m not sure the originator has thought of this. Maybe I missed it when reading the concept. Again, this is not a fatal flaw, just an inconvenience.

The biggest challenge will be for BTC to reach a critical mass of participants to have a sufficiently broad base of goods and services that can be purchased for it to create sufficient backing to have the currency sustain itself indefinitely. I am not sure this has been achieved so far. If it is true that drug dealers are beginning to use BTC at a significant scale for this purpose, then this problem would be solved rather quickly. Illegal drugs are pretty desirable, and if it is possible to get illegal drugs with BTC, one will be able to trade them for other goods as well (‘backing’ in illegal drugs should be taken seriously from an economic point of view). Besides, drug dealers would only sell drugs for it if they can get other goods and services. In short, the accusation BTC is currently used by drug dealers means that BTC is, in fact, a viable currency already.

Since the design of the currency makes it very, very difficult to shut down usage (Would those dealing with illegal drugs really care they violate some kind of sanction on the use of virtual currency? Would a ban in the US be meaningful in South America, Central and South-East Asia, and Africa?), it is hard to see how BTC could be stopped from gaining a serious foothold in the global economy.

Unless a major flaw in the technical design and operation of BTC leads to a major loss of faith in BTC as a monetary base, BTC is here to stay in a very big way.

And for those who know their economic history, and how state-control over the production of money has shaped the current world order,  it should be easy to see how political implications of Bitcoin could be downright revolutionary. Running a modern State without monopoly control over money could become a little tricky.

I think I just convinced myself to actually go and buy some BTC. Can’t hurt.

By the way, here’s a good video on the topic from the folks at Reason:

Bitcoin & The End of State-Controlled Money: Q&A with Jerry Brito

PostScript 1 – June 19, 2011: As Charles pointed out, the deflation issue really is just a matter of aesthetics. As long as decimal point management is done properly, it won’t even be noticed by anybody but the most attentive.

Also, news coverage of attacks on MtGox, such as this one, fail to appreciate that this has nothing to do with BitCoin itself. Calling the attack on MtGox an attack on Bitcoin makes about as much sense as calling a bank robbery an attack on the dollar.

An attack on Bitcoin would have to involve compromising the integrity of the verification protocol. As long as that does not happen, Bitcoin itself is fine. MtGox may be toast, though.

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