Ok, I've been asked enough times, here it is -- my view and analysis of "Bitcoin", which I have taken to calling "Bitcon."  That probably deserves an explanation....

Let's first define what an ideal currency would be.  Currency serves two purposes; it allows me to express a preference for one good or service over another, and it allows me to express time preference (that is, when I acquire or consume a good or service.)

All currencies must satisfy at least one of these purposes, and an ideal currency must satisfy both.

The good and service preference is what allows you to, possessing a dozen eggs from a chicken, to obtain a gallon of gasoline without finding someone who has gasoline and wants eggs.  That is, it is the ability to use the currency as a fungible intermediary between two goods and services, one of which you possess and the other of which you desire.  Without this function in an economy you have only barter and poor specialization, with it you have excellent specialization and a much-more-diverse economic picture.

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.  Since technological advancement tends to make it easier to produce "things" in real terms, a perfect currency reflects this and makes time preference inherently valuable.  This in turn forces the producers of goods and services to innovate in order to attract your economic surplus from under the mattress and into their cash registers, since not spending your economic surplus is in fact to your advantage.  Today's fiat currencies intentionally violate the natural time preference of increasing productivity, but even yesterday's metallic standards did a poor job of representing it.  The problem here is the State, which always seeks (like most people) to get something for nothing and what it winds up doing instead (since getting something for nothing is impossible) is effectively stealing.

Unfortunately Bitcoin, as I will explain in detail, also does a*****-poor job of satisfying either of these requirements.

But before I get to that, I want to first demolish the argument for using it that is going around in various circles and media these days -- the idea that it is stateless (that is, without a State Sponsor) and this is somehow good, in that it allows the user to evade the tentacles of the State.

This is utterly false and, if you're foolish enough to believe it and are big enough to be worth making an example of you will eventually wind up in prison -- with certainty.

All currencies require some means of validation.  That is, when you and I wish to transact using a currency I have to be able to know that you're not presenting a counterfeit token to me.  Gold became popular because it was fairly difficult to "create" (you had to find it and dig it out of the ground) and it was reasonably-easy to validate.  The mass and volume were easily verified and other materials of similar mass and volume had wildly-disparate physical properties and could be easily distinguished.  (The recent claims of "salted" bars with tungsten notwithstanding!)  With only a scale and a means of measuring displacement of a known thing (e.g. water) I could be reasonably-certain that if you presented to me something claiming to be one ounce of gold that it in fact was one ounce of gold.  It therefore was "self-validating."

Likewise, dollar bills are reasonably self-validating.  I can observe one and if it appears to be a dollar bill, feels correct and has the security features I can be reasonably certain that it is not counterfeit.  The Secret Service can determine with a fairly high degree of certainty (and very quickly too) whether a particular bill is real as they can verify the serial number was actually issued and that a bunch of the same serial numbers are not being seen in circulation, but for ordinary commerce this is not necessary; the bill itself has enough unique features so for ordinary purposes it is self-validating.

Bitcoin and other digital currencies are different -- they're just a string of bits.  To validate a coin, therefore, I must know that the one you are presenting to me is unique, that it wasn't just made up by you at random but in fact is a valid coin (you were either transferred it and the chain is intact or you personally "mined" it, a computationally-expensive thing to do), and has not been spent by you somewhere else first.  

In order to do this the system that implements the currency must maintain and expose a full and complete record of each and every transfer from the origin of that particular coin forward!

This is the only way I can know that nobody else was presented the same token before I was, and that the last transfer made of that token was to you.  I must know with certainty that both of these conditions are true, and then to be able to spend that coin I must make the fact that I hold it and you transferred it to me known to everyone as well.

Now consider the typical clandestine transaction -- Joe wishes to buy a bag of pot, which happens to be illegal to transact.  He has Bitcoins to buy the pot with.  He finds a dealer willing to sell the pot despite it being illegal to do so, and transfers the coins to the dealer.  The dealer must verify the block chain of the coins to insure that he is not being given coins that were already spent on gasoline or that Joe didn't counterfeit them, and then he transfers the pot to Joe.  There is now an indelible and permanent record of the transfer of funds and that record will never go away.

This creates several problems for both Joe and the dealer.  The dealer can (and might) take steps such as using "throw-away" wallets to try to unlink the transfer from his person, but that's dangerous.  In all jurisdictions "structuring" transactions to evade money laundering or reporting constraints is a separate and unique crime and usually is a felony.  Therefore, the very act of trying to split up transactions or use of "throw-away" wallets in and of itself is likely to be ruled a crime, leaving any party doing that exposed to separate and distinct criminal charges (along with whatever else they can bust you for.)

Second, due to the indelible nature of the records you're exposed for much longer that with traditional currencies to the risk of a bust and in many cases you might be exposed for the rest of your life.  In particular if there is a tax evasion issue that arises you're in big trouble because there is no statute of limitations on willful non-reporting of taxes in the United States, along with many other jurisdictions.  Since the records never go away your exposure, once you engage in a transaction that leads to liability, is permanent.

Third, because Bitcoin is not state-linked and thus fluctuates in value there is an FX tax issue.  Let's say you "buy" Bitcoins (whether for cash or in exchange for a good or service you provide) at a time when they have a "value" of $5 each against the US dollar.  You spend them when they have a "value" of $20 each.  You have a capital gain of $15.  At the time of the sale you have a tax liability too, and I'm willing to bet you didn't keep track of it or report it.  That liability never goes away as it was wilfully evaded and yet the ability to track the transaction never goes away either!

Worse, most jurisdictions only permit the taking of a capital loss against other gains, and not against ordinary income taxes.  This really sucks because it's a "heads you pay tax, tails you get screwed" situation. This is the inherent problem that gold and other commodities have as "inflation hedges"; the government always denominates its taxes in nominal dollars, not inflation-adjusted ones.  The only currency against which there is no FX tax exposure is the one the government you live under uses and denominates its taxes in.  That is why the government's issued currency will always be the preferred medium of exchange irrespective of all other competing currencies.

Incidentally, all of this exposure which you take with Bitcoin is very unlike transacting a bag of pot for a $100 bill -- or a gold coin.  Unless you're caught pretty much "in the act" once the pot is smoked and the dealer spends the $100 the odds of an ex-post-facto investigation being able to disclose what happened and tie you to the event fades to near-zero.  

This never happens with a Bitcoin transaction -- ever. 

If that dealer is caught some time later, but still within the statute of limitations for the original offense, you could get tagged.  And if the statute of limitations has expired you're still not in the clear if you had a capital gain on the transaction. 

There isn't any way to avoid these facts -- they're structural in all digital currencies.  And they don't just apply to buying or selling drugs -- they apply to any act that is intended to evade a government's currency or transaction controls.  The very thing that makes Bitcoin work, the irrefutable knowledge that a coin is "good" predicated on digital cryptography, is the noose that will go around your neck at the most-inappropriate time.

Those who are using Bitcoin as a means to try to foil currency controls or state prohibitions on certain transactions are asking for a criminal indictment not only for the original evasion act itself but also the possibility of a money-laundering indictment on top of it, and the proof necessary to hang you in a court of law is inherently present in the design of the currency system!

Now let's talk about the other problems generally with all such currency systems in terms of an ideal currency and how Bitcoin stacks up.

First, the ability to use Bitcoin to express good and service preference.

Here the fundamental problem of wide acceptance comes into view.  This is the problem that the proponents of the system are most-able to address through various promotional activities.  Unfortunately it also leads to deception -- either by omission or commission -- of the flaw just discussed.  To the extent that the popularity of the currency is driven by a desire to "escape" state control promotion of that currency on those grounds when in fact you are more likely to get caught (and irrefutably so!) than using conventional banknotes is an active fraud perpetrated upon those who are insufficiently aware of how a cryptocurrency works.

Cryptocurrencies have a secondary problem in that because they are not self-validating there is a time delay between your proposed transaction using a given token and when you can know that the token is valid.  Bitcoin typically takes a few minutes (about 10) to gain reasonable certainty that a given token is good, but quite a bit longer (an hour or so) to know with reasonable certainty that it is good.  That is, it is computationally reasonable to believe after 10 minutes or so that the chain integrity you are relying on is good.  It approaches computational impracticality after about an hour that the chain is invalid.

This is not a problem where ordering of a good or service and fulfillment is separated by a reasonable amount of time, but for "point of transaction" situations it is a very serious problem.  If you wish to fill up your tank with gasoline, for example, few people are going to be willing to wait for 10 minutes, say much less an hour, before being permitted to pump the gas -- or drive off with it.  This makes such a currency severely handicapped for general transaction use in an economy, and that in turn damages goods and service preference -- the ability to use it to exchange one good or service for another.  What's worse is that as the volume of transactions and the widespread acceptance rises so does the value of someone tampering with the block chain and as such the amount of time you must wait to be reasonably secure against that risk goes up rather than down.

Then there is what I consider to be Bitcoin's fatal flaw -- the inherent design and de-coupling of the currency from the obligation of sovereigns.  Yes, obligation -- not privilege.

Bitcoins are basically cryptographic "solutions."  The design is such that when the system was initialized it was reasonably easy to compute a new solution, and thus "mine" a coin.  As each coin is "mined" the next solution becomes more difficult.  The scale of difficulty was set up in such a fashion that it is computationally infeasable using known technology and that expected to be able to be developed in the foreseeable future to reach the maximum number of coins that can be in circulation.  Since each cryptographic solution is finite and singular, and each one gets progressively harder to discern, those who first initiated Bitcoin were rewarded with a large number of easily-mined coins for a very cheap "investment" while the computational difficulty of "extracting" each additional one goes up.

That means that if you were one of the early adopters you get paid through the difficulty of those who attempt to mine coins later!  That is, your value increases because the later person's expenditure of energy increases rather than through your own expenditure of energy.  If that sounds kind of like a pyramid scheme, it's because it is very similar to to how the "early adopters" in all pyramid schemes get a return -- your later and ever-increasing effort for each subsequent unit of return accrues far more to the early adopter than it does to you!

The other problem that a cryptocurrency has is that it possesses entropy.  

Entropy is simply the tendency toward disorder (that is, loss of value.)  A car, left out in the open, exhibits this as it rusts away.  Gold has very low entropy, in that it is almost-impossible to actually destroy it.  It does not oxidize or react with most other elements and as such virtually all of the gold ever dug out of the ground still exists as actual gold.

Fiat currencies, of course, have entropy in both directions because they can be emitted and withdrawn at will.  We'll get to that in a minute, and it's quite important to understand.

Bitcoin exhibits irreversible entropy.  A coin that is "lost", that is, which the current possessor loses control over either by physically losing their wallet or the key to it, can never be recovered.  That cryptographic sequence is effectively and permanently abandoned since there is no way for the entity who currently has possession of it to pass it on to someone else.  This is often touted as a feature in that it inevitably is deflationary, but whether that's good or bad remains to be seen.  It certainly is something that those who tout the currency think is good for the value of what they hold, but the irreversible loss of value can also easily lead people to abandon the use of the currency in which case its utility value to express goods and service preference is damaged, quite-possibly to the point of revulsion.

This is not true, incidentally, for something like a gold coin.  The coin can be lost or stolen but unless it's lost over the side of a boat at irretrievable depth it can be recovered and the person who recovers it can spend it.  What constitutes "irretrievable depth" has a great deal to do with exactly how many coins might be there too -- what's impractical for one coin is most-certainly not when the potential haul reaches into the thousands of pounds!

I mentioned above about fiat currencies being able to be issued and withdrawn.  There is often much hay made about the principle of seigniorage, which is the term for the "from thin air" creation of value that a state actor obtains in creating tokens of money.  Seigniorage is simply the difference in represented value between the cost of emitting the token (in the case of paper money, the paper, security features and ink) and the "value" represented in the market.  There is much outrage directed at the premise of fiat currency in this regard but nearly all of it is misplaced because people do not understand that in a just and proper currency system the benefit of seigniorage comes with the responsibility for it as well, and it is supposed to be bi-directional.

That is, in order for time preference to be neutrally expressed, less the natural deflationary tendency from productivity improvement, the government entity issuing currency gets the benefit of seigniorage when the economy is expanding.  But -- during times of economic contraction they also get the duty to withdraw currency (or credit) so as to maintain the same balance, as otherwise the consequence is inflation -- that is, a generalized rise in the price level and the destruction of the common person's purchasing power.

That this is honored in the breach rather than the observance does not change how these functions are supposed to work, any more than the fact that we have bank robbers means we shouldn't have banks.  This, fundamentally, is why currency schemes like Bitcoin will never replace a properly functioning national currency and are always at risk of becoming worthless without warning should such a currency system arise, even ignoring the potential for legal (or extra-legal) attack.

Simply put there is no obligation to go along with the privilege that the originators of a crypto-currency scheme have left for themselves -- the ability to profit without effort by the future efforts of others who engage in the mining of coins.

Those who argue that state actors creating currencies get the same privilege are correct, but those state actors also have the countervailing duty to withdraw that currency during economic contractions associated with their privilege, whether they properly discharge that duty or not.

For these reasons I do not now and never will support Bitcoin or its offshoots, nor will I accept and transact in it in commerce.  I prefer instead to effort toward political recognition of the duties that come with the privilege that is bestowed on a sovereign currency issuer in the hope of solving the underlying problem rather than sniveling in the corner trying to evade it.

The latter is, in my opinion, unworthy of my involvement.

This is amusing, really.

Haruhiko Kuroda said that the Bank of Japan (8301) will do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could start sooner than next year.

“I would like to make my stance clear that we will do whatever we can do,” Kuroda, president of the Asian Development Bank, said at a confirmation hearing in the parliament in Tokyo today. The central bank hasn’t bought enough assets and should consider buying large amounts of longer-term bonds, he said.

We've heard this before.

Indeed, we've heard this for 20 years.  How has it turned out?

Then you have Bernanke, who over the weekend said some very intresting things about long-term interest rates....

Let's recap. Long-term interest rates are the sum of expected inflation, expected real short-term interest rates, and a term premium. Expected inflation has been low and stable, reflecting central bank mandates and credibility as well as considerable resource slack in the major industrial economies. Real interest rates are expected to remain low, reflecting the weakness of the recovery in advanced economies (and possibly some downgrading of longer-term growth prospects as well). This weakness, all else being equal, dictates that monetary policy must remain accommodative if it is to support the recovery and reduce disinflationary risks. Put another way, at the present time the major industrial economies apparently cannot sustain significantly higher real rates of return; in that respect, central banks--so long as they are meeting their price stability mandates--have little choice but to take actions that keep nominal long-term rates relatively low, as suggested by the similarity in the levels of the rates shown in chart 1.

Oh really?

So your "finger on the scale" isn't responsible for this?  Rates would remain this low were you not buying up $85 billion a month?  

Bernnake obviously doesn't believe this, or he wouldn't be doing what he's doing.  That is, he doesn't believe his actions are of "null" effect; he believes they work.  That much we've heard him say repeatedly.

But what that means is that he's just admitted up above that long-term rates would not be low were he to take his finger off the scale.

That is, he admitted that he's been lying, all in one paragraph!

I've read through the various commentary on this speech and paid close attention to Bubble TV this morning.  Nobody has commented on the clear and obvious contradiction in the paragraph above, even though it wasn't even separated by more than a couple of sentences, and therefore anyone who was paying attention had to see it.

This means the media is either all comprised of idiots or they are all intentionally misleading the public, never mind the Congress which now has hard proof in Bernanke's own words that he's been lying to them all along.

Pick one.

Good lord.

Lord Adair Turner, who is FSA Chairman (in London) is on this morning pumping the premise of printing money to finance deficits.

The problem is that nobody is talking about what it really means, including Turner.

There is no free lunch.  If you increase the denominator of "money" that is present in the system the value of each unit inevitably declines by the exact same percentage as that which you emitted compared to GDP -- which is axiomatically the amount of economic activity in the economy.

This is exactly identical economically to a tax increase which is a decision that, in any proper government operating with the consent of the people, must reside in the legislature.

For a so-called "independent central bank" to unilaterally impose such a tax is exactly identical to counterfeiting and is widely-recognized, when committed by anyone else, as a high crime bordering on treason.

THAT is the discussion we should be having.  It is the point that none of these people will debate in public and speak of openly, nor will the so-called "journalists" on CNBS and elsewhere corner these screamers on. 

The reason should be obvious: Once these "policies" are recognized for what they are these central bankers would be an endangered species by nightfall.

Disclosure: Long boiled rope futures.

Last night's "debate" with Stormin' Norman, who seems to believe that:

• An index value in a fiat world, with no anchor to measure against, demonstrates the absolute strength of a currency.  (No it doesn't; measure against a tangible item one cannot increase at-will, such as gasoline, wheat, corn, etc.)
  
  
• The amount "saved" by the population (which is in and of itself a fraud; the "personal savings" rate is computed in the economy as personal income less personal expenditures; note that this counts paying a debt as "savings") is exactly identical to government deficit spending.  This in turn implies that should the government not run a deficit the people cannot possibly spend less than they make.  How this sort of silly conflation occurred in people's minds is beyond me, but it persists.
  
  
• The government "doesn't need to" tax to raise revenue; the "purpose" of taxes is to compel the population to accept the currency preferred by government since it must pay those taxes in that currency.  In other words, deficit spending serves to regulate inflation and unemployment while taxation is not used to fund the government, it is used to force acceptance of the currency involved. 
  
  
• The foundation of the above is that there are two distinct economic units within the system; government and non-government.  This in turn relies on the claim that (G - T) = (S - I) - NX, where "G" is government spending, "T" is taxation, "S" is private savings, "I" is investment and "NX" is net exports (positive if you're exporting net-net, negative if you're a net importer.)  Notice that the entire production/consumption cycle is ignored in the above equation.  That is, it is a true equality but ignores essential components of the actual economy.
  
  
• MMT finally argues, as a consequence of the above, that a government does not actually "borrow" anything when it issues debt denominated in its own currency in that you cannot borrow back your own currency (which you control the issuance of.)  Therefore, MMT argues that the more government debt is issued the more wealth the private sector accumulates.

was quite amusing.

The problem is that these claims, in particular the last claim, must fit into the fundamental economic equality, which is:

MV = PQ

That is, "M" (credit and currency in circulation) * "V" (velocity, or times each unit of credit or currency is used in the economy) = P (price of each unit of good or service) * Q (quantity of each good or service)

PQ is what we called "GDP"; by definition all units of production of goods and services that are sold times their price is equal to the GDP of the nation.

"V", or velocity, can be thought of as the "animal spirits" index.  The more confident businesses and consumers are in the economy the more-likely they are to exchange currency or credit for a good or service; that is, the higher the likelihood that they believe the necessary expenditure on goods and services from a future capacity to acquire more "M" will be possible.  This can be indirectly influenced but not directly controlled.

Finally, "M" is not just currency but also includes all circulating credit that is expended in the economy.  The latter is almost-always ignored by mainstream economists but this is a trivially-proved self-delusion as virtually everyone uses credit interchangeably with currency in their daily lives.  You pump gas and swipe your credit card to pay for it, you pull out the VISA card in the store interchangeably with $20 bills, etc.

So let's presume that the government simply "emits" 100% of GDP into the economy by "creating money" through the purported "sale" of Treasury Instruments.  The Central Bank monetizes those by pushing a button and now Treasury has $16 trillion dollars, which the government decides to evenly distribute to everyone.  That is, tomorrow you go to your mailbox and find in it a check for $51,499 for every man, woman and child in your household, payable to you, printed out of literal thin air.

You're wealthy according to MMT!  Happy days are here again, let's go have a party!

Uh, wait a second.

Remember, MV = PQ.

"V" hasn't changed.

But "Q" hasn't changed either; when you woke up this morning there weren't new factories that magically materialized, there weren't any new jobs that magically materialized, there weren't new services invented out of thin air, none of that happened. 

In fact, what happened is that "M" was dramatically increased.

Since "Q" didn't change, and "V" hasn't changed (yet), what does the fundamental economic equality say must occur?

That's right -- "P" must rise in an exactly ratable amount.

It has to, because third grade arithmetic says that it must as a matter of economic axiom.

As such the so-called "wealth" created by this MMT action is a scam, because "P" (price) immediately rises across the economy in the exact amount of the "money" that you created.

GDP (defined as "PQ") rises but this is not economic progress, it is inflation! 

That is, it's bad, not good.

But wait -- why is it bad?  Isn't all that new money worth the same as the old money in aggregate (that's what the fundamental equality says), right?

Ah, you see, you forgot something very important.

Not all the money or credit I want to spend today was acquired today.  Some of it was acquired yesterday, last year, or last decade.

But when that "money creation" happens all of the existing units of "M" are devalued by the exact ratable amount of the new monetary emission.  It cannot be otherwise; again, the fundamental economic equality must hold. 

Therefore what deficits do is destroy saving, not enhance it, as they intentionally and ratably trash the value of all such saved units of currency.

Now compare this act of destroying the value (denominated in non-monetary terms -- e.g. gallons of gasoline, bushels of wheat, etc) of the tokens used for exchange (what we call "dollars") with the government deciding to tax the same amount from the citizens instead.

Economically they are identical -- If the IRS man shows up at your door and demands 50% of everything you have acquired in dollars "to date" or if the government renders your saved dollars worth 50% less the impact in terms of gallons of gasoline, pounds of steak, or medical care for your grandmother that you can purchase with your currency and credit 10 minutes later is exactly the same.

In other words the government's decision to run a deficit is exactly identical economically to the government deciding to raise taxes retroactively on all existing currency and credit by exactly the same amount of money! 

That is, the claim that MMTers make that government deficit spending is "wealth" in the private economy is false; such an act does nothing other than devalue the currency and credit in circulation and by doing so the impact on purchasing power, which is all you care about, is exactly identical to that of having that currency and credit confiscated by taxation!

This, incidentally, is why the economy has not recovered even though the government has run deficits from 8-12% of GDP sequentially for the last four years.  This, for those who are not math-challenged, is an approximate 50% compounded devaluation in terms of GDP over those four years. 

This has been partially offset by productivity gains in the economy, which should generate gains in purchasing power. 

But this emission of "money" has been so massive that nominal median family income (before inflation) has actually decreased!  Now add to that the massive increase in costs of "things" that are essential over the last four years -- milk, gasoline, meat, etc -- many of which are up 100% or more and you find that the actual economy and personal purchasing power behaves as the above describes must happen, not as the MMT adherents imagine.

That outcome occurred in the economy because arithmetic is not theory, it is fact.  2 + 2 = 4, not 6, and no amount of arm-waving will ever change that fact.

Worse, it is saved units denoted in currency, that is, wealth, that form capital.  Capital formation is the engine of innovation; one saves wealth which is then risked on a venture not certain to succeed in the hope that the innovation you produce through doing so rises in value in the economy and people are compelled by their desire to acquire your innovative good or service in exchange for their labor. 

Without wealth one is forced into trying to get others to finance your innovative attempts by taking out loans.  But that means the total cost of your innovation's development rises precipitously and the more money emission that is taking place the higher the cost goes because nobody ever intentionally lends money at a loss.  Since time has value, risk has value and indirection has a cost in that it increases inefficiency it is therefore always more expensive to borrow to fund innovation than it is to form capital from savings.

It gets worse. 

All economies naturally run in a state of mild deflation as a consequence of improvements in productivity. That is, through innovation one hour of human labor does and should buy more tomorrow than it does today. This in turn makes saved capital more valuable in terms of future purchasing power, which is good, not bad.  That is the incentive to save capital which in turn makes available a pool of resource that is tapped to invent and innovate, driving future productivity increases! 

This is a virtuous cycle that has through the ages resulted in the improvement of our human condition -- a cycle the MMT theorists seek to intentionally destroy.

MMT is, in fact, nothing more than the belief in Unicorns that crap out pretty colored candies, when the truth is that Unicorns are mythical creatures and what's being emitted from the back end of the horse you are calling a "Unicorn" are not candy.

Apparently The Dallas Fed, which has been a strong opponent of "QE" in all forms, has come out with a working paper, the soon-to-be-infamous "#126".

The paper, entitled "Ultra Easy Monetary Policy and The Law Of Unintended Consequences", is a must-read.  It is an excoriation of the "QE more, faster, and evermore" game that has been played up until now as a means of "addressing" problems with our economy.

Among the points made are that:

One reason for believing this is that monetary stimulus, operating through traditional (“flow”) channels, might now be less effective in stimulating aggregate demand than previously. Further, cumulative (“stock”) effects provide negative feedback mechanisms that over time also weaken both supply and demand. It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the “independence” of central banks, and can encourage imprudent behavior on the part of governments. None of these unintended consequences is desirable. Since monetary policy is not “a free lunch”, governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level.

Yep.

I have often written on some of the cumulative ("stock") effects of QE, with one of them being the devastation that is laid upon capital formation.  Capital formation is inherently always tied back to savings, which is discouraged to the point of extinction under "ultra easy" policy; when negative real rates are the outcome for any "safe" savings of funds there is an effective hard bar placed that blocks capital formation from occurring.

The over-reliance on credit thus drives greater and greater levels of speculation "somewhere" in a puerile attempt to maintain the ability to obtain some sort of positive return.  But speculation is a zero-sum game at best, and due to slippage and costs is a negative-sum game on balance.  That is, for everyone who speculates and wins someone almost invariably speculates and loses more than was won.  While the winners become wealthier, everyone else becomes poorer and in aggregate the result is a net loss.

One of the key points made in the paper, and which I have often expounded on myself, is this:

There is, however, an alternative perspective that focuses on how such policies can also lead to unintended consequences over longer time periods. This strand of thought also goes back to the pre War period, when many business cycle theorists focused on the cumulative effects of bank�]created�]credit on the supply side of the economy. In particular, the Austrian school of thought, spearheaded by von Mises and Hayek, warned that credit driven expansions would eventually lead to a costly misallocation of real resources (“malinvestments”) that would end in crisis. Based on his experience during the Japanese crisis of the 1990’s, Koo (2003) pointed out that an overhang of corporate investment and corporate debt could also lead to the same result (a “balance sheet recession”).

Researchers at the Bank for International Settlements have suggested that a much broader spectrum of credit driven “imbalances”, financial as well as real, could potentially lead to boom�]bust processes that might threaten both price stability and financial stability. This BIS way of thinking about economic and financial crises, treating them as systemic breakdowns that could be triggered anywhere in an overstretched system, also has much in common with insights provided by interdisciplinary work on complex adaptive systems. This work indicates that such systems, built up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non linearities. The insights of George Soros, reflecting decades of active market participation, are of a similar nature.

This is well-worth the time to read.  Being 45 pages it is happily free of ipso-facto mathematical expressions that aver to describe an economic theory (but are sadly lacking proof of predicates claimed, which invariably devolve upon any sort of critical examination to the economic equivalent of attempting to divide by zero.)

One of the most-startling assertions raised is one that I have often raised in The Market Ticker (and been attacked for asserting), which is that:

In Section C, it is further contended that cumulative (“stock”) effects provide negative feedback mechanisms that also weaken growth over time. Assets purchased with created credit, both real and financial assets, eventually yield returns that are inadequate to service the debts associated with their purchase. In the face of such “stock” effects, stimulative policies that have worked in the past eventually lose their effectiveness.

In other words "created credit", that is unbacked credit, is a Ponzi scheme as it relies on ever-increasing exponential amounts of credit creation.  This must eventually fail to produce sufficient return to service the debt so-created and when it does the consequence is mass-bankruptcy.

Note the applicability of this to virtually everything government and the private credit-creating cartel does.  It also applies directly against the current political class and candidates, in that even the so-called Libertarian Gary Johnson refuses to come out for a "One Dollar of Capital" standard, cutting off such nonsense at the root.  Indeed, when I raised such a question at the Orlando Libertarian Convention in his suite he brushed aside the suggestion with a comment that it would inhibit economic growth.

Well, Gary, here's a nice scholarly paper to back up my assertion (which is quite-easily proved if you take the time to think it through and use your $5 calculator from WalMart) that ever-increasing amounts of credit creation are required to keep the system from collapsing once this path is embarked upon, and permanent exponential growth is by definition mathematically impossible.

Spend the time on this one folks -- it's worth it.