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Capital as Money argues the need for a new medium of exchange. The book carefully details the numerous economic benefits that will occur when an economy has a system of money that is free from government and central-bank manipulation. Bitcoins offer a welcome substitute to government-created fiat money, and we celebrate the emergence of the new alternative!

At Capital as Money we are committed to the Bitcoin and prefer it over dollars. And, to put our “money where our mouth is”, we are now pricing the e-book in Bitcoins. The price of the book is set at 0.05 BTC, regardless of any day-to-day fluctuations in the BTC/$ exchange rate.

To purchase the e-book with Bitcoins, click on the button shown above and follow the instructions. Upon receiving your Bitcoin payment, we will arrange to have the e-book sent to you as a “gift” from Amazon. The book will be downloaded to your Kindle or alternative e-book device in the normal manner as if you purchased the e-book directly from Amazon yourself.

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We can sadly remember watching with a mixture of helpless horror and fascination the video of those unfortunate individuals who wandered out on the quiet beaches of Southeast Asia before the Indian Ocean Tsunami. What were they thinking? We can only imagine… “What a day, the tide is out so far! I can find all kinds of treasures that never are never usually uncovered by the sea. What surprises await me?” Sadly, for them, there was a big one.

Inflation is analogous. Most of our fellow citizens are pragmatic beachcombers. They are simply not interested in theories or threats of future inflation that has not yet materialized. Most of them do have the time or inclination to listen to lectures on the superiority of Bitcoins, capital or other private alternatives for money. Most do not realized that failed money and banking policy are responsible for the largest U.S. economic collapse since the Great Depression and its disappointingly gradual recovery. Right now inflation is nowhere and interest rates, if one can get a loan, are very low. As long as inflation is a non-event, dollars will do just fine and Bernanke’s Fed will provide plenty of them.

Is the inflation tsunami assured? Well put it this way, quantitative easings 1 through n have pumped an unprecedented amount of intrinsically valueless fiat money into the U.S. economy. That inflation has not already occurred is only due to the fact that the U.S. money, credit and fractional-reserve banking system is still broken. When it finally regains its greed and euphoria, watch out. The only way then to stop the inflation tsunami would be for the central bank to re-absorb high-powered money at exactly the right rate to maintain price stability. Can this be done? Is the Federal Reserve and Bernanke up to the challenge? Let’s just say that if they are, it will be the first time in the 100 year history of the Federal Reserve. Clearly the odds are heavily stacked against avoiding the financial tsunami. It would be a feat akin to stopping the Titanic on a dime.

As if that weren’t enough, the public sector hyenas are already barking and salivating at the near-term prospect of the departure of Bernanke from the Federal Reserve. They have all kinds of grandiose, crack-brained spending agendas that will require the full-force fire hose of fiat money to be turned on to finance them. Incredibly, they think that under Bernanke the Federal Reserve has been too tight! If you thought that the rounds of quantitative easings were over the top, just wait! Over the next year or two the Titanic will not stop on a dime. Instead, it is likely to get a new captain who will order full speed ahead and the lookouts sent to bed. The new Fed Chairman will not be an inflation hawk.

When will our financial beachcombers care? When the purchasing power of the dollars in their accounts or wallets is rapidly being devoured by the fire of large and pervasive price increases—when the inflation tsunami has really struck. Then, interest in private monies—Bitcoins, commodities, and capital—will seriously emerge. Real assets will be one of the few havens of value in an inflation fire. Only when serious inflation strikes, will most individuals be open to and interested in storing their value and managing their trades in a different way. Open to the argument of al alternative private money.

The discerning reader may now object, “But I seem to remember that the stock market or the value of capital did not fare so well during the last major U.S. inflation of the 1970s? Why is capital then a haven for value?” Because, dear reader, the value of capital and the return to it was then and still is denominated in dollars. Moreover the tax burden that fell upon it—capital gains, corporate income tax, etc.—rose with inflation. Therefore capital was clearly not inflation neutral. Given our current tax structure, it still isn’t. However, if capital was money or the benchmark of value of all other goods, then, of course, there would have been no fiat money inflation of the 1970s. Remember, inflation is everywhere and anywhere an outcome of the expansion of a fiat money at a faster rate than the underlying growth rate of the economy, as Milton Friedman has so famously and accurately observed. It is just as accurate to think of inflation as a devaluation of a fiat currency—being printed at too high a rate—as it is to view it as a general rise in prices.

Of course, Bitcoins and other private monies aspiring to be the accepted benchmark of value and medium of exchange would face the same issue as capital, as long as their value was denominated in terms of the prime adversary—dollars. With an ultimately fixed supply, Bitcoins can be expected to appreciate at the nominal growth rate of the economy. When dollar inflation comes, transactions in them would occur at increasingly higher dollar values. Expect the government tax man to come knocking at the door. This will make them non-dollar inflation neutral as well. The cure? Redefine the game of value in terms of Bitcoins or capital instead of dollars. When the monetary value of a Bitcoin or capital is just one, there is no “capital gain” and the problem is solved. Of course, this logical outcome will not come without a serious fight, since the government will then have been stripped of its most fundamental financing power. Its fundamental power to steal. Its tool that has historically allowed monarchs, dictators, entrenched bureaucrats and politicians, and other such thieves to have their cake and eat it too. Governments have traditionally enjoyed the privilege of being monopoly counterfeiters, of printing fiat money with abandon, thereby stealing real output from the rest of us. Then, adding insult to injury, governments could tax the value of our real assets, because they were appreciating in fiat money value, thereby stealing real output from us yet again!

Readers who are interested in further development of the arguments presented here are urged to obtain our recent book, Capital as Money. It can be purchased by means of link to this website. We are so excited and enthusiastic about the recent optimistic traction of an alternative, private currency that we now encourage readers to choose the option of purchasing our book with Bitcoins.

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Stocks or BondsSuppose you think interest rates are going to go up, and you are trying to choose between alternative investments.  Of course, rising rates will reduce bond prices, and so you prudently decide to invest in stocks rather than bonds. 

But, if you expect rising rates, should you choose growth or dividend stocks?  From what I hear on business television, the obvious choice is growth stocks.  Dividend stocks, so the “experts” say, are similar to bonds because they are primarily bought for current income.  And, like a bond, when interest rates rise the dividend-paying stock’s price will decline.  This last part I fully understand.  Ceteris paribus the price of a dividend-paying stock will decline when interest rates go up.   Stock prices reflect the discounted value of expected future cash flows.  When interest rates go up the present value of a given cash flow stream will fall.

But what will happen to the price of growth stocks?  Growth stocks are generally those high-flyers that are not presently paying any dividends because the companies are reinvesting all their cash in new projects whose payoff will occur in the more distant future, if ever. Based on what I hear and read in the media, conventional wisdom is that when compared to dividend stocks, growth stocks prices will be less sensitive to rising rates.  And this is the part I don’t get.

Bond traders are usually pretty good with math.  And they understand that the “duration” of a bond determines how sensitive the bond’s price is to changes in interest rates.  A short-term bond whose duration is only one year will suffer a 1 percent decline in price for every 1 percent rise in rates.  A bond with a longer duration, say 10 years, will go down in price by 10 percent for every 1 percent rise in rates. 

Now, shouldn’t the logic be the same with stocks?  A dividend stock that is paying a known cash flow each and every quarter has a shorter duration than a growth stock that is paying nothing now, but offers the (faint) hope of large cash flows in the distant future.   Using duration as the guide, rising rates should drop the price of the short-duration dividend stock by a lesser amount than the long-duration growth stock; the talking heads have it backwards–in the face of rising rates I’ll bet on the dividend stock that is giving me cash now.

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