 Hey guys, really excited to be here. My name is Matthew Glacius. I'm the business and economics correspondent for Slate Magazine and a longtime partner of New America and Future Tense here. I'm really excited to have on the panel here two economists, both from the University of Michigan. We've got Justin Wolffers here and Miles Kimball over there. Two great thinkers on monetary topics and economics in general as well as excellent internet personalities who I've learned a lot from over the years. I'm interested to see what they have to say on this subject. Justin and I were just out in the hallway and we're chatting with Kashmir Hill and he asked her if she felt that reporting on Bitcoin was reporting on something pointless. So a rather pointed remark and so I guess you know maybe turn around by seeing, I mean is that how you see it? Is this a lot of hype over something completely pointless? We got to stretch it out for like 30 minutes. Okay so let's start. I am told that to the extent that Bitcoin's anything it's money. Is it that? Let's go to our economics one textbook. Is it a store of value? Well it goes from $800 to $75 back to $600 down to $500. That doesn't seem like a particularly reliable store of value. Is it a unit of account? I went to buy a bagel this morning and my bagel said it was one US dollar and 50 US cents. It was not labeled in bitcoins and is it a medium of exchange? Kashmir is the only person in the world who's managed to survive a week spending only bitcoins. For the rest of us when it comes time to buy a bagel it turns out the bagel shop accepts US dollars and it doesn't accept bitcoins. Actually bagels would be helpful. That really is a store of value, a unit of account and potentially a medium of exchange. So Bitcoin being money is I think it's so far been a total failure and then there's an enormous amount of enthusiasm around it which I think is sort of sociologically interesting and as an economist I don't understand in that we face many many deep important problems in monetary economics most of which have to do with trying to get the unemployed back to work that instead we spend lots of times thinking about people in the media particularly spend a lot of time thinking about a tiny cryptocurrency that appears to be backed by nothing but libertarian exuberance. So I just don't see the story here. All right there you go there you go and now Miles I mean you've thought a lot over the years I mean I mean since going back to just sort of before this surge of Bitcoin enthusiasm about the sort of the larger question of electronic money and digital currencies and does that mean do you see some some important promise? Oh absolutely I mean so the story really goes back to to 1932 in the middle of the Great Depression that a guy named Robert Eisler realized that they they could get out of the Great Depression if they distinguished between bank money and paper money and that also would have helped us avoid most of the Great Recession as well if we had had that set up. So imagine a world where and this is going to be a world that still has lots of problems but a world where we we don't have any inflation where we have recessions that are short by the way we kind of had that situation of recessions being short between 1985 and 2005 so I'm not talking about something we haven't experienced there so you have a tamed business cycle you have no inflation you do it without having to run up deficits to stimulate the economy you do it in a way where you can have you can have financial regulations that that keep banks honest so that they're risking their own money without having to worry about having enough aggregate demand all of that's possible if we if we distinguish between electronic money and paper money and and are willing to allow interest rates to run the full range from substantially positive numbers to substantially negative numbers so that is a change in the kind of system we have but but the the the unwillingness to go to negative interest rates and the paper money that helps undergird some of that unwillingness really causes us lots of problems you know so if you imagine back in early 2009 if the Fed had gone suppose you hadn't had an issue of paper money and the Fed had gone to minus three percent minus four percent interest rates with negative four percent interest rates by the end of 2009 you would have had a very strong recovery what we've suffered with this great recession is because of having interest rates not be able to go negative now why is that it's because we have these green pieces of paper that promise a zero interest rate you can you can take all the pieces green pieces of paper out of the bank you want hold them any period of time you want deposit them back again at par and get a zero interest rate so this paper money is kind of killing us now we don't have to get rid of paper money but we have to subordinate it to the electronic money and the more people love electronic money the easier that's going to be and that's what i think the importance of bitcoin is bitcoin is just showing how enthusiastic it is possible for people to be about an electronic money that really works in some ways m paces an even better example because there you don't have this sort of whatever a millenarian enthusiasm going on people just use the m-pace in a very practical way but if you can get low transactions costs on electronic money get some disruptive innovation there so that people aren't paying you know what one and a half percent credit card fees and everything and they can do transactions easily then people will come to love electronic money and it won't be hard for them to consider that the real thing and the more people love electronic money the easier it is to subordinate the paper money and say okay look we're no longer gonna have a guarantee of a zero interest rate on paper money anymore paper money will will sometimes have a negative interest rate as it gradually depreciates for short periods of time relative to the electronic money but if the paper money just isn't that important if electronic money can become in people's minds the real thing then this becomes politically possible people now think this is politically hard but it gets easier every year that people love electronic money more and more okay let's let's try to to break this down to make sure people understand because i i know it's a it's a difficult subject but but the issue that you're pointing to is that traditionally the federal reserve conducts monetary policy by sort of fiddling with interest rates you know you want to stimulate the economy you cut rates you want to curb inflation you you raise them but since 2008 2009 or so they've been stuck at a at a lower bound they feel that they can't go below zero and so instead we've had quantitative easing and fiscal stimulus is sort of unorthodox sort of measures and so your view is that is that this is basically a problem of paper yes and that if we can get people to use a convenient all electronic money system that we could we could go much lower absolutely you can keep the paper around but but you know the paper would be marginally less convenient though as far as the the interest rates you'd earn on the paper money it would actually be better than now it would be marginally less convenient but if you can get people to not say well this is the real money but say that electronic stuff is the real money you got a lot more flexibility and the reason you have more flexibility is because you know numbers on a computer have a lot more versatility than pieces of paper but so this speaks I think to the sociological point that that Justin was raising because because you're talking about the advantages of that sort of taking taking digital money in a more stimulative direction but it seems to me that the enthusiasm around this tends to come from the opposite side of the of the spectrum yeah I want to draw a distinction here between I agree with everything that Miles is in favor of always under any conditions and Bitcoin so Miles is in favor of monetary innovation and that seems to be wildly important I can think of three important reasons to be in favor of monetary innovation one in Sub-Saharan Africa people sending money to each other over their cell phones is banking the unbanked it seems incredibly important for as a way of people saving and also transferring money in a in an efficient manner and more innovation it gives more of the world access to the banking system is a good thing two those of us in the first world instead have a slightly different problem which is the you know we're using things like PayPal or American Express or visa instead for most of our transactions those transactions of course they're taking a huge chunk it's in possibly uncompetitive market and we're you know every time you use your American Express the poor shopkeepers paying four cents on the dollar and that's that's that's a real source of inefficiency in the third one is the one that Miles is worried about which is monetary policy which is as long as we have paper money it's very difficult for us to engineer negative nominal interest rates there are actually ways we could do it but it would be very difficult to engineer negative nominal interest rates and therefore we lack enough flexibility the problem with bitcoin is bitcoin doesn't address any of these in any particularly direct way i think the most i guess there is a sense in which potentially it would lower fees certainly some competition would be helpful there but in terms of the monetary policy thing because it was set up by gold bugs and libertarian zeal the money supply in the long run is going to be fixed which means that you're replacing Janet Yellen as a defense as the defender of the purchasing power of your dollar with satoshi and a bunch of computers and i know that in certain circles it's unfashionable to say it but i think that Janet Yellen is a very fine economist and the Federal Reserve has done an outstanding job in not debasing the currency and i certainly trust that to occur going forward and i think the bitcoin proposal in particular is one that would actually cause more monetary disruption rather than less the one thing i agree with everything you said except for one thing which is actually this is what matt said this is not a matter of looser monetary policy it's a matter of of of the right monetary policy and in particular electronic money has the potential to bring down inflation to zero forever and and the reason is an important one so monetary policy is hard you know maybe someday some some artificial intelligence will be able to do to monetary policy well satoshi's bitcoin algorithm is not that artificial intelligence that will do a good job with monetary policy so as it is now you need something big like a central bank with with many economists figuring things out to do good monetary policy now in those central banks they've decided to have inflation that's a conscious decision on the parts of central banks to to have inflation indeed not only is this a conscious decision on the part of the fed and ben bernanke has said as much on the part of the ecb japan which has had zero or negative inflation has decided it wants very much to get two percent inflation why it's because they want to have leeway on monetary policy the interest rates that matter are interest rates in comparison with inflation the the higher inflation is the more stimulative a zero interest rate is but you don't need to do that you don't have to have two percent inflation to have the stimulativeness of zero in zero interest rate two percent below where inflation is you can have zero inflation and minus three percent interest rates if you if you can go to negative interest rates which as long as you can demote paper currency you can keep the paper currency around but you've got to demote it from its current privileged role if you demote paper currency you can have negative interest rates then there's no reason no good reason not to have zero inflation so you can have what the folks who are talking about bitcoin say that they want which is a stable standard of value believe me bitcoin won't do that bitcoin is going to have this fluctuating value it's going to have a lot of deflation sometimes it's going to have inflation other times if you try to view things in terms of bitcoin you need somebody like a central bank that can stabilize the value of the dollar and they would if they had the ability to go to negative interest rates that the fed and other central banks around the world would would wind up choosing a zero long run inflation target and you would have the stable value of currency that people want and I think that's very valuable because this is like a yardstick you know it would be very inconvenient as Greg Manki says if a yard were 36 inches one year and 35 inches another you want to have a stable measure with your currency so people can think about say retirement saving carefully and that would happen as soon as we demote paper money and and get used to the idea of negative interest rates the dollar can be a fixed yardstick and you'll get what these folks want it's not about monetary policy being easy not about monetary policy being tough it's about the right monetary policy and a stable value of the dollar so you mentioned uh gold bugs test and um and you know I think I think enthusiasm for gold is something that puzzles a lot of economists um at the same time though it's it's something that's very real I mean you could have said sometime in 1987 but what's with all this gold but you know 20 years later people are still are still buying and selling it I mean do you think that that bitcoins can could have an enduring role in that same kind of way that precious metals have yes um and so that's where I think you're absolutely right Matt to say that this is an important area of study for sociologists um but while the long-term prospects are that it's going to be an infinitesimally small part of our economy and have no important macroeconomic consequences then real economists should be focused on real inflate on actual inflation and actual unemployment I agree I agree no I see you guys you need to disagree otherwise no no there well I can try and I'm gonna disagree with something Miles said by explaining what he was saying um but I want to just explain it more graphically so here's the the great problem according to Miles that we face is the Fed couldn't lower interest rates far enough to stimulate spending enough to get us out of the economy Greg Mankiew in fact came up with a very clever and the reason is that you can just hold on to your dollars which is a zero interest rate bearing thing Greg Mankiew actually came up with a very clever approach what we could do instead is the Fed could announce as of today as of next week every dollar bill whose final serial number ends in the number 47 will no longer be currency right and then they could threaten to do that the following week in the following week well all of a sudden what you've done is you've made it much more you really want to get those dollar bills out of your wallet today rather than leave them in there tomorrow because tomorrow they could be worthless now the problem with this is that when Greg suggested this he got more hate mail than he's ever received in his career so this doesn't seem like a politically saleable idea so what Miles has done is he said what I want to do is I want to do that but I don't want to burn the dollar bill in front of you because you'll get upset about it so what he wants is to put all your wealth in bits and bytes and then just every bit or byte that every balance that ends in 47 he's just going to like delete that away and then that's going to give the Fed the possibility of doing something for the economy it's a much starker way of describing what you're talking about I think it's accurate I'm entirely in favor of it and so maybe this is how the question which is why are people so much against it well I think I think there really is a political path to this and and one of the reasons is because there are a lot of countries in the world and and once one country does it they are going to have a big advantage vis-a-vis the other countries the the the other thing is that the fed actually has quite a bit of courage and they you know they can do things that are good for the economy even even if people complain so you know and for example you know they're they're things that people should be doing now to prepare for this eventuality because I think it's something that's very attractive to central banks for example the standard boilerplate for debt contracts should absolutely have clauses saying if ever the value of paper money is is lower than the value of an electronic dollar then we want you to pay the value in electronic dollars it's a mistake to be writing debt contracts without that kind of provision now because central banks aren't going to do this are going to do this someday I mean here's a case where it's very easy politically you take you take a country like Brazil that's that's been running seven percent inflation it decides it wants to get its act in in order and and bring its inflation down to zero they can put in place as part of that transition from seven percent to zero inflation these these this subordination of paper currency that will allow them to stabilize the economy with monetary policy at at zero inflation if if you do this nobody's gonna say oh this is this is some way of having loose monetary policy this is part of an appropriate transition from seven percent inflation to zero and and it's just good housekeeping for brazil when it does decide to go from seven percent inflation down lower to do something like that I don't know did did you see any of uh jenny yellen up on capitol hill this morning it was very difficult for me watching that to envision some future poor fed chair chairman or woman uh up there before the committee trying to explain why her policy was to take the money in people's bank accounts and and make it vanish with negative interest rates that you know the the level I mean if the impediments are political the impediments are political you seem to feel that they're that they're really technological but I think justin's point is that you know you you could do this with with analog currencies and and we don't because people people won't stand for it no no of course the big issues are political but already you see central banks who are willing to go to talk about going to mild negative interest rates I mean you had switcherlin back in the 70s do that for a brief period so central banks already are willing to contemplate going to negative interest rates and of course people get upset about that but it's not a political unwillingness to go to negative interest rates it's that you have these technical features that cause extra problems that are not a necessary consequence of negative interest rates I think you're missing matt matt's matt's point here so the question is not which side of the technocratic center thinks this is a good versus a bad thing matt's point is that you could run for president from one of the two major political parties with in the fed being one of your major planks and at various points actually lead major public opinion polls and so that's a political reality which I think actually the mainstream of technocratic economics your point needs to take a lot more seriously as well yeah but think of why that happened that happened because of the great recession it's because we had the great recession so if instead you'd ended the great recession by the end of 2009 with negative interest rates you you wouldn't have had that happen in the political in the presidential election I think now it's time to uh take the temperature of the political realities in the room um see if uh if people have any questions and we have a uh a microphone there so raise hands here we go here who says that there is no negative interest rates today andi dervish I'm with the world bank uh so how how do you measure negative interest rates and why do you think uh just simple uh debasing of the currency is not what this is not negative interest rate the simplest version of a negative interest rate would be this so suppose what what would I mean by a negative interest rate on a three-month treasury bill I mean as it is now uh if you if you have uh if a $10,000 three-month treasury bill costs uh you know nine nine thousand nine hundred then it's going to go up one percent in a in three months which is an annualized interest rate of four percent if you had a three-month treasury bill and people were willing to pay um to you know 10,100 for it and and then they get back the face value of 10,000 after three months that's a minus one percent over three months or minus four percent over a year so if if it weren't for paper currency through then through ordinary open market operations the fed could buy treasury bills until the price of a $10,000 treasury bill was uh $10,100 and that would be a negative interest rate and that would be very very stimulative to the economy minus four percent is probably too much I mean by the time you get down to minus two percent the that's going to be very very powerfully stimulative to the economy but negative interest rates are just when you the value of the loan at the beginning is greater than the amount of principal paid back at the end if you have just a simple you know payment at the end and then it's a little more complicated if you have coupons in the middle hi my name is Carter Carter Doherty I'm a Bitcoin boy at Bloomberg News uh and uh two quick comments um one I couldn't on the uh the question of this this notion of hardwiring inflation into the currency took me a while to find on the phone but actually uh some years ago I did write a story about this there are experiments like this going on in continental Europe the sort of the creation of of these currencies that depreciate automatically over time they take their inspiration from a German economist named Silvio Gizelle who I believe if memory serves uh got some approving nod from Keynes and one of his works I don't precisely remember which one um the second point I wanted to make um more of a challenge is uh I wanted to suggest the next time you talk about digital currencies you spend less time destroying a straw man which is you spend a lot of time talking about the uh I believe it was libertarian fantasies or some something to that effect zeal libertarian what zeal zeal there you go then there's plenty of libertarian zeal there's no doubt about it if you look however at where the money is going in in digital currencies uh the investments in venture capital and what I'm told will come off the sidelines once the regulators get their stuff together it's all about bitcoin as a payments technology nobody is spending venture capital to try to end the fed or end the ecb or bank of japan or whatever it's all about the technology I may get a little a little bit of trouble with uh you know my friends from the mercatus center over here uh but uh you know the people the people who go on with the libertarian fantasies at these bitcoin conferences that you attend they get a lot of applause I don't think they're making very much money okay so if you I take your challenge seriously let's follow the money that's easy the greatest currency and the greatest payments technology in the world is the US dollar by about 750 million orders of magnitude so the rest of it's just a side show I mean mark andriasson mark andriasson you know invest 50 million dollars and I meant to care because I mean it's it's a tiny part of the economy let's uh let's get some libertarian zeal from uh hi ila dorado from the mercatus center uh miles it seems like at the core of your proposal is actually not negative interest rates it's separating the unit of account from the medium of exchange well that's what allows negative interest rates exactly so so why not do that with bitcoin right we could define a new unit of account call it you know maybe a trillionth of nominal gdp maybe we could call it a summoner um and then we uh just let it float against bitcoin and people people use uh use bitcoin for as a medium of exchange and we have this uh you know ideal unit of account that addresses all nominal fluctuations we have automatic monetary policy why aren't you excited about bitcoin if we could do that well I mean there's just there's not I mean anything can be a medium of exchange that the key thing is the unit of account and the unit of account is what you need to have careful monetary policy about you need to keep a stable unit of account and then you know there there's some short run things you need to worry about in order to stabilize the economy then over a longer period of time you want it to have a stable value but ultimately the the key is to realize that that we need to have a stable unit of account but all the other mediums of exchange and here the paper dollar would be a subordinate a subordinate medium of exchange you could have bitcoins too it's not the medium of exchange that's the key role of money the absolutely central thing about money is the unit of account function and that's what central banks need to be in in charge of and you need to make sure that nothing gets in the way of that and you need to make sure that you you you've got to take away this this basically we now have a government guarantee of you can have at least a zero interest rate you have these green pieces of paper we've created this government guarantee it's just like milk price supports if you say we're going to guarantee that the price of milk is at least this high it causes problems and we end up throwing away a lot of powdered milk and so on and and similarly if you if you willy-nilly create this guarantee that interest rates are always going to be at least zero that kind of government guarantee is going to mess a lot of things up one more one more question one more question there in the back hello my name is oh that's loud mckella chagilio i'm an analyst with trilliant risk advisors and i have sort of a two part question the first is if we take your premise that this is the direction that currencies are moving in what sort of timeline are we looking at for the sociological changes to take place and my second question is if this does take place what would be the implications for cross-border transactions if some countries adopt a digital currency and others do not okay those are really interesting questions so first of all the phase one is to get people excited about the electronic money and i think that's that's proceeding and so if you the more you can get people to do electronic transactions that's the better so i think we have some years yet to run with that i do think that there are a lot of regulatory and commercial law things that people should be looking at like like i said people should absolutely have the boilerplate debt contracts say if ever the value of a paper dollar is different from an electronic dollar the amount you need to pay me is this many electronic dollars that should be starting today in the door boilerplate debt contracts but as far as now as to your other question about the international things what happens is now if one one country's central bank lowers interest rates then other country's central banks will typically try to follow down but suppose most countries are you've got a bad recession most countries are at zero interest rate and your country is the one that can go down to negative interest rates then you're going to get more powerful monetary stimulus and it's going to stimulate capital flows and net exports and you're going to have to warn other countries that hey we're going to a system where we don't have any zero lower bound you should be prepared to because if you haven't gotten rid of your zero lower bound to then when we go to negative interest rates it is going to take away from your exports that's not our intention please you should eliminate your zero lower bound to and then if you get to that point and you've got to go to negative interest rates and the other countries can't you say we've been warning you for years and years and years that you should have eliminated your zero lower bound to we got to do this to stimulate our economy and you know definitely if you want to try to cancel that out with a with a huge exchange rate intervention that's fine with us we're not doing this in order to goose our exports we're doing this to stimulate our economy and we're we'd be more happy if it were in just investment within our country that's what will happen if you eliminate the zero lower bound to i think we're we're at our time bound so thank you both and thanks everyone here