Prisoner’s Dilemmas- XX: City Council Cartels

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Anyone who has observed the chaos of local politics has seen the Machiavellian dynamics of a municipal committee elected by the town. The best example is seated on the town council. The incentive structure of the council members; is driven by the fact that their position is secured or eliminated by the will of the people. Setting up the classical variables for any Public Choice analysis, as the council members tailor their platforms and rhetoric to the voter preferences. If the same council members are either reelected or run unopposed, there is the incentive to form a coalition with the other recurring council men, formulating an informal agreement to have each other’s back. Effectively creating a cartelization since the other sitting council members have consented to support your policy prescriptions and justify your controversies. Per Katz and Mair (2018):

“…The mainstream parties, and most minor parties as well, have effectively formed a cartel, through which they protect their interests in ways that sap the capacity of their erstwhile principal—the electorate—actually to control the parties that are supposed to be the agents of the electorate. While the appearance of competition is preserved, in terms of political substance it has become spectacle (p.7)…”

By forming tight bonds and backing the rest of the elected officials on the council, each works to consolidate the power within this single unit of governance. Forming an impermeable oligarchy that the voters cannot vote out office due to a lack of policy competition. Analogous to an economic cartel, where consenting producers all fix prices in unison, all politicians “fix policy” to conform to the rest of the representatives on the council. This keeps external influences out of the fold, enabling all to retain their seats if they play ball. Much like all participants in an economic cartel enjoy larger profit margins, if no one reneges.

Hypothetically, let’s say there are four council members; one of the incumbents decides to resign mid-term. The replacement candidate is an insurgent candidate, breaking the unanimity among the colluding council members. This loosens the relational foundation among the incumbents; we start to see instances of defection among them. What was once complete accord among the old boys club quickly devolves into a prisoner’s dilemma. It is important to remember that cartels seldom are sustainable indefinitely. Eventually, the temptation of one party to undercut the rest of the colluding companies will cause them to defect (Tullock, 1985, p. 1076). For example, one particularly narcissistic council member may claim responsibility for policy reforms that his other cohorts co-sponsored. This type of behavior only undercuts the contributions of the others, leading them to undermine this arrogant council member. The cadre of incumbents suffer from the eroded trust. The newer member with innovative policy prescriptions; only proceeds to dimmish the creditability of the old boys club.

The Economics of Protesting

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Michael Huemer’s substack post Political Activism: What’s the Point, raises some intriguing inquiries regarding the actual utility of participating in political demonstrations. Much like other forms of collective action, the contributions of individual actors will have virtually no impact on the outcome. This parallels the dynamics of another notable form of collective action in politics, voting. If you divided your individual by the sum of all other votes, the aptitude of your single vote altering the results is exceedingly minuscule (p. Bohanon & Cott, 2002, p.592). But it is far more cumbersome to measure the influence of individual activists in comparison to single voters. Professor Huemer goes beyond the pure futility of the efforts of a single protester; and suggests that effectual change could not be the main force driving participation as people value their “..own welfare hundreds or thousands of times more than the welfare of strangers..”. It is more likely that people gain more from networking, personal ideological motives, and rights to virtue signal more than their concern for others being equal to their welfare.

However, he lists Dr. Martin Luther King and Rosa Parks as being exceptions to the drop-in-the-pan theory of effective activism. Both individuals are far different from the average protestor holding a sign at a demonstration. King and Parks undertook the costs of distributing communication and organizing activistic events. In theory, we could perceive them as being political entrepreneurs. A political entrepreneur per Public Choice scholar Randall G. Holcombe defines as:

“…Political entrepreneurship occurs when an individual observes and acts on a political profit opportunity. As with market entrepreneurship, entrepreneurial actions require, first, that a profit opportunity exists, second, that someone is alert enough to spot the opportunity and recognize the opportunity for profit, and third, that the individual is willing to act on the opportunity once it is spotted…” (p.143).

While civil rights advocacy did benefit people beyond King and Parks, they were still able to garner reputations as civil rights leaders. In effect, establish careers. Neither activistic leader would be able to have gained a following if there was not a demand for equality under the law. Mimicking the demand for a product or service in private markets. Regardless of our normative perception of civil rights, they both capitalized on the opportunity for social change. Analogous to how an economic entrepreneur fulfills a need in the consumer market. It is not necessarily morally objectionable that King and Parks benefitted from acting as political leaders since the changes they advocated for did achieve betterment from these societal advances. It would be wrong to classify these efforts as rent-seeking.

A high-profile activist such as Dr. King may act entrepreneurially in protest efforts, what about the rest of the demonstrators supporting King’s activist events? There is a certain amount of free-riding transpiring as this individual did not have to incur the coordination costs of planning the protest. Sure the costs of time and effort are present for even the lower-effort protestors, but King has already reduced the transaction costs of communication and coordination. Because these other demonstrators forfeited these enormous planning costs and the institutional risk, it only stands to reason that these other protestors are not even a footnote in history. Big risk equals big rewards. Dr. King paid the ultimate risk-cost for his political advocacy when he was assassinated. Few of King’s followers had to take on the costs of marching by side him. If anything his penchant for drawing like-minded followers exemplifies how he operated like a corporation for political activism. His ability to dimmish transaction costs for many protestors mirrors what corporate employers do for their employees. Corporations lower the transaction costs of employees finding clients needing service, typically on a large scale. A juggernaut; in the sphere of political protests like King effectively connects members of the same political movement in a superior manner to lesser community organizers. It is evident that without a strong unifying force, the collective action process fails and imposes costs on those less talented organizers that still opt to protest.

Friday Feature Film- Anthony Bourdain: Parts Unknown (Singapore)

Prima facie, Singapore seems like an idyllic “Nanny State” nation, with the absence of the abject penury that we typically see under tyrannical regimes. However, is the veneer of safety and cleanliness worth relinquishing individual rights? If so, can such a society be sustainable long term? Can the state-sanctioned orderly nature of Singapore endure the trials and tribulations of the next century? Only time will tell, but to quote the Robert Frost poem, “Nothing Gold Can Stay”.

Conspiracy Theories- The Lazy Man’s Cult

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The literature (p.93-94) paralleling conspiracy theory culture with the social dynamics of religious cults is starting to accumulate. In the post-factual world, there has been an explosion in the amount of research and commentary surrounding the psychological and sociological implications of conspiracy-mongering political sects such as the alt-right and QAnon. Outside of the grand edicts of Alex Jones being profane (non-spiritual in nature), there is another notable difference between the microcosm of conspiracy land and a religious cult; commitment costs. 

In theory, a fan of conspiracy theory media can participate in this sphere without paying a dime (outside of the cost of electricity and monthly bills for internet access). Sure, our good friend Alex might be slinging some bogus supplements, but there is no requirement to purchase any Infowars products. Anyone with internet access can still access his web-based content. In contrast, a religious cult not only lays claim to all your earthly possessions and assets, the leader expects that future earnings are directed to the “church’s” coffers.

 Beyond the differences in direct monetary costs, there are also drastic disparities in the nonmonetary costs of participation. In the conspiracy community, there is a large spectrum of various commitment preferences; no formal obligations to increase your level of commitment. The range goes from sitting consuming conspiracy media and frequenting conspiracy Reddit pages; even partaking in political activism predicated on conspiracy theories. Even if you are under the spell of the false prophet peddling tin-foil hat tomfoolery, there is still a degree of choice. To be a member of a religious cult, the costs of participation are extraordinarily high, and there is no gray area. A prospective member is fully obligated, or they are out. They must give up or share (their spouse or sexual partner), job, family, friends, hobbies, and contact with the external world. Alex Jones nor David Icke are not pressuring people to cut all ties with family to worship in their bugout bunker in rural South Dakota. 

Essentially, conspiracy theories are opium dreams for the lost and disillusioned, like members of religious cults. But subscribing to conspiracy theories is the lazy man’s version of being a cult member. The commitment expectations and financial costs are much lower. Theoretically, a conspiracy theory adherent can live normally; hold down a square job, and raise a family. However, once they are off the clock, then their double life begins. 

Prisoner’s Dilemmas-XIX: Labor Negotiations & Strikes

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For now, President Biden was able to pump the breaks on the railroad strikes. Biden appointed arbitrators to negotiate mutually agreeable recommended revisions to the current labor contracts. This action kept “..115,000 rail workers on the job..” and narrowly side-stepped work stoppages from occurring on Monday (July 18th). In a time of preexisting supply-chain constraints, labor disputes would only exacerbate matters (the best real example would be the situation in the UK).

The dynamics of organized labor have a long history of being contentious, and striking is their secret weapon in gaining leverage at the collective bargaining table. If a policy does not contour to union interests, the relationship between the government and the labor movement devolves into a standoff. Since both factions have competing goals, this negotiation process is a Prisoner’s Dilemma. Lawmakers tailored policies to the preferences of the majority (union members only make up 13% of the US labor force). Also, in the anti-union camp, management possesses a fiduciary responsibility to enforce policies that are advantageous for the firm. 

These sets of incentives are opposed to the interests of the unions. Organized labor aims for higher wages, better benefits, more safety measures, and other generous forms of compensating differential. These new desired measures may be more costly for the firm or adversely impact consumers with higher prices or a lower grade of customer service (inefficiency). The demands of the labor unions tend to concentrate the benefits and impose costs on the rest of the economy. Even in sectors that are only tangentially connected to the industry where the workers are on the brink of striking. When their proposals are ignored or rules they dislike come into play, they defect by halting production and picketing. 

How neither party can reach a consensus generates Pareto-inefficient outcomes; should be self-evident. Because employers and policymakers might not want to cooperate or even meet the unions in the middle, they are defecting. In turn, the unions initiate strikes which create product scarcity, production bottlenecks, and higher prices. The ripple effects of the lack of agreement will hurt every economic actor in the market.

Fireworks, Coase’s Theorem, and HOAs

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Coase’s Theorem is frequently applied to the dilemma of environmental pollution, but could this predominate model of New Institutional Economics also apply to Noise Pollution? In the United States, it is common for people to have neighbors hosting a loud party or to be a member of a rock band rehearsing in the family garage. Local noise ordinances emerged to help establish limits where Coase’s theorem may fall short. Who precisely owns the airwaves between you and your neighbor’s homes? Could not the obnoxious riffs from the untalented punk rock band practicing next door also be distributing spillover effects to households further down the block? Soundwaves permeate far beyond a ten-foot radius around a single housing unit.  Most municipalities have ordinances placing limits on the right of your neighbor to butcher classic tracks from Bad Brains

On the 4th of July, a holiday commemorating the American colony becoming a sovereign nation, it is customary for people to purchase fireworks or attend organized events with a fireworks display. There is some overlap between noise complaints and fireworks, but it takes on a different dimension because of the potential for bodily harm and damage to private property. Not everyone is going to be out blasting off roman candles, Avenger missiles, and Black Cat bottle rockets with gusto. For sleeping infants, pets, early risers, and mild-mannered people, such private exhibitions of dazzling pyrotechnics are a nuisance. For military veterans grappling with PTSD, the blasts could conjure up memories of rocket-propelled grenades demolishing buildings and vehicles in Fallujah; which is downright injurious to their mental health. Not everyone is jumping for joy when their neighbors decide to purchase a treasure trove of fireworks every July. There are even negative externalities beyond the decibels of the fireworks detonating; such as potential damage to private property when armature efforts to deploy pyrotechnics go awry. An issue one would hope that homeowner’s insurance can remedy, but there will likely be variance based upon jurisdiction and insurance provider. 

Unlike noise ordinances, laws governing the private use of fireworks are implemented at multiple tiers of government. Including HOA rules, local laws, county laws, and even laws at the state level regulating the purchase, sales, and use of fireworks and related products. For example, Massachusetts is the only state that bars retail firework sales altogether; but many permit the sales of non-aerial varieties of pyrotechnics; however, this does mean that residents of jurisdictions where aerial are prohibited refrain from purchasing them. 

Courtesy of Reader’s Digest.

Since the spillover effects of fireworks extend past an individual property line, laws regulating the use of fireworks clarify the ambiguity. This is not blind deference to legal positivism, but clarification of the use rights of citizens of a specific locality. If an individual plans to relocate to a state with looser firework laws, they should research the state and local laws before moving. In many cases, the states with less stringent fireworks laws tend to lean conservatively (correlating with a lower cost of living and taxes). Those who dislike fireworks may already be compensated through lower cost living, making gains from Coasian bargaining superfluous, per Boudreaux and Meiners:

“… A common example: someone who buys land located near a busy airport should expect to regularly hear noise from airplanes.148 That person’s property right to her land does not include the right to be free of airport noise. In the language of the common law, the person “comes to the nuisance.”149 The price that she pays for this land is discounted to reflect the absence of this particular “stick” in the bundle of rights received when she purchased the land. This price discount reflects the internalization of this landowner of airport spillover effects..” (p.24).

Even if transaction costs are high and the rights violated by shooting off fireworks are unclear, could neighbors still strike private bargains to resolve this conflict? Hypothetically, it is possible, but there is the potential for suboptimal results. It is arduous to gather all the “…relevant agents to the negotiating table..” either due to other neighbors not being aware of any private agreements in the neighborhood or other factors (time, social capital within the community, costs of organizing, and reconciling different preferences) making group bargaining prohibitive. Organizing the community for group bargaining mirrors the collective action problem we see in public policy. If there is no feasible way to represent the preferences of every household, the private agreement misses the mark on Pareto-efficiency. Any broad agreement or rule aimed at achieving social welfare without complete unanimity will fail; will not be achieved (p.72). A bargain between two households to cease all fireworks by 11:00 pm will not work for all residents. Some households would prefer no fireworks; others enjoy the positive externalities of the free pyrotechnics display and would love for it to go on all night. Regardless of the decision made, costs will be placed on at least one household, and it is unlikely to devise rules that will make everyone happy.

Unfortunately, there needs to be an organized authority for rule promulgation and enforcement. A plethora of individual households forming fractured agreements will not mitigate the spillover effects throughout the community. Should this authority by the local or state government? Not necessarily. It is important to remember that group decision-making is subject to institutional scale; management of an individual household is a form of group governance within a minuscule scope. What about the rules regarding the private use of fireworks enacted and enforced by a Homeowners Association?

Many homeowners who reside in HOA communities bemoan the existence of these apolitical governing institutions, but they are more valid than the local city government. By purchasing a home in a specific community, a person consents to the established rules in the HOA charter. A prospective homeowner can easily withdraw consent by acquiring a home in another subdivision if they disagree with the terms of the charter. It is not only the opt-out features of HOAs that make them more legitimate, it is also the degree of impact the constituency has on the decision-making process. There are no formal political parties to muddy the process, and coalitions are inevitable but lack the cohesive strength without an anchoring institutional identity. Public Choice concerns like rent-seeking are impossible to tease out, but lose traction by the increased individual costs in the absence of sustained formal factions. It is also to note that due to the lack of party politics, the elected representatives on the HOA board are held to a narrow set of interests, making it more likely that they will act per the preferences of their fellow residents. With the development of social media, HOA Facebook groups; have been established; these applications provide direct feedback on various issues within the community. The criticism can be ruthless; most residents have no qualms about voting out ineffectual representatives. 

Bootleggers and Baptists-LVI: The War of the Wok

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Labor Unions have historically held anti-immigration and nationalistic sentiments on their platforms. This makes the fact Progressives romanticize organized labor somewhat puzzling, as both factions of political actors often have conflicting objectives. One example of the prevailing nativism in the labor movement was Cesar Chavez’s hostility towards immigrants; how contemporary liberals square this cognitive dissonance when they proudly proclaim they are “Pro-Labor” is beyond the veil of reason. It should not be shocking that labor unions were one of the driving forces in implementing anti-Chinese legislation in the early 20th Century. 

The article THE ‘WAR’ AGAINST” CHINESE RESTAURANTS, published in 2017 by Regulation Magazine, provides a historical example of the anti-Chinese sentiments of organized labor. In the early-1900s, the United States excluded Chinese immigrants from most spheres of economic life in the United States; since many jobs required licensing that was only available to U.S. Citizens (p.32). The growing communities of Chinese immigrants in cities like San Francisco were able to enter the food service industry and laundry services. Chinese restauranteurs succeeded in providing a quality and low-cost dining option; birthing the American love affair with chop-suey. This was not without resistance since these new exotic restaurants were siphoning away business from eateries owned and operated by native-born citizens. The American Federation of Labor affiliated, The Cooks’ and Waiters’ Union, was a staunch supporter of anti-Chinese legislation (p.33). Various food service unions boycotted Chinese Restaurants and advocated for laws to loosen their gripe on the restaurant industry.

After the boycotts failed to achieve the Union’s anti-competitive objectives, they decided to lean on the legislature’s pen to reclaim the market share lost by Caucasian restaurant proprietors. The unions had the perfect pretext for demanding regulation (p.13); that was the moral concern of white women. As detailed by Chin and Ormond:

“..Newspapers offered lurid reports that Chinese restaurants were fronts for opium dens, and that Chinese men used opium “as a trap for young girls.” The idea of white female victimization became a media trope. In 1899, King of the Opium Ring, by Charles E. Blaney and Charles A. Taylor, played at the Columbus Theater and the Academy of Music in New York. Later produced around the country, it featured a clown who rescues a young white woman from the balcony of a Chinese restaurant. Movies depicted similar scenes and renowned “realistic” artists painted Chinatown vistas… (p.34).

At the time, there was a profuse amount of propaganda suggesting that Chinese men would try to lure white women into their establishment and then take advantage of them. The upper-class habit of “slumming” made trips to Chinatown a popular destination. There remained a lingering fear that white women would be enticed by the food but would decline into exploitation and degeneracy. Organized labor capitalized on this perception of Chinese immigrants and utilized it to provide the pretext for creating laws that would derail the success of Sino-dining establishments. Most of these measures varied by state and municipality, the majority of these laws either restricting or barring white women from entering or being employed in Chinese restaurants (p. 34-37). The unions have since given up on these measures once Chinese restaurants no longer appeared to be a threat and have since moved on to other policy issues (p.37). This chapter in American history perfectly embodies the incentives and dynamics of Bruce Yandle’s Bootleggers and Baptists (1983) model of coalitions. Regardless of the veracity of the claims of Chinese men seducing white women, it is still a “moralistic” concern as it posits a normative motive for enacting such ordinances and state legislation. Some of the holy-rollers included missionaries who entered Chinese neighborhoods proselytizing Christianity, who purportedly witness this moral impropriety (p.34). It should be conspicuous who the Bootleggers are in this scenario, as a union in themselves are nothing more than glorified lobbyists whose pedigree of rent-seeking can be traced back to the medieval guilds.

Bootleggers & Baptists- LV-Gun Control

***Special thanks to Dylan, proprietor of the Onlookers blog! He pointed out a few typos and the necessary edits have been made.

Check out his blog (Click Here).

Few issues in the current political scene are as divisive as the Second Amendment; as articulated in the SCOTUS case District of Columbia v. Heller (2008), an individual right. Anytime a mass shooting occurs or restrictions are purposed, gun rights advocates tend to double down. After all, regulating firearms is a prisoner’s dilemma in which neither side of the aisle is interested in making any concessions. Prima facie, it does seem that guns have become increasingly regulated over the years. Potentially vindicating the slippery slope logic expressed by Second Amendment proponents. The fear of prohibitively strict gun regulations or outright bans weighs on the minds of gun owners. A point substantiated by the fact that 59 % of polled gun owners indicated that gun control advocates desire to outlaw private ownership of firearms. Many gun enthusiasts view this right as sacrosanct and a vital component of living in a free society.

Number of Mass Shootings in the United States 1982-2022. Courtesy of Statista.

How do the reactionary sentiments of slow and grinding decline to an outright gun grab correlate with patterns in gun sales? There does seem to be a connection between precipitating events and increases in transactions related to procuring firearms (including background checks). Analogous to how macroeconomic events impact trading on the stock market, the prospect of regulation after events such as mass shootings results in abnormally high gun sales. For example, gun sales in California soared by 168 % between 1996-2015. 50 % of all mass shootings within the past 50 years transpired after 2000.  20 % of the mass shootings in this timeframe occurred within the past five years.

Gun control proposals; are often formulated in the wake of a mass shooting; there does seem to be at least a superficial correlation between mass shootings, gun control proposals, and gun sales. But, are politicians and political activists concerned with decreasing the number of guns in the hands of the citizenry shooting themselves in the foot? It is inherently human for people to purchase large quantities of a commodity facing a ban. A clear example of this was before JFK enacted the Cuban Trade Embargo; he stocked up on his favorite brand of Cuban cigars. It isn’t outlandish to believe that gun owners would seek to stock up on accessories, ammunition, and firearms after a mass killing or the announcement of gun control legislation. In effect, this would encourage people to obtain more guns. Rendering the bluster of tough-on-guns rhetoric to being counterproductive. Unwittingly, when politicians like Beto O’Rourke are telling us that he is coming after our AR-15s he’s saying “.. Everyone run to the gun shop now!..”. O’Rourke is blinded by political gamesmanship; he overlooks that his firebrand comments have only created a cobra effect; people panic and buy more guns.

If progressive politicians are inadvertently increasing the number of guns owned by the American public, who benefits from gun-grab-mania? Gun store owners. In applying the logic of Bruce Yandle’s Bootleggers and Baptists (1983) model, it becomes clear that gun control advocates are indirectly helping the proprietors of gun stores. By sending all of their patrons into a frenzy, the moral arguments of the anti-gun crowd end up drumming up more business for gun vendors. While neither party is intentionally working together and does not even share the same goals, they have a synergistic relationship. Beto is waving the flag of the gun shops without even knowing it.

Editorial Graveyard- Part IV: Opinion Piece- Gold-Backed Stablecoins Solution to Bitcoin’s Instability

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Rejected by FEE

In mid-June, the value of Bitcoin sunk below $20,000.00, reaching a two-year low. After a slight rebound on June 20th, Bitcoin had still lost 55% of its value; for the year and 35% within June. However, Bitcoin was not the only digital currency to suffer turmoil amid this downturn in the market; several other commonly traded cryptocurrencies also experienced a decline in value. As with any speculative assets, there are multiple factors; commentators cited as causing the recent meltdown in the crypto markets. Some commentators suggest that macroeconomic factors such as high inflation and interest rate hikes are potentially to blame. Others claim slumps in trading volume and the failure of several major crypto projects (collapse of Terra-Luna and Celsius) have agitated the market. The recent trouble in the crypto space most likely cannot be attributed to one sole factor but will not be persuading any crypto-skeptics to get on the bandwagon anytime soon. 

There is a digital currency alternative that is not only less volatile; but still possesses the benefits of blockchain technology, that is commodity-backed stablecoins. More specifically, stable coins collateralized by gold reserves and gold-pegged money seemed politically impossible since President Nixon closed the gold window back in 1971. It is possible to have gold-backed private money, that blends the advantages of cryptocurrency with the value stability and historical salability of gold. Effectively, the best of both worlds, adopting the best attributes of both monetary assets.

What are Stablecoins?

The term stablecoin is thrown around, but what is it? It is a digital currency with value tied to an asset or supply controlled by an algorithm (known as an algorithmic cryptocurrency). This category of digital assets created a cryptocurrency with a stable value. Cryptocurrencies have become popular alternatives to traditional inflation hedges as such money assets are highly volatile, meaning that Bitcoin may not be the best store of value if compared to other monetary assets. In 2014, the first stablecoin, Tether, was established and was backed by the US Dollar and related assets  (US bonds). But wasn’t the creation of cryptocurrency an attempt to veer away from the authority and meddling of central banks? There must be a better asset to collateralize private digital money than monetized debate.

Fortunately, there is gold, precious metal that has demonstrated its value retention and salability throughout human history. In an age of digital transactions, even using gold-pressed coins or promissory notes to redeem specie may be cumbersome in an era of debit cards. The idea of a gold-pegged stablecoin seems like a natural fit, combining the benefits of gold’s superior value proposition with the perks of blockchain technology. The market for the digital token has answered with popular stablecoin such as Pax GoldTether Gold, and Perth Mint Gold Token.

Gold stablecoins are valued at a specific amount of gold per token, stored in a secure vault. Per the Pax Gold white paper, each coin is collateralized by one troy ounce of gold. In the example of Pax Gold, any owner of Pax tokens can redeem them for physical gold “… at partner organizations..”. The reserve ratio requirements for gold to token backing and specifics of redemption requirements may vary by currency, most gold-backed stable coins utilize Ethereum-based smart contracts.

Gold-Pegged Stablecoins Offer a Superior Value Proposition 

The most notable difference between Bitcoin and a stablecoin like Tether Gold is the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and fluid cross-border payments conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Gold-Backed Stablecoins Are More Stable Than Unbacked Cryptocurrencies:

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence.

The Convenience of Gold Collateralized Stablecoins:

When compared to physical gold and ETF gold funds, gold-backed stablecoins have a greater degree of convenience. Gold-backed stablecoins are frequently compared to ETF Gold Finds, but “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..” While redemption in fiat currency was maybe more convenient from the standpoint of liquidity, most users are opting to obtain a currency with no instinct value (prior use). Even though those that opt to invest in gold stablecoins, there are inherent counterparty risks.

In comparison to physical gold and ETFs the ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. Plus, the unencumbered cross-border transactions make it an excellent universal medium of exchange. 

Many people may still hold a healthy amount of skepticism regarding stablecoins tied to reserves of gold. After all, there requires a high degree of institutional trust for such an arrangement to transpire. However, this may be the last shot we have at establishing a gold standard. The political interest to maintain current easy money policies is too tempting for the Federal Reserve and politicians to maintain. Beyond the macroeconomic goals of full employment and price stability, Fiscal QE can be used to fund government projects ranging from wars to universal basic income, making irresponsible monetary policy a tempting lever for political gain. In the post-Bretton Wood era, the only way to avoid the bargaining chip of an elastic money base is privacy money with fixed commodities controlling the overall monetary supply. The political interests are so strong even if we had Ron Paul in the Whitehouse, easy money types would get their way on fiscal and monetary issues. The only way to ever obtain a gold standard will be from a private monetary regime.

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 3)

Bitcoin.me Educational Video by Three Piece Suit Productions LLC, Michael Adamo, Dan Donaldson is licensed under CC-BY-NC 4.0

The Benefits of Gold-Pegged Stablecoins?

Most of the white papers of the existing gold-tied stablecoins exalt the perks of digital currency backed by the world’s most enduring monetary commodity. Many claim the benefits of  1:1 token to gold-backinglow transaction feesa safe-haven hedge against instability and inflationlow buy-in requirementslow transactional costs for people living in remote areas, and the positive aspects of combing blockchain technology (convenience, decentralization, and honest record keeping) with the enduring value proposition of gold. While all these qualities are maybe enticing, the best way to demonstrate the superiority of golden stablecoins would be to compare them to other similar alternatives. 

Standard Cryptocurrency vs. The Midas of Digital Money

The most notable difference between Bitcoin and a stablecoin like Tether Gold would be the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and internationally fluid payment system conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence. 

Gold-Backed Stablecoins and Gold ETF Funds

Gold Stablecoins are frequently compared to Gold ETF Funds which are the darling of derivatives markets. Despite the criticisms of experts, there are some advantages that gilded Stablecoins hold over ETFs. Gold ETFs are essentially investment funds possessing gold-related assets. One key attribute distinguishing ETFs from their blockchain-based cousins is the fact that “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..”. In terms of liquidity, this may be a bit more simplified than cashing out a share of a gold-backed stablecoin token, as most stablecoins redeem in gold specie. However, if the point is to obtain money of “high intrinsic” value, the ETFs have to trade easy liquid for lesser money (fiat currency), in return. It would be dishonest not to bring up that gold-tied stablecoins do have counterparty risks, but that is a chance anyone takes with any third party holding precious commodities in their care. 

ETFs are purely intended to function as a speculative asset, while in contrast, the smooth settlement and distributed ledger and nationally agnostic nature of blockchain structure make tokens like Pax Gold or Tether Gold better suited for use as a medium of exchange. In all honesty, this will probably best bet for re-establishing a gold standard in the post-Bretton Woods era. The political interests of Federal Reserve officials, banks, and politicians are too embedded in the empty promises of easy money policies of the post-2008 U.S. Monetary regime. The temptation lurks for utilizing Quantitative Easing, bent beyond purely macroeconomic objectives (full employment, price stability), to fund the ends of fiscal policy. (Fiscal QE). The temptation of gesturing such a powerful bargaining chip such as open purse strings would make the idea of a fixed money supply more of an obstacle than a virtue. The number of people who stand to benefit from the current monetary policy of using collateralized debt as money makes a gold standard wide-eyed opium dream. Any transition to gold-backed currency; must come from a private currency; no government would ever revert to such a barbarous relic. It doesn’t matter even if the “End the Fed” crowd gets Ron Paul or Dave Smith in the Whitehouse, a meat grinder of the political process will drown out any monetary reforms. 

The Benefits Over Physical Gold

Beyond the benefits of tokenized gold lending itself as a medium of exchange from blockchain technology, it is worth noting that most transactions are now digital. The ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. 

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 2)

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What are Stablecoins?

The term stablecoin is frequently thrown around by those initiated in the crypto-space, but what is it? It is a digital currency value tied to an asset or supply controlled by an algorithm (known as an algorithmic cryptocurrency). This category of digital assets created a cryptocurrency with a stable value. Cryptocurrencies have become popular alternatives to traditional inflation hedges as such money assets are highly volatile, meaning that Bitcoin may not be the best store of value if compared to other monetary assets. In 2014, the first stablecoin, Tether, was established and was backed by the US Dollar and related assets  (US bonds). But wasn’t the creation of cryptocurrency an attempt to veer away from the authority and meddling of central banks? There must be a better asset to collateralize private digital money than monetized debate.

Fortunately, there is gold, precious metal that has demonstrated its value retention and salability over the course of human history. In an age of digital transactions, even using gold-pressed coins or promissory notes to redeem specie may be cumbersome in an era of debit cards. The idea of a gold-pegged stablecoin seems like a natural fit, combining the benefits of gold’s superior value proposition with the perks of blockchain technology. The market for the digital token has answered with popular stablecoin such as Pax GoldTether Gold, and Perth Mint Gold Token.

Gold stablecoins are valued at a specific amount of gold per token, stored in a secure vault. Per the Pax Gold white paper, each coin is collateralized by one troy ounce of gold. In the example of Pax Gold, any owner of Pax tokens can redeem them for physical gold “… at partner organizations..”. While the reserve ratios for gold to token parity and specifics of redemption requirements may vary by currency, most gold-backed stable coins utilized Ethereum-based smart contracts (ERC-20 protocols).

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 1)

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In mid-June, the value of Bitcoin sunk below $20,000.00, reaching a two-year low; in late 2020. After a slight rebound on June 20th, Bitcoin had still lost 55% of its value for the year and 35% within the month of June. However, Bitcoin was not the only digital currency to suffer turmoil amid this downturn in the market; several other commonly traded cryptocurrencies also experienced a decline in value. As with any speculative assets, there are multiple factors; commentators cited as causing the recent meltdown in the crypto markets. Some commentators suggest that macroeconomic factors such as high inflation and interest rate hikes are potentially to blame. Others claim slumps in trading volume and the failure of several major crypto projects (collapse of Terra-Luna and Celsius) have agitated the market. The recent trouble in the crypto space most likely cannot be attributed to one sole factor but will not be persuading any crypto-skeptics to get on the bandwagon anytime soon. 

Although there may be a digital currency alternative that is not only less volatile but still possesses the benefits of blockchain technology, that is commodity-backed stablecoins. More specifically, stable coins collateralized by gold reserves and gold-pegged money seemed politically impossible since President Nixon closed the gold window back in 1971. Now it is feasible to have gold-backed private money that blends the advantages of cryptocurrency with the value stability and historical salability of gold. In the debate between gold aficionados and crypto enthusiasts, this is the ultimate compromise and is a far better alternative to fiat currency. In this series, I will detail the benefits of gold-backed stable coins and suggest that despite the volatility in the cryptocurrency market, tying digital assets to a valuable asset might strike a balance to create a better form of money. 

Cryptocurrency and Third-Party Doctrine

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Many people hold the misconception that cryptocurrency offers total anonymity in financial transactions. There are multiple reasons why the belief that this decentralized private digital money does not conceal the identities of transacting parties. For one, the perception of complete anonymity is illusory because all transactions on the blockchain are accessible to the public. Since most blockchain environments “..have transaction structures that show the sender and receiver addresses explicitly. Because of this property of openness, a large proportion of the users can be re-identified..” (p. 18). These concerns pale in comparison to the legal resources at the disposal of government agencies with broad objectives ranging from tax collection, criminal investigation, and to even surveillance. This disproportionately impacts new entrants in the space that use exchanges and lack the technological illiteracy to hold their digital token in self-hosted wallets, as exchanges are subject to KYC and AML laws.

There are many various laws, judicial constructs, and conferred powers government actors utilize to relinquish our financial privacy. These tactics extend beyond semantical word games over what constitutes “…persons, houses, papers, and effects..” in the digital age (Amend. IV). One of the best-known doctrinal assaults against economic privacy invoked by law enforcement is the third-party doctrine. A judicial doctrine that strides a thin line, between the state interests; and regulating illegal activities (p.3). Although, the third-party doctrine has remained in use since the 1970s it has been a subject of controversy. The decision in United States v. Miller (1976) spurred the passage of the Right to Financial Privacy Act (1978), a feeble attempt to stifle the reach of the doctrine. The law was riddled with numerous exceptions to warrant requirements.

What is the Third-Party Doctrine?

Legal scholar Orrin S. Kerr provides a succinct definition of the doctrine:

“…The “third-party doctrine” is the Fourth Amendment rule that governs the collection of evidence from third parties in criminal investigations.’ The rule is simple: By disclosing to a third party, the subject gives up all of his Fourth Amendment rights in the information revealed (p.563)..”

The extent to which the doctrine is a rule and not an exception is a matter of debate among civil libertarians and privacy purists. Any information disclosed to a financial intermediary is not out of the reach of government officials. This also includes information provided to a third party that the customer believes will “remain private” ( Hoffa v. the United States) (p.9).

The nascent roots of the third-party doctrine lay within the test established in Katz v. the United States (1967). What has become known as the “Katz Privacy Test”; weighs privacy interests against the interests of the state. The case established a two-part judicial test for distinguishing when a private citizen has a reasonable expectation of privacy. 1.) An individual must have a subjective expectation of privacy. 2.) Society must accept these circumstances as being reasonable. Both standards are abstract and murky, making it a hindrance to derive clear and consistent guidance from such disputable and open-end criteria. 

It is not until nearly a decade later that the doctrine emerged when the Katz Test applied to a case regarding financial privacy. This seminal case was no other than the infamous United States v. Miller (1976).  The case involved Mitch Miller charged with producing untaxed liquor. In the process of collecting evidence, the ATF (Department of Alcohol, Tobacco, and Firearms) issued several subpoenas to collect Miller’s banking records. (p.12). Miller was never informed that his banks had been summoned to supply his records to the ATF. As luck would have it, the lower courts saw that the ATF “…had unlawfully circumvented the Fourth Amendment by first requiring the banks to maintain the customer records for a certain period and second by using the insufficient legal process to obtain those records from the bank..”(p.13). The high court reversed the previous decision citing that “…bank kept copies of personal records that he gave to the bank for a limited purpose and in which he retained a reasonable expectation of privacy under Katz..” (p. 13). The SCOTUS reasoning :

“…checks are not confidential communications, but negotiable instruments to be used in commercial transactions, and all the documents obtained contain only information voluntarily conveyed to the banks and exposed to their employees in the ordinary course of business. The Fourth Amendment does not prohibit the obtaining of information revealed to a third party and conveyed by him to Government authorities….”

Ultimately, the court ascertained that information provided to banks was not subject to Fourth Amendment protection. After all, the information we are willing to disclose to an intermediary may not be so confidential. Ideally, we would never choose to convey such information. We also trust financial institutions to exclude the gruesome details of our purchasing decisions, regardless of the legality. All because a purchase was legal does not mean it was not embarrassing. For example, frequent outings at fast-food restaurants, pornography, and scoring BTS tickets are all legal transactions, but all ones that should not be scrutinized by the judging eyes of stuck-up government employees. It is not just the bad guys who are seeking the prying eyes of government officials. 

The case to advance the third-party doctrine was Smith v. Maryland (1979), adjudicated a few years after Miller further reinforced this hideous obstruction to individual privacy. In this case, the telephone company installed a pen register “…to record the numbers dialed from the telephone at.. the home the suspect of robberies. This scenario would be considered a Fourth Amendment exception since the phone companies already have access to and record phone records.

Another landmark case in the judicial history of the doctrine was United States v Jones (2012). The defendant was arrested on drug charges after a law enforcement official attached a GPS tracker to her vehicle for 24-hour surveillance and all without a warrant. The Supreme Court viewed the warrantless attachment of a GPS tracking device as a Fourth Amendment violation. That covert tracking constituted a trespass and a violation of the reasonable expectation of privacy.

For any faithful civil libertarian, Jones might have been a glimmer of hope in the arena of the right to privacy. The logic in Riley v. California (2014) we have the illusion of hope regarding privacy matters. Riley was a member of a San Diego gang that opened fire on a rival and subsequently drove away. He was then pulled over for expired tags while operating another vehicle and was searched before being impounded; officers intercepted contraband. The responding found two guns and called in the gun unit to analyze Riley’s phone depicting the suspect making gang signs. The ballistics tests tied Riley to the previous shooting direct toward rival gang members. The court ruled in favor of Riley in this case; digital data presents no immediate harm to investigation officers, but phones operate as “minicomputers”, holding a plethora of personal information. Therefore, a warrantless search may be acceptable in exigent circumstances (which Riley did not present).   

The next step in the stare decisis whittling down the third-party doctrine was Carpenter v. the United States (2018).  Defendant Timothy Carpenter; was implicated in a series of robberies, and his phone number was located by authorities; they used this information per the Stored Communications Act (1986)Based upon “..cell-site evidence..” Carpentry had been located as being nearby to the crimes. The five-four decision stated that :

“… Expectations of privacy in this age of digital data do not fit neatly into existing precedents, but tracking person’s movements and location through extensive cell-site records is far more intrusive than the precedents might have anticipated…”

Essentially, utilizing the tracking capabilities of smartphones veers into a territory that infringes upon our enumerated right to privacy. Paralleling, the situation in Jones warrantless tracking regardless of the method is unconstitutional. In many ways using a smartphone is analogous to strapping a tracking device to a motor vehicle.

Crypto and The Third-Party Doctrine

The byproduct of the Carpenter decision has opened a new chapter in the Jurisprudence of the third-party doctrine. Per Fourth Amendment Orrin Kerr “… Carpenter “recasts a lot of doctrine in ways that could be used to argue for lots of other changes.” (p.226). So far, the courts appear to have analogized transactions occurring on cryptocurrency with those of traditional financial institutions (banks). The first case to apply the doctrine to cryptocurrency transactions was United States v. Gratkowski (2020).

The case involved a federal investigation into a child-pornography website and officials subpoenaed Coinbase’s transaction records; defendant Richard Gratkowski was suspected of patronizing the website under investigation through the exchange. (p.1-2). Gratkowski attempted to suppress the information procured in the investigation”.. the government violated the Fourth Amendment by using a subpoena to obtain his information instead of a warrant…” (p.127). The defendant foolishly argues this point without much consideration of the stare decisis substantiating the doctrine. After all, voluntarily disclosed information, in most instances (p.1), is immune from warrant requirements. The court found paralleling cryptocurrency transactions to phone records (Carpenter) was not an equal comparison. As phone logs are far more intrusive “window into a person’s life”(p 129).

Beyond the concerns regarding the degree to which disclosure of transaction histories could be construed as intrusive, in the eyes of the law, the defendant has already consented to the visibility of his financial activity. The court perceived that Gratkowski did not have a reasonable expectation of privacy as Coinbase not only has public records of all transactions but also is subject to the Bank Secrecy Act (1970) (p. 130). Per the letter of the law, the assumption of anonymity is illusory when conducting business with an intermediary such as Coinbase since it is an institution that fits within the purview of the BSA. (p.131).

In a hail Mary attempt, Gratkowski’s defense team tried to invoke the logic of Kyllo v. the United States (2001). In Kyllo, an agent of the Department of the Interior utilized thermal-imaging technology to detect Danny Kyllo’s marijuana grow operation[1]. The Fifth Circuit felt as if extrapolating Kyllo to Gratkowski’s circumstances was inappropriate as even if thermal imaging was equal to traceable record transactions, the cited case is only applicable to searches within the home (p.132).

Conclusion:

Per the current case law, it is indisputable that the third-party doctrine extends to cryptocurrency transactions that occur on an exchange. This does not ethically justify the application of this egregiously invasive judicial construct to financial surveillance. In balancing state and individual interests, the right to privacy implied in the Fourth Amendment was effectively sullied. An individual using banking or investment services should not have to be concerned about the trespasses of government agents on their transactional histories. Even if an individual has committed no crime, they still have a right to privacy. Do you want the judgmental eyes of an overpaid government employee criticizing your recent purchases of tickets to a BTS concert or a treasure trove of goodies at the local sex shop? Some purchases and investment decisions are downright humiliating and should remain out of the view of external individuals. All because stare decisis sides with the third-party doctrine, does not mean that it is faithful to the contextual interpretation of the Fourth Amendment. Especially, when in the digital age the perception of “…persons, houses, papers, and effects…” (Amend. IV)  has shifted into a sphere of intangible media.

While it is disturbing that the technologically illiterate must restore to using crypto exchanges subject to the legal logic of the doctrine. Unfortunately, self-hosted wallets are not safe from the encroaching hand of the state. While regulators are now seeking to target self-hosted wallets for AML and KYC, we know that the Juris prudence will most likely extend the insidious third-party doctrine to these private methods of cryptocurrency storage. Soon cryptocurrency transactions will fully be under the surveillance and auspices of the government. The best we can hope for is that the high court will realize the error of this perverted doctrine and call it out for the Fourth Amendment violation that it is.