A Practical Implementation For John Nash’s ICPI

6 min readSep 10, 2018

Ideal Money is a vector of stability we don’t typically consider as being important. Consider the different observation points between micro and macro economics:

The difference between micro and macro economics is simple. Microeconomicsis the study of economics at an individual, group or company level.Macroeconomics, on the other hand, is the study of a national economy as a whole. … Macroeconomics focuses on issues that affect the economy as a whole.

Wiki suggests there is a global observation point as well but goes on to point out national framed considerations:

Macroeconomics (from the Greek prefix makro- meaning “large” + economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies.[1][2]

Macroeconomists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the different sectors of the economy to better understand how the whole economy functions. They also develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade, and international finance.

While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). Macroeconomic models and their forecasts are used by governments to assist in the development and evaluation of economic policy.

Global Macro Economics

I think it might be due to the fragmentation of major finance and trade network that we don’t really have a dedicated or specifically guided higher than macro level observation point.

If the world can’t coordinate then what would be the point?

I think this kind of economics does exist and I have certainly watched lectures in which a global observation point is discussed, however, I think that a more defined field might arise as Bitcoin matures.

A Maturing Global Bitcoin Price

Bitcoin’s price as a culmination of reasonably trustworthy exchanges is expected to be more robust over time as booms and busts reveal weaknesses in it’s global valuation.

It is not worth $X just because one exchange says so and as these exchanges allow for more and more arbitrage between each other (especially if they truly are rivals) then we can expect a more honest aggregate price to evolve.

At a certain maturity something happens that I wish to elucidate.

On The Usefulness of An Unuseful Commodity

I’ve had a lot of people suggest to me that one of the qualities that makes gold better than Bitcoin is that gold has a floor on its price since it has alternate use cases. A medium being adopt that has no other use case is only worth anything while the markets speculate on it becoming money. Gold bugs for example might use this to suggest nothing ever becomes money based on speculation and therefore Bitcoin is a bubble.

Perhaps this is true (I don’t think it is) but from a nation's standpoint there is a comparable implication for Bitcoin whether the nation itself finds a use case for Bitcoin or not. If much or all of the rest of the world had a strong price for it then that price world hold strong as if there was a foreign demand for Bitcoin as a commodity.

This would take away a nation’s ability to exert tyranistic control over the local exchange price (or over a subservient country etc.).

On George Selgin’s Definition of a Mature Free Banking Market

Selgin gives his definition of the asymptotical end of an ever more free banking scenario:

As the public holds only inside money, with commodity money used only in bank reserves to settle clearing balances, these conditions are as follows: First, the demand for reserves and the available stock of commodity money must be equal. Second, the real supply of inside money must be equal to the real demand for it.

And with this he outlines a definition is of maturity:

On the other hand, if the reserve-equilibrium condition is not satisfied, the system is still immature.

The maturity described becomes a banking system that is born out of competition and has no players that can change the laws of the game such as a central bank does at a national level disrupting the national trust of the citizenry (who are like co-players).

As such a system reaches high levels of settlement with highly connected capital flows the credit issued by banks becomes equal to the demand for it.

If all banks are doing this then there is a certain equilibrium achieved or a certain vector of stability.

Re-Membering Coppola

I remember suggesting to Frances Coppola that our ultimate goal should be to have inter-nationally stable currencies and she quickly asked why. When I explained it would imply that local prices reflect local supply and demand rather than including noise from political manipulation of the money supply she responded you can quite easily make a calculation to adjust for the floating currencies.

The Problem of Measuring Inflation

Many might realize there are two often used definitions of the inflation 1) an increase in the supply of money 2) a general increase in the price of goods.

But there is a third distinction that is important to understand.

I notice a professor on twitter I call him “Old Man Hanke” and joke that he is always yelling at clouds.

He sometimes posts a calculated inflation rate for a nation such as the Venezuelan Bolivar and then he gives his own calculated rate and it is many orders larger!

From wiki:

Hanke employs a unique methodology, based on the principle of purchasing power parity, which allows him to accurately estimate inflation in countries with very high inflation rates. Using this methodology, Hanke and his collaborators discovered several cases of hyperinflation that had previously gone unreported in the academic literature and popular press.

How can he announce his own calculation? Because inflation calculations can have different frameworks (ie local or global) and include different prices being considered. Hanke’s is a more international and less subjective view.

On Bitcoin As a Global Measure For National Currency Inflation

If Bitcoin had a very robust and globally held price we would be able to measure the fluctuation in a certain nation in regard to the globally held price. But how can we know when such a system is mature enough (it certainly isn’t today)?

Re-Turn of The ICPI

Nash lectured on a concept he called an ICPI. The idea is that it would be a globally held and agreed upon basket of commodity prices in which each major currency in the world would be targeted to.

There is an obvious political difficulty here and it didn’t go unnoticed by Nash:

We can see that times could change, especially if a “miracle energy source” were found, and thus if a good ICPI is constructed, it should not be expected to be valid as initially defined for all eternity. It would instead be appropriate for it to be regularly readjusted depending on how the patterns of international trade would actually evolve.

Here, evidently, politicians in control of the authority behind standards could corrupt the continuity of a good standard, but depending on how things were fundamentally arranged, the probabilities of serious damage through political corruption might becomes as small as the probabilities that the values of the standard meter and kilogram will be corrupted through the actions of politicians.

On The Comparability Between Nash’s ICPI and Prof Hanke’s Purchasing Power Parity

Nash even admits he proposed the concept of the ICPI but as a theoretical notion (there MUST be an optimal basket that COULD be chosen etc.)-he gave possibilities but his argument is devoid of an actual formula for choosing the optimal commodity prices.

We can note though that the claim of Hanke’s PPP is that it is a more accurate measure than other more subjectively measured inflation rates.

On A Different Use Case For John Nash’s ICPI

If a nation believed that Bitcoin would inevitably grow to break down certain economic and political barriers and wanted to be prepared for when the optimal time for change was I think they would be interested in such an ICPI.

The theoretical ICPI, if somehow constructed, from the point of view of an already impending Bitcoin would be an even better observation point than a PPP of the true inflation rate of the different currencies around the world.

Then it might be multiple nations are quite interested in having this composed basket as it would more accurately tell them when the exchange prices for Bitcoin in certain domestic currencies are reflecting the inflation rate of those same respective currencies.