Banks Archives - The Automatic Earth

4/24/20 – Top 12 State Cases
New York: 271,590
New Jersey: 102,196
Mass : 46,023
Illinois: 39,658
California: 39,254
Pennsylvania: 38,652
Michigan: 36,641
Florida: 30,174
Louisiana: 26,140
Connecticut: 23,921
Texas: 22,806
Georgia: 22,147

• “At least 30 New Yorkers ingested household cleaners in the 18 hours since the president suggested using it to fight #coronavirus”

• “The timing on the bleach stuff is interesting, since the DOJ started cracking down on MMS, the diluted form of bleach being sold as a miracle cure for any disease under the sun on social media… six days ago.”

• Cases 2,845,858 (+ 100,389 from yesterday’s 2,745,469)

197,846
• Deaths 191,791 (+ 6,055 from yesterday’s 185,156 )

From Worldometer yesterday evening -before their day’s close-

From Worldometer – NOTE: among Active Cases, Serious or Critical fell to 3%. Among Closed Cases, Deaths have fallen to 20%

From SCMP:

From COVID19Info.live: Note: Turkey, Russia, UK are the biggest risers

Keep it locked down.

• Wuhan Was The Fentanyl Capital Of The World. Then Coronavirus Hit (LAT)

For drug traffickers interested in getting in on the fentanyl business, all roads once led to Wuhan. The sprawling industrial city built along the Yangtze River in east-central China is known for its production of chemicals, including the ingredients needed to cook fentanyl and other powerful synthetic opioids. Vendors there shipped huge quantities around the world. The biggest customers were Mexican drug cartels, which have embraced fentanyl in recent years because it is cheaper and easier to produce than heroin. But the novel coronavirus that emerged in Wuhan late last year before spreading across the planet has upended the fentanyl supply chain, causing a ripple effect that has cut into the profits of Mexican traffickers and driven up street drug prices across the United States.

Few industries — illicit or not — have been unscathed by the pandemic that has upended the global economy and killed more than 190,000 people worldwide. The narcotics trade, which relies on the constant movement of goods and people, has been stymied by lockdowns, travel bans and other efforts to contain the virus, according to government officials, academic researchers and drug traffickers. Mexican production of fentanyl and methamphetamine appears especially hard hit. Both drugs are made with precursor chemicals that are typically sent on planes or cargo ships from China, where despite U.S. pressure to ban them, they continue to be sold legally. That supply chain was shut down in January when authorities in Wuhan enacted a lockdown that forced residents to stay inside for more than two months.

In February, after a major manufacturer of the chemicals closed, vendors began posting apologies on the online sites where chemicals are typically sold, said Louise Shelley, a professor at George Mason University who tracks global fentanyl production. “They were saying: ‘We’re not producing or selling or shipping,’” she said.

The headline says: “racist”. I like everything Winnie.

• ‘Wuhan Plague’ Plaques Are Popping Up Around Atlanta (Vice)

Racist plaques depicting Winnie the Pooh holding a bat with chopsticks have begun to pop up around Atlanta, and police have no leads as to who is responsible. The round, bronze and teal plaques bearing the words “Wuhan Plague,” referencing the Chinese city where the coronavirus originated, first appeared April 13 on an electrical box in Inman Park, according to Atlanta police. Another appeared three days later at a coffee shop in the neighborhood of Reynoldstown. The most recent incident occurred on April 18 at Atlanta’s Candler Park Market. Winnie the Pooh’s association with Chinese culture originated in 2013 when parody comparisons between the cuddly bear and Prime Minister Xi Jinping went viral on social media — and China then banned Pooh images.

The plaques appeared to be glued to the sites where they were posted. Hodgepodge Coffeehouse owner Kristle Rodriguez said her employees alerted her to the plaque at her site. Rodriguez said she immediately called the cops and the building’s landlord, who quickly removed the plaque. “The adhesive was still wet, meaning this happened late morning or early afternoon,” she wrote in a Facebook post Friday. “This isn’t amusing, funny, politically incorrect, edgy, or punk rock. This is super fucking gross and racist. There’s enough xenophobia and ignorance being spouted from this administration, we certainly don’t need street art reinforcing this shit.”

Curious article, because it’s not true.

• Trump Owed Tens Of Millions To Bank Of China (Pol.)

But Trump himself has taken on debt from China. In 2012, his real estate partner refinanced one of Trump’s most prized New York buildings for almost $1 billion. The debt included $211 million from the state-owned Bank of China — its first loan of this kind in the U.S. — which matures in the middle of what could be Trump’s second term. Steps from Trump Tower in Manhattan, the 43-story 1290 Avenue of the Americas skyscraper spans an entire city block. Trump owns a 30 percent stake in the property valued at more than $1 billion, making it one of the priciest addresses in his portfolio, according to his financial disclosures. Trump’s ownership of the building received a smattering of attention before and after his 2016 campaign.

But the arrangement with the Bank of China in 2012 has gone largely unnoticed. The questions surrounding Trump’s ties to the Bank of China come as his campaign is claiming that Biden would be a gift to the Communist country and America’s chief economic rival. After the first version of this article was published, the Bank of China issued a statement Friday evening stating that it sold its debt on the building weeks after the 2012 loan on the property. Vornado Realty Trust owns 70 percent of the building. “On November 7, 2012 several financial institutions including the Bank of China participated in a commercial mortgage loan of $950 million to Vornado Realty Trust,” said Peter Reisman, managing director and chief communications officer of Bank of China U.S.A.

“Within 22 days, the loan was securitized and sold into the [commercial mortgage-backed securities] market, as is a common practice in the industry. Bank of China has not had any ownership interest in that loan since late November 2012.”

Balding explains.

• Trump Doesn’t Owe Bank of China Money (Christopher Balding)

Let me explain the deal structure and why Trump doesn’t owe Bank of China money. First, Trump is a minority passive owner of a real estate trust. 30% so not nothing and he is the president but it isn’t even his company. He doesn’t manage it even before he became president 1/n

Second, the nitty gritty of the financing goes like this (and this is very common in general especially in real estate) assume Citibank agrees to lend the building $1 billion to refinance their loan in 2012. Rather than lend the entire $1 billion themselves, Citibank will 2/n

get on the phone to other banks to take a piece of the $1b they need to raise. Let’s assume in this case it was five banks of $400m, $200m, $200m, $100m, and $100m. In this case Bank of China is one of the $200m slots. They lend that company the $1b to refinance their other 3/n

loan. However, the banks aren’t done. They don’t want to make a 10 year loan on real estate when they make more money from fee and churn of debt securities. So right after they made they $1b loan, Citibank lawyers (I don’t know if it was Citibank just an example) are 4/n

Drafting offering documents to sell off different pieces of the entire $1b loan to investors. The $1b loan is not actually 5 different loans but 5 different injections into a special purpose vehicle that is capitalized with the loan capital from those banks. The SPV 5/n

Which will receive the annual payments then sells off pieces of the loan in say $10m or $25m increments to investors. The banks then receive all of their original loan back as the entire $1b is sold off piece by piece. Typically, banks will have capital out on these projects 6/n

In the US, small is ugly.

• Small Business Owners Asked To Sign PPP Loans Without Forgiveness Pledge (IC)

Randy George had never laid anyone off in his 20 years running his bakery and café in Middlesex, Vermont. But after Vermont Gov. Phil Scott shut down restaurants to slow the spread of the coronavirus, half of his sales disappeared virtually overnight. He’s had to put 28 of the staff of Red Hen Baking Co. on furlough. George decided to sign up for a loan through the Paycheck Protection Program, created by Congress’s CARES Act relief bill to help small business owners stay afloat. At first, the program was funded with $350 billion, an amount that ran out about two weeks after it began; Congress is now working on a deal to add another $320 billion.

The key feature of these loans, which are being run by the Small Business Administration, is that they are supposed to be entirely forgiven if an owner spends most of the money on payroll and doesn’t lay anyone off. The details of how that forgiveness will work, however, are far from clear, making some small business owners wary to use it at all. In bank loan contracts reviewed by The Intercept, owners have been asked to sign onto terms that said that “forgiveness may apply” or “all or part of the Loan may be forgiven” — releasing the banks from liability but giving business owners no contractual guarantee of loan forgiveness, or even guidance on how to comply with the rules or how to pursue it. One didn’t mention forgiveness at all. The application materials, which are produced on SBA letterhead, have even fewer details.

“Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities,” most applications read. No other information is offered about what “covered” means. The CARES Act contains some details about how these are defined, but it’s buried in an almost 900-page bill. And no concrete information has been given to small business owners about how they should go about getting their loans forgiven. Some owners were told that to gain forgiveness, they’d have to submit a request to their banks. Others were told that they have to go straight to the SBA. That’s left many people questioning whether the loans will indeed be converted to grants at all. “The keystone, the cornerstone of this program is not assured,” George said.

Won’t surprise a single soul.

• Small Business Rescue Earned Banks $10 Billion In Fees (NPR)

Banks handling the government’s $349 billion loan program for small businesses made more than $10 billion in fees — even as tens of thousands of small businesses were shut out of the program, according to an analysis of financial records by NPR. The banks took in the fees while processing loans that required less vetting than regular bank loans and had little risk for the banks, the records show. Taxpayers provided the money for the loans, which were guaranteed by the Small Business Administration. According to a Department of Treasury fact sheet, all federally insured banks and credit unions could process the loans, which ranged in amount from tens of thousands to $10 million. The banks acted essentially as middlemen, sending clients’ loan applications to the SBA, which approved them.

For every transaction made, banks took in 1% to 5% in fees, depending on the amount of the loan, according to government figures. Loans worth less than $350,000 brought in 5% in fees while loans worth anywhere from $2 million to $10 million brought in 1% in fees. For example, on April 7, RCSH Operations LLC, the parent company of Ruth’s Chris Steak House, received a loan of $10 million. JPMorgan Chase & Co., acting as the lender, took a $100,000 fee on the one-time transaction for which it assumed no risk and could pass through with fewer requirements than for a regular loan. In total, those transaction fees amounted to more than $10 billion for banks, according to transaction data provided by the SBA and the Treasury Department.

As he used a needlelike device to pull out the clot, he saw new clots forming in real time around it.

• People In Their 30s And 40s, Barely Sick With COVID19, Die From Strokes (WP)

Thomas Oxley wasn’t even on call the day he received the page to come into Mount Sinai Beth Israel Hospital in Manhattan. There weren’t enough doctors to treat all the emergency stroke patients, and he was needed in the operating room. The patient’s chart appeared unremarkable at first glance. He was male, no medications, no history of chronic conditions. He had been feeling fine, hanging out at home during the lockdown like the rest of America, when suddenly, he had trouble talking and moving the right side of his body. Imaging showed a large blockage on the left side of his head. Oxley gasped when he got to the patient’s age and covid-19 status: 44, positive.

The man was among several recent stroke patients in their 30s to 40s who were all infected with the virus. The median age for that type of severe stroke is 74. As Oxley, an interventional neurologist, began the procedure to remove the clot, he observed something he had never seen before. On the monitors, the brain typically shows up as a tangle of black squiggles – “like a can of spaghetti,” he said – that provide a map of blood vessels. A clot shows up as a blank spot. As he used a needlelike device to pull out the clot, he saw new clots forming in real time around it. “This is crazy,” he remembers telling his boss.

Reports of strokes in the young and middle-aged – not just at Mount Sinai but in many other hospitals in hard-hit communities – are the latest twist in our evolving understanding of the mysteries of covid-19. Even as the virus has infected nearly 2.8 million people worldwide and killed 195,000 as of Friday, its origins, biological mechanisms and weaknesses continue to elude top scientific minds. Once thought to be a pathogen that primarily attacks the lungs, it has turned out to be a much more formidable foe – affecting nearly every major organ system in the body.

Foreseen by @barabasi https://t.co/bwqBRTiVEn

— Nassim Nicholas Taleb (@nntaleb) April 25, 2020

Small is beautiful. A lot of the solutions will have to come from communities.

• South Dakota County Offers Drive-Through Covid-19 Testing Friday (Strong)

A health center in Stanley offered one of the first COVID-19 test drive through services in the state that did not require symptoms or pre-screening. As southern Mountrail County continues to be a hotspot for COVID-19, one medical center stepped up to offer free drive through testing without an appointment. At least 160 cars came through the testing site in Stanley from 10 a.m. to 2 p.m., with some holding as many as nine people who wanted to be tested. “We’re preparing probably to do between three and 400 tests,” said Dr. Rich Laksonen. Stanley is not in the southern part of the county, but Laksonen said the center wanted to help the state learn more about where the virus is spiking in the county.

“Being that we are the facility that services the count, we saw that need to determine where in Mountrail County these hotspots are located,” said Laksonen. Laksonen said they were compelled to drop restrictions on the site making it “no appointment, or symptoms necessary.” It’s one of the only in the state. “We also wanted our residents in northern Mountrial County to come in and get a test whether we have symptoms or not,” he said. Laksonen said the community was appreciative of the effort. Medical staff say it is too soon to tell how many will test positive. It will take 24 to 48 hours for the dozens of people that came out Friday to know their results.

It’s fitting this should be in Japan again.

• Nearly 60 New Coronavirus Cases Confirmed On Cruise Ship In Japan (R.)

Nearly 60 new cases of coronavirus infections were confirmed among crew members of an Italian cruise ship docked in Japan, domestic media reported on Saturday. With testing of all crew members now complete, the new number, reported by public broadcaster NHK, brings the total infections onboard the Costa Atlantica to around 150, roughly one quarter of the vessel’s 623 crew members. TV Asahi said 57 crew members tested positive. The infection cluster onboard the vessel docked in Nagasaki comes as hospitals are running out of beds in some parts of Japan, where the national tally of virus cases has risen above 12,800. Some 345 people have died.

Of those infected onboard the Costa Atlantica, only one crew member has been admitted to hospital, NHK said, while others remain on board, having shown slight or no symptoms. The vessel has been docked in Japan since February for repairs and maintenance after the pandemic prevented scheduled repairs in China. Nagasaki authorities had quarantined the vessel on arrival, and ordered its crew not to venture beyond the quay except for hospital visits. But prefecture officials said earlier this week that some of the crew had departed without their knowledge, and sought detailed information on their movements.

And China refuses an international investigation.

• China Pressured EU To Drop COVID19 Disinformation Criticism (R.)

China sought to block a European Union report alleging that Beijing was spreading disinformation about the coronavirus outbreak, according to four sources and diplomatic correspondence reviewed by Reuters. The report was eventually released, albeit just before the start of the weekend Europe time and with some criticism of the Chinese government rearranged or removed, a sign of the balancing act Brussels is trying to pull off as the coronavirus outbreak scrambles international relations. The Chinese Mission to the EU was not immediately available for comment and China’s Foreign Ministry did not immediately respond to faxed questions about the exchange. An EU spokeswoman said “we never comment on content or alleged content of internal diplomatic contacts and communication with our partners from another countries.”

Another EU official said that the disinformation report had been published as usual and denied any of it had been watered down. Four diplomatic sources told Reuters that the report had initially been slated for release on April 21 but was delayed after Chinese officials picked up on a Politico news report hat previewed its findings. A senior Chinese official contacted European officials in Beijing the same day to tell them that, “if the report is as described and it is released today it will be very bad for cooperation,” according to EU diplomatic correspondence reviewed by Reuters. The correspondence quoted senior Chinese foreign ministry official Yang Xiaoguang as saying that publishing the report would make Beijing “very angry” and accused European officials of trying to please “someone else” – something the EU diplomats understood to be a reference to Washington.

The four sources said the report had been delayed as a result, and a comparison of the internal version of the report obtained by Reuters and the final version published late Friday showed several differences. For example, on the first page of the internal report shared with EU governments on April 20, the EU’s foreign policy arm said: “China has continued to run a global disinformation campaign to deflect blame for the outbreak of the pandemic and improve its international image. Both overt and covert tactics have been observed.”

Yeah, let’s buy us some shale.

• US Weighs Taking Equity Stakes In US Energy Companies – Mnuchin (R.)

The U.S. government is considering taking equity stakes in U.S. energy companies as it seeks to help the nation’s oil and gas sector amid the coronavirus outbreak, Treasury Secretary Steven Mnuchin said on Friday. President Donald Trump, speaking at a White House event with Mnuchin, said he wants to help industry and suggested the federal government could buy fuel for the country in advance as well as purchase airline tickets in advance. “We’re looking at a whole bunch of alternatives,” Mnuchin said. “You can assume that’s one of the alternatives, but there’s many of them,” Mnuchin said, referring to possible equity stakes.

The oil sector has been hit hard by a dramatic drop in demand as the coronavirus has effectively shut down economies around the globe. “The energy business is very important to me, and we’re going to build it up. This really hurt the energy business as much as any other business because it totally knocked out – the supply kept coming,” Trump said. Trump helped negotiate a reduction in output from OPEC and other countries including Russia, but the move has not removed the market’s oversupply. The president encouraged Mnuchin to look at buying oil for later use. “The United States is the largest user of oil. We could buy oil at a great price into the future. That gives them the infusion they need, and we have oil at a great price into the future,” Trump said.

Well, if you wait long enough… Meanwhile, there are no buyers for your products anyway, so why bother?

• Economics Professor: Australia Would Be ‘Better Off’ Without Lockdown (DM)

An economics professor has been slammed as ‘cold’ and ‘heartless’ for suggesting Australia prioritised health over the economy by going into coronavirus lockdown. University of New South Wales Professor Gigi Foster sparked outrage from fellow panellists and other economic professors while answering questions about the impacts of shutdown measures on Q&A on Monday. Professor Foster suggested Australia hadn’t properly weighed up the economic consequences of tough restrictions introduced to reduce the death toll, and argued the ‘economy is about lives’ too. ‘What frustrates me is when people talk about the economic costs of the lockdown they often don’t think in detail in terms of counting lives,’ Professor Foster said.

‘Has anyone thought about how would you get a measure of the traded lives when we lock an economy down? What are we sacrificing in terms of lives? ‘Economists have tried to do that and we try to do that in currencies like the value of a statistical life. ‘If you do that kind of calculus you realise very quickly that even with a very, very extreme epidemic, in Australia, we are still potentially better off not having an economic lockdown in the first place because of the incredible effects that you see. ‘Not just in a short-run way but in many years to come.’ Her views prompted a shocked response from fellow panellists on the ABC program.

‘How can you say that?’ ACTU secretary Sally McManus fired back. ‘We’re avoiding what’s happened in the UK, what’s happening in the US, the idea of having our ICUs overrun, our healthcare workers dying as well is just the most horrible thought.’ ‘It’s horrible either way,’ Professor Foster replied. ‘The coronavirus has made the world awful. There’s absolutely no doubt about that. ‘In order to have a proper discussion about trade-offs, you need to think in terms of lives you’re giving up. ‘I know it’s invisible lives and difficult to imagine when we aggregate, for example, all of the health effects and the mental health effects and the effects of people right now who have illnesses other than COVID-19.’

Moro is no Mother Teresa himself.

• Brazil Justice Minister Resigns Over Bolsonaro’s Investigations Meddling (IC)

As the country slept Friday morning, far-right Brazilian President Jair Bolsonaro fired the Federal Police Director Maurício Valeixo, bringing to a head a long-simmering battle with Justice Minister Sergio Moro. Moro, in turn, promptly resigned — in a new, major episode of deepening chaos in Brazilian politics. The official notice firing the Federal Police head bears Moro’s digital signature, but in a press conference Friday morning, the outgoing justice minister claimed that he was not informed of the move and did not sign the document. This and other revelations made by Moro could serve as grounds for impeachment, if the Brazilian body politic can muster the political will to support such a drastic measure. Members of Congress are already gathering signatures for a congressional inquiry into Moro’s allegations.

In his press conference, Moro suggested that Bolsonaro removed Valeixo because the president opposed investigations being conducted by the Federal Police. “He was concerned about investigations underway in the Federal Supreme Court and that a change would also be opportune at the Federal Police,” Moro said of Bolsonaro’s thinking. Moro said Bolsonaro’s concerns were not a reasonable justification for firing Valeixo, but added that he nonetheless searched for “an alternative solution, to avoid a political crisis during a pandemic.” In the end, Moro said, “I understood that I could not set aside my commitment to the rule of law.”

Notably, the Federal Police are conducting several investigations that could impact Bolsonaro, his politician sons, and several members of their inner circle. Moro loomed large over Brazilian politics during the past several years, even before he accepted Bolsonaro’s offer to serve as justice minister. He was the judge at the center of the influential Operation Car Wash anti-corruption investigation that put former President Luiz Inácio Lula da Silva in prison, removing the popular politician from the 2018 presidential election and clearing the way for Bolsonaro’s victory. When he entered government, Moro was among the most popular political figures in the country and was seen as an important ally for Bolsonaro, but also as a potential rival in the 2022 elections.

The ex-judge’s standing, however, was seriously weakened after The Intercept began publishing an explosive series, in English and Portuguese, on malfeasance and potential illegal actions by Moro and Car Wash prosecutors. As a result of the series, Lula was eventually released from prison.

Is there anything more American?

• Denver Health Execss Get Bonuses 1 Week After Workers Asked To Take Cuts (CBS)

Top executives at Denver Health Medical Center received significant bonuses this month for their performance in 2019, ranging from $50,000 up to $230,000, one week after frontline hospital workers were asked to voluntarily take leave without pay or reduce their hours as the hospital dealt with the financial downturn resulting from the coronavirus pandemic. On April 3, Denver Health CEO Robin Wittenstein emailed hospital workers noting “the current situation will stress us financially.” She announced a hiring freeze and asked employees to voluntarily take leave without pay, use personal time off or reduce their normal work week.

“The goal is to reduce our total salary expense without the need to lay off employees or implement mandatory PTO/furloughs,” wrote Wittenstein. She said the hospital was also considering mandating workers to use their paid time off, mandatory leave without pay and other steps. “The goal is to avoid these extreme measures if at all possible,” she wrote. One week later, on April 10, Wittenstein and her executive staff saw their 2019 Management Incentive Plan bonuses deposited into their bank accounts.

Macron pleasing the unions AND his small businesses.

• Amazon To Be Fined €100K For Every ‘Non-Essential’ Delivery in France (RT)

Amazon will face a fine each time it delivers non-essential goods in France until it improves the safety conditions of its workers amid the Covid-19 pandemic. The company earlier closed its warehouses in protest. On Friday, an appeals court in Versailles, outside Paris, upheld last week’s ruling, which restricted Amazon’s French warehouses to only shipping IT products, health items, groceries and pet food until it ensures the safety of its workers. Jeff Bezos’ e-commerce giant was given 48 hours to comply with the ruling, and will be fined €100,000 ($108,020) for every delivery that doesn’t meet the court’s requirements.

On April 14, a court ruled that Amazon had failed to guarantee the safety of its workers amid the Covid-19 pandemic, and said that the company must submit an updated professional risk assessment before it can resume full operations. Amazon argued that it had already updated its work safety protocols and introduced disease-control measures to prevent its workers from being infected with the coronavirus. Following the ruling on April 14, the company completely shut down its French warehouses until Saturday.

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SPAIN: 107 year old woman Ana del Valle, who beat the Spanish flu in 1918, has now also beaten a coronavirus infection.

— The Spectator Index (@spectatorindex) April 24, 2020

Trara Reade’s mom called Larry King in 1993.

BREAKING: Is this the mother of Joe Biden's accuser talking to CNN in 1993? pic.twitter.com/rF7jw35s2F

— MediaResearchCenter (@theMRC) April 24, 2020

Merkel is a chemist by trade. She understands a thing or two.

This is how Angela Merkel explained the effect of a higher #covid19 infection rate on the country's health system.

This part of today's press conf was great, so I just added English subtitels for all non-German speakers. #flattenthecurve pic.twitter.com/VzBLdh16kR

— Benjamin Alvarez (@BenjAlvarez1) April 15, 2020

“@nntaleb is actually a lot more correct about stuff than most of us like to admit…@MkBlyth @adam_tooze
https://t.co/FDVQ1h2VNZ pic.twitter.com/gtKK4UbosI

— Real Vision (@RealVision) April 25, 2020

https://twitter.com/i/status/1253855510903865345

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Small Business Firings to Start

Apr 222020

April 22, 2020 Posted by Raúl Ilargi Meijer at 3:28 pm Finance Tagged with: Amazon, bankruptcies, Banks, coronavirus, government, jobs, legislators, loans, Main Street, pandemic, PPP, small business 12 Responses »

Saul Leiter Man in straw hat 1955

The following was written by Bruce Wilds, who runs the Advancing Time blog. Bruce is a small business owner in the Midwest.

I get lots of articles sent to me, but hardly ever publish any (sorry I can’t send everyone a reply) because they’re not what I think this site should be. But with this article it’s different. I think what Bruce describes is interesting, important even. The US has been losing small businesses for a long time, and the virus response is set to greatly accelerate the process. The huge stimulus plans will bypass most small businesses, because they are too small for governments to know what to do with.

The article was written before the latest round of handouts, but there’s very little reason to believe it will change much of anything. It’s not so much a grand plan or conspiracy, it just that the system has come to recognize only that bigger is better. America doesn’t like small. This is as true for banks as it is for various levels of government. But small businnesses have not only built the country, and are crucial for the faces of Main Streets and small towns, they also employ enormous amounts of Americans.

Bruce Wilds: The Paycheck Protection Program or PPP was funded with $350 billion in the last stimulus bill, this money is now gone. Of the thirty million small businesses in America, only 1.7 million received money from the 2.3 trillion dollar aid package passed to help sustain America during this difficult time. If the government blew through this money and was only was able to help only around 5% of small businesses. it is difficult to think another 250 billion dollars will set things straight. Clearly, because when the government made promises it delayed the wave of firing while companies waited for help.

The government has failed to keep its promise so now we should expect unemployment to soar as reality sets in. One of the largest problems facing small companies is they are often underfunded and have difficulty getting financing at reasonable rates. Banks find larger companies much more profitable. The sector of the economy most damaged by the covid-19 shutdown is small business. When this is over America will find many small businesses have been decimated and are not able to reopen. Others will never recover and be forced to close within months. Since small businesses employ over 54 million people in America and their importance in the economy should not be underestimated.

• Small businesses contribute 44 percent of all sales in the country.
• Small businesses employ 54.4 million people, about 57.3 percent of the private workforce.

Rest assured government employees and bureaucrats will still continue to get paid but small business, the most productive part of the economy has a knife to its throat. As a landlord and small business owner, I can tell you the program was structured in a way that will be of little help to most small businesses. The government slammed expensive legislation through with no idea of the damage they were doing and how it will cause hundreds of thousands of businesses to close their doors forever. Washington has become so attuned to dealing with lobbyists from mega-companies it has lost sight of the fact small is small, and when this comes to business, this means usually under twenty employees, not hundreds.

The government’s answer to keeping people employed was to promise small businesses an easy to get, rapid maximum loan amount of two and a half times a company’s average monthly payroll expense over the past 12 months. This loan would turn into a grant and be forgiven if a company did not fire its employees. Sadly, legislators failed to take into consideration that not all small businesses are labor or payroll intense. Some businesses with large or expensive showrooms are getting hammered by rent, others by inventory, or things like taxes, utilities, or even by having to toss products due to spoilage.

The PPP also failed to address the issue of what these employees are going to do while the company has no customers and business barely trickling. In the past, these employees were expected to pursue activities that earned revenue and garnered profits for the business but with no costumers, this is difficult to do. The PPP also ignored the fact that by keeping these employees on the payroll a generous employer is left open to the harsh mandates laid out in the government’s previous bill. The hastily drawn up 110-page federal covid-19 economic rescue package, which Trump fully supported dealt a hard blow to small business. For a small business this is a disaster, the bill requires;

• Employers with fewer than 500 employees and government employers offer two weeks of paid sick leave through 2020.
• Those same employers must now provide up to 3 months of paid family and medical leave for people forced to quarantine due to the virus or care for family because of the outbreak

As expected, this measure, named “Families First Coronavirus Response Act.” resulted in millions of workers suddenly losing their jobs. Ironically, it was held before the voters as proof lawmakers could work together during a crisis. By framing the poorly crafted pork-packed bill this way promoters positioned themselves to demonize those unwilling to support it. Remember, this bill is was in addition to the $8.3 billion emergency spending bill first approved to curb the spread of covid-19.

As government has grown larger it seems to have become totally oblivious to the fragility of many small businesses and how much it can cost a community when they close. By framing these pork-packed bills as bipartisan their promoters imply they are fair and balanced. This is not true, small business is the big loser and hundreds of thousands will soon have to close. With so many tenants looking at foregoing rent small landlords that don’t have deep pockets also face huge problems. We have our heads in the sand if we think companies that exist on events where people gather will overnight regain their luster. It is not like someone can simply flick a switch and things will return to normal.

Reality undercuts the idea of the “V-shaped recovery” theory and the idea after the economy has come to a dead stop it can quickly reboot and be back at full speed in a few months. The government has presented us with an extension of crony capitalism structured to throw just enough to the masses to silence their outrage but in the coming weeks, we will see it failed. Large businesses with access to cheap capital are the winners and the big losers are the middle-class, small businesses, and social mobility. All those people that want a higher minimum wage can forget that ever happening if we don’t have jobs.

As for just how much small business owners make, according to figures from 2015 from the Small Business Administration the median income for self-employed individuals at an incorporated business was $49,804 and $22,424 for unincorporated firms. According to PayScale’s 2017 data, the average small business owner’s income is $73,000 per year. But, total earnings can range from $30,000 – $182,000 per year. This means it varies greatly depending on where and just how big the business is. However, it is important to remember these people have “skin in the game” and most risk losing everything if their business fails.

It is important to recognize that starting your own business has always been about the opportunity to design and build your own future. It is a symbol of freedom not a guarantee of wealth. Many people choose this path proudly, not to make more money but as a way to express their individuality. For these competent and talented people, a job in government or at a large company often offers more security and benefits but far less freedom. Do not underestimate the value of small business and what it contributes to our society. Companies such as Amazon are the anti-thesis of small business making their workers a cog in a machine and stealing their soul.

Based on the government’s promise to small businesses a great many held off on letting employees go but with each passing day in order to survive they are now in the process of letting hundreds of thousands of employees go. This is a ticking time-bomb. By telling these businesses to close and then through its failure to carry out its promise of helping them the government has created a situation with massive negative economic ramifications. To make matters worse, people going on unemployment look to get almost as much as those that do work. Why will anyone want to work, especially government workers when they can get paid to stay home? This is not about wanting more money for small business, it is about the reality that the firings are just beginning.

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Debt Rattle December 15 2018

Dec 152018

December 15, 2018 Posted by Raúl Ilargi Meijer at 11:09 am Finance Tagged with: Banks, Brexit, Brussels, Clinton, Corbyn, Draghi, globalism, losses, May, Obamacare, Varoufakis, yellow vests 4 Responses »

Vincent van Gogh Road menders at Saint-Remy 1889

• US Banks See Biggest Unrealized Losses On Securities Since Q1 2009 (WS)

• European Banks’ €300 Billion Race To The Bottom (BBG)

• Global Debt Hits All-Time High Of $184,000,000,000,000 (RT)

• Act V: Yellow Vests Prepare For Massive ‘Macron Resign’ Protest (RT)

• Senior Tories Tell May To Work With Corbyn To Save Her Brexit Deal (Ind.)

• Theresa May’s Brexit Strategy Left Brutally Exposed By Brussels Failure (G.)

• Affordable Care Act Is Ruled Unconstitutional By A Federal Judge (CNBC)

• Clinton Foundation Oversight Panel Hears Explosive Testimony (RT)

• The War Against Globalism (Giraldi)

• Yanis Varoufakis’s Internationalist Odyssey (Nation)

EU banks are disasters. US banks are too.

• US Banks See Biggest Unrealized Losses On Securities Since Q1 2009 (WS)

The FDIC just released the aggregated third-quarter performance metrics of the 5,477 banks and thrifts it insures. The amount of their combined assets ticked up to $17.7 trillion. These assets – mostly loans but also investments of all kinds – include $3.6 trillion in securities (not including the securities in their trading accounts). And banks got hit by the biggest quarterly losses on those securities since the first quarter of 2009. Banks designate these securities either as “held-to-maturity” securities (valued at “amortized cost” or book value) and “available-for-sale” securities (valued at “fair value,” such as market value). For Q3, these were their unrealized losses – meaning, banks have not yet sold the securities:

• Available-for-sale securities: $51.5 billion in unrealized losses, or 2% of their amortized cost, as the FDIC said, “the highest loss level since first quarter 2009.” • Held-to-maturity securities: $32.8 billion in unrealized losses. • Both combined: $84.3 billion in unrealized losses. Note the damage done in 2018, after years of big gains: $83.4 billion in Q3; $66.4 billion in Q2; and about $55 billion in Q1; for a total so far this year about $200 billion in unrealized losses.

And Draghi went for negative rates. One for the history books.

• European Banks’ €300 Billion Race To The Bottom (BBG)

As we approach the end of a dismal year for European stocks, the question is: which sector had the worst year of them all? With a few trading sessions left before the end of 2018, banks and autos are in a tight race to the bottom. As of Thursday’s close, lenders are the biggest losers, with a quarter of their market value down the drain, a wipeout of roughly 300 billion euros in shareholders’ money. Banks haven’t seen such a bad year since the heat of the euro-zone sovereign debt crisis in 2011. As the final ECB meeting of the year confirmed, the central bank will keep rates unchanged at least until next summer and the grim outlook for the sector highlighted in one of our earlier Taking Stock columns remains valid.

Any attempt by the sector to break out from its downward trend in 2018 has so far failed. Perhaps it’s not a surprise as banks face a wall of worry from investors and nothing seems to be able to help them move forward. Repeated calls from some analysts that the sector is cheap hasn’t triggered any significant buying. A good example is Credit Suisse’s buyback and dividend announcement on Wednesday. That didn’t even raise investors’ interest with the stock hovering near its low. While any return of capital to shareholders is welcome, the dark clouds over its investment banking outlook seemed to weigh more.

Here’s the grim silver lining: …it doesn’t matter much to the rest of the market: Since the financial crisis a decade ago, the influence of banks over the broader European gauge has fallen dramatically, to a point where they now barely move the Stoxx 600. So what could help the shares regain their vigor? Although merger talk seems to find fruitful (speculative) ground, large cross-border deals remain a fantasy. But domestic love stories might be one theme to keep an eye on next year. Most prominent is the ongoing chatter about Deutsche Bank and Commerzbank, the worst and third-worst performing stocks in the Stoxx 600 Banks index. While any merger is far from certain, market reaction shows that investors, or at least algos and punters, are betting on any consolidation as the last resort to improve bottom-lines.

And if you are gloating at the “fortress balance sheet” US banks, as BMO’s Brad Wishak notes, price and time are playing a familair hand in US bank stocks… Finally, BofAML strategists summed it all up very succinctly this week: “What we learned in 2018: That central banks trump everything, when global liquidity peaked in Q1, markets peaked; that we remain in a deflationary world which cannot handle a 10-year Treasury yield above 3%; That investors have no satisfactory answers to the existential questions of ‘If not stocks, what?’, ‘If not tech, what?’ ‘If not the U.S. dollar, what?'”…

Sometimes you wonder if even a grand jubilee could change this.

• Global Debt Hits All-Time High Of $184,000,000,000,000 (RT)

The world’s debt currently exceeds $86,000 per person on average, according to the IMF. The US, China, and Japan are the top three global borrowers, accounting for more than half of the global debt. The IMF has calculated that their share of debt exceeds that of output. It stated that the emergence of China among the top ranking is, however, a relatively new development. Since the beginning of the millennium, China’s share in global debt surged from less than three percent to over 15 percent, underscoring the rapid credit surge in the aftermath of the global financial crisis. According to the IMF, global debt has reached a record high of $184 trillion in nominal terms.

That’s the equivalent of 225 percent of the world GDP in 2017. The debt figure is $2 trillion higher than the estimated number released by the fund in October, because it includes the debts of several countries who had not previously reported their updated data. “By including both the sovereign and private sides of borrowing for the entire world, the GDD (Global Debt Database) offers an unprecedented picture of global debt in the post-World War II era,” said the IMF. GDD is a comprehensive dataset covering public and private debt for 190 countries dating back to the 1950s.

As I write this, things seem to be quiet still.

• Act V: Yellow Vests Prepare For Massive ‘Macron Resign’ Protest (RT)

Paris is bracing for yet another round of Yellow Vest protests, with demonstrators planning to take to the streets on Saturday. More than 10,000 people have already RSVP’d on Facebook to the ‘Acte 5: Macron Démission’ march. The demonstration is scheduled to take place in the French capital on the Champs-Élysées. The organizers, consisting of some 15 groups, have outlined their list of demands on Facebook, saying they will continue their action against Macron until all their demands are met. “Our organizations support the demands of tax and social justice brought by the movement of yellow vests.

They call for demonstrations Saturday, December 15, for social justice and tax, for a real democracy, for equal rights, for a true ecological transition…” the planners said in a statement, as quoted by Le Parisien. Similar demonstrations are also expected to take place in other cities across the country. Security officials are gearing up for the protests, with Paris Police Chief Michel Delpuech stating that tens of thousands of cops will be deployed across France, and some 8,000 in Paris. “We need to be prepared for worst-case scenarios,” he said. Delpuech told RTL that authorities are aiming to be in “better control” of the situation than they were last weekend, when more than 125,000 people hit the streets of France, 10,000 of whom protested in Paris.

But why should he?

• Senior Tories Tell May To Work With Corbyn To Save Her Brexit Deal (Ind.)

Senior Tories have told Theresa May to open talks with Labour as her only hope of salvaging a Brexit deal, after the EU’s outright refusal to renegotiate left her strategy in tatters. A badly bruised prime minister was urged to stop trying to “go it alone”, accept her proposed agreement is dead and that she needs the help of other parties to push through softer exit terms. Nicky Morgan, the former education secretary, told The Independent that “cross-party support and proper discussions” were now essential, while Nick Boles, another former minister, said Ms May “must open cross-party discussions”.

The calls came after EU leaders dealt a devastating blow by scrapping written commitments, designed to help Ms May pass her deal through parliament, after disastrous talks failed to achieve a breakthrough. Brussels’ frustration at the prime minister’s inability to set out clearly what she wanted was laid bare when Jean-Claude Juncker, the European Commission president, branded the UK approach “nebulous”. At a press conference, Ms May put a brave face on, insisting her Brexit deal remained on track and that talks in the next few days would achieve “further clarification”.

[..] Jeremy Corbyn said the prime minister had “utterly failed in her attempts to deliver any meaningful changes to her botched deal”, calling for a Commons vote to kill it off without delay “Rather than ploughing ahead and dangerously running down the clock, the prime minister needs to put her deal to a vote next week so parliament can take back control,” he said. Nevertheless, Mr Boles said the route to success for Ms May was cross-party talks to “deliver their support for the deal”.

She fled to Europe because she could, not to get anything done. The result is no Commons vote until after Christmas.

• Theresa May’s Brexit Strategy Left Brutally Exposed By Brussels Failure (G.)

Theresa May has come home from Brussels empty-handed and without hope of further negotiations over the Irish backstop, with the failure to achieve any kind of breakthrough leaving her brutally exposed. Plans to work over Christmas on a legal guarantee over the temporary nature of the backstop had run into a brick wall, EU officials said, despite May’s claim that she would be holding further talks “in the coming days”. Brussels sources claimed May was just keeping up a pretence that the legal guarantee she had promised rebellious Tory MPs during this week’s leadership challenge was still on the cards.

Without clear evidence that she has made progress, May faces mounting jeopardy in Westminster, with Labour seriously considering tabling a vote of no confidence before Christmas, if it believes the prime minister’s DUP partners might support it. Jeremy Corbyn accused May on Friday of “dangerously running down the clock”. “The last 24 hours have confirmed that Theresa May’s Brexit deal is dead in the water. The prime minister has utterly failed in her attempts to deliver any meaningful changes to her botched deal,” he said. One shadow cabinet member said the moment at which Labour would table a no-confidence vote was getting “much, much closer”, but said it would depend on the stance of the DUP. “We are watching like hawks,” he added.

Set up a bipartisan commission and get this solved. The US is a tragic laughing stock.

• Affordable Care Act Is Ruled Unconstitutional By A Federal Judge (CNBC)

A federal judge in Texas ruled on Friday the Affordable Care Act unconstitutional, potentially threatening health-care coverage for millions of Americans and setting up a new legal showdown over former President Barack Obama’s signature policy initiative. U.S. District Court Judge Reed O’Connor of Texas issued the decision, declaring that key portions of the legislation were inconsistent with the Constitution. O’Connor’s ruling argued that the health-care law can not stand on its own since Congress last December repealed the individual mandate, which imposed a tax penalty on consumers who went uninsured. The mandate, which remains in effect for 2018, was a key part of ACA legislation, otherwise known as Obamacare. The mandate is the greater of $695 person per adult, or 2.5% of household income.

The lawsuit was backed by the Trump administration, and is likely to be appealed — which could mean the legislation will heard anew by the Supreme Court, which upheld Obamacare in a narrowly divided 2012 ruling. Medicare & Medicaid Services Administrator Seema Verma told reporters earlier this month that CMS has a plan to protect pre-existing conditions if the law is struck down. A CMS spokesperson late Friday told CNBC, “The recent federal court decision is still moving through the courts, and the exchanges are still open for business and we will continue with open enrollment. There is no impact to current coverage or coverage in a 2019 plan.”

Government investigators who refuse to share documents with the House. Not just insane, but by now years of insanity.

• Clinton Foundation Oversight Panel Hears Explosive Testimony (RT)

Fraud investigators have exposed the Clinton Foundation’s alleged misdeeds in a Congressional hearing, describing it as a de facto “foreign agent” devoted not to charity but to “advancing the personal interests of its principals.” The Clinton Foundation acted as an agent of foreign governments “early in its life and throughout its existence,” according to testimony by former government forensic investigator John Moynihan, which, if true, would not only render it in violation of the Foreign Agents Registration Act but also would violate its nonprofit charter, putting it on the hook for a massive quantity of unpaid taxes. Moynihan and fellow ex-government investigator Lawrence Doyle shared 6,000 pages of evidence with the IRS over 18 months ago, only to be met with silence.

They shared them with the FBI multiple times – ditto. Yet when the pair testified before the House Oversight and Government Reform Committee, they refused to turn over the documents, stating they did not want to interfere with any ongoing investigations. The committee chairman Rep. Mark Meadows (R-NC) said witnesses’ reluctance to share all the documents was hardly a “good foundation for truth and transparency,” while Rep. Jody Hice (R-GA) said he felt the duo was “using” the panel for their own benefit. “These are not our facts. They are not your facts. They are the facts of the Clinton Foundation,” said Moynihan, maintaining his interest in the case is purely financial – not political.

Testifying on their findings, Doyle highlighted the Foundation’s alleged “misuse of donated public funds,” explaining that it “falsely attested that it received funds and used them for charitable purposes which was, in fact, not the case. Rather the foundation pursued in an array of activities both domestically and abroad,” which included activities “properly characterized as profit-oriented and taxable undertakings of private enterprise, again failing the operational tests of philanthropy referenced above,” referring to the equally non-charitable pursuit of funding the Clinton Presidential Library. John Huber, appointed by former Attorney General Jeff Sessions to investigate the Clinton Foundation after Sessions recused himself from doing so, was conspicuously absent from the hearing, even though his job is to probe Clinton’s approval of the sale of US uranium assets to Russia.

Globalism has been extremely destructive. Hard to defend.

• The War Against Globalism (Giraldi)

The idea that republican or democratic government will eventually deteriorate into some form of tyranny is not exactly new. Thomas Jefferson advocated a new revolution every generation to keep the spirit of government accountable to the people alive. Call it what you will – neoliberalism, neoconservatism or globalism – the new world order, as recently deceased President George H.W. Bush once labeled it, characteristically embraces a world community in which there is free trade, free movement of workers and democracy. They all sound like good things but they are authoritarian in nature, destructive of existing communities and social systems while at the same time enriching those who promote the changes.

They have also been the root cause of most of the wars fought since the Second World War, wars to “liberate” people who never asked to be invaded or bombed as part of the process. And there are, of course, major differences between neoliberals and neoconservatives in terms of how one brings about the universal nirvana, with the liberals embracing some kind of process whereby the transformation takes place because it represents what they see, perhaps cynically, as the moral high ground and is recognized as being the right thing to do. The neocons, however, seek to enforce what they define as international standards because the United States has the power to do so in a process that makes it and its allies impossible to challenge.

The latter view is promoted under the phony slogan that “Democracies do not fight other democracies.” The fact that globalists of every type consider nationalism a threat to their broader ambitions has meant that parochial or domestic interests are often disregarded or even rejected. With that in mind, and focusing on two issues – wholesale unwelcome immigration and corrupt government run by oligarchs – one might reasonably argue that large numbers of ordinary citizens now believe themselves to be both effectively disenfranchised and demonstrably poorer as rewarding work becomes harder to find and communities are destroyed through waves of both legal and illegal immigration.

I can still hope he succeeds, but it’s getting hard to see how.

• Yanis Varoufakis’s Internationalist Odyssey (Nation)

Flanked by a dozen members of DiEM25, the pan-European movement launched in 2016 to “democratize” the continent’s institutions, Varoufakis announced that he would run for a seat representing Germany in the European Parliament. He would make his bid as a Greek, a European, and, you might even say, a Berliner—all to drive home a larger point about the necessity of thinking beyond borders. “No European people can be prosperous and free when other European countries are condemned to the permanent depression that eternal austerity creates,” he said. Persistent unemployment, cuts to welfare, and other suffocating economic policies across the continent help explain why Varoufakis chose Germany—a country he’s best known for antagonizing, precisely over its leaders’ support for austerity, in the fraught negotiations over Greece’s debt in 2015.

These circumstances are also the motivating force behind the Progressive International, an initiative that Varoufakis launched five days later in Burlington, Vermont, with DiEM25 and the Sanders Institute. Building broad-based coalitions takes time, and for now, the Progressive International is just a website with some inspiring language and a video. Its membership is also very Eurocentric. But Varoufakis hopes it will blossom into a global movement that helps leftists create coherent platforms, policies, and parties to defeat the “nationalist international” masterminded by Donald Trump’s former chief strategist, Steve Bannon. The logic is simple. Financiers have long had global networks; now, right-wing authoritarians do too, with coordinated social-media strategies and deep pools of dark money funding campaigns and disrupting elections around the globe.

It’s time for the left to go on the offensive and reclaim its tradition of internationalism: in Varoufakis’s words, to “mobilize workers, women, and the disenfranchised around the world” to prevent outright fascism from taking hold. This means local action, but it also means dreaming big. It’s a fuzzy plan, of course, and one that Varoufakis’s critics deem implausible. Aren’t ideas like “democratizing” the European Union and making global finance more “progressive” oxymorons? How will a ragtag group of leftists dream up a new monetary system and an ecological New Deal for the whole world when Goldman Sachs and ExxonMobil call the shots?

“Europe does not have a problem with migration,” says @yanisvaroufakis. “Europe has a problem with austerity, with a failed economy, with a failed economic system.” pic.twitter.com/nT0teHtFJb

— Christiane Amanpour (@camanpour) December 13, 2018

The Mother of All Deflations

Apr 092018

April 9, 2018 Posted by Raúl Ilargi Meijer at 12:22 pm Finance Tagged with: Banks, building society, deflation, housing, loans, money creation, money supply, money velocity, mortgages, Steve Keen 8 Responses »

Keith Haring Retrospect 1989

Longtime and dear friend of the Automatic Earth, professor Steve Keen, wrote an article recently that everyone should read (that goes for everything Steve writes). It’s hard to select highlights, but I’ll give it a try. Steve explains where our housing markets went off the rails, what (short-sighted) interests politicians have in subverting them, and, something rarely addressed, why housing markets are unlike any other markets (the turnover of existing properties is financed with newly created money)

He then suggests some measures that might counter this subversion, with a twang of It’s a Wonderful Life nostalgia thrown in. That nostalgia, which will be seen by many as outdated and a grave mistake in these ‘modern times’, instead makes a lot of sense. We might even say it’s the only way to get back on our feet. It resides in the idea that money-circulating building societies, rather than money-creating banks should be in charge of the housing market.

Because it’s not supply and demand that rule the market today, it’s available debt (credit). And banks can, and will, always create more debt at the stroke of a keyboard. That is, until they can’t, and then house prices must and will of necessity fall off a cliff. In Steve’s words: “..mortgage credit causes house prices to rise, leading to yet more credit being taken on until, as in 2008, the process breaks down. And it has to break down, because the only way to sustain it is for debt to continue rising faster than income.

Still, it left me with a big question. But I’ll ask that at the end; here’s Steve first.

The Housing Crisis – There’s Nothing We Can Do… Or Is There?

[..] the UK data is remarkable, even in the context of a worldwide trend to higher levels of leverage. Between 1880 and 1980, private debt in the UK fluctuated as a percentage of GDP, but it never once reached 75% of GDP. But in 1982, both household and corporate debt took off. In 1982, total private debt was equivalent to 61% of GDP, split equally between households and corporations. 25 years later, as the global financial crisis unfolded, private debt was three times larger at 197% of GDP, again split 50:50 between households and corporations.

The key changes to legislation that occurred in 1982 is the UK let banks muscle into the mortgage market that was previously dominated by building societies. This was sold in terms of improving competition in the mortgage market, to the benefit of house buyers: allegedly, mortgage costs would fall. But its most profound impact was something much more insidious: it enabled the creation of credit money to fuel rising house prices, setting off a feedback loop that only ended in 2008.

Building societies don’t create money when they lend, because they lend from a bank account that stores the accumulated savings of their members. There’s no change in bank deposits, which are by far the largest component of the money supply.

However, banks do create money when they lend, because a bank records a loan as their asset when they make an identical entry in the borrower’s account, which enables the property to be bought. This dramatically inflates the price of housing, since, as the politicians themselves acknowledge – housing supply is inflexible, so prices increase far more than supply.

The supply side of the housing market has two main factors: the turnover of the existing stock of housing, and the net change in the number of houses (thanks to demolition of old properties and construction of new ones). The turnover of existing properties is far larger than the construction rate of new ones, and this alone makes housing different to your ordinary market. The demand side of the housing market has one main factor: new mortgages created by the banks.

Monetary demand for housing is therefore predominantly mortgage credit: the annual increase in mortgage debt. This also makes housing very different to ordinary markets, where most demand comes from the turnover of existing money, rather than from newly created money.

We can convert the credit-financed monetary demand for housing into a physical demand for new houses per year by dividing by the price level. This gives us a relationship between the level of mortgage credit and the level of house prices. There is therefore a relationship between the change in mortgage credit and the change in house prices. This relationship is ignored in mainstream politics and mainstream economics. But it is the major determinant of house prices: house prices rise when mortgage credit rises, and they fall when mortgage credit falls. This relationship is obvious even for the UK, where mortgage debt data isn’t systematically collected, and I am therefore forced to use data on total household debt (including credit cards, car loans etc.).

Even then, the correlation is obvious (for the technically minded, the correlation coefficient is 0.6). The US does publish data on mortgage debt, and there the correlation is an even stronger 0.78—and standard econometric tests establish that the causal process runs from mortgage debt to house prices, and not vice versa (the downturn in house prices began earlier in the USA, and was an obvious pre-cursor to the crisis there).

None of this would have happened – at least not in the UK – had mortgage lending remained the province of money-circulating building societies, rather than letting money-creating banks into the market. It’s too late to unscramble that omelette, but there are still things that politicians could do make it less toxic for the public.

The toxicity arises from the fact that the mortgage credit causes house prices to rise, leading to yet more credit being taken on until, as in 2008, the process breaks down.

And it has to break down, because the only way to sustain it is for debt to continue rising faster than income. Once that stops happening, demand evaporates, house prices collapse, and they take the economy down with them. That is no way to run an economy.

Yet far from learning this lesson, politicians continue to allow lending practices that facilitate this toxic feedback between leverage and house prices. A decade after the UK (and the USA, and Spain, and Ireland) suffered property crashes – and economic crises because of them – it takes just a millisecond of Internet searching to find lenders who will provide 100% mortgage finance based on the price of the property.

This should not be allowed. Instead, the maximum that lenders can provide should be limited to some multiple of a property’s actual or imputed rental income, so that the income-earning potential of a property is the basis of the lending allowed against it.

Two smaller points first: Steve doesn’t mention the role of ultra-low rates. Which is a huge factor leading the process. Second, he says his proposals will “..transition us from a world in which we treat housing as a speculative asset rather than what it really is, a long-lived consumption good”. I wonder if perhaps we should take this a step further.

We don’t see land as a consumption good either, or water sources. They are assets that belong to a given community. Or should. So shouldn’t buildings be too? A building society (or some local equivalent, It’s a Wonderful Life style) in a community can’t, won’t lend out money to build homes that serve the interests of the owner, but hamper those of the community. But now I sound even more commie than Steve for many, I know.

On to my main point: if you return mortgage lending to money-circulating building societies, rather than money-creating banks, who’s going to create the money? Don’t let’s forget that a huge part of our present money supply comes from those banks, and much of that from the mortgage loans they issue. Steve may well have thought about this (was he afraid to ask?), and I’d be curious to see his views.

Inflation/deflation is a function of money supply x money velocity (MxV). There are multiple ways to define this, and discuss it, but in the end this remains valid.

This is what the US money supply (stock) has done over the past 30-odd years

And here is the Case/Shiller home price index for the US over roughly that period. The correlation is painfully clear. Except maybe for that drop in 2008, but the Fed caught that one. Can’t let the money supply fall off a cliff.

And why can’t we afford to let the money supply fall off a cliff? Because money velocity already has:

How dramatic that fall has been is perhaps even clearer on a shorter time-frame.

We can say that MV = GDP, or we can make it a bit more complex with MV=PT, where P is prices and T is transactions (or national output), and people can say that this is just one of many ways to define inflation, but when you have a drop in velocity as steep as that one, and you combine it with the rise in money supply we saw, the danger should be obvious.

We have made our economies fully dependent on banks creating loans out of thin air. Which is a ridiculous model, and as Steve says: “That is no way to run an economy”, but we still have. And if and when home prices start to fall, and fewer people buy homes, the money supply will first stop rising, and then start falling, and we will have the mother of all deflations.

If you take the MV = GDP formulation, GDP will go down right with the money supply, unless velocity (V) soars. Which it can’t, because people are maxed out on those mortgages. They can’t spend. If you go with MV=PT, then if money supply falls, so will prices. Unless transactions (output) is demolished, but that will just kill off velocity even more. Why many people see inflation in our future is hard to gauge.

We could, presumably, get our central banks to pump ginormous amounts of money into our societies, but where are they going to put it? Not into our banks(!), which wouldn’t create all those loans anymore, as It’s a Wonderful Life takes over that role, taking the banks and their present role down with it.

Because it’s starting to get obvious that the present ‘system’ is set to go down big time, since as Steve put it:the only way to sustain it is for debt to continue rising faster than income, and we all know where that goes, we can advocate a version of controlled demolition, but who would lead that?

The banks are the most powerful party at the table right now, and controlled demolition of what we have today, as sensible as it may be for society at large, is not for them. Which makes this not only a financial problem, but a political one too: where does power reside. Down the line, it doesn’t even seem to matter much who gives out the loans, there will be very few takers.

Let’s just say we’re open to suggestions. But they better be good.

Bitcoin Doesn’t Exist – The Full Story

Dec 122017

December 12, 2017 Posted by Raúl Ilargi Meijer at 3:03 pm Finance Tagged with: Banks, bitcoin, blockchain, crypto, exchanges, hackers, mining, privacy, resiliency, Satoshi 3 Responses »

Gustave Courbet Seascape 1874

Bitcoin Doesn’t Exist was written exclusively for the Automatic Earth by Dr. D and first published as a five-part series there. The Full Story combines these five parts. Given the length and the amount of information, we suggest you might want to save or bookmark it. And you can of course always express your appreciation of the Automatic Earth through Paypal.

Dr. D: Bitcoin is all the rage today, and as it crosses over $10,000, a 10-bagger for the year, we should look at what it is, what it isn’t, and why it’s become so popular. Note my observations are those of a layman – which may be more useful than those of a programmer – but also those of a skeptic, which I’ll get to at the end.

First, what is Bitcoin? Well, the idea of digital money goes back to the first digits, financial mainframes. In fact, the “money” in use today throughout the financial system have long been no more than virtual 1’s and 0’s on a spinning hard drive somewhere, but the idea of Bitcoin-money, private-money, goes back further still. I mean, what is “money”? At its core, it’s no more than the most-tradable good in a given society, a trading chit we use as a measurement tool, a token recording how much value we created or are owed. Arguably the first money was not gold, not seashells or even barter, but a promise. Let me borrow your net and I’ll give you a couple fish from the work. Why? Because you might break the net or I might use it, so I need to get paid for my risk, reward for my effort in making and storing the net to begin with.

So money at its most austere is simply a promise. But a promise to whom for what? And that’s the problem. No matter what good you use, people place differing values on it, different time-preferences, and most especially ways to cheat, game the system, and renege. This is bad among businesses, banks – who are after all only men – especially bad among governments, but worst of all among government and banks combined. Because, should the banks lie, renege, default, abuse their privilege, who then would hold them to task?

In the past, over and over, groups have created their own “money”. The whole 19th century was marked by general stores extending credit, bank notes issued by thousands of private banks, each with their own strength and solvency and geography and discounted accordingly. In the 20th century, with central banks controlling money, many cities issued local “scrip” – promises to pay – in Detroit in the Depression, or California in the budget crunch of 2009, or “Ithaca Dollars” in NY as a sort of ongoing Ivy League experiment. But the problem with these only highlight the problems with money generally:who can issue them? Everyone? A central authority? Can they deliver goods? And what can they buy, not just in value but in location?

Ithaca Dollars or California Tax Vouchers are not much good to buy oil from Texas or tea from China. People will always prefer a good that is accepted everywhere, with no decay and no discount, because ultimately the money flows away, offshore or to central taxation, which makes local currencies ever-less valuable. But even if successful it leads to a new set of problems: if Detroit or Ithaca Dollars were in high demand, there would be ever-stronger incentive to counterfeit, cheat, and double-spend them. Thus from the Renaissance to now we used reputable banks backed by force of governments, through the Gold standard and the Fiat age until today.

Enter the hackers.

It’s not that these problems are unknown, or haven’t been approached or attempted before. Every generation, when they find the banks + government take a percentage for their costs to insure the system, thinks how can we do away with these guys, who both take too much and end up in an unapproachable seat of power? I mean, aren’t we supposed to be a Democracy? How can we have a fair society if the Iron Bank is both backing all governments at once, on both sides of a war? What good is it to work if compounding interest invariably leads to their winning Boardwalk and Park Place 100% of the time? But despite several digital attempts – some immediately shut down by government – no one had a solution until Satoshi Nakamoto.

We don’t know who Satoshi Nakamoto is, but since several of the well-meaning developers were immediately jailed for even attempting private money on reasons arguably groundless, we can suppose he had good incentive to remain anonymous. And speculation aside, it doesn’t matter: Satoshi’s addition was not “Bitcoin” per se, but simply an idea that made private currency possible. The domain Bitcoin.org was registered in 2008, showing intent, and the open-source code was promoted to a small cryptography group in January 2009. But what was it? What did it solve?

Double-spending. Basically, the problem of money comes down to trust. Trust between individuals, between the system, but also partly trust in non-interference of governments or other powerful groups. Bitcoin is a trust machine.

How does it work? Well, the basic problem of cheating was one of not creating fake, hidden registers of value, as the U.S. Government, J.P. Morgan, and the Comex do every day. If they asked Yellen to type some extra zeros on the U.S. ledger, print a few pallets of $100 bills to send to Ukraine, who would know? Who could stop them? So with Bitcoin, the “value”, the register is created by essentially solving a math problem, akin to discovering prime numbers. Why do something so pointless? Simple: math doesn’t lie. Unlike U.S. Dollars, there are only so many prime numbers. We can be certain you won’t reach 11-digits and discover an unexpected trove of a thousand primes in the row. Can’t happen. However useless, Math is certainty. In this case, math is also limited. It’s also known and provable, unlike the U.S. budget or Federal Reserve accounting.

The second problem of cheating was someone simply claiming chits they did not own. This was solved by having the participants talk back and forth with each other, creating a public record or ledger. In fact, Bitcoin is nothing more than a very, very long accounting ledger of where every coin came from, and how every coin has moved since then, something computers do very well. These accounting lines register amongst all participants using a process of confirmed consensus.

Double-spending is when someone writes a check either against money they don’t have (yet) and round-robin in the money for the one second of clearing, or else write a check against money they DO have, but then cancel the check before it clears, walking away with the goods. In a standard commerce, the bank backfills fraud and loss and the government arrests, tries, and imprisons people, but it’s no small cost to do so. Although there is still a small possibility of double-spending, Satoshi’s plan effectively closed the issue: the ledger is either written, or unwritten. There is no time in the middle to exploit.

Great for him, but if I buy coins by Satoshi and the original cryptogroup, won’t I just be transferring all my value to make them rich? Although Bitcoin supply may be limited by mathematics, this is the issuer problem. It is solved because as a free, open source code, everyone has an equal opportunity to solve the next calculation. Bitcoin starts with the original 50 coins mined in 2009, so yes, early adopters get more: but they took more risk and trouble back when it was a novelty valuable only as proof-of-concept. The original cash transaction was between hackers to buy two pizzas for 10,000 BTC ($98M today). Why shouldn’t they get preference? At the same time, we are not buying all 20 Million eventual coins from Satoshi and his close friends, which is arguably the case with the Federal Reserve and other central banks. Bitcoin is bought and created from equal participants who have been actively mining as the coins appear, that is, from doing electronic work.

This leads to the next challenge: why would anyone bother keeping their computers on to process this increasingly long accounting ledger? Electricity isn’t free. The process of “mining” is the recording of Bitcoin transactions. The discovery of coins therefore effectively pays for the time and trouble of participating in a public accounting experiment. Even should that stop, the act of using Bitcoin itself cannot be accomplished without turning on a node and adding lines to process the ledger. So we can reasonably expect that people will keep Bitcoin software “on” to help us all get Bitcoin work done. That’s why it’s a group project: public domain shareware.

What if they shut it down? What if it’s hacked? This leads to the next problem: resiliency. You have to go back a step and understand what Bitcoin is: a ledger. Anyone can store one, and in fact participants MUST store one. If Bitcoin were “shut off” as it were, it would be stored with each and every miner until they turned their computers back on. If it’s “off” there’s no problem, because no one transferred any Bitcoin. If it’s “on” then people somewhere are recording transactions. Think of it like a bowling group keeping a yearly prize of the ugliest shirt. Is there an actual shirt? No, the shirt is not the prize. Is there a gold trophy? No, “prize” is simply the knowledge of who won it. There is no “there”, no physical object at all. Strangely, that’s why it works.

This is important for the next problem: intervention. Many private monies have been attempted, notably e-gold within Bitcoin’s own origin. But the problem was, if there was anything real, like a gold bar, it could be encumbered, confiscated, and stolen. You’d have to trust the vault, the owner, the auditor and we’re back in the old system. At the same time, if Satoshi were keeping the Bitcoin record and had any human power over it at all, government could imprison him, pass a law, create a cease-and-desist, or demand he tamper with the record, which they did with e-gold. But Satoshi does not have that power, and no one else does either.

Why? Precisely because Bitcoin DOESN’T exist. It’s not a real thing. Or rather, the only “real” thing is the ledger itself which is already public to everyone everywhere. You can’t demand the secret keys to Bitcoin privacy because it’s already completely, entirely public. What would a government demand? Suppose they ordered a miner to alter the record: the other miners would instantly reject it and it would fail. Suppose they confiscated the ledger: they now own what everyone already has. Suppose they unplugged it: they would have to unplug the entire internet, and everything else on it, or every Bitcoin node, one-by-one, worldwide. If any nodes were ever turned on, all Bitcoin would exist again.

Can they track them down? Not really. In theory, Bitcoin can be written on paper without an Internet. In practice, any public or private keys certainly can be. So even chasing down the Internet it would be very difficult to stop it given sufficient motivation, like the Venezuelan hyperinflation where they are chasing down miners, wallets, and participants, and failing despite overwhelming force.

What about privacy? A completely public ledger recording every person and every transaction seems like a police state’s dream of enforcement and taxation. Is it private? Yes and no. The Bitcoin ledger is not written like “Senator Smith spent .0001 BTC on August 21st, 2015 to buy a sex toy from Guangzhou,” but Wallet #Hash2# transferred .00017 BTC to wallet #Hash3# at UTC 13:43:12 21:11:2017 – or not even that: it’s encrypted. Who is #Hash2#? You can go back, but it will only say #Hash2# exists and was created on Time:Date. Who is #Hash3#? The ledger only says #Hash3# was created a minute ago to receive the transaction. In fact, #Hash2# may have been created solely to mask the coin transferred from #Hash1#. So is it anonymous? Not exactly. Given enough nodes, enough access to the world’s routers, enough encryption, you might see #Hash2# was created in Pawtucket, and if #Hash2# is not using active countermeasures, perhaps begin to bring a cloudy metadata of #Hash2# possible transactions into focus, tying it to Amazon, then a home address, but the time and resources required to break through would be astronomical.

What about theft? Yes, like anything else it can be stolen. If you break into my house and tie me up, you can probably get the keys. This is also true online as you must log on, type a password that can be logged on a screen that can be logged over a network that can be logged, but think again about what you’re doing: does it make sense to break into every participant’s computer one by one? Most Bitcoin is held by a few early adopters, and probably those wallets were lost when their hard drives crashed, the users lost their passwords, or died before this computer experiment had any value. We know for a fact that all of Satoshi’s original coins, 2.2 million of them, have NEVER been spent, never moved on the ledger, suggesting either death or the austerity of a saint.

So even today hacking a wallet, is far more likely to net $1.00 than $1M. Take a page from Willie Sutton: when asked why he robbed banks, he said, “that’s where the money is.” So today. Where is the real money stolen, transferred? From the ’08 bailout, the kiting of fake bonds in the market, the MF Globals, the rigging of LIBOR or the fake purchase of EU bonds. You know, where the money is. At $160B market cap, Bitcoin is still one week’s purchase of central bank bond buying, i.e. a rounding error, no money at all. Hack a home wallet? I guess, but hacking Uber or Equifax once is a lot easier than hacking 100,000 wallets on 100,000 different computers. At least you know you’ll get something.

But MT Gox was hacked and 650,000 coins went missing. Surely Coinbase, Gemini, Poloniex are the same. Well…not exactly.

Gustave Courbet The wave 1870

Dr. D: You have to understand what exchanges are and are not. An exchange is a central point where owners post collateral and thereby join and trade on the exchange. The exchange backs the trades with their solvency and reputation, but it’s not a barter system, and it’s not free: the exchange has to make money too. Look at the Comex, which reaches back to the early history of commodities exchange which was founded to match buyers of say, wheat, like General Mills, with producers, the farmers. But why not just have the farmer drive to the local silo and sell there? Two reasons: one, unlike manufacturing, harvests are lumpy. To have everyone buy or sell at one time of the year would cripple the demand for money in that season. This may be why market crashes happen historically at harvest when the demand for money (i.e. Deflation) was highest. Secondly, however, suppose the weather turned bad: all farmers would be ruined simultaneously.

Suppose the weather then recovered: the previous low prices are erased and any who delayed selling would be rich. This sort of random, uncontrolled, uninsurable event is no way to run an economy, so they added a small group of speculators into the middle. You could sell wheat today for delivery in June, and the buyer would lock in a price. This had the effect of moderating prices, insuring both buyers AND sellers, at the small cost of paying the traders and speculators for their time, basically providing insurance. But the exchange is neither buyer, seller, nor speculator. They only keep the doors open to trade and vet the participants. What’s not immediately apparent is these Contracts of Wheat are only wheat promises, not wheat itself. Although amounts vary, almost all commodities trade contracts in excess of what is actually delivered, and what may exist on earth. I mean the wheat they’re selling, millions of tons, haven’t even been planted yet. So they are synthetic wheat, fantasy wheat that the exchange is selling.

A Bitcoin exchange is the same thing. You post your Bitcoin to the exchange, and trade it within the exchange with other customers like you. But none of the Bitcoin you trade on the exchange is yours, just like none of the wheat traded is actual wheat moving on trucks between silos. They are Bitcoin vouchers, Bitcoin PROMISES, not actual Bitcoin. So? So although prices are being set on the exchanges – slightly different prices in each one – none of the transfers are recorded on the actual Bitcoin Ledger. So how do you think exchanges stay open? Like Brokers and Banks, they take in the Bitcoin at say 100 units, but claim within themselves to have 104.

Why? Like any other fractional reserve system, they know that at any given moment 104 users will not demand delivery. This is their “float” and their profit, which they need to have, and this works well as far as it goes. However, it leads to the problem at Mt. Gox, and indeed Bear Sterns, Lehman and DeutscheBank: a sudden lack of confidence will always lead to a collapse, leaving a number of claims unfulfilled. That’s the bank run you know so well from Mary Poppins’ “Fidelity Fiduciary Bank”. It is suspected to be particularly bad in the case of Mt. Gox, which was unregulated. How unregulated? Well, not only were there zero laws concerning Bitcoin, but MTGOX actually stands for “Magic The Gathering Online eXchange”; that is, they were traders of comic books and Pokemon cards, not a brokerage. Prepare accordingly.

The important thing here is that an exchange is not Bitcoin. On an exchange, you own a claim on Bitcoin, through the legal entity of the exchange, subject only to jurisdiction and bankruptcy law. You do not own Bitcoin. But maybe Mt.Gox didn’t inflate their holdings but was indeed hacked? Yes, as an exchange, they can be hacked. Now you only need infiltrate one central point to gain access to millions of coins and although their security is far better, it’s now worth a hacker’s time. Arguably, most coins are held on an exchange, which is one reason for the incredibly skewed numbers regarding Bitcoin concentration. Just remember, if you don’t hold it, you don’t own it. In a hack, your coins are gone.

If the exchange is lying or gets in trouble, your coins are gone. If someone is embezzling, your coins are gone. If the Government stops the exchange, your coins are gone. If the economy cracks, the exchange will be cash-strapped and your coins are frozen and/or gone. None of these are true if YOU own your coins in a true peer-to-peer manner, but few do. But this is also true of paper dollars, gold bars, safe deposit boxes, and everything else of value. This accounts for some of the variety of opinions on the safety of Bitcoin. So if Polinex or Coinbase gets “hacked” it doesn’t mean “Bitcoin” was hacked any more than if the Comex or MF Global fails, that corn or Yen were “hacked”. The exchange is not Bitcoin: it’s the exchange. There are exchange risks and Bitcoin risks. Being a ledger Bitcoin is wide open and public. How would you hack it? You already have it. And so does everybody else.

So we’ve covered the main aspects of Bitcoin and why it is eligible to be money. Classically, money has these things:

1. Durable- the medium of exchange must not weather, rot, fall apart, or become unusable.

2. Portable- relative to its size, it must be easily movable and hold a large amount of value.

3. Divisible- it should be relatively easy to divide with all parts identical.

4. Intrinsically Valuable- should be valuable in itself and its value should be independent of any other object. Essentially, the item must be rare.

5. Money is a “Unit of Account”, that is, people measure other things, time and value, using the units of value to THINK about the world, and thus is an part of psychology. Strangely that makes this both the weakest and strongest aspect of:

6. “The Network Effect”. Its social and monetary inertia. That is, it’s money to you because you believe other people will accept it in exchange.

The Score:

1. Bitcoin is durable and anti-fragile. As long as there is an Internet – or even without one – it can continue to exist without decay, written on a clay tablet with a stylus.

2. Bitcoin is more portable than anything on earth. A single number — which can be memorized – can transport $160B across a border with only your mind, or across the world on the Internet. Its portability is not subject to any inspection or confiscation, unlike silver, gold, or diamonds.

3. Bitcoin is not infinitely divisible, but neither is gold or silver, which have a discrete number of atoms. At the moment the smallest Bitcoin denomination or “Satoshi” is 0.00000001 Bitcoin or about a millionth of a penny. That’s pretty small, but with a software change it can become smaller. In that way, Bitcoin, subject only to math is MORE divisible than silver or gold, and far easier. As numbers all Bitcoin are exactly the same.

4. Bitcoin has intrinsic value. Actually, the problem is NOTHING has “intrinsic” value. Things have value only because they are useful to yourself personally or because someone else wants them. Water is valuable on a desert island and gold is worthless. In fact, gold has few uses and is fundamentally a rock we dig up from one hole to bury in another, yet we say it has “intrinsic” value – which is good as Number 4 said it had to be unrelated to any other object, i.e. useless. Bitcoin and Gold are certainly useless. Like gold, Bitcoin may not have “Intrinsic value” but it DOES have intrinsic cost, that is, the cost in time and energy it took to mine it. Like gold, Bitcoin has a cost to mine measurable in BTU’s. As nothing has value outside of human action, you can’t say the electric cost in dollars is a price-floor, but suggests a floor, and that would be equally true of gold, silver, copper, etc. In fact, Bitcoin is more rare than Rhodium: we mine rare metals at 2%/year while the number of Bitcoins stops at 22 Million. Strangely, due to math, computer digits are made harder to get and have than real things.

5. Bitcoin is a unit of account. As a psychological effect, it’s difficult to quantify. Which comes first, the use of a thing, or its pricing? Neither, they grow together as one replaces another, side-by-side. This happened when gold replaced iron or salt or when bank notes replaced physical gold, or even when the U.S. moved from Pounds and Pence to Dollars and Cents. At first it was adopted by a few, but managed to get a critical mass, accepted, and eventually adopted by the population and entirely forgotten. At the moment Bitcoin enthusiasts do in fact mentally price things in Bitcoins, especially on exchanges where cross-crypto prices are marked vs BTC. Some never use their home currency at all, living entirely according to crypto-prices until home conversion at the moment of sale, or as hundreds or thousands of businesses are now accepting cryptocurrencies, even beyond. For them it is a unit of account the way Fahrenheit is a unit within the United States.

6. Bitcoin has the network effect. That is, it is widely accepted and publicly considered money. It’s in the news, has a wide following worldwide, and exchanges are signing up 40,000 new users a month. It’s accepted by thousands of vendors and can be used for purchases at Microsoft, Tesla, PayPal, Overstock, or with some work, Amazon. It’s translatable through point-of-sale vendor Square, and from many debit card providers such as Shift. At this point it is already very close to being money, i.e. a commonly accepted good. Note that without special arrangements none of these vendors will accept silver coins, nor price products in them. I expect if Mark Dice offered a candy bar, a silver bar, or a Bitcoin barcode, more people would pick the Bitcoin. In that way Bitcoin is more money than gold and silver are. You could say the same thing about Canadian Dollars or Thai Bhat: they’re respected currencies, but not accepted by everyone, everywhere. For that matter, neither are U.S. dollars.

Note what is not on the list: money is not a unit created or regulated by a central authority, although governments would like us to think so. In fact, no central authority is necessary or even desirable. For centuries the lack of monetary authority was historic fact, back with medieval markets through to private banks, until 1913, 1933, 1971, and the modern evolution into today’s near-total digital fiat. Besides the technical challenge, eliminating their overhead, oversight, control and corruption is the point of Bitcoin. And right now the government’s response to Bitcoin is a strange mixture of antipathy, ignorance, oppression, and opportunity. At $160 Billion it hardly merits the interest of a nation with a $500 Billion trade deficit, and that’s spread worldwide.

This leads into one of the spurious claims on Bitcoin: that it’s a refuge for drug smugglers and illegal activities. I assure you mathematically, that is not true. According to the U.N. the world drug trade is $435B, 4 times the total, and strictly theoretical value of Bitcoin, coins locked, lost, and all. Besides if you owned $160B coins, who would you transfer them to? You’re the only user. $435B/year can only be trafficked by major banks like as HSBC, who have paid public fines because money flows that large can’t be hidden. This is so well-known the U.N. suggested the drug-money flows may be one reason global banks were solvent in ‘08. Even $160B misrepresents Bitcoin because it had a 10-fold increase this year alone. So imagine $16B total market cap. That’s half the size of the yearly budget of Los Angeles, one city. Even that overstates it, because through most of its life it’s been around $250, so imagine a $4B market cap, the budget of West Virginia.

So you’re a drug dealer in illicit trades and you sell to your customers because all your buyers have Bitcoin accounts? Your pushers have street terminals? This doesn’t make sense. And remember as much as the price of Bitcoin has risen 40-fold, the number of participants has too. Even now, even with Coinbase, even with Dell and Overstock, even with BTC $10,000 almost no one has Bitcoin, even in N.Y.C. or S.F.. So who are these supposed illegal people with illegal activities that couldn’t fit any significant value?

That’s not to say illegal activities don’t happen, but it’s the other half of the spurious argument to say people don’t do illegal acts using cash, personal influence, offshore havens, international banks like Wells Fargo, or lately, Amazon Gift Cards and Tide Detergent. As long as there is crime, mediums of value will be used to pay for it. But comparing Bitcoin with a $16B market cap to the existing banking system which the U.N. openly declares is being supported by the transfer of illicit drug funds is insanity.

Let’s look at it another way: would you rather: a) transfer drugs using cash or secret bank records that can be erased or altered later or b) an public worldwide record of every transaction, where if one DEA bust could get your codes, they could be tracked backwards some distance through the buy chain? I thought so. Bitcoin is the LEAST best choice for illegal activities, and at the personal level where we’re being accused, it’s even worse than cash.

We showed that Bitcoin can be money, but we already have a monetary and financial system. What you’re talking about is building another system next to the existing one, and doubling the costs and confusions. That’s great as a mental exercise but why would anyone do that?

In a word: 2008.

It’s probably not an accident Bitcoin arrived immediately after the Global Financial Crisis. The technology to make it possible existed even on IRC chat boards, but human attention wasn’t focused on solving a new problem using computer software until the GFC captured the public imagination, and hackers started to say, “This stinks. This system is garbage. How do we fix this?” And with no loyalty to the past, but strictly on a present basis, built the best mousetrap. How do we know it’s a better mousetrap? Easy. If it isn’t noticeably better than the existing system, no one will bother and it will remain an interesting novelty stored in some basements, like Confederate Dollars and Chuck-e-Cheez tokens. To have any chance of succeeding, it has to work better, good enough to overcome the last most critical aspect money has: Inertia.

So given that Bitcoin is unfamiliar, less accepted, harder to use, costs real money to keep online, why does it keep gaining traction, and rising in price with increasing speed? No one would build a Bitcoin. Ever. No one would ever use a Bitcoin. Ever. It’s too much work and too much nuisance. Like any product, they would only use Bitcoin because it solves expensive problems confronting us each day. The only chance Bitcoin would have is if our present system failed us, and fails more every day. They, our present system-keepers, are the ones who are giving Bitcoin exponentially more value. They are the ones who could stop Bitcoin and shut it down by fixing the present, easy, familiar system. But they won’t.

Where has our present system gone wrong? The criticisms of the existing monetary system are short but glaring. First, everyone is disturbed by the constant increase in quantity. And this is more than an offhand accusation. In 2007 the Fed had $750B in assets. In 2017 they have $4.7 Trillion, a 7-fold increase. Where did that money come from? Nowhere. They printed it up, digitally.

The TARP audit ultimately showed $23 trillion created. Nor was the distribution the same. Who received the money the Fed printed? Bondholders, Large Corporations, Hedge Funds and the like. Pa’s Diner? Not so much. So unlike Bitcoin, there not only was a sudden, secret, unapproved, unexpected, unaccountable increase in quantity, but little to no chance for the population to also “mine” some of these new “coins”. Which leads to this:

Near-perfect income disparity, with near-perfect distribution of new “coins” to those with access to the “development team”, and zero or even negative returns for those without inside access. Does this seem like a winning model you could sell to the public? Nor is this unique to the U.S.; Japan had long ago put such methods to use, and by 2017 the Bank of Japan owns a mind-bending 75% of Japanese ETFs:

So this unelected, unaccountable bank, which creates its coin from nothing without limit or restraint, now owns 75% of the actual hard labor, assets, indeed, the entire wealth HISTORY of Japan? It took from the Edo Period in 1603 through Japan-takes-the-world 1980s until 2017 to create the wealth of Japan, and Kuroda only 6 years to buy it all? What madness is this?

Nor is Europe better. Mario Draghi has now printed so much money, he has run out of bonds to buy. This is in a Eurozone with a debt measuring Trillions, with $10 Trillion of that yielding negative rates. That’s a direct transfer from all savers to all debtors, and still the economy is sinking fast. Aside from how via these bonds, the ECB came to own all the houses, businesses, and governments of Europe in a few short years, does this sound like a business model you want to participate in?

So the volume of issuance is bad, and unfairness of who the coins are issued to is as bad as humanly possible, giving incredible advantages to issuers to transfer all wealth to themselves, either new or existing.

But if the currency is functional day-to-day, surely the issuance can be overlooked. Is it? Inflation is devilishly hard to measure, but here’s a chart of commodities:

CPI:

The US Dollar:

or vs Gold (/silver):

Does that look stable to you? And not that Bitcoin is stable, but at least Bitcoin goes UP at the same rate these charts are going DOWN. One store coupon declines in value at 4% a year, or may even start negative, while the other gives steady gains to loyal customers. Which business model would you prefer?

But that’s not all.

Gustave Courbet The wave 1870

Dr. D: The money, the unaccountable, uninhibited release of tokens can do more than just buy centuries of hard labor in seconds, it‘s also a method of control. Banks, our present issuers of money, can approve or destroy businesses by denying loans. They can do this to individuals, like denying loans to unpopular figures, or to whole sectors, like gun shops. They can also offer money for free to Amazon, Facebook, and Tesla, which have no profitable business model or any hope of getting one, and deny loans to power plants, railroads, farms, and bridges as they fall into the Mississippi.

The result is banks and their attending insiders are a de facto Committee of Central Planners in the great Soviet style. What is fashionable and exciting to them can happen, and what they dislike or disapprove of for any reason can never happen. And once on a completely fiat system, this is how capital is allocated through our entire system: badly. What’s worse has been a 20-year turn toward Disaster Capitalism, whereby loans are extended to a business, sector, person, or nation, and then suddenly cut off, leading to the rapid foreclosure and confiscation of companies, assets, or continents by the “Development Team.”

Imagine a Bitcoin where Satoshi could erase your coins in your wallet for giving him a bad haircut. Or because he likes your wife. Nor is there any help for independent nations like Iran, or even nuclear powers like Russia. Both have been cut off, their funds suspended at a whim with no recourse. Even being a fellow insider is no insurance, as the NY banks cut off Lehman from funds they were owed, driving it into bankruptcy to buy the pieces in receivership. Unpopular Billionaires are treated likewise. This is a system with no justice, no order, no rules, and no predictability. Anyone within it is at grave and total risk. And yet before Bitcoin it was the only system we had, short of returning to the 19th century, it was the only way for modern commerce to deliver food, water, power, or function at all.

This is seen in its abuses, but also by its effects. The present system not only controls whether you are a winner or loser, whether you may go or stay, whether you may live or die, but also tracks every purchase, every location, in effect, every action throughout your entire life. These records will describe what books you read, what movies you watch, what associates you have, in real time Already these daily actions are being approved or denied. Take out a variable-rate jumbo loan? We’ll give you 110% of the value, paying you to be irresponsible (we’ll foreclose later). Want to buy gas when driving through Cheyenne 3:30 at night? Sorry, we disabled your card as a suspicious transaction. Sorry about you dying there of crime or of cold; we didn’t know and didn’t care. All your base are belong to us.

You say you don’t care if JP Morgan has your pay stubs to disturbing porn sites and Uber purchases to see your mistress? Well the future Mayor of Atlanta will, and he hasn’t graduated college yet. With those records it’s child’s play to blackmail policemen, reporters, judges, senators, or generals, even Presidents. And all those future Presidents are making those purchases right now, the ones that can be spun into political hay, real or unreal. So if you don’t worry what everyone knows about you, that’s fine, but imagine reading the open bank records, the life histories of every political opponent from now until doomsday. Then Don’t. Do. It. The people who have those records – not you – then have not just all the assets, not just all the money, but all the power and influence. Forever.

Are you signing up for that? Bitcoin doesn’t. Bitcoin doesn’t care who you are and with some care can make it very difficult to track you. And without tracking you, it makes it impossible to boycott you. And without a central repository, it’s impossible to march in with tanks and make them give you the records, turn money on or off, to make other people live or die and bend to your will by violence.

No one will care about that, because no one cares about it now unless, like Russia or China, it’s directed at them personally and then it’s too late. The real adoption of Bitcoin is far more mundane.

The long-term interest rate is 5%. Historically banks would lend at 8%, pay at 4%, and be on the golf course by 5. No one thought much about it because like a public utility, banking was a slow, boring affair of letting business do business. You know, farming, mining, manufacturing, all that stuff we no longer do. For decades, centuries even, banking was 5%-15% of a nation’s GDP, facilitating borrowers and lenders and timescales, paying for themselves with the business efficiencies they engender.

All that changed after WWII. Banks rose in proportion to the rest of the economy, passing the average, then the previous high, then when that level reached “Irrational Exuberance”, Greenspan started the printing presses, free money was created, and Senators and Presidents whose bank records were visible suddenly repealed Glass-Steagall. An economy stretched to breaking with free, centrally-allocated and misallocated money crashed and shrank, yet the banks– now known as the FIRE stocks: Finance, Insurance, and Real Estate – kept growing. How can banks and finance keep growing with a shrinking economy? By selling their only product: debt.

How do you sell it? Reduce the qualifications past zero to NINJA-levels, and use your free money to FORCE people to take it via government deficits and subsidized loans. No normal economy could do this. No normal business model could do this. Only a business now based on nothing, issuing nothing, with no restraint and no oversight. And the FIRE sector kept growing, through 15%, 20%, 25% until today most of U.S. GDP is either Finance selling the same instruments back and forth by borrowing new money or GDP created by governments borrowing and spending.

Remember when we started, banks paid 4% and charged at 8%. Now they openly take savings with negative interest rates, and charge at 30% or higher on a credit card balance averaging $16,000. And still claim they need bailouts comprising trillions a year because they don’t make money. The sector that once facilitated trade by absorbing 5% of GDP is now 5x larger. There’s a word for a body whose one organ has grown 5x larger: Cancer. Unstopped, it kills the host.

What does this have to do with Bitcoin? Simple. They’re charging too much. They’re making too much both personally and as a group. They’re overpriced. And anything that’s overpriced is ripe for competition. And the higher the markup, the more incentive, the more pressure, the more profit there is to join the upstart. Bitcoin can economize banking because what does banking do? It saves money safely, which Bitcoin can do. It transfers money on demand, which Bitcoin can do. It pays you interest, which mining or appreciation can do.

It also can lend, register stocks and ownership, rate credit risks, and allocate capital which other non-Bitcoin Tokens can do. In short, it can replace the 25% overpricing of the financial sector. If it could reduce the overhead of outsized profit, the misuse of expensive brainpower, of Wall Street and London office space, and reduce financial costs to merely 10% GDP, it could free up 20% of GDP for productive purposes. Why did you think Detroit and Baltimore fell in on themselves while N.Y. and D.C. boomed? That’s the 30% they took, $4B a year, from every other state, every year for 40 years.

That money and that brainpower could be much better allocated elsewhere, but so long as the Finance sector can print free money and buy free influence, they will never stop on their own. Only an upstart to their monopoly can cure the cancer and bring them back to a healthy size and purpose. Bitcoin can do this only because they charge too much and do too little. Of course, they could go back to paying 4% and charging 8% with a CEO:employee pay ratio of 20:1 but history says it will never happen. Only a conflict, a collapse, or competition can reform them, and however long it takes, competition is by far the best option.

So why would people pick Bitcoin? It costs less and does more. Amongst adopters, it’s simpler and more direct. It pays the right people and not the wrong ones. It rewards good behavior instead of bad, and can help producers instead of parasites. It’s equitable instead of hierarchical. What else? While not Bitcoin proper, as a truth machine Blockchain technology is the prime cure for the present system’s main problem: fraud. There is so much fraud at the moment, libraries of books have been written merely recording the highlights of fraud since 2001. But merely recording the epic, world-wide, multi-trillion dollar frauds clearly does not cure it. Like other human problems, no one cares about your problems, only your solutions, and Blockchain has the solution.

While the details of fraud are complex, the essence of fraud is quite simple: you lie about something in order to steal it. That’s it. It could be small or large, simple or complex, but basically fraud is all about claiming what didn’t happen. However, the Blockchain is all about truth, that is, creating consensus about what happened, and then preserving it. Take the Robosigning scandal: accidental or deliberate, the mortgage brokers, banks, and MBS funds lost the paperwork for millions of houses. A house could be paid off could be foreclosed, as happened, or it could be owned 5 times, as happened. Like the Sneeches, no one knew which one was who, and the only certainty was that the official authority – county courthouses – did not know because to register there would have cost Wall Street and inconvenient millions or billions in shared tax stamps.

The system broke down, and to this day no one has attempted to define ownership, choosing instead to usher all the questionable (and therefore worthless) material into the central bank and hiding it there until the mortgage terms expire, forcing the taxpayers to bail out a multi-trillion dollar bank fraud at full value. And this is just one messy example. The S&L crisis was not dissimilar, nor are we accounting for constant overhead of fees, mortgage transfers, re-surveys, and title searches nationwide.

With Blockchain it’s simple: you take line one, write the information, the owner, title, date, and transfer, and share it with a group. They confirm it and add mortgage #2, then #3 and so on. It’s a public ledger like the courthouse, but the system pays the fees. It also can’t be tampered with, as everyone has a copy and there is no central place to bribe, steal, and subvert as happened in 2006 but also in history like the 1930s or the railroad and mining boom of the 1800s. If there are questions, you refer to the consensus If it’s transferred, it is transferred on the ledger. If it isn’t on the ledger, it isn’t transferred, same as the courthouse. Essentially, that’s what “ownership” is: the consensus that you own something. Therefore you do not have a mortgage due disappear, or 4 different owners clamoring to get paid or take possession of the same property, or the financial terrorism of shattering the system if you even attempt to prosecute fraud.

It’s not just mortgages: stocks have the same problem. Since the digital age began, the problem of clearing stock trades has steadily increased. Eventually, the NYSE trading volume was so large they couldn’t clear at all, and the SEC let trading houses net their internal trades, only rectifying the mismatches between brokerages. Eventually, that was too large, and they created the DTCC as a central holder and clearing house. Yet, in an age of online trading and high-frequency trading mainframes, it became apparent there was no way to clear even residual trades, and they effectively no longer try, and the SEC, instead of forcing them to compliance, lets them. There are 300M failed stock trades a day and $50B a day in bond failures, or $12 Trillion year in bonds alone. And so? If you sell your stocks and bonds, the brokerage makes it come out whole, so what?

Gustave Courbet The wave 1871

Dr. D: Well, all parts of the system rely on accurate record-keeping. Look at voting rights: we had a security company where 20% more people voted than there were shares. Think you could direct corporate, even national power that way? Without records of transfer, how do you know you own it? Morgan transferred a stock to Schwab but forgot to clear it. Doesn’t that mean it’s listed in both Morgan and Schwab? In fact, didn’t you just double-count and double-value that share? Suppose you fail to clear just a few each day. Before long, compounding the double ownership leads to pension funds owning 2% fake shares, then 5%, then 10%, until stock market and the national value itself becomes unreal. And how would you unwind it?

Work backwards to 1999 where the original drop happened? Remove 10% of CALPERs or Chicago’s already devastated pension money? How about the GDP and national assets that 10% represents? Do you tell Sachs they now need to raise $100B more in capital reserves because they didn’t have the assets they thought they have? Think I’m exaggerating? There have been several companies who tired of these games and took themselves back private, buying up every share…only to find their stock trading briskly the next morning. When that can happen without even a comment, you know fraud knows no bounds, a story Financial Sense called “The Crime of the Century.” No one blinked.

But it doesn’t stop there. You don’t only buy stocks, you sell them. And you can sell them by borrowing them from a shareholder. But what if there’s no record of delivery? You can short or sell a stock without owning any. And the more you sell, the more it drives the price down and the more money you make. In fact, profits are infinite if you can sell enough that the company goes bankrupt: you never have to repay the stock at all. And this “naked” short selling can only occur if there’s openly bad recording and enough failures-to-deliver to hide it. You could literally own nothing, borrow nothing, post nothing, and with no more than insider access to an exchange, drive a company out of business. That’s how crucial recording is.

And while for appearance’s sake, they only attack and destroy small plausibly weak stocks, Overstock.com with a $1.45B market cap fought these naked short sellers for years. Publicly, openly, vocally, with the SEC. Besides eroding their capital, besides their legal fees, besides that e.g. Amazon could pay to have their competition run out of business with fraudulent shorting, the unlimited incentive to short instead of long on small companies could suppress the entire stock market, indeed the national wealth and GDP. It may account for some of the small caps underperforming their potential for years, and why an outsized portion of stock value to be in just the 5 protected FAANG or DOW 30 stocks. …We don’t know, because we have no honesty, no accounting, and nothing to compare it to. But no one cares, because it’s been going on for 20 years, and if they cared, they’d do something about it. Again, no one cares about your problems, only your solutions. Even if the nation falls.

Look at it from their point of view: if you’re a business owner, now you can’t rationally list your corporation. Your stock could be manipulated; your business could be bankrupted for no reason at all. We’ve seen the NYSE shrink as businesses start to list in more honest jurisdictions, and even Presidents can’t convince them to come back. Traders and Fund Managers retire in public interviews, telling the world there is no longer any sense or price discovery, and therefore there is market madness.

Yet we just said that to clean up the market would discover 10%, 20%, 40% fake shares, fake business values, fake pension values, therefore fake GDP values, and fake GDP to Debt ratios, and therefore would perhaps lead to an accurate Debt to GDP of 140%, which would crash the U.S. dollar and possibly the nation. Would a complete U.S. financial collapse lead to a nuclear war? And it all goes back to fraud we didn’t stop 20 years ago. How do you solve the problem? The only way out without collapse is to build an honest system parallel to the existing system and slowly transfer assets from the rotten, sinking ship to the new one. The captains of the old ship may not like it, but look at the incentives. No one can tolerate the old ship except the pirate captain; even the crew, the stock traders, don’t want or control it any more.

However, what if you created an honest stock market Blockchain that actually had the stock certificates and actually transferred them, cheaply and reliably without false duplication? This is what is happening in the Jamaican Stock Market. A new company can choose to list on the stock Blockchain and avoid the old system. Other companies or even the whole exchange can clean up the books, slowly, stock by stock, and move it to the new honest system. Because they’re honest? No way! No one cares about truth or honesty, clearly. Because they can sell their stock exchange as superior, solving the existing problems. Stopping fraud, theft, the stealing or crippling of companies, fake voting, depression of Main Street and outsiders in favor of Wall Street and insiders, this is what Blockchain can do. In short, it would work better, cheaper.

What else can Blockchain do?

Blockchain is just software written by programmers so it’s as versatile as any other software. So why not program things into it with a “Smart Contract”? Suppose you make a bet: IF the Packers beat the Lions on November 12, 2017, THEN I will pay you $50. You set up the contract, and the bot itself can look for the headlines and transfer the money when the conditions are met.

That’s pointless but how about this: You run a jewelry business on Etsy and need to buy $500 in beads from Hong Kong. Normally, you would need to pay an importer, a currency exchange, bank account, tire transfer, escrow account, and a lawyer, or their proxies within the system, plus two weeks’ clearing time. That’s a lot of overhead for a small transaction. In contrast, a smart contract such as Ethereum could post the value of the coin (escrow), and when Long Beach or FedEx confirms delivery, releases the Ethereum, a coin of value, to the seller in Hong Kong. Instantly. Why? The existing financial system is charging too much and doing too little. That’s a huge incentive to get around their slow, overpriced monopoly.

Once you cut the costs, have a more direct method, and reduce the time to minutes, not weeks, the choice is obvious, which may explain why Microsoft, Intel, and others are deep in ETH development. Why overpay for bad service, and support the overpriced bonuses of men who will use their power to turn on or shut off your livelihood at will? Blockchain costs less and does more. Being just software, there are many other software products serving hundreds of other business plans. These use-coins are generally called “Tokens”, whereas“Coins” are meant to be pure currencies. There are Tokens for a wide variety of business purposes: online gambling? Yes. Tokens to buy marijuana in certain states? Sure.

But how about a Token like Populous that contains the credit information of small businesses worldwide, so you can make modest income lending against their accounts receivable? You get more income, business worldwide gets better service and lower costs. Why? The existing financial system is charging too much and doing too little. How about a Token like Salt for personal loans and perfecting collateral? They will lend cash against your Cryptocurrencies, because if your loan falls short, they can sell your collateral instantly. No foreclosures, no repossessions, no overhead.

This is what banks do when they hold your savings and checking accounts, yet sell you a personal loan. But the banks are giving you no interest on savings, while charging origination fees and high interest. They’re charging too much and doing too little. Well, you say, this sounds too good to be true: a parallel system to replace our existing corrupt, broken, overpriced one. One that doesn’t have to confront existing power or reform the system, but beyond price appreciation has its own incentives to join? Surely there are problems.

Oh, yes. So many problems. The first is often mentioned: it’s fine that Bitcoin is a finite commodity with only 22M coins, and if Bitcoin were the only coin, that would work. But there are over 1,000 coins now, and more every day. Isn’t that just another avenue to unlimited issuance and inflation by unlimited, unregistered people? Well, yes and no. It’s true that anyone can start their own Bitcoin – Litecoin for example is a faster duplicate of Bitcoin – but it’s also true that anyone can start their own Facebook. MySpace certainly did.

So why don’t they? Basically because of financial inertia, the Network Effect, a coin you start and only you use is worthless. The value is in the belief that other people will use it. Without that, you’re banished to MySpace Siberia. Still, with a 1,000 coins, don’t they all compete? Yes, and that’s a good thing, not bad. This is no different than the competing Bank Notes of the 19th century. If you like this bank and believe in them, you prefer their notes to others. Or you might use one note in Missouri and another in Louisiana. So with Cryptos. You might choose Bitcoin, with slow traffic and high costs to pay for a house. But you would choose Litecoin to pay for coffee.

You already do this, no different than using cash to buy a hot dog, your debit card for groceries, and a bank transfer for a car. It’s overlooked because they’re all called “dollars,” but they’re not. One is currency, one is a short-term credit, and one is a banking ledger. Because of the Network Effect, you can’t have 1,000 equal coins and have them all work. The market will prefer some over others until there are only a few, just as AskJeeves and Infoseek gave way to Google, which may someday give way to someone else. Just as you can’t start a new Google today, there are only a few top coins, easily updated, and little space for new coins.

In addition, the “1,000 coins” are not actually coins. Most of the new coins are Tokens, which are not “currencies” like Bitcoin and a means of exchange, but business models and services. Like Bank Notes, the market is self-limiting, but evolving. But if there are a variety of coins, and like Litecoin they can suddenly appear and change, what reassurance do you have that your Bitcoin “money” is worth anything? Like 19th century Bank Notes or AskJeeves, your responsibility is to be aware of the market and the changing values and react accordingly. And in a mature market, “everyone knows” the histories and reputations, but in a young market, like Dell and Gateway in 1992, no one knows. But that’s also why there is more profit now as well as more risk. But we’re also watching volatility and risk in Pounds, Lira, Gold, or even outright defaults like Argentine Pesos or Rubles. We already carry that risk, but it’s familiar and taken for granted.

If coins can just “change” and “fork” whenever they want, then isn’t it like buying Australian Dollars, then waking up and finding they’re Yen? Yes and no. Like other cryptos, Bitcoin is just software written by men. So a group of developers may think Bitcoin should remain the same while the old team thinks it should be improved so much that they do the work, write the updates, and release it. Well you have a “fork”, but what happens next is the Network Effect. So you’re a miner and a user of Bitcoin. You now have a choice: do you use the new software, the old software, or both? Everyone expected one to be adopted, and the old one to wither into oblivion. Since a Fork gives you one unit of each, the eventual outcome was a wash within the user group. But that doesn’t seem to be happening.

Ethereum forked, and Ethereum Classic still exists, and trades steadily but far less. Bitcoin Cash Forked and although 1/10th the price, both are trading briskly. No one knows what will happen, because it’s never existed before. So yes, you could wake up and find you don’t like what Bitcoin decided to do, just as you could wake up and not like your new bank manager or CFO of Dell, and then you sell that asset and choose another. That’s your responsibility. That’s competition.

Besides unexpectedly finding both forks have value, there is an upside to the downside. If some new advance in speed or encryption appears in Litecoin or Dash, Bitcoin can also adopt it. This not only improves the market, but reduces sudden upsets as new advances shouldn’t unseat popular coins but are adopted by them. Indeed, this was the purpose of Bitcoin Cash fork: to improve speed and cost. Yet now they both exist for different purposes in the market. Another objection is that cryptos depend on electricity and an expensive, functioning Internet. True. But while I’m no fan of technology, which is full of problems, so does everything else. Without electricity, the western world would stop, with no water, no heat, and no light.

Without Internet, our just-in-time inventory halts, food and parts stop moving, banking and commerce fail. You’re talking Mad Max. TEOTWAWKI. That’s a grave problem, but not unique to Bitcoin.

Gustave Courbet Sunset on Lake Geneva 1876

Dr. D: Bitcoin can be stolen. Although “Bitcoin” can’t be hacked, it’s only software and has many vulnerabilities. If held on an exchange, you have legal and financial risk. If held at home, you could have a hard drive fail and lose your passwords. If it’s on a hardware fob like a Trezor, the circuits could fail. For a robust system, computers themselves are pretty fragile. You could write down your passwords on paper, and have a house fire. You could print out several copies, but if any of the copies are found, they have full access to your account and stolen without you knowing. You could have your passwords stolen by your family, or have a trojan take a screen or keystroke capture.

Hackers could find a vulnerability not in Bitcoin, but in Android or AppleOS, slowly load the virus on 10,000 devices, then steal 10,000 passwords and clear 10,000 accounts in an hour. There are so many things that can go wrong, not because of the software, but at the point where you interface with the software. Every vault has a door. The door is what makes a vault useful, but is also the vault’s weakness. This is no different than leaving blank checks around, losing your debit card, or leaving cash on your dashboard, but it’s not true that there are no drawbacks. However the risks are less obvious and more unfamiliar.

Bitcoin isn’t truly anonymous. If someone, the NSA, wanted to track your drug purchases on SilkRoad, they could follow the router traffic, they could steal or work out your keys, they could eventually identify your wallet, and from there have a perfect legal record of all your transactions. Defenders will say that wallets are anonymous, that like Swiss accounts, we have a number, but not a name, and you can create new numbers, new wallets endlessly at will. Fair enough, but if I can see the transfers from the old to the new, it can be tracked. If I can get your account number by any means, I can see the flows. To some extent it’s speculation because we don’t know what technology they have available to crack codes, to see into routers, Internet traffic and servers.

Could there be a hidden exploit not in “Bitcoin” but in AES256 or the Internet itself? Maybe. Are there secret code-breaking mainframes? Possibly. But given enough interest, we can be sure that they could always get a warrant and enter your house, hack your computer, and watch your keyboard. However, this is no different than cash. If necessary, they can already track every serial number of every bill as it leaves an ATM or a drug sting. Then you follow those serial numbers as they are deposited and reappear. I expect Bitcoin is not very different, and like cash, is only casually anonymous. But is this a problem with cash? Or with Bitcoin? Your intent as a citizen is to follow the law, pay your taxes, and not hurt others. If government or other power centers are willing to expend that much effort to track you, perhaps the problem should be addressed with proper oversight on warrants and privacy.

Bitcoin is slow and expensive. Very true. Bitcoin Core has gotten so outsized from its origins that it may soon cost $5 to buy a $1 coffee and 48 hours to confirm the purchase. That’s clearly not cheaper, faster, OR better. It’s worse: far, far worse. Nor can it improve. Since Blockchain writes the ledger, the longer the ledger, the bigger it is. Technically, it can only clear a few transactions per second. This problem may not doom it, but it would relegate it to only huge, slow transactions like moving container ships. That is, a form of digital gold note. We don’t actually ship gold or whatever to pay for transactions; it just sits in the background, an asset. Per Satoshi, Bitcoin is a “Digital Asset.”

And the core team seems to like this more secure, higher value direction, where these obstacles are acceptable. But without a larger, deeper market, it’s the plaything of billionaires and then who sets the price? It becomes another experiment, an antique. Luckily, the story doesn’t stop there. Because it’s only software, you can always change it if you can convince the participants to use the new version. Bitcoin Cash is a fork that it larger, faster, and cheaper, reducing the limitations for now. And it can become Segwit2 or Cash2 later if the community agrees. But by design Bitcoin is not meant to be instant nor free, and probably never will be. Like gold, it is meant to be expensive, vaulted, and rarely moved. If you want fast and cheap, LiteCoin, Dash, and many others are vying to be the digital silver or digital payment card. That’s not very different from the gold standard, or even payments today.

Bitcoin is a huge electric and Internet drain. This is true. However, it’s also misrepresented. What is the electric overhead of every bank, every terminal, every mainframe on the NYSE, every point-of-sale card machine, every cash register and router in retail? Don’t we use an awful lot of electric to keep those running? What about their cost, the repairmen, the creation of new systems every year from mine to market, from idea to update release, to replace them? We also personally have our computers and routers, the whole Internet on and idling. What’s the base cost? Is it fair to compare as if it were a pasture before Bitcoin arrived?

We built the existing system this way because it gained efficiency. Time in the clearing, price in not running typewriters and mail worldwide, and of course taxes. We’re talking about creating a parallel financial system here. If the old one is replaced, is the new one better, or worse? Mining takes a lot of power, but the math in Bitcoin is meant to get increasingly harder to compensate for increasing computer speed. The computers are supposed to be on to confirm transactions. That means that the more people use it, the more power consumed, but that’s true of everything. The more people that drive cars, the more gas is used. So is the car doing something useful and being used well? Is it replacing a less efficient horse, or just wasting energy better used elsewhere? These are complex questions.

At the least, Bitcoin uses far, far too much energy in the design, and because of the speculation, far too many people are mining it without using it. However, all of the subsequent coins were concerned about this, and their power consumption is far, far less. As Bitcoin is near its hardest stage and stops at 22 Million, power consumption is near peak, but should stabilize, or even fork to a low-energy proof-of-stake model. As Bitcoin is not well-suited to worldwide transactions, it should be replaced with less-power intensive alternatives, and because of this, may get smaller. And if it replaces some of the existing system, it can generate an offset. But yes, if it uses too much power, is too inefficient by design, it will be too expensive, abandoned, and fail.

Are Cryptos a scam? Probably not: we pointed out some legitimate uses above for both coins and tokens. But there’s one coin that arguably is a Ponzi, a dozen coins that are scams, scores that are terrible ideas like Pets.com and will fail, and another dozen good, well-meaning tokens that are honest but ultimately won’t succeed. Yet, like the .Com 90’s, there are probably some like Apple that rise far more than it seems they should, and by surviving, effectively give 16% compounded returns for 40 years, front-loaded. That’s the nature of business. But are many coins and tokens open scams that run off with your money? Yes. Are others worthless? Yes. It’s also true of the stock and bond market and can’t be helped. Buyer beware.

Is Bitcoin a Ponzi? It’s not a Ponzi by definition because there is no central thief, nor are new investors paying off old investors. So is it a fraud, misrepresenting a few hours of electricity as worth $10,000? Well, that depends on what you think its value is. Is it providing value, a service? If so, what is that service worth to you? We already said it has the operational elements of money, with the addition of being extremely transmissible and transportable. If that has value to you, fine, if not, perhaps gold or bonds are more appropriate. But that’s the problem of what gives Bitcoin value.

A stock or bond you can look at the underlying asset, the profit or income flows, the book value. But Canadian or New Zealand dollars? What gives them value? They’re also backed by nothing. What gives gold value? It has no income, just popularity. Likewise Bitcoin: what gives it value is that other people want it. If they stop wanting it, it has no value, but that’s psychological and can’t be directly measured. With that in mind, is its fair value $1K or $1B? No one knows. Can its value fall from $10k to $5k? Yes, and it has many times. Only the market, that is, we can decide what it’s worth to us, and the market is small and immature, with no price history and prone to wild swings.

Shouldn’t the exchanges set the price? Yes, and they do, but how is that accomplished? We already said the Exchanges do internal trading off-ledger, outside Bitcoin. So aren’t they setting the price on the exchange instead of the people setting the price peer-to-peer? It would seem so. So aren’t they subject to market manipulation? Although at the moment they have a fairer design, and smaller pipelines to the larger market of money, yes. So if they launch a Bitcoin future, a tracker, a triple-short ETF, internally inflate their holdings, wouldn’t that make it subject to corruption and thus back into the existing system?

No one knows: it’s never been done before. I suspect not, but only because the people want Bitcoin specifically because it is Outside-system, Anti-fraud and watch these things carefully. But it’s run by humans and reflect human nature: that means over time some new form of exchange and corruption can grow up around it as before. While the ability to rig Bitcoin is limited because the quantity of Bitcoin is limited and riggers must first buy Bitcoin fairly, the Exchanges and the price-setting are an issue, and especially into the future.

Central Banks and existing powers can outlaw or replace it. Bitcoin is still small, almost irrelevant, yet it has been driven down or outlawed in several places, for example North Korea, Venezuela, and New York. That’s right New York, you’re in proud company. North Korea outlaws everything and there is little internet access, so that’s no example. New York is simply regulating Bitcoin which creates business obstacles, but is still available via the few companies willing to do extensive paperwork. Venezuela, however, is actively suppressing Bitcoin which competes with the Bolivar, and is in fact seeking out and shutting down miners.

They do this on the premise that Bitcoin is consuming valuable (and free) national electric that could be better used powering a small town. Point taken. However, Bitcoin users are able to defend themselves against a terrible, lingering hyperinflation that is starving the nation to death, cutting off food, medicine, and services. Mining Bitcoin with national electric – or even having any – can be the difference between life or death. With Bitcoin, you can order food and medicine on Amazon. Without it, you can’t. So a ferocious national government has attempted to halt Bitcoin at gunpoint from both the users and the vendors. Like other currency oppressions, the USD in Zimbabwe for example, it hasn’t worked. Bitcoin is suppressed, but when the need for commerce is high enough, people make a way.

So maybe they will replace it with their own coin. Go ahead: this is a free market, freely competing. Banks already made a coin called Ripple, which trades in volume on exchanges, but is not open and public. If people choose it, I can’t stop them. Suppressing Bitcoin may make the incentives to choose the legal option far higher. But ultimately the point of Bitcoin is to be open, fair, and uncontrolled. A coin that is closed, controlled, and operated by some untrustworthy men has no incentive. But it can happen: people have chosen against their better interest before.

And that’s my real reservation. Suppose Bitcoin works. Suppose it replaces currency. Suppose it is adequately private. Suppose it can be made fast enough, cheap enough, and slim enough. Suppose the old system fades and we all get used to having our lives entirely on the Blockchain. Your every post is perfectly recorded and provably yours on Steemit. Your every photograph is saved and stamped to you. Every medical experience is indelibly written. Every purchase, every trade, it’s all on a blockchain somewhere. And even suppose it’s private. What then? I mean, isn’t this the system we had in 1900, under the former society and former gold standard? So what happened?

Being comfortable and familiar with Blockchain ledgers, taking them as for granted as Millennials do Facebook, and someone says, “Hey, rather than waste power on this inefficient, creaking system of writing everywhere for a fraction of the power the Federal Reserve Block can keep it for you. Think of the whales.” Sound silly? That’s exactly what they did in 1913, and again in 1933 – replace a direct, messy, competitive system with a more efficient one run by smarter men. The people didn’t protest then any more than they do now, so why would we expect them to in 2050 or 2070? No one cares about corruption and murder: we’re only moving to this system now because it’s better and cheaper. If the Fed Reserve Block is cheaper, won’t we move then?

I can’t solve the next generation’s problems. We’ll be lucky to survive our own. But I can warn you that even now this generation will never accept a digital mark without which you cannot buy or sell, not voluntarily and not by force. It’s too far to reach and social trust is too compromised. But could they get us halfway there and just make it official later, when everything’s fixed again? I think absolutely.

Once that’s in, you can finish all the plans written in the bank and government white papers: perfect, inescapable taxation. Perfect, indelible records of everyone you talked to, everything you said, everything you bought, everywhere you were, everyone you know. Not today, but in the future. And that is the purgatory or paradise they seek today. The price of Liberty is eternal vigilance. The system we have wasn’t always bad: a small cadre of bad men worked tirelessly while complacent citizens shirked their duty. So when we move to a new system softly, without real purge, real morality, real reform, what makes you think the same thing won’t happen to your new system? Only far, far more dangerous. But I can’t prevent that. Think, and plan accordingly.

Bitcoin Doesn’t Exist – 5

Dec 102017

December 10, 2017 Posted by Raúl Ilargi Meijer at 2:33 pm Finance Tagged with: Banks, bitcoin, blockchain, crypto, exchanges, hackers, mining, privacy, resiliency, Satoshi 14 Responses »

Gustave Courbet Sunset on Lake Geneva 1876

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 3 is here: Bitcoin Doesn’t Exist – 3

Chapter 4 is here: Bitcoin Doesn’t Exist – 4

Next up: all 5 chapters combined in one big essay.

And that’s my real reservation. Suppose Bitcoin works. Suppose it replaces currency. Suppose it is adequately private. Suppose can be made fast enough, cheap enough, and slim enough. Suppose the old system fades and we all get used to having our lives entirely on the Blockchain. Your every post is perfectly recorded and provably yours on Steemit. Your every photograph is saved and stamped to you. Every medical experience is indelibly written. Every purchase, every trade, it’s all on a blockchain somewhere. And even suppose it’s private. What then? I mean, isn’t this the system we had in 1900, under the former society and former gold standard? So what happened?

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 3 is here: Bitcoin Doesn’t Exist – 3

Chapter 4 is here: Bitcoin Doesn’t Exist – 4

Next up: all 5 chapters combined in one big essay.

Bitcoin Doesn’t Exist – 4

Dec 092017

December 9, 2017 Posted by Raúl Ilargi Meijer at 12:44 pm Finance Tagged with: Banks, bitcoin, blockchain, crypto, exchanges, hackers, mining, privacy, resiliency, Satoshi 5 Responses »

Gustave Courbet The wave 1871

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1 .

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 3 is here: Bitcoin Doesn’t Exist – 3

Chapter 5 will follow shortly. And after that, all 5 chapters combined in one big essay.

What else can Blockchain do?

Without Internet, our just-in-time inventory halts, food and parts stop moving, banking and commerce fail. You’re talking Mad Max. TEOTWAWKI. That’s a grave problem, but not unique to Bitcoin.

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1 .

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 3 is here: Bitcoin Doesn’t Exist – 3

Chapter 5 will follow shortly. And after that, all 5 chapters combined in one big essay.

Bitcoin Doesn’t Exist – 3

Dec 072017

December 7, 2017 Posted by Raúl Ilargi Meijer at 12:25 pm Finance Tagged with: Banks, bitcoin, blockchain, crypto, exchanges, hackers, mining, privacy, resiliency, Satoshi 15 Responses »

Gustave Courbet The wave 1870

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1 .

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 4 will follow shortly.

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1 .

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 4 will follow shortly.

Bitcoin Doesn’t Exist – 2

Dec 062017

December 6, 2017 Posted by Raúl Ilargi Meijer at 12:24 pm Finance Tagged with: Banks, bitcoin, blockchain, crypto, exchanges, hackers, mining, privacy, resiliency, Satoshi 11 Responses »

Gustave Courbet The wave 1870

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1

Chapter 3 will follow shortly.

So we’ve covered the main aspects of Bitcoin and why it is eligible to be money. Classically, money has these things:

1. Durable- the medium of exchange must not weather, rot, fall apart, or become unusable.

2. Portable- relative to its size, it must be easily movable and hold a large amount of value.

3. Divisible- it should be relatively easy to divide with all parts identical.

4. Intrinsically Valuable- should be valuable in itself and its value should be independent of any other object. Essentially, the item must be rare.

5. Money is a “Unit of Account”, that is, people measure other things, time and value, using the units of value to THINK about the world, and thus is an part of psychology. Strangely that makes this both the weakest and strongest aspect of:

6. “The Network Effect”. Its social and monetary inertia. That is, it’s money to you because you believe other people will accept it in exchange.

The Score:

1. Bitcoin is durable and anti-fragile. As long as there is an Internet – or even without one – it can continue to exist without decay, written on a clay tablet with a stylus.

2. Bitcoin is more portable than anything on earth. A single number — which can be memorized – can transport $160B across a border with only your mind, or across the world on the Internet. Its portability is not subject to any inspection or confiscation, unlike silver, gold, or diamonds.

3. Bitcoin is not infinitely divisible, but neither is gold or silver, which have a discrete number of atoms. At the moment the smallest Bitcoin denomination or “Satoshi” is 0.00000001 Bitcoin or about a millionth of a penny. That’s pretty small, but with a software change it can become smaller. In that way, Bitcoin, subject only to math is MORE divisible than silver or gold, and far easier. As numbers all Bitcoin are exactly the same.

4. Bitcoin has intrinsic value. Actually, the problem is NOTHING has “intrinsic” value. Things have value only because they are useful to yourself personally or because someone else wants them. Water is valuable on a desert island and gold is worthless. In fact, gold has few uses and is fundamentally a rock we dig up from one hole to bury in another, yet we say it has “intrinsic” value – which is good as Number 4 said it had to be unrelated to any other object, i.e. useless. Bitcoin and Gold are certainly useless. Like gold, Bitcoin may not have “Intrinsic value” but it DOES have intrinsic cost, that is, the cost in time and energy it took to mine it. Like gold, Bitcoin has a cost to mine measurable in BTU’s. As nothing has value outside of human action, you can’t say the electric cost in dollars is a price-floor, but suggests a floor, and that would be equally true of gold, silver, copper, etc. In fact, Bitcoin is more rare than Rhodium: we mine rare metals at 2%/year while the number of Bitcoins stops at 22 Million. Strangely, due to math, computer digits are made harder to get and have than real things.

5. Bitcoin is a unit of account. As a psychological effect, it’s difficult to quantify. Which comes first, the use of a thing, or its pricing? Neither, they grow together as one replaces another, side-by-side. This happened when gold replaced iron or salt or when bank notes replaced physical gold, or even when the U.S. moved from Pounds and Pence to Dollars and Cents. At first it was adopted by a few, but managed to get a critical mass, accepted, and eventually adopted by the population and entirely forgotten. At the moment Bitcoin enthusiasts do in fact mentally price things in Bitcoins, especially on exchanges where cross-crypto prices are marked vs BTC. Some never use their home currency at all, living entirely according to crypto-prices until home conversion at the moment of sale, or as hundreds or thousands of businesses are now accepting cryptocurrencies, even beyond. For them it is a unit of account the way Fahrenheit is a unit within the United States.

6. Bitcoin has the network effect. That is, it is widely accepted and publicly considered money. It’s in the news, has a wide following worldwide, and exchanges are signing up 40,000 new users a month. It’s accepted by thousands of vendors and can be used for purchases at Microsoft, Tesla, PayPal, Overstock, or with some work, Amazon. It’s translatable through point-of-sale vendor Square, and from many debit card providers such as Shift. At this point it is already very close to being money, i.e. a commonly accepted good. Note that without special arrangements none of these vendors will accept silver coins, nor price products in them. I expect if Mark Dice offered a candy bar, a silver bar, or a Bitcoin barcode, more people would pick the Bitcoin. In that way Bitcoin is more money than gold and silver are. You could say the same thing about Canadian Dollars or Thai Bhat: they’re respected currencies, but not accepted by everyone, everywhere. For that matter, neither are U.S. dollars.

In a word: 2008.

But if the currency is functional day-to-day, surely the issuance can be overlooked. Is it? Inflation is devilishly hard to measure, but here’s a chart of commodities:

CPI:

The US Dollar:

or vs Gold (/silver):

But that’s not all.

Chapter 1 of this five-part series is here: Bitcoin Doesn’t Exist – 1

Chapter 3 will follow shortly.

Bitcoin Doesn’t Exist – 1

Dec 052017

December 5, 2017 Posted by Raúl Ilargi Meijer at 12:14 pm Finance Tagged with: Banks, bitcoin, blockchain, crypto, exchanges, hackers, mining, nodes, privacy, resiliency, Satoshi 7 Responses »

Gustave Courbet The wave 1869

A while ago, I asked a regular commenter at the Automatic Earth, who goes by the moniker Dr. D, to try and write an article for us. Not long after, I received no less than 31 pages, and an even 12345 words. Way too long for today’s digital attention spans. We decided to split it into 5 chapters. After we work through those 5, we’ll post it as one piece as well. Dr. D, who insists on sticking with his nom de plume, picked his own topic, and it’s -fittingly- bitcoin. A topic about which one can cover a lot of ground in 12345 words.

Now, I wouldn’t be me if I didn’t throw in my own two Satoshis: Dr. D claims that “..everyone has an equal opportunity to solve the next calculation..”, but while that may perhaps have been sort of true at the very start, it isn’t now. It’s not true for the computerless or computer-illiterate, for those too poor to afford the electricity required by bitcoin mining, and for various other -very large- groups of people.

The equal opportunity idea sounds nice, but I think bitcoin runs the risk of creating just another set of elites, while reinforcing existing elites, who can afford to either buy bitcoin at whatever price at some point in time, or spend large sums to build mining ‘installations’ in locations where electricity is cheap. And sure, there will be losers among elites too, but inequality itself will not change; only the faces of winners and losers will, while the world’s real losers will remain just that.

It’s nothing new of course, inequality is our society’s middle name, but maybe that is precisely the problem. Maybe bitcoin should have come with an inbuilt way to spread wealth, not just shift it around.

Then again, it may all just be a giant bubble. Or a bubble inside a bubble inside a bubble.

Here’s your Dr.:

Enter the hackers.