Dec 122017
 
 December 12, 2017  Posted by at 3:03 pm Finance Tagged with: , , , , , , , , ,  1 Response »
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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.

 

 

Dec 102017
 
 December 10, 2017  Posted by at 2:33 pm Finance Tagged with: , , , , , , , , ,  13 Responses »
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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.

 

 

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 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.

 

 

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.

 

 

Dec 092017
 
 December 9, 2017  Posted by at 12:44 pm Finance Tagged with: , , , , , , , , ,  5 Responses »
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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.

 

 

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.

 

 

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.

 

 

Dec 072017
 
 December 7, 2017  Posted by at 12:25 pm Finance Tagged with: , , , , , , , , ,  15 Responses »
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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.

 

 

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?

 

 

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.

 

 

Dec 062017
 
 December 6, 2017  Posted by at 12:24 pm Finance Tagged with: , , , , , , , , ,  11 Responses »
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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.

 

 

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.

 

 

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

Chapter 3 will follow shortly.

 

 

Dec 052017
 
 December 5, 2017  Posted by at 12:14 pm Finance Tagged with: , , , , , , , , , ,  7 Responses »
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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.:

 

 

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.

 

 

Check in for Chapter 2 tomorrow.

 

 

Dec 292016
 
 December 29, 2016  Posted by at 10:36 am Finance Tagged with: , , , , , , , , ,  5 Responses »
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Esther Bubley Negro alley dwellings near the Capitol, Washington DC 1943

 

Trump On Russia Sanctions: ‘We Ought To Get On With Our Lives’ (R.)
Moscow Says It’s “Tired Of The Lie About The ‘Russian Hackers'” (Ptv)
Talking about Starwars: What is Henry Kissinger Up To? (PCR)
US Escalates Tensions With Israel (WSJ)
Hillary Clinton Could Face New Email Probe After Explosive Ruling
House Flipping Makes a Comeback as Home Prices Rise (WSJ)
A China-Watcher’s Guide to 2017 (Balding)
China’s ‘Godfather of Real Estate’ Pitches Reverse Mortgages (NYT)
China Slashes First Round Of Oil Products Export Quotas (R.)
China Fault Lines: Where Economic Turbulence Could Erupt in 2017 (BBG)
Trump Tax Reforms Could Depend On Little-Known ‘Scoring’ Panel (R.)
Greek Migration Minister Vows To Improve Conditions At Camps (Kath.)

 

 

It’s very simple: either the White House shows us prrof of hacking today when sanctions are announced, or all credibility is shot, across US intelligence.

Trump On Russia Sanctions: ‘We Ought To Get On With Our Lives’ (R.)

U.S. President-elect Donald Trump on Wednesday suggested that the United States and Russia lay to rest the controversy over Moscow’s computer hacking of Democratic Party computers, saying, “We ought to get on with our lives.” Trump has cast doubt on the findings of U.S. intelligence agencies that Russian hackers took information from Democratic Party computers and individuals and posted it online to help Trump win the election. The Obama administration plans to announce on Thursday a series of retaliatory measures against Russia for hacking into U.S. political institutions and individuals and leaking information, two U.S. officials said on Wednesday.

Asked by reporters if the United States should sanction Russia, Trump replied: “I think we ought to get on with our lives. I think that computers have complicated lives very greatly. The whole age of computer has made it where nobody knows exactly what’s going on.” Trump made his remarks at Mar-a-Lago, his seaside Florida resort where he is spending the Christmas and New Year’s holidays while also interviewing candidates for administration jobs. Trump said he was not familiar with remarks earlier on Wednesday by Republican Senator Lindsey Graham, who said Russia and President Vladimir Putin should expect tough sanctions for the cyber attacks. “We have speed. We have a lot of other things but I’m not sure you have the kind of security that you need. But I have not spoken with the senators and I certainly will be over a period of time,” he said.

Read more …

Again: proof or ridicule.

Moscow Says It’s “Tired Of The Lie About The ‘Russian Hackers'” (Ptv)

Moscow has vowed retaliation if Washington issues further economic sanctions over alleged Russian cyber attacks during the US presidential elections. “To be honest, we are tired of the lie about the ‘Russian hackers’, which is being poured down in the United States from the very top,” said Russian Foreign Ministry spokeswoman Maria Zakharova on Wednesday. She warned that her country would respond to any manner of “hostile steps” the US decides to undertake. “It concerns any actions against the Russian diplomatic missions in the US which will immediately ricochet the American diplomats in Russia,” she added.

Zakharova went on to stress that the US was attempting to intimidate Moscow with extending sanctions, taking diplomatic measures and sabotage against Russian computer systems, in retaliation for alleged Russian hacking interference during the US presidential elections in November. Earlier in the day, US Republican Senator Lindsey Graham of South Carolina said that Moscow needed to understand it had gone too far during the election, and that new sanctions would target Russian President Vladimir Putin. “It is now time for Russia to understand – enough is enough,” he said. “You can expect that the Congress will investigate the Russian involvement in our elections and there will be bipartisan sanctions coming that will hit Russia hard, particularly Putin as an individual,” he added.

Read more …

Oh, right, Starwars. Paul Craig Roberts contends the neocons are still as strong as ever in the US, even under Trump.

Talking about Starwars: What is Henry Kissinger Up To? (PCR)

The myth is widespread that President Reagan won the cold war by breaking the Soviet Union financially with an arms race. As one who was involved in Reagan’s effort to end the cold war, I find myself yet again correcting the record. Reagan never spoke of winning the cold war. He spoke of ending it. Other officials in his government have said the same thing, and Pat Buchanan can verify it. Reagan wanted to end the Cold War, not win it. He spoke of those “godawful” nuclear weapons. He thought the Soviet economy was in too much difficulty to compete in an arms race. He thought that if he could first cure the stagflation that afflicted the US economy, he could force the Soviets to the negotiating table by going through the motion of launching an arms race. “Star wars” was mainly hype. (Whether or nor the Soviets believed the arms race threat, the American leftwing clearly did and has never got over it.)

Reagan had no intention of dominating the Soviet Union or collapsing it. Unlike Clinton, George W. Bush, and Obama, he was not controlled by neoconservatives. Reagan fired and prosecuted the neoconservatives in his administration when they operated behind his back and broke the law. The Soviet Union did not collapse because of Reagan’s determination to end the Cold War. The Soviet collapse was the work of hardline communists, who believed that Gorbachev was loosening the Communist Party’s hold so quickly that Gorbachev was a threat to the existence of the Soviet Union and placed him under house arrest. It was the hardline communist coup against Gorbachev that led to the rise of Yeltsin. No one expected the collapse of the Soviet Union.

The US military/security complex did not want Reagan to end the Cold War, as the Cold War was the foundation of profit and power for the complex. The CIA told Reagan that if he renewed the arms race, the Soviets would win, because the Soviets controlled investment and could allocate a larger share of the economy to the military than Reagan could. Reagan did not believe the CIA’s claim that the Soviet Union could prevail in an arms race. He formed a secret committee and gave the committee the power to investigate the CIA’s claim that the US would lose an arms race with the Soviet Union. The committee concluded that the CIA was protecting its prerogatives. I know this because I was a member of the committee.

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Place this in the context of what’s being said about Russian hackers at the same time.

US Escalates Tensions With Israel (WSJ)

Secretary of State John Kerry rebuked Israel for its settlement policy and warned in unusually harsh terms that a two-state solution was in serious jeopardy as the Obama administration raced to preserve its approach to the Middle East weeks before President-elect Donald Trump takes power. Mr. Kerry’s speech on Wednesday—in which he defended a U.S. decision to allow a United Nations resolution condemning Israel’s settlements—was seen by Israeli leaders as a parting shot from an unfriendly American administration in its final weeks. But the address appeared equally intended as a message to the incoming Trump team.

Mr. Kerry spelled out principles that have long been largely consistent in American policy—the goal of Israel existing alongside a separate Palestinian state, the notion that the settlements are an impediment to peace, and the idea that Jerusalem should be the capital of both an Israeli and a Palestinian state. Mr. Trump has suggested he would consider breaking with those principles. “President Obama and I know that the incoming administration has signaled that they may take a different path,” Mr. Kerry said at the State Department. “But we cannot in good conscience do nothing, and say nothing, when we see the hope of peace slipping away.”

Read more …

“This ruling means that the Trump Justice Department will have to decide if it wants to finally enforce the rule of law..”

Hillary Clinton Could Face New Email Probe After Explosive Ruling

The U.S. Court of Appeals for the District of Columbia has ruled in favor of a conservative group’s lawsuit against the State Department over whether or not enough was done to try to restore Clinton’s missing emails, opening a potential further probe into Clinton’s emails by the Trump administration. Back in January, a District Court judge ruled that the lawsuit brought by the conservative group Judicial Watch, against the State Department, had no validity because it had there had been a “sustained effort” to recover the emails. In the new ruling, however, Judge Stephen Williams wrote that this wasn’t enough.

“The Department has not explained why shaking the tree harder – e.g., by following the statutory mandate to seek action by the Attorney General – might not bear more still,” wrote Williams. He added: “Absent a showing that the requested enforcement action could not shake loose a few more emails, the case is not moot.” Williams also said that it’s “abundantly clear that, in terms of assuring government recovery of emails” the conservative group that brought the lawsuit hasn’t “been given everything [they] asked for.” Additionally, because former State Secretary Clinton used her Blackberry email account during the first few weeks of her term, the judge felt that efforts to restore just the messages from Clinton’s private email server weren’t sufficient either.

“Because the complaints sought recovery of emails from all of the former Secretary’s accounts, the FBI’s recovery of a server that hosted only one account does not moot the suits,” he wrote. Judicial Watch president Tom Fitton issued a statement after the ruling, claiming “The courts seem to be fed up with the Obama administration’s refusal to enforce the rule of law on the Clinton emails.” Fitton added, “This ruling means that the Trump Justice Department will have to decide if it wants to finally enforce the rule of law and try to retrieve all the emails Clinton and her aides unlawfully took with them when they left the State Department,” he added.

Read more …

Homes are definitely not places for people to live in. Not in the US.

House Flipping Makes a Comeback as Home Prices Rise (WSJ)

House flipping, a potent symbol of the real-estate market’s excess in the run-up to the financial crisis, is once again becoming hot, fueled by a combination of skyrocketing home prices, venture-backed startups and Wall Street cash. After nearly being felled by real-estate forays almost a decade ago, a number of banks are now arranging financing vehicles for house flippers, who aim to make a profit by buying and selling homes in a matter of months. The sector is small—participants say roughly several hundred million dollars in financing deals have been made in recent months—but is expected to keep growing. In recent months, big banks, including Wells Fargo, Goldman Sachs and JP Morgan have started extending credit lines to companies that specialize in lending to home flippers.

[..] Over the past year, 37-year-old David Franco has collected profits of more than $200,000 on houses that he has quickly refurbished and resold, turning a hobby into an unexpectedly lucrative business. “There’s plenty of money to be made,” says Mr. Franco, who lives just outside of Los Angeles. House-flipping television shows and training “schools” for new investors are proliferating. One “super-intense, hardcore” house-flipping boot camp in Bourne, Mass., promised to teach students about real-estate investing in three days to make “REALLY MASSIVE PROFITS,” according to marketing literature. The increasing amount of speculative housing in recent months is “concerning,” ATTOM noted in a recent report. “We’re starting to see home flipping hit some milestones not seen since prior to the financial crisis.”

ATTOM said profit margins are getting squeezed in some markets. While house flippers typically aim to purchase a house at a 30% discount to the market, in some areas they’re buying homes at a 15% or 10% discount, said Senior Vice President Daren Blomquist. The research firm noted that the number of smaller, inexperienced house flippers entering the market is a sign of rising speculation. George Geronsin, 36, a Southern California real-estate agent and house-flipper who has been in the business since 2008, said he recently sold the majority of the homes he was working on and is sitting on cash “until the next big correction” in the housing market. “Anybody and everybody is getting into the business of house-flipping—that’s when you know it’s the end of the rope,” said Mr. Geronsin.

Read more …

Chris Balding confirms what I wrote yesterday.

A China-Watcher’s Guide to 2017 (Balding)

Last year, China’s leaders were touting plans for deleveraging and supply-side reform. This year, they’re touting yet more plans for deleveraging and supply-side reform. In between, total outstanding credit rose from 246% of gross domestic product to about 265%… Although reining in credit is essential for addressing many of China’s economic problems, the government is still targeting 6.5% growth next year, much of which will be reliant on yet more debt. So pay less attention to the talk and more to the data – specifically, metrics such as credit growth and real-estate prices.

Follow the Fed.China remains tied to the U.S. economy, whether it wants to be or not. Unfortunately, not everything that’s good for the U.S. is good for China. With the U.S. labor market tightening, and President-elect Donald Trump promising a $1 trillion economic stimulus, it is all but certain that the Federal Reserve will continue raising interest rates in 2017. That could have some positive effects for China’s real economy, but it will also put pressure on the People’s Bank of China to raise its own interest rates or risk breaking the soft peg of the yuan to the U.S. dollar. Higher rates, in turn, would raise borrowing costs for heavily indebted Chinese companies, many of which could end up in bankruptcy. How fast the U.S. economy grows, and how many times the Fed raises rates, could have as much impact on China’s economy as anything next year.

The cure can be worse than the disease. Rising asset prices in China have helped prop up everything from coal and steel firms to consumer sentiment. But with potential bubbles popping up everywhere, the government seems to be laying the groundwork for reform. That could mean raising interest rates, applying new restrictions on trading or tightening other regulations. Remember that such measures, however necessary, carry risks of their own. For example, given that China has some of the world’s most expensive housing relative to income, and extremely low turnover, withdrawing credit could result in a real-estate price shock. That might cause indebted developers to fail, or lead to much stronger government action to prevent a hard landing. As regulators try to rein in other asset prices, watch for similar turmoil in bonds and the yuan.

Expect the unexpected. China has long been plagued by poor-quality data, with even senior leadership expressing frustration at getting inaccurate information from the provinces. Unreliable data makes it nearly impossible to properly assess risk, which raises the probability of some type of internal shock. It could come from the nearly $4 trillion market in murky wealth-management products. It could come from social instability tied to hidden unemployment. It could come from something totally unexpected: With the bond market in turmoil, liquidity concerns mounting and defaults rising, there are many ways in which a panic could materialize.

Read more …

Prey on the elderly.

China’s ‘Godfather of Real Estate’ Pitches Reverse Mortgages (NYT)

He is known in China as the “godfather of real estate,” helping lay the groundwork for private homeownership in China, a move that enriched millions and laid the foundations for a vibrant and thriving Chinese middle class. Now, Meng Xiaosu wants a lot of Chinese — the older ones, specifically — to cash out. Older people need to mortgage their homes to address China’s looming demographic bust, Mr. Meng argues. Because of China’s now-defunct one-child policy and other social trends, the country has a rapidly graying population that someday soon may become too expensive for the Chinese government to support. Mr. Meng’s proposed solution is to bring reverse mortgages to China. Called a house-for-pension plan in China, a reverse mortgage allows homeowners to tap the equity in their homes by taking out loans against it.

His argument faces deep business and cultural opposition – mortgaging homes is a tough sell in a country where parents traditionally passed them on to their children – and only a few dozen people in all the country have signed up so far. But he argues that China may have little choice. “China’s elderly do not have much money,” said Mr. Meng, who drew much of his inspiration about the Chinese property market from a stint studying in America, “but they have valuable homes.” China is increasingly pondering tough questions as it looks to a graying future. Right now, China’s 215 million elderly people account for 15% of the total population. By 2050, that number is expected to rise to 350 million – nearly one-quarter of the population.

That has China scrambling to find a more sustainable pension system for its people. In the 1990s, the government dismantled the cradle-to-grave welfare system and borrowed money from younger workers to pay older ones. The country’s pension fund will be $116 trillion in the red by 2050, according to the Chinese Academy of Social Sciences, a top government think tank. Enter Mr. Meng.

Read more …

What I see between the lines is a huge glut building. They simply can’t sell it anymore. Oh, and what was that question? Market economy?

China Slashes First Round Of Oil Products Export Quotas (R.)

China has cut oil product export quotas to the nation’s four oil majors by 40% in the first round of licences for 2017, according to two sources who have seen the documents, even as traders expect allowances for overseas sales to meet or exceed this year’s record levels. The notice did not include quotas for independent refiners, known as “teapots”, in line with a report by Reuters earlier this month that the government has ditched the small refiners from its export program. In a notice dated Dec. 23, the Ministry of Commerce and the General Administration of Customs said the four state majors will be allowed to sell 12.4 million tonnes of gasoline, gasoil and jet fuel abroad next year.

That’s down from 20.54 million tonnes in the same round this year. Still, the cut is likely to bring little relief to the stubbornly saturated Asian oil market as China’s majors did not use up the huge quotas issued at the start of last year, and have simply applied for more realistic quotas this year, traders said. “The shrinking quota doesn’t reflect shrinking demand from overseas. Instead, it reflects a shift in company exporting strategy,” said a China-based trader who declined to be named, adding that companies were better matching exports to quotas. “We expect the total quota for 2017 to be on par or a bit higher than 2016,” the trader added. China issued allowances for a record 46.08 million tonnes of oil products in 2016, up 80% from 2015. In the first 11 months of the year, it exported 43 million tonnes of oil products – including products other than gasoline, gasoil and jet fuel – up 35% on a year earlier.

Read more …

“The real nightmare for Beijing – and for markets – is a vicious cycle of capital outflows triggering bigger devaluations of the yuan that in turn drive bigger and faster outflows..”

China Fault Lines: Where Economic Turbulence Could Erupt in 2017 (BBG)

China’s balancing act isn’t getting any easier. Policy makers are grappling with how to attack excessive borrowing and rein in soaring property prices while maintaining rapid growth. They’re also battling yuan depreciation and capital outflow pressures as U.S. interest rates rise, while on the horizon looms the risk of confrontation with America’s President-elect Donald Trump on trade and Taiwan. It’s a high-wire act with the potential to produce shocks, like the one erupting in the bond market as tighter liquidity threatens financing for small companies. President Xi Jinping told top officials he’s open to growth below the 6.5% target to 2020 if it carries too much risk, a person familiar with the situation said last week. Leaders have pledged to reduce hazards for 2017.

While forecasters have been raising growth estimates for next year and don’t expect major turbulence, the following are among areas they flag as having the potential to trigger a plunge in growth or systemic risk in the financial system: Outflows will exceed $200 billion in the fourth quarter and rise further in the first quarter, said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. Capital is leaving for more fundamental reasons than rising U.S. rates and a stronger dollar, she said. Drivers include rising expectations of yuan weakness, fears of an abrupt policy U-turn trapping funds in the country, and a lack of profitable investment opportunities at home amid rising costs and slowing growth.

“The real nightmare for Beijing – and for markets – is a vicious cycle of capital outflows triggering bigger devaluations of the yuan that in turn drive bigger and faster outflows,” Loong said. “We expect capital outflows to increase in the coming months as Chinese money seeks to maximize exit quotas in case of more stringent restrictions later on.”

Read more …

Clueless prognosticators.

Trump Tax Reforms Could Depend On Little-Known ‘Scoring’ Panel (R.)

President-elect Donald Trump’s goal of overhauling the U.S. tax code in 2017 will depend partly on the work of an obscure congressional committee tasked with estimating how much future economic growth will result from tax cuts. Known as the Joint Committee on Taxation, or JCT, the nonpartisan panel assigns “dynamic scores” to major tax bills in Congress, based on economic models, to forecast a bill’s ultimate impact on the federal budget. The higher a tax bill’s dynamic score, the more likely it is seen as spurring growth, raising tax revenues and keeping the federal deficit in check. As Trump and Republicans in Congress plan the biggest tax reform package in a generation, the JCT has come under pressure from corporate lobbyists and other tax cut advocates who worry that too low a dynamic score could show the legislation to add billions, if not trillions of dollars to the federal deficit.

“The problem is that the Joint Committee staff has adopted a whole series of assumptions that truly minimize the effects and underestimate the impact that a properly done tax reform could have,” said David Burton at the conservative Heritage Foundation think tank. A low dynamic score could force Republicans to scale back tax cuts or make the reforms temporary, severely limiting the scope of what was one of Trump’s top campaign pledges. Other analysts warn that pressure for a robust dynamic score raises the danger of a politically expedient number that could help reform pass Congress but lead to higher deficits down the road. Until last year, JCT used a variety of economic models in its arcane calculations, reflecting the uncertainties in such work. But House of Representatives Republicans changed the rules in 2015 to require that a bill’s score reflect only a single estimate of the estimated impact on the wider economy and resulting impact on tax revenues.

Next year’s anticipated tax reform package would be the biggest piece of legislation that JCT has scored using this new, narrower approach, presenting the committee with a daunting challenge. JCT Chief of Staff Thomas Barthold acknowledged the challenge of dynamic scoring in an interview with Reuters. “The U.S. economy is so darn complex, you really can’t have one model that picks up all of the complexity and nuance. So the essence of modeling is to try to slim things down, try to emphasize certain points,” he said. Tax reform is still months away. But the initial legislation expected in 2017 is likely to fall somewhere between two similar but separate plans, one backed by Trump and the other by House Republicans including Speaker Paul Ryan.

[..]The Tax Foundation estimates that the House Republican tax plan would lead to a 9.1% higher GDP over the long term, 7.7% higher wages and 1.7 million new full-time-equivalent jobs. It predicts the plan would reduce government revenue by $2.4 trillion over a decade, not counting macroeconomic effects, but by only $191 billion once economic growth is taken into account. By contrast, the centrist Tax Policy Center estimates the House plan would add 1% to GDP over 10 years and erase $2.5 trillion of revenue, even with positive macroeconomic feedback, due to higher federal debt interest.

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Biometric data cards and €400 a month allowances in a country where many pensioners don’t even get that much.

Greek Migration Minister Vows To Improve Conditions At Camps (Kath.)

Migration Policy Minister Yiannis Mouzalas vowed on Wednesday to improve living conditions for migrants stranded on the islands, boost policing and create detention centers. “We are planning to have new, small venues on the islands, either by setting up small, two-story houses, in order to empty the tents, or by finding other places… to improve conditions,” he said, adding that it will take time but “we will do it.” Overcrowded conditions, coupled with the slow processing of asylum requests, have fueled tensions, while outbreaks of violence are not uncommon – especially on the islands, where some 15,000 migrants are crammed into ill-equipped camps. Mouzalas, however, insisted that the situation is better on the mainland and all refugees in the 36 camps there are staying in sheltered, heated areas.

The exception, he said, is the camp at Elliniko, southern Athens, where some migrants are still living outdoors in 70 tents. He also announced that by March, soup kitchens at camps around the country will be abolished. Instead, he said, migrants will be given money – no more than the minimum wage of €400. Mouzalas said Greece will hire more staff to deal with the slow pace of processing asylum requests, which he called an Achilles’ heel. Moreover, he said that migrants living legally in Greece will receive an electronic card that will replace their residence permits. The card, he said, will contain biometric data and other information, and will be given to migrants who want to renew their residence permits or to new arrivals.

The cards will be ready by April, he said, adding that they are part of the effort to modernize the system that processes residence permits, and to help fight forgeries. Roughly 60,000 migrants – mostly Syrians, Iraqis and Afghans fleeing war and poverty – are scattered throughout the country, many living in overcrowded and poor living conditions.

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Nov 152014
 
 November 15, 2014  Posted by at 11:53 am Finance Tagged with: , , , , , , , , , ,  2 Responses »
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DPC Elephants in Luna Park promenade, Coney Island 1905

Oil Price Slump To Trigger New US Debt Default Crisis (Telegraph)
How Low Can the Price of Oil Plunge? (WolfStreet)
Russia Braces for ‘Catastrophic’ Drop in Oil Prices (Bloomberg)
What Really Happened In Beijing Between Putin, Obama and Xi (Salon)
Can Low Oil Prices Be Good for the Environment? (AP)
More Than 4 In 10 Americans Still Exhaust Unemployment Benefits (MarketWatch)
Most Americans Make Less Than $20 Per Hour (MarketWatch)
The Reason Small Businesses Are Disappearing (Zero Hedge)
Italy’s Crazy New Economy from Hell Suffocates Small Businesses (WolfStreet)
Beppe Grillo: The Euro Is Destroying The Italian Economy (Zero Hedge)
Eurozone Dodges Recession But Submerges In ‘Lost Decade’ (AEP)
Who Will Pay for China’s Bust? (Bloomberg)
China Slowdown Deepens as Targeted Stimulus Fails (Bloomberg)
Take Cover Now – They Don’t Ring A Bell At The Top (David Stockman)
Asset Bubbles Are Top Concern for US Heartland’s Fed Banker (Bloomberg)
Fed’s Bullard Still Wants Rate Rise in Q1 2015 (Dow Jones)
Turkish Hackers Crack Electric Utility; Delete $670 Billion Of Pending Bills (ZH)
California Pension Funds Are Running Dry (LA Times)
Pope Francis’s ‘Holy War’ On Capitalism And Toxic Inequality (Paul B. Farrell)

The end of shale as we know it.

Oil Price Slump To Trigger New US Debt Default Crisis (Telegraph)

Remember the global financial crisis, triggered six years ago when billions of dollars of dodgy loans – doled out by banks to subprime borrowers and then resold numerous times on international debt markets – began to unravel and default? Stock markets plunged, banks collapsed and the entire global financial system teetered on the brink of catastrophe. Well a similarly chilling economic scenario could be set off by the current collapse in oil prices. Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June. “A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialised,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report.

Five years ago at the beginning of what has become known as the US shale oil revolution, drillers started to load up on debt to fund their operations and acquire new acreage as vast areas of North America started to open up for exploration. In 2010, energy and materials companies made up just 18pc of the US high-yield index – which tracks sub-investment grade borrowers – but today they account for 29pc of the measure after drilling firms spent the past five years borrowing heavily to underwrite the operations. The result of this debt splurge has been a spectacular rise in US oil and gas output. Latest estimates suggest that by the end of the decade the US will have outstripped even Saudi Arabia and Russia in terms of oil production. The development of new shale resources in North America and the opening up of fields in the Arctic seas off Alaska could see the country pumping 14.2m barrels per day (bpd) of oil and petroleum liquids by 2020, up from 7.5m bpd in 2013.

This rush to pump more oil in the US has created a dangerous debt bubble in a notoriously volatile segment of corporate credit markets, which could pose a wider systemic risk in the world’s biggest economy. By encouraging ever more drilling in pursuit of lower oil prices, the US Department of Energy has unleashed a potential economic monster and pitched these heavily debt-laden shale oil drilling companies into an impossible battle for market share against some of the world’s most powerful low-cost producers in the Organisation of Petroleum Exporting Countries (Opec). It’s a battle the US oil fracking companies won’t win.

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Excellent piece by Wolf Richter. If you want to know where oil is going, read it.

How Low Can the Price of Oil Plunge? (WolfStreet)

It is possible that a miracle intervenes and that the price of oil bounces off and zooms skyward. We’ve seen stocks perform these sorts of miracles on a routine basis, but when it comes to oil, miracles have become rare. As I’m writing this, US light sweet crude trades at $76.90 a barrel, down 26% from June, a price last seen in the summer of 2010. But this price isn’t what drillers get paid at the wellhead. Grades of oil vary. In the Bakken, the shale-oil paradise in North Dakota, wellhead prices are significantly lower not only because the Bakken blend isn’t as valuable to refiners as the benchmark West Texas Intermediate, but also because take-away capacity by pipeline is limited.

Crude-by-rail has become the dominant – but more costly – way to get the oil from the Northern Rockies to refineries on the Gulf Coast or the East Coast. These additional transportation costs come out of the wellhead price. So for a particular well, a driller might get less than $60/bbl – and not the $76.90/bbl that WTI traded for at the New York Mercantile Exchange. Fracking is expensive, capital intensive, and characterized by steep decline rates. Much of the production occurs over the first two years – and much of the cash flow. If prices are low during those two years, the well might never be profitable. Meanwhile, North Sea Brent has dropped to $79.85 a barrel, last seen in September 2010.

So the US Energy Information Administration, in its monthly short-term energy outlook a week ago, chopped down its forecast of the average price in 2015: WTI from $94.58/bbl to $77.55/bbl and Brent from $101.67/bbl to $83.24/bbl. Independent exploration and production companies have gotten mauled. For example, Goodrich Petroleum plunged 71% and Comstock Resources 58% from their 52-week highs in June while Rex Energy plunged 65% and Stone Energy 54% from their highs in April. Integrated oil majors have fared better, so far. Exxon Mobil is down “only” 9% from its July high. On a broader scale, the SPDR S&P Oil & Gas Exploration & Production ETF is down 28% from June – even as the S&P 500 set a new record. So how low can oil drop, and how long can this go on?

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Did they know beforehand it would come?

Russia Braces for ‘Catastrophic’ Drop in Oil Prices (Bloomberg)

President Vladimir Putin said Russia’s economy, battered by sanctions and a collapsing currency, faces a potential “catastrophic” slump in oil prices. Such a scenario is “entirely possible, and we admit it,” Putin told the state-run Tass news service before attending this weekend’s Group of 20 summit in Brisbane, Australia, according to a transcript e-mailed by the Kremlin today. Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events, he said. Crude prices have fallen by almost a third this year, undercutting the economy in Russia, the world’s largest energy exporter.

Even the central bank’s forecast of zero growth next year may be in danger as the International Energy Agency forecasts a deepening rout in oil prices as the market enters a period of weaker demand. Brent crude, the grade traders look at for pricing Russia’s Urals main export blend, has collapsed into a bear market as leading members of the Organization of Petroleum Exporting Countries resisted calls to cut production and U.S. output climbed to the highest level in three decades because of the shale boom. Brent is heading for its eighth weekly decline after sliding below $80 for the first time in four years. Futures were at $78.29 a barrel in London today, down 6.1% this week and 29% this year.

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Must read from Patrick Smith at Salon.

What Really Happened In Beijing Between Putin, Obama and Xi (Salon)

By way of events on the foreign side, the past few weeks start to resemble some once-in-a-while event in the heavens when everyone is supposed to go out and watch as the sun, moon and stars align. There are lots of things happening, and if we put them all together, the way Greek shepherds imagined constellations, a picture emerges. Time to draw the picture. The situation on the ground in Ukraine is getting messy again. Equally, events of the past year now leave Ukraine’s economy not far from sheer extinction. You have not read of this because it does not fit the approved story, but Ukraine’s heart barely beats. Further east, we hear in the financial markets that the ruble’s decline brings Russia to the brink of another financial collapse. Let’s see. Oil prices are now below $80 a barrel. It costs me nearly $20 less to put gasoline in my car than it did a year ago, and good enough. But why has the price of crude tumbled in so short an interval? It makes little sense when you gather the facts, and – goes without saying – you get no help with that from our media.

Let’s keep on trucking. Secretary of State Kerry went to Oman for another round of talks on the Iranian nuclear question last weekend. Russia recently emerged as a potentially key part of a deal, which will be the make-or-break of Kerry’s record. In effect, he now greets Russian Foreign Minister Sergei Lavrov with one hand and punches him well below the belt with the other. Somewhere beyond our view this must make sense. En avant! Obama went to Beijing last week for a sit-down with Xi Jinping, who makes Vladimir Putin look like George McGovern when he wants to, which is not infrequently. Still in the Chinese capital, our president then attended a meeting with other Asian leaders to push a trade agreement, one primary purpose of which is to isolate China by bringing the rest of the region into the neoliberal fold. (Or trying to. Washington will never get the overladen, overimposing Trans-Pacific Partnership off the ground, in my view.)

A big item on Xi’s agenda — he was in on the Pacific economic forum, too — was the recent launch of an Asians-only lending institution intended to rival the Asian Development Bank, the World Bank affiliate doing the West’s work in the East. Being entirely opposed to people helping themselves advance without American assistance and all that goes with it, Washington used all means possible to sink this ship. When Obama got off the plane in Beijing, the Asian Infrastructure Investment Bank had $50 billion in capital and 20 members, more to come in both categories. Xi, meantime, had a productive encounter — another — with the formidable Vlad. My sources in attendance tell me both put in strong performances. In short order, Russia will send enough natural gas eastward to meet much of China’s demand and — miss this not — in the long run could price out American supplies in other Pacific markets, which are key to the success of the current production boom out West.

This is a lot of dots to connect. As I see it, the running themes in all this are two: There is constructive activity and there is the destructive. Readers may think this oversimplifies, but for this there is the ever-lively comment box below. I am willing to listen. Let’s go back to early September. On the 5th, Germany brokered a cease-fire between the Ukraine government in Kiev and the rebels in the eastern Donbass region. Washington made it plain it wanted no part of this, preferring to continue open hostilities. And then strange things happened. Less than a week after the Minsk Protocol was signed, Kerry made a little-noted trip to Jeddah to see King Abdullah at his summer residence. When it was reported at all, this was put across as part of Kerry’s campaign to secure Arab support in the fight against the Islamic State.

Stop right there. That is not all there was to the visit, my trustworthy sources tell me. The other half of the visit had to do with Washington’s unabated desire to ruin the Russian economy. To do this, Kerry told the Saudis 1) to raise production and 2) to cut its crude price. Keep in mind these pertinent numbers: The Saudis produce a barrel of oil for less than $30 as break-even in the national budget; the Russians need $105. Shortly after Kerry’s visit, the Saudis began increasing production, sure enough – by more than 100,000 barrels daily during the rest of September, more apparently to come. Last week they dropped the price of Arab Light by 45 cents a barrel, Bloomberg News just reported. This has proven a market mover, sending prices to $78 a barrel at writing.

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No worries, mate, we’ll find a way to screw that up too.

Can Low Oil Prices Be Good for the Environment? (AP)

Deepwater drilling rigs are sitting idle. Fracking plans are being scaled back. Enormous new projects to squeeze oil out of the tar sands of Canada are being shelved. Maybe low oil prices aren’t so bad for the environment after all. The global price of oil has plummeted 31% in just five months, a steep and surprising drop after a four-year period of prices near or above $100 a barrel. Not long ago a drop of that magnitude would have hit the environmental community like a gut-punch. The lower the price of fossil fuels, the argument went, the less incentive there would be to develop and use cleaner alternatives like batteries or advanced biofuels.

But at around $75 a barrel, the price is high enough to keep investments flowing into alternatives, while giving energy companies less reason to pursue expensive and risky oil fields that also pose the greatest threat to the environment. “Low prices keep the dirty stuff in the ground,” says Ashok Gupta, director of programs at the Natural Resources Defense Council. Economists and environmentalists caution that if the price goes too low, and stays there, consumption could swell and the search for alternatives could stop. They say a good price range for the environment could be somewhere between $60 and $80. As oil demand in developing countries began rising in the last decade, drillers struggled to keep up and prices began to rise. It seemed the world might be running out of oil. Investors poured money into advanced biofuels companies and battery-makers betting high oil prices would make it cheaper to drive on plant waste or electricity.

It hasn’t happened, despite some headway. Even after years of growth, electric cars accounted for just 0.4% of new vehicle sales so far this year, according to Edmunds.com. Biofuels from plant waste account for even a smaller percentage of the nation’s fuel mix. The high prices instead inspired drillers and investors to pursue oil wherever it might be found no matter the expense. They developed projects in environmentally-sensitive areas or using environmentally-destructive methods. They developed technology that has unlocked vast resources once thought out of reach. What was once a shortage now looks to be a surplus. “It was a net negative from a climate perspective,” says Andrew Logan, director of oil and gas programs at the environmental group Ceres. “It locked us into long-term dependence on oil.”

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That’s when we stop counting them.

More Than 4 In 10 Americans Still Exhaust Unemployment Benefits (MarketWatch)

The number of Americans applying for unemployment compensation is near a 15-year low, but a higher percentage than usual still don’t find jobs before their benefits run out. The percentage of people who received unemployment benefits each week until they were no longer eligible stood at a 12-month average of 41.5% in September, according to Labor Department data. In other words, more than four in 10 unemployed Americans still exhaust their benefits before finding a job. Granted, the rate has fallen sharply from a postrecession peak of 55.8% in March 2010 – the highest level since the government began keeping track in 1972. But the rate is still markedly higher vs. a 34.7% low point reached during the 2002-2006 expansion. The percentage who exhaust benefits is also well above the historical average of 35.9%. The U.S. labor market is improving, but a variety of measures such as the exhaustion rate for unemployment benefits shows that a lot more work needs to be done.

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Let’s get a mortgage, shall we? And a car loan.

Most Americans Make Less Than $20 Per Hour (MarketWatch)

According to data compiled by Goldman Sachs, most American workers earn below $20 per hour. Goldman Sachs economists David Mericle and Chris Mischaikow crunched Labor Department data that is used to generate the monthly jobs report that the market closely watches, in particular from the survey of employers. 19% of workers make less than $12.50 per hour, 32% of workers make between $12.50 and $20 per hour, 30% make between $20 and $30 an hour, 14% make between $30 and $45 per hour, and 5% make over $45 an hour. (It’s important to note that this includes all workers covered by the establishment survey, not just hourly workers; to convert annual pay to hourly pay, divide by 2080, for a standard 40-hour week.) The economists also found that, while wage growth has been soft, the fastest growth in income has come to the lowest-paid workers. And they found that the biggest driver to income growth has been rising employment, with help from rising wages and more hours worked.

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See also the following article, this is not just happening in the US.

The Reason Small Businesses Are Disappearing (Zero Hedge)

Confused why despite endless daily propaganda that the US economy is getting better – after all “just look at the record high S&P 500” – fewer and fewer Americans believe the narrative, as the Democrats and Obama found out the very hard way in last week’s midterm elections? Then the following explanation written by the owner of a small business – the segment of the US economy that has historically led every single recovery but this time was left behind – should help answer some questions.

The reason small businesses are disappearing written by a small business owner. I want to start out by saying that i am a 27 year old male with a small business in Sacramento CA. I started this business a few years ago with savings of 15k. With a lot of hard work and determination i have succeeded, but it sure as hell was not easy. I am a long time lurker and have never seen anyone go in depth about what its like to own a small business and the reason why they are disappearing. Without going into to much detail, i own a furniture store so obviously things are different then other businesses but a lot of the things are the same. I wanted to begin with the things that are killing small businesses. Also only my opinion.

Small Business Loans – Although they are not killing small business they sure as hell don’t help anyone. Unless you are opening a unique small business you are not going to get any funding. By unique i mean something along the lines of creating solar panels. According to a recent investigation by the SBA Inspector General (ill post the article if you would like), over 75% of SBA loans went to large businesses. So basically if you want to open a normal business you need a ton of collateral and a miracle to get a loan.
Permits and Licensing – In opening my specific business the first year totaled about $2000.00.
Advertising – Many small business’s cant afford to take out pages or flyers in the news paper or TV ads so they only have a few choices such as Yelp or the Penny-saver. (Don’t get me started in Yelp).
Street Advertising – While this used to be a good portion of how you get business it is now off limits. Code enforcement will not allow you to put anything outside. No balloons, signs, anything with your store name, window paint more than 50%, or any mattresses. Also delivery vehicles can not be closer than 50 feet from the curb. In my case that means behind the building.
Board of Equalization – Cant go into to much detail here but they sure as hell aren’t here to help.
Health Insurance – Now obviously with the people that have a large work force working full time they will be hit hard by obamacare, but i wanted to give you a perspective on a single person. The cheapest rate for myself and me only, and believe me i have looked around, is $250.00/month. Some might say oh that’s not bad, but let me explain what that covers, NOTHING lol. Basically if something happens to me i have to shell out 6K before insurance gets involved. Also 100 dollar co pay every time i go.
The economy – While many know that when the President comes on TV and says the economy is doing great, we all know it is not, some people don’t. Every month more people drop out of the Labor Force and the number of families on food stamps is sky rocketing. So for those of you who don’t know the economy is terrible because of all the top stories of Kim Kardashian and whoever else, lots of people in america are struggling.
Merchant Fees – This is for credit card processing machines. The machine itself costs 600.00 plus the percentages on sales and cards. Companies such as BofA charge once a year on top of the regular fees $150.00 to protect you from fraud (which they can’t even stop) and yes its mandatory. Paypal or Square seem to be the best options these days.
Fire Department – Yes even the Fire Department wants a piece. Starting last year you must do your own visual inspection and send them a check for 150! Basically if you don’t they will come to your store and give you a million violations for wasting there time.

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I quoted Beppe Grillo yesterday as saying that 25% of Italy’s industry has gone sine the country joined the eurozone in 1997. That’s a scorched earth-type devastation.

Italy’s Crazy New Economy from Hell Suffocates Small Businesses (WolfStreet)

Italy is a country of entrepreneurs and of vibrant small enterprises. Or was. Now these businesses are dying. Of its 5.3 million companies (as of December 31, 2013), 3.3 million are small, often family-owned outfits, according to Rome-based credit information provider Cerved Group. And another 900,000 are sole proprietorships, or 17% of all companies, a larger percentage than anywhere else in the EU, ahead of France (12%), Spain (10%), and Germany (10%). The remaining 1 million companies are corporations of all sizes. And life in Italy has been exceedingly tough for small outfits. Consumer spending has dropped sharply since the onset of the crisis. Industrial production continued its downward spiral in September and is down 0.5% for the first nine months of 2014 over the same period a year ago. Unemployment is 12.6%, and rising. Youth unemployment is at a catastrophic 43%, up from an already terrible 26% in 2010.

It doesn’t help that the government refuses, and I mean refuses – due to “technical” problems, as a minister explained – to pay its long overdue bills to these already strung-out businesses. It’s a shell game to lower Italy’s overall indebtedness and thus pacify the financial markets and Italy’s masters in Brussels. So this shouldn’t come as a surprise, given that the largest customer in the country, the government, refuses to pay its bills to the members of the private sector which then can’t pay their own bills: in September, non-performing loans held by Italian banks jumped 19.7% from a year ago, according to the Bank of Italy. At the same time, loans to the private sector dropped 2.3%. Economic “growth” has been negative or zero for the last 13 quarters. And this is what Italy’s glorious “recovery” from hell looks like:

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My man Beppe. Perhaps still the only man in Europe who makes real sense. He says 2/3 of the Italian Parliament supports his plan for a referendum on the euro. Martin Armstrong suggests the EU may kill him before letting it happen.
See yesterday’s: The Only Man In Europe Who Makes Any Sense.

Beppe Grillo: The Euro Is Destroying The Italian Economy (Zero Hedge)

Next week, Italy’s Beppe Grillo – the leader of the Italian Five Star Movement – will start collecting signatures with the aim of getting a referendum in Italy on leaving the euro “as soon as possible,” just as was done in 1989. As Grillo tells The BBC in this brief but stunning clip, “we will leave the Euro and bring down this system of bankers, of scum.” With two-thirds of Parliament apparently behind the plan, Grillo exclaims “we are dying, we need a Plan B to this Europe that has become a nightmare – and we are implementing it,” raging that “we are not at war with ISIS or Russia! We are at war with the European Central Bank,” that has stripped us of our sovereignty.

Beppe Grillo also said today:

It is high time for me and for the Italian people, to do something that should have been done a long time ago: to put an end to your sitting in this place, you who have dishonoured and substituted the governments and the democracies without any right. Ye are a factious crew, and enemies to all good government; ye are a pack of mercenary wretches, and would like Esau sell your country for a mess of pottage, and like Judas betray your God for a few pieces of money. Is there a single virtue now remaining amongst you? A crumb of humanity? Is there one vice you do not possess? Gold and the “spread” are your gods. GDP is you golden calf.

We’ll send you packing at the same time as Italy leaves the Euro. It can be done! You well know that the M5S will collect the signatures for the popular initiative law – and then – thanks to our presence in parliament, we will set up an advisory referendum as happened for the entry into the Euro in 1989. It can be done! I know that you are terrified about this. You will collapse like a house of cards. You will smash into tiny fragments like a crystal vase. Without Italy in the Euro, there’ll be an end to this expropriation of national sovereignty all over Europe. Sovereignty belongs to the people not to the ECB and nor does it belong to the Troika or the Bundesbank. National budgets and currencies have to be returned to State control. They should not be controlled by commercial banks. We will not allow our economy to be strangled and Italian workers to become slaves to pay exorbitant interest rates to European banks.

The Euro is destroying the Italian economy. Since 1997, when Italy adjusted the value of the lira to connect it to the ECU (a condition imposed on us so that we could come into the euro), Italian industrial production has gone down by 25%. Hundreds of Italian companies have been sold abroad. These are the companies that have made our history and the image of “Made in Italy”.

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Ambrose sees is happening, but doesn’t know why.

Eurozone Dodges Recession But Submerges In ‘Lost Decade’ (AEP)

The eurozone has averted a triple-dip recession but remains stuck in a deep structural slump, with too little momentum to create jobs or to stop a relentless rise in debt ratios. The region eked out growth of 0.2pc in the third quarter, yet Italy’s economy shrank again and has now been in contraction for over three years. Stefano Fassina, the former Italian finance minister, said “Titanic Europe” is heading for a shipwreck without a radical change of course. He warned that contractionary policies are destroying the Italian economy and called on the country’s leaders to “bang their fists of the table”. He said they should threaten an “orderly break-up” of the euro unless policies change. His comments have made waves in Rome since he is a respected figure in the ruling Democratic Party of Matteo Renzi.

While France rebounded by 0.3pc, the jump was due to a rise in inventories and a 0.8pc spike in public spending, mostly on health care. The previous quarter was revised down to minus 0.1pc. “It flatters to deceive,” said Marc Ostwald from Monument Securities. “France was basically horrible. How anybody could celebrate this as a recovery story is beyond me.” “A close reading of details is sobering. Just about all the drivers of growth are near-dead,” said Denis Ferrand, head of the French research institute Coe-Rexecode. Michel Sapin, the French finance minister, said the economy remains “too weak” to make a dent on unemployment. France’s brief rebound in employment has already sputtered out. The economy shed 34,000 jobs in the third quarter. This will not be easy to reverse since Paris has pledged to push through a further €50bn of fiscal cuts over three years to meet EU deficit targets.

Maxime Alimi from Axa said France’s public debt is likely to reach 100pc of GDP by 2017, warning that investor patience may not last. He said bond yields could rise in a “non-linear, abrupt fashion” in the next downturn. Europe is caught in limbo. The data is not weak enough to force a radical change in EMU policy, whether that might be a ‘New Deal’ blitz of investment or full-fledged quantitative easing by the European Central Bank. The risk is that the currency bloc will drift into another year in near deflationary conditions, without any catalyst for real recovery. The US Treasury Secretary, Jacob Lew, warned this week that Europe faces a “lost decade” unless surplus countries such as Germany do more to stimulate demand. “The eurozone is the epicentre of a global Keynes liquidity trap,” said Lena Komileva from G+Economics. “For the markets, the previous consensus of a periphery-led recovery has crumbled.”

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” Over the past several years, loans outstanding and other exposure to China have roughly quadrupled to more than $800 billion.” Wanna bet it’s more than that?

Who Will Pay for China’s Bust? (Bloomberg)

One reason not to worry about a Chinese credit bubble is that most of the lenders are inside the country. If there’s a wave of defaults, the logic goes, it won’t affect the global financial system in the same way as the U.S. subprime crisis in 2008.

Judging from data on global bank exposures to China, this argument is rapidly becoming less convincing.

Over the past several years, loans outstanding and other exposure to China have roughly quadrupled to more than $800 billion, according to the Bank for International Settlements, an international organization of central banks (see chart). Add in about $170 billion in derivatives, credit commitments and guarantees, and the total comes to about $1 trillion.

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It’s hard to know how much of that money is used to finance the construction of buildings that won’t be filled, excess steelmaking capacity or other misadventures. The BIS does know that the cash is mostly going to Chinese banks, followed by non-bank companies.

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Australian banks have increased their exposure to China at the fastest pace over the past five years, though U.K. banks still account for the largest share of lending.

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Knowing more about who stands to take the biggest losses would be crucial to managing the global repercussions of a Chinese credit bust. Unfortunately, six years after the financial crisis of 2008, the world’s regulators are still very far from possessing an early-warning system that would allow them to identify – in anything close to real time – concentrations of risk. This weekend’s Group of 20 summit in Brisbane, Australia, would be a good place to try to make some progress in building that system.

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It’s getting hard(er) for China to hide behind its official numbers.

China Slowdown Deepens as Targeted Stimulus Fails (Bloomberg)

Credit growth in China weakened last month, adding to signs that the world’s second-largest economy slowed further this quarter and testing policy makers’ determination to avoid broader stimulus measures. Aggregate financing in October was 662.7 billion yuan ($108 billion), the People’s Bank of China’s said in Beijing yesterday, down from 1.05 trillion yuan in September and lower than the 887.5 billion yuan median estimate in a Bloomberg survey of analysts. Earlier this week, reports showed deceleration in industrial output and fixed-asset investment. The evidence underscores concern that, outside the U.S., the global economic outlook is deteriorating. For Premier Li Keqiang, the question is whether to stick with targeted liquidity injections or embrace nationwide monetary or fiscal easing that reignites the risk of a jump in debt. “The key is not to further expand credit, given the weak credit demand, but to lower funding costs,” said Wang Tao, chief China economist at UBS in Hong Kong. A benchmark interest rate cut “is more urgent.”

The central bank has added liquidity while refraining from broad-based interest rate or reserve requirement ratio cuts. China’s benchmark money-market rate fell for a second week on speculation it will conduct more targeted fund injections. New local-currency loans were 548.3 billion yuan, and M2 (CNMS2YOY) money supply grew 12.6% from a year earlier. New yuan loans, which measure new lending minus loans repaid, compared with economists’ median estimate of 626.4 billion yuan, while the M2 figure compared with the median estimate of 12.9%. “Sluggish domestic demand and risk-aversion among commercial banks dragged credit growth,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand. “Disappointing monetary data suggest overall growth will remain soft in the last quarter.”

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And don’t you forget it. Nobody’s holding your hand anymore.

Take Cover Now – They Don’t Ring A Bell At The Top (David Stockman)

This is getting downright stupid. After the minor 8% correction in October, the dip buyers came roaring back and the shorts got sent to the showers still another time. Earlier this morning the S&P 500 was pushing 2050 – or up 12% in less than a month. So the great con game remains in tact. The casinos run by the Fed and other central banks can’t go down for more than a few of days – until one or another central banker hints that more free money is on the way. A few weeks ago it was James Bullard hinting at a QE extension. Next was Mario Draghi pronouncing that the whole ECB is unified behind a plan to expand its already swollen balance sheet by another $1.2 trillion.

And then Haruhiko Kuroda, the certifiable madman running the BOJ, not only announced his 80 trillion yen buying scheme, but soon averred that falling oil prices – a godsend to Japan – were actually a threat to his mindless 2% inflation goal that might necessitate even more money printing. That is, after buying up 100% of the massive Japanese government bond market, the BOJ would not hesitate to monetize ETF’s, stocks, securitized real estate debt and, apparently, sea shells, if necessary. Accordingly, bounteous wealth is seemingly to be had by the three second exercise of clicking “buy” on the SPU (basket of S&P 500 stocks). Indeed, for the past 68 months running, the stock market has blown through every mini-correction, and has been traversing a near parabolic rise.

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Big call for imminent rate hike from a so far pretty quiet voice inside the Fed.

Asset Bubbles Are Top Concern for US Heartland’s Fed Banker (Bloomberg)

As a Federal Reserve bank examiner in the mid-1980s, Esther George delivered bad news to a Nebraska banker: she was downgrading overdue loans, putting his firm’s survival on the line. The owner “broke down and said, ‘This was my life’s work and your decisions are taking my bank away from me,’” George, now president of the Federal Reserve Bank of Kansas City, said in an interview. “I was absolutely sympathetic. I knew what it meant for the community.” The man was a victim of the early 1980s speculative bubble that George witnessed firsthand. Today, after the crisis of 2008-9, she sees aggressive lending and lofty asset-price valuations as evidence that financial excesses may again pose a risk to the economy. To forestall another bubble, George, 56, says it’s time for the Fed to start raising interest rates it has kept near zero since 2008. She argues that ultra-cheap credit is no longer needed to support an expansion that’s in its sixth year after the worst recession since the 1930s.

“The Fed took pretty aggressive action because we were in a fairly desperate situation,” George said. “Once we saw the economy turn, we might have removed some of those emergency measures, including zero interest rates.” Her concern with financial stability prompted her to dissent against the Fed’s accommodative policy at seven of eight Fed meetings last year. Now her warnings, along with those of fellow regional Fed bank presidents including Richard Fisher of Dallas and Charles Plosser of Philadelphia, are starting to resonate at a central bank dominated by its Washington-based Board of Governors. St. Louis Fed President James Bullard today called financial imbalances “my biggest worry going forward,” and said the Fed must avoid fanning a boom like the one in housing that could lead to another bust.

“Asset-price bubbles are the elephant in the room for monetary policy in the U.S.,” he told reporters after a speech in St. Louis. Fed officials including Chair Janet Yellen have said they are watching deteriorating leveraged-loan underwriting standards, and the central bank in September created a committee on financial stability under Vice Chairman Stanley Fischer. ‘Esther George has centered attention on the issue,’’ said Lawrence Goodman, a former U.S. Treasury official who is now president of the Center for Financial Stability in New York, an independent research organization. “There are an increasing number of converts at the Fed that financial stability matters.”

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Bullard follows up on Esther George’s remarks and makes sure they’ll keep on guessing. As I said before, all Fed utterances are carefully scripted.

Fed’s Bullard Still Wants Rate Rise in Q1 2015 (Dow Jones)

Federal Reserve Bank of St. Louis President James Bullard said low inflation in the U.S. economy is no longer enough to justify the current rock bottom setting for short-term interest rates, and he repeated his view that rates should be lifted off their current near zero levels early next year. “Inflation at the current level is not enough to justify remaining at a near-zero policy rate,” Mr. Bullard said in a speech in St. Louis. “Low inflation can justify a policy rate somewhat lower than normal, but not zero.” “Labor markets continue to improve and are approaching or even exceeding normal performance levels,” Mr. Bullard said. “Over the next year, it will become more and more difficult to point to labor market performance as a rationale for a near-zero policy rate.” He told reporters after his formal remarks that his continued expectation of 3% growth and job gains through next year means “that the best time to raise the policy rate will be at the end of the first quarter of 2015.” Mr. Bullard added, “That’s based on a forecast; data could come in differently.”

In his speech, Mr. Bullard took stock of the robust gains seen in the job market, which have come at a time where inflation has run persistently below the Fed’s 2% price rise target. In a speech Thursday, New York Fed President William Dudley said ongoing labor market weakness and inflation that is falling short of the Fed’s goal argue in favor of patience when it comes to raising rates. He, like many other Fed officials, expects short-term rates to be raised from near zero levels some time next year. In his speech Friday, however, Mr. Bullard said that the job market had recovered enough to reach long-term trend levels, and that justifies changing Fed policy. Mr. Bullard expressed some caution about the current level of inflation, which is currently at a tepid 1.4% rise, having persistently fallen short of the Fed’s goals. But he also said that despite some warning signs, he still expects prices to move back toward 2%.

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Big smile on my part.

Turkish Hackers Crack Electric Utility; Delete $670 Billion Of Pending Bills (ZH)

RedHack – a Turkish hacker collective – has hacked the website of the Turkey Electricity Transmission Company, and, as TechWorm reports, claim to have deleted the pending bills of Turkish citizens amounting to Turkish Lira 1.5 trillion (a stunning $668.5 billion). The collective, which has many hacktivism projects against Turkey’s internet censorship laws, posted a video of how they deleted the debt of millions of Turks. As TechWorm reports,

RedHack the Turkey’s number one hacker collective today hacked into the website of the Turkey Electricity Transmission Company website. They then did something which will cheer a lot of Turkish citizens who owe large amounts to the Electricity department. They have claimed that they have deleted the pending bill of Turkish citizens amounting to Turkish Lira 1.5 trillion.

Redhack, are a Turkish hacker collective. They follow the Marxist–Leninist ideology and were founded in 1997. The RedHack has so far hacked several high profile Turkish websites like Council of Higher Education, Turkish police forces, the Turkish Army, Türk Telekom, and the National Intelligence Organization and many other websites.

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“Somebody who is knowledgeable and interested, is several clicks away from the ugly mess that will define California’s financial future,”

California Pension Funds Are Running Dry (LA Times)

A decade ago, many of California’s public pension plans had plenty of money to pay for workers’ retirements. All that has changed, according to a far-reaching package of data from the state controller. Taxpayers are now on the hook for billions of dollars more to cover the future retirements of public workers, with the bill widely varying depending on where they live. The City of Los Angeles Fire and Police Pension System, for instance, had more than enough funds in 2003 to cover its estimated future bill for workers’ retirement checks. A decade later, it is short $3 billion. The state’s pension goliath, the California Public Employees’ Retirement System, had $281 billion to cover the benefits promised to 1.3 million workers and retirees in 2013. Yet it needed an additional $57 billion to meet future obligations.

The bill at the state teachers’ pension fund is even higher: It has an estimated shortfall of $70 billion. The new data from a website created by state Controller John Chiang come at a time of growing anger from taxpayers over the skyrocketing cost of public workers’ retirements. Until now, the bill for those government pensions was buried deep in the funds’ financial reports. By making this data available, Chiang is bound to stir debate about how taxpayers can afford to make retirement more comfortable for public workers when private-sector employees’ own financial futures have become less secure. For most non-government workers, fixed monthly pensions are increasingly rare.

“Somebody, who is knowledgeable and interested, is several clicks away from the ugly mess that will define California’s financial future,” said Dan Pellissier, president of California Pension Reform, a Sacramento-area group seeking to stem rising statewide retirement costs. Chiang has assembled reams of data from 130 public pension plans run by the state, cities and other government agencies. It’s now accessible at his website, ByTheNumbers.sco.ca.gov. In nearly eight years as controller, essentially the state’s paymaster, Chiang has made good on a commitment to make government financial records more transparent and accessible.

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” .. he speaks with a powerful moral authority — something totally missing from American political leaders who are ideologically guided by atheist Ayn Rand.”

Pope Francis’s ‘Holy War’ On Capitalism And Toxic Inequality (Paul B. Farrell)

Big first-year anniversary for anticapitalist, anticonservative, socialist Pope Francis. Fortune magazine ranks him first among the “World’s 50 Greatest Leaders.” Tenure unlimited. Now he’s in an ideological war with U.S. Senate Majority boss Mitch McConnell’s Big Oil backed GOP as well as conservative ideologues. At war in America’s unstable, endlessly fickle, myopic, rigged political arena. At least till 2016. Then another twist. Warren Buffett predicts Hillary Clinton is next, probably till 2024. In a long war. Big picture: Economics trumps the political soap opera. Lurking in the shadows, a new crash. Inevitable.

And like 2000, nobody will hear it coming … hidden under irrational exuberance, dot-com mania, millennium celebrations … followed by a 30-month bear recession … later the 2008 crash … Alan Greenspan, Henry Paulson clueless … two crashes already this century … $10 trillion losses each … next one coming in 2016 election cycle, with echoes of the McCain/Palin loss … yes, a bigger badder bear than 2000 and 2008 … because once again bulls and optimists, traders and leaders fall into denialism … blinded by a new wave of irrational exuberance.

What about the promise of big political changes? House Speaker John Boehner and McConnell talk a good game, but their anxious, conservative GOP base is sitting on the shifting tar sands of Big Oil cash threatened by higher costs, long-term risks. Yes, talk is cheap, but once partisan conflicts blow up, climate disasters will bury the GOP’s aggressive energy agenda, support will fade. Yes, Pope Francis is celebrating his one-year anniversary since laying down his anticapitalism manifesto for his army of 1.2 billion Catholics worldwide. He’s also been removing conservative cardinals and bishops from leadership roles. He’s hell-bent on changing the world fast. And his mandate is unwavering and unequivocal. He’s drawing clear moral and political battle lines against repressive capitalism, excessive consumerism, rigid conservatism.

Listen: “Inequality is the root of social ills … as long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems.” Yes, it sure sounds like a declaration of war: The anticapitalist Pope Francis versus America’s self-destructive amoral capitalism. Bet on Mitch? Pope Francis’s target is clear: economic inequality is the world’s No. 1 problem. Capitalism is at the center of all problems of inequality. And he speaks with a powerful moral authority — something totally missing from American political leaders who are ideologically guided by atheist Ayn Rand, patron saint of the GOP’s capitalism agenda in this moral war. Without moral grounding, the GOP is no match for Francis’ vision, his principled mandate, his long-game strategy to raise the world’s billions out of poverty, to eliminate inequality, to attack the myopic capitalism driving today’s economy, markets and political system.

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