Crypto

Crypto

Oh, I have slipped the surly bonds of earth, And danced the skies on laughter-silvered wing…

-       John Maggee, Jr.

When I find I’m wrong, I change my mind. What do you do?

-       Lord Keynes

By J.M. Hamilton (12-10-2017)

Cue the Telemann.  Pop the blanc de blanc... add OJ to fight off this wretched cold.

Okay, let's go.

The fear hit about 90 days ago.  Since this blog's founding in 2010, I've done at least two pieces, per annum, on the most powerful branch in the Federal government, the phantom branch.  At least twice a year, JMH has written about the most powerful person on the planet, The Chairperson of the Federal Reserve.

But not this year.  What could possibly be written that hadn't already been covered?

And then it happened, as these things often do... a rocket ship burning straight through the earth's atmosphere and possibly, slipping the "surly bonds of earth."  

High Flight, indeed.  Cryptocurrency.  Bitcoin.  Fool's gold or salvation for the world?

It depends on who you listen or talk to.  And clearly the jury is still out… mania like qualities shroud the cyber-currency, presently, which make it ripe for abuse and the short sale.  Exchanges, and some banks, are signing on to various trades concerning cryptocurrency, and in the U.S., bitcoin futures trading begins Sunday. 

One thing is clear, many within the academic & financial establishment, as well as, central banks & government loathe bitcoin.  Which alone makes it worth writing about.

It began the year at less than $1,000 - per unit, and last Thursday this juggernaut crashed through $17,000.  Bitcoin has a market cap, presently, that exceeds the net worth/market cap of billionaires, Goldman $achs, and the GDP of many nation states.  Like all fiat currencies, its worth is perceived, that is to say, faith based.  Bitcoin could just as easily be made of seashells, linen, or polymers & tallow. Instead, bitcoin exists in the cyber realm.

And yet, this currency is not tethered by central bank, or governmental, whims. 

Which means - given its current notoriety, and as with all thing economic & financial - Bitcoin has always been highly political and its about to become even more so. 

Some nation states - like China - have already banned its citizens from trading in cryptocurrencies.

While watching my favorite news show last week, Bloomberg Surveillance, there were two exceptionally bright/well educated men on the program, in as many days:  one, Mr. Folkerts -Landau, who described the abuse central banks have heaped upon asset prices, markets, nation states and their citizens & economies (via overextension of highly accommodative monetary policy); and a second guest, Mr. William Buiter, who lashed out at Bitcoin with great fury.  

Intentional or not, an excellent pairing.  

Mr. Folkerts-Landau and Mr. Buiter were - no pun intended - arguing from opposite sides of the same coin, and neatly captured the heart of the debate before us.

Whether you're an anarchist, fiscal conservative, liberal, libertarian, Marxist, or merely a citizen, who happens to care about the value of the currency they are holding and its sustainability (trust me, given world debt levels, we should all care)... there's something very exciting about a currency that is completely autonomous and free of the misuse - all too often - loaded upon fiat currencies by there governments.  (As interesting as the cryptocurrency is, the blockchain technology utilized to track and provide a ledger for bitcoin ownership and trades is an equally interesting story.  Blockchain applications span other industries and potential uses.)

There is also something rebellious and revolutionary about cyber-currency that also tracks with the populist revolt seen, now, throughout Western democracies.  Revolts where citizens have become quite explicit that they have had enough of plutocratically controlled, and owned, center-left and center-right political parties.  And just as mainstream political parties have become captured and owned by a cadre of billionaires and multinationals, so too have central banks.  Look around the globe and central banks are often run by banksters and Goldman $achs alums.  Mark Carney, head of the BOE, Goldman alum; Mario Draghi, head of the ECB, Goldman alum.  And Mr. Trump's new appointment to Chair the Fed, Mr. Powell, comes from private equity (predatory capitalism defined).

Cyber-currency, arguably, is a revolt against these central bank institutions, the Wall Street men who control them, and the repercussions of a decade of hyper-accommodative monetary policies, as well as, the 2007-2008 crash itself (spawned in part, by central bank policies).  JMH is not saying that all present owners of bitcoin are bomb throwers and revolutionaries (many are undoubtedly, in it for the speculative gain); but I am saying that the founding of cryptocurrencies was a natural blowback against central bank policies, corrupt world governments, and the oligarchy's monetary policy capture.

Bitcoin --- if its pool of liquidity & worth continue to grow; if it is legitimized by world governments; and if ultimately, cryptocurrency is accepted as a form of currency by commercial establishments --- could upend commercial banking models, central banks, and central bank monetary policy.  Longer term, highly abused global fiat currencies could, potentially, fall.

Hence the reaction from many w/in the economics and financial establishment.  Most of the objections to cryptocurrencies are as follows: they are used to fund criminals and criminal enterprise; cryptocurrency is used to evade taxation; it can be used to fund terrorism; and it's associated with money laundering & illegal capital mobility.  Cryptocurrency could also, possibly, be used as an end around OFAC economic sanctions.

To which JMH responds: yes, but every fiat currency around the globe – particularly, in the form of cash - is used for similar criminal enterprise and illicit endeavors.  For starters, 90% of all U.S. cash in circulation possesses cocaine traces.

Future coin of the realm?

And what exactly have central banks done for the 99% that makes citizens continue to want to utilize our current currencies, central banks, and monetary policies (?):

The Federal Reserve papered over the 2007-2008 financial crisis, bailed out Wall Street banks, and a financial oligarchy that brought chaos and ruin to the global economy.  And we are still feeling the effects of the crash to this very day.

Central banks printed trillions out of thin air, allegedly, in order to give banking institutions and governments an opportunity to reform; and yet, this money - often provided at little or no interest & often with no strings attached - was often used to prop up zombie banking institutions (see Southern Europe, particularly Italy).  On Wall Street, arguably, a capital strike occurred, as the loan to deposit ratio slipped. 

What gratitude.

In the U.S., as a result of Federal Reserve policies, Wall Street banking institutions grew larger, more concentrated, and their control & ownership of assets - and Western governments - only grew more powerful.

Was this free money - provided by central banks - used to ease the burden of ordinary citizens and kick-start the economy?  Write down loans, restructure mortgages, forgive student debt.... all of which would have had a simulative impact upon the economy... not a chance.

Equally nefarious, central banks suppressed interest rates and bought up huge amounts of toxic assets/debt, highly speculative instruments, and in some instances, corporate debt and stocks (see the ECB & EU). Mom & pop, savers, retirees were robbed.  While robber barons and captains of industry used cheap debt - sponsored by central bank policies- to leverage up corporate balance sheets, engage in financial engineering, evade taxation, and pay themselves fat bonuses & dividends.

And they call bitcoin a facilitator of criminal enterprise.  Really?

Post crisis and thanks to central bank policies, record amounts of M&A and industry consolidation ensued, w/ its attendant layoffs and pink-slips.  And we wonder why - despite the fiction of super low unemployment - labor force participation remains exceptionally low.

Perhaps as insidious as all the above, central bank policies - by financing federal debt at record low yields (German bunds nominal & real yields are negative) - have allowed politicians to exploit the United State's "exorbitant privilege" to finance tax cuts for the wealthy, finance war w/out end, and pay for all manner of corporate welfare on the backs of future generations.

Libertarians & Liberals: Sick of the deep state/the surveillance state, the US empire, wars w/out end, and US war crimes.... thank the Federal Reserve, which provides a credit card for all this, so that the national debt now exceeds 20 trillion dollars.  

Notice however, the Federal Reserve credit card does not extend to entitlement spending (Social Security, Medicare, Medicaid, and the ACA), which POTUS Trump promised not to touch, and in the case of the ACA, actually pledged to enhance... and now, the GOP controlled Congress is getting ready to take a chainsaw to entitlements to finance tax cuts for billionaires, multinationals, and heirs & heiresses.

Our fiat currency also gives the U.S. unprecedented power over nation states... if a Latin American country defaults on their debt, they are likely to end up in a U.S. courtroom, their sovereignty stripped, and paying U.S. vulture capitalist exorbitant sums (in essence, pay up, or we'll crush your economy, and cut your nation out of capital markets).

This is what central banks do and its wrong.  And now, we know some of the economics and politics behind cryptocurrency.  Cryptocurrency is an agent of change; cryptocurrency has the potential to be a great disrupter of banks and central banks (and a trickle down monetary policy that has left the 99% high & dry).

If a cyber-currency, or cryptocurrencies, takes off, and global governments do not outlaw it or sabotage same (via futures & options/swaps & derivatives, or by co-opting aspects of the cryptocurrency model) - its potential is limitless.  

Need a loan?  Cut out the middle man - the world's greatest welfare queens, Wall Street banks.

The abuse of markets, the citizenry, the criminality & venality surrounding unlimited war... would likely, be significantly curtailed as governments are forced to live w/in their means.  

Asset prices and markets juiced by dovish central bank policy: gone.

Why?  Because the citizenry would, likely, dump the dollar – or nation state currencies - in exchange for unmanipulated cryptocurrency. 

Multinationals would gladly accept a universal cryptocurrency.  The elimination of the cross-currency hedging costs alone would make one world currency appealing.

Political parties with extremist ideologies - advocating trickle down tax policies, unlimited war, and corporate welfare, at the expense of entitlement spending - would, likely, become extinct (such deviant policies, no longer financed by the credit card afforded by government controlled fiat currencies and central banks).

Hmmm.  Cast in that light, cryptocurrency is beginning to sound rather appealing. Less money for war, less money for multinational welfare, less money for tax cuts for the wealthy: democracy and voters would insist upon it.

It would also force world governments to deal with the colossal debt bubble that bank bailouts, central banks, and crony capitalism have fueled.  

If fiat/nation state currencies lose their "exorbitant privilege" - due to a crypto-usurper -  there only, likely, hope at redemption and salvation would be to hit the reset button and write down nation state debt (yet another threat to the global multinational banking model).

To be sure, there are times when monetary policy and stimulus are appropriate, but as Mr. Folkerts-Landau indicated on Bloomberg, such policies have become a massive crutch for the West (and even China).  Monetary policy should not be utilized by politicians to kick the fiscal can – and unsustainable global debt – down the road, indefinitely, for future generations to deal with (so a handful of people, at the top, can become wealthier).

It’s both absurd and morally reprehensible.

Crypto may force, finally, a day of reckoning.  The advent of cryptocurrency is coming at a time that the globe’s citizenry are waking up to the abuses heaped upon them by mainstream political parties, co-opted by the billionaire class and multinationals.  The 99% are less aware of how much this abuse is facilitated by centrals banks, but they're learning.

Finally, bitcoin is still in its infancy - and while cryptocurrency sounds great in theory - the sustainability of the current crypto/blockchain model will, undoubtedly, be tested and retested many times.  Whether bitcoin burns up and implodes upon reentry into the earth's atmosphere - in a speculative binge or a pump & dump scheme (or set up for failure by Wall Street & government) - or becomes highly successful remains to be seen.  

Either way, bitcoin will undoubtedly pave the way for a learning process and possibly, future cyber-currencies.

Copyright JM Hamilton Publishing 2017