Liquid gold

Here’s another shot of a piece of art from Frieze which caught my eye: photo 2I love it. Not only do I think it’s very clever, I think it expresses the goldbug confusion better than any single image or piece of writing ever could.

Gold is not the thing of value. It’s the ability to process something like gold into liquidity which has value.

What the image expresses is gold’s power to suck value out of everything around it and concentrate it in just a few hands.

Think of a big sucking sound, ssssoooop, which hoovers up all the oddly shaped, hard to value, random pieces of gold in the vicinity which no merchant would ever be prepared to accept due to the complexity of figuring a value transfer with something so odd and unstandardised, and transforms it into a nice standardised coupon which everyone understands the value of.

And the reason that shop has the power to do that is because there’s a portion of society which is happy to provide useful liquidity coupons that give access to anything to a shop that promises to homogenise all the different trinkets of gold still outstanding by literally liquefying them until they can be valued on standardised terms.

In other words, the goldbugs are paying for something illiquid to be made more liquid, with coupons which are even more liquid, not realising that no matter how much they pay up to standardise the world’s gold, it will never become as liquid or as efficient at transmitting value in a digital world as a dematerialised coupon.


Raison d’etre consensus

Steve Randy Waldman has a nice thing about consensus forming applications in his most recent article on open science, econometrics and cryptocurrency.

I’ve done a more formal thing about it for AV which should be out on Monday, but I wanted to expand here because some of the stuff he says happens to complement my interest in power consolidation through propaganda and mythmaking.

In fact, I was telling xxhshste (cryptographically obscured) the other day as we were meandering through the Frieze art fair — a fair I find fascinating precisely because of the cultism and mythmaking at hand — about my undergraduate academic thesis on the significance of Apollo to Augustus. I shan’t bore you with too many of the details, suffice to say Augustus identified with Apollo so that the public would come to associate the god’s key attributes with the Augustan era, Pavlovian style.


photo 1

(A piece of art at Frieze which drew my eye.)

The Augustan approach was thus a hugely successful exercise in reverse psychology and subtle persuasion/brainwashing of the masses. And it succeeded precisely because the symbols and associations were never too overt. Augustus didn’t want to tell people he was the divinely favoured son of Apollo –a.k.a the light of the sun personified. He wanted them to make the association themselves. This is because he knew that a man who arrives at a belief via his own “proof of work” is much more likely to trust the conclusion.

Augustus’ great genius, consequently, lay in the realisation that if he planted just enough seeds in the public consciousness or dropped just enough clues in public art and infrastructure — not too few, not too many — he could guide the public’s factual evaluation and decision-making processes. Which, of course, amounted to the manufacture of consent.

Augustus in that sense was a pioneer in the art of using subliminal messaging to skew and corrupt public consensus.

The technique was so effective it changed the minds of a people who were so profoundly distrustful of absolute monarchy (that they had structured all their social systems to never allow it to manifest) into accepting absolute rule open heartedly.

And while publicly Augustus tried to make it look very much like leadership was a heavy burden to bear, privately, absolute rule was always his aim.

And this sort of thing is exactly what I worry about whenever anyone suggests consensus-based applications are the future.

Now, I don’t want to rehash the same old arguments I’ve already made about Bitcoin (in particular) being a bait and switch re-enactment of Animal Far which exploits public gullibility to create an even more oppressive system than the one it is on the surface trying to get rid of. I’ve written plenty about this before.

What I want to explore, on the back of Waldman’s post, is why so many highly intelligent people seem to believe that the blockchain consensus-forming technology behind Bitcoin, might be a revolutionary technology in and of its own right.

I think the use of the word “revolutionary” is the clue here.

That’s because it suggests none of this is really about technology, money or assets at all. But rather that it’s really about politics, hierarchy and anacyclosis.

On that basis “belief” in the potential of the blockchain is just another manifestation of the age old desire to transfer power from the elite to the masses.

The only difference is that for some reason people seem to think that because our communication tools are better this time around the revolution might actually be effective. And by effective I mean that it creates a new order which doesn’t open itself to a whole new corruptive influence on the back of it.

At this point I would like to state for the record that I have absolutely nothing but respect for anyone who wishes to make a fairer or more just system. But I remain skeptical about the blockchain as a path to empowerment because I think too many people mistake it as being the sort of technology that leads to absolute outcomes, when really it’s about using technology to better organise a still highly fallible human race.

Xxhshste said to me that the reason he’s excited about the blockchain is because he thinks there’s a real need to have a distributed publicly owned backup of all the important stuff in the world that needs to be documented or tracked.

I don’t disagree. It would be lovely if I knew that a transaction I did with a corrupt individual who might otherwise “overlook” that the transaction ever happened could have recourse to a public ledger that could stand by my version of events.

But there are two issues at hand. The first is, so what?! Just because something is documented doesn’t mean people will believe it or act upon it.

None of this resolves the issue of enforcement.

Just look at all the vast amounts of people who routinely deny documented fact and science, despite benefiting from those publicly acknowledged discoveries on a day to day basis. Or, for that matter, who disregard the law unless it suits them. The great irony of libertarians’ fascination with blockchain is that the blockchain only works for a civilised and subservient society which agrees to honour its findings and succumb to its protocol.

Unfortunately there will always be those who subscribe to it only when it suits them. And that’s because there will always be those who see it for the abstracted version of reality which it is.

The second issue is who forms the consensus anyway? And how can you be sure they won’t be skewed or biased by stronger forces?

In the current incarnation, the bias is controlled by the embedded payoff. Everyone has an interest in defending the ledger because there’s too much at stake if the system can be corrupted. So, for as long as there’s a payoff provided to those defending the system, and the system’s defence is the only thing that guarantees the value of that payoff, the thing is kept (relatively) honest.

But the payoff still has to come from somewhere. At the moment the payoff comes from the transfer of wealth into the system from outside. It originates from the product of someone else’s more conventional work, and flows to those expending real energy and resources keeping the blockchain honest. Which, by the way, is why there’s an arms race to attract ever greater transfers of wealth into the system.

All fine and dandy, except what happens when the cost of defending the blockchain gets so expensive it requires a disproportionately large transfer of real-world product (the product of someone else’s work) to the hands of those with the fastest computers?

Fine. Remove the payoff, you might say?

Well, that’s precisely what the new generation of blockchains are trying to do from scratch. Except you’ve guessed it. If you remove the payoff those expending time and energy defending the consensus-formation process must be compensated in some other way or else they’ll walk away leaving only the most cost-efficient processor defending the system.

The most obvious way is via transaction fees. Unfortunately, paying 1,000 people to simulate the processing job of Visa (and then to reach a consensus) is likely to make it 1,000x more expensive than Visa. What’s more their costs are unlikely to be uniform, so a universal fee will not be equally compensatory, meaning once again you end up with some getting more exploited than others, and the structure and control of the system orientating to the “defenders” with the lowest marginal costs.

Which is why if you remove the payoff the whole thing fails. You end up with a classic transaction fee led “business’, which due to the cost of operating the system inevitably reduces the many to the few (via the standard forces of monopolization), and we end up with a small number of people controlling the system, no better no worse.

So, raison d’etre consensus

The ethereum approach which Waldman references, of course, is to attach some form of raison d’etre to participation. Again, a highly noble endeavour. Except. How are you ever going to convince people that it’s really worth their time and energy to participate in defending the payments, contracts, registry system of the world. Why should their computer resources be overcrammed by processing transactions or contracts on the other side of the planet among a community of people they have no interest in?

Raison d’etre makes sense, but only on a local basis. And for that reason it can never scale, because as soon as you get a babysitters club blockchain running up too many costs due to the burden of processing all the world’s babysitting coupons, you will get fragmentation towards the local geography or pool.

The raison d’etre approach, in other words, can only exist with extremely selective and localised blockchains that are relevant to the individuals participating. And even then, there’s always going to be a business opportunity for anyone who comes along and says, “hey, don’t waste your time having to defend all these systems you participate in yourself, we’ll do it for you, you can trust us, and you go and play tennis, or whatever”.

The only raison d’etre approach that can ever work is if human self-determination and life itself depends on it. I.e. when the cost of not participating is so great, that it turns you into a manipulated drone with no privacy, no self-determination and/or when your life becomes meaningless from non-participation.

Unfortunately, however, there will always be a sector of society that will happily accept and even enjoy this sort of pre-packaged life. We know this, because it has always been so. And it will remain the case for as long as people can be convinced (through subtle persuasion) that their inferior life is the one they want, are responsible for and can’t change. And even better, if they can be persuaded to actually think they’re getting a bargain because they don’t have to work and all this stuff they get is free.

In my book treating blockchain as a revolutionary empowerment tool runs the risk of taking our eyes off the real power abuse issue. So what if some small section of society is empowered by the blockchain when the rest of society ends up being hopelessly exploited because there is and always will be an information asymmetry between those who can be bothered to defend their freedoms and those who are happy to trust others to do the heavy lifting for them.

Enough musings for now, I might be back with some choice extracts from the Chomsky classic, “Manufacturing Consent”.



Decentralised vs centralised [Updated]

Here’s a shocking proposition: sometimes centralisation isn’t always a bad thing.

Wait, wait. There’s more. Sometimes decentralised stuff ain’t all that great either.

The point being, just because something is decentralised doesn’t automatically make it better.

On that basis, I’d be truly grateful if people stopped using “centralisation” as if was some sort of dirty word? All of this stuff, after all, is contextual.

What’s more, it’s fairly clear that the tendency to centralise is a key human attribute. Humans like forming hubs, and always have. So why are you making us feel bad about that?

Let’s look at some examples.

Decentralised dining = dining at home. Nothing wrong with that, of course, but centralised dining opens the door to restaurants, and all that fun and convenient stuff.

Decentralised rail = Privatised British Rail that never works efficiently.
But centralised rail = the swiss rail network SBB, which we all know is as dependable as an atomic clock.

Decentralised entertainment = sitting at home on a nintendo, the internet and/or watching TV by yourself. Nothing wrong with that either, but does it really eliminate the desire for centralised entertainment such as bars, clubs, concerts and carnivals?

Decentralised education = the “internet” or a parent teaching you at home without it being clear that you’ve grasped the concepts at all.
Centralised education = learning from mimicking peers and professional educators as much as from books.

Decentralised sport = the gym at home, like a rat on a treadmill, or lonesome jogging.
Centralised sport = football, the Olympics, team sports.

As for when decentralised stuff is downright awful? How about when it creates a destructive balkanising effect which encourages the formation of compartmentalised echo chambers that never listen to each other, never get along and increasingly fragment and stall economic cooperation and activity as a result?

I’m not suggesting that decentralised networks are never useful, or that they never lead to better ways of organising things. I’m simply proposing that just because something is decentralised doesn’t automatically make it fairer or more efficient in all cases.

It’s not right in my mind consequently that terms such as “decentralised” and “distributed” acquire purely positive connotations. This is misleading. Each system should be evaluated on its own individual merits.

Update: The Buttcoiner trolls do make me laugh. I love this response to the AMA with Jim Harper, Global Policy Counsel at the Bitcoin Foundation.

Screen Shot 2014-10-15 at 10.20.48

In which Tirole predicts the Ice Bucket thang

Looking back at Jean Tirole’s work on liquidity premia gives one a real insight into how his two-sided market theory and agency stuff came about. In particular the role fear plays in leading people to make what seem to be irrational pricing decisions.

But there’s also a treasure trove of stuff on belief-driven markets, and the real motives behind apparently selfless acts of altruism.

Hint, no such thing as a selfless act, although core values do play a role in pricing assets during periods of complete information darkness.

In any case keep in mind the Ice Bucket of 2014 thing when reading the below 2005 paper on prosocial behaviours:

B. Holier-than-thou competition
We saw that competition may reduce welfare by inducing excessive participation in prosocial activities that generate only moderate public-good benefits but have a high visibility. We will now see that it can reduce welfare (relative to a monopolist) even without any change in participation, by leading sponsors to screen contributors in inefficient ways. This result formalizes in particular the idea of religions and sects competing on orthodoxy, asceticism and other costly requirements for membership (e.g., Eli Berman (2000)). Another example of rapidly growing importance is that of charities sponsoring events where agents, instead of simply donating or raising money (or on top of it), engage time-intensive, strenuous activities such as a day-long walk, marathon or other test of endurance.

Public self flagellation is used as a means to disguise, obscure or distance oneself from the real motives of an overly altruistic donation which may be construed as being manipulative. (Oh Augustus and your false piety, what have you done!)

I find these insights particularly interesting because I’ve always wondered why it is that we’ve ended up with a charity system obsessed with linking donation to self flagellation. Why is it that we need to run a marathon to “raise” money for charity? If the cause is good enough and in tune with social values why doesn’t the money flow to that cause regardless of marathons etc?

The suggestion here (I think) is that anonymous donation is clearly economically inefficient, yet notoriety/publicity associated with public donation can begin to look suspicious (because it’s impossible to know if you are motivated by true values or a desire to gain public popularity through benevolent acts) thus you need to deserve the recognition you get, so at the very least go run a darn marathon or something to prove you’re not just a shameless publicity whore. Or at the very least throw an ice bucket on yourself to publicly shame/pillory yourself.

Here’s the conclusion of the paper in any case:

To gain a better understanding of prosocial behavior we sought, paraphrasing Adam Smith, to “thoroughly enter into all the passions and motives which influence it”. People’s actions indeed reflect a variable mix of altruistic motivation, material self-interest and social or self image concerns. Moreover, this mix varies across individuals and situations, presenting observers seeking to infer a person’s true values from his behavior (or an individual judging himself in retrospect) with a signal-extraction problem. Crucially, altering any of the three components of motivation, for instance through the use of extrinsic incentives or a greater publicity given to actions, changes the meaning attached to prosocial (or antisocial) behavior and hence feeds back onto the reputational incentive to engage in it.

This simple mechanism lead to many new insights concerning individuals’ contributions to public goods as well as the strategic decisions of public or private sponsors seeking to increase or capture these contributions. This line of research could be extended in several interesting directions. A first one concerns organizations, where high-powered incentives or performance pay could potentially conflict with agents’ signaling motives that arise from teamwork or career concerns. A second relates to the role and objectives of sponsors, who in practice often have their own signaling concerns. A third one, linked to the self-image interpretation of the model, is to the topic of identity and the many instances where people refuse transactions that seem to be in their best economic interest, but which they judge to be insulting to their dignity.

(That last direction btw relates to honourably declining gifts as a journalist, including Bitcoin tips.)

The sad conclusion once again is that there is no such thing as a free lunch, and if you think you’re getting something for free you probably are not, unless, of course, you have the remarkable good fortune of living in a microcosm in which everyone genuinely shares the same core values as yourself.

The Ice Bucket thang became so shamelessly self-promotional in the end, due to the eyeball factor it created, that the donations provided by the celebrities became inconsequential relative to the positive publicity they received as a result of participation.

Some have argued, what’s the problem with that? Isn’t it a virtuous circle because at the end of the day a charity got money to help its cause even if a few celebs managed to exploit our sensibilities? Well, perhaps. But the issue really is whether we as a whole ended up being manipulated or not in the process. Did we make decisions based on perfect or imperfect information?

Someone benevolently giving for a cause without publicity is much more likely to research the credentials of the charity in hand, than someone taking advantage of a fad.

Also, is it economically efficient to over allocate money to one particular altruistic cause? What, in other words, was the cost to other charities (or businesses) of one particular charity’s over exposure in that particular time frame?

Brute force, trial and error systems vs imagination

From the New Scientist article Daydream Believers (from last week):

“I would love to know if chimpanzees can entertain the notion of a unicorn, but we have no idea,” he says. “As far as I can tell, we don’t even know whether they can entertain two possible scenarios to solve a problem.” In Call’s view, it is impossible to say whether the animals that solve problems without trial and error are consciously imagining different solutions, or subconsciously integrating information to come up with the correct solution. “I’m not saying animals can’t imagine two different scenarios,” he says. “I just don’t see the evidence for it.”

As I have been learning this week from AI experts, the ability to learn depends mostly on trial and error processes which strengthen neural pathways that lead to positive results.

But as I am also learning, the field of artificial intelligence is split between three different types of AI learning processes.

First there are big data systems. These aren’t really intelligent because they depend on pre-programming by intelligent agents. They’re effective only because of brute force approaches to problems, processing huge amounts of data. You can imagine the problem. It’s a very energy intensive way to achieve the optimum action, and it remains dependent on instructions on what to look for. Like finding a needle in a haystack by processing every single bit of hay and checking that it isn’t by chance a needle. This is brute force trial and error.

Then there’s proper AI which achieves intelligence through self-learning algorithms that reward the AI for reaching objectives of their own accord. These are a different type of trial and error process. You don’t have to know what the task is, you’re simply learning to deal with the environment you are faced with and every time you discover something exploitable you develop a neural pathway that teaches you this is a good way to approach that sort of problem.

Problem with this system is that, if an unexpected obstacle hits the AI (unexpected item in the bagging area), it can get stuck in blind alleys applying approaches it has found effective in the past until it finds a work around. This can take a while. But sometimes it may not work at all.

The third system — arguably the smartest — incorporates what i have come to understand as mental visualization/modeling. It’s a system that aims to replicate the way the human brain works.

This is achieved by the AI integrating a model of its perceived surroundings into its actions, so if and when it comes across an unexpected obstacle it can revert to its model and take a good intuitive guess about where the solution might be. In other words it uses its imagination to figure out a solution.

The more creative it is the more likely it is to think outside the proverbial box and find the sort of solution that a process-driven AI would never be able to imagine.

A lot of human intelligence thus seems to be linked to the ability to create a working internal model of surroundings and to be able to cut corners through processes which would otherwise take ages and/or loads of energy.

But I do wonder if perhaps we have inherited a dual system as reflected by the presence of both process-type thinkers and creative-type thinkers in society.

The latter of course are pattern recognizers and extrapolators. These are people who have a tendency to jump to conclusions based on instinct and hunches, without too much care for the process of how to arrive at that solution. These are the sort of people who are super intuitive, who at school didn’t have to study too hard to pass exams, because they found they could get away with getting good marks with only half the amount of work of everyone else.

The former, however, are dedicated to the process. If you provide them with an unexpected solution to a problem they won’t necessarily trust you until they have worked out for themselves the process by which you can arrive at that point. These are, in other words, book learners. At school they would have been the type that got incredibly good results but had to study hard (and probably enjoyed that studying) so as to get to that end result.

There are, of course, strengths and weaknesses in both systems.

The amazing strength of book learners (I.e. non visualization people) is that once they understand the process they become better than anyone at doing it. They can become human calculators. And are generally hugely efficient at whatever skill they learn, and don’t get bored easily.

Their weakness, however, is that they can get stuck in the little picture and go down blind alleys. Also, they tend to be scared of unexpected encounters or anything they are not used to. In the extreme they probably fall on the autistic side of the psychological spectrum. On the really extreme side they may have trouble recognizing faces and emotions because of poor pattern recognition skills.

The amazing strength of creatives (people who can visualize from models) is that they can cut corners and find the most unexpected solution to problems and obstacles. That said they’re probably only efficient for short periods of time, with the efficiency highly linked to the out-of-box thinking process that leads them to an unexpected outcome. This may encourage an obsessive personality, I would imagine, which labours to prove that its pathway is correct. Nevertheless, they are very good at spotting patterns and are probably very good at visual representation, the arts and the subtleties of tones etc due to the power of their mind’s eye.

The downside, however, is that they do get bored easily by everything not related to their current preoccupation and can get carried away by their imaginations, never bothering to back up or update their models with actual confirmed processes from elsewhere. If they become too used to extrapolating, it can probably lead to extreme eccentricity and/or madness. Also, just because you can model internally doesn’t mean the model is necessarily correct. In the extreme scenario, you can imagine how eccentric some of these people may get and how much they may end up disregarding process, to the point of becoming non-functional or disruptive members of society. It seems quite likely to me (extrapolating madly, of course) that dyslexic types fall into this category.

The biggest advantage of the creative mind, however, is that it is labour-saving in terms of how many trial and error processes one has to go through to reach a conclusion. Consequently it is much more efficient, albeit not necessarily as accurate as the process-driven mind.

I imagine in society we need a good distribution of both types of brains because in the long run both are needed and both complement each other.

Give a creative mind a well formed model (I.e. One that has a wide range of data points/processes to draw on) and you get to some very special intelligence. And that presumably is the real potential of an artificial intelligence which has the capacity to model (visualize) but also has at its fingertips an expansive data set to feed those models. You go from brute force analysis of everything towards achieving action through dynamic real-time extrapolation that is more accurate than usual.

But I’ll have more on this, as well as the hierarchal architecture of the brain (which apparently features a fascinating competitive neural structure reminiscent of evolutionary game theory and competitive forces more generally) , when I actually sit down and read the papers which were given to me.


Quick update. I think all the above explains the success of the Myers Briggs system. Not sure how Introvert vs extrovert comes into it, but intuitive vs sensing does make a lot of sense. A sensing agent is the process-driven one, while the intuitive one has a good working model. Thinking vs feeling probably reflects our ability to back up that intuition with fact. As an ENFP, I just run with whacky extrapolations rather than using that intuition to figure out the process. I just “feel” it must be right. Thankfully I’m only marginally feeling, so I do have a lot of respect for confirmation and if the facts prove my intuition wrong I will change my mind (begrudgingly!). If you are intuitive and extremely feeling you can imagine a tendency towards cultism. Last there is perceiving vs judging. I guess that applies to how you respond to extrapolated options. Interestingly I have a tendency to orientate towards other ENFPs and/or INTJ/P types in life. I can see how this is complementary. INTs probably have extremely good intuitive models so can understand what crazies like ENFPs are on about, but their respect for process means they are not only great at deducing solutions they are also great at proving them. INTJs tend to be rude with an ability to alienate other personality types (other than ENFPs). Small surprise INTJs are the least common personality type. INTPs are also rare.

But do check out the sort of people who tend to be INTJs here. And the sort who tend to be INTPs. Basically they’re mainly nice geniuses or asshole geniuses.

I think it’s pretty likely that if we do create an AI it will have the personality of an INTsomething.

ENFPs (my personality type) are all extreme extrapolators. Namely creative writers, journalists, idealists and err in some cases conspiracy theorists.

Although, obviously, hard to know how true those classifications are (especially for the historic figures).

But I do think it’s interesting that logic suggests the extreme opposite of the above should be an ISFJ type. Logic further suggests these types should be dedicated to process-focused actions and/or good at following orders. Funnily enough a) there aren’t as many famous ISFJs as other types, and those who are famous tend to be military people.

Process and brute force accompanied by “thinking” rather than “feeling” meanwhile allows for very effective, convincing and powerful leaders to emerge.

Paypal hubris

Overnight I received a lot of gloaty “ain’t you an idiot for calling the death of bitcoin on the day paypal announces it’s taking bitcoin?” type emails from over zealous bitcoin fans.

(Apparently a 10% spike following a c30% decline in the month confirms I’m an idiot for ever doubting bitcoin and I should get my coat. )

So first, let me concede, the calibre and witticism of your ripostes has been truly outstanding. You’ve got me. Even now I’m not sure how to gain ground against a verbal onslaught that includes such delightfully crafted quippery as the below:


You’re all clearly gifted wordsmiths with a flare for potent and theatrical rhetoric. Also, I must say, you offer an innovative spin on the rationale of pointing out another person’s hubris.

With a swift tippety tap of the keyboard you have been able to deal me a reputational blow of such magnitude I don’t think I will ever recover. But let me try.

You see, the one thing you learn from covering financial markets is that there’s no upside to making price predictions. Ever. If you think you can read the market with such precision that you see fit to make a price prediction, you are indeed either an idiot or a glutton for punishment.

Markets can stay irrational longer than you can stay relevant.

At the same time all of this does mean that if you are prepared to stick your neck out to make a directional call due to an assessment of underlying fundamentals — which involves everything from break-even rates to dollar basket strength, toppy tech and VC burn frustration — it hopefully means something. (Especially if you don’t call peaks too often, and if and when you do you have a good track record. Gold, ahem).

But given the above risks no-one sensible would be foolhardy enough not to leave themselves a few parachutes if and when they do.

Mine were a) not giving a time frame or a price target b) specifically pointing out that deep pocketed believers will have a good stab at throwing everything they’ve got at it before giving up and c) referring to this particular incarnation of bitcoin only.

Now that we’ve got that out of the way let’s analyse the facts.
Just to be clear.

1) paypal’s deal is mainly a step in the direction of more OTC price clearing by the likes of coinbase and bitpay, who transact as much of their flow off exchange as possible to neutralize the impact. They internalize this flow onto their own (totally untested never publicly audited) balance sheets and are only limited by their capital with regards to the inventory they can afford to carry. It’s a step therefore towards more off blockchain transaction and more opacity, something that undermines the only point of blockchain technology.

2) it’s pretty telling that paypal has decided to cooperate with not one, not two but three bitcoin broker dealers to cover itself from the risk of accidentally ending up with a giant and unsellable bitcoin float.

3) who better to profit from a managed price run up (thanks to a paypal announcement) than Coinbase — the Goldman Sachs of bitcoin — and other deal insiders? As far as I know, there are no insider trading rules in bitcoin, and they’re free to manage their flow however they see fit. Of course there was going to be a pop.

4) this announcement leaves paypal firmly on top of the hierarchal arrangement. It’s not, after all, deploying bitcoin technology or even daring to accumulate bitcoin float. (Which is also telling because usually paypal’s business is focused very heavily on float accumulation and interest rate arbitrage).

5) if you read this more clearly therefore you realise paypal is mainly facilitating a bitcoin cashout. It’s allowing merchants who still have real costs priced in stable currencies that don’t have 10% moves in one day to tap the bitcoin cult market for sales. Yay for sales! (Think promotional campaign directed at a specific demographic segment which will make frenzied purchases without the need for expensive marketing or advertising).

6) given that the deployment is mainly for digital goods, papal is even hedging on the above front. The purchasing net it is casting in exchange for bitcoin is smartly focused on the intangible goods segment for a reason. This is much less related to the real costs of the physical economy and therefore much less likely to have an inflationary business busting effect.

7) all in all it’s a great tactical PR move for Paypal. The company now gets to be beloved by cultists who were threatening to bring it down, but at the same time change very little about its business model, while exposing itself to little of no risk.

Animal Farm V.2

Some people are perplexed by my obsession with Bitcoin and don’t understand why I keep going on about it.

I think, perhaps, this is due to the fact that nothing annoys me more than absolutist thinking, or people who evangelise about having the ultimate solution to everything and refuse to accept that the truth is never that concrete (unless it’s empirically tested).

I also happen to think the whole phenomenon provides an excellent example of cyclical repetition and generational myopia — a core interest of mine — since it perfectly reflects how and why we end up making the same mistakes over and over again (mainly due to the stubbornness of those who think they have discovered a wisdom that nobody has seen before them, without realising plenty of people have many times before).

When I was a Reuters trainee many years ago they trained us using a pretend emerging republic called Manchukistan. This was a great model because it allowed us to really understand the processes by which modern states emerge. As an ancient historian I see the same processes that influence the formation of emerging states repeated everywhere. i.e. We think that as modern individuals we are hugely sophisticated, but in reality our core human tendencies remain the same. What has happened before will happen again, and again, and we are always doomed to repeat history.

In fact, for me, bitcoin is mainly a reenactment of the story of Animal Farm. That is to say, it is the story of communism and how it all went wrong due to an overestimation of our ability to change our selfish human nature. And how it then ended up serving the interests of a small minority of “early adopters” who lived off the exploitation of others, and drove the system into bankruptcy because of the wealth they disproportionately gobbled up and never replaced.

Common to both is the idealistic belief that if everyone works together the decentralised collective can free itself from the tyranny of the incumbent system. Unfortunately, it’s a vision that fails to account for the fact that some will always do more than others and vice versa.

Either way, stage one in implementing this vision is all about creating and instigating a revolution. This involves rejecting the standing system and creating a new set of values for people to believe in.

To succeed, campaigns, evangelism and even the sacrifice of a few “true believers” is needed to gather the recruits needed to make an impact. In the modern internet age this mostly means rejecting the tax system, the standing rules/laws, and seeking refuge in an isolationist community that depends only on itself and the recruits it can persuade to join them. (Luckily, it rarely involves taking to the streets).

The second stage is about ensuring that the system can prosper in line with the directives and values outlined. That involves enforcing compliance with the extreme ideology which has been decided on, and sticking to it rigidly whether it creates wealth or not.

In animal farm those ideological protocols consisted of:

Whatever goes upon two legs is an enemy.
Whatever goes upon four legs, or has wings, is a friend.
No animal shall wear clothes.
No animal shall sleep in a bed.
No animal shall drink alcohol.
No animal shall kill any other animal.
All animals are equal.

In the world of Bitcoin those ideological “protocols” consist of:

Whatever uses inflationary fiat currency is an enemy.
Whatever rejects inflationary fiat currency is a friend.
No Bitcoiner shall endorse flexible supply.
No Bitcoiner shall view things in dollar terms.
No Bitcoiner shall replicate the old system.
No Bitcoiner shall sabotage the system with a 51% attack.
All Bitcoiners are equal.

In Animal Farm, however, it soon became obvious that those rules were a farce, and were mainly intended for the masses, not the powerful minority. That meant over time they changed to accommodate the corruption:

No animal shall sleep in a bed with sheets.
No animal shall drink alcohol to excess.
No animal shall kill any other animal without cause.
All animals are equal, but some animals are more equal Four legs good, two legs better!

In the world of Bitcoin the rules are also changing:

Whatever uses inflationary fiat currency is an enemy.
Whatever rejects inflationary fiat currency is a friend.
No Bitcoiner shall endorse flexible supply, unless it suits them.
No Bitcoiner shall view things in dollar terms unless cashing out.
All Bitcoiners are equal, but some Bitcoiners have more hashing power than others and are thus more equal.

Bitcoin great, the old system even better!

The point being, that what starts off as an idealistic vision of empowerment always falls privy to the forces of exploitation by “early adopters” who gain leverage over the majority, and whose interests are not the same as theirs.

The same way that the pigs end up getting the animals to do more and more of the work which allows them to live in an increasingly decadent manner, so too do the early bitcoin adopters end up exploiting the naive by encouraging them to continuously pass over their real earnings into a system which benefits them above all others, and which allows them to cash out with ferraris and summer houses and so on.

In animal farm, of course, the pigs also realise that isolationism doesn’t work in the long run because the “technology” they are developing depends on the servitude of the average animal, who is so busy developing the technology (a windmill) he’s not doing his ordinary work. That leaves an ever smaller share of real wealth to go around the farm.
With the little that there is being passed directly to the pigs, the pigs soon realise that trading with their old oppressors makes sense if they’re to receive the goods and services they need.

In the world of Bitcoin this is the equivalent of getting outside businesses and shops to “adopt” bitcoin without actually subscribing to the system’s true initial rules and protocols. The shops are providing goods to the bitcoin system in exchange for the diminishing amount of valuable stuff the Bitcoin community has (i.e. dollars) not for Bitcoins themselves.

Over time, just as the pigs eventually become indistinguishable from the men that preceded them, the same will happen to Bitcoin. In fact, we already see this happening with the adoption of the exact same sort of banking practices that got us into trouble in the standing system: dark pools, derivatives, OTC, and shadow banking. Also note the greater tendency to “reform” bitcoin according to the standards of the incumbent system, for it to cooperate with existing institutions and even to be subjected to regulation.

The problem for Bitcoin, of course, is that it can’t survive in a regulated world, because being regulated is an existential threat to a system that derives value from exploiting others’ naivety. Regulation would require transparency and real price discovery, and rules and procedures about not conning people. (The very same is true of the banking sector)

The gigantic profits of the banking industry were generated by unregulated or poorly regulated businesses practices on the fringes of traditional banking. They also involved mass jurisdictional arbitrage which prevented regulators from overseeing or enforcing laws and regulations that the “honest” system subscribed to.

It should be no surprise therefore that as soon as the banking industry was forced into more regulation, a cottage industry of fresh shadow banking practices sprung up to fill the void. And that’s because the crazy banking profits of the investment banks are and always have been based on the exploitation of asymmetrical knowledge and/or those who don’t see they are misvaluing thing or overpaying for stuff. (This should not be confused with arbitrage that is focused on the identification of genuine asymmetries and imbalances, and efforts to build bridges between them for the benefit of all involved. What I’m talking about is the purposeful misdirection and skewing of balances — i.e. keeping things imbalanced on purposes — so that a few can benefit from charging tolls.)

The central bank emerged from the need to form a cartel and regulate cheating incentives

My last point on all this is simply that the modern banking system emerged from exactly the same forces which drive Bitcoin.

The banking system is and always was a private system. It is not a government system. It is government supervised only because self-supervision failed time and time again, and it was in the interests of the banks to cooperate with the government.

Furthermore, banking money itself is private and always has been. Even the government has to borrow from the private system not the other way around. The only reason money appears to be government-controlled is because private banks have tended (usually, through their own volition!) to use government assets to back their money issuance. (When there’s a lack of government assets they tend to secure against private assets from corporate businesses to houses.)

My greatest annoyance with the whole Bitcoin fad, consequently, is the cognitive dissonance associated with their central bank beliefs. On one hand they want the return of private currency, on the other hand they argue that the current system is flawed because the central bank is an evil private institution that responds to the interests of Goldman Sachs rather than those of the public. (And they fail to notice that their movement is heading in the direction of an even more powerful bank trust/monopoly.)

A small newsflash for the bitcoin cultists: the central bank system emerged from a private system not a public one.

It developed — much like Rockefeller and Opec — from the need to forge cartels or monopolies to control the chaos associated with overproduction and everyone looking our for their own interests rather than the system’s. (Read The Prize by Daniel Yergin to understand the problems that plagued the early oil drillers in Titusville and collapsed prices everywhere).

The reason Rockefeller became the wealthiest man in the world is because he in particular understood the importance of monopoly actions. He was the winner that took all, and he was able to do so because he was ruthless and didn’t play by the moral rules most others played by, and was quick to reinvest when others didn’t.

In the end Rockefeller created such barriers to entry that his product became the “STANDARD” one that everyone based everything else against.

With banks, the barriers to entry have always been mostly reputational, so an outright monopoly was never really an option. Overproduction has instead been controlled by a series of increasingly effective banking cartel systems. Some of these were publicly organised, others where privately organised. What they all had in common were rules pertaining to the conditionality of money issuance, compliance as well as an incentive to break ranks if their equity prices and reputations could withstand it. When compliance broke down too broadly and loans turned bad, financial panics resulted.

I don’t want to rehash banking and money history to those who are more than familiar with it, but the truth is that private commercial banks have always had tendencies to form cartels or trusts to protect the value of the money they print or secure, and governments have always been put under pressure to legitimise and standardise those tokens by means of a national currency.

In fact, there has been a battle between the righteousness of government money and public money for generations. Nothing changes. And this applies not just to the US, but to most major western economies.

In the case of the Federal Reserve, it was set up as a DECENTRALISED central bank system in a bid to appease both sides of the argument and to finally break the destabilising streak of banking panics which had preceded the era of the Fed. The decentralised/central structure was seen as the best compromise between interests who on one side wanted a publicly overseen and controlled system and on the other wanted an entirely private system run by the banks (albeit with assets backed by government and/or national securities). (FYI – The banking interests argued the downside of a public cartel would have been the “Continental problem” — i.e. governments overissuing money for war and other profligate reasons — whilst public supporters wanted freedom from the tyranny of corporate banking cartels.)

Today, consequently, we have inherited a dual system which benefits both from being independent (thus influenced by commercial interests) and publicly supervised (thus influenced by the interests of the people) . The system’s key mandate is ensuring stability and full employment (maximising the system’s potential). And as long as the members don’t try to regularly cheat it, it works pretty damn well.

If there have been financial crises in the US over the ages, they have not generally been caused by the profligate habits of the government element. They’ve usually been caused by the private banks not complying with their own system’s rules due to the same greedy incentives that have always caused over issuance or overproduction of anything with value.

In fact, it was the government element in the federal banking supervision system which tried to teach the banking sector a lesson by letting Lehman fail. Furthermore, in the panic that followed people withdrew to the safety of government money (debt), which was on a relative basis seen as a more prudent and restricted issuance system than that of the private banking sector, and thus a better store of value.

To suggest it was the government fiat system that let us down is thus beyond ridiculous. After all, if it was loose government money which got us into this mess, how come the private central-bank-system saw merit in recollateralising itself with government debt and/or private claims over bricks and mortar (via MBS securities).

If the Bitcoin cartel was faced with the same circumstances it too would end up debasing and recollateralising itself, breaking its own rules, because the incentive to do so (in our current system) lies not with the government but with the private banking cartel.

Not doing so would risk the private banks’ annihilation, or such extreme wealth concentration that the monopoly would breakdown of its own accord.

But here’s the clincher…what the crisis has really taught us is that as long as there is no inflationary consequence of bailing out the system in this way, it may not be a problem after all.

What’s more, it may have been overly tight cartel rules that destabilized the system rather than the profligacy of the banks themselves.

At the end of the day the bank loans given out were the means by which real wealth was distributed to those who could not otherwise afford to improve their lives. Those loans could and should have been defended with government liquidity for as long as inflation was not a problem.

Yes the banks lowered their lending standards and expanded broad money supply with it. But that’s possibly because they understood what the far too restrictive government/supervisory element didn’t understand. If the system can afford it, it’s better (for all involved) if wealth is distributed around rather than hoarded.

If Bitcoin is to prevail, it too must realise what the bank cartel realised long ago: money can be magicked out of thin air providing it is assigned to the real economy on productive terms and conditions — or at the very least against valuable collateral; having too rigid a system is not good for anyone in the long run; it’s the conditions of money supply that protect value, not the quantity of money supply per se.