Does trust imply collaboration?

I’m curious to know what people think apropos the current obsession with eliminating trusted intermediaries from the system?

Is it really about efficiency? Or is it about eliminating the need to collaborate and depend on other people, rationalising the view that selifshness is always in your interests?

To what degree does eliminating trusted intermediaries justify the idea that a system is best served by everyone doing what is best for them?

If everyone does what’s good for them (not you), you can’t really trust anyone but yourself.

Or are the two unrelated?

It just seems to me that a society that depends a lot on trust, is going to be more collaborative by definition.

Bitcoin works best when everyone defends and supports the system, and thus doesn’t trust anyone else to do it for them. It breaks down when too much trust accumulates in certain centres (MT Gox etc), and people forget you shouldn’t be trusting anyone in that system.

This is different to banking which openly solicits yours trust.

But even with Bitcoin, you have to trust that people will always do what’s in their interests, and follow the protocol that tells them to do that. So there’s still trust!

Am curious for views about this. Instinctively I feel that trust can’t be eliminated, and that that’s because society always benefits from some form of collaboration. Perhaps trust can be diluted, but not eliminated?


Here’s a related post on the evolution of trust.

It makes the point that trust isn’t being eliminated but rather is evolving. The core trusted intermediary model is being replaced by a network trust model instead.

You will rent your room to a stranger if he has a good network score, and you will rent a room from a stranger if he has a good network score.

Reputation goes two ways now.

But didn’t it always? I guess it’s just that what used to be local knowledge is now global knowledge. You get barred from one hotel, you actually get barred from all of them. You get a bad review you lose customers.

It’s panopticon society?

Don’t fear the NSA because (just like in communism) it’s everyone else who is doing the watching on their behalf. Your neighbors. Your peers.

Does this lead to a freer society? I don’t know. It’s a very unforgiving society that’s for sure. Some bad or stupid behavior early on can lead to terrible social exclusion even if you have changed or learnt your lesson.

Surely trust and de facto collaboration is about taking a risk? In a world where everyone is a watcher, however, things are derisked by almost a fear of god effect. There is no risk.

Is the collaborative economy a misnomer?

Not sure it’s as much about trust as it is about sanitizing trust.

Surely value comes from being able to take a risk in trusting a known convict and collaborating with him to achieve something that would not have been achieved otherwise. This is the sort of trust arrangement which has for generations been facilitated by cash. You will work with the convict providing he pays you in verifiable cash.

Bitcoin’s solution is based on encouraging you to work with the convict providing x amount of people witness the transaction and promise to not conveniently forget about it when it suits them. They also promise to verify it without the need of knowing who the two of you actually are thanks to cryptography.

You’re having to trust a wider network to replace the physical certainty of authenticated cash. But that network needs to witness and watch all the time in order to make that situation work. That commits a lot of energy to just watching. Energy that could be used elsewhere?

The only alternative is trusting one third party to witness and verify transactions professionally. Since his business depends on being a trusted and guaranteed watcher he can be more efficient about it and has an interest in not conveniently overlooking transactions. Conventionally he has needed to know the identities of whoever he is watching and implicitly guaranteeing.

Though a third option is using a single trusted counterpart to witness your transaction as per above, but not have him know who you are. You can call that the David Birch plan, and it’s generally much more energy efficient. It’s also a little liberating.

I like this last option the best.

As for the collaborative economy’s solution? That seems to me about developing trusted networks by simply eliminating all non-trusted parties from the system. Not sure how collaborative that really is? In fact it gets kind of biblical.

Once excluded — say because you failed to abide by the collaborative economy’s 10 golden credit-score commandments — you actually need a third party (ideally with a flawless credit score) to vouch for you to get back into the network. But by being associated with you, that third party ends up sacrificing his own perfect credit score to get you back in. In other words he redeems your credit score at the cost of his own.

You have to wonder what’s in it for him?



Fixed vs flexible regimes

Debt may be a giant monetary short-sale, but it’s not a capital short-sale.

Hence why I contend that a system based on fixed monetary units representing capital — which actually has infinite expansion potential — has the capacity to be so disruptively squeezed. And that’s the case whether the fixed units are gold, bitcoin or fiat.

In a fixed regime, you’re lending units for the purpose of creating more capital — which can be expressed in many other things than just the units you’re lending — but expecting only the underlying fixed units back, not a pay off in the new capital. Unless the money supply grows in tandem with the new capital created, however, there is always going to be a squeeze. This is what the cross of gold argument is all about. It punishes the economy for creating new capital.

As Paul Krugman has explained in the past:

First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates–and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy–by changes, for example, in dentistry.

The United States abandoned its policy of stabilizing gold prices back in 1971. Since then the price of gold has increased roughly tenfold, while consumer prices have increased about 250 percent. If we had tried to keep the price of gold from rising, this would have required a massive decline in the prices of practically everything else–deflation on a scale not seen since the Depression. This doesn’t sound like a particularly good idea.

In that piece Krugman also cites the moral of the story of King Midas, which in his opinion is about teaching Midas that gold is only a metal, and that its value comes only from the truly useful goods for which it can be exchanged.

That’s not to say that a gold standard isn’t a good thing in economies that are prone to depleting resources and capital rather than adding to them. But discouraging waste is a very different to discouraging growth.

As an aside, purpose-based currency could change this because it could see people paid back in underlying goods produced rather than money, preventing the money supply short squeeze from happening at all. That, I have to say, would be a truly great monetary innovation in a world which clearly can’t tolerate the central bank adjusting supply by judgment alone.

That way, if you have a need for bread rolls in your local area, you provide the start up capital to a company committed to making more bread rolls. When you’re paid back in bread rolls or in kind rather than dollars, it doesn’t really matter if the expansion of bread roll supply in your area prevents the company from being able to fetch enough money to pay off its debt to you. You just care about receiving the rolls which you would not have got had you not invested.

Had the debt been in dollars not bread terms, the only way business — which might still be viable, necessary and desired — could sustain itself is through cheap credit and the ability to continuously roll the debt on and make the payments on it. And then it might be classified a zombie business, even though it’s not.

The China case

Which leads me to the only place in the world where they seem to understand this fundamental problem with money-supply short squeezes: China.

China has managed to get itself out of the poverty trap (a.k.a the Cocktail trap) — a trap in which hard work is never enough to allow you to catch up with incumbent wealth since success is actually dependent on serendipity or luck, not meritocracy – by understanding that the West’s fixed monetary supply obsession can be used to their advantage if one is prepared to expand the money supply in their place.

What do I mean? Well, it’s very similar to taking advantage of the Bitcoin no-debt doctrine. As I’ve explained before this is the idea that you can always enter the Bitcoin economy via work or labour alone, and that that’s a fair system. In reality ‘s stacked in favour of incumbents or capital owners.

What China realised, however, is that this vicious cycle can be broken if the money earned by labour is prevented from returning to those who own all the capital, and switched into a more accommodating currency instead.

From China’s perspective that meant a) attracting dollars to China by means of extremely cheap labour and b) retaining them in China by substituting them with a much more flexible currency such as the yuan, thus preventing them from being spent on goods, resources and services produced by US capital owners.

To the contrary, yuan were spent on Chinese goods and services which ended up empowering Chinese capitalists instead.

This was the main genius of the “currency-swap” strategy. The second bit of genius was ensuring that Chinese capitalists, unlike American capitalists, could never rely on a safe yuan-denominated store of value, because it would be constantly debased.

What you ended up with, consequently, was a yuan fractional reserve system collateralised by dollar reserves. Think of it like a giant ETF that issues way more units than it holds in underlying collateral, and pegs its units to a depreciating rate versus that collateral by taking a nice sovereign level management fee for itself.

The constant debasement of yuan relative to the US capital stock it retained soon enough created a negative savings rate for the population. This meant no matter how wealthy the Chinese capital owners and/or employees got, they would be “debased” unless they reinvested that money in capital expanding operations. As always capitalists sought out the most productive ventures and/or investments which they thought would be hard to debase like property — though this just led to a massive incentive to build loads of property.

Since this made wealth accumulation very difficult in China, the richest (and luckiest) one per cent became very prone to corruption, nepotism and/or capital exodus into economic zones which were much more sympathetic to protecting capitalist interests. Those who couldn’t protect wealth in that way had a greater incentive than most to spend on luxury goods and other wealth symbols.

This proceeded into a very positive feedback loop for China. The more the yuan was debased to spread wealth around, the cheaper Chinese goods became for those who still had dollars in the US, encouraging even more dollars to flow into Chinese coffers and be trapped there against an ever expanding yuan base.

The only dollar exodus was now in exchange for raw materials and commodities.

As far as the Chinese state was concerned, as long as the dollars didn’t flow back into the US in a way that benefited US  capital owners but the wider population, which would now redirect those dollars back to China anyway, that’s all that mattered. And so the trapped dollars came to be reinvested not in a way that sent dollars back up the capital chain but rather towards public securities like USTs and later MBS. In short, rather than rewarding capital owners via Chinese consumer spending choices, the state — by issuing yuan against the dollars it collected — could chose how to strategically deploy those dollars according to its much more socialistic agenda. The result was cheaper financing for the US state, as well as for US leveraged property buyers.

China, in short, was able to subsidise US public spending and housing.

Had the US offset the Chinese debasement with its own debasement much earlier on, however, it would have prevented China from capturing as much wealth as it did at the cost of US capitalists.

QE, however, shows that the US now realises that capital owners not debased by its own hand can still be debased by the hands of other clever states that have the means to attract dollars and stop them being returned to the US.

Putting this in Bitcoin terms..

Imagine if I wanted to leverage the increasingly concentrated capital in the Bitcoin economy. All I’d need to do is acquire a handful of bitcoin via my own labour, and then refuse to spend them in the bitcoin economy. Instead, I would issue my own dizzycoins against that bitcoin supply, and allow that supply expand more quickly than the supply of bitcoin. Since this would depreciate my dizzycoins versus the bitcoins, bitcoiners would be incentivised to spend bitcoins in my economy, not theirs, because the exchange rate would be much more favourable. I’d then mop up even more bitcoins and issue even more dizzycoins against them.

Eventually I could totally squeeze the bitcoin economy simply by refusing to trade out of bitcoin. Unless Satoshi changed the rules and started printing more bitcoin to compete with my favourable valuation, the entire bitcoin economy would be squeezed to smithereens and suffer a deflationary collapse.

In the meantime, if I felt the bitcoin economy was particularly unfair because it was rewarding drug barons and pimps rather than the wider public, I could deploy my bitcoin with conditionality back into the bitcoin system. For example, I could lend all my bitcoin to people who promise to dedicate it to public infrastructure spending or housing development.

Either way my ability to corner bitcoin supply and deploy a greater number of dizzy coins in their place would be the means by which I could extract wealth from that economy.

Naturally, I would have little interest in liquidating my bitcoin reserves unless bitcoiners retaliated with FX wars of their own, prompting my currency to become overvalued in comparison, and encouraging my citizens to leverage themselves in bitcoins rather than dizzycoins. (This is approximately where we are now.)

The commodity contango trade turns to Bitcoin

It was only going to be a matter of time before professional commodity gurus — no longer able to mis-sell commodities to the dumb money in conventional commodity markets, because these guys have got wise to the fact that commods don’t always go up – were going to turn to the extremely squeezable Bitcoin market instead.

Bitcoin is perfect for these guys because it allows them to deploy all their conventional volatility and cornering strategies outside the annoying supervision of regulators. It also allows them to take advantage of a whole new sub group of dumb money.

Bitcoin contango trades at the moment are ridiculously profitable. And there’s hardly any storage costs to account for making it even easier to arrange. Your only risk is counterparty default risk on the derivatives leg. Hence the push to create legitimate exchanges that can enforce payment and/or collect margin to protect the nifty commodity traders who bag these opportunities.

The only positive side to this is that it’s only dumb money being exploited, and the side-effects are limited to bitcoin prices not real commodity prices that impact the prices of essential food and energy.

I truly hope that overtime the dumb money will catch on to this blatant value extraction con, and realise that at the heart of everything is an even more riggable market than any in the conventional market place. Also that this is the equivalent of gambling in a casino, where the odds are actually stacked against the little guy. In my opinion it also exposes the totally valueless contribution of many of these intermediaries in markets. The fact that they can use a totally synthetic market to encourage mispricings from which they then extract rents proves this to be the case.

Hence be wary of stories like the following. The more commodity gurus and hedge funds enter the market the more the market is going to be used to bleed honest (but gullible) people who think this is some sort of value protection system.

Bitcoin taps former Credit Suisse commodities boss Adam Knight

A UK-based Bitcoin exchange has tapped the former global head of commodities at Credit Suisse to lead its attempt to promote professional trading of the virtual currency.

Adam Knight, who has been an angel investor in London since leaving Credit Suisse in 2011, has become executive chairman of Coinfloor and taken a stake in the company in a fresh fundraising round.
“Having spent my career trading commodity markets, I understand the exchange, clearing house and storage models well and wanted to find a team with the right skills and approach to build a robust global Bitcoin financial services business,” said Mr Knight.
“Bitcoin has survived some pretty significant shocks and proven to be far more robust than I had initially expected.”

And the biggest red flag of all:

Daniel Masters, a 50-year-old veteran commodities trader, started working for some of the largest companies in the world right out of university, trading in London, New York and Zug, Switzerland, for JPMorgan Chase and Phibro before moving on to the New York Mercantile Exchange, a short walk from Wall Street. By all appearances, it was your standard Wall Street career.

This is not market legitimisation. This is about priming lambs for slaughter!

And whilst it might seem like a perfect trade, because no-one can theoretically counteract your cornering of the bitcoin market with more supply, the way those darn shale developers were able to rumble the oil market, for the trade to work you still need a consistent flow of new money into the scheme.

When prices get so high that bitcoin becomes unaffordable, the whole thing crashes. The only way to make money on that, is to a) have information advantage on that side — i.e. be the one that suddenly dumps the supply into the market and front-runs it via derivatives markets or b) create a shorting market in bitcoin, which lends itself to the creation of a bitcoin debt economy, which begins to mess with people’s real businesses and lives. Being short bitcoin is also pretty risky given its propensity to be squeezed before you can benefit from a crash.

And let’s not forget, the more it is squeezed the greater the incentive to launch a double spending attack, rumbling the whole darn thing.

* I should point out that if you don’t have any ethical objection to using something like this strategy to legally extract money from the sort of people who can least afford it, by all means this is an excellent way to get rich quick. Especially if you can control the derivative exchanges cartel style that ensure you are always paid out.

** I should add that the original contango trade was about extracting dollars from the dumb buyside which was always unable to participate in the physical trade. With Bitcoin it will exploit anyone who doesn’t know how to buy bitcoins directly and will use an ETF or derivatives to acquire exposure to them, and also the physical premium provided by Russian and Chinese exit dollars.

*** One other point. At the moment there’s a lot of dumb money and/or desperate money (i.e. the money that is illegitimate and trying to desperately legitimise itself via bitcoin, and thus happy to suffer a discount) in the market to exploit. But the more professional money comes in to try and corner the whole thing, the more the low hanging fruit will be picked off. At which point, when the whole thing is crowded out by professional money and it all becomes a giant game of Liar’s Poker where the winners are the ones that best read the intentions and bluffs of all their co-participants.

The Cocktail trap

Flow is what happens when you take some time out, surround yourself with different things and reframe your view of things. Writer’s block turns into writer’s mania.

After something of a dry patch I am now experiencing a state of flow. A series of shortish posts on a range of different topics, based on a different — but hopefully still useful — way of viewing things is about to follow. I have at least five topics I want to write about.

This post builds on the last couple of observations about debt being a short-sale.

My hypothesis is not only that debt is a short-sale, but that it’s currently a short-sale rigged in favour of the stock lender. So yes, markets are rigged, but not by the central bank. The central bank, if anything, is derigging the markets from their natural state of riggedness. Because debt, just like short selling, can be a great and good thing for markets if done right. Without this intervention it would be incredibly hard for anyone to break free of what I will now refer to as the Cocktail trap.

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What’s the Cocktail trap?

Well, Cocktail is an excellent a 1988 Tom Cruise film about a barman called Brian Flanagan who desperately wants to strike it rich. He’s hardworking and willing to learn, but despite being fabulously goodlooking (okay, that’s a biased opinion) and everything going for him he can’t catch a break in any of the industries that can conventionally propel a working class chap like him into the fabulously wealthy social stratosphere. These industries include banking, trading, advertising or sales. Before he knows it, what was supposed to be a temporary job becomes his real job. He’s a barman who takes pride in his work.

His transition towards becoming a professional is quietly encouraged from the sidelines by his much more jaded contemporary Doug. Unlike the wide-eyed Brian, Doug is acutely aware of the fact that the American dream is a fraud. In his opinion guys like him can’t elevate themselves to the next rung of the social ladder by means of hard work alone. In Doug’s mind, it’s a question of risk, work and return. While Brian is willing to read a million econ strike-it-rich books and mess around with capitalistic ventures like Cocktails and Dreams, a bar which can be franchised in every suburban mall, Doug assesses that there is just as good a chance if not a better of striking it rich by remaining a barman and marrying money instead. The bar, essentially, is a fabulous place to pull.

Doug is proved right. He lands a huge fortune by marrying “a rich chick” while Brian resorts to tending bars in Jamaica in a bid to try and raise the capital for his venture.

But, of course, this is a classic Hollywood movie, which can’t conclude on such a cynical message. Doug’s easy route to riches is soon enough struck down by hubris. Having failed to educate himself properly about money, Doug bankrupts himself and his wife. Not being able to face the situation, he commits suicide. 

The twist in the movie is that Brian ends up falling in love with an even richer chick, without even knowing it.

A hitherto unappreciated risk is however added to the rich chick strategy: she is disinherited as soon she commits to marrying a barman.

But this, of course, suits the moral message of the film because it teaches us that it’s best to stick to an honest hard working strategy after all. In the end Brian’s uncle lends him the capital to start Cocktail & Dreams. True love and the american dream prevail. The concluding message is you don’t need ancestral wealth to elevate yourself in America. (Though, of course, a loan from an extremely money tight uncle can go a long way.)

This is very different to the real world, where the Cocktail trap persists and where Coughlin’s law (Doug’s strategy) remains the surer and smarter bet.

Also, nobody mentions that even if Cocktails & Dreams is a major success, the system is still loaded against Brian from the start. Furthermore, Brian can only achieve the success he needs to elevate himself to the next social class if someone else’s business is disrupted. Even then he still has to pay off his uncle before he can do that.

It’s a situation that can only be overcome if someone — say the government — recognises the wealth Brian has added to the social infrastructure of America and adds additional monetary credits (money) into the system to represent that fact. Only then can a prosperity-driven money short squeeze be avoided.

Debt as a massive short sale

Just read Scott Skyrm’s defence of short selling here.

This increasingly makes me think that looking at the phenomenon of debt as a short sale is a pretty useful way of understanding what drives the financial system.

Viewed in this way, banking crises are nothing more than your archetypal short squeeze situation, easily relieved if only the rules could be amended or if an intermediary agent could just provide you with the stock you need.

This fact is hugely important because the key thing to remember about short squeezes is that they are not a reflection of the real fundamentals or a phenomenon of value (as CYNK testifies to). They are a phenomenon of cornering, market dysfunction, friction and illiquidity.

There is no better example of this than the RINSageddon episode of last year. All it took was one rule change and bang, a potentially bankrupting crisis was made to go away. Not saying that RINs in and of themselves are a bad thing. They are a means by which a government is trying to incentivize the private sector to accelerate changes which are (arguably) good for society but which the short-termism of markets doesn’t care about. But with a social cost already introduced to the market for doing things their way rather than the government way, it was never in the government’s interests to allow a synthetic instrument like a RIN to be squeezed to such a degree that the whole scheme became unstable. This is the perfect example of how allowing more RINs into the market actually helped to stabilize the market and keep the goals of the government in tact.

So back to debt as a major short sale, and banking crises as an example of unnecessary and totally synthetically maintained short squeezes, with real economic costs.

In a regular short sale, the owners of assets lend those assets out so as to receive an improved rent from the assets that they would be holding anyway. They “put those assets to work”. And yes, there is risk associated with lending to unscrupulous borrowers, so a lot of the time these loans are collateralised. But not always.

Either way, the person doing the borrowing is hoping that he knows how to deploy those assets in a way that ensures he will always be able to get back more of them back than he needs to close out the borrow. Usually that means swapping them into something he considers to be a better store of value than those assets… I.e. The dollar. If his bet pays off, his dollars will be able to acquire more assets than he needs to pay off the loan with, and whatever he doesn’t need to acquire to square his position can be booked as a dollar profit for him.

In that sense shorting is the exact same thing as money lending, just that the capital being deployed doesn’t expect a return in quantity of equity but quantity of dollars.

The lender of the stock doesn’t care about anything else other than the return of his assets plus the dollar rent. Which is actually a bit nuts from their perspective as it suggests getting more of the underlying equity or bond is not as important as getting dollar rent. Money lenders are much smarter.

The mechanism in a money loan, of course, is exactly the same except that the thing being lent out is money (potentially collateralised with assets or not) and the rent is expected in additional quantity of money, not another arbitrary unit. From the perspective of the borrower he is still borrowing stock (money stock) and swapping it into the market for a basket of alternative goods or resources which he believes will ultimately lead to the accumulation of more money via a quantity return. The return is based being able to attract all the additional money units in the system to him. Though it’s also possible he’s invested in something he believes will simply be a better store of value than the dollar in its own right, like a house.

Though, if he’s used the money to swap into a house rather than to build a productive company that has the capacity to attract quantities of money to it, he is betting either that money expansion will make his asset appear more scarce and thus a better store of value, or in a fixed money supply world, that the simple preference for holding houses longer than holding money will lead to the same effect.

To recap here are the dynamics at play.

Short sale

Equity holder => lends equity to borrower => charges dollar rent

Equity borrower => swaps equity into dollars => anticipates dollar will hold value better than equity (there will be more equity available per dollar than dollars per equity).

If the short sale pays off the equity holder is worse off despite the dollar rent. (The dollar has appreciated much more vs the equity than the original compensation plan accounted for.) However, had the equity holder charged a return in additional equity not dollars — i.e. the equity was the numeraire — even if the dollar appreciated it would be unclear if the short seller had broken even. The dollar position, in other words, would somehow have to result in the acquisition of more stock to breakeven on the loan.

If the equity holder happened to own all the residual stock, or there simply wasn’t a way to create more of it because no-one was lending or creating it, acquiring that additional stock could be troublesome and a short squeeze would prevail benefiting the equity holder.

Debt loan

Money holder => lends money to borrower => charges dollar (quantity) rent

Money borrower => swaps dollars into assets => anticipates assets will hold value better than money. But that doesn’t matter because he owes additional money units not assets. Even if his assets replicate into many more assets, that doesn’t make the loan immediately successful, unless those assets all hold their value against the dollar.

The irony is, the more productive his investment is, the more assets there are chasing fewer dollars, compromising the original dollar swap commitment.

That means the only way to avoid a dollar short squeeze is either to invest in horribly unproductive or scarce assets and hope their value goes up in relative terms to money due to basic preferences and s&d (because more people want houses than money), or that by the grace of god more dollars enter the system so that your productive assets don’t depreciate unfairly versus your dollar debt.

Deflation in that sense is a major “money supply” short squeeze, propagated by the fact that money lenders want an absolute quantity of money in return rather than a relative sum denominated in the additional quantity of assets created by the loan. All of this is exacerbated if the money lenders also happen to own most of the spare stock that can deliver the necessary additional money returns, and refuse to allow more stock to be added to the system to offset the short squeeze effect.

A no-debt society?

The Austrian obsession with intrinsic worth leads me to another observation about the crypto currency faithful. Not sure if this is an Austrian theory per se (in fact I don’t think it is at all) but it’s certainly something I keep hearing about in the crypto forums and at crypto debates.

What they ultimately desire is a no-debt society.

I find this strange since it runs contrary to the intended evolution of bitcoin that you read about on the bitcoin wiki. This very much envisages a lending market in bitcoin once the supply cap is reached. The only difference with conventional lending is that it prohibits dreaded fractional reserve lending. Only what exists can be lent.

I’ve always thought that once we get to this point this — if anything — will mark the end of the system.

To understand why all you need to do is look at CYNK.

When you don’t have the capability to issue more units into a debt system you open the whole thing up to Squeezageddon. A.k.a. the deflation curse.

But before considering that scenario, let’s consider what I am increasingly hearing about, which is the “no debt” society which could be stimulated by bitcoin.

It works, as far as I can see, something like this:

I live in an economy where there are only five gold bars, and where people can only redeem goods and services against those five bars. Anyone who doesn’t have the fortune to be a producer of goods or a gold bar holder is disenfranchised from the system. Even if the gold bar holders offer fractions of those gold bars around, they circulate from producer to producer and accumulate in the hands of those who have the most powerful surplus producing assets. The only way round this problem is to produce goods of value yourself through your own labour, or offer your labour to the producers that accumulate most of the gold.

On that basis, there are times the bars circulate from producer to employee, but even then they still accumulate in the hands of the producer who has the greatest surplus of the most desired good.

As Graeber notes in “Debt”, this is the makings of Marx’s observation that even if you start from an equal playing field, this process leads to a type of slavery:

Karl Marx, who knew quite a bit about the human tendency to fall down and worship our own creations, wrote Das Capital in an attempt to demonstrate that, even if we do start from the economists’ utopian vision, so long as we also allow some people to control productive capital, and, again, leave others with nothing to sell but their brains and bodies, the results will be in many ways barely distinguishable from slavery, and the whole system will eventually destroy itself.

In other words, the pure no-debt model leads to an unequal society and a wealth trap based on never being able to amass enough capital to create a competing production system that can dislodge the owners of productive capital from their wealth perch.

Okay, so let’s factor in debt into the model.

At this point, the theory gets Austrian. In this world debt is okay providing it is properly policed. Debt is even good because it allows social elevation and meritocracy. That means, if you have a better way of doing things, or can think of something more desirable than what is currently being produced by the incumbents, you will be able to attract the capital that allows this competing means of production to be produced.

The problem is that this world is zero sum. There is a fixed amount of capital in the system, no matter what. In order to create a superior means of production you have to persuade people to divert claims over the goods and resources and labour over to yourself. The gold bars are still ending up in the pockets of the incumbents who are producing the stuff we use — or in the hands of labour (who you are now competing over)  – but they’re allowing you to organise a better way of producing things in the process.

Eventually, if you are successful, the employees and other producers that you are not focused on displacing, will begin to allocate the bars to your business rather than the incumbent and now disrupted producer. As he dies, you flourish. Until a better idea comes along that can disrupt your way of doing things.

But there are two problems with this scenario: first, the efficiency more than likely involves labour displacement, which contracts the amount of gold that can circulate through the system through employees. Second, it doesn’t allow for growth. Not only does the old incumbent have to die to allow you to flourish (his loss is your gain), you have to gain more than the incumbent so that you can make good on the interest on your debt to be as well off as he was.

Since there is a fixed amount of gold in the system, the gold now begins to accumulate disproportionately in the hands of so-called rentiers rather than producers. Not only do they have less need for employees, they also obtain the power to bankrupt perfectly viable businesses if the rents they are owed are not delivered. That’s despite the fact that the products of the company are still very much appreciated and consumed by society.

If they spread wealth around it’s to sectors that make increasingly luxurious products or via the services they consume (house maids, doctors, hairdressers, gardeners).

There is also, we should add, a lot of volatility associated with every disruptive shift as these tastes change.

A system that operates on a flexible base-money basis, however, can smooth these disruptive cycles. It can allow capital to be allocated not only to productive enterprise but to the sort of productive enterprise that allows a greater proportion of people to engage in that wealth. By debasing the rents and making capital more easily available it allows companies that are still making things that most of the population hasn’t had a chance to benefit from, and allows for more industry to grow.

In a nutshell it prevents the economy from suffering a deflationary short-squeeze at the hands of the rentier class, because it allows the system to create the stock that can be delivered to pay-off the lender of capital who happens to be simultaneously squeezing the system.

None of which is to say that capital should be squandered.

But all you need to do is look at human civilisation to date to understand that capital doesn’t come in fixed sums. We didn’t build New York or London, or all the major metropoli by passing around one bit of capital around from one point to the next. Population growth by itself implies human capital is growing all the time.

Okay, the Austrian view might be that capital is not necessarily fixed, but it must be acquisitioned concretely. That means all the factories and cities in the world don’t represent capital unless they are backed one for one by stacks of gold or other stores of value that truly represent wealth. We created New York and London because every efficiency allowed us to spend some leisure time acquisitioning a luxurious trinket.

This, as explained before, is all about the preciousness obsession. I have one more point on that matter but it will have to wait until my next post.



What’s the problem with a scarcity of safe assets?

Not this.

To really understand the issue you first have to understand inflation.

Frances Coppola does a great job of explaining why inflation is a political phenomenon. It’s what happens when poorly run governments use monetary or fiscal policy to squander resources leading to consumption crises. (I.e. No goods on shelves and the crowding out of the goods and services which are available).

It’s a must read not least because you still have the likes of Niall Ferguson going around (erroneously) disparaging the idea that money debasement is hated by the one percent because it kills their risk free rents.

Over on Austrian economics sites, meanwhile, they laugh at Keynesians for thinking inflation is a price phenomenon at all.

For example here’s a curious response to Noah’s Bloomberg Austrian brainworm post on the Mises blog:

Curiously, and leaving the conspiracy plots aside that many, if most Austrians do not believe, I propose that when the brain-worm invades you start believing things like monetary printing boosts the economy, and inflation only pertains to prices.

The above is an important clue to what’s really going on inside the brain of an Austrian, and explains perfectly why things like the original Zerohedge article I linked to misunderstand the issue behind the scarcity of safe assets.

The core problem starts with a fascination that there is such a thing as an intrinsic value system to begin with.

This is an idea that the crypto anarchists are obsessed with as well, something evident from their blog posts about money.

In their world money is not a neutral reflection of relative value dynamics. It’s not even a reflection of favours earned and remembered. Money in their world is value in and of itself.

This is because they believe that money originates from ingenuity and leisure time.

The basic idea here (as I’ve gathered from reading their blogs) is that because someone way back in history was smarter and more successful at feeding himself and his family or providing them with shelter, he accumulated leisure time, which allowed him to spend time on creating, amongst other things, trinkets or decorative leisure objects. (In crypto land that leisure-work is associated with mining and proof of work.)

These objects, being the product of ingenious leisure time, are immediately desired by people who are too stupid to acquire the leisure time for themselves, or alternatively lack the skills for artisanal hobby craft and thus can’t make desirable objects at all. In this way they become traded for consumables, and encourage others to work harder to acquire those objects. Gold in this world has value because it originates as a product of someone’s leisure time. And since it’s shiny, robust and generally considered pretty by all people, it is the most desired and most fungible of all the leisure value objects.

If you think of money as a representation of leisure-time earned and dedicated to the manufacture of something intrinsically valued by those who have less leisure time than you, you can see how and why some people can think that money has intrinsic worth.

Debasement in this world is a heinous crime because it distributes more claims for precious leisure objects than there are objects out there. More mining of gold however is not a problem weirdly enough (and Portugal’s silver debasement saga is neatly overlooked).

Hence you arrive at nonsense theories like the one that inflation isn’t just a price phenomenon. In the eyes of an intrinsic value Austrian money printing leads to the crowding out of all precious objects, not just gold. This includes anything that was once the product of ingenuity or leisure time, and which should in their eyes be treated as a permanent trophy-like store of value. Asset markets, specifically tangible ones like houses (it took someone’s leisure to build a superior house) rolexes, art, wine, classic cars, rare commodities and even to some degree equities and bonds all count as these trophy stores of value.

The only way to acquire these should be through barter or through ingeniously creating your own via accumulating your own leisure time.

Once you see it that way you see that the reason why Austrians are paranoid about money printing. It’s because they worry that a limited amount of precious objects will be crowded out. (Forgetting, we should add, that by their own book the price rise should encourage others who can’t afford such precious objects to accumulate their own leisure time.)

In their world wealth can never be tied to having nothing to want for. There is always the pursuit of physical and durable precious objects at the heart of all their value systems. Thus, when money printing doesn’t drive up prices of consumables produced by all these stores of values, it must in their eyes instead be driving up the prices of the stores of values themselves.

For them inflation is not a consumption crisis, where money crowds out the things people want and need to consume today so as to have a good life, it’s a safe asset crisis. There is too much money in the system and not enough safe assets.

The irony is that to mostly everyone else this is the exact definition of a deflation crisis.

Which brings me back to the original Zerohedge article.

The allegation here is that the Fed’s QE programme has removed so many safe assets that this is about to cause a crisis, and that reverse repo facility will never work because it is no substitute for safe assets.

I disagree. The reverse repo facility is a perfect substitute for safe assets because the key problem is not a shortage of “precious” objects — nowadays these can be produced via the creation of any cult system that convinces people that a cronut or a Koons is a store of value. The problem is a shortage of assets that are truly safe from a change of value-perception risk.

The problem with too much leisure time is that there is now a proliferation of precious objects. In fact, all the things that used to work well as stores of value are being compromised.

Can you really be sure a Rolex will hold its value given that high-end watch production has never been greater? Or modern art? Or gold? All these value systems are threatened by too much supply. The same goes for houses. In many ways you can think of the subprime crisis as an oversupply crisis in which value collapsed due to too many houses being distributed to too many unworthy people. The supply was a responce to the belief that houses would somehow remain scarce. The same went for commodities, which were briefly considered safe assets due to physical constraints, but were unravelled by technology and demand shifts.

The crowding out that the Austrians are obsessed with, consequently, is about the elimination of highly desired precious objects/assets.

Think about it. They moan about high house prices but they also moan about the threat of oversupply and overbuilding, especially if those overproduced precious houses are distributed to the evil leveraged section of society that never had to amass the leisure time or surplus to begin with to gain those precious objects. (Unlike them, who worked for them).

Hence why they are currently obsessed with creating synthetic previous value markets in which supply can NEVER be increased without some intrinsic proof of work. Because it’s not the crowding out of precious objects they really have a problem with, it’s the fear that those high prices won’t last or that those objects might be distributed to the undeserving via government subsides or debt.

The paranoia is also related to not knowing which precious market is over stretched and which may suffer a price collapse any time soon, crushing their break-even rates. What the break-even rate really represents is protection of hierarchy. A precious trinket is just not precious if everyone has one.

So it all goes back to my German sun seeker analogy.

Which is why the only true safe assets are ones which the government can guarantee the break-even rate for. But, as it happens, the only way the government can ensure that is by taking such assets on its balance sheet in exchange for liquidity (the creation of current consumption rights). If that liquidity is evenly distributed that can lead to the breakdown of hierarchy and the spreading of wealth across a greater distribution of people, something the Austrians also have a problem with. At the moment, because that liquidity is being distributed to asset owners, it’s having more of a deflationary effect leading to the crowding out of yet more safe assets (especially those which can’t be overproduced because of government shutdown fears).

And so you end up with a scarcity of government assets, something which can only lead to negative private market repo rates and the pumping up of yet more unstable collateral markets by those paranoid about losing not only their risk-free rents but also their principal — a.k.a hierarchal position in society.

The irony is if the government didn’t intervene with an IOER or RRP policy that crowding out effect would lead to the search for more insane intrinsic value systems and the creation of yet more unstable bubbles. (Mostly focused on guaranteeing value by locking up “intrinsic” or scarce goodies under lock and key (commodity collateralisation and hoarding) that leads to cornering value, but also encourages more supply, or via the manufacturing of new cult value systems. Sometimes a little bit of both.)

The more cult-based the more prone to instability and collapse.

RRP and IOER, however, changes all that. Since the mechanisms guarantee principal they provide a stable store of value in a world where precious objects can no longer do that job. The reason Austrians don’t like it is that in order to do that job properly the stability mechanism must be accessible to all. But that compromises hierarchy, especially the sort which was earned through generations of precious object accumulation. They’d rather go search for new “intrinsic” value systems than be like everyone else.

From the economy’s perspective that’s fine. The more they risk on cryptocurrency bubbles the more of today’s consumable wealth is distributed to wider tranches of the economy at their own risk rather than the government’s.

As I’ve said before, RRP is the route towards official emoney creation. In a permanently deflationary economy which depends on permanent money expansion to avoid stagnation, and in which that expansion takes the form of UBI (arguably replacing conventional rentier society) that begins the process by which money itself is one day eliminated.

Though that’s still a very long way away since there’s still way too much scarcity to be overcome. But the point is that it’s IOER and RRP which is saving the rentiers from crowding themselves and from flinging themselves into increasingly abstract and tenous cult-based forms of value, which in the long run amount to the very same thing as just giving away stuff for free because absolutely everyone has the leisure to create a precious leisure object.