Too much efficiency?

Testing some thoughts. Nothing concrete. Mostly inspired by a frequent question I ask myself: do I actually add value to the economy as a journalist/thinker/writer?

My growing concern — in a nod to David Graeber’s larger bureacracy thesis – is that probably no, we journalists don’t add all that much value at all. At least not compared to the much more useful people in society. And not compared to what we used to before the signal to noise ratio started to be drowned out by the abundance of information.

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I was under the impression that bearer bonds were a thing of the past. 

And yet, as I discovered this week, not only does the BoE issue foreign currency debt to finance its foreign currency reserves (that’s weird right?) it does so in the form of securities that can be held in bearer form. And it’s been doing so since 2006.

It’s not a huge amount of money – about $6 billion, so almost nothing in central bank terms — but it is curious.

For one thing, foreign exchange reserves are usually the result of operations that provide central banks with an FX position on the asset side of the balance sheet. Here you are the central bank picking up foreign exchange as part of your daily operations — which are usually held in the account of a bank within the monetary system (or at least with a subsidiary) of the foreign currency unit you are holding or in some cases directly with the foreign central bank — and you have two choices. You can keep holding the FX in a bank account or you can invest it in a money-like debt security. If you are feeling especially exotic, you might buy some private debt or equity.

Nevertheless, if you choose the second option you go to the market and acquire said securities. You don’t issue them yourself.

And either way the FX has been financed by the issuance of your own sterling liabilities. The FX exchange exposure/effect is something you probably desire, as in the case of the SNB.

But here we have the BoE (not the UK Treasury) issuing dollar securities to raise dollars for FX operations on the liability side, which expose the central bank to FX risk it can’t necessarily control without guaranteed access to Fed swap lines (which of course it does now have) in the event the dollar appreciates.

But to top things off, the notes have a bearer option.

You can read all about the bearer terms and conditions in the prospectus. Lots of references to common safe keepers.

I raise this mainly because it’s curious for a BoE official to call for currency digitization when there are still bearer notes in circulation (issued in another currency no less!)

A bearer security doesn’t require the same level of registration as a registered security. I can’t figure out from the terms and conditions whether you can hold them without offering any identity information at all — the way you used to be able to in the old days — (surely that would be impossible because of AML and KYC reasons?). But even if they did it’s a bit like buying London houses with offshore companies and then selling the companies when you want to shift the houses without paying any stamp duty or capital gains tax. Or maybe not. I don’t know. 

Do other central banks do this? 

Official emoney is only as good as the carrying value of its float

Some of the reasons I’ve always advocated official emoney (by which I mean digital base money issued by a central authority) include that it would be a good way to overcome the negative interest rate problem, would help ease the shortage of safe assets in the system and be a good way of distributing and controlling for the inflationary consequences of a basic income, if it was ever introduced.

The problem with official emoney, however, is that it would essentially nationalise/monopolise the job of payments and safe liquid asset provision. 

While I’m still pro the idea of exploring a digital base money, I’m increasingly mindful of some of the harmful/complicated consequences.

A market where unlimited official emoney is available to users like me — i.e. one where I’m happy to forgo interest in exchange for a risk-free par value investment — is one that theoretically allows me to store an infinite amount of wealth as liquid digital cash forever. 

Yet, this is problematic for a number of reasons. One. It sees the central bank undercutting the banks’ own deposit services, because they can’t compete with an institution which has no restriction on base money production (apart from inflation). Two. It potentially underemploys capital in the economy. Three. It transfers the cost of payment provision onto the national balance sheet as a seigniorage input. And four. Par value protection becomes a national real-time concern (national equity instead of bank equity).

Think of if it this way. In the old model your rights to liquid national equity redemptions (by which I mean spending in the real-economy) would be deposited in a private institution which would make certain assumptions about the rate at which you were likely to drawn these claims down. 

The overall presumption behind that framework, however, relates to the idea that the total liquid stock of the land — the float –is constantly changing (decaying and being replenished) in line with national productivity and consumption. The overall size of the float may stay pretty constant, but its internal composition is dynamic. This means any time period you forgo/delay your float redemption rights until tomorrow is a wasted opportunity for the system. 


Banks lend what you choose not to consume today to someone else who needs it for a price (the interest rate), whilst promising you the option to change your mind if you so desire it.

This scenario allows for a much more efficient use of total liquid capital because it means nothing that is produced by the economy goes to waste. The problem is that banks can only ensure the profitability of this set up by making an extraordinary judgement — akin to a punt — about your real rate of consumption vs your entitlements. If they get this wrong bad things happen. 

For example, if they over assume your consumption intentions, they compromise their potential profitability by keeping more liquid capital on reserve than necessary. If they under assume your consumption intentions, they can be left with a liquid capital shortfall and a bank run.

Which is why in exchange for the risk that they might get that balance wrong and leave you without the liquidity you need when you need it, they reward you with a share of the additional interest they create via the process. They also offer you incentives to guarantee you won’t need to withdraw your money any time soon. Banking is a profit-share relationship with those who bring liquid capital to their system.
All well and good.

In a national emoney system, however, there is no such synergy. Everyone’s cash is base money, meaning it’s the real deal. Whilst you are theoretically free to lend it on via a banking or P2P system if you wish, if you prefer not to, all par value decay risk lies with you and the state directly.

What’s the problem with that?

Well, mainly the fact that those who wish to keep their money as zero yielding liquid emoney at the central bank kind of take the system hostage, because the only way the redemption risk associated with those claims can be prudently managed is if a real-world buffer reserve representing all the potential consumption associated with those rights is constantly set aside in the economy just in case they choose to redeem it.

That’s a hugely wasteful system, especially if most of the time people are demanding to save unilaterally, essentially refusing for this liquid stock to be reinvested in such a way that can extend its shelf life and protect it from depreciative decay and reduction of par value.

The truth is that liquid claims not reinvested in the system are decaying claims. 

Think of it in terms of claims on the contents of your fridge. If such claims are not consumed during their shelf life period, they go to waste. You’ve swapped your earnings (the product you produce for the system) for an oversupply of perishable goods which you were never able to take full advantage of. You’re a loser in that deal.

Of course, if you were to share the stuff you overbought before it went off with someone who has the capacity to consume it when you don’t, they can now owe you that surplus back when you really do have a consumption requirement for it. All of a sudden the full potential of the “sharing economy” comes into its own. Because you shared rather than hoarded, (providing the counterparty you shared with can be trusted) you have extended the duration of your saving.

It’s fairly likely that a central bank operating an emoney “full reserve” system would soon realise that it had in reality become the temporal guardian of decaying stock which unless it reinvested into something more productive or at the very least non-perishable (like gold or astronaut Soylent food) would lose its saving value over time and leave the system exposed to a capital shortfall problem.

Savings, in a nutshell, have to be offset with some sort of non perishable asset if they are to hold their value. The best non perishable assets are social promises since they have no physical carrying cost. 

They do, howeveer, come at the cost of someone else’s leverage. If nobody in the economy is prepared to borrow, then the only real option savers have is putting their savings into non perishable assets that they perceive will always have some future value to society or themselves.

But that’s quite a punt. You simply cannot guarantee that by the time you are ready to cash in your non-perishable gold/commodity for consumption goods, that the market will have the will or capacity to service your consumption desires with useful product.

Herein lies the error with claims I often hear from the Bitcoin community that go something like “it’s my money, I earned it. And I have a right to keep it for myself only.”

Yes you do have that right. But you don’t have the right to insist that your money retains the same purchasing power it had when you earned it.

So how might an emoney system solve this problem? I imagine it could set limits on how much emoney you can hold at any given period. But this doesn’t then solve the safe asset or negative rate problem. All you end up with is the central bank effectively guaranteeing your deposits to a certain level, something it already does when you use the standing bank system. Does it really matter if the digital units are registered on the ledger of the central bank directly or a private bank? Not really. They’re one and the same mostly, and at least a commercial bank can compensate for the deadweight of holding these deposit reserves by using that guarantee to justify riskier constructive lending.

Forcing the central bank to make loan decisions instead of the private sector however exposes the economy to all sorts of command economy moral hazard risks. We’ve been here before as well. China’s PBoC has been trying to extend the shelf life of its surplus national earnings by investing in low risk governments for decades! It leads to things like subprime.

So basically emoney doesn’t necessarily solve the negative interest or safe asset problem at all. It potentially makes it worse.

Indeed, if there was no limit on how much base money we could keep directly at the central bank, all this would do is force the monstrous “I’m an elephant in any market” central bank to reinvest earnings on our behalf instead of the more diversified banking sector. Not allowing it to do so meanwhile would expose the economy to decaying value and inflation risk, something the cbank would find very hard to mitigate at that stage because once base money is out there in the hands of everyone it’s only attractive private or public sector investments that can restore the balance between money supply and output.

To conclude: emoney is only as good as the investment strategy of any central bank. Yet that’s an awesome power to give to a central bank without any democratic oversight. But, if you are to make these investment strategies publicly accountable, you might as well channel them through the fiscal account and have them become public spending strategies in their own right. If there aren’t any non-decaying options to lend to because the economy is maxed out on leverage, better to waste that surplus on the public good and projects that can help to reduce leverage via inflation than not to spend it at all — or worse than that, spend it on non-perishable reserve commodities which have a negative carry value because storing commodities comes with storage and insurance costs.*

Either way you end up in the keynesian world of private to public investment substitution for the purposes of stimulating and equalizing wealth distribution across the economy. 

*the other stupid thing about emoney backed by non-perishable commodities is that it continues to encourage needless commodity production without solving for the fact that it goes towards the production of surplus perishable stock that can’t get consumed. It’s basically massively deflationary.


Bitcoin zero-ville

I meant to blog about this Liberty Street Economics piece on Bitcoin mining last week, but ran out of time.
Which is kind of apt because the economics in question kinda relate to running out of time in competitive terms.
As the authors  found:
As the aggregate hash rate declines, the aggregate network profit should return to zero. We may, however, see increased concentration of mining power in locations with the cheapest energy costs.

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Scaling and why it matters

Adam Smith never talked about scaling per se. But he did say this:

When the division of labour has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes, in some measure, a merchant, and the society itself grows to be what is properly a commercial society.

Which is to say that you can’t have civilisation without division of labour. The two are inseparable. Indeed, it is only when we specialise in certain sectors or develop expertise that we can achieve the sort of efficiencies that allow civilised existence to manifest.

Trust and centralised distribution are essential ingredients in that set up because without them there is no point in being a specialist. The benefits of specialisation would not be able to flow further because nobody would be able to trust you had done your job properly, thus eliminating the scaling advantage. Hence civilisation would not follow.

Look around. Structural specialisation based on trust in centralised process is everywhere around us. From the food we consume — mostly produced, slaughtered or prepared by other specialists — to the energy we depend on, or the entertainment we enjoy. Even when we cook our own meals, the ingredients, hardware or recipes we use are all the product of many other people’s specialised activities. And what makes all that specialised delegation possible is trust in the units that entitle specialists to the product of other specialists.

The way capitalism organises itself, those who specialise in sectors that are most demanded by society or which are most difficult to dislodge competitively  — because of years and years of necessary investment and specialisation — gain the greatest social rewards, which are mostly distributed to them in varied claims on the product of other people’s specialisation.
This can cause resentment, tiering and inequality — especially if the specialism is inherited rather than earned. That’s not good for society because it prevents new generations acquiring the skills or knowledge necessary to deploy in useful specialisations of their own and develops a dependency on the primary specialist at the cost of other specialisations and diversity.
Scaling in the digital economy
The digital economy, like the financial industry, has been profoundly useful in encouraging smarter distribution and matching of other people’s specialisations vis-a-vis their wants and needs. When done well, this becomes a service that allows society to organise itself more efficiently, growing the pie for everyone. It — the service — even becomes a specialist activity in its own right.
This works great for as long as these specialists, whose core product is trust in themselves to better distribute product, don’t demand excessive returns, don’t abuse the trust and society as a whole doesn’t grow too dependent at the cost of its own knowledge, capacity or expertise.
Sadly, in both the digital and financial industry the temptation to abuse this trust can be significant. In some cases, just as per the real economy, powerful monopolies can emerge squeezing the fruits of other people’s specialisation beyond their entitlement. It’s arguably more malicious in finance and information technology, because their returns are based on allocating other people’s goods and services not even their own. Consequently, if and when there’s a major breach of trust, the implications for the real economy can be significant.
Critically, trade related scaling is impacted because vendors/producers have to once again supervise distribution directly, almost on a back to barter basis. But that’s not sustainable for a world economy which has structured itself to take advantage of scaled up services.
It is these circumstances that understandably lead us to the search for a new type of digital or financial organisation, one that doesn’t need to be trusted at all. The thinking is that if you can turn finance or information technology into a mechanism by which people’s wants and needs can be matched with those of other specialists at their own prerogative, there is no scope for abuse. You will remain in control whilst drawing benefits from information-based distribution mechanisms provided and developed by someone else.
But as I pointed out in this post, this may be a dangerous fallacy.
For a so-called P2P system to effectively reduce our dependency on a central agent or institution it must instead increase our dependency on bilateral trust relationships at the cost of our own labour and expertise. This is why these systems can’t scale! 
And because unscaling or zero-scale structures simply can’t support our modern system, P2P systems don’t tend to stay P2P systems very long. They quietly evolve instead into centralised or pejorative structures.
That they have to do this is no sin of course. It’s inevitable. What is a sin is their insistence to the common man that they are somehow different to the trust/centralised systems that have come before them.
In fact, that’s the most dangerous thing about the current P2P platform fad. By presenting itself as “trustless”, it encourages the common man to take his eye off the trust abuse ball. That’s not good for society because it’s far easier to abuse someone’s trust if they didn’t even know they’re having to trust you.
In any case, what you need to know is that as time moves on, the rules that govern scaling in the real world end up governing these “P2P” systems as well. Small eBay vendors are pushed out by professionals. Amateur property landlords or hospitality agents lose business to professional landlords or hospitality agents on AirBnb. And in companies like Uber, the lowest cost service providers survive at the expense of the higher cost agents — mostly those who are prepared to go into debt to the same extent or diminish their quality of life.
Amateurs using these platform either get taken advantage of by more adept professional parties or end up trusting third parties to make decisions on their part without even knowing it.
Before you know it these platforms moat up, the winning agents become entrenched vested interests, and we arrive back at exactly the same model we had before.

Capital City

Last night — as part of my research into Thatcher’s enterprise zone initiatives and their effects on business incentives and jobs — I found myself re-watching the British TV Show Capital City from 1989.

I must have been about 11 when I first watched it ( mainly because my mother was excited about the fact there was a polish actress in it) so at the time I had no idea what the hell was going on with respect to the financial narrative.

Yes, it’s kitsch. Yes, it’s dated. Yes, it’s poorly made. But goddamit, for someone like me, it’s as fascinating an insight into finance and how it was perceived during the deregulation period as the Paul Tudor Jones 80s documentary which has since been pulled from the internet. High yield currency swaps. EEC frauds. Space agency financing. Insider dealing. 80s excess. Cliche trading chat. Rigging. ALL THERE. I’m on my third episode already.

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Cryptic bullet points

I have A LOT of theories/post ideas bustling around in my head, but sadly not enough time to explain the logic behind them or to write them. Many are counter-intuitive. Some are more obvious but under explored.

So here’s a list of stuff I am currently thinking about, considering or quietly exploring and bookmarking in my mind, which may or may not be relevant to the bigger picture and which I don’t have time to explain my thinking on at this point.

  • Too much competition is a bad thing, especially when it involves providing below cost or subsidized services by anyone other than a publicly accountable entity. 
  • P2P lending is turning into a Pfandbrief.
  • Some P2P firms are probably mispricing returns, hence the interest from institutional investors who want yield without an S&D price discovery process. There is no bond style price discovery auction process.
  • Traditional offshore centres are being cut off from predictable/dependable liquidity channels and this is going to be a major problem for them in the next few years.
  • Fintech is being seized upon as a solution to the above, hence Osborne’s desire to make London the fintech capital of the world.
  • The history of “the corporation” behind the City of London is pretty fascinating, from a quasi-autonomous relations with the state perspective.
  • Offshore conduits prey on HNWI who don’t understand risk and are so delighted with their tax savings they overlook risks they are being duped into taking elsewhere. Do they inadvertently end up funding  some of the riskiest assets in the world? Do they know this? Do their tax evasion tendencies make them less likely to sue or complain about fiduciary mismanagement?
  • If offshore tax centres quietly use HNWI funds to fund the riskiest loans in the world, does that mean tax evasion (unless the losses are bailed out by the state) is self-defeating on an aggregate level?
  • Without the potential for tax savings would these funds be much more risk averse? Does this explain the post 2008 shortage of safe assets?
  • How exactly do Chinese cash buyers pay for London properties? I want to know the actual mechanics.
  • Is Google actually a hedge fund/financial org?
  • The next crisis will probably be a billionaire crisis. This is good for the middle classes.
  • Championing anacyclosis as a socio economic theory. It’s the only political system/theory that makes sense to me.
  • The real reason billionaires own super yachts.
  • The return of media 1.0. It will be making a comeback because quality, filtering and neutrality is worth paying for.
  • The return of single-entry accounting (aka blockchain) and whose interests it really serves. And no, blockchain isn’t triple entry.
  • The history of RTGS and why 2008 proved instant clearing is not necessarily a good thing.
  • Amateur investing is a really bad idea for the economy. (From a division of labour perspective – doctors should not be worrying about selling the Dow when operating)
  • What do the sopranos and goodfellas have to do with Switzerland? Arguably, a lot.
  • Turning every day people into gamblers is a core part of the  fintech model. 
  • Alpha is based on luck or information advantage/someone else’s dumbness.
  • Gambling centres: there’s a reason we used to put them in inhospitable places. And there’s a reason why they invested a lot of money in turning them into hedonistic hubs. 
  • Lottery as a public funding mechanism.  
  • Dubai as an offshore centre.
  • Commodity traders are actually EM financiers, doing business where banks fear to tread.
  • Twitter is not a sustainable business model. Nor are most winner-takes-all unicorns.
  • Fintech: too small to succeed. Also, finance can’t be democratized and is always going to be oligopolistic or monopolistic. The product is access to consumption, which has to be rationed/limited to have value. You can’t compete on rations.
  • How certificates of deposits originated in the first place.
  • The “everything now” economy compromises our collective human intelligence. Policy is also hindered and becomes way too reactionary.
  • Gold is the original offshore tax haven.
  • Contrary to popular belief Bitcoin is a luxury market and its fees will eventually reflect that. If they don’t, banks will exploit the resource parasitically at someone else’s cost. (Back to the subsidization point.)
  • Linkedin is a misleading false information hub and a propagandist’s dream. 
  • I have a pre-written post called “don’t buy anything!”, referring to the Goodfellas scene with the fur coat, which is about consumption censorship for the sake of power accumulation.
  • ETFs were ultimately devised to give market makers the chance of reaping profits from countercyclicality without the associated balance sheet risk and the ability to book these profits today rather than tomorrow. Outsourcing the role of risk warehousing to dumb money.
  • Is ethical finance an oxymoron?
  • The Enron emails are really insightful.
  • Ronen Palan’s book on offshore banking is really worth your time.
  • Prefunding/full reserve system is not compatible with growth because of depreciation.