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.