How Business Owners Take Cues From Interest Rates

https://www.zerohedge.com/news/2018-06-01/how-business-owners-take-cues-interest-rates

Authored by Frank Shostak via The Mises Institute,

[MD] The Mises Institute is professionally and universally clueless about money. But within that community, Frank Shostak holds the record for irrational thought. In the olden days his clarion call was “money pumping” … as if money could be pumped. Let’s see what he’s up to now.

According to the Austrian Business Cycle Theory (ABCT) the artificial lowering of interest rates by the central bank leads to a misallocation of resources because businesses undertake various capital projects that prior to the lowering of interest rates weren’t considered as viable. This misallocation of resources is commonly described as an economic boom.

[MD] According to the theory of park swings, if you push on a swing, it will oscillate. What in the world does Shostak think the business cycle is but the money changers farming operation? We here at MD know that a “real” money process does not allow any such perturbations … thus this is a non-sequitur. Now let’s watch him sequitur.

As a rule businessmen discover their error once the central bank – that was instrumental in the artificial lowering of interest rates – reverses its stance, which in turn brings to a halt capital expansion and an ensuing economic bust. From the ABCT one can infer that the artificial lowering of interest rates sets a trap for businessmen by luring them into unsustainable business activities that are only exposed once the central bank tightens its interest rate stance.

[MD] As we love to do here, we point out the nonsense that happens or is imagined to happen without a real money process in operation. What Frank writes about here “can not happen” with a real money process. INTEREST collections are in a bear hug with DEFAULTs experienced. Neither INTEREST nor DEFAULTs are a knob anyone can turn.

Critics of the ABCT maintain that there is no reason why businessmen should fall prey again and again to an artificial lowering of interest rates. Businessmen are likely to learn from experience, the critics argue, and not fall into the trap produced by an artificial lowering of interest rates. Correct expectations will undo or neutralize the whole process of the boom-bust cycle that is set in motion by the artificial lowering of interest rates. Hence, it is held, the ABCT is not a serious contender in the explanation of modern business cycle phenomena.

[MD] What Frank writes here would be true … if we had a real money process. But we don’t. We have a manipulated money process. What could be more obvious when we see them repeatedly use the term “monetary policy”. A real money process has no such capability … and never will. But the so-called “business cycle” which requires no theoretical examination … is a real tool of manipulation. And it does what it is intended to do … to put traders off balance in a “predictable way” … predictable to those turning the knobs … not to the traders suffering the manipulations.

According to a prominent critic of the ABCT, Gordon Tullock,

One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue to be unable to figure this out, however, seems unlikely. Normally, Rothbard and other Austrians argue that entrepreneurs are well informed and make correct judgments. At the very least, one would assume that a well-informed businessperson interested in important matters concerned with the business would read Mises and Rothbard and, hence, anticipate the government action.1

[MD] Consider an inventory control analogy. If you know exactly what demand will be and have total control of supply, you can have a part arrive at the exact moment a customer comes in to buy it. But if either of those expectations cannot be expected, you must lay in “safety stock” (i.e. surplus for eventualities) to keep service percentage high. Now if someone is artificially manipulating demand or supply for their own benefit, you have two things: (1) A cheater benefiting from his behavior; and (2) A non-optimal process that must pay the cost of defending against the cheater. There’s enough of that going on in business without having it being done covertly and overtly to the money itself … especially in the name of “price stability” and “full employment”.

Even Mises himself had conceded that it is possible that some time in the future businessmen will stop responding to loose monetary policy thereby preventing the setting in motion of the boom-bust cycle.

[MD] No they won’t. In the inventory control example, the businessman statistically observed the supply and demand patterns. When they are noisy and unpredictably cyclical, he must lay in more safety stock. When they’re highly predictable, he can trim his safety stock dramatically. Let’s see what the “Mises” genius himself has to say on the subject.

In his reply to  Lachmann he wrote,

It may be that businessmen will in the future react to credit expansion in another manner than they did in the past. It may be that they will avoid using for an expansion of their operations the easy money available, because they will keep in mind the inevitable end of the boom. Some signs forebode such a change. But it is too early to make a positive statement.2

[MD] Idiot! The businessman has no choice. He must serve his customers in the face of any eventuality. Picture him going to his bank and saying he’s not going to pay his mortgage this month because of “tightening” but fear not, next month there will be “loosening” and I will make both payments then.

Do Expectations Matter?

Now, a businessman has to cater for consumers future requirements if he wants to succeed in his business.

So whenever he observes a lowering in interest rates he knows that this most likely will provide a boost to the demand for various goods and services in the months ahead. Hence, if he wants to make a profit he would have to make the necessary arrangements to meet the future demand.

[MD] What is Shostak arguing for? He hasn’t made a demand to institute a “real” money process to make this manipulation impossible.

For instance, if a builder refuses to act on the likely increase in the demand for houses because he believes that this is on account of the loose monetary policy of the central bank and cannot be sustainable, then he will be out of business very quickly. To be in the building business means that he must be in tune with the demand for housing.

[MD] Actually, he’s better to be in tune with the money changer’s farming operation. That’s the tune that is being played.

Likewise, any other businessman in a given field will have to respond to the likely changes in demand in the area of his involvement if he wants to stay in business.

If a businessman has decided to be in a given business this means that the businessman is likely to cater for changes in the demand in this particular business irrespective of the underlying causes behind changes in demand. Failing to do so will put him out of business very quickly.

[MD] But do you see these businessmen or Shostak demanding the institution of a real money process? I wonder if Shostak will demand anything to deal with this manipulation problem.

Hence, regardless of expectations once the central bank tightens its stance most businessmen will “get caught”. A tighter stance will undermine demand for goods and services and this will put pressure on various business activities that sprang up whilst the interest rate stance was loose. An economic bust emerges.

Furthermore, even if businessmen have correctly anticipated the interest rate stance of the central bank and the subsequent changes in the growth rate of money supply, because of the variable time lag from money changes to its effect on economic activity it will be impossible to establish the accurate timing of the boom-bust cycle.

[MD] Frank. Read some history! Thomas Jefferson wrote in 1802 “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…. I believe that banking institutions are more dangerous to our liberties than standing armies…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” And even if he didn’t write it, it’s absolutely true and obvious.

Due to the time lag, prior changes in money supply could continue to dominate the economic scene for an extended period. (Given that the time lag is variable, it is not possible to ascertain when a given change in the money supply growth rate is going to start to dominate the economic scene and when the effect of past changes in money supply is going to vanish).

We can conclude that correct expectations cannot prevent boom-bust cycles once the central bank has eased its interest rate stance.

The only way to stop the menace of boom-bust cycles is for the central bank to stop the tampering with financial markets.

[MD] And the only way to get them to do that … since they’re doing it “on purpose for their farming operation”  … is to INSTITUTE A REAL MONEY PROCESS TO COMPETE WITH THEM. Asking them kindly “please don’t do that” isn’t going to work.

About Trust and Agents Incentives (hadriencroubois.com)

MD: Reply to Hadrien Croubois article “About Trust and Agents Incentives”
HC: Hadrien Croubois
https://hadriencroubois.com
Oct 11, 2017
PoCo Series #1 — About Trust and Agents Incentives
Who am I?
My name is Hadrien Croubois and I am a Ph.D. student at ENS de Lyon. My research as a Ph.D. student focuses on middleware design for the management of shared Cloud-based scientific-computing platforms; and more particularly how to optimise them for workflow execution.

MD: Why in the world should “cloud-based” systems even exist?

HC: However, my interests are much broader and include HPC, physics, and biology large-scale simulations, image rendering, machine learning and of course cryptography and blockchain technologies.

Since September 2017 I am also a scientific consultant for iExec. I met Gilles at ENS de Lyon and it was the perfect opportunity for me to experience working in a team designing innovative solutions.

My role as a member of this team is to study existing work from the research community and provide insight into the design of a proof-of-contribution protocol for iExec. This article is by no means a solution to this complex issue. It is rather an overview of our understanding and ideas regarding this issue.
Why iExec needs Proof-of-Contribution?

The iExec platform provides a network where application provider, workers, and users can gather and work together. Trust between these agents is to be achieved through the use of blockchain technology (Nakamoto consensus) and cryptography.

MD: COIK (Clear Only If Known). The key here is how Nakamoto establishes consensus. You really can’t know from reading the white paper that got all this started. In short, it comes down to “democracy” … i.e majority rules. In this case, over 1/2 the population. Anyone who has looked into democracy knows it cannot work with more than 50 parties involved.

HC: Our infrastructure is divided into 3 agents:

Application providers: They provide applications, which are seen as services.

MD: How do “application providers” originate?

HC: These applications can be called by the users with specific parameters. Application providers are paid for each execution of their application.

MD: Who pays the application providers. Almost the entire Android community of applications are provided at no cost whatever.

HC: The applications rely on the iExec smart contract to manage communications between the ethereum blockchain and the off-chain computing platform.

MD: COIK … what is a “smart” contract? Is it transparent? Who can see it? Who cannot?

HC: Users: They are the clients of the infrastructure. They pay to obtains results computed by the application.

MD: Seems like a non-competitive model. Take the internet itself. It is an infrastructure with no clients and no providers … or better yet, where everyone is both a client and provider. What problem is being solved here?

HC: Workers: They are computing entities that provide computing resources. These resources are used for the off-chain execution of the applications. Workers are paid based on their contribution to the computation of the applications.

MD: Again COIK. Why would workers be just “computing resources?” Seems like (reading way between the lines here) anyone being a source, or an opposition to a source, of information is a worker.

HC: The goal of the Proof-of-Contribution protocol is to achieve trust between the different agents, and more particularly between users and workers, in order for the users to be able to rely on the results computed by an external actor whose incentive is, at best, based on income.

MD: I once sat in a meeting where they made the rule that you had to say 5 nice things before you could say 1 thing critical. Want to guess how that meeting went?

HC: In particular, we want to achieve protection against Byzantine workers (who could provide bad results to penalize users) and users (who could argue against legitimate work performed by legitimate workers).

MD: Right. In sports we call those referees. But in real sports, the contestants referee themselves. We lose it when we establish rules and laws. What we really have is principles … and very few of them, the “golden principle” being paramount. Rules and laws just dilute principles. They essentially say, by defining this particular instance of the application of the principle, we declare all other applications unlawful … and thus have to define all particular instances in law after that … and thus totally lose sight of the principle. It’s called “gaming the system”.

HC: First approach: the result contribution validation scheme

Validation of the work performed by the worker can be achieved in two different ways:

Majority voting on the (hash of the) result.

MD: Like the long list of scientists who “vote” that global warming is real … when almost none of them are meteorologists or have the slightest clue of things physical?

HC: This helps mitigate against Byzantine workers but at the price of computing power overhead. Validating the result for a specific execution requires multiple workers to compute it, thus multiplying the execution cost by a factor m. In desktop grid or volunteer computing platforms (BOINC), this factor m can range from 3 all the way to 20~50. With more replication come more confidence in the result, but that also means that the reward is shared among more worker, reducing the incentive to the workers to contribute.

MD: Have you thought of a hierarchical structure to get around the fact that democracy doesn’t work with more than 50 people involved? The solution is to have each group of 50 solving the problems they can solve. They select a representative for the next lower group of 50 … and so on until you get to the final group of 50. Nothing should make it down to the bottom group of 50 and if it does, that group should come to a unanimous conclusion (establishing the principle) … not a majority conclusion. With this structure you can “democratically” represent the entire population on earth in just 6 layers of 50 person groups.

HC: Relying on a court system to solve conflicts between users and workers (TrueBit). This solution is however complicated both in terms of efforts from the users, who have to check every single result and from the platform which has to implement complex arbitration mechanisms. While this method does not require the work to be executed many times, the arbitration mechanism might call for heavy instrumentation of the execution in order for the worker to provide elements of proof if their execution is challenged.

MD: Better to make users and workers show where what they are doing “is” principled when challenged. Then let a small democratic group judge their “principled” defense … i.e. would they really want to be treated the way they are treating?

HC: A significant contribution was published by Luis Sarmenta (2002. Sabotage-tolerance mechanisms for volunteer computing systems. Future Generation Computer Systems, 18(4), 561–572). The proposed approach is based on majority voting but rather than relying on a fixed m factor, it dynamically “decides” how many contributions are necessary to achieve consensus (within a specific confidence level). The replication level is therefore dynamic and automatically adapted, during execution, by the scheduler. This helps to achieve fast consensus when possible and to solve any conflicts.

MD: Did it ever occur to you that if we had computers before we had internal combustion engines and the subsequent invention of governors that we couldn’t even mow our lawns today? The mower would become too complicated to use … and enormously unreliable … in spite of the enormous computing power that is thrown at the problem.

HC: Fig 3 from Sarmenta’s paper, describing how workers contribute to different jobs by voting on the result.

This approach relies on worker reputation to limit the potential impact of Byzantine agents and to achieve consensus.

MD: Did you read the global warming emails. You see how workers reputations are easily co-opted … how the best of systems are easily gamed by gangsters.

HC: Yet this approach is designed for desktop grid infrastructures, where money is out of the equation. Using the financial incentive of the different actors, we can modify and improve their approach to better fit our context:

Each worker retribution for computing a task can be indexed on their impact on the consensus for this task. In addition, having a good reputation helps to achieve fast consensus with fewer agents (meaning a bigger share for each agent). This gives the workers a financial incentive to act well and have their reputation go up.

MD: Do you think Digital Research would have won out over the deficient Microsoft if your rules were in place? Do you think Borland would still exist?

HC: Workers are required to commit a security deposit (stake) which is seized in case of bad behavior. This gives the worker an additional financial incentive to behave correctly.

MD: And the process for “seizure” is???

HC: The main drawback of Sarmenta’s article is the assumption that Byzantine workers are not working together and do not coordinate their attacks. While this assumption does not hold in our context, we believe we can still achieve it by selecting workers randomly among the worker pool. Therefore Byzantine workers controlled by a single entity should statistically be dispatched on many different tasks and should therefore not be able to overtake the vote for a specific task.

MD: I created a computer language (see WithGLEE.com). As I was creating it I was basking in the environment where “I” made all the decisions. I had no inertia to keep me from abandoning a bad tact, reversing it, and taking another tact. In the end I was delighted with the result. But all the time, the camel that is the collection of internet process (e.g. Java, JavaScript, Python, … etc.) won out, because though they were all deficient as horses, they had a constituency as a camel (a horse designed by committee). Python is the most obvious. You don’t use visual structure as a programming element.

HC: Adapting Sarmenta’s result certification mechanism to off-chain execution

While Sarmenta’s work is interesting, a few modifications are required to work in our context. In this section, we discuss preliminary ideas on how we believe this work could be adapted to iExec needs. Our idea is to orchestrate the exchanges between the users and the workers as described below.

MD: You better find a different word than “orchestrate” if you want to establish trust. Global warming is a perfect example of “orchestration”. Climate change is a perfect example of “orchestration soiling its own nest and having to change its feathers”.

HC: In addition to the users and workers, we have an additional component: the scheduler. Schedulers manage pools of worker and act as middlemen between the blockchain (listening to the iExec smart-contract) and the workers. A scheduler can, in fact, be composed of multiple programs which complementary features but we will here consider it as a single “virtual” entity.

MD: Right. Always leave openings for large numbers of regulators and bureaucrats. Did it ever occur to you that a full 3/4ths of the fruits of your labor go to government? Really bright people, when given the task of maintaining a broom in upright position, would create an enormously complicated platform using all kinds of sensors and PID controllers. Any maid would just suspend it from the top and rely on it’s naturally stable tendencies.

HC: One should notice that our discussion here does not deal with the scheduling algorithm itself. In a scheduler, the scheduling algorithm handles the logic responsible for the placement of jobs and handles execution errors. The scheduler is free to use any scheduling algorithm it desires as long as it can deal with step 3 and 5 of the following protocol.

MD: Ah yes … and to change it dynamically and often to suit conflicting whims. Ask Facebook how that’s working as they bend to demands to filter out fake news … when all they really are is a medium of communication and the content should be none of their business or responsibility. The gangsters are trying to do the same thing to the internet. Their ox is being gored badly … and what could be better than to gore their ox out of existence?

HC: Workers register themselves to a scheduler.

MD: I’m not going to comment further. This is a perfect example of the condition: “losing sight of our objective we redouble our efforts”. It’s also an example of “if I am a hammer, everything looks like a nail”. It’s also an example of “the first and best solution to every issue is government and regulation”.
Read on at your own risk!

HC: Users submit tasks to scheduler managing the work pool they chose.
Workers ask the scheduler for work to execute. The scheduler gives them tasks to be executed. Note: If we are coming from step 5 we should not ask a worker to compute a task it has already contributed to.
The worker computes the result (A) of the task. In order for this result to be validated, the platform has to achieve a consensus on this result. This is achieved through Sarmenta’s voting. In order to contribute to this consensus, the worker commits the result to the scheduler:
a. Generate and memorize (but not publish) a random value r (private disposable personal identifier).
b. Submit a transaction (contribution) with :
i. hash(A) → used to vote on an answer;
ii. hash(r) → used as a public disposable personal identifier;
iii. hash(A+r) → used as proof of knowledge of A;
iv. commitment fund (with a minimum value) → incentive to only commit good results (see later). A higher commitment fund increases the Cr (cf Sarmenta, L.F.) and thus increases the potential returns (see later);
v. A tamper-proof timestamp → Used by the worker to prove its contribution and claim its reward.
With each new vote (contribution) by the workers, the scheduler checks if an answer (hash(A)) achieves the expected likelihood threshold using Sarmenta’s voting.
a. If we do not have a consensus, the scheduler will ask more nodes to compute the same task (dynamic replication) and contribute to the consensus → go back to 3;
b. If we have a consensus continue to 6.
An answer has been selected. The scheduler can now:
a. Publish the elected hash(A). At this point no new contribution is possible.
b. Ask the winning workers for A and r. Having a value of r which matched a correct transaction dating from before the election result is a proof of contribution. At this point A can be published by any worker. The value for r shows that a worker knew the answer they voted for before the results of the election. That way they cannot claim a contribution by just submitting a transaction with the hash(A) published by other voters.
c. Check the correctness of each worker contribution.
d. Put the deposit fund (stake) of all workers who voted for another answer in the reward kitty.
e. Distribute the reward kitty (users payment + deposit fund from wrong workers) among the winning workers proportionally to their contribution (Cr value computed from the reputation and the funds committed to the vote). The scheduler may take a commission for its work.
f. Increase the reputation of winners, decrease (reset) the reputation of losers.
g. Send the, now validated, answer to the user.

Equations used by Sarmenta to compute the credibility of a result from the credibility of the voters.
Trust level, worker pools, and billing policy

Sarmenta’s voting helps to achieve the given level of confidence using worker reputation and dynamic replication. This confidence level is defined by a value ε which describes the acceptable error margin. Results should only be returned if a confidence level higher than 1-ε is achieved. This value is a balance between cost and trust. A lower ε means more confidence in the result, but also requires more reputation/contributions to achieve consensus, and therefore more work to be performed. While this value could be defined by the user for each task, they might not know how to set it and it might cause billing issues.

We believe this value should be fixed for a worker pool. Therefore the billing policy could be defined for a worker pool depending on the performance of the workers (speed) and the ε value used by this worker pool scheduler (level of confidence). The user would then be free to choose between worker pools. Some worker pools might only contain large nodes running technology like Intel SGX to achieve fast result with low replication. Other worker pools could contain (slower) desktop computers and have their consensus settings adapted to this context.

With consensus managed by the scheduler and financial opportunities for late voters provided by the security deposit of opposing voters, the users should not worry about anything. Users pay for a task to be executed on a pool of worker, regardless of the number of workers that end up involved in the consensus. If consensus is fast and easy the payment of the user is enough to retribute the few workers who took part in the vote. If the consensus is hard and requires a lot of contributions, the workers are retributed using the security deposit of losing voters. This gives the workers a financial incentive to contribute to a consensus with many voters without requiring the user to pay more.

In the current version of this work, the protocol is such as the user has no part in the consensus. Payments are done when submitting the task and no stake is required. Results are public and guaranteed by the consensus. Users can therefore not discuss a result.
Assumptions and agents incentives

We believe the protocol described previously to be secure providing a few assumptions are met :

The first strong assumption is the ability of workers to publish their transaction (contribution) in a public manner. The medium used to publish those contributions has to provide a secure way for anyone to verify that contribution have been done prior to the election results. This can simply be achieved using current blockchain technology such as ethereum smart contracts. Still, that should not prevent us from considering other approaches like DHT (distributed hash tables).
The second assumption is that the voting algorithm will, in fact, give good results. This assumption is equivalent to saying that 51% of the reputation (of a worker pool) is not controlled by a single malicious user. We believe this is not a flaw of the protocol for two reasons:
a. All voting based systems, including the Nakamoto protocol, are subject to such attacks. This flaw is not in the design of the protocol.
b. There are strong (financial) penalties for bad actions on the platform and spot checking can be enforced to give more power to the scheduler and help them deal with bad actors. It is a matter of balance between the scheduler and the workers to enable spot-checking or not. We can imagine multiple worker pools, run by different independent schedulers which specific policy. Ultimately those pools could compete to attract the users (with elements such as the achieved quality of results and pricing).

Finally, we believe that both scheduler and workers will be inclined to work correctly in order to provide a good service to the users and benefit from the iExec ecosystem. Having 51% of the reputation controlled by actors wanting to do things right and benefit from it should not be an issue.

Incentives for the different agents are as follows

Users: They are requesting work to be done, and money in a healthy system would only come from them. User incentive to use the platform is to obtain good results for a low price. This will lead them to create a competition between worker pools. Their ability to chose or boycott worker pools create an incentive for workers and schedulers to work together in order to achieve the best service possible and attract users.
Workers: Their incentive is to gain as much money as possible for their work. To maximize their gain, they should maximize their contribution. Contribution can be obtained by having a good history (reputation) and/or by committing more funds when submitting a contribution. Giving bad results would make them lose both funds and reputation, which they should avoid at all cost.
a. New actors, with no history, start with a low reputation, meaning they will weigh less in the vote. Their chance to overtake a vote against trusted workers is small, and it would be a waste of fund from an attacker.
b. An old actor with a good history can win a lot by using their reputation to perform computations. As they are trusted, fewer contributions are needed to settle a vote and the reward kitty is therefore shared among fewer agents. On the other hand, by submitting bad results they risk losing all their reputation (and the money they committed with the contribution). Reputation does not guarantee them to win votes and spot-checking can help to detect bad contributors with high reputation.
Scheduler: Their incentive is to gain money by helping coordinate the platform. They make money through:
a. Commissions on all transactions;
b. Unclaimed rewards: if a worker doesn’t claim the reward after a contribution the corresponding fund would be kept by the scheduler.

In order to make money, the scheduler requires users to submit jobs and workers to register in its worker pool. This gives him the incentive to manage the worker pool correctly and grow strong.
Public schedulers for a fully decentralized platform

One of the key elements that could ultimately help a scheduler getting bigger and attracting more workers and users is to be open about its decisions. We believe that a scheduler could rely on a blockchain mechanism to orchestrate the protocol described above. In fact, this protocol is designed so that every message can, and should, be public. Security is achieved using cryptography. In particular, the use of a blockchain solves the issue of proving a contribution existence (presence on the blockchain) and validity (precedence to the vote results).

The main issue that still has to be solved is the worker designations. At step 3, the scheduler submits the task to specific workers. This is important for two reasons:

We don’t want workers to race. This would favor fast nodes and one could attack the voting system by coordinating many fast nodes to take over the vote before other nodes can contribute.

We don’t want malicious nodes to take over some votes. By randomly assigning workers to jobs we distribute malicious nodes amongst many votes where they would not be able to take over and where their best play is to provide good results and benefit from the platform working correctly.

Such a mechanism requires a source of randomness which any observers of the blockchain can agree on. This problem is beyond the scope of this post. Having such a source of entropy could help the scheduler designate workers using a random yet verifiable algorithm. The data required for verification would be public. The only change required to the protocol would be that a valid contribution from a worker would require a proof that the worker was designated by a scheduler.

Blockchains versus Traditional Databases (Hackernoon.com)

HN: Shaan Ray
Feb 10
Blockchains versus Traditional Databases
https://towardsdatascience.com/blockchains-versus-traditional-databases-e496d8584dc

To understand the difference between a blockchain and a traditional database, it is worth considering how each of these is designed and maintained.
Distributed nodes on a blockchain.

Traditional Databases

Traditional databases use client-server network architecture.

MD: There is no such thing as a traditional database. Databases existed way before there was a client-server orientation. But we’ll assume your client-server model for purposes of this critique.

HN: Here, a user (known as a client) can modify data, which is stored on a centralized server. Control of the database remains with a designated authority, which authenticates a client’s credentials before providing access to the database.

MD: Do you think the DNS (Domain Name Service) databases fit this model?

HN: Since this authority is responsible for administration of the database, if the security of the authority is compromised, the data can be altered, or even deleted.

MD: Can we replace “authority” with “protocol” or “process” and still assume we are talking about the same thing?

HN: Traditional Databases.

Blockchain Databases

Blockchain databases consist of several decentralized nodes. Each node participates in administration: all nodes verify new additions to the blockchain, and are capable of entering new data into the database. For an addition to be made to the blockchain, the majority of nodes must reach consensus. This consensus mechanism guarantees the security of the network, making it difficult to tamper with.

MD: Don’t “shared” and “distributed” databases have this trait? If not, how can they possibly work? How about “journaled” databases?

HN: In Bitcoin, consensus is reached by mining (solving complex hashing puzzles), while Ethereum seeks to use proof of stake as its consensus mechanism. To learn more about the difference between these two consensus mechanisms, read my earlier post.

MD: See: https://moneydelusions.com/wp/2018/02/13/what-is-proof-of-stake/

HN: Integrity and Transparency

A key property of blockchain technology, which distinguishes it from traditional database technology, is public verifiability, which is enabled by integrity and transparency.

MD: Actually “public” is a relative term. Corporations have databases that do this without blockchain technology for their own “public” that can be very large and use very distributed database technologies. And airline reservations do this through federation with franchised travel agents … all without blockchain.

HN: Integrity: every user can be sure that the data they are retrieving is uncorrupted and unaltered since the moment it was recorded

MD: Only if they are believers. The only users with anything close to such an assurance are the “developers” who supposedly know “all” the complicated mechanism involved. A distributed public transparent data organization, where “anyone” can see everything gives better assurance. This is the mechanism favored by a “proper” MOE process.

HN: Transparency: every user can verify how the blockchain has been appended over time

MD: By using “trusted” API’s. There’s no way they can know the API’s they’re using should be trusted. They’re too complicated … and they’re not open.

HN: A map of Dashcoin masternodes distributed across the world.

CRUD vs Read & Write Operations

In a traditional database, a client can perform four functions on data: Create, Read, Update, and Delete (collectively known as the CRUD commands).

MD: And if the database is distributed and journaled they can do this without the “delete” and “update” … a necessary requirement for “true” transparency.

HN: The blockchain is designed to be an append only structure. A user can only add more data, in the form of additional blocks.

MD: And this causes unnecessary and undesirable latency (which is killing Bitcoin right now). Ideally, every transaction journaled into the database is “related” by hash to every other “related” transaction. What is needed is a hash linking the journal entries … and that is very easy to provide by including an input and output hash into the hashing process itself. Most transactions in a so-called blockchain block have no relevance to each other. It makes more sense to keep “related” transaction chains together rather than “all” transaction chains. This reduces latency and synchronization problems enormously.

HN: All previous data is permanently stored and cannot be altered. Therefore, the only operations associated with blockchains are:
Read Operations: these query and retrieve data from the blockchain
Write Operations: these add more data onto the blockchain

MD: Which I have described above is not “novel” at all. We have had it with journaled distributed databases for a very long time now. We have many of the mechanisms in the various forms of RAID (Random Array of Inexpensive Drives).

HN: Validating and Writing

The blockchain allows for two functions: validation of a transaction, and writing of a new transaction. A transaction is an operation that changes the state of data that lives on the blockchain. While past entries on the blockchain must always remain the same, a new entry can change the state of the data in the past entries.

MD: This is deceptive. The data in past entries never changes. The state of the current data changes by adding transactions to previous states. And you can mitigate corruption of this process with an input and output hash linking them and included in the hash of the new transactions. No block is required. Just a journal entry with two hashes … an input hash and an output hash which includes the input hash. The input hash can be verified back in time as far as the user chooses to do so … and all users my choose to do so any time they want to prove the process integrity.

HN: For example, if the blockchain has recorded that my Bitcoin wallet has 1 million BTC, that figure is permanently stored in the blockchain.

MD: A “real” money process has no such thing as a “bitcoin” wallet. It only has to prove that something claiming to be a bitcoin is not a counterfeit. A huge flaw in the bitcoin process is the fractioning of bitcoins. This is not different in end result than the fractioning of Indian (native American) lands … where they have been fractioned so many times the parcels are too small to be of use and they cannot be practically re-aggregated.

HN: When I spend 200,000 BTC, that transaction is recorded onto the blockchain, bringing my balance to 800,000 BTC.

MD: A “real” and “proper” process cares nothing about the money once it is created by traders. It only cares that it cannot be counterfeited and that the promise creating it is delivered as promised. No money is in circulation without a relation (albeit not direct) to a trader’s “in-process” promise. For any given creation, money does not exist before the promise, nor after the promise is fulfilled. In the mean time it is the most common object in every simple barter exchange … because it works. And it works because it never changes value over time an space. The “process” or “protocol” guarantees it and cannot be manipulated.

HN: However, since the blockchain can only be appended, my pre-transaction balance of 1 million BTC also remains on the blockchain permanently, for those who care to look. This is why the blockchain is often referred to as an immutable and distributed ledger.

MD: With a “real” process, the money “used” by traders is totally anonymous and unaudited. It is usually just a ledger entry in a “trusted” account … trusted by the traders using it. It may temporarily be in use as a coin or currency and returned to a ledger entry. The coin and currency are just uncounterfeitable tokens that when converted to a ledger entry are placed in storage and have no value at all. “Creation” and “destruction” and “default” and “interest” collection are a different matter (than “usage”) entirely. The traders are known and singular. They aren’t groups. They aren’t aliases. Their locations are known and they can be visited. That’s what keeps the process honest and leads other traders to “use” the money. As an example, we all “create” money when we buy a house on time. The documents recording our “promise” are recorded by the county clerk and available for all to see. We know how to do this. We also know how to streamline it (by using things like credit bureaus and title companies). As we pay back our “mortgage” we return money and it is destroyed. We don’t return the same money we created … that’s just not necessary nor can it work in practice.

HN: Centralized vs. peer to peer.

In short, the difference is Decentralized Control

Decentralized control eliminates the risks of centralized control. Anybody with sufficient access to a centralized database can destroy or corrupt the data within it. Users are therefore reliant on the security infrastructure of the database administrator.

MD: And as I have illustrated, that is not the difference, because a distributed journaled database of any kind “must” have decentralized control. What is central and known is the “process” or “protocol”.

HN: Blockchain technology uses decentralized data storage to sidestep this issue, thereby building security into its very structure.

MD: The blockchain has nothing to do with centralization or decentralization. It has everything to do with mitigating “forging” and “counterfeiting” and it does it unnecessarily inefficiently, expensively, slowly, and in an unnecessarily complicated fashion.

HN: Though blockchain technology is well-suited to record certain kinds of information, traditional databases are better suited for other kinds of information. It is crucial for every organization to understand what it wants from a database, and gauge this against the strengths and vulnerabilities of each kind of database, before selecting one.

MD: A journaled database can just manage documents or links … or links to links … or links to links to links. That is irrelevant. What is relevant is transparency of what it is managing and who is interacting with it. That’s what journaling does.

What is “Proof of Stake”

HN: Hacker Noon
By Shaan Ray

What is “Proof of Stake”
https://hackernoon.com/what-is-proof-of-stake-8e0433018256

Oct 6, 2017

The proof of stake system is attracting a lot of attention these days, with Ethereum switching over to this system from the proof of work system.

MD:
The Bitcoin (i.e. blockchain) people claim it’s main asset is that there is no central authority. But there is certainly a central process or “switching over” wouldn’t be possible. The RFC process of the entire internet has shown us it is possible to have a universally accepted process … without cryptography and without block chains and without a central authority. The DNS (Domain Name System) is a distributed database protocol that has many attributes useful for a distributed database system with no central authority. And of course it has some serious issues.

HN: Proof of stake is an alternative process for transaction verification on a blockchain. It is increasing in popularity and being adopted by several cryptocurrencies. To understand proof of stake, it is important to have a basic idea of proof of work. As of this writing, the proof of work method is used by Bitcoin, Ethereum and most other major cryptocurrencies.

MD: At MD we know for “real” money you don’t need “proof” of anything. What you need is universal transparency to things. Those things are the “creation and delivery on time and space spanning promises made by traders.”

HN: Proof of work

Proof of work is a mining process in which a user installs a powerful computer or mining rig to solve complex mathematical puzzles (known as proof of work problems). Once several calculations are successfully performed for various transactions, the verified transactions are bundled together and stored on a new ‘block’ on a distributed ledger or public blockchain. Mining verifies the legitimacy of a transaction and creates new currency units
.
MD: Digging a hole and filling it right back in is work … totally useless work. A money system that relies on useless work is an open admission that the “money” itself has zero value. Rather it “represents” something of “perceived” value … and that perception must be universal. Thus, here we have open admission of a failure of the “proof of work” scheme.

HN: The work must be moderately difficult for the miner to perform, but easy for the network to check. Multiple miners on the network attempt to be the first to find a solution for the mathematical problem concerning the candidate block. The first miner to solve the problem announces their solution simultaneously to the entire network, in turn receiving the newly created cryptocurrency unit provided by the protocol as a reward.

MD: This is admission that this scheme is even more stupid than using precious metals as money (being proof of work). At least with precious metals all miners are creating something of “real” value. And when someone else gets there first, they don’t lose their work.

HN: As more computing power is added to the network and more coins are mined, the average number of calculations required to create a new block increases, thereby increasing the difficulty level for the miner to win a reward. In proof of work currencies, miners need to recover hardware and electricity costs. This creates downward pressure on the price of the cryptocurrency from newly generated coins, thus encouraging miners to keep improving the efficiency of their mining rigs and find cheaper sources of electricity.

MD: Another open admission of the absurdity of this process. We see the predictable today. So-called “miners” use exotic bots to “steal” computer cycles from internet users. They sneak onto government owned super computers. They also create faster machines that quickly obsolete existing machines thus wasting more “real” resources. It’s not unusual for brand new state of the art ASIC and FPGA based machines to pay themselves off in one to three months … and be totally obsolete in three to six months. In the meantime, they make so much noise they drive their owners out. But they do have an advantage. They use so much electricity, they can mask a hidden marijuana operation.

HN: Bitcoin is an example of a cryptocurrency that uses the proof of work system.

MD: There is no need for the “currency” to be encrypted. In fact, in a “real” money process, the traders, the process, and the terms must be in universal plain view … and unchangeable. This is easily accomplished with simple universal hashing protocols.

HN: Mining rigs in a bitcoin mining facility.

Proof of Stake

Unlike the proof of work system, in which the user validates transactions and creates new blocks by performing a certain amount of computational work, a proof of stake system requires the user to show ownership of a certain number of cryptocurrency units.

MD: In a “real” money system, new traders creating money don’t have to be existing large money changers. Here is open admission that the “proof of stake” system copies a myth from our existing flawed (rigged actually) Medium of Exchange (MOE) process.

HN: The creator of a new block is chosen in a pseudo-random way, depending on the user’s wealth, also defined as ‘stake’. In the proof of stake system, blocks are said to be ‘forged’ or ‘minted’, not mined. Users who validate transactions and create new blocks in this system are referred to as forgers.

MD: In any MOE system, counterfeiters are often “forgers”. Interesting choice of terms isn’t it. Presumably they’re using the “forge” metaphor where existing metal is hammered into different shapes. But there is also the “faking” form where signatures and whole documents are forged. Any MOE process must prevent this. In a “real” MOE process, it is the only leak possible and is mitigated by total transparency of the money creation and destruction activity.

HN: In most proof of stake cases, digital currency units are created at the launch of the currency and their number is fixed.

MD: Bad idea. This fixing of the number “guarantees” the process will be deflationary. In a “real” process, inflation (deflation) is perpetually zero.

HN: Therefore, rather than using cryptocurrency units as reward, the forgers receive transaction fees as rewards. In a few cases, new currency units can be created by inflating the coin supply, and forgers can be rewarded with new currency units created as rewards, rather than transaction fees.

MD: What are these cases? If this can be done, how can they say the number is fixed? Also notice that their process seems to “require” that the creators of the money be “rewarded”. This is also taken from our flawed (corrupt) existing system. They implement a process of elites with power and privilege and ability to demand tribute … just like our current flawed system.

HN: In order to validate transactions and create blocks, a forger must first put their own coins at ‘stake’. Think of this as their holdings being held in an escrow account: if they validate a fraudulent transaction, they lose their holdings, as well as their rights to participate as a forger in the future.

MD: So they take their fake wealth and risk it … like putting it up as collateral. This is also from our existing flawed system. The capitalists take just two years to reclaim their stake (they collect 40%/year interest which doubles in two years). After that, they are forever playing with OPM (Other People’s Money) and risk nothing themselves at all.  A “proper” MOE process uses perfect “transparency” and “interest collection according to propensity to default” to keep the players honest and provide negative feedback for stability. In a proper process, these deadbeats can pay back their defaults and return to good standing.

HN: Once the forger puts their stake up, they can partake in the forging process, and because they have staked their own money, they are in theory now incentivized to validate the right transactions.

MD: Myth in the open. Putting up a stake does not mean putting up their own money. They’ve gotten back their own money through deflation very quickly.

HN: This system does not provide a way to handle the initial distribution of coins at the founding phase of the cryptocurrency, so cryptocurrencies which use this system either begin with an ICO and sell their pre-mined coins, or begin with the proof of work system, and switch over to the proof of stake system later.

MD: Now they’re borrowing from the corporate model where a group can create a vision, sell a little less than half to suckers (in the form of stocks), hype the vision, pull out their stake but leave themselves in control, and bingo … you have another form of elite gaming of the system. And again, how do they switch systems later.?This sounds like they’re destroying the money and then using it to buy gold. Our current MOE manipulators call this the “business cycle”. It’s their “farming operation”.

HN: Cyptocurrencies that currently run the proof of stake system are BlackCoin, Lisk, Nxt and Peercoin, among others.
Proof of work mining versus proof of stake forging.
Block Selection Methods
For a proof of stake method to work effectively, there needs to be a way to select which user gets to forge the next valid block in the blockchain.

MD: There must be privileged users. In our present corrupt system we call them bankers (and sometimes governments) and they get 10x leverage over the rest of us.

HN: Selecting the forger by the size of their account balance alone would result in a permanent advantage for the richer forgers who decide to stake more of their cryptocurrency units. To counter this problem, several unique methods of selection have been created. The most popular of these methods are the ‘Randomized Block Selection’ and the ‘Coin Age Based Selection’ methods.

MD: This is characteristic of processes invented by very smart people with very good memories. Rather than seeing the rudimentary flaws in what they are doing, scrapping it, and starting over with a better concept, they run into obvious flaws we less smart people see immediately, and come up with more and more complicated workarounds … and the process soon stops because no one understands it.

HN: Randomized block selection

In the randomized block selection method of selection, a formula which looks for the user with the combination of the lowest hash value and the size of their stake, is used to select the next forger. Since the size of the stakes are public, each node is usually able to predict which user will be selected to forge the next block. Nxt and BlackCoin are two proof of work cryptocurrencies that use the randomized block selection method.

MD: This looks like an open invitation to corruption and manipulation. And when you have a “randomizing” process, the pseudo-random number generator must be open and fixed. Everyone must use the same process. The same random seed must yield the same next random number. This is problematic for obvious reasons.

HN: Coin Age based selection

The coin age based system selects the next forger based on the ‘coin age’ of the stake the potential forger has put up. Coin age is calculated by multiplying the number of days the cryptocurrency coins have been held as stake by the number of coins that are being staked.

MD: Look how long Bitcoin ran before people started to pay attention  … it was several years. During that time they were giving coins away just to make it look like there was activity. Mining costs were trivial and the supply grew very quickly with the demand not growing at all. Now that it is starting to catch on (the hook is getting set), these early worthless “coins” own the process. What’s not to like about that? Duh? A Ponzi scheme with no Ponzi.

HN: Coins must have been held for a minimum of 30 days before they can compete for a block.

MD: This is building a time constant into the process … and is open for manipulation. A proper MOE process has no openings for manipulation at all.

HN: Users who have staked older and larger sets of coins have a greater chance of being assigned to forge the next block. Once a user has forged a block, their coin age is reset to zero and then they must wait at least 30 days again before they can sign another block
.
MD: How is this done? Does this mean the “timestamps” for the coins … used for determining age … can be manipulated too? What’s not to like?

HN: The user is assigned to forge the next block within a maximum period of 90 days, this prevents users with very old and large stakes from dominating the blockchain thereby making the network more secure.

MD: Another knob to manipulate … another opening for fraud and corruption … by regulators.

HN: Because a forger’s chance of success goes up the longer they fail to create a block, forgers can expect to create blocks more regularly. This mechanism promotes a healthy, decentralized forging community.

MD: This is classic complication delivering fairness. Hint people: Fairness is not complicated. But it does go against something that is current flawed wisdom … wisdom that says centralization is good. This says centralization is “not” good. So let’s apply that wisdom … iterative secession. BTW: With a “proper” MOE process, there can be any number of independent processes as long as they all deliver the same transparency and follow the same simple rule (DEFAULT perpetually equals INTEREST collected). No system can be better in any way so all competing systems are equal in performance to the traders using it.

HN: Peercoin is a proof-of-stake system based cryptocurrency which uses the coin age selection process combined with the randomized selection method. Peercoin’s developers claim that this makes a malicious attack on the network more difficult, since purchasing more than half of the coins is likely costlier than acquiring 51% of proof-of-work hashing power.

MD: Notice how all these “complicated” processes have “developers” making “claims” and solving open flaws in other complicated processes … such flaws being prone to “malicious attacks” … opened by their complexity.

HN: Most proof of stake coins that pay a reward in the form of a transaction fee for verifying transactions and creating new blocks, set a target interest rate which users can expect to earn from staking their coins.

MD: Another knob (interest) that a proper MOE process knows should never exist but rather should be an automatic negative feedback mechanism with no opening for intervention. A proper MOE process has no monetary policy. Rather, it precludes it totally.

HN: In the case of cryptocurrencies where forgers create new coins, this rate also becomes the maximum rate at which the currency supply is inflated over time.

MD: “Maximum rate”? For inflation? Over time? What a joke. They clearly have no understanding of what money is. Hint: Don’t try to create a money process without know what money is. Hint: Money is “an in-process promise to complete a trade over time and space and is “always” and only created by traders”.

HN: Proof of stake systems are more environmentally friendly and efficient, as the electricity and hardware costs are much lower than the costs associated with mining in a proof of work system.

MD: A “proper” MOE process is “perfectly” environmentally friendly and efficient. It costs nothing to create and destroy money. There is no “profit” to be made in the process anywhere. The total cost is always borne by the traders and is trivial to the size of their trades. Ideally, it is absorbed as an implicit default and is paid through interest collections on deadbeat traders. Responsible traders pay nothing at all.

HN: A greater number of people are encouraged to run nodes and get involved because it is easy and affordable to participate in this system; this results in more decentralization.

MD: In a proper MOE process, the only incentive to become a node is to decrease latency … and that is a huge incentive. It’s like a communication system with no backbone. Rather it is a mesh system where all nodes make up the connection path. This would be an obvious improvement over the current (easily manipulated) internet process. Can you say “network neutrality?”

HN: This is only a general guide to the proof of stake system. Each cryptocurrency issuer will most likely customize this system with a unique set of rules and provisions of their own as they issue their currency or switch over from the proof of work system.

MD: But the different monies  themselves must be indistinguishable to the “users” (as opposed to the “creators”) of the money. And they must be non-counterfeit able.

HN: Additionally, this is a rapidly evolving industry, and apart from proof of work and proof of stake, there are currently several other systems and methodologies of transaction verification and block creation being tested and experimented with.

MD: All equally complicated and demented I’m sure.

The pot calls the kettle black again

MD: You can’t get so-called crypto currencies right if you don’t know what money is. Money is obviously and provably “an in-process promise to complete a trade over time and space.” Money is always, and “only” created by traders making such promises. Money is destroyed as those traders deliver as promised. And if they fail to deliver as promised the resulting DEFAULT is immediately reclaimed by INTEREST collections from new money-creating traders with a like propensity to default.

Knowing this, let’s parse this article and expose this writer’s delusions.

The “Experts” Are Getting Crypto All Wrong

The crypto-token ether sure seems like a currency. But ether isn’t a currency. Because most people who trade it don’t really understand or care about its true purpose, the price of ether has bubbled and frothed like bitcoin in recent weeks.

Back on January 1, I made the following prediction:

Bitcoin suffers a big correction after swinging wildly in the last 10 days of December. … Sometime in the next three months we will see a sell-off as latecomers panic and sell. Long-term investors will remain in bitcoin and it will creep back up, but will not revisit its December highs.

MD:  Admission of failure. “Real” money doesn’t have big corrections and swings.

I nailed it.

Bitcoin peaked about a month ago, on December 17, at a high of nearly $20,000. As I write, the cryptocurrency is under $11,000 … a loss of about 45%. That’s more than $150 billion in lost market cap.

The crypto-token ether sure seems like a currency. But ether isn’t a currency. Because most people who trade it don’t really understand or care about its true purpose, the price of ether has bubbled and frothed like bitcoin in recent weeks.Cue much hand-wringing and gnashing of teeth in the crypto-commentariat. It’s neck-and-neck, but I think the “I-told-you-so” crowd has the edge over the “excuse-makers.”

Here’s the thing: Unless you just lost your shirt on bitcoin, this doesn’t matter at all. And chances are, the “experts” you may see in the press aren’t telling you why.

In fact, bitcoin’s crash is wonderful … because it means we can all just stop thinking about cryptocurrencies altogether.

The Death of Bitcoin…

In a year or so, people won’t be talking about bitcoin in the line at the grocery store or on the bus, as they are now. Here’s why.

Bitcoin is the product of justified frustration. Its designer explicitly said the cryptocurrency was a reaction to government abuse of fiat currencies like the dollar or euro. It was supposed to provide an independent, peer-to-peer payment system based on a virtual currency that couldn’t be debased, since there was a finite number of them.

MD: Delusion admission: When you’re talking about “real” money, there is a perpetual perfect balance between supply and demand for the money itself. And of course both are finite and both vary in lock step.

That dream has long since been jettisoned in favor of raw speculation. Ironically, most people care about bitcoin because it seems like an easy way to get more fiat currency! They don’t own it because they want to buy pizzas or gas with it.

MD: Common slur from those deluded about money. They call it “fiat” currency. Since all money represents a promise, and all promises are fiat, all money is fiat

Besides being a terrible way to transact electronically — it’s agonizingly slow — bitcoin’s success as a speculative play has made it useless as a currency. Why would anyone spend it if it’s appreciating so fast? Who would accept one when it’s depreciating rapidly?

MD: Bitcoin’s major flaw in this regard is its insistence on keeping track of every single trade (and thus fractioning) of the bitcoins once created. This is totally unnecessary. All you must keep track of is the creation of “real” money by traders and the destruction of it as they deliver. You must keep track of defaults and meet them immediately with like interest collections. Beyond that, the “real” money trades totally anonymously.

Bitcoin is also a major source of pollution. It takes 351 kilowatt-hours of electricity just to process one transaction — which also releases 172 kilograms of carbon dioxide into the atmosphere. That’s enough to power one U.S. household for a year. The energy consumed by all bitcoin mining to date could power almost 4 million U.S. households for a year.

MD: Tying the Bitcoin nonsense to the global warming nonsense is truly humorous. That not-withstanding, a “real” money process consumes virtually zero energy. The trees have to look elsewhere for their carbon dioxide.

Paradoxically, bitcoin’s success as an old-fashioned speculative play — not its envisaged libertarian uses — has attracted government crackdown.

MD: Governments are helpless (in a competitive sense) in defending themselves against a “real” money process. Once people see it, the nonsense of government itself is quickly exposed and governments wilt on the vine … a bloodless war ending quickly

China, South Korea, Germany, Switzerland and France have implemented, or are considering, bans or limitations on bitcoin trading. Several intergovernmental organizations have called for concerted action to rein in the obvious bubble. The U.S. Securities and Exchange Commission, which once seemed likely to approve bitcoin-based financial derivatives, now seems hesitant.

And according to Investing.com: “The European Union is implementing stricter rules to prevent money laundering and terrorism financing on virtual currency platforms. It’s also looking into limits on cryptocurrency trading.”

We may see a functional, widely accepted cryptocurrency someday, but it won’t be bitcoin.

MD: All will fail just as bitcoin will fail. Why? Because none of them behave as real money. Nothing can out-compete real money. At best, it can only tie.

…But a Boost for Cryptoassets

Good. Getting over bitcoin allows us to see where the real value of cryptoassets lies. Here’s how.

To use the New York subway system, you need tokens. You can’t use them to buy anything else … although you could sell them to someone who wanted to use the subway more than you.

In fact, if subway tokens were in limited supply, a lively market for them might spring up. They might even trade for a lot more than they originally cost. It all depends on how much people want to use the subway.

MD: Subway tokens are close to “real” money. They are created by those intending to travel. They are destroyed as they complete their trip. In the process, there is perfect balance between supply and demand for them. They fail as real money because they can only be used in one very narrow marketplace … the subway.

That, in a nutshell, is the scenario for the most promising “cryptocurrencies” other than bitcoin. They’re not money, they’re tokens — “crypto-tokens,” if you will. They aren’t used as general currency. They are only good within the platform for which they were designed.

MD: With real money, there is no distinction between tokens, coins, currency, or ledger entries. The money can move from one form to the other with perfect freedom. Just like a baton plays no role in running a race, the tokens themselves play no role in actual trading. They are simply a score keeping mechanism.

If those platforms deliver valuable services, people will want those crypto-tokens, and that will determine their price. In other words, crypto-tokens will have value to the extent that people value the things you can get for them from their associated platform.

MD: Nonsense. The proper unit of measure of real money would be the HUL (Hour of Unskilled Labor). It never changes its value over time and space. It always trades for the same size hole in the ground. So does real money.

That will make them real assets, with intrinsic value — because they can be used to obtain something that people value. That means you can reliably expect a stream of revenue or services from owning such crypto-tokens. Critically, you can measure that stream of future returns against the price of the crypto-token, just as we do when we calculate the price/earnings ratio (P/E) of a stock.

MD: Tokens and currency are real assets with “recorded” value, not intrinsic value. If I have currency and I exchange it for a ledger entry, that currency (which has never had intrinsic value but does have trading value) can be burned and there is no change in value anywhere. Money in the form of currency or tokens is only money when it is involved in trade. And if someone puts them under a mattress, it “is” involved in trade. However, if the process exchanges it for a ledger entry and the currency or token is placed on a pallet, in  that store it has zero value … just like a baton sitting in a locker before or after a race plays no role in a race.

Bitcoin, by contrast, has no intrinsic value. It only has a price — the price set by supply and demand. It can’t produce future streams of revenue, and you can’t measure anything like a P/E ratio for it.

MD: This is a major major delusion. Money has a unit of measure (ideally the HUL – Hour of Unskilled Labor) but no price. This is because the supply/demand ratio is guaranteed to be perpetually unity.

One day it will be worthless because it doesn’t get you anything real.

MD: Real money will always have value as long as “responsible” traders exist. Responsible traders don’t default. They use money as it should be used … as an in-process promise to complete a trade over time and space. And the vast majority of us are responsible traders. There are really very few deadbeats and the proper money process quickly makes them uncompetitive traders and they are naturally ostracized from the marketplace.

(For more of my thoughts on the differences between cryptocurrencies and crypto-tokens, click on the video below.)

Ether and Other Cryptoassets Are the Future

The crypto-token ether sure seems like a currency. It’s traded on cryptocurrency exchanges under the code ETH. Its symbol is the Greek uppercase Xi character (Ξ). It’s mined in a similar (but less energy-intensive) process to bitcoin.

MD: Oh really? What is the distinction? What is the difference?

But ether isn’t a currency. Its designers describe it as “a fuel for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations.”

MD: With real money a process is needed to keep track of things. But that cost is negligible compared to the cost of the things being tracked.

Ether tokens get you access to one of the world’s most sophisticated distributed computational networks. It’s so promising that big companies are falling all over each other to develop practical, real-world uses for it.

Because most people who trade it don’t really understand or care about its true purpose, the price of ether has bubbled and frothed like bitcoin in recent weeks.

MD: This isn’t because of misunderstanding. It’s because there is not guaranteed perpetual balance between supply and demand for the stuff.

But eventually, ether will revert to a stable price based on the demand for the computational services it can “buy” for people. That price will represent real value that can be priced into the future. There’ll be a futures market for it, and exchange-traded funds (ETFs), because everyone will have a way to assess its underlying value over time. Just as we do with stocks.

MD: Does this suggest it somehow maintains perfect supply/demand balance for the money itself? How does it do that???

What will that value be? I have no idea. But I know it will be a lot more than bitcoin.

MD: Proving you are deluded. If you knew what money was and you knew what you speak of to be money, you know perpetually what its value will “always” be.

My advice: Get rid of your bitcoin, and buy ether at the next dip.

MD: This reminds me of the quip “you have to love standards … there are so many to choose from”.

Kind regards,

I'm going to stick my neck out and make a few calls for Wall Street 2018 based on evidence, logic … and history. And we have all year to see how I do…

Ted Bauman

Editor, The Bauman Letter

Can Central Banks Keep Control of Interest Rates?

MD: I haven’t posted for some time but this article was too pertinent, silly, and misguided to pass up (revealing total cluelessness … and/or corruption … of our current Medium of Exchange (MOE) process.) The article is from the great see-er of all things money oriented … the Wall Street Journal. This is the link to the article which is likely to go away in a short period of time.

Can Central Banks Keep Control of Interest Rates?

 

MD: As usual, the title itself exposes the total lack of understanding of what money is. As anyone knows who has been paying attention here, interest rates are “not” controlled by anyone or anything in a “proper” MOE process. INTEREST collections are perpetually and immediately made to meet DEFAULTs experienced … and if that is under anyone’s control, it is the trader defaulting.

Inflation-adjusted—or ‘real’—rates remain low, lending support to booming , prices for stocks, property and other assets. But some worry that could vanish sooner than markets realize

MD: Actually, what we’re seeing here is the banks farming operation in action. They’ve loaded up the wagon with energized traders’ expectations and resulting risk taking behavior, and they will soon pull the rug out from under them.

By Jon Sindreu
Dec. 26, 2017 7:47 a.m. ET

Investors are elated by a booming global economy and the promise of central banks to tighten monetary policy only gradually. But a question haunts them: Will interest rates develop a mind of their own?

MD: “Will interest rates develop a mind of their own?” Can a stupider question be posed? Interest “rates” are a function of two things. In the numerator, they are a function of continuously accumulated DEFAULT experience. In the denominator they are a function of what someone chooses that denominator to be.  In a “proper” MOE process, the denominator would be related to cumulative defaults for each money-creating class, according to their actuarial propensity to DEFAULT.

While central banks set short-term rates—the 1.5% rate that the Federal Reserve publishes on its website—economists disagree about how much control they have over long-term borrowing costs. These are gauged by government-bond yields, especially those with returns tied to inflation.

MD: These so-called short-term rates are arbitrarily set by our current system. In general, they are about what their target rate of INFLATION is. They target 2%, have historically delivered 4%, while the proper value of inflation is 0%.

Low inflation-indexed—or “real”—rates push money into risky assets, because investors get little extra purchasing power for holding safer securities. According to a new report by BlackRock Inc., the world’s biggest asset manager, subdued real rates have been 2017’s main driver of returns in global infrastructure debt and investment-grade corporate debt. They also boost gold and real estate, analysts say, which don’t pay coupons but don’t lose value when inflation rises.

MD: “Subdued real rates?” What more direct evidence could their be of the banks farming operation? Do these so-called “asset managers” just accept this? Or are they actually part of the farming operation themselves?  “Main driver of returns?” In a “proper” money process, supply/demand ratios for each product and service are the main … and only real … driver of returns. If the ratio is high, the return will be low and vice-versa. Money has nothing to do with it because its perpetual supply/demand ratio is 1.000.

Many markets could climb off record highs if real rates rise. But it is hard to forecast, said Kevin Gardiner, global investment strategist at Rothschild Wealth Management, because “nobody knows exactly what sets interest rates.”

MD: “Climb off?” … don’t they mean “fall off?”.  Interest rates in the current process only benefit the money changers. With their special privilege, a 1% increase in interest rates yields them a 10% increase in return. In a proper process with perpetual 0% inflation, their privilege becomes no privilege at all … ten times zero is zero (10x 0.0000 = 0.0000)

Real rates have often moved in lockstep with central-bank policy—but not always. In the 1970s, runaway inflation pushed real rates down even as the Fed and other central banks increased nominal rates.

MD: With a “proper” process, the only “policy” is that DEFAULTs are immediately met with INTEREST collections of equal amount. That policy never ever changes. A “proper” process cannot be farmed.

Yields on 10-year inflation-linked Treasurys are currently below 0.5%. Before the 2008 financial crisis, they hovered at around 2%. After the Fed unleashed unseen amounts of monetary stimulus, they hit a record-low of minus 0.87% in 2013. Many analysts and investors see it as a sign that policy makers have strong control over real rates.

MD: With a “proper” process there is no such thing as “monetary stimulus”. Money is in perpetual free supply. That supply is perpetually identical to demand for the money yielding perpetual zero inflation.

“We are overweight global indexed bonds,” said Paul Rayner, head of government bonds at Royal London Asset Management. “We’ve done a lot of analysis on this, and ultimately the biggest driver of government bond yields still remains central bank activity, even for [inflation-linked bonds].”

MD: With a proper MOE process, Rayner is out of work. There is no “lot of analysis” to be done. Their worshiped relation  ((1+”i”)^”n”) … they call it the time value of money … is neutered when “i” is perpetually zero.

With a “proper” MOE process, there are no “government bonds”. Governments are simply no different than any other trader. If they are responsible, they create money without any interest load. If they are deadbeats, they pay interest accordingly. And since governments “never” return the money they create (they just roll their trading promises over … which is default), the interest paid by them perpetually equals the money they wish to create. In other words, they “can’t” create money.

But classic economic theory says that central banks can only influence rates at first, as people ultimately see through their meddling. So unless officials set policy to reflect the economy’s long-term economic trends—which is how the Fed’s Janet Yellen and Mark Carney at the Bank of England have justified keeping rates low in recent years—inflation or deflation will follow.

MD: “Classic economic theory?” You mean “classic economic stupidity!” don’t you? People never see through banks meddling. It is the farming operation and it has worked as long as the governments they institute protect the operation. Again, this is an open realization that banks have an enormously profitable farming operation. A competing “proper” MOE process would make that farming operation experience perpetual crop failure and/or market opposition.

According to this view, rates are so low because people are saving a lot and these saved funds can be lent out and used to invest, a copious supply that pulls down the cost of borrowing.

MD: Stupid is as stupid does … or as stupid has been duped to think. In our current process there is the illusion that savings play a role. And the 10x leverage privilege retail banks enjoy is directly affected by that. But in the final analysis, it is the Rothschilds that control everything through their control of all but two central banks in the entire world … and of the Bank of International Settlements. They do whatever they please. With a competing process they would be out of business almost instantaneously, never to raise their ugly head and influence again … ever!

Some money managers and analysts now warn that the tide is about to shift, whether central banks keep policy easy or not. By looking at the share of the population aged between 35 and 64—when people save the most—research firm Gavekal predicts real rates will soon rise as people retire and spend their life savings, eroding gains in stock markets.

MD: Boy … this guy is deluded beyond repair I think. The Rothschilds are in total control. The theoretical mechanisms the writer thinks are at work have been propagandized into his head. Yes, a degree in economics is just buying self imposed propaganda. With a proper MOE process, there are no economics … just trading decisions made on a perfectly static level playing field … i.e. buying and selling and producing decisions.

It “could happen tomorrow or 10 years from now, but I’m not counting on the latter,” said Gavekal analyst Will Denyer.

J.P. Morgan Asset Management argues that aging is already starting to push rates higher, meaning that 10-year real yields will be 0.75 percentage point higher over the next 10 years.

Other investors have a different worry: They fear that yields will stay low even if central banks try to tighten policy because they are concerned a recession may be coming. This year, the Fed has nudged up rates three times and yields on long-term government bonds—both nominal and inflation-linked debt—have stayed unchanged or declined, echoing similar issues that then Fed Chairman Alan Greenspan had in 2005.

MD: Translation: “a recession may be coming” means “harvest time may be coming”. It’s pretty easy to see when it’s time to harvest. You look at how ripe the crop is … i.e. how thoroughly the traders have been sucked in. The farming analogy is near perfect.

Indeed, the yield curve—the yield gap between short and long-term Treasurys—is now at its flattest since 2007, and many investors underscore that, in the past, this has often preceded an economic slowdown in the U.S.

“Unless the evidence is very compelling that’s a false signal, I think the market’s going to be nervous,” said David Riley, head of credit strategy at BlueBay Asset Management, who is now investing more cautiously.

MD: Booga booga … buy gold advises the great see-er.

Still, investors may read too much into what yields say about the economy, said the Bank for International Settlements, a consortium of central banks. In new research looking at 18 countries since 1870, the BIS found no clear link between rates and factors like demographics and productivity—it is mostly central-bank policy that matters.

MD: “A consortium of central banks?”…  Rothschield’s holding company you mean?

Does this mean investors can rest easy because rates won’t creep up on them? Not so fast, said Claudio Borio, head of the monetary and economic department at the BIS, because officials may still raise them to contain market optimism. Central banks in Canada, Sweden, Norway and Thailand are thinking along these lines, analysts said.

MD: “Not so fast” says Rothschild’s weather man. We can do anything to the crop we choose to do … when we choose to do it.

If central banks control real rates, then it is inflation that has a life of its own—it isn’t just a reaction to officials deviating from economic trends—and it could explain why central bankers have failed to stoke it for years. So officials might as well raise rates to quash bubbles instead of “fine-tuning inflation so much,” Mr. Borio said.

MD: Anyone who has followed MoneyDelusions analysis of these ridiculous articles has to be holding their sides in pain from laughing too hard.

Still, Isabelle Mateos y Lago, global macro strategist at BlackRock Investment Institute, thinks investors don’t have to worry about this yet.

“The conversation is moving this way, but I don’t think central bankers have a fully articulated view,” she said.

MD: “Central banks don’t have a fully articulated view?” Dream on. They do control the weather of this farming operation you know. And they control the farmers ability to buy seed and tractors and land. But having dropped the obligatory number of names, the write concludes his nonsense for now.

Write to Jon Sindreu at jon.sindreu@wsj.com
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MD: Please do write Jon as he begs … and send him a link to this exposure of his Money Delusion.

Dollar Cost Averaging (Quora question)

“How can I evaluate returns from a dollar cost averaging (automatic investment) into a leveraged fund (e.g. SSO) over a longer term (10+yrs)?”

(Link to Quora question and answer)

Early in my career I wrote an application for “financial criminals” to move people away from “whole life” insurance to “term” insurance, and investing the premium saved by dollar-cost-averaging into their mutual fund. The “illustrations” I produced for them were dramatic. Basically, the “investment income” goes to you and the mutual fund managers and not to the insurance company.

Well, to do this, the “law” demanded lots of small print. But it also demanded I show the cash flows precisely as if they were done into the mutual fund historically. That meant going back the 30 years (the planning window) and saying “if the next 30 years are exactly the same, this is where you would be”.

But it was really pitching “if you’d done this 30 years ago with our mutual fund, this is where you’d be” … and it was dramatically better than what the whole life scenario delivered (unless you used a poorly performing mutual fund … or had zero inflation).

This was 30+ years ago. Back then you had “whole life” insurance salesmen … with a comfortable annual commission stream. It tipped their cart. These insurance salesmen now call themselves “financial analysts”. Follow the money.

None of this would work if we had a “proper” Medium of Exchange (MOE) process … that “guaranteed” zero inflation … all the time and everywhere. If we had that, you could put your surplus money under a rock and do better than either alternative.

Leveraging doesn’t work with zero inflation (i.e. (1+i)^n is always “1.000” for all “n” when “i” is perpetually zero). So don’t expect a “proper” MOE process to be adopted any time soon. It puts the money changers and the governments they institute out of business.

(see http://MoneyDelusions.com (http://MoneyDelusions.com))

Todd Marshall
Plantersville, TX

Are Cryptocurrencies Inflationary? Are they “real” money?

Are Cryptocurrencies Inflationary?

 MD: If you understand money, you know the proper process to enable it “guarantees” perpetual perfect supply/demand balance for the money itself. Thus, it is neither inflationary nor deflationary.

The Bitcoin process thinks (like the gold bugs think) that money needs to be rare to be viable. This is nonsense of course. But Bitcoin is enormously “deflationary” as a consequence of its process. Supply is severely limited and ultimately capped. Demand is exploding because of this (because it is deflationary) … not because Bitcoin is viable money.

Nobody in their right mind owning bitcoins would ever part with them (unless the inevitable collapse was in progress). That’s the nature of a “deflationary” asset. The only appeal to bitcoins is their anonymity. And thus it is illicit trade that is really finding bitcoin useful. Everyone else holding them is gambling … plain and simple.

I have never tried to really understand the underlying process of bitcoin mining. The reason for this is the process is bogus on its face. It has no way of matching supply and demand. If this is a characteristic of all cryptocurrencies (and block chain mechanisms) in general, then all are not viable. However, I see no reason a block chain concept cannot be devised that creates new transparent, unchangeable blocks at zero cost. Then the proper MOE process uses the block chain to deliver the necessary “transparency” attribute of a proper MOE process.

As always, I’ll now intersperse comments as appropriate to highlight these obvious principles and violations thereof.

by John Rubino

There’s a debate raging over what, exactly, bitcoin and the thousand or so other cryptocurrencies actually are. Some heavy-hitters are weighing in with strong, if not always coherent opinions:

MD: Oh really? What is being debated? That they are money?

Jamie Dimon calls bitcoin a ‘fraud’
JPMorgan Chase CEO Jamie Dimon did not mince words when asked about the popularity of virtual currency bitcoin.

Dimon said at an investment conference that the digital currency was a “fraud” and that his firm would fire anyone at the bank that traded it “in a second.” Dimon said he supported blockchain technology for tracking payments but that trading bitcoin itself was against the bank’s rules. He added that bitcoin was “stupid” and “far too dangerous.”

————————

Peter Schiff: Even at $4,000 bitcoin is still a bubble
One of the best-known among the bears, investor Peter Schiff, is now making his case in even stronger terms for why bitcoin has advanced ever farther into bubble territory.

MD: It went into bubble territory right out of the box.

Schiff, who predicted the 2008 mortgage crisis, famously referred to bitcoin as digital fool’s gold and compared the cryptocurrency to the infamous bubble in Beanie Babies.

Moreover, the recent run-up in bitcoin hasn’t softened Schiff’s view: If anything, it’s reinforced his sense of impending doom.

Schiff told CoinDesk:
“There’s certainly a lot of bullishness about bitcoin and cryptocurrency, and that’s the case with bubbles in general. The psychology of bubbles fuels it. You just become more convinced that it’s going to work. And the higher the price goes, the more convinced you become that you’re right. But it’s not going up because it’s going to work. It’s going up because of speculation.”

MD: The fact that it is going up is proof that it “does not work”. Real money never goes up or down. It stays constant over all time and space.

“What it comes down to is that bitcoin ain’t money.”

“Libertarian-minded crypto fans saw this was a way to liberate people from the government,” he said, concluding:

“I think it will have the opposite effect. People are going to lose money. This could really backfire, giving libertarian ideals a bad name by making fiat look good. The downside can be really spectacular.”

MD: Actually, a competitive proper MOE process would give people an alternative to the “improper” MOE process commanded by the money changers and the governments they institute. If instituted  properly  (i.e. guaranteeing zero inflation), and in multiplicative fashion (like credit cards) nobody would continue to use government money, It couldn’t compete. The government would be forced to demand use of government money (for more than just paying taxes) and that would tip their hand … i.e. that they are simply the money confiscation machine instituted by money changers. Right now that machine is confiscating 3/4ths of everything each of us makes.
————————

Hedge fund manager James Altucher: Cryptocurrencies Could Be Worth $200 Trillion One Day
I’m not exaggerating when I say cryptocurrencies are the biggest innovation since the internet. We’re on the ground floor of an enormous trend that’s going to change the world.

Cryptocurrencies are currencies with no government in the middle. No bank in the middle. No organizations in the middle keeping track of all your payments, or taking advantage of your spending so they can invade your privacy, and on and on.

Cryptocurrencies solve trillions of dollars’ worth of problems, which is why they will be worth trillions of dollars one day.

MD: He says about three things that are right and then caps it off by saying something that proves they solve no problems at all.

Consider the potential:

There is currently $200 trillion in cash, money and precious metals used as currencies in the world. Meanwhile, there’s only $200 billion in cryptocurrencies. Cryptocurrencies are eventually replacing traditional currencies.

MD: If he knew what he was talking about … i.e. what money really is … he would also say there are currently $200 trillion in-process trading promises (net of government counterfeiting that is demonstrably about 4%). But of course that isn’t true because government trading promises are always defaulted … i.e. counterfeiting right out of the box.

So that $200 billion will eventually rise to the level of currencies. And probably sooner than we can imagine.

MD: Admitting he is clueless about money. Supply and demand for real money rise and fall in lock step.

Ask yourself, why does the world need multiple currencies? There’s actually no real reason. The only reason we have a U.S. dollar and also a Canadian dollar is that in 1770 the people in Canada decided not to join the U.S. So an artificial border created two currencies. It’s all dictated by artificial borders.

MD: Actually, it’s because “none” of the world’s currencies are from a “proper” MOE process. If we had a proper MOE process that “guaranteed” zero inflation, then there would be no need for multiple currencies (exchange rates would be perpetually constant). However, there always should be multiple processes in operation … just like there should be multiple insurance companies in operation. They’re addressing an identical problem and are disciplined and driven to efficiency by transparency and competition.

In the past, an ounce of gold would be accepted almost anywhere in the world. In that sense, unbacked modern fiat currencies are a step backwards.

MD: As it is today. Gold becomes more acceptable in trade as the MOE process in place becomes more and more “improper” (i.e. tolerates more and more counterfeiting by governments and more and more tribute demands by the money changers. Gold is just a clumsy inefficient stand-in for real money.

But in cryptocurrency world, there are what I call “Use Borders.” Every currency is defined by its use. For instance, Ethereum is like Bitcoin but it makes “smart contracts” easier. Contract Law is a multi-trillion dollar industry so this has a huge use case. Filecoin makes storage easier. It’s a $100 billion industry. And on.

Studying the “use” cases, and the effectiveness of the coin to solve those use cases can help us make investment decisions confidently.

MD: KISS (Keep is Simple Stupid). Money is not about “use cases” … it is about trade over time and space. Block chains may be about use cases, but those cases are not cryptocurrency. They’re not currency at all. Who ever thought of a contract as being currency? Just trapped myself didn’t I … because in a proper MOE process, the money represents a contract … a promise by a trader to the whole trading community that he will deliver on a trade over time and space.

This is the great promise of cryptocurrencies and why they will change the world. It’s just getting started.

No normal non-expert should expect to make sense of the above. So let’s just assume that the cryptocurrency universe will continue to expand for a while and narrow the discussion down to a single question: Are cryptocurrencies inflationary? That is, will their spread lead to higher or lower prices for the average person, and greater or lesser financial instability for the markets, and what does this mean for today’s fiat currencies?

MD: That’s his judge of inflation? Higher (or lower prices)? Prices are just a crude measure of inflation. Inflation can’t be measured. But a proper process can guarantee it to be zero … and thus requires no measurement. No block chain process I have ever seen described attempts to maintain perfect balance between supply and demand for the money (i.e. trading promises) it represents.

MF: I suggest you continue to read this article if you find it interesting. If you do, I suggest you continue to annotate it in your mind knowing the principles of “real” money and how they apply. This article is making me tired.

One common opinion is that cryptocurrencies can’t be inflationary because their owners have to pay for them in fiat currencies. So one bitcoin bought means one dollar, yen, or euro sold, with the net effect on prices being zero.

This makes intuitive sense at first glance, but only holds for the moment of purchase. Consider what happened after someone in, say, 2014 exchanged dollars for bitcoins. The dollars held most of their value, which means the total amount of dollar purchasing power in the world remained constant. But those bitcoins went up by several thousand percent, dramatically increasing the purchasing power – and thus the potential inflationary impact – of the bitcoin complex.

A real world example is Julian Assange:

Julian Assange Says Wikileaks Has Made a 50,000% Return on Bitcoin. Here’s What That Means
Wikileaks has seen an amazing return on investments in bitcoin, founder Julian Assange says, and he is “thanking” the U.S. government for forcing the controversial organization to get into bitcoin in the first place.

In a Tweet on Saturday, Assange said the group’s investment in the cryptocurrency has seen a return greater than 50,000% since 2010. Wikileaks began investing in bitcoin back then because global payment processors like Visa, Mastercard, and Paypal were under pressure by the U.S. government to block the ability of the group to take payments.

In fact, Bitcoin has seen a more-than 9 million percent return over the dates Assange references. In certain periods in 2010, bitcoin was trading for mere pennies. According to coindesk.com, one unit of bitcoin is now worth a record high of roughly $5,700. Anyone buying bitcoin through much of 2011 and 2012, when one unit was sometimes trading below $1 and was often under $10, would indeed see a return on investment of more than 50,000%, assuming they never sold.

The difference between Wikileak’s purchasing power pre and post-bitcoin is immense. If Assange decides to spend his windfall on goods and services he’d have, at the margin, an inflationary impact on the stuff he buys.

So the answer to the question of cryptocurrencies’ impact on price levels depends on how their values change. If they rise after people buy them, then they’re inflationary. If they rise a lot, they’re potentially very inflationary.

In this sense, it might be helpful to view cryptocurrencies as assets like houses or stocks rather than as money. When they rise relative to fiat currencies they increase the purchasing power of their owners, generate a “wealth effect” in which owners feel richer and more comfortable with splurging, and in that way push up prices. Based on the following chart, a lot of early adopters are feeling a whole lot richer these days.

Which then leads to what might be the major cryptocurrency theme of the coming year: Why would governments allow such an inflationary supernova to explode right in front of them when they presumably have the power to stop it? Here’s one possible — and of course disturbing — answer:

Will cryptocurrencies trash cash? ‘Fedcoin’ could do it
Economist Ed Yardeni of Yardeni Research asks the obvious question: Why would central banks—which derive their power as the centralized gatekeepers of fiat currency creation, check clearing and payment processing—embrace a movement that’s primary motivation has been to usurp this power in a decentralized way?

Part of that, according to St. Louis Federal Reserve president James Bullard, is recognition that the technology has achieved critical mass. Thus, there’s a fear of being left behind as the very foundations of banking and monetary policy—intermediation, funds transfers, transactions—rapidly change, not unlike the way the creation of mortgage-backed securities and credit default swaps changed housing finance in the mid-2000s.

There’s another, more self-serving purpose: Central banks could use their own cryptos to put the squeeze on paper currency. Why? To facilitate the use of negative interest rate policy, which has been deployed in Europe and Japan in recent years in half-baked forms. Currently, in Switzerland, short-term interest rates are at -0.75%.

When another recession hits, especially if one comes soon, a dive to even deeper rates of negative interest would be hampered by the hoarding of cash since banks would charge for deposits (vs. absorbing the cost of negative rates themselves, as they’re doing now). This is known by the economics cognoscenti as the “zero lower bound” in that interest rates cannot go much below negative before the traditional functions of deposits, loans and fractional money creation break down. Mattress stuffing ensues en masse.

The Fed is clearly thinking about it. In testimony to Congress last year, Fed chairman Janet Yellen admitted policymakers “expect to have less scope for interest-rate cuts than we have had historically,” adding she would not completely rule out the use of negative interest rates.

The BIS­—the central bank of central banks—in its latest quarterly review posited that a crypto backed by the Fed “has the potential to relieve the zero lower bound constraint on monetary policy.” Any distinction between regular dollars and this new “Fedcoin” could be removed by establishing a fixed one-to-one valuation. Any competition from the likes of bitcoin could be squashed by regulation; not unlike how the private ownership of gold was outlawed in the 1930s when it threatened the Fed’s ability to ease credit conditions.

At the risk of being repetitious, pretty much all of the above looks good for gold and great for silver.

FT: The virtual currency boom echoes dotcom fever

The virtual currency boom echoes dotcom fever

MD: Remembering what money really is … “an in-process promise to complete a trade over time and space” … that it is only created by traders … and that for any given trading promise, it only exists for the duration of that promise … and that during that interim time, there is perpetual perfect supply/demand (i.e. zero inflation) of that money created … knowing all that, look how silly such articles like this become.

by Izabella Kaminska

In 1999, the actor Whoopi Goldberg made a bold decision. Rather than be paid for an endorsement for a dotcom start-up, she took a 10 per cent stake in the business. It seemed wise. At the time, everyone was investing in internet businesses and a rush of initial public offerings was making early investors into millionaires. I was reminded of this amid a flurry of news about the new boom in cryptocurrencies — and their celebrity backers. Ms Goldberg’s venture, Flooz, was billed as the future of money in a digital world and it hoped one day to rival the dollar.

MD: Let’s see if there is evidence that they had any clue about what money is before starting this venture. Nope!

The way it worked, however, was much less revolutionary. The service resembled a gift certificate: customers paid in dollars and received Flooz balances. These could be redeemed at participating merchants, with the hope that credits would one day circulate as money in their own right.

MD: What’s the point? How were they supposed to work without dollars kicking them off in the first place? When they replaced the dollar, what was going to create them?

The problem for Flooz was that little prevented mass replication of its model. One prominent competitor, Beenz, differed only slightly, by allowing its units to trade at fluctuating market prices.

MD: A “proper” MOE process can have no competitors. A competitor either does the exact same thing as this proper MOE process, or it isn’t competitive. And since there is no money to be made in the process (contrasted to the similar casualty insurance process where money is made on investment income), it’s not going to attract many competitors. It would be the trading commons themselves who would steward the process. We have experience with this. The internet is just such a process example … a technology commons.

Like banking syndicates before them, the ventures decided to club together for mutual benefit by accepting each other’s currencies in their networks. Even so, by 2001 both companies had failed, brought down by a lack of the one ingredient that counts most in finance: trust. Flooz was knocked by security concerns after it transpired that a Russian crime syndicate had taken advantage of its currency, while the fluctuating value of Beenz soon put users off.

MD: Fluctuating value turning users off is a good sign. Users aren’t as clueless as these entrepreneurs.

Their loss turned into PayPal’s gain, the latter succeeding precisely because it had set its aspirations much lower. Rather than replace established currencies, PayPal focused on improving the dollar’s online mobility, notably by creating a secure network that gained public support. This, it turned out, is what people really wanted.

MD: And PayPal missed the real opportunity by not following up. If they had gone ahead and implemented micro-transactions, I would be paying a tiny (what 1 cent; 5 cents?) price for reading this article. That day has to come. Supporting the likes of FT with advertising and subscriptions is just plain nonsense.

Did we learn anything from the failures of the internet boom? Apparently not. In what is looking increasingly like a new incarnation of dotcom fever, celebrities are endorsing virtual currency systems. Heiress and reality TV star Paris Hilton tweeted this week that she would be backing fundraising for LydianCoin, a digital token still at concept stage. It offers redemption against online artificial intelligence-assisted advertising campaigns.

MD: Advertising campaigns “are” artificial intelligence. We know it as propaganda. It’s annoying … and really dangerous when it reaches the minds of the stupid.

Baroness Michelle Mone, a businesswoman, announced she would be accepting bitcoin in exchange for luxury Dubai flats. What is particularly striking about this path to riches is its “growing money on trees” character.

MD: What is “particularly striking” is that someone would part with their bitcoins for one of her flats … knowing the extraordinary deflationary nature of bitcoins.

While the internet boom was dominated by IPOs, linked to a potentially profitable venture to come, this time it is “initial coin offerings” igniting investor fervour. Most ICOs do not aspire to deliver profits or returns. Indeed, from a regulatory standpoint, they cannot — most lawyers agree doing so could classify them as securities, drawing regulatory intervention which would force them into stringent listing processes.

MD: If they knew what real money was, they would know that every trader (like you and me contracting for a house or car with monthly payments) is making an ICO. What in the world is it going to take to get these brilliant idiots to recognize and understand the obvious?

That opinion was substantiated in July when the US Securities and Exchange Commission warned: “Virtual coins or tokens may be securities and subject to the federal securities laws” and that “it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.”

MD: Now isn’t that the pot calling the kettle black. The SEC is itself a scam.

So most ICOs make do by selling tokens for pre-existing virtual currencies for promises of direct redemption against online goods, services or concepts, or simply in the hope the tokens themselves will rocket in value despite offering nothing specific in return.

MD: Stupid is as stupid does. If you know that zero inflation is the right number for any money you don’t go looking for “rocketing” value. An ideal unit for money is the HUL (Hour of Unskilled Labor). We were all a HUL doing summer jobs in high-school so we can relate to them any time in our lives … and to any trade we make. The HUL itself has not changed over all time. It trades for the same size hole in the ground. With median income now at about $50,000 per year, the median person is able to trade his skilled hours for about 3.5 HULs these days.

They still think they can succeed where other parallel currency systems have failed, by bolting into pre- established blockchain-distributed currency systems such as Ethereum or bitcoin.

MD: A proper MOE process is totally transparent when it comes to the money creation/destruction parts of the process. Block-chain techniques (i.e. universally accessible ledger) would be helpful to enhance that transparency. But there would be no mining involved. New blocks would have to be created at any time at zero cost.

These already come with a network of token-owning users. But with the numbers of conventional merchants that will accept these currencies falling rather than rising, these holders need something more compelling to spend their digital wealth on. As it stands, the real economy can only be accessed by cashing out digital currency for conventional money at cryptocurrency exchanges. This comes at some expense.

MD: So far, the expense is insignificant … because of the enormous “guaranteed” continual deflation of the cryptocurrency itself (their ridiculous mining process). It’s kind of like the reverse of our government run lotteries. With government lotteries, you are guaranteed to lose (except for the minuscule chance you win). With cryptocurrency, you are guaranteed to win (until everyone loses as what is essentially a Ponzi scheme … with no Ponzi … comes down).

But with regulators clamping down on how exchanges are governed, token holders who cannot or do not want to pass through know-your-customer and anti-money laundering procedures remain frozen out.

MD: What’s disconcerting is the knowledge that if we instituted a “proper” MOE process, the regulators would clamp down on it too. It would make their current counterfeiting impossible … and it would make it impossible for money changers to demand tribute. That would just not stand. Regulators and governments everywhere are a major part of our problem.

That leaves their holdings good for only three things: virtual currency speculation, which is ultimately a zero-sum game; redemption against dark-market goods or capital control circumvention. It is assumed ICOs offering real goods, services or real estate in exchange for cryptocurrencies can somehow tap into this sizeable, albeit potentially illicit and restricted, wealth pool.

MD: Real estate wants positive inflation. Money changers in real estate do not want real money (there’s no leverage in it … time value of real money is guaranteed to be perpetually 1.0000) … and for sure they don’t want money that is guaranteed deflationary.

Yet if competing unregulated economies really start gaining traction, governments will act. China’s central bank has already branded ICOs an illegal form of crowdfunding and more rulings are expected from other jurisdictions in coming weeks.

Then again, if history teaches us anything, the system’s own propensity to cultivate fraud and unnecessary complexity in the face of more secure and regulated competition may be the more likely thing to bring it down.

MD: Actually, if you crowd the money changers existing con … “they” are likely to bring it down. “Real” money crowds money changers out of existence. That will not stand. Too bad for us traders and producers in society.

When given the choice, people usually opt for security.

MD: Which of course we don’t have … if you call government taking 3/4ths of everything we make …. you can’t call that security. I call it slavery. If you call money changers taking “all” taxes we pay as tribute … leaving governments (which the money changers instituted to protect their con) to sustain themselves by counterfeiting … I call that criminal.

izabella.kaminska@ft.com Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don’t copy articles from FT.com and redistribute by email or post to the web.

MD: I am openly violating this request. My comments are far more valuable than anything to be learned in this article. And the fairest way to make my comments is to intersperse them in the disinformation that these articles present.

Deviant Investor: Debt Ceiling Delusions and Dollar Difficulties

Debt Ceiling Delusions and Dollar Difficulties

Read:  Harvey, Irma, Gold and Bad Options

MD: Notice that  Deviant Investor represents himself as a “non-traditional perspective”. And then he rejects us in moderation for being “unorthodox”. Go figure.

Here at MD we have no illusion about what money is. We see all governments as just traders. And we see all governments for the irresponsible traders that they are … they never deliver on their money creating trading promises … they just roll them over … and that’s just plain counterfeiting.

Now let’s point out where the Deviant Investor just plain “doesn’t get it”!

 

Guest Post from Clint Siegner, Money Metals Exchange

Those who paid any attention to the financial press last week saw the following narrative; President Donald Trump betrayed Republicans by cutting a deal with Democrats Nancy Pelosi and Charles Schumer. They agreed to punt on the borrowing cap until December and spend $15 billion for hurricane relief.

MD: So what? The borrowing cap is an illusion. It does not exist in practicality. Every time they pretend it does, it results in a paid holiday for government workers … and them moves right on up.

Americans are supposed to conclude that Trump is flip-flopping, and that Republicans aren’t responsible. Dig just a little, and you’ll find only one of those things is true.

Trump is flip-flopping, no question about that. The president campaigned on promises to honor the borrowing limit. This tweet from 2013 is what candidate Trump had to say on the matter: “I cannot believe the Republicans are extending the debt ceiling — I am a Republican & I am embarrassed!”

MD: Man is this guy deluded! He’s recognizing Republicans (presumably in contrast to Democrats), admitting to be one, and is embarrassed by what Trump is and does? Surely he jests!

But any implication that Republican leaders in Congress actually oppose more borrowing is patently false. Republicans in Congress overwhelmingly supported the deal. It was passed in the House with a vote of 316 to 90. The Senate voted 80 to 17.

MD: Leaving me with “Trump is Flip Flopping” is the truthful statement?

Some who voted in opposition likely only did so for the sake of appearances. Others thought the president and Democrats did not go far enough. GOP leaders Paul Ryan and Mitch McConnell wanted a deal to suspend the borrowing cap for much longer than the 3 months they got.

Make no mistake – lots of Republicans share the commitment to unlimited borrowing with the President and Democrats.

MD: I agree. They should have unlimited “money creation” privileges as should all traders (within principled reason … you shouldn’t be able to create money to build a General Motors from scratch). But, as with all irresponsible traders, they should have an interest load commensurate with their propensity to default. In their case, that is 100%. Therefore, they effectively cannot create money (the borrowing metaphor is a fiction). Institute a proper MOE process in competition with theirs, and the debt ceiling no longer moves in any direction but down … until they prove themselves to be responsible traders … which of course they never will do.

At least the currency markets seem to have gotten it right. Last week’s decline in the dollar may be a recognition the debt ceiling – the final pretense of borrowing restraint – will soon be going away. The sooner investors at large arrive at this conclusion, the better it will likely be for owners of hard assets.

MD: With a proper MOE process (i.e. real money) there is no such thing as a “currency market”. The “real” money (best denominated in HULs … Hours of Unskilled Labor” never declines or increases. In a proper MOE process, money is every bit as hard as gold (but easier to trade with). Gold isn’t money at all … and never has been. It’s just a clumsy and expensive and inefficient stand-in for real money … it’s just stuff like cement blocks are stuff.

 

Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

Thanks to Clint Siegner