Marathon Digital Holdings Inc. (NASDAQ:MARA) price on Wednesday, July 19, rose 4.64% above its previous day’s close as an upside momentum from buyers pushed the stock’s value to $17.59.
MD: I presume we’re supposed to know about MARA already (i.e. COIK: Clear Only If Known). Let’s see how far we can get before we have to do our homework. Reaching into my pocket I have the $0.59. The $17 may be more problematic.
A look at the stock’s price movement, the close in the last trading session was $16.81. Turning to its 52-week performance, $19.88 and $3.11 were the 52-week high and 52-week low respectively. Overall, MARA moved 76.25% over the past month.
MD: I’m one of those gamblers that buys at $19.88 and sells at $3.11. I quit gambling long ago. Before I quit I even started betting against myself. I was still always wrong. Go figure.
The artificial intelligence (AI) revolution is already here. And it’s about to change everything we know about everything. According to Grand View Research, the global AI boom could grow from about $137 billion in 2022 to more than $1.81 trillion by 2030. And investors like you always want to get in on the hottest stocks of tomorrow. Here are five of the best ways to profit from the AI boom.
MD: Just like with money, everybody seems to be clueless about AI. You don’t get smart by contemplating your navel… or contemplating everybody else’s navel. They should call it AS… Artificial Stupidity. And there is more than enough RS (real stupidity) to go around.
Marathon Digital Holdings Inc.’s market cap currently stands at around $2.99 billion.
MD: Let’s see. $2.99B divided by $17.59… That means they’ve divided this fiction into 170 million pieces. Likely they’ve kept 50 million for themselves for which they paid nothing. And found other suckers to buy into their get rich scheme to the total tune of 120 million pieces. What’s not to love about leverage when it comes to finance.
Analysts project the company’s earnings per share (EPS) to be -$0.02, which has seen fiscal year 2023 EPS growth forecast to increase to $0.14 and about $0.49 for fiscal year 2024. Per the data, EPS growth is expected to be 104.50% for 2023 and 250.00% for the next financial year.
MD: Wow. The power of big numbers. Earning 2 cents a share… but times 120M shares, we’re talking real money… who said that, Everette Dirkson? And there are people out there that think “regulation” is the antidote for this, right? Wrong! It’s the enabler.
Analysts have a consensus estimate of $92.65 million for the company’s revenue for the quarter, with a low and high estimate of $78.29 million and $111.2 million respectively. The average forecast suggests up to a 271.80% growth in sales growth compared to quarterly growth in the same period last fiscal year. Wall Street analysts have also projected the company’s year-on-year revenue for 2023 to grow to $431.33 million, representing a 266.30% jump on that reported in the last financial year.
MD: It’s amazing we can be this far into this article and still be clueless about the “value proposition”. I guess everybody reading this already knows what’s going on here. We’re probably too dumb to be even reading this… let alone getting in on the game.
Revisions could be used as tool to get short term price movement insight, and for the company that in the past seven days was no upward and no downward review(s). Turning to the stock’s technical picture we see that short term indicators suggest on average that MARA is a 100% Buy. On the other hand, the stock is on average a 100% Buy as suggested by medium term indicators while long term indicators are putting the stock in 100% Buy category.
MD: A 100% Buy. What could possibly go wrong? We’ll reserve comment until we get to something of substance, ok?
6 analyst(s) have given their forecast ratings for the stock on a scale of 1.00-5.00 for a strong buy to strong sell recommendation. A total of 3 analyst(s) rate the stock as a Hold, 3 recommend MARA as a Buy and 0 give it an Overweight rating. Meanwhile, 0 analyst(s) rate the stock as Underweight and 0 say it is a Sell. As such, the average rating for the stock is Overweight which could provide an opportunity for investors keen on increasing their holdings of the company’s stock.
MARA’s current price about 17.67% and 50.35% off the 20-day and 50-day simple moving averages respectively. The Relative Strength Index (RSI, 14) currently prints 65.45, while 7-day volatility ratio is 9.73% and 10.73% in the 30-day chart. Further, Marathon Digital Holdings Inc. (MARA) has a beta value of 5.04, and an average true range (ATR) of 1.40. Analysts have given the company’s stock an average 52-week price target of $13.10, forecast between a low of $7.98 and high of $20.00. Looking at the price targets, the low is 54.63% off current price level while to achieve the yearly target high, price needs to move -13.7%. Nonetheless, investors will most likely welcome a 23.25% jump to $13.50 which is the analysts’ median price.
In the market, a comparison of Marathon Digital Holdings Inc. (MARA) and its peers suggest the former has performed considerably stronger. Data shows MARA’s intraday price has changed 4.64% in last session and 80.23% over the past year. Elsewhere, the overall performance for the S&P 500 and Dow Jones Industrial shows that the indexes are up 0.24% and 0.31% respectively in the last trading.
If we refocus on Marathon Digital Holdings Inc. (NASDAQ:MARA), historical trading data shows that trading volumes averaged 49.88 million over the past 10 days and 40.28 million over the past 3 months. The company’s latest data on shares outstanding shows there are 169.97 million shares.
The 0.20% of Marathon Digital Holdings Inc.’s shares are in the hands of company insiders while institutional holders own 37.50% of the company’s shares. Also important is the data on short interest which shows that short shares stood at 42.15 million on Jun 29, 2023, giving us a short ratio of 0.92. The data shows that as of Jun 29, 2023 short interest in Marathon Digital Holdings Inc. (MARA) stood at 24.80% of shares outstanding, with shares short falling to 43.09 million registered in May 30, 2023. Current price change has pushed the stock 414.33% YTD, which shows the potential for further growth is there. It is this reason that could see investor optimism for the MARA stock continues to rise going into the next quarter.
MD: Nope! We still have no clue what they do. Looks like we’ll have to find another article. This may not publish.
MD: A common provocative phrase. Money is an “in-process promise to complete a trade over time and space.” Well, substituting this provable definition for the “money” in the phrase, we essentially get “time is an in-process promise”. Obviously, it is not. Rather it is a fourth dimension defining “when” something is located “where.” Further we know that money is “always and only created by traders like you and me.” Well, you and I don’t create time. So how can time be money. The real principle is the “time value of money”. Does money today have a different value than money last year…or money a year from now. The simple answer: In a “real money process”, the value of money never changes…not over time…not over space. Thus, we can’t say it has time value.
It’s a phrase you’ve heard before. And probably a phrase you’ve accepted as truth. And it’s certainly true that there are plenty of ways that time and money relate to each other.
But a few months ago, I started to wonder: Is time really money? And if not, how does that change the way I think about my time and my money?
MD: Shouldn’t you begin by defining both “time” and “money”?
Today begins a series exploring those questions. I’ll tackle them from different angles and different aspects of entrepreneurship so that we can make more intentional decisions about how we spend our time and our money.
MD: How we “spend” our time and our money? That’s like “making more intentional decisions about how we trade.” There are only two ways: (1) Simple barter exchange in the here and now. (2) Exchange spanning time and space.”
First, a little context.
“Remember, time is money” is a line from Benjamin Franklin’s 1748 essay, “Advice to a Young Tradesman.” He encourages the reader to consider the money they might spend if they take a day off, as well as the money they’d lose for not working. I don’t know about you, but I feel like I’ve been running that calculation on repeat since I was sixteen years old! At least in the US, it seems we’re born with this idea already encoded into our brains.
MD: This is kind of a false choice. When you’re working, you’re in the process of making a trade. Not all work results in useful gain. Further, when you’re idle you’re in the process of doing something besides trading your “time and effort” for something. “Rest” is just such a thing…and if you don’t make that trade regularly you will die of exhaustion. Regardless, this has nothing to do with money.
Max Weber cites this aphorism repeatedly in his book, The Protestant Ethic and the Spirit of Capitalism. He sees it as a sort of semiotic turning point—a shift from the godly ethic of vocation to the secular ethic of capitalism. And remember, this phrase dates back to at least 1748. That’s 274 years of cultural indoctrination to this idea.
Now, if all of that sounds like I’m firmly against considering time as money (or money as time), I’m not. But I do think it’s an incredibly complicated truism that’s worth interrogating instead of merely accepting as immutable.
To kick off this deep dive into the question of whether time is actually money, I wanted to talk about money. And what money actually is, how we think about it, why the way we think about money matters. So I called up Paco de Leon, who just released a fantastic new book called, Finance For The People. She’s also the founder of The Hell Yeah Bookkeeping, which serves production companies and creative agencies. Paco knows more than a thing or two about money. But I wanted to start with the basics:
MD: Well, let’s see if Paco does indeed know a thing or two about money.
What is money?
At its most fundamental level, Paco told me, “Money is a shared delusion.” Money is valuable because we believe it’s valuable, not because it has inherent worth. If you’ve ever heard the term “fiat currency,” this is what it refers to: money that’s based on an agreement rather than an intrinsic value.
MD: Does a promise have value? Yes…of course it does. We value promises continually throughout our lives. And some promises we come to “not” value…because we know they won’t be kept. But knowing “all” promises creating money “will” be kept, either by the creator of the promise (and thus the money), or by the process that “guarantees” that the promise is delivered…and thus has value.
How is this guarantee accomplished? Well, it’s a lot like “casualty insurance”. You can send a ship of goods half way around the word. You can buy an insurance policy to guarantee “you” get paid for those goods and your ship returns. This is called a “PREMIUM”. And if your ship doesn’t return, you make “CLAIM” on the insurance provider. And in the insurance business, the operative relation is: PREMIUMS = CLAIMS. The money is made on the “investment income” from the PREMIUMS.
The operative relation for money is INFLATION = DEFAULT-INTEREST =zero. If the promise is not delivered, that is DEFAULT. Mitigating DEFAULTs with immediate INTEREST collections of like amount “guarantees” zero INFLATION. The crucial issue is “how” do you collect INTEREST and who do you collect it from?
That answer is you put the INTEREST load on irresponsible traders who have a non-zero propensity to DEFAULT. This is the same as the actuarial process of insurance: those who have the most CLAIMs pay the HIGHEST premiums.
About 10 or 11 years ago, I went to a lecture on money & meaning at my alma mater. Yes, I am that kind of nerd. That was the first time I was introduced to this idea—this fact, really. Money becomes valuable because you and I (and millions of other people) believe it is valuable. We believe it strongly enough to use money as a means of exchange and pay taxes and wages. The government incentivizes us to believe that—but ultimately, without the trust of US consumers, the dollar just wouldn’t be as valuable.
MD: So the lecture didn’t tell you that government is a dead-beat trader? If someone repeatedly lies to you, does that incentivize you to believe them? Of course not. You are admitting…you are deluded by government. A “real” money process gives money value buy guaranteeing the completion of a trading promise spanning time and space. It doesn’t require government. In fact, government behavior precludes it from creating money…i.e. a promise it is known never to deliver…but rather to just roll over with a new promise…to deliver on a failed promise with a new promise, also guaranteed to fail.
Further, this lecturer explained money exists to make exchanging goods—buying and selling—easier. Instead of every trade being a negotiation of how many eggs are worth a pound of wheat, we can assign a monetary value to each product and then independently decide whether we want to trade our money for the eggs or the wheat or a new phone.
MD: The common unit of measure is only part of the story. Our current money process gives a name to a certain amount of gold and/or silver. That name is the “dollar”. It assumes that the value of gold and silver never changes. That assumption is a delusion. If they had chose the name HUL (standing for Hours of Unskilled Labor), that would have been better. A HUL trades for the same size hold in the ground over all time.
We’re seeing this play out in real-time right now with cryptocurrency, my current research obsession. What do people believe bitcoin or ether is worth? And how does that value fluctuate based on the number of people who believe in its value? How is a quote-unquote currency impacted if few sellers accept it as payment from buyers? If you’re curious about how this “money is a shared delusion” thing plays out practically, learn about crypto and all the wild things happening in that market. (Hint: it’s not great.)
MD: Crypto (specifically Bitcoin) claims a solution to the “byzantine general’s problem”. Basically it tries to guarantee truth. It does this with a concept it calls “proof of work” and therefore proof of value. It’s another delusion. You don’t create value by digging a hole and then filling it in again. But you do expend work. A real money process makes no claims whatever about the value of the “promise” (i.e. money). It just guarantees that is ultimately delivered on…and destroyed. In the interim it trades as the most common object in simple barter exchange.
Back to the kind of money we have a stable agreement about. It can be hard to integrate the idea that money is a shared delusion because it’s so integral to the way we navigate the world. Our survival, in many ways, depends on how we earn and spend money. Paco was fascinated with that duality; money is both imaginary and key to our contemporary existence. She said, “Once we start to examine what [money] is at its core, we can start to ourselves, ‘If this thing is based on belief, well, how else is the way I interact with it based on beliefs?’”
MD: Do you describe “insurance” as a “shared delusion”…because it’s so integral to the way we make promises? Our survival depends on being of value. And that means trading our time for sustenance. Paco evidently failed in her examination of what [money] is at its core. You plant seeds with the belief that they will grow into a plant that you can eat. If you have a brown thumb like I have, you don’t believe it. But you can see skilled farmers making things grow. For me, I choose not to trade my time in planting. Rather, I trade it for something the farmer wants…and I trade that for the fruits of “his” planting. Don’t make this more complicated than it is.
What we believe about money impacts how we interact with it.
It’s the reason you and I can make drastically different money decisions, and they’re still the right decisions for us. Money isn’t an immutable, universal Truth—but a fluid, relative representation of value, which is always individual. What I value is not what you value. What you value is not what I value. What we each value will be decided by our circumstances, values, personal preferences, and priorities. And even within that relativity, there’s also the question of how value is related to available resources. For instance, I might understand and appreciate the value of investing in a house in Montana right now. It’s where we plan to move in about five years. But saying the market there is volatile would be an extreme understatement. Could I put together a down payment to buy property there? Sure. But I have to weigh the value of that money against the potential risk of buying now versus purchasing a few years from now.
Money isn’t an immutable, universal Truth—but a fluid, relative representation of value, which is always individual.
Paco gave me an even better example. Imagine you’re at a restaurant with a friend, and the Happy Hour special is $1 oysters. If you’re not an oyster fan, know that that price is a steal. You say to your friend, “I love oysters! Let’s get a dozen—that’s such a good price.” But your friend is dubious. “$1 oysters?” they say, “That’s… suspicious.” Maybe they are old. Perhaps the restaurant got them from an unscrupulous purveyor. Maybe they’re just not very good. You and your friend are working with the same financial information on the surface. It’s Happy Hour, and the oysters are $1 each. But you bring your beliefs about money and value to the table, and your friend brings theirs. The result is two drastically different approaches to the potential purchase.
MD: But none of that has to do with money. That has to do with trade. Trade has three stages: (1) Negotiation; (2) Promise to deliver; (3) Delivery as promised. In simple barter exchange, (2) and (3) happen simultaneously in the here and now. Money enables (2) and (3) to happen over time and space. And money has nothing to do with “belief”. That’s all taken care of in stage (1)…and it only applies to the two parties involved.
Our values, personal histories, upbringing, geographic location, culture, class… all these things and more influence the way we approach the proverbial $1 oyster. So do the beliefs that we have about ourselves. Paco told me that many of her original stories about money were informed by her belief that she wasn’t good enough. It might be easy to write it off as a “money mindset thing.” Yet, her anxiety about not being good enough was based on real experiences. She told me, “Being queer and a woman of color has not been a nice day at the beach. I’ve heard family members talking about so-and-so being gay. I remember hearing that story and being like: okay, noted, not okay to be gay.” She also picked up the “not good enough” message from thirteen years of Catholic school—a privilege in many ways, but also a daily immersion into a story about being fundamentally flawed.
MD: If Paco was this easily conflicted about money, what did she have to say about trade? Could she compare and contrast the two? I think you were wasting your time with Paco. In the land of the blind, the one eyed person is most value. In the land of the queer, the straight person has a value deficiency in at least one category of trade…that being an inter-personal relationship…which is the most equitable trade possible.
The worry about not being good enough coalesced into a story that she should take what she’s given and be grateful for it, grateful to be included, to belong. But eventually, she started to shift that story—and decided to go out on her own in order so she could take control of the value of her work on the open market. And… still, she was undercharging for bookkeeping services and consulting. “I was that $1 oyster,” she said. So the work continued. She pursued therapy and other ways of processing her beliefs and experiences to unpack why she was perennially coming up short on decisions about price.
MD: Again, this has nothing to do with money. She is addressing the (1) Negotiation state of trader.
This is what we mean when we talk about understanding your money mindset. It’s not about “charging what you’re worth” or investing in yourself. It’s really a process of unpacking unconscious stories, weighing them against cultural conditioning, and finding ways to resource yourself to shift your thinking. “Thinking bigger” is just a bandaid over a much bigger issue. If you try to cover your money wounds with “charge what you’re worth,” you won’t get very far without bleeding out. This is why so much money mindset advice feels like a panacea. Before we can write a more effective money story, we actually have to root out and process the old one.
Before we can write a more effective money story, we actually have to root out and process the old one.
“The quality of your thinking impacts the decisions you make,” Paco told me. That’s why she cares about really getting to the heart of how we think about money, rather than trying to plaster over it with affirmations and financial advice. When you say something like “charge what you’re worth” to cover over feelings of inadequacy, the inadequacy is going to leak through. Those unexamined feelings influence your decision-making. So you find a way to rationalize a decision prompted by your original, negative money story rather than the one you think you’re telling. Paco says:
“Just feel your damn feelings on the upfront! Recognize that you’re an emotional creature. Sometimes your feelings are going to get in the way. Feel them and manage them and regulate your nervous system.”
MD: Again…is irrelevant to money.
The Moral Quality of Money
When we start talking about how our beliefs impact our decisions with money, we inevitably land on assumptions about the moral quality of money. Money and what we do with it seem to signal whether we’re a good or bad person, a good citizen or a bad citizen.
MD: This is nonsense. If you have grapes and you want strawberries money gives you an option. You can “sell” your grapes for some number of HULs …hours of unskilled labor. You know a HUL value because you traded in them at some point in your life…usually a job during high school. You then take those HULs and find someone with strawberries. And you negotiate that trade. Using money you have two negotiation steps. (1) grapes for HULs; (2) HULs for strawberries. If you make a bad trade on you grapes, you still have a chance of correcting it on your trade for strawberries. Or you can gain on both trades or you can lose on both trades. It’s about your ability to trade. It’s not about money.
The messages around this can come from the oddest places—or, maybe, the most predictable least helpful places. For instance, in an interview on cable news, former Labor Secretary Elaine Chao said that low-wage workers had a patriotic duty to get back to work. Prosperity gospel preachers tell you that wealth is a sign of god’s favor. And the vast majority of the political machine in the US has been touting the welfare queen as the ultimate moral villain since Reagan.
MD: And again, be that as it may, it has nothing to do with money.
These messages aren’t the whole of the moral lessons we learn about money—they’re just the tip of the iceberg. They’re signposts of a pervasive, inescapable message about money; having money is good and, if you don’t have it, you better work your ass off for more of it so you can be good.
Paco said:
“We are overly focused on our own personal shortcomings, right? You did this wrong. You are bad. You are not disciplined. But what I really think what we need to focus on when we feel these negative feelings of shame and guilt is exploring and understanding where they came from. Who taught you that you should be ashamed of this? Where did you pick that up? Was it a move? Was it a song? Was it your grandparents?”
MD: I wonder what Paco would have to say about trading for art?
She said we pick up these expectations from family, friends, and society. When we violate that behavior, we feel bad. The answer? Paco says that financial pros need to help people heal the parts of them that are broken to help the people they serve to heal.
MD: And don’t forget the things we pick up from advertising and other forms of information and/or brainwashing.
Nowhere is moralizing more prevalent than in discussion about debt. But as Trump and other billionaires have proved repeatedly, debt only seems to be bad when you’re the wrong kind of person with that debt on your balance sheet. So I asked Paco: what’s the deal with debt?
MD: While you were at it did you ask her “what the deal with a promise”? Is a promise a debt? Of course it is.
As is her gift, Paco gave me a great analogy. Debt is like fire, she said. Fire has benefits—it lets us cook our food, for instance. But if that fire gets out of control? Well, then there’s a problem. Debt has significant benefits. Without the invention of the 30-year mortgage, many of us would not be able to own real estate. Without a loan or a business credit card, we might not be able to make investments in the growth of our companies. But debt can quickly get out of control. And that’s when it becomes a problem. “We shouldn’t look at things with this tunnel vision of ‘debt is bad,’” Paco said. Black and white thinking rarely (maybe never?) benefits us.
MD: The “30 year mortgage” illustrates the scam that is our existing money system. (1) It assumes someone is “lending” you the money when in actuality, “you” are “creating” it. (2) It assumes you must pay “interest” on the money you have still not returned. Both are false in a “real” money process. In a “real” money process, money is in perpetually free supply. It never changes its value. And it imposes no resistance to trading (e.g. interest load).
Is time money?
As I mentioned, I’m really interested in exploring the maxim, “time is money.” In what ways is that true? In what ways is it not true? And how might a fundamental, unexamined belief that time is money benefit or harm us and our work? So I asked Paco for her thoughts. She told me that there was a long time where she definitely ascribed to this philosophy. She’d make calculations about what she wanted to buy and whether the price was worth the amount of time it would take to earn that amount. She said it wasn’t a horrible way to think about money—but it’s certainly not the only way to think about the relationship between time and money.
MD: You took time to write this article. I took time to make these annotations. I received nothing in trade for my effort. That makes me a fool. What did you receive for writing the article?
For instance, when she started hiring, she realized that she could create leverage with other people’s time. As a business owner, she could use their work to earn more. She also thinks about how money can buy time, “Time is a non-renewable resource. Money is a renewable resource.” And, of course, she’s very interested in investing in a way that produces more money without more time spent on work.
MD: “Money is a non-renewable resource”: Try this? You can make money writing this article. You can obtain a hole by digging. If you need a hole, would you choose to spend your time writing this article for money…then trading that money for a guy to dig your hole? What if it takes twice as long to dig the hole yourself than to have the guy do it. Did you “reclaim” some non-renewable time? You know the old axiom: work smarter, not harder.
Paco and I agree that the danger in believing “time is money” is that it often reinforces conditioning around productivity and usefulness. We learn at an early age that the goal is to get as much done in a certain period of time as possible—the more ways we can hack our time to produce more, the more we’re rewarded. We’re also taught to evaluate our worth to society from the perspective of productivity. Taking time off, therefore, risks getting you labeled as lazy. And that brings us back to the core belief Paco (and I) have had to wrestle with: Am I enough? Am I doing enough?
MD: And again, that’s all irrelevant.
“Am I deserving of the space to just be a human appreciating the sunshine on my face? I want to normalize wanting to chill,” she told me.
“To me, money is freedom and it’s power. It allows me to live a life of dignity.”
MD: And if sea shells were money does that make picking up sea shells bring you more freedom and power? You know it doesn’t. You can’t just call something money and make it be so. It’s the process that brings the value.
As we started to wrap things up, Paco told me that she really wants people to be able to live a life of dignity. Yes, we need to concern ourselves with our own personal finances. But we should also be concerned about the public policies that would allow all people to live dignified lives. She said, “let’s just solve that problem first. And then luxury will follow.”
MD: If “all” people just took care of themselves “all” would be fine. That’s everyone’s first task…take care of yourself.
I’ve been rolling the idea of “dignity” around in my mind since I talked to Paco. Who is denied dignity? What are the mechanisms that enforce that denial? What does a dignified life look like, and how much does it cost?
Paco does such a great job of addressing the things we can control about money. And she also does a great job acknowledging that there is much that’s out of our control. This is certainly true when it comes to dignity, as well. We can do a lot for ourselves to ensure a dignified life. But for many of us, factors out of our control make it incredibly difficult. So, what policy changes could we advocate for so that all people could have access to a dignified life? What community care projects could help more people live with dignity?
MD: If you have money and you created it, you must eventually return it as you promised and it is destroyed. If you obtained your money in trade, it’s no different than grapes you obtained in trade…except for the process. With a “real” money process, you can put your money under a rock for 10 years…then take it out and trade it for the same size hole in the ground as you could 10 years ago. With grapes…well, they rotted 10 years ago. And with our counterfeit dollar, you can trade for a hole that is 2/3rds as big…assuming 4% inflation caused by government counterfeiting.
We all have room to work on our beliefs about money, and many of us have enough space to start changing the larger conversation, too.
MD: Actually, everything in your article is about “trade”…not “money”.
MD: Having a total and universal misunderstanding of what money is, we get myriad articles telling how money is being manipulated…or should be manipulated. From the title we expect this is just such an instance. We’ll look…and annotate in place.
What lies beneath
As usual, just over two weeks into the new quarter, and well in advance of the developed economies, GDP-giant China told us exactly what happened there in Q1. When I say ‘exactly’, I mean to the usual degree of decimal-place detail, but the same lack of any useful breakdown: and despite lockdowns so hard that China’s Weibo is allegedly censoring the first line of the Chinese national anthem (“Stand up! Those who refuse to be slaves”) after it was used to vent frustrations.
MD: What a bazaar opening salvo!
Somehow, the expectation was for a 0.7% q/q GDP print, 4.2% y/y, up from 4.0% in Q42021: we got a far stronger print to show Covid, and Chinese data, don’t matter – GDP rose 1.3% q/q and 4.8% y/y.
Does one celebrate the resilience of the economy? MD: How can one separate the economy from the manipulation of its money?
Does one ask how that was possible when March data saw retail sales -3.5% y/y, below consensus of -3.0%, down from 1.7%… and yet higher than expected at 3.3% y/y year-to-date (YTD) vs. a 6.7% print in February that already did not match what *any* retailer is seeing? When fixed asset investment, albeit above consensus, slowed to 9.3% from 12.2% y/y even as property investment was weaker than seen at just 0.7% from 3.7% y/y? And industrial production rose to 5.0% from 4.3% y/y – which must have been via net exports… despite port closures!
MD: Does anyone ask why behavior of an economy should be sensitive to a calendar?
Does one ask why monetary policy was eased last week anyway, with the reserve requirement ratio cut 0.25% again? (That’s a move which will be as ineffectual for the real economy as all the previous cuts were: the only thing it perks up is enthusiasm from analysts who don’t understand how the real economy works.) MD: Does anyone ask why there should be such a thing as a “monetary policy”? Does anyone ask why anyone…or any small group…should have such a knob to manipulate?
Does one ask why China just announced details-free economic stimulus measures? (e.g., “Reform will be deepened to remove consumption constraints. Sound and steady development of consumption platforms will be advanced.” How so, when rumours are that we are soon to see bank deposit rates cuts to make room for lower lending rates, which follows the same financial-repression/demand-destruction path seen in the ‘new normal’ elsewhere?) Probably not. MD: When it is provable that everyone acts in their own self interest, why does not everyone’s self interest have equal weight? Why do we have banks screwing with lending rates when we know it is “traders”, not banks or the governments they institute, that create and destroy money?
Does one ask how local-government debt to build more infrastructure is ‘consumption’? (e.g., “consumption-related infrastructure development may be funded by local government special-purpose bonds, to leverage the catalytic role of investment in expanding consumption.”) MD: Why do we allow something claiming to be government…why do we allow it to control something like infrastructure development…but not manufacturing development? We shouldn’t even have government. What’s it good for?
Does one note an easily achievable stimulus floated is a de facto export subsidy? (e.g., “Export rebates will be better utilized as an inclusive and equitable policy tool that is consistent with international rules, and the business environment for foreign trade will be improved on multiple fronts.”) Yet if China thinks it can grow its way out of a structural crisis by flooding the world with more goods *again*, then it is in for a real shock. MD: Do traders need stimulus? What’s keeping traders from naturally making trades they can see clear to deliver on? Why do people allow a money-changer creation like government to even exist?
Making that point, Bloomberg warns: ‘Global Investors Flee China Fearing That Risks Eclipse Rewards’. All the more reason for a 1.3 % q/q print then(?) The article notes, “Russian sanctions raise concerns the same could happen to China… a growing list of risks is turning China into a potential quagmire for global investors. The central question is what could happen in a country willing to go to great lengths to achieve its leader’s goals.” This is hardly news to those who wanted to see it: but a South China Morning Post politics podcast this weekend in which one of their correspondents stated he had heard directly from an EU source that in recent discussions over Russian sanctions, US officials stated they are already gaming-out the same measures for China – and using language such as “when we sanction China”, not “if”. MD: Sanctions are a siege tactic. And siege is an act of war. Who is conducting this warring aggression…and why? Why does an entity capable of mounting such an attack even exist? Who needs it?
Imperialism and realism: Bancor and Rancor
Meanwhile, in Ukraine, hopes of peace talks appear forlorn: Mariupol appears close to falling, as the city of 400,000 stands in ruins; and despite talking of risks of a Russian tactical nuke, President Zelenskiy defiantly states his country won’t give up the Donbas and can keep fighting for 10 years, if needed. If supported by the West, perhaps it can – and the EU’s Von der Leyen is pushing for Europe to accelerate arms shipments to Kyiv, talking about an oil boycott, again, and sanctioning Russia’s largest bank, Sberbank. Markets were thinking 10 days and none of the above when this all started. MD: Why doesn’t this paragraph state it was Zelenskiy whose artillery caused the ruin of Mariupol?
On another front, as Finland and Sweden race towards NATO membership, Russia is moving forces towards the Baltic. Is this a bluff, as some felt it was over Ukraine? Or is Moscow going to engage in some form of limited confrontation with either or both Scandinavian states to ensure that if they enter NATO they do so already in a conflict with Russia? MD: Why do these countries want NATO membership? What’s in it for them? What do they lose by ostracizing NATO? What if Russia’s movements are totally defensive…or protective of the innocent…which of course they are?
Taking things to a more meta level, last week I argued ‘Bretton Woods 3’ (BW3) — a new global FX and financial architecture– is a fancy name for militarized mercantilism; that the West used to be good at it; that it will be again, even if it means lots of neoliberal norms have to go; and anyone who thinks a BW3 emerges painlessly hasn’t read any history. Usefully, one of the key proponents of ‘anti-American imperialism’ just made the point for me in depth. MD: If you argued for any kind of “global FX and financial architecture” you are stupid beyond belief. At the very least, you are clueless about what money is…where it comes from…and where it goes. Mercantilism is government imposed monopoly. Eliminating government is the solution.
(NB For these thinkers, American imperialism is the only imperialism: everything else is ‘realism’. That was underlined by humanist and coffee-table intellectual’s intellectual —and long-time believer that the auto-genocidal Khmer Rouge get a bad press— Noam Chomsky, who explained this weekend that Ukraine should surrender, because that’s ‘just the way the world is’.) MD: There should be a vaccine against morons like Chomsky.
In an interview, Russian politician Sergey Glazyev talks about “the imminent disintegration of the USD-based global economic system, which provided the foundation of the US global dominance… the new economic system [unites] various strata of their societies around the goal of increasing common well-being in a way that is substantially stronger than the Anglo-Saxon and European alternatives. This is the main reason why Washington will not be able to win the global hybrid war that it started. This is also the main reason why the current dollar-centric global financial system will be superseded by a new one, based on a consensus of the countries who join the new world economic order.” MD: The fact that such a thing as “the USD-based global economic system” even exists or should be tolerated is admission of zero understanding of money. They can change the money system all they want. Until they understand what money is…where it comes from…and where it goes, they’ll keep getting the same result. And of course they want that result. This leopard doesn’t change its spots.
So far, so gold-bug, crypto-nite, Chomskyite, Russian/Chinese nationalist, US billionaire hedge-fund manager, or general Down With This Sort of Thing. But we get details: MD: Such nonsense!
“In the first phase of the transition, these countries fall back on using their national currencies and clearing mechanisms, backed by bilateral currency swaps.At this point, price formation is still mostly driven by prices at various exchanges, denominated in dollars.” MD: Open admission of money manipulation. A “real money process” cannot be manipulated in any fashion whatever.
That’s what I have been flagging: things remain priced in USD and, for a few, at the margin, and inefficiently, USD are netted out via bilateral, geopolitical barter. However, “This phase is almost over.” That seems ambitious: it isn’t even a month old! Regardless, next comes “a shift to national currencies and gold,” and then: MD: A problem that does not…and cannot exist with a “real money process”.
“The second stage of the transition will involve new pricing mechanisms that do not reference the USD. Price formation in national currencies involves substantial overheads, however, it will still be more attractive than pricing in ‘un-anchored’ and treacherous currencies like USD, GBP, EUR, and JPY. The only remaining global currency candidate –CNY– won’t be taking their place due to its inconvertibility and the restricted external access to the Chinese capital markets. The use of gold as the price reference is constrained by the inconvenience of its use for payments.” MD: A “real money process” cares nothing about pricing mechanism. That’s up to supply/demand balance of objects being traded. All the “real money process” is concerned with is guaranteeing perpetual perfect supply/demand balance of the money itself.
So, as I pointed out, nothing really works; which, alongside final consumption being in the West, and lots of aircraft carriers, is a strong argument for the USD status quo, imperialist or not. But not to worry if you disagree, because after that: MD: When “it’s broke”, it a good time to “fix it”. You don’t fix something by changing it’s name. This will get fixed when a “real money process” is available for traders to choose. Once that is done, all these broken processes will wilt on the vine. No trader in his right mind would ever use one.
“The third and the final stage on the new economic order transition will involve a creation of a new digital payment currency founded through an international agreement based on principles of transparency, fairness, goodwill, and efficiency.” Which the international community is of course famous for. “A currency like this can be issued by a pool of currency reserves of BRICS countries, which all interested countries will be able to join.” MD: This is like religion…constantly trying to deal with knowledge that encroaches on its myths. They just create new myths…and change the wording of the old myths. It’s pretty disgusting.
Except India is questionable, and even Brazil might be shaky given where it sits geographically, near the source of all those aircraft carriers. And so we have Russia, China, and South Africa. That doesn’t even make a good acronym, let alone bloc.
“The weight of each currency in the basket could be proportional to the GDP of each country (based on purchasing power parity, for example), its share in international trade, as well as the population and territory size of participating countries.” So, it will be dominated by China; and so India is definitely out. “In addition, the basket could contain an index of prices of main exchange-traded commodities: gold and other precious metals, key industrial metals, hydrocarbons, grains, sugar, as well as water and other natural resources. To provide backing… relevant international resource reserves can be created in due course. This new currency would be used exclusively for cross-border payments and issued to the participating countries based on a pre-defined formula. Participating countries would instead use their national currencies for credit creation, in order to finance national investments and industry, as well as for sovereign wealth reserves. Capital account cross-border flows would remain governed by national currency regulations.” MD: If the currencies in the basket were using a “real money process”, their weight would not be relevant. The exchange rate would be constant…and one to one…at all times. This is a problem created by, and moved around by, money changers and the governments they institute. If you turn back the history of these governments you always find “one individual” who got control of a military and directed it to his own ends…and then took charge of the territory it acquired. This typically spans no more than 10 or 20 years in the first instance. And if he’s successful in creating a religion in that period, that religion passes to his heirs…until the people being dominated pull back the curtain and expose the scam. In the case of Britain, the people are so stupid it spans a period going back beyond useful records. That, folks, is perfect stupidity.
So, he is talking about a new ‘gold standard’ based on everything from precious metals to base metals, to water, to one of the key ingredients for cakes, to the GDP of China, questionable data and all. Somehow these back a new global reserve currency which somebody will manage, and provide emergency liquidity in, despite *ALMOST EVERYONE IN THE NEW BLOC RUNNING TRADE SURPLUSES* – and most so with the West, who are not going to join. As such, this is not so much a proposed Bancor, as Keynes floated at the original Bretton Woods before the US insisted on the global role of the USD; nor a monstrous Rancor to devour Wall Street; it’s just plain rancour (“bitterness or resentfulness, especially when long standing”). Indeed, here is the coup de grace: MD: Anyone talking about a standard that changes value with time, is talking nonsense. And gold is anything but constant in value. We can now create new gold at a fraction of earlier costs…except where a new discovery is found … and then you can just pick up nuggets off the ground creating fictitious wealth. Changes like that…or large quantities going down with a sinking ship…create great disruptions. And such disruptions are totally unnecessary…actually impossible…if a “real money process” is in effect.
“Transition to the new world economic order will likely be accompanied by systematic refusal to honor obligations in USD, EUR, GBP, and JPY. In this respect, it will be no different from the example set by the countries issuing these currencies who thought it appropriate to steal foreign exchange reserves of Iraq, Iran, Venezuela, Afghanistan, and Russia to the tune of trillions of USD…. Even if they were to default on their obligations in those currencies, this would have no bearing on their credit rating in the new financial system. Nationalization of extraction industry, likewise, would not cause a disruption.” MD: An open admission to traders that they are…and will continue to be…dictated to by the money-changers. How is it that the real producers in the world (i.e. the traders) can be so totally dominated by the absolute non-producing slugs of the world (i.e. the money changers)?
In other words, adopt the new world order and you get to default on all your FX debt and nationalise all your foreign-owned businesses! That is precisely what I also argued: bet on the new and bet on the default of the old. That is not going to be peaceful or painless – and it will be vigorously resisted. MD: This “new world order” thing is just the new “war monger”. The latest weapons of these war mongers is immigration and virus creation and spread…and they are essentially the same thing.
You want to ensure that even vampire-squid on Wall Street and global-not-local US billionaire hedge-fund managers agree to dump neoliberalism for Western mercantilism and a bifurcated Cold War world of tariffs, capital controls, and naval blockades? Keep talking about mass nationalisations and organised debt defaults in the Eurodollar markets.52,222109 MD: These articles just continue to be less and less interesting…more and more stupidity revealing. Such is life…and then you die.
MD: I tripped over the following YouTube propaganda and thought I should warn you about GoldMoney.com. Macleod gave a link to this article which I will now annotate.
MD: First, I’ll relate my story. Then I’ll annotate this article by Macleod. Neither Turk nor Macleod have a clue about what money is. It is obvious from this YouTube discussion and will likely be evident from this article as well. You can see other reactions to his nonsense by searching for “Macleod” or “GoldMoney” at the end of this article.
First, my story. Over 10 years ago I was buying gold because I was convinced the financial system was going down the toilet. GoldMoney.com had this value proposition: If I bought “gold grams” from them, they would store the gold in secure vaults around the world. They claimed to be governed by the Isle of Wight I think. At the time, gold and silver were going up quite aggressively against the dollar.
First, I dipped my toe in. I sent them about $1,000, let it sit in the account for a little while, then asked them to send me the $1,000 plus the appreciation back. They did it without a hitch. Next, I sent them quite a bit more money from my retirement fund. And I ran an experiment. I asked them to send me some gold. They did this…but there was a hitch. I had to pay “import duty” on the gold. The round trip “load” was 10% so I decided as long as gold was diving, I’d wait until it hit bottom to ask for my delivery. At least the import duty would be lower.
Anyone who has watched gold knows it has been a poorly performing asset. The cement blocks I’ve bought over that same period have done much better than my gold at GoldMoney.com. Every few months I would do my reconciliation of my account so I could update my own records.
All of a sudden I couldn’t get into my account. At the time I was busy with other things and procrastinated. But when I finally raised the issue with them they claimed their “regulator” needed additional information. I said “no problem”. Just close my account under our original terms and send me the gold.
They refused. But they said they would send me dollars to my bank account. I had to close my bank account some years earlier because my money proved not to be safe there. They said I had no recourse but to do as I was told. I went to the “WayBack.com” archive and gave them a link to our original agreement…which specifically said they weren’t regulated by any financial regulator…and that was part of their “value proposition”.
As of this writing the issue is still not resolved. They owe me a response in our dialog. I told them I was under no illusion that this matter would be resolved “legally” as the legal process is corrupt beyond hope.
Now…on to Macleod’s nonsense.
By Alasdair Macleod Goldmoney Insights April 07, 2022 We will look back at current events and realise that they marked the change from a dollar-based global economy underwritten by financial assets to commodity-backed currencies. We face a change from collateral being purely financial in nature to becoming commodity based. It is collateral that underwrites the whole financial system.
MD: Right now, as I noted, I’m looking back and seeing that Goldmoney is not to be trusted.
The ending of the financially based system is being hastened by geopolitical developments. The West is desperately trying to sanction Russia into economic submission, but is only succeeding in driving up energy, commodity, and food prices against itself. Central banks will have no option but to inflate their currencies to pay for it all. Russia is linking the ruble to commodity prices through a moving gold peg instead, and China has already demonstrated an understanding of the West’s inflationary game by having stockpiled commodities and essential grains for the last two years and allowed her currency to rise against the dollar.
MD: Note, with a “real” money process, geopolitics can play no role at all. Of course, Macleod is clueless about that.
China and Russia are not going down the path of the West’s inflating currencies. Instead, they are moving towards a sounder money strategy with the prospect of stable interest rates and prices while the West accelerates in the opposite direction.
MD: Notice he uses the term “stable” for interest rates and prices. We know that prices will do what they will do. It “is as it is” they say. But with a “real” money process, we know INTEREST is zero for responsible traders like you and me. And we know prices are not influenced by the money at all. Money is guaranteed to have perfect supply/demand balance throughout its life…and thus zero inflation and deflation.
The Credit Suisse analyst, Zoltan Pozsar, calls it Bretton Woods III. This article looks at how it is likely to play out, concluding that the dollar and Western currencies, not the rouble, will have the greatest difficulty dealing with the end of fifty years of economic financialisation.
MD: We know that any regulated money scheme will eventually blow up. If they can envision a Bretton Wood III, they can envision a XVIII…it’s like the Superbowl. And he needs to learn how to spell “ruble”. I wish he could help me with “dealing” with GoldMoney.com. Oh…and with a “real money process”, there is no such thing as financialisation…or backing for that matter.
Pure finance is being replaced with commodity finance
It hasn’t hit the main-stream media yet, which is still reporting yesterday’s battle. But in March, the US Administration passed a death sentence on its own hegemony in a last desperate throw of the dollar dice. Not only did it misread the Russian situation with respect to its economy, but America mistakenly believed in its own power by sanctioning Russia and Putin’s oligarchs.
MD: The USA has had its death sentence my whole life…nearly 80 years. When I started my career, about 1/4th of my income went to government…and about 1/4 of the citizens were dependent on government. By the end of my career 50 years later, both those ratios have increased at an exponential rate to over 3/4…and we know even they can’t go past 4/4ths.
It may have achieved a partial blockade on Russia’s export volumes, but compensation has come from higher unit prices, benefiting Russia, and costing the Western alliance.
The consequence is a final battle in the financial war which has been brewing for decades. You do not sanction the world’s most important source of energy exports and the marginal supplier of a wide range of commodities and raw materials, including grains and fertilisers, without damaging everyone but the intended target. Worse still, the intended target has in China an extremely powerful friend, with which Russia is a partner in the world’s largest economic bloc — the Shanghai Cooperation Organisation — commanding a developing market of over 40% of the world’s population. That is the future, not the past: the past is Western wokery, punitive taxation, economies dominated by the state and its bureaucracy, anti-capitalistic socialism, and magic money trees to help pay for it all.
MD: Maybe we should remember that only the USA congress can declare war. Sanctions are a siege tactic…and a siege is an act of war. Congress just declares war on inanimate things like “drugs”…they don’t want the competition. I wish they could declare war on “stupidity”…but of course that would be shooting themselves in the foot. For a long time I have realized that Britain and Israel were our worst enemies. But government is now eclipsing them.
Despite this enormous hole in the sanctions net, the West has given itself no political option but to attempt to tighten sanctions even more. But Russia’s response is devastating for the western financial system. In two simple announcements, tying the rouble to gold for domestic credit institutions and insisting that payments for energy will only be accepted in roubles, it is calling an end to the fiat dollar era that has ruled the world from the suspension of Bretton Woods in 1971 to today.
MD: And again remember the latency. In 1971 when the USA formally renegged on their guarantee of $35/ounce for gold (after confiscating all their citizens gold at $28/ounce)…in 1971, the real price of gold was over $70/ounce. France demanded a debt payment in gold and the jig was up. But it had obviously been up for some time at that point.
Just over five decades ago, the dollar took over the role for itself as the global reserve asset from gold. After the seventies, which was a decade of currency, interest rate, and financial asset volatility, we all settled down into a world of increasing financialisation. London’s big bang in the early 1980s paved the way for regulated derivatives and the 1990s saw the rise of hedge funds and dotcoms. That was followed by an explosion in over-the-counter unregulated derivatives into the hundreds of trillions and securitisations which hit the speed-bump of the Lehman failure. Since then, the expansion of global credit for purely financial activities has been remarkable creating a financial asset bubble to rival anything seen in the history of financial excesses. And together with statistical suppression of the effect on consumer prices the switch of economic resources from Main Street to Wall Street has hidden the inflationary evidence of credit expansion from the public’s gaze.
MD: We should remember, in 1964 we could buy a gallon of gas for a quarter dollar…which was 90% silver. In 1965 they quit minting silver into the coins…but the 1965 quarters still traded for a gallon of gas. This proved beyond all doubt that the silver had nothing to do with the trade. It implicitly demonstrated that money “represented” an in-process promise to complete a trade over time and space. And coins and currency were just tokens representing that promise. Why doesn’t Macleod make note of that?
All that is coming to an end with a new commoditisation — what respected flows analyst Zoltan Pozsar at Credit Suisse calls Bretton Woods III. In his enumeration the first was suspended by President Nixon in 1971, and the second ran from then until now when the dollar has ruled indisputably. That brings us to Bretton Woods III.
MD: And as I noted, even if you believe Macleods nonsense about commoditisation, don’t resort to Goldmoney.com for your commodity. They can’t be trusted.
Russia’s insistence that importers of its energy pay in roubles and not in dollars or euros is a significant development, a direct challenge to the dollar’s role. There are no options for Russia’s “unfriendlies”, Russia’s description for the alliance united against it. The EU, which is the largest importer of Russian natural gas, either bites the bullet or scrambles for insufficient alternatives. The option is to buy natural gas and oil at reasonable rouble prices or drive prices up in euros and still not get enough to keep their economies going and the citizens warm and mobile. Either way, it seems Russia wins, and one way the EU loses.
MD: What’s good for the goose is good for the gander. We played that card with the middle eastern nomads in the 1930s. They must accept only dollars for their oil. Write all you want Macleod. Theirs no end to their ability to rig any game.
As to Pozsar’s belief that we are on the verge of Bretton Woods III, one can see the logic of his argument. The highly inflated financial bubble marks the end of an era, fifty years in the making. Negative interest rates in the EU and Japan are not just an anomaly, but the last throw of the dice for the yen and the euro. The ECB and the Bank of Japan have bond portfolios which have wiped out their equity, and then some. All Western central banks which have indulged in QE have the same problem. Contrastingly, the Russian central bank and the Peoples Bank of China have not conducted any QE and have clean balance sheets. Rising interest rates in Western currencies are made more certain and their height even greater by Russia’s aggressive response to Western sanctions. It hastens the bankruptcy of the entire Western banking system and by bursting the highly inflated financial bubble will leave little more than hollowed-out economies.
MD: Wouldn’t it be neat if this Bretton Woods III thing actually fixed the problem once and for all by instituting a “real money process”? There would be no such thing as a central bank…anywhere on the planet. In fact, banks would probably cease to exist as well. And of course Goldmoney.com wouldn’t exist either.
Putin has taken as his model the 1973 Nixon/Kissinger agreement with the Saudis to only accept US dollars in payment for oil, and to use its dominant role in OPEC to force other members to follow suit. As the World’s largest energy exporter Russia now says she will only accept roubles, repeating for the rouble the petrodollar strategy. And even Saudi Arabia is now bending with the wind and accepting China’s renminbi for its oil, calling symbolic time on the Nixon/Kissinger petrodollar agreement.
The West, by which we mean America, the EU, Britain, Japan, South Korea, and a few others have set themselves up to be the fall guys. That statement barely describes the strategic stupidity — an Ignoble Award is closer to the truth. By phasing out fossil fuels before they could be replaced entirely with green energy sources, an enormous shortfall in energy supplies has arisen. With an almost religious zeal, Germany has been cutting out nuclear generation. And even as recently as last month it still ruled out extending the lifespan of its nuclear facilities. The entire G7 membership were not only unprepared for Russia turning the tables on its members, but so far, they have yet to come up with an adequate response.
MD: Earth to Macleod…oil doesn’t come from fossils. It abiotic. And further, planet Earth loves CO2. It basks in CO2. The global warming nonsense is just that…nonsense!
Russia has effectively commoditised its currency, particularly for energy, gold, and food. It is following China down a similar path. In doing so it has undermined the dollar’s hegemony, perhaps fatally. As the driving force behind currency values, commodities will be the collateral replacing financial assets. It is interesting to observe the strength in the Mexican peso against the dollar (up 9.7% since November 2021) and the Brazilian real (up 21% over a year) And even the South African rand has risen by 11% in the last five months. That these flaky currencies are rising tells us that resource backing for currencies has its attractions beyond the rouble and renminbi.
But having turned their backs on gold, the Americans and their Western epigones lack an adequate response. If anything, they are likely to continue the fight for dollar hegemony rather than accept reality. And the more America struggles to assert its authority, the greater the likelihood of a split in the Western partnership. Europe needs Russian energy desperately, and America does not. Europe cannot afford to support American policy unconditionally.
That, of course, is Russia’s bet.
MD: Imagine if Russia and China adopted a “real money process” and quit counterfeiting money. Then the whole world would have to follow suit. And governments couldn’t create money to wage wars. They couldn’t counterfeit money to buy citizen’s support. They would be less than 1/10th the size they are now.
Russia’s point of view
For the second time in eight years, Russia has seen its currency undermined by Western action over Ukraine. Having experienced it in 2014, this time the Russian central bank was better prepared. It had diversified out of dollars adding official gold reserves. The commercial banking system was overhauled, and the Governor of the RCB, Elvira Nabiullina, by following classical monetary policies instead of the Keynesianism of her Western contempories, has contained the fall-out from the war in Ukraine. As Figure 1 shows, the rouble halved against the dollar in a knee-jerk reaction before recovering to pre-war levels.
MD: Imagine the chart below if Russia (and the USA) had instituted a “real ” money process. That chart would be a straight horizontal line at 100. It wouldn’t wiggle at all. Now how could that be bad?
The link to commodities is gold, and the RCB announced that until end-June it stands ready to buy gold from Russian banks at 5,000 roubles per gramme. The stated purpose was to allow banks to lend against mine production, given that Russian-sourced gold is included in the sanctions. But the move has encouraged speculation that the rouble is going on a quasi- gold standard; never mind that a gold standard works the other way round with users of the currency able to exchange it for gold.
MD: With a real money process you have none of that nonsense.
Besides being with silver the international legal definition of money (the rest being currency and credit), gold is a good proxy for commodities, as shown in Figure 2 below.[i] Priced in goldgrams, crude oil today is 30% below where it was in the 1950, long before Nixon suspended the Bretton Woods Agreement. Meanwhile, measured in depreciating fiat currencies the price has soared and been extremely volatile along the way.
MD: Macleod doesn’t seem to realize that the changing supply/demand for gold and the changing supply/demand for oil…and for virtually all commodities will always dictate price. But with a real money process, a perpetually perfect balance of supply and demand for money is “guaranteed” and thus plays no role in pricing at all. It doesn’t need to be as complicated as these dolts are making it folks.
MD: It’s interesting that the curve above for goldgrams is a constant “zero”. That’s what your gold is worth to you if you bought it from Goldmoney.com…absolutely zero. They say “the regulators made us steal it from you”.
It is a similar story for other commodity prices, whereby maximum stability is to be found in prices measured in goldgrams. Taking up Pozsar’s point about currencies being increasingly linked to commodities in Bretton Woods III, it appears that Russia intends to use gold as proxy for commodities to stabilise the rouble. Instead of a fixed gold exchange rate, the RCB has wisely left itself the option to periodically revise the price it will pay for gold after 1 July.
MD: Is it just coincidence that “Pozsar” looks a lot like “Ponzi”? And earth to Pozsar, money is always and only linked to one thing…a responsible traders promise to complete a trade over time and space. The only reason we have all the nonsense that this article pontificates about is because moneychangers (and the governments they institute) counterfeit money at will. Stop that and bingo…problem solved.
Table 1 shows how the RCB’s current fixed rouble gold exchange rate translates into US dollars.
MD: Need to add cement blocks to the above chart. They did better than gold.
While non-Russian credit institutions do not have access to the facility, it appears that there is nothing to stop a Russian bank buying gold in another centre, such as Dubai, to sell to the Russian central bank for roubles. All that is needed is for the dollar/rouble rate to be favourable for the arbitrage and the ability to settle in a non-sanctioned currency, such as renminbi, or to have access to Eurodollars which it can exchange for Euroroubles (see below) from a bank outside the “unfriendlies” jurisdictions.
The dollar/rouble rate can now easily be controlled by the RCB, because how demand for roubles in short supply is handled becomes a matter of policy. Gazprom’s payment arm (Gazprombank) is currently excused the West’s sanctions and EU gas and oil payments will be channelled through it.
MD: With a real money process governing all nations money, exchange rates between the various currencies would be constant. In time they would all adopt the HUL (hour of unskilled labor) as the unit of measure. Since that never changes in value…i.e. always trades for the same size hole in the ground…exchange rates would be perpetually 1.0000 for all nation’s money. There would be no need for nations.
Broadly, there are four ways in which a Western consumer can acquire roubles:
By buying roubles on the foreign exchanges.
By depositing euros, dollars, or sterling with Gazprombank and have them do the conversion as agents.
By Gazprombank increasing its balance sheet to provide credit, but collateral which is not sanctioned would be required.
By foreign banks creating rouble credits which can be paid to Gazprombank against delivery of energy supplies.
MD: Be careful. That’s like Goldmoney.com saying a way to acquire gold is by sending money to them. But when you ask for your gold they say net not, nay, nope, nix, n’t;
The last of these four is certainly possible, because that is the basis of Eurodollars, which circulate outside New York’s monetary system and have become central to international liquidity. To understand the creation of Eurodollars, and therefore the possibility of a developing Eurorouble market we must delve into the world of credit creation.
MD: Macleod. Everyone here are MoneyDelusions knows that the Euro is pure nonsense…like all government managed (distorted and misguided) money…like putting lipstick on a pig.
There are two ways in which foreigners can hold dollar balances. The way commonly understood is through the correspondent banking system. Your bank, say in Europe, will run deposit accounts with their correspondent banks in New York (JPMorgan, Citi etc.). So, if you make a deposit in dollars, the credit to your account will reconcile with the change in your bank’s correspondent account in New York.
MD: But if the USA government claims you owe them money, they grab it right out of your bank. Your bank does nothing to defend you. And you “won’t” get your money back. You will die first. And of course the government is faceless…so there’s nobody for you to kill in return. They call it civilization.
Now let us assume that you approach your European bank for a dollar loan. If the loan is agreed, it appears as a dollar asset on your bank’s balance sheet, which through double-entry bookkeeping is matched by a dollar liability in favour of you, the borrower. It cannot be otherwise and is the basis of all bank credit creation. But note that in the creation of these balances the American banking system is not involved in any way, which is how and why Eurodollars circulate, being fungible with but separate in origin from dollars in the US.
MD: In a real money process, there is really no reason for loans. Only deadbeat traders (i.e. those who default on their promises need ever resort to loans.
By the same method, we could see the birth and rapid expansion of a Eurorouble market. All that’s required is for a bank to create a loan in roubles, matched under double-entry bookkeeping with a deposit which can be used for payments. It doesn’t matter which currency the bank runs its balance sheet in, only that it has balance sheet space, access to rouble liquidity and is a credible counterparty.
MD: The solution doesn’t lie in creating new government entities to do the counterfeiting. The solution is to take the money process out of the hands of “all” governments. Let it rest with the traders like you and I.
This suggests that Eurozone and Japanese banks can only have limited participation because they are already very highly leveraged. The banks best able to run Eurorouble balances are the Americans and Chinese because they have more conservative asset to equity ratios. Furthermore, the large Chinese banks are majority state-owned, and already have business and currency interests with Russia giving them a head start with respect to rouble liquidity.
MD: Remember when we did it to the Japanese in the late 30’s. We restricted their trade. And we enticed (forced) them to attack us (yes…our government was fully aware of Pearl Harbor and the war it would enable them to start.)
We have noticed that the large American banks are not shy of dealing with the Chinese despite the politics, so presumably would like the opportunity to participate in Euroroubles. But only this week, the US Government prohibited them from paying holders of Russia’s sovereign debt more than $600 million. So, we should assume the US banks cannot participate which leaves the field open to the Chinese mega-banks. And any attempt to increase sanctions on Russia, perhaps by adding Gazprombank to the sanctioned list, achieves nothing, definitely cuts out American banks from the action, and enhances the financial integration between Russia and China. The gulf between commodity-backed currencies and yesteryear’s financial fiat simply widens.
MD: And Goldmoney.com will claim some government is prohibiting them from delivering your gold to you. See how easy that works?
For now, further sanctions are a matter for speculation. But Gazprombank with the assistance of the Russian central bank will have a key role in providing the international market for roubles with wholesale liquidity, at least until the market acquires depth in liquidity. In return, Gazprombank can act as a recycler of dollars and euros gained through trade surpluses without them entering the official reserves. Dollars, euros yen and sterling are the unfriendlies’ currencies, so the only retentions are likely to be renminbi and gold.
In this manner we might expect roubles, gold and commodities to tend to rise in tandem. We can see the process by which, as Zoltan Pozsar put it, Bretton Woods III, a global currency regime based on commodities, can take over from Bretton Woods II, which has been characterised by the financialisation of currencies. And it’s not just Russia and her roubles. It’s a direction of travel shared by China.
MD: This is like your wife always claiming to have a yeast infection. Pretty soon you find a way around that.
The economic effects of a strong currency backed by commodities defy monetary and economic beliefs prevalent in the West. But the consequences that flow from a stronger currency are desirable: falling interest rates, wealth remaining in the private sector and an escape route from the inevitable failure of Western currencies and their capital markets. The arguments in favour of decoupling from the dollar-dominated monetary system have suddenly become compelling.
MD: When does the obvious cease to be a belief?
The consequences for the West
Most Western commentary is gung-ho for further sanctions against Russia. Relatively few independent commentators have pointed out that by sanctioning Russia and freezing her foreign exchange reserves, America is destroying her own hegemony. The benefits of gold reserves have also been pointedly made to those that have them. Furthermore, central banks leaving their gold reserves vaulted at Western central banks exposes them to sanctions, should a nation fall foul of America. Doubtless, the issue is being discussed around the world and some requests for repatriation of bullion are bound to follow.
There is also the problem of gold leases and swaps, vital for providing liquidity in bullion markets, but leads to false counting of reserves. This is because under the IMF’s accounting procedures, leased and swapped gold balances are recorded as if they were still under a central bank’s ownership and control, despite bullion being transferred to another party in unallocated accounts.[ii]
MD: Actually there is no end to the money-changers creativity in cheating you. Deal them out of the game. Institute a real money process. There’s really no use in reading this nonsense further. I’m tired…and throwing in the towel. Just one parting comment: Do business at Goldmoney. com at your own risk A word to the wise is sufficient.
No one knows the extent of swaps and leases, but it is likely to be significant, given the evidence of gold price interventions over the last fifty years. Countries which have been happy to earn fees and interest to cover storage costs and turn gold bullion storage into a profitable activity (measured in fiat) are at the margin now likely to not renew swap and lease agreements and demand reallocation of bullion into earmarked accounts, which would drain liquidity from bullion markets. A rising gold price will then be bound to ensue.
Ever since the suspension of Bretton Woods in 1971, the US Government has tried to suppress gold relative to the dollar, encouraging the growth of gold derivatives to absorb demand. That gold has moved from $35 to $1920 today demonstrates the futility of these policies. But emotionally at least, the US establishment is still virulently anti-gold.
As Figure 2 above clearly shows, the link between commodity prices and gold has endured through it all. It is this factor that completely escapes popular analysis with every commodity analyst assuming in their calculations a constant objective value for the dollar and other currencies, with price subjectivity confined to the commodity alone. The use of charts and other methods of forecasting commodity prices assume as an iron rule that price changes in transactions come only from fluctuations in commodity values.
The truth behind prices measured in unbacked currencies is demonstrated by the cost of oil priced in gold having declined about 30% since the 1960s. That is reasonable given new extraction technologies and is consistent with prices tending to ease over time under a gold standard. It is only in fiat currencies that prices have soared. Clearly, gold is considerably more objective for transaction purposes than fiat currencies, which are definitely not.
Therefore, if, as the chart in the tweet below suggests, the dollar price of oil doubles from here, it will only be because at the margin people prefer oil to dollars — not because they want oil beyond their immediate needs, but because they want dollars less.
China recognised these dynamics following the Fed’s monetary policies of March 2020, when it reduced its funds rate to the zero bound and instituted QE at $120bn every month. The signal concerning the dollar’s future debasement was clear, and China began to stockpile oil, commodities, and food — just to get rid of dollars. This contributed to the rise in dollar commodity prices, which commenced from that moment, despite falling demand due to covid and supply chain problems. The effect of dollar debasement is reflected in Figure 3, which is of a popular commodity tracking ETF.
A better understanding would be to regard the increase in the value of this commodity basket not as a near doubling since March 2020, but as a near halving of the dollar’s purchasing power with respect to it.
Furthermore, the Chinese have been prescient enough to accumulate stocks of grains. The result is that 20% of the world’s population has access to 70% of the word’s maize stocks, 60% of rice, 50% of wheat and 35% of soybeans. The other 80% of the world’s population will almost certainly face acute shortages this year as exports of grain and fertiliser from Ukraine/Russia effectively cease.
China’s actions show that she has to a degree already tied her currency to commodities, recognising the dollar would lose purchasing power. And this is partially reflected in the yuan’s exchange rate against the US dollar, which since May 2020 has gained over 11%.
Implications for the dollar, euro and yen
In this article the close relationship between gold, oil, and wider commodities has been shown. It appears that Russia has found a way of tying her currency not to the dollar, but to commodities through gold, and that China has effectively been doing the same thing for two years without the gold link. The logic is to escape the consequences of currency and credit expansion for the dollar and other Western currencies as their purchasing power is undermined. And the use of a gold peg is an interesting development in this context.
We should bear in mind that according to the US Treasury TIC system foreigners own $33.24 trillion of financial securities and short-term assets including bank deposits. That is in addition to a few trillion, perhaps, in Eurodollars not recorded in the TIC statistics. These funds are only there in such quantities because of the financialisation of Western currencies, a situation we now expect to end. A change in the world’s currency order towards Pozsar’s Bretton Woods III can be expected to a substantial impact on these funds.
To prevent foreign selling of the $6.97 trillion of short-term securities and cash, interest rates would have to be raised not just to tackle rising consumer prices (a Keynesian misunderstanding about the economic role of interest rates, disproved by Gibson’s paradox[iii]) but to protect the currency on the foreign exchanges, particularly relative to the rouble and the yuan. Unfortunately, sufficiently high interest rates to encourage short-term money and deposits to stay would destabilise the values of the foreign owned $26.27 trillion in long-term securities — bonds and equities.
As the manager of US dollar interest rates, the dilemma for the Fed is made more acute by sanctions against Russia exposing the weakness of the dollar’s position. The fall in its purchasing power is magnified by soaring dollar prices for commodities, and the rise in consumer prices will be greater and sooner as a result. It is becoming possible to argue convincingly that interest rates for one-year dollar deposits should soon be in double figures, rather than the three per cent or so argued by monetary policy hawks. Whatever the numbers turn out to be, the consequences are bound to be catastrophic for financial assets and for the future of financially oriented currencies where financial assets are the principal form of collateral.
It appears that Bretton Woods II is indeed over. That being the case, America will find it virtually impossible to retain the international capital flows which have allowed it to finance the twin deficits — the budget and trade gaps. And as securities’ values fall with rising interest rates, unless the US Government takes a very sharp knife to its spending at a time of stagnating or falling economic activity, the Fed will have to step up with enhanced QE.
The excuse that QE stimulates the economy will have been worn out and exposed for what it is: the debasement of the currency as a means of hidden taxation. And the foreign capital that manages to escape from a dollar crisis is likely to seek a home elsewhere. But the other two major currencies in the dollar’s camp, the euro and yen, start from an even worse position. These are shown in Figure 4. With their purchasing power visibly collapsing the ECB and the Bank of Japan still have negative interest rates, seemingly trapped under the zero bound. Policy makers find themselves torn between the Scylla of consumer price inflation and the Charybdis of declining economic activity. A further problem is that these central banks have become substantial investors in government and other bonds (the BOJ even has equity ETFs on board) and rising bond yields are playing havoc with their balance sheets, wiping out their equity requiring a systemic recapitalisation.
Not only are the ECB and BOJ technically bankrupt without massive capital injections, but their commercial banking networks are hugely overleveraged with their global systemically important banks — their G-SIBs — having assets relative to equity averaging over twenty times. And unlike the Brazilian real, the Mexican peso and even the South African rand, the yen and the euro are sliding against the dollar.
The response from the BOJ is one of desperately hanging on to current policies. It is rigging the market by capping the yield on the 10-year JGB at 0.25%, which is where it is now.
These currency developments are indicative of great upheavals and an approaching crisis. Financial bubbles are undoubtedly about to burst sinking fiat financial values and all that sail with them. Government bonds will be yesterday’s story because neither China nor Russia, whose currencies can be expected to survive the transition from financial to commodity orientation, run large budget deficits. That, indeed, will be part of their strength.
The financial war, so long predicted and described in my essays for Goldmoney, appears to be reaching its climax. At the end it has boiled down to who understands money and currencies best. Led by America, the West has ignored the legal definition of money, substituting fiat dollars for it instead. Monetary policy lost its anchor in realism, drifting on a sea of crackpot inflationary beliefs instead.
But Russia and China have not made the same mistake. China played along with the Keynesian game while it suited them. Consequently, while Russia may be struggling militarily, unless a miracle occurs the West seems bound to lose the financial war and we are, indeed, transiting into Pozsar’s Bretton Woods III.
[i] Chart kindly provided by James Turk from his recent book, Money and Liberty (pub. Wood Lane Books)
[ii] See Treatment of Reserves and Fund Accounts — Balance of Payments Division IMF Statistics Department.
[iii] Gibson’s paradox showed that the price correlation with interest rates was with the general price level, not with the rate of price changes. Because Keynes and others failed to explain it, modern economists ignore this relationship with respect to monetary policies. See https://www.goldmoney.com/research/goldmoney-insights/gibson-s-paradox
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David Lawant this is my bio More posts by David Lawant.
MD: This blog named MoneyDelusion.com (note singular, not plural like this one) I tripped over. It was created in 2020. MoneyDelusions.com (note plural…was created three years earlier in 2017). This David Lawant is likely a Mises Monk. He’s posted three articles to his blog…one each day for three days…and then nothing. I wonder what he thinks he’s up to. Let’s see if he knows anything about money. If he does he’ll be the first Mises Monk I’ve found who does…and wouldn’t that be exciting!
A Medium of exchange (MoE) is an economic good that is used in exchange for other goods. Money is nothing more than a special case of media of exchange that happens to be universally accepted through a process that has already been well described elsewhere. Under this definition Bitcoin is not money because it’s not commonly accepted (yet), but it certainly is a MoE. For this text you can read these two concepts as synonyms, as everything here about money can be generalized to media of exchange without any loss in meaning.
MD: Right off the bat it looks like he doesn’t get it. A “medium” is the environment (control) within which “media” exists. It’s a minor point…unless his confusion goes deeper. Nope: Second sentence his thinks “money” is a special case of “media”. This is wrong. Money “is” the media. Different “cases” would be like ledger entries, demand deposits, coins, currency, etc. And what is this “universally accepted process described elsewhere”? Now he swerves into correctness…Bitcoin “is” not money…but it looks like it’s “acceptance” that is not mature enough…and thus will eventually be money. He’s wrong. It’s not created correctly. That’s what keeps it from ever being money. That’s what makes it just being stuff of simple barter exchange like gold and silver. And read that last sentence again. He is “money deluded”…that’s for sure.
Media of exchange are not a payment system, as Pierre Rochard correctly and insistently emphasizes. Although a payment system might be a nice-to-have feature to transfer a MoE form one hand to another, it is important to understand that these are completely orthogonal concepts. The channel through which a good is exchanged is not important for the economic analysis of a MoE. What matters is that the good is primarily used to be exchanged for other goods. Ludwig von Mises traced this confusion to a juridical view of money:
…the principal, although not exclusive, motive of the law for concerning itself with money is the problem of payment. When it seeks to answer the question ‘What is money?’ it is in order to determine how monetary liabilities can be discharged. For the jurist, money is a medium of payment. The economist, to whom the problem of money presents a different aspect, may not adopt this point of view if he does not wish at the very outset to prejudice his prospects of contributing to the advancement of economic theory.
MD: See…I told you he was a Mises Monk…and his brain is thoroughly contaminated. We here know that money is “an in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. It may never circulate as an object of simple barter exchange…but virtually always does. And when it does, it trades like any other object that two traders are willing to exchange. But its process is what makes it special. Real money has zero intrinsic value. But when properly protected from counterfeiting, it is the most efficient and most trusted of any object of simple barter exchange. This is because its value never changes over time and space. This is because there is no interest load associated with using it. And it is because the “process (e.g. medium) guarantees this to be so. It cannot operate any other way.
Some Bitcoiners question whether it makes sense to stress so much the MoE aspect of money if it is only a stage in the evolutionary process brilliantly depicted by Nick Szabo (collectible, store of value, medium of exchange, and unit of account). The point, as Szabo points out, is that something special happens when an economic good becomes a medium of exchange.
MD: Here you see a very common attribute of the Mises Monks…that is worship of other Mises Monks. They’re truly a mutual admiration society. It is a religion…and misguided like all religions. But the key thing to note here: An economic good does not “become” a medium of exchange (or even properly a “media” of exchange). Money is not an economic good…it is a “promise”. And “real” money is a promise that is guaranteed to be kept. It’s designed into the process. The sidebar explains it in very simple terms.
Categorization of Economic Goods
One of the most basic distinctions in economics is the one between consumption and production goods, usually called by Austrian economists as first-order and higher-order (second-order, third-order, etc…) goods. We can get away for now with the following simplified definition: first-order (consumption) goods satisfy direct human needs and higher-order (production) goods are used to produce lower-order goods.
MD: Money has no interest in what it is being traded for or how it will be used…or why it is being traded. Why should it? Why do they make this complicated? If I trade money for a hammer, do I care if it’s used to pound nails or to blacksmith wrought iron…or just to hang on the wall? If this article tells us why “he” cares we’ll correct him at that instant.
There’s nothing intrinsic about whether a good is first or higher order. For example: I can consume a certain amount of water to satisfy my thirst (i.e., water as a first-order good) or alternatively I can provide this same amount of water to cattle which I will ultimately consume as food (i.e., water as a second-order good and cattle as a first-order good).
First- and higher-order economic goods, albeit ultimately connected to a fundamental theory of value, are different enough to be treated separately in many instances. As Jesus Huerta de Soto puts it: “this classification and terminology were conceived by Carl Menger, whose theory on economic goods of different order is one of the most important logical consequences of his subjectivist conception of economics”.
Peter Paul Rubens’ representation of an altcoiner trying to spin up a monetary system (c. 1614–1616)
MD: More praise for fellow Mises Monks. Look how far we are into this article and he still has said nothing that has to do with money. He’s just tried to act like an intellectual. We know that as “double talk”. And watch out for creation of a new “..ist”…in this instance “subjectivist”. Does the world really need any more “ists”?
We have thus defined that media of exchange are goods that have no real “utility” aside from being exchanged for other goods, which in turn have real “utility” of their own. So how do we classify media of exchange? Are they first-order (consumption) or higher-order (production) economic goods? Is there anything especial about media of exchange that warrants a special analysis of them?
MD: When you realize that it’s the entire trading universe that is the “medium” of exchange, you don’t have to classify anything. In trading, those who prefer to trade for gold know its value. If they trade in silver, they know its value. What is different about “real” money is “its value never changes.” This can’t be said for any other object of simple barter exchange.
MD: The preferred unit for money is the HUL (Hour of Unskilled Labor). For all time in the past it has traded for the same size hole in the ground. And in a “real” money process, it will trade for the same size hole in the future. It is the traders who decide in their personal trades how many HULs is being traded.
MD: And this is a great simplification over the complicated process he alludes to. In his process you have to know the changing value of every good and service …in your mind. But when it comes to “real money” as one of the exchanged objects, you always know its value. When you were in high school (i.e. unskilled labor) you knew exactly what people were willing to pay for it. With the improperly managed dollar, people were willing to pay me $1.50 for a HUL. Today they are willing to pay $8.00. Why? Because the improper “dollar process” has allowed counterfeiting. They have allowed the supply/demand balance to change over time…and it is with supply continually outstripping demand through government counterfeiting (i.e. making promises they never keep)…counterfeiting “inflates” the supply. It’s just that simple.
Media of Exchange Are a Sui Generis Type of Economic Good
The number of economists who don’t have good answers to these questions is astounding. Most simply classify media of exchange as a higher-order good by exclusion. They don’t have direct “utility”, so they cannot be first-order economic goods.
MD: Here we see the pot calling the kettle black. I’m going to just let him spew on here. To put what he writes in context, he thinks gold is money. He thinks money “always” has intrinsic value. Gold thus gets its value by digging dirt and refining it. But dirt in your back yard isn’t going to give you any gold…no matter how much you refine it. And you can argue until you’re blue in the face that you put as much work into your backyard dirt as the gold professional put into his. He got gold…you didn’t. He got something to trade for his HULs…you didn’t. But when you know money is a promise, and you know “real” money comes from a process that “guarantees promises”, you don’t need to screw around with things like gold. I’ll let you read on yourself for a while. These guys make me tired..
Austrian economists think this approach is simplistic and inconsistent. They defend a three-fold categorization of economic goods: first-order (consumption) goods, higher-order (production) goods and media of exchange. This is a key proposition in Ludwig von Mises’ indispensable Theory of Money and Credit. He even criticizes his master Eugen von Böhm-Bawerk and defends the position of Karl Knies, economist of the rival German historical school, in this respect:
Production goods derive their value from that of their products. Not so money; for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money. The laws which govern the value of money are different from those which govern the value of production goods and from those which govern the value of consumption goods.
The peculiarity of media of exchange, and by extent of money, as economic goods is clearly exposed by a simple conundrum. We know intuitively that every economic good can command a price because it has “utility”. If the “utility” of a MoE is to have purchasing power (i.e., a price), how to we get out of this circular reference to understand how money has value? Mises derived his famous regression theorem to solve this apparent circularity by introducing the time element, but this is outside the scope of this text. What matters for us is that media of exchange are unique because their “utility” and purchasing power coincide. As Murray Rothbard puts it:
Without a price, or an objective exchange-value, any other good would be snapped up as a welcome free gift; but money, without a price, would not be used at all, since its entire use consists in its command of other goods on the market. The sole use of money is to be exchanged for goods, and if it had no price and therefore no exchange-value, it could not be exchanged and would no longer be used.
MD: Here is a good time to comment on this thing they call “price”. It’s how much of the stuff you have and are willing to trade for how much of the stuff your trading partner has and is willing to trade. If the “stuff” is real money, you both know exactly what is being traded…one hour of unskilled labor…and it’s guaranteed. You can convert that to dollars, marks, franks, ounces of gold, or pork bellies. It’s up to you to decide on that conversion. But one thing you don’t have to do with “real” money. You don’t have to decide what a HUL is worth. You always know, because at one point in your life your were one…an hour of unskilled labor. So if you’re using “real” money, your trade just got less risky by a factor of two (i.e. one of the objects being traded is “guaranteed” not to change over time and space). Let’s let him blab on further for a while..
This special relationship between “utility” and price for media of exchange makes its analysis unique and leads to conclusions that might seem counter-intuitive compared to the analysis of typical commodities. As Mises points out: the real problem of the value of money only begins where it leaves off in the case of commodity-values. Rothbard agrees with Mises on this point:
In the case of consumers’ goods, we do not go behind their subjective utilities on people’s value scales to investigate why they were preferred; economics must stop once the ranking has been made. In the case of money, however, we are confronted with a different problem. For the utility of money (setting aside the nonmonetary use of the money commodity) depends solely on its prospective use as the general medium of exchange. Hence the subjective utility of money is dependent on the objective exchange-value of money, and we must pursue our analysis of the demand for money further than would otherwise be required.
MD: This is a lot like hearing someone quote bible verses isn’t it.
This is the first stepping stone to intellectually justify why immutability and censorship resistance are such important concepts for media of exchange. As we will see in future texts, it will lead to the Austrian view that, contrary to other types of economic goods, increasing the supply of a MoE will only benefit some at the expense of others. On the other hand, reductions in the supply of a MoE do not make society worse off. The purchasing power that is hoarded is transmitted to others in the exact same proportion.
MD: So what do you think it will take for these “intellectuals” to grasp the concept of perpetual supply/demand balance…guaranteed? They’re beating a dead red herring…to mix a metaphor.
B2C, B2B and… B2MoE?
The singularities of different types goods are not just an abstraction — the business and investing communities also understand this well. The contrasts any executive or investor sees between business-to-consumer (B2C) and business-to-business (B2B) companies are too obvious to state here. Financial professionals are also familiar with the division between retail and wholesale banking. It is very to easy to understand that these are fundamentally different businesses that have unique challenges.
One of the reasons why Bitcoin is so novel is that companies and investors have never dealt directly with media of exchange before, but only with services built on top of an established MoE. These services are just typical consumer or production goods, not media of exchange. Trying to fit the standard toolkit to such a unique type of economic good without first considering its idiosyncrasies might lead to expensive mistakes.
Bitcoiners, possibly due to their Austro-Hungarian DNA traces, understand these concepts fully. Still, it is important to be mindful of them and make them explicit, especially as more new people start to get involved with Bitcoin. Most arguments against Bitcoin can be traced down to a misunderstanding of how media of exchange actually work. Traditional economists are generally not better positioned to understand this either, as monetary economics has been reduced to reading FOMC tea leaves and computing econometric analyses.
The next time someone points a laughable obsession over the 21 million hard cap or satellite dishes, try to gauge his understanding of some basic monetary concepts like the ones discussed here. Then think again about what is actually laughable. The next time someone tries to shill another “blockchain” that optimizes for a number of features, or for any specific feature, at the expense of immutability and censorship resistance, try to understand whether this person has considered the fact that media of exchange work under different rules.
MD: Do you think he could be more clueless? I ask you, as a trader and given the choice of an inflating money, a deflating money, or a money guaranteed to have zero inflation or deflation, which would you choose? Now that you have chosen, would your trading partner make the same choice as you in this instance? For both trading partners to be on an equal footing as far as money is concerned, the money itself must “never” change value. Does the dollar have this attribute? The Zimbabwe or Weimer Germany money? How about gold? How about cement blocks? My cement blocks have held their value better than gold.
The positions of Bitcoin proponents are usually grounded on air-tight logic and sound economic theory that extends back for a long time. This is neither dogmatism nor tribalism. Contrary to what many believe, the Austrian School of Economics does not take individual freedom and property rights as an axiom, but it arrives at those ideals through rigorous deductive logic. It certainly is a longer route to appreciate the free market system, but it might be the only one that does not lead one astray over time.
PS: An upcoming text in this series will delve deeper into the concept of utility and will probably be a required companion to this text. For now, I’m working with the oversimplified concept of utility as the satisfaction of someone’s needs. For that reason, “utility” is used in quotes throughout this text.
In that sense, a more rigorous way to transmit the main message of this text is (to paraphrase Mises): “In the case of money, subjective use-value and subjective exchange-value coincide. Both are derived from objective exchange-value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it”.
MD: As always, I couldn’t be more relieved to have reached the end of this article. And look at the help from his Mises Monk pals and scrutiny he got. Pretty scary isn’t it.
If The Fed Starts A Digital Currency, It Had Better Guarantee Privacy Tyler Durden’s Photo by Tyler Durden Tuesday, Apr 05, 2022 – 08:00 PM
MD: As always, Money Delusions will use the true definition of “real” money to annotate this article. The article appear in ZeroHedge.com as “If the Fed Starts A Digital Currency, It Had Better Guarantee Privacy”. And the title itself reveals confusion about what money is…and what its characteristics are. This begins by knowing what money is (i.e “an in-process promise to complete a trade over time and space”); how money is created (i.e. transparently in plain view by traders like you and me); how money is destroyed (i.e. also transparently by the trader delivering as promised); what happens if the trader “defaults” (i.e. “interest” of like amount is immediately collected); and how money trades in the interim (i.e. anonymously as any other object of simple-barter-exchange). Let’s get started:
Authored by By Andrew M. Bailey & William J. Luther via RealClearPolicy.com,
President Biden’s latest executive order calls for extensive research on digital assets and may usher in a U.S. central bank digital currency (CBDC), eventually allowing individuals to maintain accounts with the Federal Reserve. Other central banks are already on the job. The People’s Bank of China began piloting a digital renminbi in April 2021. India’s Reserve Bank intends to launch a digital rupee as early as this year.
MD: They immediately exhibit that they don’t know what money is. “Banks” have nothing to do with “real” money at all. It is the most obvious corruption of real money. And “digital” is just one of many forms of money.
Most commonly, money is just an entry in a ledger. In some cases it is in the form of coins and currency…both carefully designed to resist counterfeiting. In some cases it is in the form of a check (i.e. against a demand deposit). And we already have a fairly digital form of money in “debit cards”…a link to your ledger records that you carry in your purse. “Credit cards” are not an example of money. Rather, they are an example of “money creation”.
When you charge something on a credit card, “you” are creating money…a promise to complete a trade over time and space. When you use a “debit card” you are merely submitting proof that you hold some previously created money.
A CBDC may upgrade the physical cash the Federal Reserve already issues – but only if its designers appreciate the value of financial privacy.
Cash is a 7th century technology, with obvious drawbacks today. It pays no interest, is less secure than a bank deposit, and is difficult to insure against loss or theft. It is unwieldy for large transactions, and also requires those transacting to be at the same place at the same time — a big problem in an increasingly digital world.
MD: And before cash we had the tally stick…which claims to be the best implementation of money. And tally sticks were “real” money. They represented a promise to complete a trade over time and space. They worked better than gold. In fact, they could claim any kind of “backing” the trader’s agreed to (e.g. pork bellies). But nobody “traded” tally sticks. Thus, in that respect they weren’t money at all. They really were close to “crypto” in that respect…but much cheaper to create. You could create a tally stick with a twig and a knife. Today’s crypto requires insane amounts of electricity waste to create. They call it “proof of work”…which of course is nonsense.
Nonetheless, cash remains popular. Circulating U.S. currency exceeded $2.2 trillion in January 2022, more than doubling over the last decade. The inflation-adjusted value of circulating notes grew more than 5.5 percent per year over the period. And U.S. consumers used cash in 19 percent of transactions in 2020.
MD: Actually, the money changers are revealing the imminent collapse of cash. They hold lots of cash (counterfeited by government) and are doing everything they can to exchange it for real “property”. I get a dozen calls a day from “so-called investors” who want to “buy” my property. It’s a game of musical chairs. They don’t want to holding it when the “reset” comes as they know it will be instantly worthless. And also note, with “real” money, inflation is perpetually zero. No adjusted valuation is ever necessary.
Why is cash so popular, despite its drawbacks? Cash is easy to use. There are no bank or merchant terminal fees associated with cash. And, most importantly, it offers more financial privacy than the available alternatives.
MD: In actuality, cash is “not” easy to use. You almost never see it being used…even in restaurants and bars. I use it in bars just to keep score. I take a certain amount of cash, which when I’ve used it up I know I’m about to have had too much to drink. I spend lots of time explaining to other patrons why I can’t let them buy me a beer.
When you use cash, no one other than the recipient needs to know. Unlike a check or debit card transaction, there’s no bank recording how you spend your money. You can donate to a political or religious cause, buy controversial books or magazines, or secure medicine or medical treatment without much concern that governments, corporations, or snoopy neighbors will ever find out.
MD: With a “real” money implementation, there is no need for banks to be involved. All that is necessary is a “block chain” like implementation that resists the “three general problem” and counterfeiting. And when properly implemented, the “block chain” implementation is cost free. It has no use for “proof of work”. It “knows” it’s keeping track of performance on promises.
Privacy means you get to decide whether to disclose the intimate details of your life. Some will happily share. That is their choice. But others will prefer to keep those details private.
MD: But keep in mind, while “real” money used in trade is “always anonymous”, it’s creation is always “open and transparent”. Awareness of this distinction is crucial.
In a digital world, personal information can spread far and wide. And it can be used to exclude or exploit people on the margins. The choice about what information to share is important. For some, flourishing depends on carefully choosing how much others know about their politics, religion, relationships, or medical conditions.
Financial privacy matters just as much as privacy in other areas. What we do reveals much more about who we are than what we say. And what we do often requires spending money. In many cases, meaningful privacy requires financial privacy.
MD: Again, keep in mind that money is only concerned with the problem of “counterfeiting”. It cares not at all who is using it and for what. But people using it must know and expect it is genuine…i.e. not counterfeited. And of course we all know the principal counterfeiters of money are governments. For a “real” money process to exist, it’s operation must be transparent and impervious to any attempts to control or to counterfeit it. It is simply about record keeping.
Privacy also operationalizes the presumption of innocence and promotes due process. You are not obliged to testify against yourself. If law enforcement believes you have done something unlawful, they must convince a judge to issue a warrant before rifling through your things. Likewise, financial privacy prevents authorities from monitoring your transactions without authorization.
MD: Law doesn’t apply to a “real” money process. But open communication and mitigation is crucial. Again, it’s about making counterfeiting impossible. And when detected it must reveal who did the counterfeiting; see that the counterfeiting doesn’t happen again; and treat the counterfeiting for what it is… a “default”. And thus it immediately mitigates it with “interest” collection of like amount. This must be totally transparent…so the marketplace can ostracize the perps. Who pays the interest? Other irresponsible traders.
The recent executive order, to the administration’s credit, notes that a CBDC should “maintain privacy; and shield against arbitrary or unlawful surveillance, which can contribute to human rights abuses.” But a reasonable person might worry that the government is paying lip service to privacy concerns.
MD: A principle “axiom” must be observed at all times. If you are considering a government solution to any problem, you are still looking for a solution. Government is “never” the solution to any problem. It is just a magnifier of the problem.
A recent paper from the Fed, offered as “the first step in a public discussion” about CBDCs, suggests the central bank has no interest in guaranteeing privacy at the design stage. Instead, it maintains that a “CBDC would need to strike an appropriate balance […] between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.” The Fed then solicits comments on how a CBDC might “provide privacy to consumers without providing complete anonymity,” which it seems to equate with “facilitating illicit financial activity.” A U.S. CBDC, in other words, will likely offer much less privacy than cash.
MD: No central entity (especially a central bank) is ever involved in a “real” money process. Rather, it is the “process” that is the entity. As such, the process is universally used and totally transparent to all traders at all times.
We do not deny that financial privacy benefits criminals and tax cheats. Such claims tend to be exaggerated, though. In reality, it is a small price to pay for civil liberty. That due process applies to everyone — criminals included — is no reason to scrap the Fourth or Fifth Amendments.
MD: Taxes implies government…so it is a non-starter. If government participation was ever a valid option, it would be the “only” viable option. You would pay taxes (and only taxes) for everything. Your gasoline, your groceries, your clothing…all would be free. You would just pay tax and it would be covered out of that. Some people call this communism. Some call it insurance. It’s all nonsense.
Policymakers may be tempted to compromise on financial privacy when implementing a CBDC. Instead, they should attempt to replicate the privacy afforded by cash. Like non-alcoholic beer, the Fed’s “digital form of paper money” would superficially resemble the real McCoy while lacking its defining feature.
MD: Policy is the the marker here. No process is every properly governed by policy. The closest we should ever come to adopting policy is the “golden rule”. Policy is different from process. Money is a “process”. It cares nothing about policies like full employment and setting inflation at 2% (while continuously failing by a factor of 2).
MD: Note: There are charts
embedded in this article
which link back to the original. In time they will likely get
broken.
MD: A proper MOE (Medium of Exchange or Money) Process
treats all “traders” equally. But this instance does bring on to
the stage an important case. What limits should be placed on the
size of “promises” it will embrace…and why?
The case is fairly simple for individuals. It easily embraces
the case for viable shelter (buying a house). It easily embraces the
case for viable transportation (buying a car). It easily embraces
the case for unanticipated medical needs (supplementing insurance).
But how does it deal with the case for highly leveraged promises?
I will answer this question as I read the article and
intersperse my comments. Hopefully it will address these issues. The
most important issues are regarding “leverage” and detection of
“rollovers”.
The only way to get really wealthy in any society is through
unusual leverage.
Banks grant themselves 10x the leverage you and I have. As
individuals we have no leverage. We work an hour…we make some
number of HULS (note: HULs…Hours of Unskilled Labor… are the
ideal MOE measure). We must be really really good at what we do
(e.g. neurosurgery) to be worth 10x what we were in high school).
The mom and pop shop has almost no leverage. They “are”
the business. But as they grow they hire help. And that is the
beginning of their leverage growth. They take a piece of their
workers’ labor as if they performed it themselves. As they grow they
retain earnings but may also take on debt (i.e. they make money
creating promises) or they take on partners (sell shares in their
company). The money creating case is problematic. You can’t just say
I want to create a car company and create $100B (or 10B HULS).
Then we have the financial wizards. They claim to be able to
deploy surplus HULs better those who earn those HULs. And they take
a piece of the action if they succeed. They don’t suffer if they
fail; their clients do the suffering. They use options, derivatives,
high speed trading, and myriad other tricks to multiply the natural
leverage this game brings them.
Selling shares is not problematic. Each shareholder has to
decide how he’s going to come up with the money to pay for his
share. And the business itself decides how it will reward his
participation. There are many games being played in this space to
help mom and pop keep control as they grow. For example, they can
give themselves options to buy shares as payment. They can mix debt
and equity instruments as warrants. The options have proven to be
inexhaustible…their consequences unknowable and unsupportable.
Such tactics are of no concern to the MOE process. Its only
interest is in the “reasonableness” of the money creation and
tracking its return and destruction. That means assessing the
trader’s propensity to default and monitoring his performance in
real time. And we know how to address such issues. We call them
actuaries. They have great experience in the mutual casualty
insurance business.
So now lets see how we address this very unusual but real
instance of a threat to the MOE process. More importantly, we see
how the MOE process places the responsibility exactly where it
belongs…with the promise maker and with the process behavior. This
characteristic gives some assurance of self discipline.
If the trader screws up, the trader must back his failed
promise or he must pay the consequences (i.e. be banned from
creating money…as we know all governments will be banned if they
don’t change their behavior).
If the process screws up (i.e. supports an irresponsible
trader), it must penalize oncoming traders (responsible or
irresponsible) immediately. They pay INTEREST (which is returned if
they prove to be responsible).
Now to the article. My interspersed comments appear formatted
as this pretext is formatted. And please bear with me…I’m thinking
through this as I write and it’s worth at least what you’re paying
for it.
==================
Well, with everyone and everything else getting a bailout, may as
well go all the way.
MD: What a remarkable opening. Is that like “if rape
is inevitable, relax and enjoy it”?
Two months after we
reported that the state of California is trying to turn
centuries of finance on its head by allowing businesses to walk away
from commercial leases – in other words to make commercial debt
non-recourse – a move the California Business Properties Association
said “could cause a financial collapse”, attempts to bail
out commercial lenders have reached the Federal level, with the WSJ
reporting that lawmakers have introduced a bill to provide
cash to struggling hotels and shopping centers that weren’t able
to pause mortgage payments after the coronavirus shut down the U.S.
Economy.
MD: Well, the concept of “throwing good money after bad” is well known. And this likely falls into that category. Shopping malls have become a thing of the past. They had their 50years in the sun and have now been made obsolete by a better idea (.e.g. Amazon). The handwriting was on the wall way before the COVID-19 hoax and government lock-down suspended trade. COVID-19 is a neutron bomb attack. It kills people but doesn’t destroy things. For those still alive, a restart should be a simple process. Suspend the delivery on existing money creating promises until the external restrictions have been lifted. Continue to support new money creating promises using regular actuarial principles. Such principles will detect “rollover” attempts and reject them.
I think the obvious solution is to recognize the situation and do an “automatic extension” of promise time terms (the “time” part of the time and space spanning trade) of all affected promises, and move painlessly on down the road. Nobody gets hurt.
The bill would set up a government-backed funding vehicle which
companies could tap to stay current on their mortgages. It is meant
in particular to help those who borrowed in the $550 billion CMBS
market in which mortgages are re-packaged into bonds and sold to
Wall Street. What it really represents, is a bailout of the only
group of borrowers that had so far not found access to the Fed’s
various generous rescue facilities: and that’s where Congress comes
in.
MD: The problem as expressed here does not exist with a
proper MOE process. Money is not “backed” by anything but the
process. So there is no such thing as a CMBS market or
mortgage-backed securities and bonds. If we had a proper MOE
process, such techniques could still exist for those who want the
risk of non-responsible traders. But that is no concern or
responsibility of the money process. And the phrase
“government-backed funding vehicle” is a marker. This is not a
viable proposal with the word “government” in it.
To be sure, the commercial real estate market is imploding, and
as we reported at the start of the month, some 10% of loans in
commercial mortgage-backed securities were 30 or more days
delinquent at the end of June, including nearly a quarter of loans
tied to the hard-hit hotel industry, according to Trepp LLC.
MD: And if those leases were taken on by trader created
money, then an automatic 30 day extension would have already been
applied to their promise. Such extensions could go on indefinitely.
There are no so-called investors involved at all. Mom and pop
created the money (they created money for the full lease as if it
was a purchase…but is paid out to the seller monthly) and this is
one of those unavoidable occurrences that the money process
naturally accommodates. Loan sharks anticipate this too. They take
the property. Moving these leases into the MOE process space stops
the domino effect such instances create.
MD: The above curve illustrates the superiority of the
MOE process solution. In April, the COVID-19 hoax lock down
occurred. Up until then the market was healthy and getting more
healthy. Then wammo!. With the MOE process, the above curve would go
flat…or maybe even continue to go down. And a new curve would
start up. That curve would be the automatic extensions of the time
component of the money creating promises. There is no pain to anyone
anywhere…and everyone is still responsible for their promise.
Note, this concept also applies to floor plans purchased in
anticipation of normal business sales performance…now interrupted
by the lock down. Such provisions are now provided by banks through
lines of credit or compensating balance loans…and they profit
exorbitantly.
“The numbers are getting more dire and the projections are
getting more stern,” said Rep. Van Taylor (R., Texas), who is
sponsoring the bill alongside Rep. Al Lawson (D., Fla.).
MD: In our system “sponsoring a bill” means “bowing
to a lobbyist”. That’s how our corrupt system works. That’s what
gives the wealthy so much leverage over the mom and pops. A proper
MOE process levels the playing field…at no cost or risk to anyone.
Under the proposal, banks would extend money to help these
borrowers and the facility would provide a Treasury Department
guarantee that banks are repaid. The funding would come from
a $454 billion pot set aside for distressed businesses in the
earlier stimulus bill.
MD: You’ve got to love that phrase “banks would extend money”. Folks. The banks don’t have money. They have a 10x leverage privilege. A proper MOE process makes that privilege unnecessary. Let the banks continue to exist if they want to. But the 10x privilege is an anachronism.
Richard Pietrafesa owns three hotels on the East Coast
that were financed with CMBS loans. They have recently had occupancy
of around 50% or less, which doesn’t bring in enough revenue to
make mortgage payments, he said.
MD: And here is a case where we have to ask: where does the money come from? When you buy a house over time you can securely make that money creating promise. You know what you expect to make and purchase a house accordingly. But if the income is interrupted its your problem to find a replacement for it.
But Pietrafesa has no way of replacing his interruption. Such deals are heavily leveraged (OPM…other people’s money). He couldn’t get the MOE process to allow this money creating trade in the first place. He would have to rely on forming a collective to get his hotel deal done. And if the collective fails, well, as individuals in the collective, they have an incentive to keep it from failing or they lose their share. The MOE process may allow their trading promise to Pietrafesa…but would not allow Pietrafesa’s promise to the owner of the hotel he purchased. For example, just like buying a house with time payments, they could actuarially show they could buy a piece of a hotel with time payments…and be responsible if it fails.
He said he is now two months behind on payments for one
of his properties, a Fairfield Inn & Suites in Charleston, S.C.
He has money set aside in a separate reserve, he said, but his
special servicer hasn’t allowed him to access it to make debt
payments.
MD: Here we have the domino effect. He’s paying a “special servicer” to cover this risk. He’s buying insurance. It’s an actuarial problem. And insurance companies are the ultimate leveragor. In insurance CLAIMs = PREMIUMS. The money is made on the investment income. But with a real MOE process which guarantees zero INFLATION, investment income can’t benefit from the leverage INFLATION gives. The insurance business becomes a risk mitigation business with a proper MOE process…as it should be.
“It’s like a debtor’s prison,” Mr. Pietrafesa
said.
MD: An MOE process does not have a provision for penalizing. It only has a provision for naturally ostracizing. Pietrafesa would have to pay INTEREST if he DEFAULTs and tries to create money again. And he has to make up that DEFAULT to become a responsible money creating trader again. It’s the natural negative feedback stabilizing loop of the process.
Those magic words, it would appear, is all one needs to say these
days to get a government and/or Fed-sanctioned bailout. Because in a
world taken over by zombies, failure is no longer an option.
MD: These days are no different than other days. In the
olden days the zombies were taken over by the Rothschilds…through
their J.P.Morgan agency. It was and is a protection racket…just
like the mafia runs. A proper MOE process removes the leverage and
drives them out of business…kind of like legalizing drugs drives
those dealers them out of that business. Ultimately, people need to
be responsible for their own stupidity…but not for the stupidity
of others.
While any struggling commercial borrower that was previously in
good financial standing would be eligible to apply for funds to
cover mortgage payments, the facility is designed specifically for
CMBS borrowers.
MD: Thus, the leverage is in the ability to lobby. Such
advantage needs to be eliminated…in a very natural, not
legislative, manner. A proper MOE process goes far in enabling that.
It gets better, because not only are taxpayers ultimately on the
hook via the various Fed-Treasury JVs that will fund these programs,
but the new money will by default be junior to existing insolvent
debt. As the Journal explains, “many of these borrowers have
provisions in their initial loan documents that forbid them from
taking on more debt without additional approval from their
servicers. The proposed facility would instead structure the
cash infusions as preferred equity, which isn’t subject to the
debt restrictions.“
MD: The taxpayers are not on the hook. Our current
process with no stabilizing negative feedback will just keep
escalating until it blows itself up. Then most people (not in the
inner circle with advance warning) lose; it resets; and starts all
over again…with the insiders picking up the pieces for pennies on
the dollar. We now pay over 3/4ths of what we earn to governments.
Where does communism begin? Where does slavery begin?. It’s not a
good system folks. We’ve been duped. And praising the constitution
and wrapping ourselves in the flag is not going to fix it. It was
broken when it was installed…the anti-federalists got it right but
lost the argument.
Yes, it’s also means that the new capital is JUNIOR
to the debt, which means that if there is another economic downturn,
the taxpayer funds get wiped out first while the pre-existing debt –
the debt which was unreapayble to begin with – will remain on the
books!
MD: When a building collapses, it’s kind of immaterial
whether the lower floors or the upper floors collapse first. When
this calamity happens, the dirt this house of cards stands on is the
only thing of value.
Perhaps sensing the shitstorm that this proposal would create,
the WSJ admits that “the preferred equity would be considered
junior to other debt but must be repaid with interest before the
property owner can pull money out of the business.”
MD: And this is how we get 40,000 new laws every year.
They start with a bad process (i.e. principles diluted by laws) and
are stuck with a huge maintenance problem.
What was left completely unsaid is that the existing impaired
CMBS debt will instantly become money good thanks to the
junior capital infusion from – drumroll – idiot taxpayers who won’t
even understand what is going on.
MD: “will instantly become money”: Let’s examine
this. We know what money is. So somehow he’s saying that some trader
instantly makes a promise spanning time and space here. Who’s the
trader, the taxpayer? Well that’s no different than what we have now
with government doing perpetual rollovers of their trading promises.
That’s not money creation. That’s counterfeiting. We already know
that.
How did this ridiculously audacious proposal come to being? Well,
Taylor led a bipartisan group of more than 100 lawmakers who last
month signed a letter asking the Federal Reserve and Treasury to
come up with a solution for the CMBS issues. Treasury Secretary
Steven Mnuchin and Fed Chairman Jerome Powell have indicated that
this may be an issue best addressed by Congress.
MD: “asking the Federal Reserve and Treasury to come
up with a solution”? They’re the problem. Institute a proper MOE
process and we drive out the problem. That allows us to address
issues in a “proper” context rather than an “opportunist”
context.
In other words, while the Fed will be providing the special
purpose bailout vehicle, it is ultimately a decision for Congress
whether to bail out thousands of insolvent hotels and malls.
MD: The malls have no future. They are the buggy whip
of a previous era. They need to be plowed under and reseeded. But
the hotels are viable. They are just suspended in time. If they’re
collectively owned they are the responsibility of the members of the
collective. They are suspended in time. They are not failing. And
suspension carries no cost in this instance except maintenance.
Remember, with a propper MOE process, money has zero time value.
Failure? That’s something else again. It all get’s back to the
individual traders’ responsibility and recourse. A proper MOE
process should allow small traders to create money to tide
themselves over the temporary situation. It should not support large
highly leveraged traders to do so. It’s an actuarial problem.
And if some in the industry have warned that an attempt to rescue
the CMBS market would disproportionately benefit a handful of large
real-estate owners, rather than small-business owners, it is because
they are precisely right: roughly 80% of CMBS debt is held by a
handful of funds who will be the ultimate beneficiaries of this
unprecedented bailout; funds which have spent a lot of money
lobbying Messrs Taylor and Lawson.
MD: Handful of “funds”. What is a fund but a
collective… where the manager gets the gains and the participants
get the losses. People who buy into a fund roll their own dice. When
the fund is a pension fund, only the pensioner should have control.
With perpetual zero inflation, placing their pension under a rock is
a viable solution.
Of course, none of this will
be revealed and instead the talking points will focus on reaching the
dumbest common denominator. Taylor said the legislation is focused on
– what else – saving jobs. What he didn’t say is that each job that
is saved will end up getting lost just months later, and meanwhile it
will cost millions of dollars “per job” just to make sure
that the billionaires who hold the CMBS debt – such as Tom Barrack
who recently
urged a margin call moratorium in the CMBS market – come out
whole.
MD: Saving jobs “is” the issue. These workers are
suspended in time. It’s their responsibility to provide for
themselves. They can do this by creating money to tide themselves
over (say for a year or two if necessary). A proper MOE process could
actuarially support this money creation.
Say we have the maitre-d of the hotel restaurant. It’s
pragmatic for him to span this interruption and go back to work as if
nothing happened. So he creates a time and space spanning money
creating promise. He creates two years of normal income to be paid
back 1/100th monthly. The payback begins two years hence and proceeds
100 months. When he goes back to work he begins paying back,
essentially cutting his own salary a manageable amount. And while
suspended, he can put up dry-wall and make some pin money.
For the bar-back it’s a little different. He may make a money
creating promise covering 3 months income to be paid back monthly
beginning in three months over a two year span. And he immediately
goes looking for a replacement job…maybe putting up dry-wall. His
job is not his “career”.
“This started with employees in my district calling and saying
‘I lost my job’,” Taylor said, clearly hoping that he is dealing
with absolute idiots.
MD: An idiot institutes processes that have built in
domino effect.
And while it is unclear if this bill will pass – at this point
there is literally money flying out of helicopters and the US deficit
is exploding by hundreds of billions every month so who really gives
a shit if a few more billionaires are bailed out by taxpayers –
should this happen, well readers may want to close out the trade we
called the “The
Next Big Short“, namely CMBX 9, whose outlier exposure to
hotels which had emerged as the most impacted sector from the
pandemic.
MD: The money flying out of the helicopters is
counterfeit. It will go directly to producing INFLATION. It will only
create taxes to the extent the money-changers demand their tribute
payments…that’s where “all” taxes go.
With a proper MOE process the domino effect is mitigated; a
natural stabilizing negative feedback mechanism prevails; and a
pragmatic self controlled recovery is instituted. Remember. When you
have a government solution to a problem, you just have the same
problem multiplied and are still looking for a solution.
Alternatively, those who wish to piggyback on this latest
egregious abuse of taxpayer funds, this crucifxion of capitalism and
latest glorification of moral hazard, and make some cash in the
process should do the opposite of the “Next Big Short”
and buy up the BBB- (or any other deeply impaired) tranche of the
CMBX Series 9, which will quickly soar to par if this bailout is ever
voted through.
MD: And the real character of so-called “investors”
is revealed and amplified. Without a proper MOE process, money is the
chips in an opportunist, privileged casino called capitalism.
Traderism is where real money lives.
MD: So here we have another good example where a proper MOE process doesn’t “treat” a problem; rather it anticipates it and prevents its effect.
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.
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.
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.
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.
by Tyler DurdenMonday, Apr 18, 2022 – 07:25 PM
David Lawant this is my bio 
