BITCOIN “SOUND MONEY” EXPERIMENT
During the week, BOOM watched an interview on Youtube with someone who may be Satoshi Nakamoto. Who is Satoshi Nakamoto? He is the man who invented Bitcoin in 2008 and then somehow simply disappeared. The person interviewed on the Youtube video may (or may not) be that man. Some say that he is and some say he cannot be. But let’s put that aside to concentrate on what was said in the interview which may have significance for the world of so-called crypto-currencies, especially if that man is actually the famous Satoshi.
The person in the video who may or may not be Satoshi Nakamoto said that in an economic sense he is an Austrian who believes in the concept of sound money and that Bitcoin was invented to be “sound money”.
If this is true, then Bitcoin can be clearly seen as an Austrian experiment in so-called Sound Money and its ultimate success or failure will be dependent upon that concept’s monetary and economic validity.
Now, at this point, you must grasp the fact that there is a branch of economic theory called the “Austrian” school of economics that has a dogmatic belief in the concept that all money should be “sound” — backed by something that somehow restricts its supply such as Gold or in the case of so-called crypto-currencies by a mathematically difficult algorithmic mining method. The Bitcoin miners and Gold miners are one and the same in this analysis.
The argument is that “sound money” should dispense with the evils of CPI inflation created by governments and central banks endlessly expanding the money supply. This should thereby smooth out the “booms and busts” of capitalist economies. The implication is that a Nirvana or Utopian world of economic serenity would then prevail and we could all live happily ever after.
What are the Austrians missing here? BOOM is adamant that they simply do not understand that the essential nature of money is humanity itself because money evolved as a reflection of human needs. By contrast, the Austrian economists think that money should be some sort of precious resource, carefully assembled (saved) and slowly released into the economy, thus guaranteeing economic stability. They think it should never be destroyed once it is made — just like Gold (or Bitcoins).
BOOM begs to differ. BOOM sees money as much more dynamic and reflective of human needs and desires. Money is created mainly as credit (a promise for the future between individuals) even in primitive societies. It is not immortal. It has a life. It is born in modern societies as commercial bank loans, it is put to use in many, varied transactions and then it dies when the bank loan is repaid or is defaulted on by either the borrower or the bank. It is the essence of any advanced economic life and it assists the flow of human endeavor.
In a primitive society, barter exists for a micro-second until one person says to the other –“if you help me now with building my house then I will help you next week to harvest your crop”. Thus a contract of credit (money) is created as a communal promise. And sooner rather than later, the village begins to represent such promises in an easy to exchange manner e.g. by pieces of salt, bundles of fish, robust coins (that are eventually made from metals such as gold and silver to provide the quality of robustness), as scratches on Tally sticks and, finally, after the printing press is created, as paper notes. These are all examples of currency. So money is invented first (as credit — as a promise in a communal setting) and money as currency comes afterwards (as a form of easy exchange, transportation and transfer).
The word currency comes from Middle English: curraunt, “in circulation”. And from Latin: currens, -entis, refers to money in any form when in actual use or circulation as a medium of exchange. Circulation is flow.
All modern currencies are now mostly digital (notes and coins are less than 3%). So the digital nature of Bitcoin (and other “cryptos”) is not an innovation. And modern currencies are electronically stored on ledgers at banks. So the storage of Bitcoin on distributed ledgers is not really innovative either. And the Blockchain technology used to create “distributed ledgers” is equally not very innovative. A Git could perhaps be used just as easily to perform such a task. A Git is a version-control system for tracking changes in computer files and coordinating work on those files among multiple people. It is primarily used in software development, but it can be used to keep track of changes in any set of files. It was invented by Linus Torvalds in 2005.
And the blockchain technology is not new. The first Cryptology Block Chain paper occurred in 1991. The National Security Agency of the USA (the NSA) released a paper on 18th June 1996 — “How to Make a Mint”. Then Satoshi Nakamoto released the so-called “original paper” on Bitcoin on October 31st 2008. So we are 10 years into the Bitcoin phenomenon as measured from the appearance in 2008 of the Bitcoin Santa Claus, Satoshi Nakamoto who has since magically disappeared. And it is 22 years since the NSA published its paper. And we are 27 years (more than a quarter of a century) since the first Cryptology discussions appeared describing the basis of a Block chain technology (a chain of blocks).
So, it looks like Bitcoin may be an attempt to create Austrian “sound money” that is issued by anyone anywhere with sufficient computer power, is limited in quantity (only 21 million), does not embody a promise forged in a communal setting or agreement and can never be destroyed. In other words, it is not money or currency in any normal historical sense. The harshest judgment may be that perhaps it is false money? Or unsound money? And perhaps it is not a representation of anything of value? So its price in conventional currency terms could theoretically fall to Zero if it is looked upon as simply pieces of unique binary code and not much else. An Austrian dreamer’s dream.
When thinking about this subject, it is worth noting that Germany, a very successful modern economy, has had 6 official national currencies over the last 100 years. So currencies can come and go, reflective of human communal needs. Money and currencies remind BOOM of water in a biological sense — a flow essential to all biological endeavors.
Why is all this important to understand? Because we all live in a world of money and currency. Last week, BOOM explained how we all actually live on an economic and financial Planet called the US Dollar Planet. We must all come to terms with what money is and is not, what currency is and is not, what value is and is not, what relative value is and is not, what price represents and does not. Even Satoshi Nakamoto.
BOOM suggests you read this article if you wish to learn more. The Seven Deadly Paradoxes of Cryptocurrency https://bankunderground.co.uk/2018/11/13/the-seven-deadly-paradoxes-of-cryptocurrency/
Then there is the SEC to consider and all the other national regulators of security issuance and trading. They have not been idle.
SEC STATEMENT ON DIGITAL ASSETS
The Securities and Exchange Commission of the United States issued a Statement on Digital Asset Securities Issuance and Trading on 16th November. The Statement outlines the SEC’s regulator role in regard to how issuers, broker-dealers and exchanges must comply with existing Federal securities laws. This applies to Initial Coin Offerings (ICOs) and digital assets such as Security Token Offerings (STOs). BOOM encourages you to read it and to seek professional advice if it applies.
GOVERNMENT DEBT DEFAULT RATE 0.3%
BOOM recently read a comprehensive report on global sovereign debt (governmental debt). The striking fact that it revealed is that the current default rate on such debt is extremely low at 0.3% per annum. That is a very small number and it underlines the fact that borrower default from national governments is a rare occurrence indeed. The DOOM and Gloomers constantly rail on about “the dangers of government debt” but it is a false paradigm. Relative excess in private debt is where the economic dangers lie, not government debt.
As BOOM has pointed out many times, governments do not borrow from banks (they issue bonds to the broad investment market). And that so-called “debt” is not really debt in the normal sense because 1. the risk of borrower default is almost non existent 2. there is no collateral security sought by the investors and 3. the money supply does not increase except perhaps marginally (so it is generally not CPI inflationary).
Corporate bonds issued by companies have the same dynamics. Just as with government bonds, they simply take already existent money in the general economy onto their books and then spend it back into the economy. No new money is created when companies and governments issue bonds and then spend the proceeds.
GOVERNMENTS MUST START BORROWING FROM BANKS
BOOM also recently saw a review of Dollar Increase in US Financial Debt (as a percentage of GDP) compared to Dollar Increase in GDP (as a percentage of GDP), averaged over a three year period. It showed that financial debt growth in the US is currently just matching GDP growth. In the past, GDP growth has been stimulated by financial debt growth. So this suggests that there is clear potential for more US GDP growth if financial debt can be expanded.
The US government is currently rapidly expanding its deficit toward $ 1.3 Trillion annually with more and more bond issuance to plug the financing gap. And companies have been issuing low grade and high grade corporate bonds by the gross load, often using the proceeds to simply buyback their shares. This represents a huge increase in governmental and corporate spending but it is clearly not having much impact on Real GDP growth which is stuck in the sub-optimal range of 2.0 – 3.5% with CPI inflation stuck around 2%.
This is akin to “spinning the wheels”. We all know what that means — much action but no progress.
BOOM suggests that the US government should begin to fund its deficit more through bank borrowings rather than bond issuance and it should encourage companies to do likewise. To BOOM, this is the obvious step to take to re-invigorate inflationary GDP growth in the US economy.
This is a radical but necessary step where the US government would have to approach the commercial banking sector for loans. BOOM is certain that commercial bankers would be happy to extend loans to such a low risk customer. That would immediately increase the money supply and thus any resultant governmental expenditures would tend to be CPI inflationary and stimulatory to the overall economy. The private economy should respond immediately to such action.
Once steady inflationary GDP growth is established and the private sector is growing strongly, then the government could desist from this approach and move back towards using taxation revenues and bond issuance as its chief financing methodologies.
Essentially, this would generate instant economic effect because there would be no time-lag in the expansion of the money supply . It would be a volume stimulator to money supply rather than a conventional central bank low interest rate cost stimulator (with its usual time lag delays). It would be a sharp fiscal (governmental) stimulus to both the financial sector and the real economy non-financial sector.
Can someone please tell the US government what to do?
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
EMAIL: gerry [@]
PRICE PULSE DOMINANCE CHANGES DURING LAST WEEK Ended 25th November 2018:
1. NASDAQ COMP INDEX — Changed to DOWN Arrow Dominant
2. US JUNK BOND PRICES — Changed to DOWN Arrow Dominant
3. TRIM TABS US FLOAT (TTAC) — Changed to DOWN Arrow Dominant
4. US HIGH GRADE CORP BONDS (LQD) — Changed to DOWN Arrow Dominant
NOTE — RED ARROWS INDICATE BOOM PRICE PULSE DOMINANCE in the present moment (as indicated by the date of the chart and taking into account the 3 year time frame shown). The charts are now arranged in PRICE PULSE RED ARROW DOMINANCE. NOTE: All Charts are WEEKLY Charts over the last 3 YEARS time frame. Arrows indicate PAST price action (not future). No predictions are implied from past action.
Comments refer to past PRICE PULSE (Red Arrow DOMINANCE) over the last 3 years, the week ended 25th November 2018. You can RIGHT CLICK a chart and OPEN in a New Tab. Make your own conclusions, do your own research. BOOM does not offer investment advice.
PLEASE NOTE — Many charts are ETF’s from NY Market (not the base commodity or currency etc). The NY Stock Code is in the Top Left Hand Corner of each chart.
Charts are produced from http://www.stockcharts.com
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
PRICE PULSE RISING — (RED ARROW UP DOMINANCE)
# NATURAL GAS (SPOT PRICE) — UP Arrow Dominant
# BRAZIL STOCK INDEX — UP Arrow Dominant
# PALLADIUM PRICE — UP Arrow Dominant
# ARGENTINA STOCKS — UP Arrow Dominant
# US INFLATION PROTECTED BOND PRICES — UP Arrow Dominant
# US UTILITIES STOCKS — UP Arrow Dominant
# RWR (US Real Estate REIT Fund) — UP Arrow Dominant
# VALE STOCK (Iron Ore) — UP Arrow Dominant
# WEST TEXAS OIL PRICE — UP Arrow Dominant
# US DOW STOCK INDEX — UP Arrow Dominant
# US TRANSPORT INDEX — UP Arrow Dominant
# US 3 MTH T BILL YIELD — UP Arrow Dominant
# LIBOR — UP Arrow Dominant
PRICE PULSE FALLING — (RED ARROW DOWN DOMINANCE)
# TRIM TABS US FLOAT (TTAC) — DOWN Arrow Dominant
# US HIGH GRADE CORP BONDS (LQD) — DOWN Arrow Dominant
# NASDAQ COMP INDEX — DOWN Arrow Dominant
# US JUNK BOND PRICES — DOWN Arrow Dominant
# COMMODITIES INDEX (USCI) — DOWN Arrow Dominant
# SWISS FRANC (AGAINST $US) — DOWN Arrow Dominant
# FRANCE STOCKS — DOWN Arrow Dominant
# AUSSIE ALL ORDS INDEX — DOWN Arrow Dominant
# THAI SETI INDEX — DOWN Arrow Dominant
# GERMAN DAX — DOWN Arrow Dominant
# TAIWAN STOCKS — DOWN Arrow Dominant
# FVL — VALUE LINE — DOWN Arrow Dominant
# US KBW BANK INDEX — DOWN Arrow Dominant
# US LONG BOND PRICE (TLT) — DOWN Arrow Dominant
# YEN (AGAINST $US) — DOWN Arrow Dominant
# DENMARK STOCKS — DOWN Arrow Dominant
# COAL ETF (KOL) — DOWN Arrow Dominant
# TED SPREAD — DOWN Arrow Dominant
# COPPER PRICE — DOWN Arrow Dominant
# INDUSTRIAL METALS ETF (DBB) — DOWN Arrow Dominant
# YUAN (AGAINST USD) ETF — DOWN Arrow Dominant
# HANG SENG — DOWN Arrow Dominant
# SOUTH KOREA STOCKS — DOWN Arrow Dominant
# SINGAPORE STOCKS — DOWN Arrow Dominant
# AUSSIE DOLLAR AGAINST US DOLLAR — DOWN Arrow Dominant
# CANADIAN DOLLAR AGAINST USD — DOWN Arrow Dominant
# BRITISH POUND AGAINST USD — DOWN Arrow Dominant
# EURO (AGAINST $US) — DOWN Arrow Dominant
# NOMURA HOLDINGS — DOWN Arrow Dominant
# PLATINUM PRICE — DOWN Arrow Dominant
# SHANGHAI STOCKS — DOWN Arrow Dominant
# BITCOIN INDEX $NYXBT — DOWN Arrow Dominant
# DEUTSCHE BANK SHARES — DOWN Arrow Dominant
# FOOD INPUT PRICES (DBA) — DOWN Arrow Dominant
# EURODOLLAR INDEX ($XED) — DOWN Arrow Dominant
PRICE PULSE UNCERTAIN NON-DOMINANCE OF RED ARROW –
# RUSSELL 2000 INDEX — NO Arrow Dominant
# US BIOTECHNOLOGY INDEX — NO Arrow Dominant
# US INSIDER SENTIMENT (KNOW) — NO Arrow Dominant
# GOLD PRICE in USD —NO Arrow Dominant
# GOLD PRICE (in Aus Dollars) — NO Arrow Dominant
# AGGREGATE US BOND PRICES (BND) — NO Arrow Dominant
# INDIAN STOCKS — NO Arrow Dominant
# SWISS STOCKS — NO Arrow Dominant
# RUSSIAN RTSI STOCK INDEX — NO Arrow Dominant
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