Links

MORAL HAZARD, THE HIDDEN ALCHEMY BEHIND FIAT MONETARY DISTORTION

As the largest monetary expansion in history fails to contain the long-term debt cycle that ended in 2008 (see The 40-Year Market Distortion Unwind), while spurring unprecedented levels of moral hazard, the barely-hidden financial crisis stands as proof that Predator-Prey Resource Competition Dynamics governs mankind as it does all living things — regardless of the language constructs that power elites have been spinning over the ages. Ultimately, individual rights to property, mobility, and self-defense continue to be trampled under the 21st Century Schizoid Man’s Logic of Violence.

As the 21st Century approaches its first quarter end, it becomes ever more obvious that once the generation of US President Thomas Jefferson faded from the scene in the early 19th Century, neither “democracy” nor “individualism” had ever been truly guaranteed — and did not persist. In 1831, political philosopher Alexis de Tocqueville noted: “…having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the supreme power then extends its arm over the whole community.” Two centuries later, his words resonate louder than ever to those of an independent mind, unshackled from the mainstream media.

Sadly, nearly a century before Jefferson’s monumental contribution to the world, the political-financial elite in England had already begun expanding unfunded credit cycles. Since 1694, the Bank of England (BOE) had been arbitrarily debasing its currency and expanding credit, knowing this would shock nominal prices higher. The BOE founders and their entourage quietly seized prime income-producing assets before real-economy asset-prices soared. Predictably, unlimited money expansion bumped up against physical inventory size, causing asset and commodity prices to soar — until aggregate demand collapsed and nominal prices crashed too. Regrettably, against Jefferson’s wishes, the BOE template — which bypassed democracy — was adopted in the USA, and the same happened. In fact, had it not been for the oil empire that made the US Dollar more dominant than Gold for several decades into the 20th Century, the expanding global adoption of the BOE template would long ago have taken G-7 nations to the dog-eat-dog world where Zimbabwe, Venezuela and other nations languish.

Unfortunately, the BOE template still prevails around the globe. Whatever actions are taken to neutralize it are almost always doomed to fail, as prescribed by the simplest differential equations ever devised: the Lotka–Volterra Predator-Prey equations, which prove why the linear-math models of Neoclassical Economics absolutely fail to describe the dynamics that govern human ecosystems. Only System Dynamics can fully validate the interactions that rule human economics and are intrinsic to all ecosystems (see Predator-Prey Economics). There is no better proof of this than the top chart, where the blue “Financial cycle” curve “kills” the red “Business cycle” curve, as the latter begins to dip irreversibly after 2008 — despite the titanic credit expansion by G-7 Central Banks to save Globally Systemically Important Banks (GSIBs), which have flooded the world in fiat currency and debt for the past 14 years. The GSIBs have used ploys straight out of the 1966 Report from Iron Mountain, which specifies, as a justification, using substitutes for war that must (1) be economically wasteful, (2) represent an apocalyptic threat, and (3) provide a credible excuse for making people serve the government’s will. What the “Iron Mountain” report written by James K. Galbraith and members of the think-tank predecessor of the WEF, failed to mention is that, except for scaring citizens into giving up their individual rights, wars rarely serve many other objectives. Instead, the most ruthless factions in a nation’s industrial-military complex are presented with a kaleidoscope of opportunities to encroach on the privacy and property rights of ordinary citizens for the sake of “national security.”

In conclusion, as the world reaches the end of the current long-term debt cycle and commodity purchases become unaffordable, regardless of how much domestic currency or sovereign debt G-7 economies issue, the global ratio of production versus consumption is likely to reverse, with interest rates moving towards their 5% nominal geometric-mean of 5,000 years. That will strip naked governments’ highly levered, illiquid and inefficient monetary scheming. Their four decades of interest rate distortion will likely not survive the onslaught of real interest rates and truly capitalist competition… Thank goodness!

Fortunately, as humanity faces the current cycle ending, we are the first generation to have access to a new monetary technology that can endure longer than ornamental rocks. Its name is Bitcoin, the only payment in specie ever invented to be impregnable to government decrees, counterfeiting, shipping blockades or the threat of violence.

HOW I LEARNED TO STOP WORRYING AND LOVE BITCOIN!

“Gentlemen, you can’t fight in here” … After Bitcoin Replaces Fiat!

“Bitcoin is the first example of a new form of life.
It lives and breathes on the internet.
It lives because it can pay people to keep it alive.
It lives because it performs a useful service that people will pay it to perform.
It lives because anyone, anywhere, can run a copy of its code.
It lives because all the running copies are constantly talking to each other.
It lives because if anyone copy is corrupted it is discarded, quickly and without any fuss or muss.
It lives because it is radically transparent: anyone can see its code and see exactly what it does.”

Ralph Merkle

The main reason I dedicated nearly two years (2015–17) to study how Bitcoin works was an intense mix of incredulity and curiosity. It was hard to believe that a mysterious hacker had found, implemented, and abandoned! Triple-Entry Bookkeeping (“TEB”), the solution, I had found (accidentally) to Systemic Financial Risk*. Or believing that, before vanishing, alias Nakamoto had left running the digital equivalent of a perpetual motion machine. Except, I had to admit that just as TEB had come along in 1989 (see bottom), microprocessors had already opened up a nonphysical reality where the absence of Newton’s “external unbalanced forces” could enable a digital perpetual motion machine to “live” on the internet, as Merkle put it. In essence, Satoshi had proven Newton right: “The laws of physics indicate that perpetual motion would occur if there were no external-unbalanced forces.”

A secondary, more mundane reason is that, although I had enough informal computer knowledge to understand the basics, it wasn’t enough to understand cryptography, without taking several months of online courses to scrutinize what Satoshi had actually achieved.

*I bumped into TEB in 1994, only because one of my professors at Tepper School of Business (Carnegie Mellon) had invented it just 5 years earlier and nearly 500 years after Double Entry Bookkeeping.

Simultaneously, I had been studying Systemic Financial Risk since 1989, when the SEC’s Paul Mulford unilaterally changed decades of FSAB regulations (and common sense) in order to allow banks to register Latin American Debt at FACE value, by just taking it out of our trading book and registering it into our maturity book (as if they were Treasury Bills or near maturity bonds).

Later, when Nicholas Brady came up with his nominal face value exchange plan (versus net present value logic), did it become clear to me why they had changed our mark-to-market rules entirely. An immoral scheme that left no doubts in my mind, that financial sector regulators were fully captured by the banking cartel, who knows since when.

Thus, Bitcoin was the first time I saw a functional application of TEB, and since I considered it the final solution to global systemic financial risk, I had kept on searching for any meaningful implementation of it. Once I understood Bitcoin’s technological and historical significance, I could only wonder if Prof. Ijiri had ever seen his majestic invention at work, before he passed away.

To give you a sense of the vastness of information Satoshi handled better than others in many fields where they are experts, notice in the brief below, that just knowing the fundamentals of Prof. Ijiri’s invention would be a formidable feat for a non-financial professional, furthermore being so familiarized with its principles, as to be able to unequivocally encode them in an algorithm that has been flying solo, while interacting with millions of people and billions of transactions with a 99.98% uptime record for over 13 years. Let alone the depth of knowledge** needed to master the interactions of the myriad scientific, logical, and behavioral principles that keep Bitcoin overcoming adversarial opponents of all sizes, both in the physical and digital realms, as if such an invention had already been maturing over several decades.

** To illustrate, ignoring that Bitcoin is purposefully coded in Non Turing Complete language (NTC code), doomed ETH from the start.

THE ERA OF DECENTRALIZED TRUST
Oswaldo Lairet
Fund Manager & Financial Researcher

Since Triple-Entry Bookkeeping* (“TEB”) arrived in 1989, it had been expected to eradicate our financial system’s dependence on Double-Entry Bookkeeping’s unavoidable byproduct: Centralized Trust. Thus, TEB would eventually stop our global financial system’s exponentially growing degree of Systemic Risk. Surprisingly, it was not until 20 years later, when Bitcoin’s activation validated TEB, that it became widely known. Meantime, Centralized Trust reached a point beyond which, it could only subsist, under a mantle of central bank monetary maneuvers, collusive practices, and concealed gate-keeping constraints that netted a web of hidden encroachments on privately-owned financial assets. Since then, the negative gap between real and nominal global bank capitalization has been fixed by globally expanding sovereign debt and central bank balance sheets to help GSIBs’ cover their chronically deficient Loan-to-Value ratios while compressing real interest rates. A policy that, aside from conflicting with natural law, brought global Real GDP expansion to a halt.

Conversely, Bitcoin’s most transcendental innovation was to achieve simultaneous, secure, and irreversible consensus, prior to registering bookkeeping entries on a ledger, shared among innumerable, unrelated, and globally disseminated parties. In turn, Bitcoin participants receive a verified and continuously updated copy of their digital ledger that replaces every one of the constraints previously preventing them from taking full and instantaneous control of their assets, for a set of cryptographic keys that only they can access.

In this context, it becomes clear that by providing Unconstrained Access to Privately-Owned Financial Assets, what Bitcoin truly digitized and decentralized is Trust.

  • Tepper School of Business Professor of Accounting and Economics Emeritus Yuji Ijiri developed TEB in 1989 ~500 years after the mathematician, Fry Luca Pacioli formalized Double-entry bookkeeping.

VENEZUELA IN ONE CHART

“Capitalism is the only system of economics compatible with human dignity, prosperity, and liberty. To the extent we move away from that system, we empower the worst people in society to manage what they do not understand.” — Frederick Hayek

Venezuela epitomizes Hayek’s dictum. It enjoyed the world’s fourth highest per-capita income in 1961, when it established the political system that over the six following decades, it tenaciously expanded, until fully abolishing capitalism and destroying its economy. 

Visualizing how the progression from one wealth-extreme to the other happened, entails charting how each of the dominant economic regimes, before and after 1961, impacted Real GDP per capita (dotted line) and oil production (continuous red line), versus Oil price (continuous blue line). Below, a few more pointers:

BACKGROUND COLOR RUBRIC

Blue– Capitalism: GDP and Oil production grow unbounded, despite Oil price

Yellow– Socialism: GDP binds to Oil price and Oil production drops materially

Red– Communism: GDP depends on Oil price and Oil production starts a persistent descent

TIMELINE AND OTHER POINTERS

  1. The coloring of the labels coincides with the periods along the timeline when Venezuela, formally or not, adopted each type of economic policy. Note that GDP & Oil Production outcomes closely follow the rubric above, even for the shortest time period (89- 92).
  2. Though in 1961, Venezuela adopted central planning as the guiding principle of its economy, it continued to enjoy the same degree of economic freedom that allowed foreign concessionaires to invest capital, knowledge and technology in developing oil production to the high reached in 1970, when our new constitution began impacting it.
  3. Though constitutionally allowed since 1961, the nationalization of Venezuela’s oil business was not openly debated in Congress until the late 60s. Yet, by 1970, the certainty that the oil industry would be nationalized had pushed foreign oil companies to stop all new investments in oil exploration and production expansion.
  4. Even as oil production begins dropping sharply in 1970, GDP doesn’t follow until 1977, a year after oil nationalization. What postponed the decline was the sudden and massive inflow of petrodollars, coming from the multiple oil price increases that began in 1973.
  5. Capitalism returns in 1989, and though cut short by a military uprising that forces the president to resign, its economic-liberalization and government decentralization reforms go on to benefit Venezuela for at least a decade. Note also that, as per the rubric, GDP & Oil production begin growing, despite oil prices dropping during most of this period.
  6. Upon the return of Socialism, economic difficulties caused by years of low oil prices and a local banking crisis forced the new president to honor the previous government’s plan to reopen Venezuela’s oil business to foreign oil firms, under the Orinoco Oil Joint Ventures. Once again, Capitalism is what brings oil production back to higher levels.
  7. Communism begins under a democratically elected militaristic regime, that eventually seizes power via undemocratic maneuvers and starts an indiscriminate wave of company expropriations, FX and economy-wide price controls, and many other counterproductive economic policies that over time bankrupted Venezuela’s economy.

SPINNING HYPERINFLATION AT 6.5 MILLION TURNS

SPINNING HYPERINFLATION AT 6.5 MILLION TURNS

Only one year after measuring how much devaluation the Chavista regime had imposed on its citizens since 1999, the aggregate sum of counterfeit money the Venezuelan central bank has issued totals  6.5 million times the amount of Bolivars available in Venezuela, when Chávez came to power in February 1999.

As a benchmark of Venezuela’s purchasing power for many decades, our “4.30” represents an ideal gauge to measure the degree of embezzlement gulped down by the current regime since 1999.

In fact, the monetary dilution of the past 19 years has been so many times greater than “4.30,” we need to use a logarithmic scale to visualize it. Additionally, log scaling allows us to expose the scam, using data directly available on Banco Central de Venezuela’s web page, rather than using conversions that require any explanation.

As the chart confirms, via massively printing Bolivars, the government diluted all of the capital Venezuela had amassed until 1999, plus every resource that entered our economy since then.

LINKS WITHIN POST

Chart

Monetary Base

Inorganic Money

LINKS TO 2017 ORIGINALS

Prezi

Edition (Spanish)

SOURCES

Banco Central de Venezuela

Dólar Today

U.S. Energy Information Administration

Organization of the Petroleum Exporting Countries

Servicio Nacional Integrado de Administración Aduanera y Tributaria de Venezuela

Ministerio de Petróleo y Minería de Venezuela