Sunday, December 17, 2017

Regulating Cryptocurrencies--and Why It Matters

Nations that attempt to limit cryptocurrencies' ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.
There's a great deal of confusion right now about the regulation of cryptocurrencies such as bitcoin. Many observers seem to confuse "regulation" and "banning bitcoin," as if regulation amounts to outlawing bitcoin.
Further confusing things is the regulation of cryptocurrency exchanges, where cryptocurrencies are bought and sold.
In China, for example, cryptocurrencies are not outlawed, but exchanges were shut down until regulators could get a handle on how to deal with the potential for excesses such as fraud, misrepresentation, etc.
A Wild West free-for-all is conducive to scammers, and so some thoughtful regulation that protects users is to be welcomed.
Governments tax income and capital gains. This is how they fund their activities. Clearly, gains reaped from cryptocurrencies are no different from gains reaped from other speculations and investments, so they should be recorded and taxed in the same manner.
Some enthusiasts of cryptocurrencies seem to think that regulations requiring the reporting and taxation of gains made buying and selling cryptocurrencies is tantamount to destroying cryptocurrencies.
I think this view has it backwards: fully legalizing and regulating cryptocurrencies as financial instruments legitimizes them in a much wider circle of potential users, and common-sense regulations are to be encouraged and welcomed, not viewed as threats to cryptocurrencies.
I want to stress that beneath all the speculative frenzy we see in the cryptocurrencies, what will retain value and remain scarce and in demand is whatever solves problems.
Cryptocurrencies have the potential to solve two problems:
1. reducing the cost and friction of financial intermediaries.
2. holding value as the $250 trillion in phantom wealth created in the asset bubbles of the past 12 years vanishes.
These are real problems: financial intermediaries introduce a great amount of friction and cost globally, and even a modest reduction in cost and friction (time, effort, compliance, recording transactions, etc.) would add up very quickly.
The global value of real estate, stocks, bonds and debt-assets such as mortgages and auto loans is around $500 trillion. By my rough estimate, about half of this was created in the past 12 years as central banks inflated enormous bubbles.
A house that was worth $200,000 in 2005 is now worth $500,000, but it provides no additional value as shelter; it is the exact same house with the exact same utility value. So the additional $300,000 of current market value is entirely phantom wealth.
The same can be said of all the other assets whose value has skyrocketed: the underlying assets/collateral haven't changed enough to justify the current valuations.
Once the bubbles in stocks, bonds, housing, commercial real estate and debt-assets start popping, the owners of all that phantom wealth will be desperate to sell what is dropping in value and convert that wealth into assets that are either holding their value or appreciating.
Virtually all of this newly created financial "wealth" is ephemeral. Bitcoin et al. are routinely criticized as being "worthless" due to their digital/ephemeral nature.
But critics rarely if ever examine the equally ephemeral nature of $250 trillion in financial "wealth."
Bitcoin in particular has two features which may be viewed as having value as all these coordinated bubbles pop:
1. The organization and distribution of bitcoin is mathematical. It is not something that can be changed at the whim of a handful of self-serving people in a room (i.e. central bankers).
2. It is limited in quantity.
Some critics claim this can be changed, but that's not the way it works. A group of bitcoin miners can propose a new version of bitcoin that will issue a trillion coins, but if nobody supports their new version, it dies.
In other words, the marketplace of users decides what has value and what doesn't.
Regulations that enable cryptocurrencies to solve the two problems listed above should be welcomed, as these problems are structural and impact everyone in some fashion.
Nations that attempt to limit cryptocurrencies' ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.



I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).
Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Susan M. ($10/month), for your outrageously generous pledge to this site-- I am greatly honored by your most steadfast support and readership.

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Friday, December 15, 2017

Have We Reached Peak NFL?

How will the owners and managers of the multi-billion-dollar NFL empire handle the league's decline phase?
OK, I get it: pro football is so popular because it's one of the last refuges of modern life that hasn't been ruined by politics. Oops, scratch that. But we shouldn't pin the decline of pro football's popularity (as measured by viewership) solely on player protests, as the decline predates the recent politicization.
As this chart shows, viewership has been sliding for years across the entire demographic spectrum:
Even more troubling for the multi-billion-dollar NFL empire, the youth demographic is evaporating like mist in a scorching summer day in Death Valley. The problem for the NFL is two-fold: the number of young people who are dedicated NFL viewers is modest, and even worse, it's declining at a fast clip.
I am sure there are plenty of 25-year old fans, but anecdotally, I don't know a single Millennial who has any interest in sitting through a 2-hour pro football game at home, or ponying up the big bucks and huge chunk of time required to attend a game.
Again, anecdotally, young people seem more likely to watch a short clip of the game's highlights on Youtube than devote 2+ hours to sitting through endless annoying TV adverts for a few moments of action.
Or they're investing their sports-related time and money in college or local sports; if they're parents, their time may be devoted to their kids' sports activities.
In other words, pro football is an interest of the older generations that isn't shared by the younger generations. We can chart this progression with an S-curve, which in the case of the NFL, is marked by the "boost phase" of viewership in the 1970s and 1980s as Monday Night Football expanded the TV audience and the league added franchises.
The league reached a maximum audience some years ago, and has now entered the decline phase.
But the NFL's troubles run even deeper than demographics: its fan base is being pressured financially while the cost of attending a game keeps rising.Anecdotally, attending a game costs a small fortune now. Yes, there may be a few cheap seats in the nose-bleed sections, but the costs of getting to the game, parking and refreshments far exceed what attendance cost the previous generation, even adjusting for inflation.
Maybe somebody feels $10 for a beer in a tiny plastic cup suitable for a urine sample and $20 (or more) for a couple of hot dogs or snacks is a fair price, but outside the circle of dedicated fans, it's a ripoff.
Just in case the NFL didn't notice, 95% of the populace is experiencing stagnating wages and rising costs of essentials, leaving less and less to blow on luxuries such as NFL games.
Only the top 5% have the dough to blow on luxuries, and not to put too fine a point on it, but outside of the luxury corporate boxes, the top 5% is not the prime NFL audience for several reasons, including that they're too busy working and taking care of responsibilities to devote precious spare time to watching pro football.
Spending is correlated to income, naturally enough: most of the "recovery" is the result of soaring discretionary spending by the top 5%, not the modest spending that is affordable to the bottom 95%. That means that the advertisers spending big bucks to advertise on NFL TV games are reaching an audience with diminishing cash or credit to spend.
Lastly, the NFL has reached the point of over-saturation. Monday Night Football was an innovation in 1970, but who has time or interest for Thursday morning football, Friday afternoon football, etc.? Then there's the health-related issues (brain damage suffered by players) and the politicization.
To summarize:
1. The NFL has saturated the potential audience to the point of exhaustion.
2. The potential audience is shrinking as student-loan-burdened Millennials have collectively little interest in spending the money or time required to be a rabid fan of pro football.
3. The cost of attending an NFL game is increasingly out of reach of the bottom 95% of households.
4. TV viewership is declining across the entire demographic spectrum.
5. The wages/income of the vast majority of the TV audience has stagnated, and 95% of the populace has less disposable income than a generation ago.
6. The top 5% with the majority of the disposable income are not big pro sports fans, mostly due to the many demands on their time and the diversity of other pursuits available to them.
How will the owners and managers of the multi-billion-dollar NFL empire handle the league's decline phase? Managing the decline phase is less fun than reveling in the expansion phase.


I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).
Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Matthew R. ($5/month), for your monstrously generous pledge to this site-- I am greatly honored by your support and readership.

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Thursday, December 14, 2017

The Christmas Letter I'd Like To See

Now that I'm out of the pen, I'm enjoying a modest fund-raising success on a street corner here in town.
Whenever I get a cheery form Christmas letter from family and friends, recounting a variety of glorious travel and career exploits, my first instinct is to begin composing a parody of the genre. My wife observed this would reveal my true psychological profile (yikes!), but since you have (mostly) tolerated my various inanities over the past year, I decided to share the results anyway.

{parody initiating . . . launch parody}

Dear Friends and Family:

I hope this holiday season finds you well and in good cheer. Things are certainly looking up here, as I managed to extricate myself from Federal prison last week by hocking the house. It was all a setup--the quarter-ton of Canadian OxyCotin in the trunk of the Cadillac, the empty Jack Daniel bottle in my lap, the "I heart Putin" bumper stickers, the inflammatory Mo Tzu literature littering the back seat, the Twinkies wrappers, all of it.

You all know I prefer Zinfandel, so it was painfully obvious that the F.B.I./COINTELPRO crew only did a cursory background check. What really fries my fat is that I didn't even rank high enough on the Enemies List to get a quality character assassination--though they did get the Mo Tzu right.
My health is improving after my little adventure in China. I always wanted to try an "extreme sport" before I get too old, so I signed up to climb the 1,000 foot tall bamboo Kroika Tower outside Shanghai. The climb went well until the freak windstorm hit.

As you know, bamboo is remarkably flexible, and as a result the top two hundred feet of the tower whipped back and forth with astounding force. Observers estimated the top was swinging at least 50 feet, a number I can't confirm, as I was flung off the tower and landed in a very surprised farmer's pigsty. Fortunately I missed the pigs and my fall was cushioned by the soft mud.

My flight was somehow recorded by a Chinese film student filming the tower, and I am pleased to note the YouTube clip has been hit over a million times. Woo-hee, fame at last!

Apparently the Chinese authorities discovered my interest in Mo Tzu and the Legalist School of Chinese philosophy, and so I was quickly bundled up as a subversive and put on the next flight back to the States. If it wasn't for the crack legal team of the hugely influential American-Chinese Philosophy Club, I might be rotting in some Chinese gulag instead of enjoying the "Club Fed" Federal Prison where I ended up on Homeland Security Act Violations.

I was just out of traction when I woke up on the U.S./Canadian border in the Caddy with the "hot" OxyCotin. Funnily enough, I wasn't even taking any for my own pain. You gotta hand it to those zany COINTELPRO guys, they have a keen sense of irony!

Now that I'm out of the pen, I'm enjoying a modest fund-raising success on a street corner here in town. I have plugged my trusty Les Paul electric guitar into a portable amp and my sign reads, "Give me money and I'll stop playing 'All Along the Watchtower.'" I got the idea from those endless PBS torture-fests known as "pledge drives". I think the eye-patch and all the barely healed wounds are eliciting the sympathy of passersby, though I do hear some negative patter and have been robbed a few times. My "bitcoin accepted here" sign drew smiles but no contributions yet. But hey, life is good!

I'm hacked off that Mo Tzu's name and ideas are being smeared along with my own, but Christmas is a time for joy and gratitude and I'm trying to look past the business failure that wiped out the last of our savings, my injuries, my countersuit against the government (hopeless, I know) and the fact that I have to duct-tape my left hand to the guitar in order to play.

The pets are doing OK, though my beloved parrot lost a leg in an accident which I won't describe as it is too painful. I probably told you about the house roof, right? I did get a blue tarp over the gaping hole left by that frozen chunk of airliner latrine waste which crashed right through the rafters; bad things happen in threes, I guess, and since I've racked up six, I should be in for some good luck in 2018.

Have a safe happy Christmas! {/end parody}

Thank you, readers, for all your astonishing support of this humble site in 2017. I am greatly honored by your readership and look forward to exploring the adventures of 2018 with you.



I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).
Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Tim O. ($5/month), for your sumptuously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

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Tuesday, December 12, 2017

Could Central Banks Dump Gold in Favor of Bitcoin?

All of which brings us to the "crazy" idea of backing fiat currencies with cryptocurrencies, an idea I first floated back in 2013, long before the current crypto-craze emerged.
Exhibit One: here's your typical central bank, creating trillions of units of currency every year, backed by nothing but trust in the authority of the government, created at the whim of a handful of people in a room and distributed to their cronies, or at the behest of their cronies.
And this is a "trustworthy" currency?
Exhibit Two: central banks can't become insolvent, we're told, because they can create as much currency as they want, whenever they want. And this is a "trustworthy" currency?
Exhibit three: and here's what happens when trust in the currency is lost due to excessive currency issuance: the currency goes from 10 to the US dollar to 5,000 to $1 and then to 95,000 to $1, on its way to 2,000,000 to $1:
Yes, this was once a "trustworthy" currency.
While many people expect China to issue a gold-backed currency some day, they overlook the inconvenient reality that China is creating far more fiat currency than it is adding in gold reserves. They also overlook that gold-backed means nothing if the currency isn't convertible into gold.
If it isn't convertible, it isn't gold-backed. Claiming there's gold somewhere in a vault doesn't make a currency gold-backed, as the central bank can devalue the currency it issues at will. Gold-backed means the currency is pegged at X units of currency to 1 unit of gold, and X units of currency can be exchanged for 1 unit of gold.
All of which brings us to the "crazy" idea of backing fiat currencies with cryptocurrencies, an idea I first floated back in 2013, long before the current crypto-craze emerged: Could Bitcoin (or equivalent) Become a Global Reserve Currency?(November 7, 2013)
Since there is no real-world commodity backing the digital currency, its value must be based on scarcity and its ubiquity as money. The two ideas are self-reinforcing: there must be demand for the digital money to create scarcity, and the source of demand is the digital currency's acceptance as money that can be used to buy commodities, goods, services and (the ultimate test) gold.
Speaking of gold, correspondent Liberty Philosopher recently posed a scenario that was new to me: if gold continues losing value, could central banks dump their gold in favor of cryptocurrencies?
Yes, I realize this is anathema to those who anticipate a gold-backed currency becoming the dominant form of centrally issued currency, but the idea of governments that have debauched their currencies building reserves of decentralized and limited-in-issuance cryptocurrencies may not be as farfetched as you might imagine.
Here is Liberty Philosopher's commentary:
My understanding is that gold is kind of a reserve asset held by governments that provides the ultimate assurance that they are able to pay their debts. If the value of the assets they hold, which are a guarantee of their ability to pay, begins to erode, and the erosion in value is not a temporary or passing phenomenon, but a continuous and long-term trend, this would imply that the ability of governments to ultimately pay their debts would be eroding. If the value of gold begins to decline, governments who have gold reserves, but whose ability to pay their debts may be somewhat in question, would come under pressure to fortify their reserves as proof that they remained able to pay their debts.
If the price of gold were to continue to decline, my thought is that governments would be under pressure to sell the reserve asset that was declining in value, because the continuing decline in value would call into question their ability to repay their debts. They couldn’t just sit there and allow their reserves to decline in value year after year. They would have to act. If the need for having some kind of “hard” currency reserve remains (creditors may not want to accept newly printed bank notes in lieu of “hard” reserves), and they are forced to begin selling their gold reserves, what other hard reserve asset could they obtain or purchase? I think they could become purchasers of the most valuable cryptocurrencies as a replacement for their gold reserves.
The ideal reserve gains in purchasing power over time. If Venezuela had purchased bitcoin in size when it was $100, or even $1,000 in January 2017, its own currency wouldn't be heading to near-zero quite so quickly.
In my book A Radically Beneficial World, I proposed that nations which had debauched their centrally issued fiat currency could acquire the labor-backed currency I propose as reserves.
The acquisition of decentralized cryptocurrencies as reserves may sound crazy now, but as central banks destroy the purchasing power of their fiat currencies, all sorts of ideas that seem crazy now will start looking practical once the death spiral of the current unstable monetary regime begins.


I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).
Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

 
Thank you, Don S. ($100), for your outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.
 

Read more...

Monday, December 11, 2017

Three Bubbles/Strikes and You're Out

Those betting on a fourth bubble of even greater extremes will find their time at bat has come to an end.
The conventional investment wisdom holds that central banks will never let markets decline. This is an interesting belief, given that two previous asset bubbles based on central bank "easy money" both imploded, impoverishing believers in central bank omnipotence.
So perhaps we can say that the conventional investment wisdom holds that any asset bubble that bursts will quickly be reflated into an even more extreme asset bubble. That's certainly been the history of the past 17 years.
But there's a case to be made that bubbles are like strikes, and you only get three. A recent article, Deutsche: "We Are Almost At The Point Beyond Which There Will Be No More Bubbles", made a nuanced case for "3 bubbles and you're out" based on volatility and other inputs.
I propose a much simpler case for "3 bubbles and you're out":
1. Every policy yields diminishing returns as the positive results follow an S-curve.
2. What every trader knows no longer has any predictive power.
3. Policy extremes have become normalized, leaving central banks with unintended and unpredictable consequences should they push even more extreme policies in the next bubble burst.
Radical new central bank policies work wonders in the initial boost phase (see diagram below) because the sums being deployed are so large and the policy is so extreme: quantitative easing / purchase of assets by central banks, for example: never before have central banks conjured trillions of dollars, yuan, yen and euros out of thin air and used this new currency to buy bonds, stocks and debt instruments in vast quantities for eight years running.
But over time, the novelty and effectiveness of the radical policies wear off.Participants habituate to the policies, which become a given that can not be removed without disrupting the markets.
Traders are always seeking an edge, and front-running central bank policy has proven to be a very effective strategy. But once everyone starts using the same strategy, it stops working. Put another way, there's no predictive power left in what everyone knows.
So central banks suppress volatility--everybody knows that. Central banks jump in and buy every dip, stopping any decline in its tracks with unlimited buying of assets. Everybody knows this.
Eventually, everyone is on the same side of every trade. At that point, there is only one movement left--a reversal that catches everyone by surprise.
The third dynamic is that central banks are visibly getting nervous about the unintended and unpredictable consequences of their extreme policies. It's all fun and games when central banks are buying trillions of assets with money created out of thin air, but how do you stop the asset purchases when everyone depends on them as the foundation of the markets?
Are there no consequences from holding interest rates near zero for eight long years?
What about political blowback from the rising wealth inequality that central banks have fueled?
Policy extremes trigger unintended consequences as a result of being extreme.You can't throw around trillions and not generate expectations, incentives and blowback from those who don't benefit from the extreme policies.
Central banks don't control the consequences of their policies. If they respond to the popping of the current bubble with tens of trillions in new asset purchases, they might find this policy is nowhere near as effective as when it was unleashed in 2008.
Once markets grasp that central banks have lost control of the consequences of their policies, confidence, faith and trust in central banks "saving the day" will evaporate. The likely result of this realization is that markets will plummet to new lows rather than reach new highs.
Three bubbles/strikes and you're out. Those betting on a fourth bubble of even greater extremes will find their time at bat has come to an end.


I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).
Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Thomas B. ($250), for your outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Read more...

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