Posts Tagged ‘reserve currency’

The Great Blockchain Race

Tuesday, December 12th, 2017

There is a big hustle going on right now over blockchain-based systems, most notably digital cryptocurrencies. It is as if the public just became aware of the word “blockchain”, saw that Bitcoin posted some crazy value gains, and decided “Oh? It went up? That means it is going to be a safe bet that it will go up forever!” and just hopped in with both feet.

Despite blockchain’s inherent scalability problems…

Despite the totally insane energy cost behind every single transaction going forward…

This has, of course, attracted the attention of The Sneakies. The Sneakies are people who realize that running a confidence game on a single person is moderately difficult, but running one on a large population that doesn’t really have the time or interest to dig into the details is quite easy — especially if you have a piece of cake in one hand, and even easier if they are panicked about something at the same time. Fear and hope are a powerful combination when aligned.

Since about 2014 an interesting proliferation of digital currencies (most being cryptocurrencies, but some even being created by banking consortia — har har!) has occurred. Some try to attract attention by spreading FUD about Bitcoin (not that the things they say about Bitcoin are inaccurate, but the same criticisms usually apply to the newly proposed currency as well), some try to attract attention using a “proof-of-work” system analogous to the original Bitcoin algorithm (“Get in now on the ground-floor!”), some try to leverage pre-existing FUD about Trump or the Euro or whatever. Most use a subtle combination and target a specific demographic (Antifa sympathizers, Randite Objectivist libertarians, Neo-Commies, Neo-Nazis, retirees and other “near-deads”, veterans, even Neo-Pagans).

Catching a trend? This is how trends that become confidence scams start to look.

Are cryptocurrencies the future of lightweight value exchange? Yeah, probably something like that. But we already have something more concrete backed by violence: actual currencies that can be electronically divided, transferred and calculated at a much lower cost to energy.

So what will happen? The early miners are punching out now — because while the run has been great and Bitcoin & co will be worth more than $0 even after the market correction, nobody knows when the correction will come. Full disclosure: I’m holding some Bitcoin. Mostly stuff I mined a few years ago. The value is sort of preposterous at the moment. Will I cash in? Maybe — but who knows what sort of pain that might cause me with tax services? It might not even be worth it unless I’m prepared to be shady about things.

But the scammers are starting to cash in, and it won’t be too much longer before one of two things happen:

  1. Scary but predictable: The Bitcoin “whales” cash in and the market collapses, causing a race to the bottom (like a short-call on everyone who has been betting against the Yen, Dollar, Pound and gold)
  2. Crap your pants scary and unpredictable: A quantum breakthrough or algorithmic development makes the entire blockchain transparent and manipulable — POOF!

I’m not saying these sort of efforts are a bad idea, just that they are unrefined and this is unexplored territory.

Also, as a parting thought… Every piece of software used for running crypto wallets, miners, etc. right now is rushed into production with little to no validation or security testing whatsoever. Maybe that isn’t the best way to safeguard something many non-techhies are hoping to be The Next Big Thing. Many of these platforms require Oracle’s Java, for example, and cannot even run on IBM’s JVM or the OpenJDK. Maybe that’s also not a good plan. That’s like having all your eggs in one big basket inside another basket of baskets. Whoops.

The Yuan: Stealing from Piers to pay 保罗

Tuesday, December 1st, 2015

So, indeed the Yuan was made into a reserve currency and the link-by-failure is already being established. It is interesting, though, that the bulk of the value transfer involved is coming from the Euro, not the Dollar or Yen. Linked by the IMF formally or not, though, if either the Euro or the Yuan fail over the mid-term the other will as well. The Chinese and Eurozone economies are intimately linked already, but were linked more by success than failure until now. That the failure of either is a very real possibility is too terrifying for the financial press to discuss, I think, and it is a political landmine public figures are trying very hard to avoid mentioning. It even seems that the made-up nature of Chinese government economic estimates isn’t even in the news much these days. You would think that little detail might enter into the discussion about adding a new currency to the IMF’s reserve currency group.

There is no longer a strong relationship among basic aspects of value assignment, legal ownership, practical control (that is, “real ownership”), vested business interest in terms of the performance value of concerns, and available goods and services in either the Eurozone or Chinese markets. While there are no recipes for economic success, there are several recipes for disaster (ask an economist about this — their responses tend to be as enlightening and humorous as they are depressing on reflection). A lack of correlation between various forms of utility values and assigned values is one of the disaster recipes. There is no easy way to fix this other than a kinetic re-establishment of property rights, and that means there is nothing left to do in the current situation than hope that when they do fail, they fail cleanly. But historically there is no such thing as a clean failure (in theory, of course, all sorts of lovely solutions exist).

Dropping an anvil on the overloaded camel’s back in the Eurozone or China would be rather easy at the moment, as both economies are in precarious situations. In fact, inducing a major market collapse would be so easy right now that failure is almost certain to come as the result of a deliberate action from an external player than by mere circumstance. The more players who realize this is true the more likely such an action becomes: why let a failure happen to you when you can be the one making it happen if the event is inevitable?

In describing the European and Chinese economic situations a financial analyst friend of mine used the phrase “poised to fail” (along with a lot of depressed-looking facepalming). When someone says that to a geopolitical analyst, though, ears perk up. There is always opportunity to be found in crisis, and sometimes when crisis is inevitable the best play is to be the cause of it yourself, because then you are the only one truly prepared. Consider the economic fallout of Russia’s invasion of Georgia in August 2008. A similar performance is absolutely not out of the question, nor is having some “terrorists” conveniently demonstrate the peaceful nature of some religion all over a ship in the Strait of Malacca at a perfectly horrible moment.

2007-2010 SPY chart

Rhetoric forces us to pretend that the August invasion of Georgia did not trigger a reassessment of risk in Eastern European carry trade loans, and instead believe that the already liquidated American subprime loans acted as a magical “contagion” that unfairly crushed the Eurozone. As if the European economies were not profoundly overleveraged and primed to implode.

There really isn’t anything to do about what is going on with the Yuan, really. This course was set about 20 years ago (yes, all the way back in 1995 — after the Cold War, after the first post-Tienanmen Square Five Year Plan was in action; as China started on its “Money is Good” -> “Expansion Above All” -> “Don’t Stop the Train” -> “WTO Rules? Screw the rules, I have money!” chain of policies). The general trend will continue, as none of the players seems to have any inkling of how to change the rules of the game — and the trend is of the end of a decades-long political and financial cycle. The way these stories end is never happy.

1984-2015 Money Base chart

Anyone who thinks that events since 2008 have been business as usual and that geopolitics plays no part in this because “its just a market hiccup” is deluded.

But!

Every end is a new beginning, and that’s what is really worth focusing on. That may sound like small comfort (and it is), but if you already know things are going to get worse before they get better, then at least you won’t find yourself sleeping in a bed of broken dreams. It is too soon to tell which way this Jenga tower is going to topple, but we are nearing the end of this round of the game.

China: Yuan Will Be a Reserve Currency, Come What May

Tuesday, December 1st, 2015

EDIT: Indeed, it has been made a reserve currency, or at least it looks like announcements have already been made to pave the way.

The IMF is considering adding the Yuan to the group of reserve currencies. That would put it alongside the U.S. Dollar, the Japanese Yen, the English Pound, and the Euro in terms of “officially perceived” stash-your-value-here viability. As far as actual criteria for inclusion go, the Canadian Dollar, Australian Dollar, and very likely the Russian Ruble are probably actually closer to being genuine reserve currency material than the Chinese Yuan.

But… politics.

China is much closer to a total financial collapse and internal civil disruption* than recovery and stability in its current form. Long-term, of course, China will still be right where it is and the people there will still be Chinese (but there will eventually be far fewer of them, at least for a few generations). A Chinese collapse right now would be a major disaster for everyone. The commodity markets are depressed more than they have been for several decades (in relative terms, actually, I’m not sure that we actually have a post-WWII precedent for what is happening), energy is cheap, credit is massively overleveraged, and yet people aren’t buying enough stuff to keep the wheels spinning.

What does that have to do with the Yuan becoming a reserve currency? It does three things:

  • Gives China access to an external aggregate value device to prop up the yuan if necessary (links their economy to everyone else’s by failure, similar to the way subsidies can do this within a national economy). This effect is actually more a hoped-for psychological effect on the market than a tangible superpower China is being granted by the rays of a yellow sun.
  • Makes the Yuan a necessary holding for anyone trying to carry a balanced basket of reserve currencies (temporarily spikes demand for the Yuan).
  • Promotes an impression of stability in the Yuan (well-founded or not).

Why would the West agree to this? (And I say “the West” because, let’s face it, Washington and London are pretty much the ones who will be deciding.) Because if China were to fail right now it would be a severe annoyance for the U.S. and a complete disaster for Europe and Russia. Nobody really knows what the fallout of that would be, but it wouldn’t be pretty.

The Yuan will be made a reserve currency, whether it makes sense or not, and whether it actually fits in the reserve currency club by the standards and rules the IMF itself has laid out. These are scary times and nobody has any good levers to pull to “fix the economy” so national governments and central banks are pulling at straws because there is simply nothing left to try. All the control rods have been yanked out and tossed already, or shoved in and locked tightly; all the red buttons have been mashed; all the hyperbolic rhetorical devices have been so over-used at this point that the only thing that might actually influence market participants is a frank exposition about the truth rather than more “we’ll do whatever it takes!” and other gung-ho, “it’ll work this time” and “this is the lastest of the last rounds of QE, and this time it will really be the most effectivest of effective measures… I promise!” blather.

[* China is due for two painful corrections which will likely occur together, as they are linked. The first is a political correction; China’s geography does not lend itself to a central command economy. The second is a property-claims correction; when basic goods cannot be had at any price it means the entire system is so out of whack due to government interventions that only a hard reset can fix things. This will likely take the form of a civil war, but who knows. It could be gradual decline toward state failure followed by a logical and non-violent nation-wide roundtable discussion, or even a bloodless revolution coupled with a voluntary capitulation of material holdings by the power elites. But seriously, this has never happened in history and there is no reason to expect China’s inevitable transitions to occur independently of one another, or for either to be non-violent.]