“How did you go bankrupt?” Bill asked.
Ernest Hemingway, The Sun Also Rises
“Two ways,” Mike said. “Gradually, then suddenly.”
A cascade of financial crises are rushing across the Western world.
Gradually
Imagine a set of express trains that are all headed toward a single catastrophic, multi-track collision. Each train is heavily damaged already, but the passengers have a peculiar and mutually held faith that as long as nobody mentions how damaged their own train is it will still keep running and everything will be fine.
At each stop along the way there is a chance that someone, possibly from another train or even an uninvolved spectator, might loudly make an observation about just how damaged a given train is, perhaps even prompted by the train’s own conductor making a confident assertion that the train is sound and strong and in perfect working order. Once such an observation is made, of course, the passengers in the damaged train flee, the thrall of groupthink now being broken, and disembark only to reembark on the least damaged-looking of the trains stopped nearby and trundle along toward their appointment with destiny.
Occasionally a handful of passengers decide they are done with this train business entirely and go find new things to involve themselves with, but this is fairly rare as the social pressure to stay in the system of trains and perpetuate that system’s associated groupthink is even more powerful than the pressure to stay on any one train.
In this way the passenger population is gradually concentrated into fewer and fewer trains. Thousands of trains will become a half dozen by the time this process completes. Eventually those half dozen trains will reach points in their converging tracks where they all start colliding in quick succession, cars flying off the track from one collision smashing into an adjacent train, sending bits of it flying into another in turn.
The passengers onboard will be absolutely smashed to bits, of course, and instead of experiencing a final devastating revelation will reach their end feeling baffled and confused as to how any of this came to be. In their final moments they will be filled with a blind, self-righteous moral outrage at the unscrupulous conductors who brought them to where they are, without the slightest appreciation for their own role in keeping the false faith of train health alive all this way.
The process of collecting the passengers in from the least healthy trains has been, up to this point, quite slow. It has been so slow that it has been largely imperceptible unless you’ve been paying attention for quite a long time. The process has extended across decades at this point, which is long enough that “old” and “experienced” finance managers, bankers and analysts have come to regard a situation where no new trains are built, old trains are abandoned and all trains are barely functioning as normal. “Hey, the technical analysis checks out, just look at my charts!“
It isn’t normal. We have merely been living through Hemingway’s “gradually”.
… then suddenly
We are reaching the end of the runway. Sperg-tier analysis of the details really don’t matter at this point, only the fundamentals do. In the end, all efforts at relieving the situation within the confines of what we call the “financial system” amount to borrowing from the future, and at this point we have borrowed so much from the future that it is impossible to ever pay it back. There simply isn’t anything to do but start messing with metrics and lying (both of which are already fully engaged).
“Messing with metrics” in this case generally boils down to inflating the currency and then boasting about how much things are going “up” if measured by that metric. Take stock prices, for example. Are they really going up? Is a price increase of 5% over the year in a year where the real inflation rate is 18% a gain? How about the GDP? Is a GDP increase of 1.5% truly a gain in a year where the inflation rate is 12%?
It is interesting how easily we conflate the concept of “increase” with “gain” in these specific contexts. Even more interesting is that this stupid measurement problem is simple enough to have been a plot mechanic in a Curious George episode that children can understand, but supposedly sophisticated, sober and grounded analysts in the financial press dance around the point or ignore it hoping it can just be wished away.
“Lying” in this case comes in two forms. The conductors of the trains obviously have an incentive to boast about train health and the stability of the rail system as a whole (while in the back arranging gilded ejection seats for themselves, having long ago converted the train company into a bank in practice), so this is what they do. The willfully blind peons riding those trains to disaster also have some incentive to tell themselves and each other lies in order to, so they believe, keep their own train a safe and effective vehicle (where these incenives are external and financial vs where they are internal and based on self-conception is an interesting subject).
Willful ignorance makes one culpable.
Hockeystick
The TL;DR is that we are set for hyperinflation, at least in the world of fiat. There are no “financial tools” left but money printing (and never really were — that’s been the big secret this whole time).
It is unclear whether that will affect all fiat currencies or just some. It is also unclear whether a handful of extremely high-trust societies might manage to implement a “debt jubilee” (that said, it is also unclear how many genuinely high-trust societies remain after the COVID farce — just to name one of a dozen profound faith-breaking events of the last few years).
Above this all is the problem where all human wealth is based in human activity. No country fell from the sky fully formed with a rich economy, history, culture, and educated, healthy, beautiful population. Great societies are built over generations, not received or inherited, and not even stolen or easily plundered. Any great society whose inhabitants believe themselves to simply be “inheriting” that society without a duty to advance it through further hard work won’t be great for very long — just consider the state of Portland, San Francisco, New York, Chicago, Frankfurt, London, Philadelphia, Stockholm, Paris, etc.
Humans must be motivated to be productive because being productive is hard, slow, costly, and often painful. Being destructive is swift and cheap. It is the basic creation/destruction tradeoff that makes the negotiation/violence continuum work in this entropic world of ours. Every major social and political event of the last several years has been profoundly demotivating, encouraged a rush toward financial speculation, playing number games, diddling with ponzi and political schemes, everything but actual productive activity. Despite a spike in absolute activity we as a species in general and Western societies in particular are suffering from a lack of productive activity of almost all forms, be they industrial, agricultural, social, intellectual or even sexual.
If everyone stops making things, we are going to eventually run out of things.
Motivators
There are two main motivations for human productivity: money and meaning.
The surface motivation for most people to do hard things is money, because money is a ready metric by which we can informally assess the value of things we produce. It’s a really neat system, enabling a rancher to trade cows for baseballs without having to figure out the details of how much cow one baseball is worth (or alternately, having to commit to buying some thousands of baseballs all at once in exchange for a full grown cow).
The deeper motivation for humans to commit to costly activity is meaning, and that is harder to pin down in many cases. It is usually strongly connected to concepts like family, identity, moral rectitude and other concepts that are almost impossible to quantify and measure. Because they are hard to measure, though, they are almost entirely ignored in the study of economics despite their paramount importance. (Consider how these issues often dominate in politics, for example. We’ve separated “political economy” into “politics” and “economics” in modern times so this tends to be a blind spot.)
There are no technical solutions to the meaning problem, there are only perhaps some systems of philosophy and religion that can restore our sense of self and our place in the universe. There may, however, be techniques that can be applied to the money problem that can provide us an alternative to the flaming ball of steaming lies the establishment has tried to sell us about finance that can help us continue to motivate one another to perform useful work during the upside down times ahead while the great apes that rule this world reorder themselves.
A possible, partial, interim solution
One such technical solution may be provided by blockchain.
Note that I am saying this is a possible, partial and interim solution. I am not claiming that blockchain is the way forward generally. Blockchain absolutists and gold absolutists are just as ridiculous as fiat absolutists (aka “Keynsians”).
Absolutists are silly people who are far more often shilling for their own sneaky “big number go up” speculation scheme than espousing true beliefs. However, ignoring that there is a deep need for a highly liquid medium of exchange (as distinct from long-term stores of value) that is safe from the influence of maximally corrupt politicians and fake bankers is naive to the point of self-defeat.
Having a medium of exchange that exists outside the confines of the fake finance system is necessary to keep some semblance of real economy moving forward outside of the inevitable command economies that will likely be manifesting as a panic response to the collapse of the WEF’s warped nightmare version of globalization. There are a number of serious problems with blockchain, though, the most important being that it is almost impossible to use for actual commercial transactions because the related software tooling has become focused entirely on demos and fake ponzi nonsense and demos of fake ponzi nonsense instead of being focused on easing real-world trade transactions.
Almost every solution to the problems of blockchain have been focused on using centralized ledgers to provide better ease of use and transaction throughput. These “solutions” are entirely fake by the standards of decentralized finance as they precisely overturn crypto’s most important feature. This is not good enough — it is simply making the same mistake that fiat finance has made, but making it much, much faster (and the re-creation of fractional-reserve banking that exchanges have engaged in is absolutely poisonous).
I can go off about this forever, and will in another post because this one is getting too long, but the bottom line is that if you are going to use crypto as a medium of exchange and your funds are not on chain and in your full control then you that’s not really your money. “Not your keys, not your crypto” was a catch phrase for a few years and somehow has been suddenly forgotten — because it is a lot easier to make the big number go up faster if you ignore all that technical stuff.
To restate, because this is absolutely critical: your funds must be outside of an exchange, outside of a fake “layer 2” system, on chain in your own account you have the private key to or they are not really yours. In the same way that “no means no”, “on-chain means on-chain”.
Objections that it is good to keep funds inside an exchange because that’s the only way that those precious crypto tokens can be exchanged for fiat currency amounts to literally believing that fiat is more stable than crypto while implicitly admitting that crypto isn’t very useful for doing real business.
See the problem?
Also, consider that as governments break down and the fake financial system collapses the impulse of regulators is going to be toward increasing rather than decreasing corruption, and trade deals over food and piracy (literal high-seas piracy, not downloading movies “piracy”) will trump concerns about whose fake ledger within which who has claims written to whom. The collapse of FTX will be a comical chapter in a book about mass hysteria some day.
The “what can I actually buy/sell with that”? Problem
A technical gap really does exist here and that is the problem that aside from the infamous Silk Road system of yore, there have been zero crypto-based systems that permit ordinary users to simply buy and sell things online in a simple way using crypto, at least until just now.
Consider this carefully: If you have some crypto on chain what can you actually buy with it? Alterately, what can you sell for it? Where can you do this trading in the first place? These are actually not easy questions to answer. There aren’t any marketplaces! You would think that the first thing someone would come along and do is integrate a real marketplace with an actual blockchain, but nope — that has been an afterthought at best, because the way to “make money” with crypto has changed from real work to financial speculation, which is the exact evil that crypto was designed to overcome!
This situation is just fascinating to me.
I have thought about this problem for a long time and come to the conclusion that the most important gap to cover, given the imminent implosion of the fiat financial system, is the online marketplace use case. The second most important gap to cover is the real-life point-of-sale case.
My band of misfits and I have managed to cobble together a working solution to the online marketplace problem. It is based in Japan, owned and operated by a Japanese company, and is located here: https://aegora.jp.
(I am working on a solution to the point-of-sale problem as well, and there is a very good path forward there that was only clear once the marketplace problem had been properly addressed.)
Some shameless (if brief) shilling
Aegora is based on the “Aeternity” blockchain, which has a number of advanced features that solve a handful of fundamental problems with blockchain. The most notable problem that Aeternity solves in the short term is the ever-troublesome speed problem. Aeternity is fast enough that transactions on Aegora are usually smoother than online payments with Visa. This means that you can actually do commercial transactions on Aeternity in a reasonable time, and it can scale to at least an eBay-sized marketplace.
Aegora’s business proposition is also unique in the blockchain world: it is a marketplace that charges an overhead of 2% for transactions. That’s it. That’s the entire business proposition. Boringly traditional. The whole idea we have is that people need to motivate each other to action, and buying and selling is a good way to do that. The core theory is that having a business model is much more powerful over the long term than any windfall profit based on currency speculation could ever be, so Aegora is designed as a marketplace business and expects to never (or rarely) be returning any AE tokens back to fiat currency.
On the note of AE price fluctuation, the potential volatility of AE is actually a problem that Aegora has had to solve. Our approach so far has been to implement a system of live price adjustments between buyer and seller, and the buyer’s ability to put a block on a trade pending an agreed price adjustment. In addition, because the fiat price of AE might not mean much soon (and we expect the stablecoins used by exchanges to conduct 1-to-1 crypto-to-fiat “swaps” to fail the same way Luna did), Aegora will always have a basic commodity for sale (a 10kgs bag of rice) and that can be used as a rough index of value, as its price will be adjusted when needed to reflect the real-world exchange value of AE (from a Japanese domestic perspective, at least).
Aegora’s operation is not yet well explained in English (or even Japanese), so I will be writing another article explaining exactly how it works (UPDATE: a brief one has been written, with more complete documentation still pending). For the moment there is a video that fully demonstrates how the site works (on Odysee and YouTube), but better materials are needed, as that video is fairly snooze-inducing.
I believe that we are probably within two quarters of a major financial collapse, so it is better to spell out how things work on my blog here for now than to bother with in-site explanations, technical doodads, helpers, documentation nobody will actually read, or well-produced videos and things. Those all take time to produce properly and are far less likely to be found by a search engine than posts here are, so for now posts will suffice until we get at least a base of references assembled.
The Bottom Line
In the end we are going to want to figure out some way to trade with people online as long as “online” remains a thing. Crypto has never lived up to its promise in this regard despite being given every chance simply because the get-rich-quick nonsense attracted all the interest early on and that in turn attracted the sly fox confidence men like SBF, almost from the moment there was a “there” there.
The creation of Aegora exposed a number of technical gaps that remain in blockchain, but also opened good paths to fixing a large number of them, which overall is a very positive development. For now we have at least managed to create one solution to the problem where if you have a thing you want to sell you can sell it for crypto (at least AE) and if you have some AE you can buy a real thing for it if you see it for sale on Aegora. In creating that solution we have gone at least part way to answer the fundamental usability question with crypto: “What can I do with it?” (Sure, for technical reasons this problem is only solved for AE, but other blockchains that are serious about being commerce coins can, and should, copy this.)
Incidentally, this also solves the problem of “how do I get some crypto?” — the fastest solution is to get 0.1AE from someone (we’ll even help if you have something you want to sell — send me an email) and sell something on Aegora.