Fiat money: Currencies that derive their value largely through trust in the governments that issue them

The Four Phases Of Hyperinflation, According To The IMF Authored by Mark Jeftovic via BombThrower.com, Inflation is much more than a monetary phenomenon; it rips at the very core of social cohesion. Secular high inflation is one of the worst possible experiences a population can face. We are now heading for what looks like global high inflation across all currencies, with multiple episodes of hyperinflation. It will be unprecedented. The Four Phases of Hyperinflation Hyperinflations are generally defined as periods in which the monthly inflation rate exceeds 50%. In this 2018 paper, the IMF breaks hyperinflationary episodes out into four phases which comprise two stages: Phase One: is “the rise”. The IMF also calls this “the extraordinary acceleration phase” which is the lead-up to the hyperinflation. IMF actually terms it “the path toward hyperinflation”, but given that they define that as an annual inflation rate of greater than 50% but under 500%, an uncredentialed, non-economist observer might describe that as already being hyperinflation. “The average duration of the first phase is 8-9 years with an annual average inflation of 125 percent” Phase Two: is the actual hyperinflation proper. Wheelbarrows of money, burning banknotes in the oven (or more tragically, sticking your head in there). In one well storied example from Weimar Germany, an emigre fighting to retrieve his savings from a German bank was finally paid out – via a cheque mailed to him in America. The stamp on the envelope cost more than the value on the cheque made out to him. Over the eighteen 20th century hyperinflations covered in the IMF paper, the average inflation rate here, according to the IMF study was 2,912% and the median duration was four years – this “explosive” phase is usually over in about two years. Venezuela, isn’t in the graph because their hyperinflation took place in the 2000’s. It is noted therein, that the inflation rate there hit 488,865%. As we’ve covered in the premium letter, Venezuela has undergone three currency devaluations over the 14 years, knocking about half a dozen zeros off their banknotes each time (via the July 2021 issue of TCC): Venezuela is launching their Digital Bolivar CBDC in tandem with a currency redenomination that took effect Oct 1st. They knocked six zeros off of their banknotes in an effort to get in front of the hyperinflation which has ravaged the economy for years. This is the third currency redenomination for Venezuela in 13 years. In 2018 they knocked five zeros off the currency and in 2008 they took away three zeroes. Maybe this is another indicator of hyperinflation? When the time between redenominations shrinks while the number of zeroes removed increases…. (The prior two devaluations also coincided with the launching of a Central Bank Digital Currency). Phases Three and Four are the second stage of a hyper inflationary event: “disinflation” – where the annual inflation rate plummets to somewhere between 50% and 500% and lasts another six years on average – and finally the “stabilization” phase, where inflation remains under 50% per year for at least three years. The case for a “Phase Zero” of Hyperinflation: I would argue that there is a Phase Zero: where the future inflationary path becomes baked in by unsustainable debt. While policy makers are still able to talk with a straight face as if there is an alternative, the path to inflation is assured.  We’ve been in Phase Zero for over 50 years, since the Nixon shock of 1971. We are at the edges of the Phase Zero to One transition now. Back in the 1940s during WWII, public debt to GDP quickly jumped from 40% to over 100%. But, this actually understates the scale of what happened. Debt went from $43 billion to $258 billion, which was a 500% increase in five years. pic.twitter.com/6rA4bglkBp — Lyn Alden (@LynAldenContact) February 25, 2023 Phase zero could probably be defined as the moment a currency becomes fiat. We notice from Lyn Alden’s chart, of US debt-to-GDP above, that after the World War II spending binge, the ratio actually declined. Over the Leave-It-To-Beaver and Hippies era, it came down to below the level it was before the war. Then came the Nixon Shock in the early 70’s, when the last vestiges of gold convertibility were suspended (“temporarily”). Since then, the global monetary system has been irrevocably committed to an inflationary path.  In this James Lavish Twitter thread, various participants look at how the interest due on America’s debt has entered the territory where it is cannibalizing the budget expenditures. When you have to borrow more, at higher interest rates, this is what happens. It’s really simple. And scary. pic.twitter.com/zA3eyVfBdq — James Lavish (@jameslavish) February 20, 2023 Seen in this light, it’s no surprise that central banks around the world are already backing off the interest rate hikes (Canada has already said they’re on hold, and the only thing the US is meaningfully tapering is the size of the rate hikes). [ Insert: In previous editions of the letter it was always reiterated that the Fed will continue hiking “until something breaks” in the credit markets / banking system. Given the startling and rapid collapse of the Silicon Valley Bank over the past couple days, we may be getting there ] If the Fed slows down hikes, they have to normalize higher inflation. The folks over at Zerohedge once predicted that when it becomes clear that the Fed can’t control money supply, they would start dropping “leaks” that the hallowed “target inflation rate” would be raised.  Right now that’s 2%, pretty well across all civilized nations. That’s the golden rate at which governments can embezzle wealth from the economy and the peasants will let them get away with it. But to get inflation down to that level, according to this Obama-era advisor, that would mean in excess of 6% unemployment for two years. The Fed wants “demand destruction” (which means people lose their jobs or their business) – but not too much demand destruction.  Apparently 6% for 2 years is too much, so the level of embezzlement will have to be raised. It’s not like we’re talking hyper-inflationary numbers, yet – right?  But raising a target inflation rate from 2% to 3% is a 50% hike in the rate of theft.  Fear not, the corporate press is always there with a solution. In this case it’s the Wall Street Journal suggesting you could skip breakfast “Several breakfast staples saw sharp price increases due to a perfect storm of bad weather and disease outbreaks—and continued effects from Russia’s invasion of Ukraine.” This reminds me of the infamous Bloomberg piece on how to make ends meet on a measly $300,000 / year… advice included that you get rid of your car, switch from eating meat to lentils… and euthanizing your dog. This all jives with our core premise that the ESG movement is so widely endorsed by “woke” capitalists because it provides cover for the reality that we are in an unsustainable debt bubble and monetary expansion – and that the rabble has to ratchet down their living standards to cope.  We can look at weaker economies to see what the future looks like: Lebanon just did a currency devaluation – reducing the official exchange rate by 90%, overnight. This came after a spat of bank robberies, where citizens were sticking up banks to get their own money out. Now they’re burning them down. In Lebanon people are burning down financial institutions and politicians' homes to reclaim their own money which has been frozen by the banks. Keep in mind with CBDC the financial establishment has the ability to freeze your money with a push on a button..... pic.twitter.com/kNIn8Z1Gbh — Richard (@ricwe123) February 19, 2023 On January 31st, Lebanese citizens went to bed thinking the official exchange rate on the Lebanese pound was around 1500 to 1 USD, (whether or not they could actually get at their money, that was the rate).  When they awoke the next morning, the official exchange rate had been set to 15,000 Lebanese pounds to 1 USD. The black market rate was even worse, coming in around 64,000.  In Bitcoin terms, the collapse was even more pronounced: The fiat system is collapsing, weaker currencies first – but anything not backed by something tangible is headed for the dumpster of history.  In prior high inflation or hyperinflationary events, people could always seek refuge in other currencies or adopt some kind of “notgeld” (emergency money). But in this chapter, it’s every currency, across all political affiliations, and jeopardizing every incumbent power structure. (Which is why it seems like the world is sleepwalking into another world war, if we’re not already in the early innings of one.) It may seem like being on alert for hyperinflation here in the West is bonkers, but we’re already seeing massive fissures in the financial system opening up from normalizing interest rates to %4.57, well below even the official rate of inflation – and that hallowed “Fed Taper” still hasn’t even gotten going yet… It probably never will. Banking crises are here (we’ve had two in under a week, if you count the Elizabeth Warren-led rat-fucking of Silvergate), and former Treasury Secretary Larry Summers went on Bloomberg to say this “won’t be a source of systemic risk”. It remains to be seen if that utterance gets filed next to “sub-prime is contained”.  If we squeak through this crisis, we buy some time but only forestall the inevitable destruction the global financial system, which explains the incessant drive toward CBDCs, but that could all be too late, given the rate of collapse. This morning I woke up to see USDC had de-pegged to as low as 0.82, and while it looks like it will probably re-peg in due course (I sent a note about that to my premium list earlier today), it reinforces my core tenet that volatility aside, the only thing I really trust to be around for the foreseeable future, (and that I can move in an instant during a financial collapse) …is Bitcoin. *  *  * Jump on the Bombthrower mailing list to get these posts as they come out. Today’s article was largely an excerpt from The Bitcoin Capitalist month end letter. Sign up today for our trial offer. Follow me on Nostr, Twitter, or Gettr. Tyler Durden Sun, 03/12/2023 - 13:00.....»»

2021 Greatest Hits: The Most Popular Articles Of The Past Year And A Look Ahead One year ago, when looking at the 20 most popular stories of 2020, we said that the year would be a very tough act to follow as there "could not have been more regime shifts, volatility moments, and memes than 2020." And yet despite the exceedingly high bar for 2021, the year did not disappoint and proved to be a successful contender, and if judging by the sheer breadth of narratives, stories, surprises, plot twists and unexpected developments, 2021 was even more memorable and event-filled than 2020. Where does one start? While covid was the story of 2020, the pandemic that emerged out of a (Fauci-funded) genetic lab team in Wuhan, China dominated newsflow, politics and capital markets for the second year in a row. And while the biggest plot twist of 2020 was Biden's victory over Trump in the presidential election (it took the pandemic lockdowns and mail-in ballots to hand the outcome to Biden), largely thanks to Covid, Biden failed to hold to his biggest presidential promise of defeating covid, and not only did he admit in late 2021 that there is "no Federal solution" to covid waving a white flag of surrender less than a year into his presidency, but following the recent emergence of the Xi, pardon Omicron variant, the number of covid cases in the US has just shattered all records. The silver lining is not only that deaths and hospitalizations have failed to follow the number of cases, but that the scaremongering narrative itself is starting to melt in response to growing grassroots discontent with vaccine after vaccine and booster after booster, which by now it is clear, do nothing to contain the pandemic. And now that it is clear that omicron is about as mild as a moderate case of the flu, the hope has finally emerged that this latest strain will finally kill off the pandemic as it becomes the dominant, rapidly-spreading variant, leading to worldwide herd immunity thanks to the immune system's natural response. Yes, it may mean billions less in revenue for Pfizer and Moderna, but it will be a colossal victory for the entire world. The second biggest story of 2021 was undoubtedly the scourge of soaring inflation, which contrary to macrotourist predictions that it would prove "transitory", refused to do so and kept rising, and rising, and rising, until it hit levels not seen since the Volcker galloping inflation days of the 1980s. The only difference of course is that back then, the Fed Funds rate hit 20%. Now it is at 0%, and any attempts to hike aggressively will lead to a horrific market crash, something the Fed knows very well. Whether this was due to supply-chain blockages and a lack of goods and services pushing prices higher, or due to massive stimulus pushing demand for goods - and also prices - higher, or simply the result of a record injection of central bank liquidity into the system, is irrelevant but what does matter is that it got so bad that even Biden, facing a mauling for his Democratic party in next year's midterm elections, freaked out about soaring prices and pushed hard to lower the price of gasoline, ordering releases from the US Strategic Petroleum Reserve and vowing to punish energy companies that dare to make a profit, while ordering Powell to contain the surge in prices even if means the market is hit. Unfortunately for Biden, the market will be hit even as inflation still remain red hot for much of the coming year. And speaking of markets, while 2022 may be a year when the piper finally gets paid, 2021 was yet another blockbuster year for risk assets, largely on the back of the continued global response to the 2020 covid pandemic, when as we wrote last year, we saw "the official arrival of global Helicopter Money, tens of trillions in fiscal and monetary stimulus, an overhaul of the global economy punctuated by an unprecedented explosion in world debt, an Orwellian crackdown on civil liberties by governments everywhere, and ultimately set the scene for what even the World Economic Forum called simply "The Great Reset." Yes, the staggering liquidity injections that started in 2020, continued throughout 2021 and the final tally is that after $3 trillion in emergency liquidity injections in the immediate aftermath of the pandemic to stabilize the world, the Fed injected almost $2 trillion in the subsequent period, of which $1.5 trillion in 2021, a year where economists were "puzzled" why inflation was soaring. This, of course, excludes the tens of trillions of monetary stimulus injected by other central banks as well as the boundless fiscal stimulus that was greenlighted with the launch of helicopter money (i.e., MMT) in 2020. It's also why with inflation running red hot and real rates the lowest they have ever been, everyone was forced to rush into the "safety" of stocks (or stonks as they came to be known among GenZ), and why after last year's torrid stock market returns, the S&P rose another 27% in 2021 and up a staggering 114% from the March 2020 lows, in the process trouncing all previous mega-rallies (including those in 1929, 1938, 1974 and 2009)... ... making this the third consecutive year of double-digit returns. This reminds us of something we said last year: "it's almost as if the world's richest asset owners requested the covid pandemic." A year later, we got confirmation for this rhetorical statement, when we calculated that in the 18 months since the covid pandemic, the richest 1% of US society have seen their net worth increase by over $30 trillion. As a result, the US is now officially a banana republic where the middle 60% of US households by income - a measure economists use as a definition of the middle class - saw their combined assets drop from 26.7% to 26.6% of national wealth as of June, the lowest in Federal Reserve data, while for the first time the super rich had a bigger share, at 27%. Yes, the 1% now own more wealth than the entire US middle class, a definition traditionally reserve for kleptocracies and despotic African banana republics. It wasn't just the rich, however: politicians the world over would benefit from the transition from QE to outright helicopter money and MMT which made the over monetization of deficits widely accepted in the blink of an eye. The common theme here is simple: no matter what happens, capital markets can never again be allowed to drop, regardless of the cost or how much more debt has to be incurred. Indeed, as we look back at the news barrage over the past year, and past decade for that matter, the one thing that becomes especially clear amid the constant din of markets, of politics, of social upheaval and geopolitical strife - and now pandemics -  in fact a world that is so flooded with constant conflicting newsflow and changing storylines that many now say it has become virtually impossible to even try to predict the future, is that despite the people's desire for change, for something original and untried, the world's established forces will not allow it and will fight to preserve the broken status quo at any price - even global coordinated shutdowns - which is perhaps why it always boils down to one thing - capital markets, that bedrock of Western capitalism and the "modern way of life", where control, even if it means central planning the likes of which have not been seen since the days of the USSR, and an upward trajectory must be preserved at all costs, as the alternative is a global, socio-economic collapse. And since it is the daily gyrations of stocks that sway popular moods the interplay between capital markets and politics has never been more profound or more consequential. The more powerful message here is the implicit realization and admission by politicians, not just Trump who had a penchant of tweeting about the S&P every time it rose, but also his peers on both sides of the aisle, that the stock market is now seen as the consummate barometer of one's political achievements and approval. Which is also why capital markets are now, more than ever, a political tool whose purpose is no longer to distribute capital efficiently and discount the future, but to manipulate voter sentiments far more efficiently than any fake Russian election interference attempt ever could. Which brings us back to 2021 and the past decade, which was best summarized by a recent Bill Blain article who said that "the last 10-years has been a story of massive central banking distortion to address the 2008 crisis. Now central banks face the consequences and are trapped. The distortion can’t go uncorrected indefinitely." He is right: the distortion will eventually collapse especially if the Fed follows through with its attempt rate hikes some time in mid-2020, but so far the establishment and the "top 1%" have been successful - perhaps the correct word is lucky - in preserving the value of risk assets: on the back of the Fed's firehose of liquidity the S&P500 returned an impressive 27% in 2021, following a 15.5% return in 2020 and 28.50% in 2019. It did so by staging the greatest rally off all time from the March lows, surpassing all of the 4 greatest rallies off the lows of the past century (1929,1938, 1974, and 2009). Yet this continued can-kicking by the establishment - all of which was made possible by the covid pandemic and lockdowns which served as an all too convenient scapegoat for the unprecedented response that served to propel risk assets (and fiat alternatives such as gold and bitcoin) to all time highs - has come with a price... and an increasingly higher price in fact. As even Bank of America CIO Michael Hartnett admits, Fed's response to the the pandemic "worsened inequality" as the value of financial assets - Wall Street -  relative to economy - Main Street - hit all-time high of 6.3x. And while the Fed was the dynamo that has propelled markets higher ever since the Lehman collapse, last year certainly had its share of breakout moments. Here is a sampling. Gamestop and the emergence of meme stonks and the daytrading apes: In January markets were hypnotized by the massive trading volumes, rolling short squeezes and surging share prices of unremarkable established companies such as consoles retailer GameStop and cinema chain AMC and various other micro and midcap names. What began as a discussion on untapped value at GameStop on Reddit months earlier by Keith Gill, better known as Roaring Kitty, morphed into a hedge fund-orchestrated, crowdsourced effort to squeeze out the short position held by a hedge fund, Melvin Capital. The momentum flooded through the retail market, where daytraders shunned stocks and bought massive out of the money calls, sparking rampant "gamma squeezes" in the process forcing some brokers to curb trading. Robinhood, a popular broker for day traders and Citadel's most lucrative "subsidiary", required a cash injection to withstand the demands placed on it by its clearing house. The company IPOed later in the year only to see its shares collapse as it emerged its business model was disappointing hollow absent constant retail euphoria. Ultimately, the market received a crash course in the power of retail investors on a mission. Ultimately, "retail favorite" stocks ended the year on a subdued note as the trading frenzy from earlier in the year petered out, but despite underperforming the S&P500, retail traders still outperformed hedge funds by more than 100%. Failed seven-year Treasury auction:  Whereas auctions of seven-year US government debt generally spark interest only among specialists, on on February 25 2021, one such typically boring event sparked shockwaves across financial markets, as the weakest demand on record hit prices across the whole spectrum of Treasury bonds. The five-, seven- and 10-year notes all fell sharply in price. Researchers at the Federal Reserve called it a “flash event”; we called it a "catastrophic, tailing" auction, the closest thing the US has had to a failed Trasury auction. The flare-up, as the FT put it, reflects one of the most pressing investor concerns of the year: inflation. At the time, fund managers were just starting to realize that consumer price rises were back with a vengeance — a huge threat to the bond market which still remembers the dire days of the Volcker Fed when inflation was about as high as it is today but the 30Y was trading around 15%. The February auaction also illustrated that the world’s most important market was far less liquid and not as structurally robust as investors had hoped. It was an extreme example of a long-running issue: since the financial crisis the traditional providers of liquidity, a group of 24 Wall Street banks, have pulled back because of higher costs associated with post-2008 capital requirements, while leaving liquidity provision to the Fed. Those banks, in their reduced role, as well as the hedge funds and high-frequency traders that have stepped into their place, have tended to withdraw in moments of market volatility. Needless to say, with the Fed now tapering its record QE, we expect many more such "flash" episodes in the bond market in the year ahead. The arch ego of Archegos: In March 2021 several banks received a brutal reminder that some of family offices, which manage some $6 trillion in wealth of successful billionaires and entrepreneurs and which have minimal reporting requirements, take risks that would make the most serrated hedge fund manager wince, when Bill Hwang’s Archegos Capital Management imploded in spectacular style. As we learned in late March when several high-flying stocks suddenly collapsed, Hwang - a former protege of fabled hedge fund group Tiger Management - had built up a vast pile of leverage using opaque Total Return Swaps with a handful of banks to boost bets on a small number of stocks (the same banks were quite happy to help despite Hwang’s having been barred from US markets in 2013 over allegations of an insider-trading scheme, as he paid generously for the privilege of borrowing the banks' balance sheet). When one of Archegos more recent bets, ViacomCBS, suddenly tumbled it set off a liquidation cascade that left banks including Credit Suisse and Nomura with billions of dollars in losses. Conveniently, as the FT noted, the damage was contained to the banks rather than leaking across financial markets, but the episode sparked a rethink among banks over how to treat these clients and how much leverage to extend. The second coming of cryptos: After hitting an all time high in late 2017 and subsequently slumping into a "crypto winter", cryptocurrencies enjoyed a huge rebound in early 2021 which sent their prices soaring amid fears of galloping inflation (as shown below, and contrary to some financial speculation, the crypto space has traditionally been a hedge either to too much liquidity or a hedge to too much inflation). As a result, Bitcoin rose to a series of new record highs that culminated at just below $62,000, nearly three times higher than their previous all time high. But the smooth ride came to a halt in May when China’s crackdown on the cryptocurrency and its production, or “mining”, sparked the first serious crash of 2021. The price of bitcoin then collapsed as much as 30% on May 19, hitting a low of $30,000 amid a liquidation of levered positions in chaotic trading conditions following a warning from Chinese authorities of tighter curbs ahead. A public acceptance by Tesla chief and crypto cheerleader Elon Musk of the industry’s environmental impact added to the declines. However, as with all previous crypto crashes, this one too proved transitory, and prices resumed their upward trajectory in late September when investors started to price in the launch of futures-based bitcoin exchange traded funds in the US. The launch of these contracts subsequently pushed bitcoin to a new all-time high in early November before prices stumbled again in early December, this time due to a rise in institutional ownership when an overall drop in the market dragged down cryptos as well. That demonstrated the growing linkage between Wall Street and cryptocurrencies, due to the growing sway of large investors in digital markets. China's common prosperity crash: China’s education and tech sectors were one of the perennial Wall Street darlings. Companies such as New Oriental, TAL Education as well as Alibaba and Didi had come to be worth billions of dollars after highly publicized US stock market flotations. So when Beijing effectively outlawed swaths of the country’s for-profit education industry in July 2021, followed by draconian anti-trust regulations on the country's fintech names (where Xi Jinping also meant to teach the country's billionaire class a lesson who is truly in charge), the short-term market impact was brutal. Beijing’s initial measures emerged as part of a wider effort to make education more affordable as part of president Xi Jinping’s drive for "common prosperity" but that quickly raised questions over whether growth prospects across corporate China are countered by the capacity of the government to overhaul entire business models overnight. Sure enough, volatility stemming from the education sector was soon overshadowed by another set of government reforms related to common prosperity, a crackdown on leverage across the real estate sector where the biggest casualty was Evergrande, the world’s most indebted developer. The company, whose boss was not long ago China's 2nd richest man, was engulfed by a liquidity crisis in the summer that eventually resulted in a default in early December. Still, as the FT notes, China continues to draw in huge amounts of foreign capital, pushing the Chinese yuan to end 2021 at the strongest level since May 2018, a major hurdle to China's attempts to kickstart its slowing economy, and surely a precursor to even more monetary easing. Natgas hyperinflation: Natural gas supplanted crude oil as the world’s most important commodity in October and December as prices exploded to unprecedented levels and the world scrambled for scarce supplies amid the developed world's catastrophic transition to "green" energy. The crunch was particularly acute in Europe, which has become increasingly reliant on imports. Futures linked to TTF, the region’s wholesale gas price, hit a record €137 per megawatt hour in early October, rising more than 75%. In Asia, spot liquefied natural gas prices briefly passed the equivalent of more than $320 a barrel of oil in October. (At the time, Brent crude was trading at $80). A number of factors contributed, including rising demand as pandemic restrictions eased, supply disruptions in the LNG market and weather-induced shortfalls in renewable energy. In Europe, this was aggravated by plunging export volumes from Gazprom, Russia’s state-backed monopoly pipeline supplier, amid a bitter political fight over the launch of the Nordstream 2 pipeline. And with delays to the Nord Stream 2 gas pipeline from Russia to Germany, analysts say the European gas market - where storage is only 66% full - a cold snap or supply disruption away from another price spike Turkey's (latest) currency crisis:  As the FT's Jonathan Wheatley writes, Recep Tayyip Erdogan was once a source of strength for the Turkish lira, and in his first five years in power from 2003, the currency rallied from TL1.6 per US dollar to near parity at TL1.2. But those days are long gone, as Erdogan's bizarre fascination with unorthodox economics, namely the theory that lower rates lead to lower inflation also known as "Erdoganomics", has sparked a historic collapse in the: having traded at about TL7 to the dollar in February, it has since fallen beyond TL17, making it the worst performing currency of 2021. The lira’s defining moment in 2021 came on November 18 when the central bank, in spite of soaring inflation, cut its policy rate for the third time since September, at Erdogan’s behest (any central banker in Turkey who disagrees with "Erdoganomics" is promptly fired and replaced with an ideological puppet). The lira recovered some of its losses in late December when Erdogan came up with the "brilliant" idea of erecting the infamous "doom loop" which ties Turkey's balance sheet to its currency. It has worked for now (the lira surged from TL18 against the dollar to TL12, but this particular band aid solution will only last so long). The lira’s problems are not only Erdogan’s doing. A strengthening dollar, rising oil prices, the relentless covid pandemic and weak growth in developing economies have been bad for other emerging market currencies, too, but as long as Erdogan is in charge, shorting the lira remains the best trade entering 2022. While these, and many more, stories provided a diversion from the boring existence of centrally-planned markets, we are confident that the trends observed in recent years will continue: coming years will be marked by even bigger government (because only more government can "fix" problems created by government), higher stock prices and dollar debasement (because only more Fed intervention can "fix" the problems created by the Fed), and a policy flip from monetary and QE to fiscal & MMT, all of which will keep inflation at scorching levels, much to the persistent confusion of economists everywhere. Of course, we said much of this last year as well, but while we got most trends right, we were wrong about one thing: we were confident that China's aggressive roll out of the digital yuan would be a bang - or as we put it "it is very likely that while 2020 was an insane year, it may prove to be just an appetizer to the shockwaves that will be unleashed in 2021 when we see the first stage of the most historic overhaul of the fiat payment system in history" - however it turned out to be a whimper. A big reason for that was that the initial reception of the "revolutionary" currency was nothing short of disastrous, with Chinese admitting they were "not at all excited" about the prospect of yet one more surveillance mechanism for Beijing, because that's really what digital currencies are: a way for central banks everywhere to micromanage and scrutinize every single transaction, allowing the powers that be to demonetize any one person - or whole groups - with the flick of a switch. Then again, while digital money may not have made its triumphant arrival in 2021, we are confident that the launch date has merely been pushed back to 2022 when the rollout of the next monetary revolution is expected to begin in earnest. Here we should again note one thing: in a world undergoing historic transformations, any free press must be throttled and controlled, and over the past year we have seen unprecedented efforts by legacy media and its corporate owners, as well as the new "social media" overlords do everything in their power to stifle independent thought. For us it had been especially "personal" on more than one occasions. Last January, Twitter suspended our account because we dared to challenge the conventional narrative about the source of the Wuhan virus. It was only six months later that Twitter apologized, and set us free, admitting it had made a mistake. Yet barely had twitter readmitted us, when something even more unprecedented happened: for the first time ever (to our knowledge) Google - the world's largest online ad provider and monopoly - demonetized our website not because of any complaints about our writing but because of the contents of our comment section. It then held us hostage until we agreed to implement some prerequisite screening and moderation of the comments section. Google's action was followed by the likes of PayPal, Amazon, and many other financial and ad platforms, who rushed to demonetize and suspend us simply because they disagreed with what we had to say. This was a stark lesson in how quickly an ad-funded business can disintegrate in this world which resembles the dystopia of 1984 more and more each day, and we have since taken measures. One year ago, for the first time in our 13 year history, we launched a paid version of our website, which is entirely ad and moderation free, and offers readers a variety of premium content. It wasn't our intention to make this transformation but unfortunately we know which way the wind is blowing and it is only a matter of time before the gatekeepers of online ad spending block us again. As such, if we are to have any hope in continuing it will come directly from you, our readers. We will keep the free website running for as long as possible, but we are certain that it is only a matter of time before the hammer falls as the censorship bandwagon rolls out much more aggressively in the coming year. That said, whether the story of 2022, and the next decade for that matter, is one of helicopter or digital money, of (hyper)inflation or deflation: what is key, and what we learned in the past decade, is that the status quo will throw anything at the problem to kick the can, it will certainly not let any crisis go to waste... even the deadliest pandemic in over a century. And while many already knew that, the events of 2021 made it clear to a fault that not even a modest market correction can be tolerated going forward. After all, if central banks aim to punish all selling, then the logical outcome is to buy everything, and investors, traders and speculators did just that armed with the clearest backstop guarantee from the Fed, which in the deapths of the covid crash crossed the Rubicon when it formally nationalized the bond market as it started buying both investment grade bonds and junk bond ETFs in the open market. As such it is no longer even a debatable issue if the Fed will buy stocks after the next crash - the only question is when. Meanwhile, for all those lamenting the relentless coverage of politics in a financial blog, why finance appears to have taken a secondary role, and why the political "narrative" has taken a dominant role for financial analysts, the past year showed vividly why that is the case: in a world where markets gyrated, and "rotated" from value stocks to growth and vice versa, purely on speculation of how big the next stimulus out of Washington will be, the narrative over Biden's trillions proved to be one of the biggest market moving events for much of the year. And with the Biden stimulus plan off the table for now, the Fed will find it very difficult to tighten financial conditions, especially if it does so just as the economy is slowing. Here we like to remind readers of one of our favorite charts: every financial crisis is the result of Fed tightening. As for predictions about the future, as the past two years so vividly showed, when it comes to actual surprises and all true "black swans", it won't be what anyone had expected. And so while many themes, both in the political and financial realm, did get some accelerated closure courtesy of China's covid pandemic, dramatic changes in 2021 persisted, and will continue to manifest themselves in often violent and unexpected ways - from the ongoing record polarization in the US political arena, to "populist" upheavals around the developed world, to the gradual transition to a global Universal Basic (i.e., socialized) Income regime, to China's ongoing fight with preserving stability in its gargantuan financial system which is now two and a half times the size of the US. As always, we thank all of our readers for making this website - which has never seen one dollar of outside funding (and despite amusing recurring allegations, has certainly never seen a ruble from the KGB either, although now that the entire Russian hysteria episode is over, those allegations have finally quieted down), and has never spent one dollar on marketing - a small (or not so small) part of your daily routine. Which also brings us to another critical topic: that of fake news, and something we - and others who do not comply with the established narrative - have been accused of. While we find the narrative of fake news laughable, after all every single article in this website is backed by facts and links to outside sources, it is clearly a dangerous development, and a very slippery slope that the entire developed world is pushing for what is, when stripped of fancy jargon, internet censorship under the guise of protecting the average person from "dangerous, fake information." It's also why we are preparing for the next onslaught against independent thought and why we had no choice but to roll out a premium version of this website. In addition to the other themes noted above, we expect the crackdown on free speech to accelerate in the coming year when key midterm elections will be held, especially as the following list of Top 20 articles for 2021 reveals, many of the most popular articles in the past year were precisely those which the conventional media would not touch out of fear of repercussions, which in turn allowed the alternative media to continue to flourish in an orchestrated information vacuum and take significant market share from the established outlets by covering topics which the public relations arm of established media outlets refused to do, in the process earning itself the derogatory "fake news" condemnation. We are grateful that our readers - who hit a new record high in 2021 - have realized it is incumbent upon them to decide what is, and isn't "fake news." * * * And so, before we get into the details of what has now become an annual tradition for the last day of the year, those who wish to jog down memory lane, can refresh our most popular articles for every year during our no longer that brief, almost 11-year existence, starting with 2009 and continuing with 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019 and 2020. So without further ado, here are the articles that you, our readers, found to be the most engaging, interesting and popular based on the number of hits, during the past year. In 20th spot with 600,000 reads, was an article that touched on one of the most defining features of the market: the reflation theme the sparked a massive rally at the start of the year courtesy of the surprise outcome in the Georgia Senate race, where Democrats ended up wining both seats up for grabs, effectively giving the Dems a majority in both the House and the Senate, where despite the even, 50-seat split, Kamala Harris would cast the winning tie-breaker vote to pursue a historic fiscal stimulus. And sure enough, as we described in "Bitcoin Surges To Record High, Stocks & Bonds Battered As Dems Look Set To Take Both Georgia Senate Seats", with trillions in "stimmies" flooding both the economy and the market, not only did retail traders enjoy unprecedented returns when trading meme "stonks" and forcing short squeezes that crippled numerous hedge funds, but expectations of sharply higher inflation also helped push bitcoin and the entire crypto sector to new all time highs, which in turn legitimized the product across institutional investors and helped it reach a market cap north of $3 trillion.  In 19th spot, over 613,000 readers were thrilled to read at the start of September that "Biden Unveils Most Severe COVID Actions Yet: Mandates Vax For All Federal Workers, Contractors, & Large Private Companies." Of course, just a few weeks later much of Biden's mandate would be struck down in courts, where it is now headed to a decision by SCOTUS, while the constantly shifting "scientific" goal posts mean that just a few months later the latest set of CDC regulations have seen regulators and officials reverse the constant drone of fearmongering and are now even seeking to cut back on the duration of quarantine and other lockdown measures amid a public mood that is growing increasingly hostile to the government response. One of the defining political events of 2021 was the so-called "Jan 6 Insurrection", which the for America's conservatives was blown wildly out of proportion yet which the leftist media and Democrats in Congress have been periodically trying to push to the front pages in hopes of distracting from the growing list of failures of the Obama admin. Yet as we asked back in January, "Why Was Founder Of Far-Left BLM Group Filming Inside Capitol As Police Shot Protester?" No less than 614,000 readers found this question worthy of a response. Since then many more questions have emerged surrounding this event, many of which focus on what role the FBI had in organizing and encouraging this event, including the use of various informants and instigators. For now, a response will have to wait at least until the mid-term elections of 2022 when Republicans are expected to sweep one if not both chambers. Linked to the above, the 17th most read article of 2021 with 617,000 views, was an article we published on the very same day, which detailed that "Armed Protesters Begin To Arrive At State Capitols Around The Nation." At the end of the day, it was much ado about nothing and all protests concluded peacefully and without incident: perhaps the FBI was simply spread too thin? 2021 was a year defined by various waves of the covid pandemic which hammered poor Americans forced to hunker down at home and missing on pay, and crippled countless small mom and pop businesses. And yet, it was also a bonanza for a handful of pharma companies such as Pfizer and Moderna which made billions from the sale of "vaccines" which we now know do little if anything to halt the spread of the virus, and are instead now being pitched as palliatives, preventing a far worse clinical outcome. The same pharma companies also benefited from an unconditional indemnity, which surely would come in useful when the full side-effects of their mRNA-based therapies became apparent. One such condition to emerge was myocarditis among a subset of the vaxxed. And while the vaccines continue to be broadly rolled out across most developed nations, one place that said enough was Sweden. As over 620,000 readers found out in "Sweden Suspends Moderna Shot Indefinitely After Vaxxed Patients Develop Crippling Heart Condition", not every country was willing to use its citizens as experimental guniea pigs. This was enough to make the article the 16th most read on these pages, but perhaps in light of the (lack of) debate over the pros and cons of the covid vaccines, this should have been the most read article this year? Moving on to the 15th most popular article, 628,000 readers were shocked to learn that "Chase Bank Cancels General Mike Flynn's Credit Cards." The action, which was taken by the largest US bank due to "reputational risk" echoed a broad push by tech giants to deplatform and silence dissenting voices by literally freezing them out of the financial system. In the end, following widespread blowback from millions of Americans, JPMorgan reversed, and reactivated Flynn's cards saying the action was made in error, but unfortunately this is just one example of how those in power can lock out any dissenters with the flick of a switch. And while democrats cheer such deplatforming today, the political winds are fickle, and we doubt they will be as excited once they find themselves on the receiving end of such actions. And speaking of censorship and media blackouts, few terms sparked greater response from those in power than the term Ivermectin. Viewed by millions as a cheap, effective alternative to offerings from the pharmaceutical complex, social networks did everything in their power to silence any mention of a drug which the Journal of Antibiotics said in 2017 was an "enigmatic multifaceted ‘wonder’ drug which continues to surprise and exceed expectations." Nowhere was this more obvious than in the discussion of how widespread use of Ivermectin beat Covid in India, the topic of the 14th most popular article of 2021 "India's Ivermectin Blackout" which was read by over 653,000 readers. Unfortunately, while vaccines continue to fail upward and now some countries are now pushing with a 4th, 5th and even 6th vaccine, Ivermectin remains a dirty word. There was more covid coverage in the 13th most popular article of 2021, "Surprise Surprise - Fauci Lied Again": Rand Paul Reacts To Wuhan Bombshell" which was viewed no less than 725,000 times. Paul's reaction came following a report which revealed that Anthony Fauci's NIAID and its parent, the NIH, funded Gain-of-Function research in Wuhan, China, strongly hinting that the emergence of covid was the result of illicit US funding. Not that long ago, Fauci had called Paul a 'liar' for accusing him of funding the risky research, in which viruses are genetically modified or otherwise altered to make them more transmissible to humans. And while we could say that Paul got the last laugh, Fauci still remains Biden's top covid advisor, which may explain why one year after Biden vowed he would shut down the pandemic, the number of new cases just hit a new all time high. One hope we have for 2022 is that people will finally open their eyes... 2021 was not just about covid - soaring prices and relentless inflation were one of the most poignant topics. It got so bad that Biden's approval rating - and that of Democrats in general - tumbled toward the end of the year, putting their mid-term ambitions in jeopardy, as the public mood soured dramatically in response to the explosion in prices. And while one can debate whether it was due to supply-issues, such as the collapse in trans-pacific supply chains and the chronic lack of labor to grow the US infrastructure, or due to roaring demand sparked by trillions in fiscal stimulus, but when the "Big Short" Michael Burry warned that hyperinflation is coming, the people listened, and with over 731,000 reads, the 12th most popular article of 2021 was "Michael Burry Warns Weimar Hyperinflation Is Coming."  Of course, Burry did not say anything we haven't warned about for the past 12 years, but at least he got the people's attention, and even mainstream names such as Twitter founder Jack Dorsey agreed with him, predicting that bitcoin will be what is left after the dollar has collapsed. While hyperinflation may will be the endgame, the question remains: when. For the 11th most read article of 2021, we go back to a topic touched upon moments ago when we addressed the full-blown media campaign seeking to discredit Ivermectin, in this case via the D-grade liberal tabloid Rolling Stone (whose modern incarnation is sadly a pale shadow of the legend that house Hunter S. Thompson's unforgettable dispatches) which published the very definition of fake news when it called Ivermectin a "horse dewormer" and claimed that, according to a hospital employee, people were overdosing on it. Just a few hours later, the article was retracted as we explained in "Rolling Stone Issues 'Update' After Horse Dewormer Hit-Piece Debunked" and over 812,000 readers found out that pretty much everything had been a fabrication. But of course, by then it was too late, and the reputation of Ivermectin as a potential covid cure had been further tarnished, much to the relief of the pharma giants who had a carte blanche to sell their experimental wares. The 10th most popular article of 2021 brings us to another issue that had split America down the middle, namely the story surrounding Kyle Rittenhouse and the full-blown media campaign that declared the teenager guilty, even when eventually proven innocent. Just days before the dramatic acquittal, we learned that "FBI Sat On Bombshell Footage From Kyle Rittenhouse Shooting", which was read by over 822,000 readers. It was unfortunate to learn that once again the scandal-plagued FBI stood at the center of yet another attempt at mass misinformation, and we can only hope that one day this "deep state" agency will be overhauled from its core, or better yet, shut down completely. As for Kyle, he will have the last laugh: according to unconfirmed rumors, his numerous legal settlements with various media outlets will be in the tens if not hundreds of millions of dollars.  And from the great US social schism, we again go back to Covid for the 9th most popular article of 2021, which described the terrifying details of one of the most draconian responses to covid in the entire world: that of Australia. Over 900,000 readers were stunned to read that the "Australian Army Begins Transferring COVID-Positive Cases, Contacts To Quarantine Camps." Alas, the latest surge in Australian cases to nosebleed, record highs merely confirms that this unprecedented government lockdown - including masks and vaccines - is nothing more than an exercise in how far government can treat its population as a herd of sheep without provoking a violent response.  The 8th most popular article of 2021 looks at the market insanity of early 2021 when, at the end of January, we saw some of the most-shorted, "meme" stocks explode higher as the Reddit daytrading horde fixed their sights on a handful of hedge funds and spent billions in stimmies in an attempt to force unprecedented ramps. That was the case with "GME Soars 75% After-Hours, Erases Losses After Liquidity-Constrained Robinhood Lifts Trading Ban", which profiled the daytrading craze that gave an entire generation the feeling that it too could win in these manipulated capital markets. Then again, judging by the waning retail interest, it is possible that the excitement of the daytrading army is fading as rapidly as it first emerged, and that absent more "stimmies" markets will remain the playground of the rich and central banks. Kyle Rittenhouse may soon be a very rich man after the ordeal he went through, but the media's mission of further polarizing US society succeeded, and millions of Americans will never accept that the teenager was innocent. It's also why with just over 1 million reads, the 7th most read article on Zero Hedge this year was that "Portland Rittenhouse Protest Escalates Into Riot." Luckily, this is not a mid-term election year and there were no moneyed interests seeking to prolong this particular riot, unlike what happened in the summer of 2020... and what we are very much afraid will again happen next year when very critical elections are on deck.  With just over 1.03 million views, the 6th most popular post focused on a viral Twitter thread on Friday from Dr Robert Laone, which laid out a disturbing trend; the most-vaccinated countries in the world are experiencing  a surge in COVID-19 cases, while the least-vaccinated countries were not. As we originally discussed in ""This Is Worrying Me Quite A Bit": mRNA Vaccine Inventor Shares Viral Thread Showing COVID Surge In Most-Vaxxed Countries", this trend has only accelerated in recent weeks with the emergence of the Omicron strain. Unfortunately, instead of engaging in a constructive discussion to see why the science keeps failing again and again, Twitter's response was chilling: with just days left in 2021, it suspended the account of Dr. Malone, one of the inventors of mRNA technology. Which brings to mind something Aaron Rogers said: "If science can't be questioned it's not science anymore it's propaganda & that's the truth." In a year that was marked a flurry of domestic fiascoes by the Biden administration, it is easy to forget that the aged president was also responsible for the biggest US foreign policy disaster since Vietnam, when the botched evacuation of Afghanistan made the US laughing stock of the world after 12 US servicemembers were killed. So it's probably not surprising that over 1.1 million readers were stunned to watch what happened next, which we profiled in the 5th most popular post of 2021, where in response to the Afghan trajedy, "Biden Delivers Surreal Press Conference, Vows To Hunt Down Isis, Blames Trump." One person watching the Biden presser was Xi Jinping, who may have once harbored doubts about reclaiming Taiwan but certainly does not any more. The 4th most popular article of 2021 again has to do with with covid, and specifically the increasingly bizarre clinical response to the disease. As we detailed in "Something Really Strange Is Happening At Hospitals All Over America" while emergency rooms were overflowing, it certainly wasn't from covid cases. Even more curiously, one of the primary ailments leading to an onslaught on ERs across the nation was heart-related issues, whether arrhytmia, cardiac incidents or general heart conditions. We hope that one day there will be a candid discussion on this topic, but until then it remains one of the topics seen as taboo by the mainstream media and the deplatforming overlords, so we'll just leave it at that. We previously discussed the anti-Ivermectin narrative that dominated the mainstream press throughout 2021 and the 3rd most popular article of the year may hold clues as to why: in late September, pharma giant Pfizer and one of the two companies to peddle an mRNA based vaccine, announced that it's launching an accelerated Phase 2/3 trial for a COVID prophylactic pill designed to ward off COVID in those may have come in contact with the disease. And, as we described in "Pfizer Launches Final Study For COVID Drug That's Suspiciously Similar To 'Horse Paste'," 1.75 million readers learned that Pfizer's drug shared at least one mechanism of action as Ivermectin - an anti-parasitic used in humans for decades, which functions as a protease inhibitor against Covid-19, which researchers speculate "could be the biophysical basis behind its antiviral efficiency." Surely, this too was just another huge coincidence. In the second most popular article of 2021, almost 2 million readers discovered (to their "shock") that Fauci and the rest of Biden's COVID advisors were proven wrong about "the science" of COVID vaccines yet again. After telling Americans that vaccines offer better protection than natural infection, a new study out of Israel suggested the opposite is true: natural infection offers a much better shield against the delta variant than vaccines, something we profiled in "This Ends The Debate' - Israeli Study Shows Natural Immunity 13x More Effective Than Vaccines At Stopping Delta." We were right about one thing: anyone who dared to suggest that natural immunity was indeed more effective than vaccines was promptly canceled and censored, and all debate almost instantly ended. Since then we have had tens of millions of "breakout" cases where vaccinated people catch covid again, while any discussion why those with natural immunity do much better remains under lock and key. It may come as a surprise to many that the most read article of 2021 was not about covid, or Biden, or inflation, or China, or even the extremely polarized US congress (and/or society), but was about one of the most long-suffering topics on these pages: precious metals and their prices. Yes, back in February the retail mania briefly targeted silver and as millions of reddit daytraders piled in in hopes of squeezing the precious metal higher, the price of silver surged higher only to tumble just as quickly as it has risen as the seller(s) once again proved more powerful than the buyers. We described this in "Silver Futures Soar 8%, Rise Above $29 As Reddit Hordes Pile In", an article which some 2.4 million gold and silver bugs read with hope, only to see their favorite precious metals slump for much of the rest of the year. And yes, the fact that both gold and silver ended the year sharply lower than where they started even though inflation hit the highest level in 40 years, remains one of the great mysteries of 2021. With all that behind us, and as we wave goodbye to another bizarre, exciting, surreal year, what lies in store for 2022, and the next decade? We don't know: as frequent and not so frequent readers are aware, we do not pretend to be able to predict the future and we don't try despite endless allegations that we constantly predict the collapse of civilization: we leave the predicting to the "smartest people in the room" who year after year have been consistently wrong about everything, and never more so than in 2021 (even the Fed admitted it is clueless when Powell said it was time to retire the term "transitory"), which destroyed the reputation of central banks, of economists, of conventional media and the professional "polling" and "strategist" class forever, not to mention all those "scientists" who made a mockery of the "expertise class" with their bungled response to the covid pandemic. We merely observe, find what is unexpected, entertaining, amusing, surprising or grotesque in an increasingly bizarre, sad, and increasingly crazy world, and then just write about it. We do know, however, that after a record $30 trillion in stimulus was conjured out of thin air by the world's central banks and politicians in the past two years, the attempt to reverse this monetary and fiscal firehose in a world addicted to trillions in newly created liquidity now that central banks are freaking out after finally getting ot the inflation they were hoping to create for so long, will end in tears. We are confident, however, that in the end it will be the very final backstoppers of the status quo regime, the central banking emperors of the New Normal, who will eventually be revealed as fully naked. When that happens and what happens after is anyone's guess. But, as we have promised - and delivered - every year for the past 13, we will be there to document every aspect of it. Finally, and as always, we wish all our readers the best of luck in 2022, with much success in trading and every other avenue of life. We bid farewell to 2021 with our traditional and unwavering year-end promise: Zero Hedge will be there each and every day - usually with a cynical smile - helping readers expose, unravel and comprehend the fallacy, fiction, fraud and farce that defines every aspect of our increasingly broken system. Tyler Durden Sun, 01/02/2022 - 03:44.....»»

Bitcoin & The US Fiscal Reckoning Authored by Avik Roy via NationalAffairs.com, Cryptocurrencies like bitcoin have few fans in Washington. At a July congressional hearing, Senator Elizabeth Warren warned that cryptocurrency "puts the [financial] system at the whims of some shadowy, faceless group of super-coders." Treasury secretary Janet Yellen likewise asserted that the "reality" of cryptocurrencies is that they "have been used to launder the profits of online drug traffickers; they've been a tool to finance terrorism." Thus far, Bitcoin's supporters remain undeterred. (The term "Bitcoin" with a capital "B" is used here and throughout to refer to the system of cryptography and technology that produces the currency "bitcoin" with a lowercase "b" and verifies bitcoin transactions.) A survey of 3,000 adults in the fall of 2020 found that while only 4% of adults over age 55 own cryptocurrencies, slightly more than one-third of those aged 35-44 do, as do two-fifths of those aged 25-34. As of mid-2021, Coinbase — the largest cryptocurrency exchange in the United States — had 68 million verified users. To younger Americans, digital money is as intuitive as digital media and digital friendships. But Millennials with smartphones are not the only people interested in bitcoin; a growing number of investors are also flocking to the currency's banner. Surveys indicate that as many as 21% of U.S. hedge funds now own bitcoin in some form. In 2020, after considering various asset classes like stocks, bonds, gold, and foreign currencies, celebrated hedge-fund manager Paul Tudor Jones asked, "[w]hat will be the winner in ten years' time?" His answer: "My bet is it will be bitcoin." What's driving this increased interest in a form of currency invented in 2008? The answer comes from former Federal Reserve chairman Ben Bernanke, who once noted, "the U.S. government has a technology, called a printing press...that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation...the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to...inflation." In other words, governments with fiat currencies — including the United States — have the power to expand the quantity of those currencies. If they choose to do so, they risk inflating the prices of necessities like food, gas, and housing. In recent months, consumers have experienced higher price inflation than they have seen in decades. A major reason for the increases is that central bankers around the world — including those at the Federal Reserve — sought to compensate for Covid-19 lockdowns with dramatic monetary inflation. As a result, nearly $4 trillion in newly printed dollars, euros, and yen found their way from central banks into the coffers of global financial institutions. Jerome Powell, the current Federal Reserve chairman, insists that 2021's inflation trends are "transitory." He may be right in the near term. But for the foreseeable future, inflation will be a profound and inescapable challenge for America due to a single factor: the rapidly expanding federal debt, increasingly financed by the Fed's printing press. In time, policymakers will face a Solomonic choice: either protect Americans from inflation, or protect the government's ability to engage in deficit spending. It will become impossible to do both. Over time, this compounding problem will escalate the importance of Bitcoin. THE FIAT-CURRENCY EXPERIMENT It's becoming clear that Bitcoin is not merely a passing fad, but a significant innovation with potentially serious implications for the future of investment and global finance. To understand those implications, we must first examine the recent history of the primary instrument that bitcoin was invented to challenge: the American dollar. Toward the end of World War II, in an agreement hashed out by 44 Allied countries in Bretton Woods, New Hampshire, the value of the U.S. dollar was formally fixed to 1/35th of the price of an ounce of gold. Other countries' currencies, such as the British pound and the French franc, were in turn pegged to the dollar, making the dollar the world's official reserve currency. Under the Bretton Woods system, foreign governments could retrieve gold bullion they had sent to the United States during the war by exchanging dollars for gold at the relevant fixed exchange rate. But enabling every major country to exchange dollars for American-held gold only worked so long as the U.S. government was fiscally and monetarily responsible. By the late 1960s, it was neither. Someone needed to pay the steep bills for Lyndon Johnson's "guns and butter" policies — the Vietnam War and the Great Society, respectively — so the Federal Reserve began printing currency to meet those obligations. Johnson's successor, Richard Nixon, also pressured the Fed to flood the economy with money as a form of economic stimulus. From 1961 to 1971, the Fed nearly doubled the circulating supply of dollars. "In the first six months of 1971," noted the late Nobel laureate Robert Mundell, "monetary expansion was more rapid than in any comparable period in a quarter century." That year, foreign central banks and governments held $64 billion worth of claims on the $10 billion of gold still held by the United States. It wasn't long before the world took notice of the shortage. In a classic bank-run scenario, anxious European governments began racing to redeem dollars for American-held gold before the Fed ran out. In July 1971, Switzerland withdrew $50 million in bullion from U.S. vaults. In August, France sent a destroyer to escort $191 million of its gold back from the New York Federal Reserve. Britain put in a request for $3 billion shortly thereafter. Finally, that same month, Nixon secretly gathered a small group of trusted advisors at Camp David to devise a plan to avoid the imminent wipeout of U.S. gold vaults and the subsequent collapse of the international economy. There, they settled on a radical course of action. On the evening of August 15th, in a televised address to the nation, Nixon announced his intention to order a 90-day freeze on all prices and wages throughout the country, a 10% tariff on all imported goods, and a suspension — eventually, a permanent one — of the right of foreign governments to exchange their dollars for U.S. gold. Knowing that his unilateral abrogation of agreements involving dozens of countries would come as a shock to world leaders and the American people, Nixon labored to re-assure viewers that the change would not unsettle global markets. He promised viewers that "the effect of this action...will be to stabilize the dollar," and that the "dollar will be worth just as much tomorrow as it is today." The next day, the stock market rose — to everyone's relief. The editors of the New York Times "unhesitatingly applaud[ed] the boldness" of Nixon's move. Economic growth remained strong for months after the shift, and the following year Nixon was re-elected in a landslide, winning 49 states in the Electoral College and 61% of the popular vote. Nixon's short-term success was a mirage, however. After the election, the president lifted the wage and price controls, and inflation returned with a vengeance. By December 1980, the dollar had lost more than half the purchasing power it had back in June 1971 on a consumer-price basis. In relation to gold, the price of the dollar collapsed — from 1/35th to 1/627th of a troy ounce. Though Jimmy Carter is often blamed for the Great Inflation of the late 1970s, "the truth," as former National Economic Council director Larry Kudlow has argued, "is that the president who unleashed double-digit inflation was Richard Nixon." In 1981, Federal Reserve chairman Paul Volcker raised the federal-funds rate — a key interest-rate benchmark — to 19%. A deep recession ensued, but inflation ceased, and the U.S. embarked on a multi-decade period of robust growth, low unemployment, and low consumer-price inflation. As a result, few are nostalgic for the days of Bretton Woods or the gold-standard era. The view of today's economic establishment is that the present system works well, that gold standards are inherently unstable, and that advocates of gold's return are eccentric cranks. Nevertheless, it's important to remember that the post-Bretton Woods era — in which the supply of government currencies can be expanded or contracted by fiat — is only 50 years old. To those of us born after 1971, it might appear as if there is nothing abnormal about the way money works today. When viewed through the lens of human history, however, free-floating global exchange rates remain an unprecedented economic experiment — with one critical flaw. An intrinsic attribute of the post-Bretton Woods system is that it enables deficit spending. Under a gold standard or peg, countries are unable to run large budget deficits without draining their gold reserves. Nixon's 1971 crisis is far from the only example; deficit spending during and after World War I, for instance, caused economic dislocation in numerous European countries — especially Germany — because governments needed to use their shrinking gold reserves to finance their war debts. These days, by contrast, it is relatively easy for the United States to run chronic deficits. Today's federal debt of almost $29 trillion — up from $10 trillion in 2008 and $2.4 trillion in 1984 — is financed in part by U.S. Treasury bills, notes, and bonds, on which lenders to the United States collect a form of interest. Yields on Treasury bonds are denominated in dollars, but since dollars are no longer redeemable for gold, these bonds are backed solely by the "full faith and credit of the United States." Interest rates on U.S. Treasury bonds have remained low, which many people take to mean that the creditworthiness of the United States remains healthy. Just as creditworthy consumers enjoy lower interest rates on their mortgages and credit cards, creditworthy countries typically enjoy lower rates on the bonds they issue. Consequently, the post-Great Recession era of low inflation and near-zero interest rates led many on the left to argue that the old rules no longer apply, and that concerns regarding deficits are obsolete. Supporters of this view point to the massive stimulus packages passed under presidents Donald Trump and Joe Biden  that, in total, increased the federal deficit and debt by $4.6 trillion without affecting the government's ability to borrow. The extreme version of the new "deficits don't matter" narrative comes from the advocates of what has come to be called Modern Monetary Theory (MMT), who claim that because the United States controls its own currency, the federal government has infinite power to increase deficits and the debt without consequence. Though most mainstream economists dismiss MMT as unworkable and even dangerous, policymakers appear to be legislating with MMT's assumptions in mind. A new generation of Democratic economic advisors has pushed President Biden to propose an additional $3.5 trillion in spending, on top of the $4.6 trillion spent on Covid-19 relief and the $1 trillion bipartisan infrastructure bill. These Democrats, along with a new breed of populist Republicans, dismiss the concerns of older economists who fear that exploding deficits risk a return to the economy of the 1970s, complete with high inflation, high interest rates, and high unemployment. But there are several reasons to believe that America's fiscal profligacy cannot go on forever. The most important reason is the unanimous judgment of history: In every country and in every era, runaway deficits and skyrocketing debt have ended in economic stagnation or ruin. Another reason has to do with the unusual confluence of events that has enabled the United States to finance its rising debts at such low interest rates over the past few decades — a confluence that Bitcoin may play a role in ending. DECLINING FAITH IN U.S. CREDIT To members of the financial community, U.S. Treasury bonds are considered "risk-free" assets. That is to say, while many investments entail risk — a company can go bankrupt, for example, thereby wiping out the value of its stock — Treasury bonds are backed by the full faith and credit of the United States. Since people believe the United States will not default on its obligations, lending money to the U.S. government — buying Treasury bonds that effectively pay the holder an interest rate — is considered a risk-free investment. The definition of Treasury bonds as "risk-free" is not merely by reputation, but also by regulation. Since 1988, the Switzerland-based Basel Committee on Banking Supervision has sponsored a series of accords among central bankers from financially significant countries. These accords were designed to create global standards for the capital held by banks such that they carry a sufficient proportion of low-risk and risk-free assets. The well-intentioned goal of these standards was to ensure that banks don't fail when markets go down, as they did in 2008. The current version of the Basel Accords, known as "Basel III," assigns zero risk to U.S. Treasury bonds. Under Basel III's formula, then, every major bank in the world is effectively rewarded for holding these bonds instead of other assets. This artificially inflates demand for the bonds and enables the United States to borrow at lower rates than other countries. The United States also benefits from the heft of its economy as well as the size of its debt. Since America is the world's most indebted country in absolute terms, the market for U.S. Treasury bonds is the largest and most liquid such market in the world. Liquid markets matter a great deal to major investors: A large financial institution or government with hundreds of billions (or more) of a given currency on its balance sheet cares about being able to buy and sell assets while minimizing the impact of such actions on the trading price. There are no alternative low-risk assets one can trade at the scale of Treasury bonds. The status of such bonds as risk-free assets — and in turn, America's ability to borrow the money necessary to fund its ballooning expenditures — depends on investors' confidence in America's creditworthiness. Unfortunately, the Federal Reserve's interference in the markets for Treasury bonds have obscured our ability to determine whether financial institutions view the U.S. fiscal situation with confidence. In the 1990s, Bill Clinton's advisors prioritized reducing the deficit, largely out of a conern that Treasury-bond "vigilantes" — investors who protest a government's expansionary fiscal or monetary policy by aggressively selling bonds, which drives up interest rates — would harm the economy. Their success in eliminating the primary deficit brought yields on the benchmark 10-year Treasury bond down from 8% to 4%. In Clinton's heyday, the Federal Reserve was limited in its ability to influence the 10-year Treasury interest rate. Its monetary interventions primarily targeted the federal-funds rate — the interest rate that banks charge each other on overnight transactions. But in 2002, Ben Bernanke advocated that the Fed "begin announcing explicit ceilings for yields on longer-maturity Treasury debt." This amounted to a schedule of interest-rate price controls. Since the 2008 financial crisis, the Federal Reserve has succeeded in wiping out bond vigilantes using a policy called "quantitative easing," whereby the Fed manipulates the price of Treasury bonds by buying and selling them on the open market. As a result, Treasury-bond yields are determined not by the free market, but by the Fed. The combined effect of these forces — the regulatory impetus for banks to own Treasury bonds, the liquidity advantage Treasury bonds have in the eyes of large financial institutions, and the Federal Reserve's manipulation of Treasury-bond market prices — means that interest rates on Treasury bonds no longer indicate the United States' creditworthiness (or lack thereof). Meanwhile, indications that investors are growing increasingly concerned about the U.S. fiscal and monetary picture — and are in turn assigning more risk to "risk-free" Treasury bonds — are on the rise. One such indicator is the decline in the share of Treasury bonds owned by outside investors. Between 2010 and 2020, the share of U.S. Treasury securities owned by foreign entities fell from 47% to 32%, while the share owned by the Fed more than doubled, from 9% to 22%. Put simply, foreign investors have been reducing their purchases of U.S. government debt, thereby forcing the Fed to increase its own bond purchases to make up the difference and prop up prices. Until and unless Congress reduces the trajectory of the federal debt, U.S. monetary policy has entered a vicious cycle from which there is no obvious escape. The rising debt requires the Treasury Department to issue an ever-greater quantity of Treasury bonds, but market demand for these bonds cannot keep up with their increasing supply. In an effort to avoid a spike in interest rates, the Fed will need to print new U.S. dollars to soak up the excess supply of Treasury bonds. The resultant monetary inflation will cause increases in consumer prices. Those who praise the Fed's dramatic expansion of the money supply argue that it has not affected consumer-price inflation. And at first glance, they appear to have a point. In January of 2008, the M2 money stock was roughly $7.5 trillion; by January 2020, M2 had more than doubled, to $15.4 trillion. As of July 2021, the total M2 sits at $20.5 trillion — nearly triple what it was just 13 years ago. Over that same period, U.S. GDP increased by only 50%. And yet, since 2000, the average rate of growth in the Consumer Price Index (CPI) for All Urban Consumers — a widely used inflation benchmark — has remained low, at about 2.25%. How can this be? The answer lies in the relationship between monetary inflation and price inflation, which has diverged over time. In 2008, the Federal Reserve began paying interest to banks that park their money with the Fed, reducing banks' incentive to lend that money out to the broader economy in ways that would drive price inflation. But the main reason for the divergence is that conventional measures like CPI do not accurately capture the way monetary inflation is affecting domestic prices. In a large, diverse country like the United States, different people and different industries experience price inflation in different ways. The fact that price inflation occurs earlier in certain sectors of the economy than in others was first described by the 18th-century Irish-French economist Richard Cantillon. In his 1730 "Essay on the Nature of Commerce in General," Cantillon noted that when governments increase the supply of money, those who receive the money first gain the most benefit from it — at the expense of those to whom it flows last. In the 20th century, Friedrich Hayek built on Cantillon's thinking, observing that "the real harm [of monetary inflation] is due to the differential effect on different prices, which change successively in a very irregular order and to a very different degree, so that as a result the whole structure of relative prices becomes distorted and misguides production into wrong directions." In today's context, the direct beneficiaries of newly printed money are those who need it the least. New dollars are sent to banks, which in turn lend them to the most creditworthy entities: investment funds, corporations, and wealthy individuals. As a result, the most profound price impact of U.S. monetary inflation has been on the kinds of assets that financial institutions and wealthy people purchase — stocks, bonds, real estate, venture capital, and the like. This is why the price-to-earnings ratio of S&P 500 companies is at record highs, why risky start-ups with long-shot ideas are attracting $100 million venture rounds, and why the median home sales price has jumped 24% in a single year — the biggest one-year increase of the 21st century. Meanwhile, low- and middle-income earners are facing rising prices without attendant increases in their wages. If asset inflation persists while the costs of housing and health care continue to grow beyond the reach of ordinary people, the legitimacy of our market economy will be put on trial. THE RETURN OF SOUND MONEY Satoshi Nakamoto, the pseudonymous creator of Bitcoin, was acutely concerned with the increasing abundance of U.S. dollars and other fiat currencies in the early 2000s. In 2009 he wrote, "the root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust." Bitcoin was created in anticipation of the looming fiscal and monetary crisis in the United States and around the world. To understand how bitcoin functions alongside fiat currency, it's helpful to examine the monetary philosophy of the Austrian School of economics, whose leading figures — especially Hayek and Ludwig von Mises — greatly influenced Nakamoto and the early developers of Bitcoin. The economists of the Austrian School were staunch advocates of what Mises called "the principle of sound money" — that is, of keeping the supply of money as constant and predictable as possible. In The Theory of Money and Credit, first published in 1912, Mises argued that sound money serves as "an instrument for the protection of civil liberties against despotic inroads on the part of governments" that belongs "in the same class with political constitutions and bills of rights." Just as bills of rights were a "reaction against arbitrary rule and the nonobservance of old customs by kings," he wrote, "the postulate of sound money was first brought up as a response to the princely practice of debasing the coinage." Mises believed that inflation was just as much a violation of someone's property rights as arbitrarily taking away his land. After all, in both cases, the government acquires economic value at the expense of the citizen. Since monetary inflation creates a sugar high of short-term stimulus, politicians interested in re-election will always have an incentive to expand the money supply. But doing so comes at the expense of long-term declines in consumer purchasing power. For Mises, the best way to address such a threat is to avoid fiat currencies altogether. And in his estimation, the best sound-money alternative to fiat currency is gold. "The excellence of the gold standard," Mises wrote, is "that it renders the determination of the monetary unit's purchasing power independent of the policies of governments and political parties." In other words, gold's primary virtue is that its supply increases slowly and steadily, and cannot be manipulated by politicians. It may appear as if gold was an arbitrary choice as the basis for currency, but gold has a combination of qualities that make it ideal for storing and exchanging value. First, it is verifiably unforgeable. Gold is very dense, which means that counterfeit gold is easy to identify — one simply has to weigh it. Second, gold is divisible. Unlike, say, cattle, gold can be delivered in fractional units both small and large, enabling precise pricing. Third, gold is durable. Unlike commodities that rot or evaporate over time, gold can be stored for centuries without degradation. Fourth, gold is fungible: An ounce of gold in Asia is worth the same as an ounce of gold in Europe. These four qualities are shared by most modern currencies. Gold's fifth quality is more distinct, however, as well as more relevant to its role as an instrument of sound money: scarcity. While people have used beads, seashells, and other commodities as primitive forms of money, those items are fairly easy to acquire and introduce into circulation. While gold's supply does gradually increase as more is extracted from the ground, the rate of extraction relative to the total above-ground supply is low: At current rates, it would take approximately 66 years to double the amount of gold in circulation. In comparison, the supply of U.S. dollars has more than doubled over just the last decade. When the Austrian-influenced designers of bitcoin set out to create a more reliable currency, they tried to replicate all of these qualities. Like gold, bitcoin is divisible, unforgeable, divisible, durable, and fungible. But bitcoin also improves upon gold as a form of sound money in several important ways. First, bitcoin is rarer than gold. Though gold's supply increases slowly, it does increase. The global supply of bitcoin, by contrast, is fixed at 21 million and cannot be feasibly altered. Second, bitcoin is far more portable than gold. Transferring physical gold from one place to another is an onerous process, especially in large quantities. Bitcoin, on the other hand, can be transmitted in any quantity as quickly as an email. Third, bitcoin is more secure than gold. A single bitcoin address carried on a USB thumb drive could theoretically hold as much value as the U.S. Treasury holds in gold bars — without the need for costly militarized facilities like Fort Knox to keep it safe. In fact, if stored using best practices, the cost of securing bitcoin from hackers or assailants is far lower than the cost of securing gold. Fourth, bitcoin is a technology. This means that, as developers identify ways to augment its functionality without compromising its core attributes, they can gradually improve the currency over time. Fifth, and finally, bitcoin cannot be censored. This past year, the Chinese government shut down Hong Kong's pro-democracy Apple Daily newspaper not by censoring its content, but by ordering banks not to do business with the publication, thereby preventing Apple Daily from paying its suppliers or employees. Those who claim the same couldn't happen here need only look to the Obama administration's Operation Choke Point, a regulatory attempt to prevent banks from doing business with legitimate entities like gun manufacturers and payday lenders — firms the administration disfavored. In contrast, so long as the transmitting party has access to the internet, no entity can prevent a bitcoin transaction from taking place. This combination of fixed supply, portability, security, improvability, and censorship resistance epitomizes Nakamoto's breakthrough. Hayek, in The Denationalisation of Money, foresaw just such a separation of money and state. "I believe we can do much better than gold ever made possible," he wrote. "Governments cannot do better. Free enterprise...no doubt would." While Hayek and Nakamoto hoped private currencies would directly compete with the U.S. dollar and other fiat currencies, bitcoin does not have to replace everyday cash transactions to transform global finance. Few people may pay for their morning coffee with bitcoin, but it is also rare for people to purchase coffee with Treasury bonds or gold bars. Bitcoin is competing not with cash, but with these latter two assets, to become the world's premier long-term store of wealth. The primary problem bitcoin was invented to address — the devaluation of fiat currency through reckless spending and borrowing — is already upon us. If Biden's $3.5 trillion spending plan passes Congress, the national debt will rise further. Someone will have to buy the Treasury bonds to enable that spending. Yet as discussed above, investors are souring on Treasurys. On June 30, 2021, the interest rate for the benchmark 10-year Treasury bond was 1.45%. Even at the Federal Reserve's target inflation rate of 2%, under these conditions, Treasury-bond holders are guaranteed to lose money in inflation-adjusted terms. One critic of the Fed's policies, MicroStrategy CEO Michael Saylor, compares the value of today's Treasury bonds to a "melting ice cube." Last May, Ray Dalio, founder of Bridgewater Associates and a former bitcoin skeptic, said "[p]ersonally, I'd rather have bitcoin than a [Treasury] bond." If hedge funds, banks, and foreign governments continue to decelerate their Treasury purchases, even by a relatively small percentage, the decrease in demand could send U.S. bond prices plummeting. If that happens, the Fed will be faced with the two unpalatable options described earlier: allowing interest rates to rise, or further inflating the money supply. The political pressure to choose the latter would likely be irresistible. But doing so would decrease inflation-adjusted returns on Treasury bonds, driving more investors away from Treasurys and into superior stores of value, such as bitcoin. In turn, decreased market interest in Treasurys would force the Fed to purchase more such bonds to suppress interest rates. AMERICA'S BITCOIN OPPORTUNITY From an American perspective, it would be ideal for U.S. Treasury bonds to remain the world's preferred reserve asset for the foreseeable future. But the tens of trillions of dollars in debt that the United States has accumulated since 1971 — and the tens of trillions to come — has made that outcome unlikely. It is understandably difficult for most of us to imagine a monetary world aside from the one in which we've lived for generations. After all, the U.S. dollar has served as the world's leading reserve currency since 1919, when Britain was forced off the gold standard. There are only a handful of people living who might recall what the world was like before then. Nevertheless, change is coming. Over the next 10 to 20 years, as bitcoin's liquidity increases and the United States becomes less creditworthy, financial institutions and foreign governments alike may replace an increasing portion of their Treasury-bond holdings with bitcoin and other forms of sound money. With asset values reaching bubble proportions and no end to federal spending in sight, it's critical for the United States to begin planning for this possibility now. Unfortunately, the instinct of some federal policymakers will be to do what countries like Argentina have done in similar circumstances: impose capital controls that restrict the ability of Americans to exchange dollars for bitcoin in an attempt to prevent the digital currency from competing with Treasurys. Yet just as Nixon's 1971 closure of the gold window led to a rapid flight from the dollar, imposing restrictions on the exchange of bitcoin for dollars would confirm to the world that the United States no longer believes in the competitiveness of its currency, accelerating the flight from Treasury bonds and undermining America's ability to borrow. A bitcoin crackdown would also be a massive strategic mistake, given that Americans are positioned to benefit enormously from bitcoin-related ventures and decentralized finance more generally. Around 50 million Americans own bitcoin today, and it's likely that Americans and U.S. institutions own a plurality, if not the majority, of the bitcoin in circulation — a sum worth hundreds of billions of dollars. This is one area where China simply cannot compete with the United States, since Bitcoin's open financial architecture is fundamentally incompatible with Beijing's centralized, authoritarian model. In the absence of major entitlement reform, well-intentioned efforts to make Treasury bonds great again are likely doomed. Instead of restricting bitcoin in a desperate attempt to forestall the inevitable, federal policymakers would do well to embrace the role of bitcoin as a geopolitically neutral reserve asset; work to ensure that the United States continues to lead the world in accumulating bitcoin-based wealth, jobs, and innovations; and ensure that Americans can continue to use bitcoin to protect themselves against government-driven inflation. To begin such an initiative, federal regulators should make it easier to operate cryptocurrency-related ventures on American shores. As things stand, too many of these firms are based abroad and closed off to American investors simply because outdated U.S. regulatory agencies — the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission, the Treasury Department, and others — have been unwilling to provide clarity as to the legal standing of digital assets. For example, the SEC has barred Coinbase from paying its customers' interest on their holdings while refusing to specify which laws Coinbase has violated. Similarly, the agency has refused to approve Bitcoin exchange-traded funds (ETFs) without specifying standards for a valid ETF application. Congress should implement SEC Commissioner Hester Peirce's recommendations for a three-year regulatory grace period for decentralized digital tokens and assign to a new agency the role of regulating digital assets. Second, Congress should clarify poorly worded legislation tied to a recent bipartisan infrastructure bill that would drive many high-value crypto businesses, like bitcoin-mining operations, overseas. Third, the Treasury Department should consider replacing a fraction of its gold holdings — say, 10% — with bitcoin. This move would pose little risk to the department's overall balance sheet, send a positive signal to the innovative blockchain sector, and enable the United States to benefit from bitcoin's growth. If the value of bitcoin continues to appreciate strongly against gold and the U.S. dollar, such a move would help shore up the Treasury and decrease the need for monetary inflation. Finally, when it comes to digital versions of the U.S. dollar, policymakers should follow the advice of Friedrich Hayek, not Xi Jinping. In an effort to increase government control over its monetary system, China is preparing to unveil a blockchain-based digital yuan at the 2022 Beijing Winter Olympics. Jerome Powell and other Western central bankers have expressed envy for China's initiative and fret about being left behind. But Americans should strongly oppose the development of a central-bank digital currency (CBDC). Such a currency could wipe out local banks by making traditional savings and checking accounts obsolete. What's more, a CBDC-empowered Fed would accumulate a mountain of precise information about every consumer's financial transactions. Not only would this represent a grave threat to Americans' privacy and economic freedom, it would create a massive target for hackers and equip the government with the kind of censorship powers that would make Operation Choke Point look like child's play. Congress should ensure that the Federal Reserve never has the authority to issue a virtual currency. Instead, it should instruct regulators to integrate private-sector, dollar-pegged "stablecoins" — like Tether and USD Coin — into the framework we use for money-market funds and other cash-like instruments that are ubiquitous in the financial sector. PLANNING FOR THE WORST In the best-case scenario, the rise of bitcoin will motivate the United States to mend its fiscal ways. Much as Congress lowered corporate-tax rates in 2017 to reduce the incentive for U.S. companies to relocate abroad, bitcoin-driven monetary competition could push American policymakers to tackle the unsustainable growth of federal spending. While we can hope for such a scenario, we must plan for a world in which Congress continues to neglect its essential duty as a steward of Americans' wealth. The good news is that the American people are no longer destined to go down with the Fed's sinking ship. In 1971, when Washington debased the value of the dollar, Americans had no real recourse. Today, through bitcoin, they do. Bitcoin enables ordinary Americans to protect their savings from the federal government's mismanagement. It can improve the financial security of those most vulnerable to rising prices, such as hourly wage earners and retirees on fixed incomes. And it can increase the prosperity of younger Americans who will most acutely face the consequences of the country's runaway debt. Bitcoin represents an enormous strategic opportunity for Americans and the United States as a whole. With the right legal infrastructure, the currency and its underlying technology can become the next great driver of American growth. While the 21st-century monetary order will look very different from that of the 20th, bitcoin can help America maintain its economic leadership for decades to come. Tyler Durden Tue, 10/19/2021 - 23:25.....»»

Part 2 of a Two-Part Look at: 1. Principles for Navigating Big Debt Crises, and 2. How These Principles Apply to What’s Happening Now If we don’t agree on how things work, we won’t be able to agree on what’s happening or what is likely to happen. For that reason I like to begin by […] Part 2 of a Two-Part Look at: 1. Principles for Navigating Big Debt Crises, and 2. How These Principles Apply to What’s Happening Now If we don’t agree on how things work, we won’t be able to agree on what’s happening or what is likely to happen. For that reason I like to begin by describing how I believe things work to see if we can agree on that. In Part 1, I provided a simplified description of how I believe the money-credit-debt-markets-economic “machine” works that’s available here. It is a part of my more comprehensive description of the cause/effect relationships that lead countries and their markets to rise and decline. .first{clear:both;margin-left:0}.one-third{width:31.034482758621%;float:left;margin-left:3.448275862069%}.two-thirds{width:65.51724137931%;float:left}form.ebook-styles .af-element input{border:0;border-radius:0;padding:8px}form.ebook-styles .af-element{width:220px;float:left}form.ebook-styles .af-element.buttonContainer{width:115px;float:left;margin-left: 6px;}form.ebook-styles .af-element.buttonContainer input.submit{width:115px;padding:10px 6px 8px;text-transform:uppercase;border-radius:0;border:0;font-size:15px}form.ebook-styles .af-body.af-standards input.submit{width:115px}form.ebook-styles .af-element.privacyPolicy{width:100%;font-size:12px;margin:10px auto 0}form.ebook-styles .af-element.privacyPolicy p{font-size:11px;margin-bottom:0}form.ebook-styles .af-body input.text{height:40px;padding:2px 10px !important} form.ebook-styles .error, form.ebook-styles #error { color:#d00; } form.ebook-styles .formfields h1, form.ebook-styles .formfields #mg-logo, form.ebook-styles .formfields #mg-footer { display: none; } form.ebook-styles .formfields { font-size: 12px; } form.ebook-styles .formfields p { margin: 4px 0; } Get The Full Ray Dalio Series in PDF Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues (function($) {window.fnames = new Array(); window.ftypes = new Array();fnames[0]='EMAIL';ftypes[0]='email';}(jQuery));var $mcj = jQuery.noConflict(true); Q4 2022 hedge fund letters, conferences and more   That more comprehensive description was laid out in my book Principles for Dealing with the Changing World Order. I hope you will examine my description of the cause/effect relationships that drive how things work to assess whether you by and large agree with it. In this Part 2, I will briefly review some of the timeless and universal cause/effect relationships that drive how “the machine” works, then I will review what happened from 1945 until now to compare what actually happened with my template, and then I will focus on what’s happening now and what this template leads me to believe about the future. While I’d love for you to read the whole thing because I think it’s packed with valuable stuff, if your goal is to blast through it and glean the highlights quickly, there are highlights that I put in bold or you can skip to what you’re interested in by looking at the subject headings. By the way, I put the principles that I believe are timeless and universal truths in italics. The Big Picture If you want to see how and why big events have unfolded, be careful not to focus precisely on small events. People who try to see things precisely typically miss the most important things because they are preoccupied with looking for precision. Also, if you look at things up close, you will never see the most important big things. Instead, when looking for the big things pay attention to the big things. The world order that began at the end of World War II, which was shaped by the United States being the dominant power, is now changing to produce a very different type of world order. This transition is happening in classic ways that drove how transitions occurred throughout history. Throughout history there have always been rich and powerful countries and poor and weak countries and there have always been changes in their relative strengths that occurred for logical and measurable reasons that have changed the world order. To benefit from these changes rather than be hurt by them, one must understand the cause/effect relationships behind them and adapt to these changes, ideally being ahead of them rather than being significantly behind them.   Because there is too much that is important that is happening in too many places for me to be able to stay on top of in my head, I have systemized data that describes the most important measures of strength and shows how they’re changing. I have found that 18 types of strength have driven almost all changes in countries. I monitor these in 24 countries. They are described in my book Principles for Dealing with the Changing World Order and updated on my website www.economicprinciples.org. The five most important drivers of changes that are important to understand are: The debt-money-economic dynamic The internal conflict dynamic The external conflict dynamic Acts of nature (droughts, floods, and pandemics) Human invention and technology development  In this report I will focus just on these five and just in the biggest countries. I should however point out that some of the most attractive pictures that I am seeing reflected in both these measures and in my firsthand contact are coming from some smaller countries that aren’t on this top 24 list. In Part 1, I briefly reviewed the mechanics of money and debt cycles and the principles for dealing with them well. In this Part 2, I will very briefly review my template, show how events have been transpiring relative to this template, and then show what’s happening now and what I think about it. A Brief Review of My Template I have a template for explaining how “the machine” works that I hope to convey in an easy-to-understand way so you and others can assess it for yourselves. Very simply a) money (i.e., the access to resources) + b) talented people + c) an environment that is conducive to conjuring up and building out developments = d) economic success (and economic success contributes to all sorts of other successes such as health, education, social, and military). In fact, any two of these ingredients will be enough (though all three together is best). For example, talented people in the right environment will earn or attract the money/resources that they need to succeed, and money with the right environment will attract talented people.   As explained in Part 1, I’d like to start by describing money because it’s of paramount importance and it’s what I know best. I believe that the money-credit-debt-markets-economic dynamic is the most important dynamic to understand and to stay on top of both for investing and for understanding the changing world order, so I will start with that. As explained in Part 1, it is driven by borrower-debtors, lender-creditors, and central bankers that both produce and respond to incentives to lend and borrow that lead to two interrelated cycles—a short-term one that has averaged about six years in length +/- three years and a long-term one that has averaged about 75 years +/- 25 years—which evolve around an upward trend line in productivity that is due to humanity’s inventiveness. By “short-term debt cycle” I mean the cycle of 1) recessions that lead to 2) central banks providing a lot of credit, which creates a lot of debt that initially leads to 3) market and economic booms that lead to 4) bubbles and inflations, which lead to 5) central bankers tightening credit that leads to 6) market and economic weakening. There have been 12.5 of these since 1945. By “long-term debt cycle,” I mean the cycle of building up debt assets and debt liabilities over long periods of time to amounts that eventually become unmanageable. This leads to a combination of big debt restructurings and big debt monetizations that produce a period of big market and economic turbulence. I believe that we are now roughly about 85% through the one that began in 1945.  As for the mechanics of this dynamic, history has shown and logic dictates that the return relative to the inflation rate (the real return) will follow the strength of the borrowers with a lag. That is because the financial ability of debtors to meet their obligations to pay back is the most important determinant of the value of the debt. If their finances aren’t good, they won’t be able to fully pay back and the only question is which way they won’t pay back to be relieved of their debt burdens. That’s largely up to the central banks and the central governments. If central banks keep interest rates high and money tight, creditors will get less real money because of debt defaults and debt restructurings. On the other hand, if central banks keep interest rates low and/or print money, creditors will get the money promised but at a depreciated value (i.e., the money will have less buying power.) For this reason, when there are a lot of debt assets and debt liabilities, it’s a risky situation for both debtors and creditors that puts central bankers in the difficult position of trying to simultaneously 1) keep real interest rates high enough and money tight enough to satisfy the lender-creditors without 2) having real interest rates so high and money so tight that it hurts the borrower-debtors intolerably. Getting this balance right is critical because if real interest rates are not high enough and money is not tight enough borrower-debtors will over-borrow and lender-creditors won’t adequately lend and will sell the debt assets they own, forcing the central bank to have to choose between a) allowing real interest rates to rise to high enough levels to bring about a supply-demand balance that will have devastating effects in markets and the economy, or b) printing a lot of money and buying the debt assets that others won’t buy which will lower real interest rates and devalue the money. In either case, when there are a lot of debt assets and debt liabilities it isn’t good to hold debt assets except for short tactical moments. Whether central banks are tight or loose will however make a difference in which debt assets are good. If central banks go the tight money route, credit spreads will widen because risky debtors need to devote more of their income to debt service. Meanwhile, those debt assets that are default-protected by the central government and central bank will still perform poorly but won’t be hurt as much. If they go the easy money route, there will be less differentiation because credit spreads won’t increase as much, though all debt is likely to be devalued in real terms. So, as a general rule, when there are a lot of debt assets and liabilities outstanding relative to both the debtors’ abilities to service the debt and the creditors’ abilities to get a good real return from the debt assets, watch out. For a much more complete look at this dynamic and many case studies over several hundred years see Chapters 3 and 4 in my book Principles for Dealing with the Changing World Order. As explained in that study of past cases, in all cases where there have been big debt crises and the debt is denominated in currencies that central banks can print, central banks have always printed the money and bought the debt because this is the least painful way to deal with the debt restructuring. In any case, the reduction in the debt assets and debt liabilities occurs and a new cycle can begin. These cycles move markets and economies around an upward-sloping trend line of rising living standards that is due to people’s inventiveness and the increases in productivity that come from it. The incline of its upward slope in productivity is primarily driven by the inventiveness of practical people (e.g., entrepreneurs) who are given adequate resources (e.g., capital) and work well with others (their coworkers, government officials, lawyers, etc.) to make productivity improvements. Over a short period of time (i.e., one to 10 years) the cycles are dominant. Over a long period of time (i.e., 10 to 30 years and beyond) the upward-sloping trend line has a much bigger effect. Conceptually, the way this dynamic transpires looks like this to me: dsadsa During the big money-credit-debt-market-economic cycles (which I will henceforth, for brevity, call debt cycles), different monetary regimes come and go mostly to accommodate and facilitate continued credit and economic growth. Within each of these money/currency regimes there were sub-phases that I call paradigms. For example, the 1970s paradigm was one of high inflation and slow growth while the 1980s paradigm was one of falling inflation and strong growth, while both occurred in the same monetary regime. Over time, from one cycle to the next, debt liabilities and debt assets have virtually always increased to make the long-term debt cycle expansion. In all cases that has continued until the debt burdens have become unsustainably large or the debt assets have become intolerably low-returning, at which time there are big reductions in debt liabilities and debt assets that take place through some mix of debt restructurings and debt monetizations. These are the big debt crisis periods. These big debt restructurings and debt monetizations end the prior big debt cycle by reducing debt burdens and eliminating the prior monetary order, leading to the next new big debt cycle and monetary order. They take place much like big changes in domestic political orders and big changes in world orders—like seismic shifts due to the old orders breaking down. That is a simplified version of what the first of the five big forces—i.e., the money-credit-debt-market-economic cycle—looks like to me. The Other Four Big Forces Affect How This Debt Cycle Transpires Just as This Debt Cycle Affects How the Other Four Forces (and All of the 18 Previously Mentioned Forces) Transpire Together More specifically, 1) the money-credit-debt-markets-economic cycles, 2) the cycles of peace and conflict that take place within countries, 3) the cycles of peace and war that take place between countries, and 4) the acts-of-nature shocks of droughts, floods, and pandemics create big swings in conditions around 5) a productivity-driven uptrend that is due to humanity’s ability to invent and produce. The interactions between these forces drive how conditions change. They tend to reinforce each other both upwardly and downwardly. For example, periods of financial and economic crisis tend to reinforce periods of internal conflict, and periods of internal conflict worsen financial and economic conditions. Similarly, periods of internal financial problems and internal political conflicts both weaken the country that they are happening in and increase the likelihood of external conflicts. Together these forces create the Big Cycles of ups and downs in countries and the big changes in domestic and world orders. These big rises and declines are easy to see by monitoring the 18 forces (particularly the big five) that I’m sharing with you. For example, you can see the big evolutionary decline of great powers and their monies reflected in 1) the decline of many indicators of health (e.g., education, infrastructure, law and order, civility, government effectiveness, class and ethnic conflict, etc.) relative to those other world powers, and 2) the unwavering rises of indebtedness accompanied by the steady weakening of the types of monetary systems used to restrain credit-and-debt-growth-motivated attempts to raise credit and economic growth.  While I won’t now delve into how all these work—both because doing that would be too much of a digression and because it’s better explained in my book or even in my relatively brief video, both titled Principles for Dealing with the Changing World Order—I now will move from describing this template to looking at what has actually happened over the 78 years since 1945 when the money and political world order last changed. That way you will go from looking at my theoretical template to looking at what happened and why. It will also give you a perspective that I think will help you imagine the future.     While I think the next section is important because it shows how this template and actual developments have worked and it explains how we got to where we are and it helps to understand where we are, if you don’t want to read it all read what’s in bold and quickly get to the 2020-2022 section to set the stage for seeing where we are and then read the section on looking ahead. A Brief Review of What Actually Happened Relative to My Template: 1945 until Now In order to paint the big picture of how things work, what happened, and where we are, I will start in 1945 and will quickly bring you through what I believe are the most important things up to now. Since the money part of what happened was most important in shaping what happened, I will look at what happened through the lens of the previously described money-economic lens of the short-term and long-term debt cycles evolving around the productivity-living standard uptrend. I will divide the post-1945 period into four phases that correspond with the four monetary regimes that drove the credit-debt dynamic since 1945. 1945 was the year the war ended so it was the first year of the new monetary and geopolitical world orders. Because the United States was the strongest economic, geopolitical, and military power, these new orders had US money and US geopolitical power at the heart of them.  Phase 1: 1945 to 1971—A Gold-Linked Monetary System From 1945–1971 there was a gold-linked monetary system in which dollars (which were considered like checks with no intrinsic value) were exchangeable for gold (which was considered the real money) at a fixed exchange rate and other currencies were exchangeable for dollars at agreed-upon and changeable rates. During this 26-year period there were five short-term debt-economic cycles, which were wiggles around an uptrend in GDP and indebtedness. From 1945 until 1970 Great Britain declined, and Germany and Japan rose economically, so the British pound fell and the German deutschemark and Japanese yen rose in importance. In 1956 something called artificial intelligence was invented. In 1957 key inventions included lasers, personal computers, and satellites. In the ’60s came high-speed rail, Kevlar, the technical foundations of the internet, and the pocket calculator. During this 1945-1970 period the US overspent and financed that overspending by borrowing, especially in the 1960s on the Vietnam War and the War on Poverty, so debt assets and debt liabilities increased far more than incomes and the quantity of gold that the US had in the bank. The civil rights movement conflicts added to the tensions. Some of those who held dollar assets (such as France under President Charles de Gaulle), which were claims on gold, chose to turn in their dollar assets for gold. This created the beginning of a balance of payments problem and a tightening of monetary policy that led to a recession in 1970. Because the dollar claims on gold had become much larger than the gold in the bank and that became more apparent, a “run on the bank” occurred. It took the form of holders of debt assets turning them in for money to get the gold which led this monetary order to break down in 1971. That is when the first of the post-war monetary orders broke down. Phase 2: 1971 to 2008—A Fiat Money, Interest-Rate-Driven Monetary Policy (MP1) 1971 was the transition year when the gold-linked monetary system was replaced by a fiat monetary system in which central banks ran a monetary system that stimulated and restrained money/credit/debt growth by changing interest rates. I call this type of monetary system—i.e., one in which fiat currencies are managed via interest rate changes—Monetary Policy 1 (MP1). There are two other types of monetary policy that take place at the different stages of the long-term debt cycle that I call Monetary Policy 2 (MP2) and Monetary Policy 3 (MP3). If you are interested in learning more about them, I describe them beginning on Page 36 of my book Principles for Navigating Big Debt Crises, which you can get in PDF form here. While the gold-dollar-based system broke down, the US remained the dominant world power economically, militarily, and in most other respects, and most world trade and global lending was done in dollars so the dollar remained the world’s leading currency. Because of the big devaluation of the dollar (and all other currencies) versus gold in 1971 and because of the way the new fiat monetary system was managed (with low real interest rates and plenty of credit availability) being a borrower-debtor was rewarded so there was a large increase in money/credit/debt that produced a lot of inflation with slow growth in the 1971-1980 period. Lots of money was lent to emerging countries, especially those in Latin America. That 10-year period consisted of two short-term money-credit-debt-economic cycles that each transpired in classic ways with the Fed’s decisions to ease or tighten monetary policy driving them, though the second money/credit/debt and inflation surge was much bigger than the first. Naturally the pendulum swung in the classic way to the opposite extreme—i.e., easy money and credit causes very high inflation which led to an equal and opposite reaction in monetary policy, so money and credit was very easy early in the period which led to high inflation which led to the greatest tightening of monetary policy “since Jesus Christ” (according to German Chancellor Helmut Schmidt) to fight inflation at the end of the 10-year period. As always this tightening took the form of a sharp rise in real rates that shifted the conditions from benefiting borrower-debtors early in the decade to benefiting lender-creditors in a big way at the end of it. That ended the decade-long stagflation paradigm and began the 1980s decade-long disinflationary growth paradigm. In the 37 years from 1971 until 2008 there were five short-term credit-debt-economic cycles. These cycles occurred within the greater long-term debt cycle trend of rising debt levels supported by declining short-term real and nominal interest rates. After the two large tightenings in the ’70s and early ’80s until 2008, every cyclical peak and every cyclical trough in interest rates was lower than the one before it. These declines supported asset prices and economic activity. The declining trend of real and nominal interest rates shifted conditions from those that benefited lender-creditors back to those that favored borrower-debtors, which allowed debt/income levels to rise until there was the 2008 debt-economic crisis and interest rates hit 0%. Hitting zero eliminated central banks’ abilities to ease and stimulate the next wave of credit/debt/economic expansion through interest rate cuts, so they turned to MP2. During this time period, the geopolitical landscape changed as the Soviet Union fell, China rose, and wealth gaps increased. The big inventions were the microprocessor, video game consoles, laptop computers, GPS, lithium-ion batteries, satellite television, DNA profiling, the internet, search engines, smartphones, social media, apps, digitalization of thinking, and the earliest blockchains. Phase 3: 2008 to 2020—Fiat Money, Debt Monetization, Independent Monetary Policy (MP2) In late 2008 the interest-rate-driven monetary system (which I call Monetary Policy 1) couldn’t be used for easing anymore because interest rates couldn’t be lowered enough to create a credit-debt-economic expansion. As a result, the prior type of monetary system (MP1) was replaced by central banks printing money and buying debt in large quantities (MP2) which ushered in the era of “debt monetization” or “quantitative easing” as they are now called. Said differently, central banks started to become big lender-creditors making up for the shortage of free-market lender-creditors. They needed to do this to keep the expansion phase of the big credit-debt-economic cycle going. That was the first time this set of circumstances and this monetary policy happened since 1933 (i.e., 75 years earlier). Such moves to debt monetization have occurred throughout history and are symptomatic of being in the late phase of the long-term debt cycle. This buying of financial assets by the Fed helped push up the prices of financial assets and push down their yields. The stimulative monetary policies that flowed through the system freely favored the rich who had financial assets that rose and good access to borrowed money. These developments and rising wealth gaps increased class conflict. The government bailing out the banks contributed further to the environment of animosity toward the capitalists. Also, because the Chinese and other emerging market producers had become more competitive which took away jobs at the same time that new technologies took away jobs which contributed to the hollowing out of the middle class, that also increased class warfare. People who were hurting economically believed that the “elites” running things and the system were rigged against them. That led to the rise of populist sentiment and nationalism. These developments were also analogous to those that happened in the early 1930s and many times before under similar circumstances. In the US these developments led to Donald Trump’s election and his moves to nationalism which included aggressive trade, technology, and geopolitical policies to confront and contain China. In this 2008-2020 period there were two short-term credit-debt-economic cycles (including the one we’re currently in) with each amount of debt creation and each amount of debt monetization greater than the one before it. During this period China continued to rise and the wealth and opportunity gaps continued to rise. Technologically, computer chips rapidly advanced, cryptocurrencies were launched, self-driving car features began to be rolled out, movie streaming became more widespread, 4G (and then 5G) wireless began, and reusable rocket ships began to be used. Climate change began to garner greater attention. In 2020, the world was hit with the COVID pandemic. That necessitated a change in monetary policy to what I call Monetary Policy 3.    Phase Four: Since 2020—Big Fiscal Deficits Monetized (MP3) Monetary Policy 3 is the type of monetary policy in which there is coordination of fiscal and monetary policies because this type of monetary policy is required to get money and credit in the hands of those who would not get it in a free-market capital markets system. That is because free-market capitalism naturally provides capital to those who are financially well-off. Throughout history MP3 has happened under similar circumstances in similar parts of the long-term debt cycle. Since 2020 we have experienced the big easing part and most of the big tightening part of the short-term debt cycle. The big easing part happened in 2020 because of the combination of COVID-induced debt and economic crises, large wealth gaps, and political moves to the left via the elections of a Democratic president, a Democratic-controlled House of Representatives, and a Democratic-controlled Senate. These things together led to huge government spending increases, huge increases in government fiscal deficits, and huge increases in the amounts of debt that governments had to sell to finance these deficits. This selling of debt assets was much greater than free-market lender-creditors would buy which required central banks, most importantly the Fed, to buy/monetize the debt. That increased the amount of money/credit/debt/spending a lot. This massive MP3 type of coordination of fiscal and monetary policies to allow the central government to both tax and direct money as it chooses via the central bank buying its debt with printed money is explained starting on Page 37 of my book about debt crises if you’re interested in knowing more and seeing past cases. That is what happened in 2020-21; it has happened repeatedly for similar reasons throughout history. The 2020-2021 debt monetization was the fourth[1] and the largest big debt monetization since the original big debt monetization/QE in 2008 (which was the first since 1933). Since 2008 the nominal Treasury bond yield was pushed down from 3.7% to 0.5%, the real Treasury bond yield was pushed from 1.4% to -1.1% and non-government nominal and real bond yields fell a lot more (because credit spreads narrowed). As money and credit became essentially free and plentiful the environment became great for borrower-debtors and terrible for lender-creditors which led to new bubbles forming. My bubble indicator, which was at only 8% in 2010, rose to 82% at the end of 2020, showing the bubbles in companies and assets that had little or no profits and were funded by selling equity and/or borrowing money based on promises of doing well in the future and speculative buying fever. It was analogous to the “Nifty-Fifty” bubble in the 1970-72 period, the “Japan bubble” of 1989-90, and the “dot-com bubble” of 1999-2000. That decline in interest rates took them so low that they couldn’t continue to fall. I estimate that the interest rate decline raised stock prices about 75% more (compared to pre-financial-crisis peak) than they would have risen without that decline. In addition, profit margins on average doubled as a result of technologies and globalization which also boosted profits and with them asset prices in unsustainable ways (because profit margins are now more likely to decline than to rise). Corporate and personal taxes declined which helped asset prices, and they are now more likely to rise than decline which will be a negative for asset prices over the next 10 years. All these factors drove asset prices up to levels that were extremely stretched. From the post-crisis lows of 2009 to 2020 the nominal value of wealth in US financial assets (i.e., “paper wealth”) rose from $22 trillion to $88 trillion, so there was a quadrupling of paper wealth. That money/credit/debt surge in 2020 produced a huge increase in inflation which was exacerbated by the external conflicts (i.e., which is the third of the five major forces that I will touch on later). That led to the short-term cycle pendulum swinging back to a big tightening via the Fed and other central banks raising interest rates and curtailing their debt monetizations. That flipped the short-term debt cycle from the easing mode to the tightening mode.  Nominal and real interest rates went from levels that were overwhelmingly favorable to borrower-debtors and detrimental to lender-creditors, to levels that are more balanced. Since the tightening began, US Treasury bond nominal yields have risen from 0.5% to over 4%, real yields have risen from about -1.1% to 1.6% and credit spreads have risen significantly, all of which hurt most asset prices, particularly those with weak or negative profits and/or needs for new equity funding. Naturally that shift especially hurt prices of assets that were in bubbles. My bubble index fell from 82% to 30% and the bubble stocks in the index have fallen an average of 75%. The nominal value of wealth in stocks and bonds has fallen by ~12% in the US and the real value of wealth fell by nearly 18%, which are the greatest declines since 2009. Since these peaks in rates were reached in October these nominal and real interest rates have declined a bit which has helped markets to rally a bit.  More specifically, due to the Fed’s rapid tightening, dollar-denominated debt assets and debt liabilities, and all assets affected by them, very quickly repriced as short-term nominal and real interest rates were brought to levels that were/are relatively attractive for lender-creditors and relatively unattractive for borrower-debtors. The rising of interest rates and tightening of money had the very classic effect of lowering the present values of future cash flows as the discounted interest rate rose and it strengthened the dollar relative to the currencies of other countries whose central bankers were slower to tighten. In other words, the Fed’s quick movement brought US dollar-denominated cash to relatively attractive levels in relation to most assets, cash denominated in other currencies, and gold—i.e., cash went from “trash” to “attractive.” As usual that hurt interest-rate-sensitive sectors like commercial and residential real estate, as well as low or negative cash flow bubble companies, both public and private, though public more so. For example, the FAANG stocks and the NASDAQ are down from their peaks by around 30% and 25% respectively. Non-public market assets—private equity, venture capital, and real estate assets—have not been marked down commensurately as there is a great reluctance to accept the markdowns. Write-downs and having down fundraising rounds became too painful for both the companies and the venture capital and private equity managers in these markets, so there is a standoff in which sellers and buyers can’t agree on prices and transaction volumes have plunged. Now negative cash flow companies are figuring out how much cash they have on hand to survive and how to cut costs to wait out the market. In my opinion they will never see prices rise to levels that won’t require them to have write-downs and down rounds. That means selling stocks for prices that are less than when the stock was last sold which leads those who bought it last time to have losses, shows that the company is falling short of expectations, and means that the venture capital and/or the private equity managers have to report poor performance numbers. For those reasons the incentives are not to have the write-downs. I believe these assets will generally be well below their historic highs for a very long time because I believe we will never see nominal and real interest rates go to such levels and cash be given away so freely again.  The internal and external conflicts intensified during this 2020-2022 period and moved the world much closer to the brinks of civil war and international war. However, most recently there have been small steps back from the brinks as the fears of going over them have become more vivid and terrifying to those involved. Regarding the internal conflicts between the extremists, while their increasing intensity showed up in elections and in other ways—especially in the US, Italy, Brazil, and throughout Latin America—and while they began to surface in strikes in Europe, by and large there was a stepping back from the brinks rather than a moving toward them. In the US midterm elections, for example, extremists of both the right and the left lost to moderates so there was a small stepping back from the brink. Regarding external conflicts, while over the 2020-present period there was significant movement closer to brinks of catastrophic economic and military warfare, that movement brought into focus to all parties that crossing these brinks would be disastrous, which has led to restraints. More specifically we have seen a) Russia, Ukraine, the US, and NATO go into a military war that they have thus far contained geographically to be in Ukraine and in severity by using only conventional weapons and b) the US and China’s geopolitical war regarding Taiwan and China’s support of Russia, while having moved closer to the brinks of terribly damaging economic and military war during the 2020-2022 period, exhibited great restraints to prevent going over these brinks. At the same time Iran-Israel-US and related countries face a big decision as Israel (and the US) will be considering whether to militarily destroy Iran’s nuclear capabilities and/or Iran’s leadership to prevent Iran from becoming a nuclear power or if they will let Iran become a nuclear power.    As for the use of capital and economic warfare, US sanctions against Russia proved ineffective but they raised the worry of a number of countries’ leaders that holding dollar debt assets could be risky. This came at the same time as the internationalization of the RMB—i.e., China increasingly denominating trade and capital flows in RMB—advanced. While these developments can undermine the long-term demand for dollars and dollar assets, they have not yet become large enough to drive markets.  Seeing how these wars transpired in 2020-2022 has given us some indications of how they might transpire in the future. For example, over the last couple of years it has become clearer how countries would probably line up against each other and how far each would go and in what ways these conflicts would play out. Indications came in the form of UN votes and what countries traded what items with whom. The ways these “wars” transpired in 2020-2022 made clear that a) while the two sides—the US and NATO countries on the one side and Russia and China on the other side of their “wars” (most importantly over Ukraine and Taiwan)—were willing to go to the brink, they are afraid of going over it, b) virtually all other countries didn’t want to be drawn into these wars, and c) those countries that are uninvolved and rising powers, such as India, Singapore, the rising ASEAN countries such as Indonesia and Vietnam, Saudi Arabia, and the UAE have benefited from what is going on. This dynamic is creating clarity about where the good places are and where the riskier places are. More specifically we have seen that my three criteria for identifying places that would do relatively well in this new environment—i.e., those that 1) earn more than they spend so they have strong income statements and good balance sheets, 2) have internal order and other favorable conditions for prosperity, and 3) are unlikely to be involved in a bad international war—have thus far proven to be valuable.  A Few More Evolutionary Developments over the Whole 1945-to-Now Period While I showed you some of the big evolutionary developments that occurred since 1945 and focused a bit on what has happened recently, there are a few important big evolutions that I’d like to point out. The ones that I think are most important are:  While I made clear that major monetary regimes in the world’s reserve currencies became progressively less restrictive which has led debt assets and debt liabilities to grow to dangerously high levels in the United States, Europe, and Japan without any prospect of being seriously restrained, what is not yet clear enough is how big changes in wealth have taken place. Wealth changes, which are very important, are not given adequate attention because most people mistakenly focus more on GDP than wealth. Think of it this way. GDP is like revenue that shows up in the income statement and tells you essentially nothing about wealth or profitability. Wealth, which shows up in the balance sheets, goes down when liabilities increase faster than assets. An examination of real wealth changes shows that there has been a very big decline in the relative wealth levels of Americans, Europeans, and Japanese relative to Chinese and many other nationalities such as Norwegians, Indians, Saudis, and Indonesians because the debts that have funded the three major reserve currency areas have increased faster than the assets. While borrowing allowed these countries to spend more than they earned, paying back will require them to spend less than they earn. That day of reckoning will certainly come. Another big shift in wealth has been from central governments and central banks to the private sector (especially to the household sector)—i.e., the government sectors worsened their balance sheets to improve the household sector’s balance sheets. This is cushioning the negative effects that the tightening is having on the household sector. This shift in wealth happened via central governments borrowing a lot and central banks printing a lot of money and buying a lot to get money in the hands of those in households. These shifts affect the money-credit-debt-economic dynamic a lot. For example, since central governments supported by central banks don’t have default risks and since central bank losses from buying bonds that have gone down in price don’t have losses that squeeze them in any way, this dynamic has created less credit risk and more ability to borrow than would have existed, and that has created more “value of money” inflation risk than would have existed. These shifts in wealth will become extremely important when creditors start moving to getting back and converting these debt assets into real goods and services. That it will happen is not questionable, though when it will happen is questionable. While I am not anticipating its timing, I am able to identify it when it starts to happen and begins to accelerate. It will look like a classic run on a bank in which there is big selling of debt assets which will put central banks in the position of having to choose between a) real interest rates rising fast and a lot and damaging the markets and the economy, and b) printing a lot of money and buying a lot of debt which will devalue money a lot.   The vulnerability of the dollar and dollar-denominated debt has been steadily increasing because of a) the supply of dollar-denominated debt being much larger than the free-market demand for it which has been requiring central banks to buy large quantities of the debt with money and credit they print, b) the growing desire of foreign countries to diversify their central bank and sovereign wealth fund holdings away from the dollar because they are too concentrated in dollars and diversification is prudent, c) foreign countries doing more trade and capital transactions with China than with the United States, meaning it’s natural from both China’s and other countries’ perspectives to denominate more transactions in China’s RMB, d) US sanctions having raised the concerns of some foreign holders of dollar bonds about these holdings being sanctioned, and e) US political and social conflicts, including the handling of the debt limits, undermining confidence in the US and its policies.  Some countries have been ascending while some have been declining. China is the most important ascending power to understand, but other, less-watched ascending powers also warrant greater attention. Let’s look at China and then look at the others.  Seeing the whole evolutionary arc of China and its impact on the world is important. Since it doesn’t come across by looking at it in pieces, I will briefly review it here. From 1945 until around 1980 China was unimportant to the world because its economy was insignificant in size and isolated from the rest of the world. Then in 1978 Deng Xiaoping came to power and pursued his “open door” and “reform” policies which led to China having huge economic effects, which changed not only China but the whole world. From around 1980 until now, China went from being a poor, weak country to being a rich (judging by its total, rather than its per capita, GDP and wealth levels) powerful country. Peoples’ reactions also evolved with China’s success, which is having a big effect on the world order. When China entered the world economy around 1980 and it was small and trying to be integrated into the world community, it was perceived favorably because it brought its inexpensive labor and high productivity gains to provide the world with attractively priced manufactured goods. The US and most of the world liked getting attractively priced manufactured goods, especially because China used a lot of its earnings to lend money to those who bought the merchandise. Those sales built up China’s income and allowed it to both get stronger and lend to the United States. Then, during the 2008-2016 period, the pendulum of sentiment toward China began to swing from positive to negative because of lost employment, especially in middle class manufacturing jobs as Chinese could do these jobs less expensively. To Americans, deals previously thought of as good seemed exploitative, intellectual property theft became a contentious issue, and restrictions against highly competitive foreign (especially US) companies being allowed to freely enter the Chinese market and freely compete were contentious issues. Also, China’s economic power grew, which gave it the resources to develop its military, geopolitical influence, and technology powers, which led it to become more assertive. The combination of these developments not only had an economic effect but it also contributed to the emergence of populism, nationalism, and anti-Chinese sentiment. As a result, US-China policies shifted from cooperation and opening up to confrontation and closing down. The United States and China are now—and will likely continue to be for the next 10 years or more—locked in a classic great power conflict. How that transpires will have a huge impact on these two countries and the world so it’s important to follow this closely. While what is going on in the United States, China, and, to a lesser extent, Europe garners most of the attention, it’s time that we start focusing on rising countries with strong fundamentals (as reflected in my 18 measures) such as India, ASEAN countries such as Singapore, Indonesia, and Vietnam, the UAE, and Saudi Arabia, which have benefited by being neutral vis-à-vis the power conflicts. A number of them are at take-off points in their developmental cycles because their people, governance systems, and capital markets are approaching being capable of competing in ways that didn’t previously exist. Also, the wars between the United States and China are making the United States and China less desirable places to be which is driving capital, businesses, and talented individuals to these places. All these countries are experiencing the Big Cycle changes in the 18 indicators, with some ascending while others are declining. Hurtful acts of nature in the forms of climate change, loss of biodiversity, and pandemics have been increasing.  As previously expressed, the greatest of all forces is the force of human innovation. At no time in history, including the Renaissance and Industrial Revolution, has this force been as powerful as it is now. The unwavering evolutionary development of thinking technologies such as computers, expert systems, machine learning, AI, and quantum computing started in the middle of the 20th century and will radically change how we think and use that thinking to create new inventions that will move us forward. Over the next five years you will see mind-blowing advancements in many areas. Because these thinking tools help thinking in almost all areas, we are seeing revolutionary advances in almost all areas. I and others at Bridgewater have experienced and capitalized on this (r)evolution via the computerization of investment decision making, so I’m excited by what will be happening. I believe that we are now at the brink of a new era in which machine thinking will replace human thinking in many ways in the same way that machine labor replaced human labor during the Industrial Revolution. Just as we have seen doing math in our heads and remembering facts become much less important with the invention of computerized tools that do these things, and just as we go to Google (or its equivalents) to find information rather than gathering information in more traditional ways, we will soon be going to computers to get instructions on what to do when we are in different situations because the computer will come up with better guidance more quickly than we can. For these reasons, while I’m concerned about the value of money and debt assets, the internal and external conflicts, and acts of nature, I am very excited and optimistic about the revolutionary improvements that are likely to take place as the result of inventive/practical people put together with capital that gets them the resources that they need (perhaps most importantly, these new thinking technologies), operating in great environments that are conducive to advancement. Of course, new technologies are double-edged swords. For example, they have advanced how we can do each other harm as well as how we can do each other good. Looking Ahead First of all, I want to re-emphasize that what I don’t know, especially about the future, is much greater than what I do know, and for that reason diversification among seemingly good bets is of paramount importance. As for what seem to be the good and bad bets, it appears to me that the big power countries that are plagued with the big problems that I described, and the world as a whole, are in what I call Stage 5 of the Big Cycle—i.e., near the brinks of financial/economic crises and big internal conflicts/wars, and in the early part of an evolving, costly climate crisis—at the same time as the world is near the brink of having amazing technological breakthroughs that will affect our daily lives. Stage 5 is the last-chance stage before going into Stage 6 which is the financial crisis and war part of the cycle. It seems to me that that will make the environment very challenging for those who are following the traditional leveraged long approach to investing in traditional areas, while it will provide great opportunities in those geographic and subject areas that are benefiting from these changes. Re: 1) The Money-Credit-Debt-Markets-Economic Cycles In my opinion the tightening that began in March 2022 ended the last paradigm in which central banks gave away money and credit essentially for free, which was great for the borrower-debtors. We are now in a new paradigm in which central banks will strive to achieve balance in which real interest rates will be high enough and money and credit will be tight enough to satisfy lender-creditors without interest rates being too high and money and credit being too tight for borrower-lenders. In my opinion this will be a difficult balance to achieve which will take the form of slower-than-desired growth, higher-than-desired inflation, and lower-than-expected real returns of most asset classes.  Regarding where exactly we are in the short-term debt cycle, it appears to me that we are now approaching the end of the tightening phase but not approaching the easing phase that is priced into the markets. While all these short-term debt cycles are basically the same in the most important ways, each one is a bit different. This one is severe for some and mild for others and overall pretty mild. More specifically, in this short-term debt cycle, the over-levered, cash-short, interest-rate-sensitive, and/or bubble companies and those investors who invest in them are being hurt while corporates and banks are being squeezed but not in trouble, and the household sector is doing pretty well. The household sector is doing pretty well because there was a big shift in wealth to the household sector from the government sector which is now carrying a lot of the debt. This happened in most developed economies, most importantly in the reserve currency economies—the US, Japan, and the Eurozone—via the central governments’ borrowing a lot to make distributions to households and central banks lending them a lot. Said differently, this came about because central governments and central banks deteriorated their balance sheets so that households could improve theirs. This has created a safer environment because, unlike the private sector, central governments and central banks don’t get squeezed for money and don’t have to worry about market losses causing them financial trouble. Regarding where we are in the long-term debt cycle it appears that we are in the late stages, about 85% through it, but I can’t say exactly. I guesstimate that the likelihood of a major restructuring of debt assets and debt liabilities denominated in the major reserve currencies happening over the next 10 years to be something like 60%. That is because the debt assets and debt liabilities are already very large, and they are projected to rise to significantly higher levels that will make it increasingly difficult to have interest rates high enough and money tight enough to satisfy the lender-creditors without having interest rates too high and money too tight to not hurt the borrower-debtors.  Re: 2) Internal Conflicts and 3) External Conflicts As for the internal and external conflicts, I have conveyed my concerns which are also reflected in the conflict gauges I use to measure and anticipate different types of wars. Based on these I now estimate the probability of a profoundly disruptive civil war to be about 35-40% and the probability of a profoundly disruptive international war also being about 35-40% over the next 10 years. I don’t expect a big military war between nuclear countries because it is widely recognized that using nuclear weapons would lead to mutually assured destruction. For that reason, based on what I know, I expect the United States and China to avoid an all-out military war. The only way I can see any side winning a war is by secretly building a technology of overwhelming power that can be inflicted without triggering an intolerable retaliation so that simply demonstrating it to the other side would lead to some form of capitulation by the country not having it—like the secretive development of the atomic bomb and demonstration of its power to the Japanese via the attacks on Hiroshima and Nagasaki. To be clear, I am not ruling out such a scenario because I know that there are developments of mind-blowingly powerful technologies that remain unknown to us.   Regarding my estimated probabilities, please understand that they are unreliable, though the measures of the risk levels are higher than at any time in the post-1945 period because the number of militarily powerful (e.g., nuclear) countries and the measured conflict levels between them are both greater than at any time since the last world war.   Re: 4) Acts of Nature In the years ahead it’s likely that acts of nature, most importantly climate change, will be very costly in one way or another—i.e., either because we expend the amounts of money and endure the inefficiency costs to make fast enough progress to minimize the environmental and adaptation costs in the future or we don’t spend the money now and endure the costs later. The climate problem is one of those classic types of problem that isn’t well-handled because the pain is increasing at a pace that is too slow to prompt action and because what’s good for the whole isn’t the same as what’s good for all of the parts so agreeing on how to share the costs is damn near impossible.  Re: 5) New Technologies It appears to me virtually certain that many big changes fueled by artificial intelligence working with human intelligence will lead to shocking advances in many areas over the next 10 years (in fact over the next three years). For example, OpenAI and products that are competitive with it will be shocking game changers that you will see imminently. I think such technological developments will be mind-blowing in changing how we think and what we think in ways that are enormous and probably far more good than bad. For example, I think that this sort of OpenAI technology (ChatGPT) is a technology that will in many cases give wisdom that can only come from seeing across subject matters, geographies, and histories and that is currently impossible for the human brain to gain, with these perspectives being void of different cultural and religious biases. This is a subject for another time. However, from an investment perspective it is not clear how much profit will come in relative to the costs that will go out to invest in and create these new technologies. I think there will be exceptionally big differences between the performance levels of countries, investors, and companies that will penalize those who choose poorly and reward those who choose well enormously. Stepping back from all these things to see them from a big-picture level, it seems that events are continuing to track the Big Cycle template due to the most important and most classic cause/effect relationships continuing to work in the same logical ways that they worked in the past.  Footnotes [1] Counting QE1, QE2, QE3, and then QE during COVID lockdowns. Article by Ray Dalio, via LinkedIn.....»»

Macleod: The Evolution Of Credit & Debt In 2023 Authored by Alasdair Macleod via GoldMoney.com, The evidence strongly suggests that a combined interest rate, economic and currency crisis for the US and its western alliance will continue in 2023. This article focuses on credit, its constraints, and why quantitative easing has already crowded out private sector activity. Adjusting M2 money supply for accumulating QE indicates the degree to which this has driven the US tax base into deep recession. And the wider effects on credit in the economy should not be ignored.  After a brief partial recovery from the covid crisis in US government finances, they are likely to start deteriorating again due to a deepening recession of private sector activity. Funding these deficits depends on foreign inward investment flows, which are faltering. Rising interest rates and an ongoing bear market make funding from this source hard to envisage. Meanwhile, from his public statements President Putin is fully aware of these difficulties, and a consequence of the western alliance increasing their support and involvement in Ukraine makes it almost certain that Putin will take the opportunity to push the dollar over the edge. Credit is much more than bank deposits Economics is about credit, and its balance sheet twin, debt. Debt is either productive, in which case it can extinguish credit in due course, or it is not, and credit must be extended or written off. Money almost never comes into it. Money is distinguished from credit by having no counterparty risk, which credit always has. The role of money is to stabilise the purchasing power of credit. And the only legal form of money is metallic; gold, silver, or copper usually rendered into coin for enhanced fungibility. Credit is created between consenting parties. It facilitates commerce, created to circulate existing commodities, and to transform them into consumer goods. The chain of production requires credit, from miner, grower, or importer, to manufacturer, wholesaler, retailer and customer or consumer. Credit in the production chain is only extinguished when the customer or consumer pays for the end product. Until then, the entire production chain must either have money or arrange for credit to pay for their inputs.  Providers of this credit include the widest range of economic actors in an economy as well as the banks. When we talk of the misnamed money supply as the measure of credit in an economy, we are looking at the tip of an iceberg, leading us to think that debt in the form of bank notes and deposit accounts owed to individuals and businesses is the extent of it. Changes in the banking sector’s risk appetite drive a larger change in unrecorded credit conditions. We must accept that changes in the level of officially recognised debt are merely symptomatic of larger changes in payment obligations in the economy.  The role of credit is not adequately understood by economists. Keynes’s General Theory has only one indexed reference to credit in the entire book, the vade mecum for all macroeconomists. Even the title includes “money” when it is actually all about credit. Von Mises expounds on credit to a considerable degree in his Human Action, but this is an exception. And even his followers today are often unclear about the distinction between money and credit. Economists and commentators have begun to understand that credit is not limited to banks, by admitting to the existence of shadow banking, a loose definition for financial institutions which do not have a banking licence but circulate credit. The Bank for International Settlements which monitors shadow banking appears to suspect shadow banks of creating credit without the requirement of a banking licence. There appears to be a confusion here: the BIS’s starting point is that credit is the preserve of a licenced bank. The mistake is to not understand the wider role of non-bank credit in economic activity. But these institutions, ranging from insurance companies and pension funds to various forms of financial intermediaries and agents, unconsciously create credit by allowing time to elapse between a commitment giving rise to an obligation, and its settlement. Even next day settlement is a debt obligation for a buyer, or credit extended by a seller. Delivery against settlement is a credit obligation for both parties in a transaction. Futures, forwards, and options are credit obligations in favour of a buyer, which can be traded. And when a broker insists a client must have a credit in his account before investing, or to deliver securities before selling, credits and obligations are also created. Therefore, credit has the same effect as money (which is very rarely used) in every transaction, financial or non-financial. All the debts in the accounts of businesses are part of the circulating medium in an economy, including bills of exchange and other tradable obligations. And at each transfer a new credit, debt, or right of action is created, while others are extinguished. A banking system provides a base for further credit expansion because all credit transactions are ultimately settled in bank notes, which are an obligation of the note issuer (in practice today, a central bank) or through the novation of a bank deposit, being an obligation of a commercial bank. Banks are simply dealers in credit. As such, they facilitate not just their own dealings, but all credit creation and expunction.  The reason for making the point about the true extent of credit is that it is a mistake to think that the statistical expansion, or contraction of it, conventionally measured by the misnamed money supply, is the true extent of a change in outstanding credit. Central banks in particular act as if they believe that by influencing the height of the visible tip of the credit iceberg, they can simply ignore the consequences for the rest.  It is also worth making this point so that we can assess how the economies of the western alliance will fare in the year ahead — the American-led NATO and other nations adhering to its sphere of influence. With signs of bank credit no longer expanding and, in some cases, contracting, and with price inflation continuing at destructive levels and a recession threatened, it is rarely so important to understand credit and its role in an economy.  We also need to have a true understanding of credit to assess the prospects for China’s economy, which appears to be set on a different course. Emerging from lockdown and in the light of favourable geopolitical developments while the western alliance is tipping into recession, the prospects for China’s economy are rapidly improving. Interest rates in 2023 That the long-term trend of declining interest rates for the major fiat currencies over the last four decades came to an end in 2021 is now beyond question. That this trend fostered a continuing appreciation of asset values is fundamental to an understanding of the consequences. And that the expansion of bank credit supporting a widening plethora of financial credit has stopped, is now only beginning to be register. If we look at the quarterly rate of change in US M2 money supply, this is now evident. Since the Bretton Woods agreement was abandoned in 1971, there has not been as severe a contraction of US dollar bank credit as witnessed today. It follows a massive covid-related spike when the US Government’s budget deficit soared. And its rise and fall is contemporaneous with a collapse in government revenues and soaring welfare costs. In fiscal 2020 (to end-September), the Federal Government’s deficit was $3.312 trillion, compared with revenue of $3.42 trillion. It meant that spending was nearly twice tax income. Some of that excess expenditure was helicoptered directly into citizens’ bank accounts. The rest was reflected in bank balances as it was spent into public circulation by the government. Furthermore, from March 2020 the Fed commenced QE at the rate of $120bn per month, adding a total of $2.6 trillion in bank deposits by the end of fiscal 2021.  Deflating M2 by QE to get a feel for changes in the aggregate level of bank deposits strictly related to private sector origination tells us that private sector related credit was already contracting substantially in fiscal 2020—2021. This finding is consistent with an economy which suffered a suspension of much activity. This is illustrated in our next chart, taken from January 2020. In this chart, accumulating QE is subtracted from official M2 to derive the red line. In practice, one cannot make such a clear distinction, because QE credit goes directly into the financial sector, which is broadly excluded from the GDP calculation. Nevertheless, QE inflates not just commercial bank reserves at the Fed, but their deposit liabilities to the insurance companies, pension funds, and other members of the shadow banking group. A minor portion of QE might relate to the commercial banks themselves, which for practical purposes can be ignored. Through QE, state-origination of credit effectively crowds out private sector-origination of credit. A Keynesian critic might dismiss this on the basis that he believes QE stimulates the wider economy. That may be true when a monetary stimulus is first applied, since it takes time for market prices to adjust to the extra quantity of credit. Furthermore, QE stimulates financial market values and not the GDP economy, only affecting it later in a roundabout way. But when QE eventually leaks out into the wider economy, it leads to higher prices for consumer goods, confirmed by the dramatic re-emergence of consumer price inflation. Furthermore, regulated banks are limited in their ability to create credit by balance sheet constraints, so to accommodate QE they are necessarily restricted in their credit creation for private sector borrowers. Given the far larger quantities of non-bank credit which depend for its facilitation on bank credit, the negative impact on the economy of banks becoming risk averse is poorly understood. It is ignored on the assumption that state-origination of credit through budget deficits stimulates economic activity. What is less appreciated is that QE has already driven the non-government portion of the US economy into a deepening recession, yet to be reflected in government statistics. Furthermore, that the extra credit burden on the commercial banking system has exceeded their collective balance sheet capacity is confirmed by the Fed’s reverse repo facility, which offers deposit facilities additional to the commercial banking system. Currently standing at $2.2 trillion, it represents the bulk of excess credit created by QE since March 2020. Adjusted for QE, the falling level of private sector deposits in the M2 statistic is consistent with an economic slump, only concealed statistically by the expansion of state spending and the loss of the dollar’s purchasing power. The economic distortions arising from QE are not restricted to America but are repeated in the other advanced economies as well. The only offset to the problem is an increase in private sector savings at the expense of immediate consumption and the extent to which they absorb increasing government borrowing. That way, the consequences for price inflation would have been lessened. But in America, much of the EU, and the UK, savings have not increased as a proportion of GDP, so there has been little or no savings offset to soaring budget deficits. A funding crisis is in the making Returning to the US as our primary example, we can see that national monetary statistics are concealing a slump in economic activity in the “real economy”. This real economy represents the state’s revenue base. On its own, this is going to lead to higher government borrowing than expected by forecasters as tax revenues fall and welfare commitments rise. And interest expense, already estimated by the Congressional Budget Office to cost $442bn in the current fiscal year and $525bn in fiscal 2024, are bound to be significantly higher due to unbudgeted extra borrowing. Officialdom still assumes that a recession will be mild and brief. Consequently, the CBO’s calculations are unrealistic in what is clearly an unfolding economic slump given the evidence from bank credit. Even without considering additional negative factors, such as bankruptcies and bank failures which always attend a deep recession, borrowing cost estimates are almost certainly going to be far higher than currently expected. In addition to domestic spending, the western alliance appears to be stepping up its war in Ukraine against Russia. US Defence spending is already running at nearly $800bn, and that can be expected to escalate significantly as the conflict in Ukraine worsens. The CBO’s estimate for 2024 is an increase to $814bn; but in the face of a more realistic assessment of an escalation of the Ukraine conflict since the CBO forecast was made last May, the outturn could easily be over $1,000bn.  To the volume of debt issuance must also be added variations in interest cost. Bond investors currently tolerate negative yields in the apparent belief that falling consumer demand in a recession will reduce the tendency for consumer prices to rise. This is certainly the official line in all western central banks. But as we have seen, this “transient inflation” argument has had its timescale pushed further into the future as reality intervenes.  This line of thinking, which is based on interpretations of supply and demand curves, ignores the plain fact that a general fall in consumption is tied irrevocably to a general fall in production. It also ignores the most important variable, which is the purchasing power of a fiat currency. It is the loss of purchasing power, which is primarily reflected in the consumer price index following the dilution of the currency by its debasement. In the absence of a sheet anchor tying credit values to legal money there is the thorny question of its users’ confidence being maintained in it as the exchange medium. Should that deteriorate, not only have we yet to see the consequences of earlier QE work their way through to undermining the dollar’s purchasing power, but the cost of government borrowing is likely to remain higher and for longer than official forecasts assume.  Funding difficulties are ahead We can now identify sources of ongoing credit inflation, which at the least will serve to continue to undermine the dollar’s purchasing power and ensure that a rising trend for interest rates will continue. This conclusion is markedly different from expectations that the current catalogue of problems facing the US authorities amounts to a series of one-off factors that will diminish and disappear in time. We can see that in common with the Eurozone, Japan, and the UK, the US financial system will be required to come up with rising levels of credit to fund government debt, the consequence of continuing high levels of budget deficits. Furthermore, after a brief respite from the exceptional levels of deficits over covid, there is every likelihood that these deficits will increase again, particularly in the US, UK, and the PIGS grouping in the Eurozone. Not only do these nations have a problem with budget deficits, but they have trade deficits as well. This is bad news particularly for the dollar and sterling, because both currencies are overly dependent on inward capital flows to balance their governments’ books. It is becoming apparent that with respect to credit policies, the authorities in America (and the UK) are faced with mounting funding difficulties to resolve. We can briefly summarise them as follows: Though they have yet to admit it, despite all the QE to date the evidence of a gathering recession is mounting. It has only served to conceal a deteriorating economic condition. The Fed is prioritising tackling rising consumer prices for now, claiming that that is the immediate problem. Along with the US Treasury, the Fed still claims that inflation is transient. This claim must continue to have credibility if negative real yields in bond markets are to endure, a situation which cannot last for very long. Monetary stimulus is confined by a lack of commercial banking balance sheet space. Further stimulation through QE will come up against this lack of headroom.  With early evidence of a declining foreign appetite for US Treasuries, it could become increasingly difficult to fund the government’s deficits, as was the case in the UK in the 1970s. This author has vivid recollections of a similar situation faced by the UK’s monetary authorities between 1972—1975. In those days, the Bank of England was instructed in its monetary policy by the Treasury, and often its market related advice was overridden by Treasury mandarins lacking knowledge of financial markets. During the Barbour boom of 1971—1972, the Bank suppressed interest rates and encouraged the inflation of credit. Subsequently, price inflation started to rise and interest rates belatedly followed, always reluctantly conceded by the authorities. This rapidly became a funding crisis for the government. The Treasury always tried to issue gilt-edged stock at less than the market was prepared to pay. Consequently, sterling’s exchange rate would come under pressure, and with a trend of rising consumer prices continuing, interest rates would have to be raised to get the gilt issue of the day subscribed. Having reflected a deteriorating situation, bond yields then fell when it was momentarily resolved. The crunch came in Autumn 1973, when the Bank of England’s minimum lending rate was increased from 9% on 26 July in steps to 13% on 13 November. A banking crisis suddenly ensued among lenders exposed to commercial property, and a number of banks failed. This episode became known as the secondary banking crisis. As bond yields rose, stock markets crashed, with the FT30 Share Index falling from 530 in May 1972, to 140 in January 1975. The listed commercial property sector was virtually wiped out. In an air of crisis, inept Treasury policies continued to contribute to a growing fear of runaway inflation. Long maturity gilt issues bore coupons such as 15 ¼% and 15 ½%. And finally, in November 1976, the IMF bailed Britain out with a $3.9bn loan.  Today, these lessons for the Fed and holders of dollar denominated financial assets are instructive. Future increases in interest rates were always underestimated, and as the error became apparent bond yields rose and equities fell. While the Fed is notionally independent from the US Treasury, the Federal Open Market Committee’s approach to markets is one of control, which was not so much shared by the Bank of England in the 1970s but reflected the anti-market Keynesian view of the controlling UK Treasury.  In common with all other western central banks today, official policy at the Fed is to deny that price inflation is related to the quantity of credit. It is rare that money or credit in the context of a circulating medium is even mentioned in FOMC policy statements. Instead, interest rate setting is the dominant theme. And there is no acknowledgement that interest rates are primarily compensation to depositors for loss of purchasing power — a dangerous error when national finances are dependent on foreigners buying your treasury bonds.  Foreign ownership of dollars and dollar assets In the 1970s, sterling’s troubles were compounded by a combination of trade deficits and Britain’s dependence on inward (foreign) investment. In short, the nation was, and still is savings deficient. Consequently, at the first sign of rising interest rates foreign holders recognised that the UK government would drag its heels at accepting reality. They would turn sellers leading to perennial sterling crises. Today, the dollar has been protected from this fate because of its status as the world’s reserve currency. Otherwise, it shares the same characteristics as sterling in the 1970s — twin deficits, reliance upon foreign investment, and rising yields on government bonds.  According to the US Treasury’s TIC statistics, in the 12 months to September last, foreign holders purchased $846bn long-term securities. Breaking these figures down, private sector foreigners were net buyers, while foreign governments were net sellers. This reflects the difference between the trade deficit and the balance of payments: in other words, importers were retaining and investing most of their dollar payments on a net basis. Table 1 shows the most recent position. Over the last year, the total value of foreign long-term and short-term investments in dollars (including bank deposits) fell by $3.531 trillion to $30.270 trillion. $2.532 trillion of this decline was in equity valuations, and with the recent rally in equity and bond markets, there will be some recovery in these numbers. But they are an indication of market and currency risks assumed by foreign holders of these assets if US bond yields start to rise again. And here we must also consider relative currency attractions. The decline of the petrodollar and rise of the petroyuan It is in this context that we must view Saudi Arabia’s move to replace petrodollars with petroyuan. Through its climate change policies, the western alliance against the Asian hegemons has effectively told its oil and natural gas supliers in the Gulf Cooperation Council that their carbon fuel products will no longer be welcome in a decade’s time. It is therefore hardly surprising that the Middle East sees its future trade being with China, along with her associates in the Shanghai Cooperation Organisation, the Eurasian economic Union, and the BRICS. Saudi Arabia has indicated her desire to join BRICS. Along with Egypt, Qatar, Emirates, Kuwait, and Bahrain, Saudi Arabia are also on the list to become dialog partners of the SCO.  Binding the membership of the SCO together is China’s plans to accelerate a communications and industrial revolution throughout Asia, and with a savings rate of 45% she has the capital available to invest in the necessary projects without undermining her currency. While America stagnates, China’s economy will be powering ahead. There are further advantages to China’s plans with respect to the security and availability of cheap energy. While the Asians pay lip service to the western alliance’s insistence that fossil fuels must be reduced and then eliminated, in practice SCO members are still building coal-fired power stations and increasing their demand for all forms of fossil fuel. Members, associates, and dialog partners of the SCO, representing over 40% of the world’s population now include all the major oil and gas exporters in Asia. The economic consequences are certain to impart significant advantages to China and her industrialisation plans, compared with the western alliance’s determination to starve itself of energy. While it will take some time for the Saudis to fully declare the petrodollar dead, the signal that she is prepared to accept petroyuan is an important one with more immediate consequences. We can be sure that besides geopolitical imperatives, the Saudis will have analysed the relative prospects between the two petro-currencies. They appear to have concluded that the risk of loss of the yuan’s purchasing power is at least no greater than that of the dollar. And if the Saudis are arriving at this conclusion, we can assume that other Asian governments holding dollars in their reserves will as well. Russia is likely to stir the currency pot With the western alliance increasing its support and involvement in the Ukraine proxy war, the military pressure on Russia is mounting. If President Putin has learned anything, it should be that military attempts to secure Eastern Ukraine carry a high risk of failure. Furthermore, with the alliance bringing more lethal weaponry to bear on his army, his prospects of military success are declining. Compounding his military problems is the recent decline in oil and gas prices, particularly of the latter which has taken the energy squeeze off the EU. There can be little doubt that the greater these negative factors become, the greater the pressure on Putin to resort to a financial solution. Putin’s strategy is likely to be simple and has already been telegraphed in his speech to the delegates at the St Petersburg Economic Forum last June. In short, he understands the weakness for the dollar’s position and by extension those of the other alliance currencies. Ideally, a cold snap in Middle and Eastern Europe will help lift oil and gas prices, increasing the prospects for price inflation, thereby bringing renewed pressure for interest rates in the alliance currencies to rise. This will lead to renewed losses on US and EU bonds, further falls in equities, and therefore dollar liquidation by foreigners. The eventual outcome of Triffin’s dilemma, a final crisis for the reserve currency, is certainly in the wings. With the situation in Ukraine likely to escalate, Putin can ill afford to delay. On another front, he has authorised Russia’s National Wealth Fund to invest up to 60% in Chinese yuan and 40% in physical gold. This is probably a move to protect the fund from Putin’s view of future currency trends and from their declining value in gold. It is consistent with what the Saudis are doing with respect to getting out of dollars into yuan, and probably some gold bullion through the Shanghai International Gold Exchange. If this demand for gold extends beyond both Russia and Saudi Arabia, then the mechanism for dollar destruction could be accelerating demand for gold from multiple governments and entities in the Russian Chinese axis. Tyler Durden Sat, 01/14/2023 - 17:30.....»»

2022's Ten Most 'Conspiratorial' Events Via 21st Century Wire, It’s New Year’s Eve again, and with that our time-honoured tradition of looking back at the most conspiratorial events of the past year.  It goes without saying that 2022 has seemed like an extended nightmare for many, but it has also served as a reoccurring revelation too. Still, many are glad to see the back of it, while cautiously optimistic that this next year ‘couldn’t get any worse.’ That remains to be seen, and more insights on that front are available in our other annual opus, Trends and Predictions for 2023. Another important truism: the tin foil hat conspiracy theorists continue to be vindicated as significant events unfold. So much so, that we can now lay the common trope, “Oh, it’s just a coincidence” – safely to rest. Henceforth, those who still insist on referring to bona fide conspiracies as mere coincidences, shall be dubbed as coincidence theorists. Before we get to the top ten list, here are some of the honourable mentions from the past year… Here are some of this past year’s standout stories which didn’t make the top tier. We should first mention that the ongoing fallout from the experimental mRNA ‘vaccine’ roll-out and the vaccine passport/digital ID could easily be at the top of any list of conspiracies and scandals, and will unfortunately remain as a looming threat to the lives of billions of people for many years, if not decades to come. That said, some other controversial events of note from this past year include the incredible Canadian Truckers Protest against a vaccine-obsessed Trudeau regime and its unprecedented draconian attack on Canadian citizens demanding a restoration of their basic human rights. We also saw the mysterious demolition of the infamous Georgia Guide Stones monument to Malthusian eugenics, the precarious trial of Jeffrey Epstein’s partner in crime Ghislane Maxwell which somehow netted no VIP client names (and amazingly, she’s still alive in one piece), and also the bizarre political tale of Nancy Pelosi’s husband Pauli P. supposedly getting mauled with a hammer by a known local personality in their San Francisco mansion – a story promptly buried my the MSM right before the election. On the tech front, we should point to the ominous unleashing by Google’s OpenAI of their new ChatGPT artificial intelligence bot. It was a moderate year for false flags and mass shootings, with a few heavily politicized high-profile anomalous events like the Uvalde School Shooting in Texas and the Club Q Shooting in Colorado Springs. In Europe, the Dutch Farmers Revolt exposing a pernicious anti-farming and GMO food agenda by the World Economic Forum and Bill Gates networks, along with meat shortages and continued supply chain disruptions – all converging to form the perfect financial storm which now threatens to ravage an already weak and unstable global economy. Later in the year came a real blast from the past, reports of an imminent document release which contains some evidence of the CIA’s role in the JFK Assassination. Granted, these are just a few in a long list of major events which didn’t make our final cut. So without further ado, here are the top ten conspiracies of 2022... 10. US Midterm Election Fraud Considering all that is going on in the US and internationally at this time, most Americans would agree that the 2022 Midterm Election was one of the most important and consequential elections of their lifetime. Both the House of Representatives and US Senate were up for grabs, and there was a real opportunity to correct a serious imbalance of power in Washington. However, before Nov. 8th there was a real air of trepidation, as the shadow of the controversial 2020 Election still loomed large, with accusations of widespread and systemic election fraud still unresolved. The sum of all fears became real again in the key swing state of Arizona: on election morning most of the voting machines in the state’s largest population center, Maricopa County, just happened to malfunction. Officials claimed it was just an unfortunate coincidence. That was only the beginning, as boxes with thousands of ballots continued to mysteriously turn up after election day. In short, the Arizona election became a national and international embarrassment. As it goes, the state’s election and processes were being controlled by Democratic Party operatives – who then slow-walked the vote counting for two weeks after the election was meant to be over. Not surprisingly, the favorite in the governor’s race, Republican, Kari Lake (image, above) barely lost to an unremarkable Democrat candidate Katie Hobbs (if you believe the final contested result), and to add insult to injury, the person in charge of the state’s election debacle… was Katie Hobbs, who happened to also be serving as Arizona’s Secretary of State. Kari Lake sued the state to demand a recount and a run-off, but political and media pressure on the courts prompted the judge to dismiss her challenge – despite having truckloads of evidence proving foul play. Lake has appealed the decision. What’s important is that this time the world saw what happened, and the state and Democratic Party machine was widely exposed – effectively vindicating millions of Americans who still hold well-founded suspicions about the infamous 2020 Election which managed to install the corrupt, deep state candidate Joe Biden into power. Similar anomalies were observed in 2022 – in states like Nevada and Pennsylvania. In the end, the Republicans still managed to flip the House of Representatives by a slim margin, while losing the US Senate by an even slimmer margin. In a country where half the population still do not trust the democratic process, civility and stability are now teetering on borrowed time. 9. Monkeypox As the Covid gravy train began to break down, the globalists’ Government-Media-Pharma Complex grew desperate for a new ‘pandemic’ to maintain the structures of control and human surveillance which they erected during the contrived Covid-19 ‘state of emergency’. Enter a relatively unknown and exotically-titled alleged pathogen, Monkeypox. Attempts were made to portray this mythical epidemic as some sort of universal threat, and when that failed, the Establishment then pivoted to try and promote it as a new “gay disease” in an attempt to emulate a familiar template used to reproduce the perennial (and highly questionable) HIV crisis. In the end, their fear campaign never really took off, but not before a brand-new vaccine was created to “protect the public from another potentially deadly epidemic.” And after all that failed, efforts were then made to use it in order to harvest some political capital – by sacrificing this brand at the altar of political correctness, as social justice clerics demanded the mythical virus be rebranded due to fears that name “Monkeypox” was somehow racist…? But how? Against primates? No one was quite sure what they meant. Oh well. Introducing “MPOX”. Rinse, and repeat. Welcome to the world of Modern Virology (aka Big Pharma’s main meal ticket). Meanwhile, we’re all waiting with bated breath for Bill Gates’ self-confessed “next pandemic.” 8. China Lockdown Redux  Just when the Chinese were beginning to get a taste of freedom again, the Central Party decide to fire-up the pandemic control grid again. In February 2022, an alleged COVID-19 ‘outbreak’ was announced in the city of Shanghai. Central Party claimed that the alleged ‘outbreak’ was caused by the Omicron variant. The state then proceeded to decree a new “Zero Covid” policy, before locking-down more cities, and dragging the country back into the authoritarian hell of February 2020. As it turned out, the real reason this new ‘Covid wave’ materialized was because of nondiagnostic PCR testing ‘case’ data generated through more meaningless mass COVID-19 testing. Finally, after 8 months of Covid madness, foreign investment began drying up, and China’s already fragile economy was destabilizing. The state’s overzealousness then triggered mass protests against Orwellian government restrictions, with millions of Chinese taking to the streets across the country to demand their basic freedom. This prompted Central Party to quickly abandon its failing social control program, and not surprisingly their economy began to rebound as people and business got back to work. Rather interestingly, the US government seemed unhappy that China was taking its foot off the authoritarian pedal, and so Biden then levied an administrative punishment against China by slapping a new mandatory Covid test travel restriction on any Chinese travelers arriving in the USA. It really seems that as the world’s most populous nation, without China’s total compliance the globalists’ New Normal agenda will quickly fall apart. This incident should tell us all we need to know about the so-called ‘global pandemic.’ 7. The Trans Agenda On March 17, 2022, Lia Thomas (formerly named William Thomas), 22, became the first openly transgender athlete to win America’s top college sports title – following a cringe worthy  victory in the women’s 500 yard freestyle. Let us explain: because Thomas believes he is now a woman, some institutions like the NCAA – who have come under political pressure from the radical leftist wing of the political machine – now feel obligated to allow a biological male like Thomas to compete against physically inferior biological females (aka real women). The victory was short-lived though, as the woke bombast of the Thomas debacle quickly became a lightning rod in the debate about so-called “trans women” in sports – triggering a massive backlash against this extreme ideological invasion of womens’ competitive sports. Not long after, international sporting organizations ruled that biological male athletes like Thomas can no longer compete in top races. FINA, the world swimming’s governing body, also announced plans to create a new “open” category of competition to include “transgender women” (aka men who believe they are female). Now that the debate has been blown wide open, expect further course corrections as people gradually return to their senses on the issue. But do not expect radical leftists to surrender just yet, as the culture wars will continue to rage on. 6. FTX and SBF Ponzi Scheme Like the S&L scandal of the 1980’s, and the Eron and Bernie Madoff financial scams – this latest iteration of the classic Ponzi Scheme managed to destabilize markets and rob countless investors of their life savings. Sam Bankman-Fried (SBF), a 30-year-old crypto celebrity icon and celebrated savant, founded what he claimed were two separate companies: a hedge fund called Alameda Research and FTX cryptocurrency exchange, before going the whole hog by hyping his own fiat crypto token and then used it as collateral to create hundreds of millions of loans for himself, before robbing his depositors to embezzle and gamble away untold fortunes on the markets. And that’s just the beginning. It turns out that SBF was the number two political donor to the Democratic Party, and used his laundered proceeds to bankroll a sizeable portion of the Democrats’ 2020 Midterm Election campaigns, not to mention his mother just happening to be a chief organizer for the Democratic Party as well. Not surprisingly, the Biden Administration waited until after the Midterm Election to begin an investigation into the floppy haired SBF and his FTX ponzi empire. SBF was eventually arrested in the Bahamas and awaits federal trial in the Southern District of New York. The trial is sure to be both shocking and entertaining in equal measure. But the real question remains: how will this drama effect the government’s role in the world of cryptocurrency? More crucially: is the FTX takedown really a controlled demolition of crypto designed to pave the way for an oppressive Central Bank Digital Currency global ‘cashless’ takeover? We shall see… 5. CBDC 2022 was the year the CBDC has made landfall, and is currently waiting in the wings of the halls of power. For the last few years, elites have been gathering at globalist confabs like Bilderberg and the World Economic Forum in Davos to wax lyrical about the need to abolish the ‘old money’, or ‘dirty cash’ – and to make way for the central bankers’ new Central Bank Digital Currencies (CBDC) – turning the planet into a full-blown cashless society. In the US, this technocratic overhaul is being hatched under the guise of “Project Hamilton” as a joint effort between the Boston Federal Reserve Bank and the Massachusetts Institute of Technology (MIT) to design and plan the release of a “digital dollar” – which will destroy the value of old dollar in order to force people onto the new monetary matrix. As cash disappears from the economy, so does privacy.  Essentially, CBDCs are meant to be an electronic form of fiat money in a particular country or region, but unlike Bitcoin, this digital coin is centralized and regulated by the governments and their central banks. Without ever putting this matter to a public vote, elites and technocrats have simply been moving ahead to implement this authoritarian monetary system. While the mainstream media and globalist think tanks claim that the CBDC is designed to reign in crypto currencies, and supposedly tackle crimes like money laundering, and tax avoidance (something which elites partake in daily), the reality of the CBDC is something altogether different. They plan to issue a programmable currency whereby the bank can control where and what you are allowed to spend your CBDC’s on. They can also shut your money off. Imagine this digital money system combined with a Chinese-style social credit score, or a vaccine passport/digital ID. This dystopian digital control grid will transform commerce and human society in ways we can possibly imagine. For these reasons, many rightly believe that this is the road to digital slavery. The window of opportunity to push back against this massive authoritarian assault is now closing. 4. The Twitter Files This is the biggest tech scandal in modern history – and it’s gone mostly unreported by 90% of the mainstream media because of the partisan nature of its revelations. The Twitter Files have provided an unprecedented look behind the dirty inner workings of the firm’s opaque censorship regime, and exposes an openly fascist merger of Silicon Valley’s ‘Big Tech’ companies and the bloated National Security State. In early December, under new management of owner and CEO Elon Musk, Twitter HQ began disseminating a massive trove of internal documents revealing the direct collusion between former CEO Jack Dorsey’s corporate regime and the US Federal Government – to censor and cancel users from the platform for speech or political views which went against globalist or government policies. This included copious evidence of election interference. It seems that in their desperation to conjure up proof of alleged “foreign influence” on Twitter, FBI and other federal government officials doubled-down to try and save their sinking Russiagate narrative, and creating a monster in the process. New revelations also exposed the FBI’s role in leaning on Twitter to expedite illegal censorship operations, and how so-called ‘public health’ officials strong-armed Twitter into sanitizing all speech relating to COVID-19 and the experimental mRNA ‘vaccine’ injections. The FBI were also drawing-up shadowbanning and censorship blacklists in an attempt to cleanse the platform of effective opposition to the Biden campaign in 2020 and later into his first term. Under Dorsey, the platform became an open cesspool for spooks and government operatives – many of whom appeared to be allowed to spy on users’ DMs, and to dictate terms of censorship on the platform. Watch this space. This is only the beginning. 3. Sabotage of the Nordstream Pipelines Back in late September, the world woke up to truly horrific news – both the Nordstream 1 and 2 pipelines were reported to be leaking gas into the Baltic Sea and into the atmosphere – after what looked like a deliberate act of sabotage. While the media played dumb, pretending not to know who carried out this attack, sane onlookers were well aware of the only entity who had the motives, means and opportunity to carry out this state-sponsored act of terror – namely the United States and its NATO partners. Incredibly, the entire western media quickly began blaming Russia for blowing up its most important energy infrastructure project. The result of this attack was a further devastation of Europe’s energy supplies and hyperinflationary EU and UK consumer prices for the fall and winter – not to mention the millions of cubic meters of methane which were released into the Earth’s atmosphere. Despite all the vacant US denials, the facts are clear as day: Joe Biden and Victoria Nuland were both on record beforehand promising they would “end the Nordstream pipeline.” Of course, this is a hugely dangerous red line which the US and its allies have crosses: by declaring a no-holds-barred geopolitical energy war, the gates are now open for further escalations – which may lead to WWIII. History has shown this can happen. Consider the Anglo-American energy embargo and strong-arming of Japan which led up to the Attack on Pearl Harbor which opened the door for the US to enter WWII. Think of the Nordstream attack as just that, but worse – as it was also direct attack on the day-to-day energy and finances of people living in the EU and the collective West. Indeed, the West is playing an extremely dangerous game, which is really the Great Game 2.0. 2. The Energy Shock In the future, we will look back at 2022 as one of the most consequential years of young 21st century history. If you live in the collective West or the EU, you know that the energy crisis is now a reality. The real question is: is all of this by simply by happenstance, or is it being done by design? And can it be traced back to a much older global agenda, and forward through to the WEF’s Great Reset? The answer to all those questions is course, yes. But this is only the surface of this issue. For Brussels and Berlin, this ‘green’ road to energy scarcity pure economic suicide. Rather than change this policy course and work to stabilise global energy and agricultural markets – the gallant virtue-signalling West has opted instead to double-down on their precarious stance by further tightening anti-Russian sanctions, as well as pursue even deeper commitments towards de-nulearisation and the not-so-green ‘Net Zero’ carbon reduction agenda. The cancelation of Russia, coupled with the disastrous ‘green’ energy policies are only accelerating inflationary cycles globally. All of this is a recipe for disaster – all due to policies directly created by western governments. By blocking inbound energy supplies from the Nordstream and other Russian pipelines which supplied them with affordable and reliable gas and oil into the EU, Europe has painted itself into a very perilous corner. Behind the energy wars and even beyond Klaus Schwab’s globalist facade – you will find hardcore geopolitics at play. The main Anglo-American objective: the deindustrialization of Germany and EU, the separation of Russian resources and political leadership from western markets. We live in truly perilous times. 1. The Ukraine War In late February 2022, the unthinkable happened: Russia launched its military intervention into neighboring Ukraine. War is hell, and while Russia seems intent on seeing its “Special Military Operation” through, the US and its allies are going to have to decide just how long they plan to fight Russia down to the last Ukrainian. How many dead Ukrainian soldiers and lost territory will it take for the West to instruct Ukraine’s President Zelensky to finally sue for peace? Welcome to NATO’s ultimate proxy war of attrition in Ukraine, driven by the greatest western media propaganda campaign of all-time. Suffice to say that Russia, Ukraine, and the North Atlantic Treaty Organization (NATO) alliance are now at war – with each party firmly in the belief that they are fighting an existential war, not over any particular political or territorial dispute, but for the future existence of their countries, or in the case of NATO, over their ability to maintain regional hegemony for the Atlanticist power bloc. Will this near frozen conflict escalate to a WWIII situation, or a thermo-nuclear exchange between the great powers? The US and British invasion of Iraq nearly two decades ago is a particularly pertinent and telling counterpoint to events in Ukraine. Then, as now, the ‘free and democratic Western World’ was supposedly faced with a dangerous, unhinged despot in Saddam Hussein, who, like Putin is said to be unwilling to compromise. It’s a well-worn script for the West, and will likely remain the justification of another endless war. Of course, Zelensky could end it all tomorrow if he declared his intentions to disavow any NATO aspirations, demilitarize the country, and declare Ukraine a neutral state. Such a declaration would certainly be welcome by Russia today, but the West are determined to keep this proxy war going, and cancel Russia from the global economic system. Besides, business is just too good for Ukraine who have managed scrape more than $100 billion from the US and EU treasuries so far, not to mention the billions in profits for shareholders in the US defense industry. Oh, and on the backend of this war, the WEF and BlackRock are eyeing Ukraine’s remaining assets, as private oligarchs hatch their plan to carve up and reshape the post-war landscape there. The future world order is at stake. What an unbelievable year. Expect some seriously impactful moments in 2023. HAPPY NEW YEAR. *  *  * SEE PREVIOUS TOP TEN CONSPIRACIES: 2021 Top Ten Conspiracies2020 Top Ten Conspiracies2019 Top Ten Conspiracies2018 Top Ten Conspiracies2017 Top Ten Conspiracies2016 Top Ten Conspiracies2015 Top Ten Conspiracies2014 Top Ten Conspiracies PLEASE HELP SUPPORT 21ST CENTURY WIRE'S WINTER FUNDRAISING DRIVE HERE Tyler Durden Sat, 12/31/2022 - 23:00.....»»

Five Examples Of Bitcoin's Real-World Utility Authored by Trent Dudenhoffer via BitcoinMagazine.com, Bitcoin has real-world use cases right now that are major improvements on the dollar and other fiat currencies, even during a bear market... Believe it or not, bitcoin is money. This may be a hard sell to many of us in the Western world, specifically here in the United States. I get it; the dollar is the reserve currency of the world. Yes, there is inflation, but it’s not that bad, despite today’s inflation being the highest it’s been in more than 40 years. I don’t know about you, but the ever-decreasing value of my dollars is one of the reasons I learned about bitcoin in the first place. Whoever said we needed to have inflation? John Maynard Keynes did, by the way, and it’s the economic theory taught in schools throughout the nation. My point is it can be difficult for Western civilization to understand why bitcoin is important. Many are blinded by the “strength” of the dollar and are unable to appreciate bitcoin’s utility. To jog your memory, let’s go through five examples of what bitcoin can do that the dollar, other fiat currencies and gold cannot. 1. BITCOIN PROVIDES NEUTRAL, CENSORSHIP-RESISTANT MONEY The theme of censorship has been in the spotlight over the last decade, and especially relevant in the last handful of years. Twitter deplatformed a sitting president of the United States. COVID-19 origination theories — once viewed as heresy — are now largely accepted as valid. Believing in this theory earlier led to the deplatforming of many prominent people, including legitimate, respected doctors. And this is just what’s happening on social media. What happens when your money is censored? Look no further than the Canadian trucker protest that took place in early 2022. The Canadian government sought to require vaccination of every trucker that entered its country. At the sight of this obvious intrusion of human rights, the truckers decided to protest the mandate by essentially closing the capital city of Ottawa by blockading the streets. One thing led to another, and before you knew it, the Canadian banking system began to “turn off” the money of every person involved in these protests. That’s right. Whether you were a trucker yourself, donated some money to the efforts or passed out food, you were on the hit list and you had your money turned off. Frozen. It was there, but you couldn’t do anything with it. Today, it’s a trucker protest. What if it’s a women’s rights protest next? A protest against abuses by a country you’re allied with? Who decides? Bitcoin sure as heck doesn’t. Bitcoin doesn’t care about the color of your skin, your political affiliation, the country you’re in, what videos you watch on YouTube, etc. If you play by the same rules that everyone else plays by, you can use bitcoin. This is one reason why thousands of people donated bitcoin to the Canadian truckers’ cause. It was money that no one, not even the government or banking system, could stop. More than 21 bitcoin was raised in the effort by 5,000 donors, at the time totaling nearly $1 million in support. Bitcoin is censorship-resistant money. 2. YOU CAN TAKE YOUR BITCOIN ANYWHERE WITHOUT ANYONE ELSE KNOWING Jurisdictional arbitrage will become more prevalent with political parties leaning further to the extremes here in the United States, as well as across the world. You see polarization, capital controls and capital flight taking place every day: Pro-choice and pro-life states States with legalized marijuana and/or other drug use Countries with sensible energy policies (e.g., not Germany) Countries that are prone to sanctions, such as Iran and Russia As a citizen, sometimes you must act fast or risk being too late to flee, but how do you move an entire household of trinkets and things with you as you leave? How do you cross borders with wads of cash falling out of your pocket or gold ingots weighing you down? The answer is simple: you don’t. Good luck getting anything of value across borders without it being confiscated. But you can move your bitcoin and if you do it correctly, you can move it with no one else knowing and without any evidence. All you need to do is maintain 12 (or in some cases 24) words. These words can represent your entire livelihood and are known as a seed phrase. By having these words, you can bring your wealth anywhere in the world. That’s what Laleh Farzan did. After receiving threats from the Taliban in 2016, she fled to Germany. Most of the time, when you flee a hostile area such as Afghanistan amid chaos, you’re bound to run into thieves and/or unrelenting governments. The emigrants typically leave with nearly zero possessions. But for Laleh, she was able to store her wealth via her seed phrase. It was contained on a tiny piece of paper which thieves and others disregarded. Once she arrived in Germany, she was able to sell a portion of her bitcoin for fiat to pay for everyday expenses. 3. BITCOIN MINING AND THE ENERGY GRID ARE MATCH MADE IN HEAVEN Bitcoin mining requires a great deal of energy. Talking heads on the news have parroted this line plenty of times. It’s supposed to consume all the world’s energy by 2020 (how’d that work out?). One might argue, the more energy bitcoin consumes, the better. Hear me out. Bitcoin miners act as an energy consumer of first and last resort. Essentially, they will always buy (use) energy if it’s available to them. What most don’t know about our modern energy grids is that this type of reliability and consistency is extremely helpful. Rather than having to plan for energy demand peaks and troughs, energy producers can simply provide energy without worrying that no one will use it. Long story short: Bitcoin miners stabilize entire energy grids. If you’d like a deeper dive, read more here. Not only do miners stabilize grids, but bitcoin mining encourages using the most efficient energy sources available. As a miner, your profit and loss statement is very easy to decipher: your revenue is the bitcoin you mine, your expenses (for the most part) are the energy required to mine it. As a business owner, you ideally want to increase revenue and decrease expenses to beef profits. Besides mining more bitcoin, what’s the easiest way to increase profit? Lower your expenses, aka your cost of energy. What’s the cheapest energy available to us? Energy that comes naturally: solar, wind, hydro, etc. Bitcoin is ushering in new developments and innovation in green energy, and even more importantly, wasted energy. Bitcoin miners attempt, as best as they can, to mine with energy that would otherwise be wasted. It’s a win-win for both parties. The miner gets cheap energy and the energy producer sells energy that otherwise would have not produced any revenue. A great example of this is flared gas mining. When I first saw a video of miners using flared gas, I knew it was a game changer. It makes sense for every single producer on earth to plug in a bitcoin miner to earn more revenue and decrease emissions. It’s a no-brainer. Did you know that an estimated 60% of energy produced is lost before reaching the consumer? Bitcoin miners will happily buy the otherwise wasted energy from producers, thus allowing the producers to earn more revenue as well as provide reliable expectations for supply and demand. It’s only a matter of time before miners fully integrate themselves with energy markets. 4. BITCOIN IS OPEN 24/7 Ever needed banking services after 5:00 p.m. or on a weekend? Pretty inconvenient, right? In a world of globally connected markets and on-demand everything else, why haven’t our financial services been held to the same availability standards? Bitcoin has an up-time of 99.99%. Spanning more than 12 years, the Bitcoin network has only experienced a cumulative 14 hours of downtime. I can be anywhere in the world at any time of the day and interact with the Bitcoin network as long as I have internet connectivity. If internet connectivity is an issue, some geniuses much smarter than me are working on ways to account for it. 24/7, 365. No holiday closures. No circuit breakers during volatile times. Tick tock, next block. 5. MICROPAYMENTS AND THE EASE OF INTERNET COMMERCE Commerce occurs on the internet rather than meat space more and more as the years go by. I’m not going to focus on commerce that requires a product to be physically shipped to your house in this post, but what I want to talk about instead are products and content that you consume directly on your computer. Why do I have to divulge my credit card information and address to the Wall Street Journal if I want to read an article? Why do I have to do the same with Spotify to listen to a podcast? Bitcoin, and its scaling layers, such as the Lightning Network, are going to disrupt e-commerce with internet-native micropayments. There is a growing trend in the space known as value-for-value. Let’s look at Fountain as an example. Fountain is a podcast app that is built directly above Bitcoin’s base layer on the Lightning Network. While using Fountain, podcast listeners can load up a Lightning wallet and stream tiny portions of a bitcoin — known as satoshis, or sats — directly to the content creator. These streams may be as small as five sats per minute, which today has a value of $0.0011. Content creators can now rely exclusively on their audience to fund their venture if they prefer. Many podcasters appreciate this idea to align their own incentives with their listeners: zero product shilling, zero false advertising, etc. This also allows for a more engaging experience between the two parties. Another fantastic use case for bitcoin in internet commerce is those pesky paywalls. Let’s use the Wall Street Journal again as an example. I rarely ever read the Wall Street Journal, but let’s say one article catches my eye that I desperately want to read. Then I encounter a paywall. 99 out of 100 times, I’m going to exit the window and forget about the article. The odds of me getting my wallet, typing in my credit card info, all my other personal information and likely having to sign up for a monthly subscription are next to zero. With the Lightning Network, the Wall Street Journal may put up a paywall using BTCPay Server. In this instance, I can whip out my Lightning wallet, scan the QR code, pay the invoice and begin reading the article. The whole process may take less than 30 seconds without the publication having any clue who I am or where I live. This avenue of billing could expand the Wall Street Journal’s reach considerably, keep the one-time readings affordable and respect their viewers’ privacy. Although these types of transactions aren’t nearly as world-changing as some of the other points mentioned above, it’s another arrow in Bitcoin’s quiver. Another real-world use case that bitcoin does worlds better than our current system. CONCLUSION No, bitcoin isn’t dead. This isn’t the first bear market and it certainly won’t be the last. Too many are fixated on bitcoin’s fiat price. What most don’t realize is that bitcoin continues to work just as advertised. It’s reliable, open to all and there are no rulers — only rules. Bitcoin is objectively better money. I look forward to everyone else coming to this realization. Tyler Durden Mon, 10/10/2022 - 14:30.....»»

Multipolar World Order – Part 2 Authored by Iain Davis via Off-Guardian.org, In Part 1, we discussed the nature of “world order” and global governance. We learned the crucial difference between the Westphalian model of equal, sovereign nation-states—a mythical ideal, never an actuality—and the various attempts to stamp a world order on that template. In particular, we considered how the UN has been the leading organisation promoting global governance and how its founding Charter facilitates the centralisation of global power. We observed that the UN has undergone a “quiet revolution” that has transformed it into a global public-private partnership (UN-G3P). Latterly, we have seen the rise of a prospective multipolar world order that some say opposes the hegemony of its unipolar predecessor. This new model of global governance will apparently be led by allies Russia and China, the two countries that head up the multilateral partnerships of the BRICS (Brazil, Russia, India, China and South Africa). The multipolar world order is predicated upon a more prominent role for the G20 rather than the G7. Thereby strengthening Russia’s and China’s positions as permanent members of the UN Security Council. Whereas the existing unipolar world order established a system of global governance that enables UN-G3P oligarchs to influence policy agendas of nation-states around the world, the new multipolar world order is designed to advance the power of those oligarchs even further - by transforming their influence into absolute control. Look no further than the Russian and Chinese governments, where the marriage between the political and corporate state is complete. We will address this in detail in Part 3. President Vlaidimir Putin (left) and President [Supreme Leader] Xi Jinping (right) WHO WANTS A MULTIPOLAR WORLD ORDER? We ask: who wants a multipolar world order? The short answer: everyone. The longer answer: everyone who has sufficient power and influence to change global governance. The multipolar model isn’t being pushed solely by the Russian and Chinese governments, their oligarchs and their think tanks. It’s also being promoted by the erstwhile “leaders” of the unipolar world order. Consider this remark by German Chancellor Olaf Sholtz. His speech, set within the context of Russia’s military intervention in Ukraine—which every member of the Western establishment lambastes for the cameras—was given at the World Economic Forum’s 2022 Davos gathering: I see another global development that constitutes a watershed. We are experiencing what it means to live in a multipolar world. The bipolarity of the Cold War is just as much part of the past as the relatively brief phase when the United States was the sole remaining global power[.] [. . .] The crucial question is this: how can we ensure that the multipolar world will also be a multilateral world? [. . .] I am convinced that it can succeed – if we explore new paths and fields of cooperation. [. . .] If we notice that our world is becoming multipolar, then that has to spur us on: to even more multilateralism! To even more international cooperation! Western central banks, too, have looked toward the multipolar model. In a 2011 round table discussion at the Banque de France, then-French Finance Minister Christine Lagarde, who subsequently became the head of the International Monetary Fund (IMF) and then was appointed President of the European Central Bank (ECB), said: Our starting point is to create the conditions to achieve two closely intertwined objectives, i.e. strong, sustainable, and balanced growth, on the one hand, and an orderly transition to a world that is multipolar in economic and monetary terms, on the other. [. . .] The G20 reached agreement [to] promote the orderly transition from a world where a small number of economies, with their currencies, represent the bulk of wealth and trade, to a multipolar world where emerging countries and their currencies represent a growing if not predominant share. That same year, Mark Carney, then Governor of the Bank of Canada, delivered a speech to the Canada Club of Ottawa, during which he said: We meet today in the midst of another great transformation—one that is occurring more rapidly than most recognise. The financial crisis has accelerated the shift in the world’s economic centre of gravity. Emerging-market economies now account for almost three-quarters of global growth. [. . .] [W]eakness in advanced economies and strength in emerging economies [. . .] determines the global economic outlook. [. . .] This shift to a multi-polar world is fundamentally positive, [but] it is also disruptive. Still a third speech in 2011, this one by Lorenzo Bini Smaghi, who was representing the Executive Board of the ECB, emphasised the potential of the multipolar world order. Smaghi noted that, in order to move towards the new world order, an economic, financial and policy shift was required. Bemoaning the lack of progress in the financial and policy fields, he suggested: [W]e have a multi-polar economic world, but no multi-polar financial or policy world yet. [. . .] [H]ow can we improve the functioning of the international monetary system? The first avenue is to start building a new institutional framework[.] [This] will have to be designed for this new multi-polar world. [. . .] The second avenue involves implementing policies consistent with the transition to a more complete multi-polar world, in all its dimensions. [. . .] A more balanced multi-polar world also requires deeper financial and economic integration in Europe[.] [. . .] The G20 is thus destined to become an over-arching grouping, capable of tasking institutions like the IMF, World Bank or FSB with specific mandates but also to give guidance on politically sensitive issues, in the way the G7 operated in the past. The World Economic Forum, which describes itself as the international organisation of public-private cooperation, has been advocating the potential of a multipolar world order for some time. For example, in 2019 it published an article by Credit Suisse’s Global Head of Investment Strategy & Research, Nannette Hechler Fayd’herbe, who advocated investment in “emerging markets.” Credit Suisse is one of the nine global investment banking giants that collectively comprise the Bulge Bracket. The opinion of its head of strategic investment is notable: In 2018, we moved closer to the multipolar world that looks set to replace the bipolar US-Russian geopolitical regime that emerged from the Cold War. China’s ascent as a serious economic and geostrategic rival for the US, and its growing assertiveness with programs like “One Belt, One Road” or “Made in China 2025”, has strengthened its influence on the world stage. [. . .] From an investor standpoint, the newly emerged multipolar world brings national champions [—companies in large countries with a sizeable domestic workforce in strategic sectors—] and brands into focus, including emerging market consumers. Even the Council of Foreign Relations (CFR), whose elitist members are ardent pro-NATO US foreign policy supremacists, accepts the imminent arrival of the multipolar world order. Stewart M. Patrick, the CFR senior fellow who defined the International Rules Based Order (IRBO), wrote in 2021: [T]he Western-led order was on its heels well before Trump, knocked off balance by rising geopolitical competition from China and Russia; a shrinking collective share of global GDP among the member states of the high-income Organization for Economic Cooperation and Development; and public disillusionment with globalization, particularly after the financial crisis. These weaknesses remain. [. . .] The Cornwall summit [G7 summit] will also allow observers to gauge the G-7’s political cohesion and global relevance in an ideologically diverse, multipolar world. A final example: Speaking at a White House business convention on 21st March 2022, US President Joe Biden said: We are at an inflection point, I believe, in the world economy[.] [. . .] [I]t occurs every three of four generations. [. . .] Now is a time when things are shifting[.] [T]here’s going to be a new world order out there, and we’ve got to lead it and we’ve got to unite the rest of the free world in doing it. What’s going on? Why would the architects of the unipolar hegemony obligingly accept being replaced by multipolarity—and offer to help make the transition? Why, no matter where you look, even in the most hawkish Western think tanks, is there universal acquiescence to the emergence of a new multipolar world order? You could argue that this is the only realistic perspective. Still, the lack of any resistance at all is conspicuous. It suggests that there is more to this baffling contradiction than meets the eye. Indeed, these statements we have quoted, and many more like them from other Western power brokers, reveal, more than acquiescence to a multipolar world, a clear rationale for the creation of a “new world order.” The point is, if the current holders of global power wish to retain control, then transition to the multipolar world order is required. They understand that the multipolar system is the necessary next step in the evolution of the unipolar order. Christine Lagarde – former French Finance Minister, President of the IMF and now Governor of the ECB. THROWING THE DOLLAR RESERVE CURRENCY AWAY As if to hammer home the fact that the dollar-backed unipolar world order is over, Jerome Powell, Governor of the US Federal Reserve (the Fed), said in April 2022: The US federal budget is on an unsustainable path, meaning simply that the debt is growing meaningfully faster than the economy. And that’s by definition unsustainable over time. He then added a reassuring, but ultimately empty caveat: It’s a different thing to say the current level of the debt is unsustainable. It’s not. The current level of debt is very sustainable. And there’s no question of our ability to service and issue that debt for the foreseeable future. If the gods were perfectly aligned, geopolitics didn’t exist, universal peace and joy sprang forth and the world ran smoothly and predictably, then Powell’s reassurances may have been plausible. But that is not how the world works. Nor are Powell’s imaginary “ifs” any basis for a sound global reserve currency. His admission was the salient point. The US government debt-to-GDP ratio currently stands at an estimated 137.2% of GDP. The cost of the COVID-19 countermeasures and the West’s sanction response to Russia’s military action in Ukraine—including the vast sums the US and some European countries have invested in Ukraine’s supposed militarisation—has only made the situation worse. Spiralling government debt is nearly as bad in every other major Western economy. It stands at 103.7% of UK GDP and in the Euro Monetary Union (Eurozone), it eclipsed 100% of GDP in 2021. The economic, financial and political basis of the unipolar world is rapidly evaporating. As central bankers like Powell (US), Lagarde (EU), Andrew Bailey (UK) Elvira Nabiullina (Russia) and Agustín Carstens (Bank for International Settlements) know, as do all the other major players like Carney (UN), there is every reason to question how long the US can service its debt obligations—that is, repay the minimum required amount. America’s only option is to keep the metaphorical money printing presses running, which can only lead to further inflation and eventual economic ruin. As the US economy sinks, so does the dominant global reserve currency and, apparently, the financial power of the Western-aligned oligarchs. This looks likes deliberate self-destruction. Just two days after the launch of Russia’s so-called “special military operation” in Ukraine, the governments of the US, UK, Canada, and the European Union—the core of the G7—announced that they had decided to freeze the Central Bank of Russia’s $630 billion foreign currency reserves. While the US administration has done this kind of thing before, it did it to Afghanistan two weeks earlier, taking the wealth of a major developed nation and a fellow member of the UN Security Council sent very clear signals to the rest of the world. Countries hold foreign currency reserves for numerous reasons, but chief among them is to hedge against the economic impacts of crises of various kinds. If, for example, the currency of a nation is devalued, holding reserves of a stable foreign currency ensures that it can maintain levels of international trade in the short term. For some markets, notably the global oil market, trade is overwhelmingly conducted in the current leading reserve currency, the US dollar. As there is no single, overarching framework of “international law” adjudicating reserve currency, if ever the concept of an “international rules based order” were applicable it was to the agreed role of the US dollar as a global reserve currency. Regardless of the morality of the Russian government’s military action or its human cost, the Western unipolar clique, in seizing Russia’s reserves based purely upon a foreign policy disagreement, announced to the world that their IRBO was completely meaningless. The only reason nation-states agree to holding a dominant global reserve currency, beyond economic force, is that they trust the stability of that currency. If those currency reserves are seized whenever the issuing state feels like it, then that currency couldn’t be more unstable and has lost credibility as a viable reserve. Despite the claims of the Western politicians and their mainstream media (MSM) propagandists, the whole of the world is not united in its condemnation of Russia’s military action in Ukraine. Beyond North America, Europe and Australasia, censure is notable for its absence. By grabbing Russia’s reserves, the so-called IRBO more or less openly declared to the rest of the world that its US dollar, as a global reserve currency, was dead. Vladimir Putin was apparently right to observe: Imposing sanctions is the logical continuation and the distillation of the irresponsible and short-sighted policy of the US and EU countries’ governments and central banks. [. . . ] The global economy and global trade as a whole have suffered a major blow, as did trust in the US dollar as the main reserve currency. The illegitimate freezing of some of the currency reserves of the Bank of Russia marks the end of the reliability of so-called first-class assets. [. . .] Now everybody knows that financial reserves can simply be stolen. He also dropped in some virtue signalling, praising the Russian private sector for its “sustainable development” efforts: I would like to thank the business community and the teams at companies, banks and organisations, which are not only responding effectively to sanction-related challenges but are also laying the foundation for the continued sustainable development of our economy. The NATO-aligned nation-states behind the sanctions also decided to progressively cut Russian commercial banks out of the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network. This is the international financial communication system that enables banks and financial institutions to notify each other of international fund transfers using a standardised set of codes. Both Russia and China have prospective alternatives to the SWIFT system. Russia developed its System for Transfer of Financial Messages (SPFS) in 2014 and China its Cross-Border Interbank Payment System (CIPS) in 2015. According to the Central Bank of Russia (CBR) SPFS has expanded rapidly in response to the sanctions. Potentially both systems could supplant the West’s, but CIPS appears to be the most likely replacement for SWIFT. The G7’s claimed objective for these sanctions was to sever the Russian Federation’s access to global markets, but the world is a big place. All the sanctions did was curtail Russia’s ability to trade its energy and other key commodities such as grain and palladium—vital for the manufacture of semiconductors, with the West. Primarily at the West’s own expense. Russia and China have long sought to “de-dollarise” their economies and have forged numerous bilateral trade agreements outside of the dollar system. With the sanction, the West handed the Russian Federation one of its major monetary foreign policy objectives on a plate. A strange kind of punishment. This year the IMF reported that countries around the world have increasingly diversified their foreign currency reserves over the past two decades. In the last quarter of 2021, the dollar share of global reserve currencies had already fallen to below 59%. The sanctions against the Russian Federation provided a massive boost to Russian and Chinese ambitions to reset global reserve currencies for the benefit of their own economies. In June 2022, following the sanctions, the BRICS nations announced their plans to establish a new form of global reserve asset based upon a basket of BRICS currencies. This is a direct challenge to the special drawing rights (SDRs) that the IMF allocates to nation-states. Based upon the underlying value of the currencies in the “basket,” they can be exchanged, like any asset, for goods, services, or commodities—or redeemed for currency. Jerome Powell – Chairman of the US Federal Reserve MULTIPOLAR GLOBAL GOVERNANCE IS DIFFERENT BECAUSE REASONS It is easy to believe, as some do, that the Western oligarchs are in danger of losing their power base. Many of the people who hold such views also contend that the current world order is dominated by these same oligarchs. We have to wonder what they think globalist oligarchs do with all that power and authority. Simply sit idle and watch it slip away as the world turns around them? In reality, they haven’t been idle at all. As witnessed by their statements and actions, they have been making preparations to move to the new multipolar system for decades. To illustrate: in 2009, global investor, currency speculator and oligarch George Soros told the Financial Times: [Y]ou really need to bring China into the creation of a new world order, a financial world order. [. . .] I think you need a new world order that China has to be part of the process of creating it and they have to buy in. They have to own it the same way as, let’s say, the United States owns the Washington consensus, the current order[.] [. . .] I think the makings of it are already there because the G20, in agreeing to peer reviews, effectively is moving in that direction. [. . .] As long as the renminbi is tied to the dollar, I don’t see how the decline in the dollar can go too far. [. . .] [A]n orderly decline of the dollar is actually desirable. [. . .] China will emerge as the motor replacing the US consumer and [. . .] China will be the engine driving it [the world economy] forward and the US will be actually a drag that’s being pulled along through a gradual decline in the value of the dollar. According to representatives of the Russian and Chinese governments, the multipolar world order, supposedly led by them, will empower the G20, rather than the G7, to manage “global economic governance.” No surprises there. Further, the stated objective is to supposedly reinstate an “international law-based world order” that will enhance “genuine multipolarity with the United Nations.” The UN Security Council will continue to play “a central and coordinating role,” with the objective of promoting “democratic international relations” and “sustainable development across the world.” This global agenda is virtually indistinguishable from the one promoted by the unipolar IRBO. The claimed difference is that Russia and China will lead a BRICS-centric multipolar order which does more than pay lip service to international law and multilateral agreement. Allegedly, the multipolar model will abide by international law and focus upon collective decision making. The belated pushback by some US states against BlackRock’s investment strategy in US pension funds is only a minor irritation for the global corporate titan. While they have pressured the US economy to “decarbonise” they have not taken the same approach in China. BlackRock, and the Western oligarchs who invest through it, decided to make an enormous investments in China’s “state owned” hydrocarbon giant PetroChina. The China National Petroleum Corporation (CNPC) is among the largest “fossil fuel” energy companies in the world. It deals in both gas and oil and PetroChina is its publicly listed arm. In 2021 BlackRock was the first foreign company “allowed” by the Chinese government to launch a mutual fund in China which aims to achieve “long-term capital growth” for Chinese investors. The capital growth will come from BlackRock’s commitment to “sustainable development.” This was met with consternation by the Western MSM, and disgruntled oligarch George Soros, who claimed this was a huge blunder, adding: The BlackRock initiative imperils the national security interests of the U.S. and other democracies because the money invested in China will help prop up President Xi’s regime. China’s authoritarian style of technocratic government suits BlackRock. Speaking to Bloomberg’s Erik Schatzker in 2011, BlackRock CEO Larry Fink infamously said: Markets don’t like uncertainty. Markets like, actually, totalitarian governments where you have an understanding of what’s out there and, obviously, the whole dimension is changing now. [. . . ] with the democratisation of countries. And democracies are very messy, as we know in the United States[.] This followed the 2010 comment of George Soros that “today China has not only a more vigorous economy, but actually a better functioning government than the United States.” So perhaps his little spat with BlackRock is surprising. As mentioned in Part 1, oligarchs are not a homogenous group of automatons that all think with one mind. They are collectively committed to long-term goals but often disagree on how to achieve them. While BlackRock’s investors apparently see China’s technate as advantageous, Soros has always sought to destabalise nation from within, through various revolutionary means, and then use his wealth to instal the system he wants. His apparent backing for violent revolt in Hong Kong and his financial crimes, directed against Chinese companies, hasn’t endeared him to China’s oligarchy. But upsetting your partners is no reason to loose sight of the long game. Having publicly slated the Chinese government, calling Xi Jinping “the most dangerous enemy” of democracy in 2019, Soros backed NGO’s like the Sunrise Movement and ActionAid USA wrote an open letter to the US administration in 2021 urging closer cooperation with China on the oligarchs’ shared ambition of sustainable development. Post Russia’s war with Ukraine and the West’s sanction response, BlackRock’s PetroChina investment doesn’t look like such a monumental mistake now. The spike in oil prices saw a huge surge in profits for PetroChina, as it did for nearly every other oil and gas company. But BlackRock’s Chinese investment strategy is astute for other reasons too. With energy flows suddenly being directed away from the West and towards the East, moves such as the multibillion dollar deal between Russia’s “state owned” Gazprom and China’s “state owned” CNPC will further improve BlackRock’s bottom line. Pushed by the sanctions, Gazprom and CNPC will conduct their business in the ruble and the yuan. The consequent underpinning of their currencies strengthens the BRICS plan to challenge the primacy of the dollar as a reserve currency. With its Chinese mutual fund in operation, not only will BlackRock investors capitalise on their PetroChina deal, they are also well placed to take advantage of the likely shift in the International Monetary and Financial System (IMFS). It seems BlackRock possesses almost magical powers of prescience. There is no hint that the multipolar world order will do anything the tackle the inordinate power of the private sector oligarchs who dominate the United Nations’ global public-private partnership (UN-G3P). Neither they nor their investment portfolios are confined within national borders. Any nation-state can be an investment vehicle and international relations are just part of their strategic financial planning. The global mechanisms and partnership networks that “act as a force multiplier” for the globalist oligarchs are not at risk. In terms of global governance, from the oligarchs’ perspective, the shift to the multipolar model is simply a change of middle management. The oligarchs’ policy agendas, including the creation of a new global economy built upon debt–based sustainable development and natural asset classes, set within a $4 quadrillion carbon-neutral IMFS, remain firmly on track. Far from a threat, the multipolar world order is crucial. Without it, the theft of our natural resources and the capitalisation of nature cannot proceed. Recently, Larry Fink, speaking at the Clinton Foundation’s Global Initiative seminar, said: If we are going to change the world, there’s just not enough money that is going in to the emerging world. We must change the Charters of the IMF and the World Bank if we are going to get there. [. . .] There’s huge pools of capital but that capital is not equipped[.] [. . .] Its up to the equity owners [. . .] basically the G20, they have to have a desire for doing this. [. . .] If we can do that, the amount of capital that is going to go into the emerging world, into Africa [for example], will be extraordinary. [. . .] there is that opportunity in the next few years to do this and then we will have, not just a tectonic shift in the developed world, but a tectonic shift in all of the world. Perhaps Larry is thinking of the kind of reforms that the BRICS, exploiting the pseudopandemic, suggested in 2021. Collectively the BRICS stated priorities for reform of the IMF and the World Bank included “innovative and inclusive solutions, including digital and technological tools to promote sustainable development” and stregnthening nations’ capacity to tackle problem relating to “terrorism, money laundering, [the] cyber-realm, infodemics and fake news.” The hegemons of the multipolar world order would also like to see “reform” of the UN Security Council by increasing “representation of the developing countries,” such as Brazil, India or South Africa, thereby swinging control in the BRICS favour. They also recognised “the 2030 Sustainable Development Agenda as a comprehensive, indivisible, far-reaching and people-centred set of universal and transformative targets.” All of this will supposedly improve “the system of global governance” they said. The only perceptible difference is that the BRICS “emphasized the urgency of revitalization of the UN General Assembly so as to enhance its role and authority.” As we discussed previously, under the UN Charter, the General Assembly doesn’t have any “authority.” Yet the BRICS envisaged reform of the General Assembly will be “in accordance with the UN Charter.” If the BRICS statement doesn’t make any sense that is because it doesn’t. Clearly BlackRock and the BRICS are on the same page, but leaving that aside, this new model of global governance, headed by China and Russia, while the same as the existing model, will be better presumably because Russian, Chinese and Indian oligarchs are nicer people than their Western counterparts. We will explore that assumption in Part 3. Just like the IRBO, the multipolar world order has signalled its intention to maintain the censorship agenda. The commitment to reform the IMF and the World Banks is firmly based upon an unshakeable commitment to “sustainable development” and Agenda 2030—thus Agenda21—which suits BlackRock, Vanguard and the rest of the global-public-private partnership perfectly. In order for this new model of G20 based “global governance” to have a bite and not merely a bark, a global tax system is required. To this end, in December 2021 the G20 and the Organisation for Economic Co-operation and Development (OECD) finalised their “Two Pillar Solution To Address Tax Challenges.” Supposedly designed to stop the tax avoidance of “multinational enterprises” (MNEs), which it won’t, the impetus for this nascent global tax system has largely come from the G20. Unsurprisingly, the BRICS core of the multipolar world order are all signatories to the first concerted effort to legislate a single, unified global tax system into being. It seems that the new world order will fund itself into existence just as all empires do—by taxing the people. Larry Fink – CEO BlackRock CHANGING THE NEIGHBOURHOOD The Western, unipolar, debt-ridden world order is economically and financially spent and, for the UN-G3P, is approaching its used by date. The current IMFS, first established with the Bretton Woods Agreement and maintained by the subsequent petrodollar scheme, is finished. It finally pegged out in 2008 with the global financial collapse. Since then it has been kept on life support simply by printing—digitally speaking—trillions of dollars. Little of that money found its way into the real economy that you and I inhabit. The bulk of it has been siphoned off to prop up the financial markets while the move towards the multipolar system progresses. This excess supply of the US dollar, the current leading global reserve currency, will keep eroding—and ultimately destroy—its value. Consequently, the US economy in its present form, along with significant swathes of the Western economic order, is degrading. As noted by BlackRock, the existing drivers of financial exploitation are tapped out. Now that Western economies have reached their limits of growth, new sources of global economic stimulus are required. Neither Russia nor China have become the world’s engine for growth by chance. China is energy hungry and Russia is energy rich. Collectively they lead the world in military technology and China leads the world in manufacturing which Russia is happy to fuel with its oil, gas and coal. Despite the enmities of the past, the leadership in both nations not only recognised the mutual benefit of a closer partnership, they forged one. If capable, all nation-states engage in industrial espionage. It is silly to claim that Russia and China don’t. Equally silly were the comments of the former director of the US National Security Agency (NSA) and then head of US Cyber Command, Gen. Keith Alexander, who, when speaking about China’s technological development, told a 2015 US Senate Armed Forces Committee: All they’re doing is stealing everything they can to grow their economy. [. . .] It’s intellectual property, it’s our future. I think it’s the greatest transfer of wealth in history. Tax and inflation are the greatest transfers of wealth in history, but that wasn’t the end of Gen. Alexanders blunders. Contrary to his claims, the Western public-private partnership has done everything it possibly can to assist China’s development. In 1970 Zbigniew Brzezinski published Between Two Ages: America’s Role In The Technetronic Era. He recognised that private sector power had already exceeded that of governments and saw the a merger of the political and corporate state as the logical way forward in an emerging world dominated by digital technology: The nation-state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multi-national corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state. In 1973 Brzezinki joined the oligarch David Rockefeller in the formation of the Trilateral Commission (think tank). Their objective, with a mind to US led public-private partnership dominance, was to invigorate development in the East, with a particular focus upon China. Recounting their initial purpose and subsequent evolution, the Commission says: [T]here was a sense that the United States was no longer in such a singular leadership position as it had been in earlier post-World War II years. [. . .] , and that a more shared form of leadership [. . .] would be needed for the international system to navigate successfully the major challenges of the coming years. [. . .] [T]he enduring effects of the financial crisis that began in 2008 has been felt in every nation and region. It has fundamentally shaken confidence in the international system as a whole. The Commission sees in these unprecedented events a stronger need for shared thinking and leadership by the Trilateral countries. In 2009 delegates from the governments of China and India joined the Pacific Asian Group of the Trilateral Commission. Hence trilateralist George Soros’ promotion of greater involvement for China in the creation of a “new world order” in the same year. Efforts to shift the centre of global power eastward began in earnest in the 1980’s. Guided by the policy trajectories advised by the Trilaterlists and other globalist think tanks, the West notably stepped up its efforts to bolster China’s economic, financial and technological development. Between 1983 – 1991, Western foreign direct investment (FDI) in China increased from $920M to $4.37Bn. In 1994, in terms of US overseas investment, China ranked 30th. By 2000, it was 11th, as Western multinational corporations quadrupled their FDI into China between 1994 and 2001. By 2019, it had eclipsed $2.1Tn. The pseudopandemic saw an initial 42% slow-down in global FDI, but not in China where it grew again by another 4%. Consequently, China overtook the US to temporarily become the world’s leading recipient of foreign direct investment. While the private sector drove the modernisation of the Chinese economy, the public sector in the West encouraged China to embolden its global political presence. In 1979, the US granted China full diplomatic recognition; in 1982, the commitment was reaffirmed in the third joint communiqué; in 1984, Beijing was permitted to purchase US military hardware; in 1994, the Clinton Whitehouse intervened to scrap the cold war embargo on the export of “sensitive technology” to China (and Russia); the 2000 US – China Relations Act was signed by President Clinton (a member of the Trilateralist Commission), establishing further improvements to trade relations; In 2003 the US supported China’s entry into the World Trade Organisation and soon thereafter the Bush administration established permanent normal trading relations (PNTR) with China and, in 2005, then Deputy Secretary of State Robert B. Zoellick, called on China to take its place as a “responsible stakeholder.” A 2019 report by the World Bank, titled Innovate China: New Drivers of Growth, noted the depth of the West’s G3P commitment to Chinese development: Governments in other high-income countries have supported specific technologies and industries, particularly by targeting research and development (R&D). In the United States, government agencies such as the Defense Department’s Defense Advanced Research Projects Agency (DARPA) and the National Institutes of Health provided critical financing for key technologies. [. . .] These policies are complemented by support for key enabling technologies and industries—such as the space, defense, automotive, and steel industries—including through various funds, such as the European Structural and Investment Funds (five funds worth more than €450 billion) and Horizon 2020 (€77 billion for 2014–20). Bringing his enthusiasm for the multipolar world order with him, then Bank of England Governor Mark Carney, and now UN Special Envoy for Climate Action & Finance, spoke at the G7 Central Bankers symposium in Jackson Hole, Wyoming, in August 2019.  This remarkable speech, shocking to anyone who believes that politicians run the world, more or less laid out where the world order is heading: [A] destabilising asymmetry at the heart of the IMFS is growing. While the world economy is being reordered, the US dollar remains as important as when Bretton Woods collapsed[.] [. . .] In the medium term, policymakers need to reshuffle the deck. That is, we need to improve the structure of the current IMFS. [. . .] In the longer term, we need to change the game. [. . .] Any unipolar system is unsuited to a multi-polar world. [. . .] In the new world order, a reliance on keeping one’s house in order is no longer sufficient. The neighbourhood too must change. [. . .] [A] multi-polar global economy requires a new IMFS to realise its full potential. That won’t be easy. Transitions between global reserve currencies are rare events. [. . .] [I]t is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies. [. . .] [A]n SHC might smooth the transition that the IMFS needs. [. . .] The deficiencies of the IMFS have become increasingly potent. Even a passing acquaintance with monetary history suggests that this centre won’t hold. [. . .] Let’s end the malign neglect of the IMFS and build a system worthy of the diverse, multi-polar global economy that is emerging. In a nutshell, according to Carney: The “world economy is being reordered,” the dollar only remains “important” in the short term and “we”—the G7 central bankers—need to improve the IMFS by changing “the game” to suit a “multi-polar world” because the unipolar system is unsuitable. “The neighbourhood” (the Earth) must change to realise the potential of a “multi-polar” IMFS. This requires transforming “the global reserve currency” to some sort of “Synthetic Hegemonic Currency,” perhaps based upon “central bank digital currencies” (CBDCs). China, thanks in part to Western assistance, leads the world’s developed economies in CBDC technology. It began seriously testing CBDC in 2014, and started rolling it out in cities like Shenzhen, Chengdu and Suzhou in 2020. This year, China extended use of the digital yuan, called e-CNY, as it surged ahead in the race to become the first cashless major economy. Russia aren’t far behind. Russia 12 leading banks began technical trials of the digital ruble in 2021 prior to its official launch on the 15th February 2022, just nine days before the “special military operation” began in Ukraine. The First Deputy Chairman of the CBR, Olga Skorobogatova, said: The digital ruble platform is a new opportunity for citizens, businesses and the state. We plan for citizens transfers in digital rubles [to] be free and available in any region of the country[.] [. . .] The state will also receive a new tool for targeted payments and administration of budget payments. More than that, adoption of CBDC in a cashless society, where no other form of payment is “permitted,” enslaves every citizen to the state. CBDC is both programmable money and a liability of the central banks. Not only does it always belong to the central bank, and never the user, it can be programmed to function as they see fit. Russia has already installed the legal framework to make this a reality. In 2019 Vladimir Putin announced amendments to Russian federal law that enables the Russian state to outlaw the use of cryptocurrencies. In a “cashless society” these could potentially be a form of alternative currency. As yet, the legal amendments have had little effect. But, if and when Russia moves to a cashless control grid the regulatory platform is ready and waiting. According to the NATO think tank, the Atlantic Council, as 105 countries representing 95% of global GDP explore CBDC, “the G7 economies, the US and UK are the furthest behind on CBDC development.” It seems strange that the unipolar IRBO is apparently lagging so far behind again. Especially given that fact that some of its leading “thinkers” would like to see “a network of central bank digital currencies.” Still, in its search for a Synthetic Hegemonic Currency, it may come as some relief to the leaders of the IRBO that, as noted by the Atlantic Council, “many countries are exploring alternative international payment systems” and that the “proliferation of different CBDC models is creating new urgency for international standard setting.” While it is evident that China are leading, perhaps the IRBO and the Central Bank of Russia can take some consolation in the NATO think tank’s assessment: The trend is likely to accelerate following financial sanctions on Russia. The neighbourhood is certainly changing. Mark Carney – former MD Goldman Sachs, Governor of the Bank of Canada and the Bank of England, UK Prime Minister’s Special Climate Envoy To COP26, Chairman of the FSB, WEF Board of Trustees member and current vice chairman and head of Impact Investing at Brookfield Asset Management and UN Special Envoy on Climate Change. BUILDING THE NEW IMFS Russia is the third–largest oil-producing nation after the US and Saudi Arabia and the second–largest producer of natural gas after the US. But since US domestic energy consumption far exceeds Russia’s, it is the second–largest oil exporter, after Saudi Arabia, and the leading natural gas exporter in the world. Russia also possesses the largest gas reserves on Earth. In 2018, the Shanghai International Energy Exchange started trading oil futures denominated in the Chinese yuan (CNY). All that was required, in order to make the yuan a full-blown petroyuan, was for crude oil exporters to widely accept it as payment. China has been paying Russia and Iran for oil using yuan since 2012, but the sanctions this year moved the credibility of the petroyuan to a whole new level. The Russian Federation has not only massively increased its oil exports to China, becoming its leading oil supplier, but is accepting payment in renminbi (RMB). The CNY is the principle of account for the RMB. Globally, as a direct consequence of the West’s sanctions, the petroyuan is now a practical reality. Venezuela, too, has already agreed to accept the petroyuan. If Saudi Arabia accepts the petroyuan, as seems increasingly likely, the yuan will also have taken a leap forward as a potentially dominant global reserve currency. Perhaps it is just a coincidence that both the pseudopandemic and the war in Ukraine have resulted in nation-states the world over committing to policies that precisely facilitate the transition to the multipolar world order. That both of these world-changing events just happen to “reshuffle the deck” exactly as desired by the global parasite class is certainly uncanny, if not downright unbelievable. Nonetheless, as the centre of power moves eastward, maybe the new world order will ultimately deliver on the promise claimed by some—namely, that Russia and China really are standing up to the insidious Great Reset. Could it be true? We live in hope. Despite the fact that the Western public-private partnership has played a pivotal and seemingly intentional role in this polarity shift, perhaps the Russian and Chinese governments are determined to create a better world order for us all, as some commentators suggest: [A] higher geopolitical reality is being born which will have a much greater benefit to [. . .] humanity more generally if it is not sabotaged. [. . .] A potentially beautiful new future driven by the re-awakening of the spirit of the Silk Road is being painted before our eyes. When we conclude this series with Part 3, we may just discover that the wondrous vision of a “beautiful new future” led by China and Russia is a realistic prospect. Or perhaps not. Tyler Durden Thu, 09/29/2022 - 03:30.....»»

What Would A Crypto Crash Mean For Markets And The Economy By Peter Tchir of Academy Securities On “bitcoin infinity” day (apparently 8/21 is symbolic of ∞ infinity, the projected value of bitcoin) divided by 21,000,000 (the total number of bitcoin that can ever be mined), it seemed like a good time to explore what a crypto crash would look like and what it would mean for markets and the economy. We all know what a mortgage bank collapse looks like (Washington Mutual). We’ve seen broker dealers collapse (Lehman), we’ve seen the stress on the system when money center banks and insurance companies come under intense pressure. Heck, we’ve even endured a sovereign default (Greece). We’ve also experienced flash crashes in equities and bond yields. In all those cases, I would argue that having a gameplan ahead of time allowed companies and investors to profit from the events (both positive and negative). I haven’t seen much on what a crypto crash would mean, so I figured we could examine that today. Jackson Hole I could have written the 900th Jackson Hole primer, but I couldn’t bring myself to do that. I’ve already covered a lot that is applicable to Jackson Hole in Taxi Strategies, Orwellian Moments, Things You Won’t See, and Inversion and Inventories. My focus right now is pretty simple: What is the real story on jobs? The weak data is a more accurate sign of the current situation. How bad is the inventory build? I think it might be the worst we’ve seen in my lifetime. Is the wealth effect a problem? I think that the concentrated nature of the wealth effect in disruptive stocks and crypto is different than anything else we’ve experienced historically, and the housing sector weakness is ominous to me. Inflation Fighting. Be careful what you wish for is all that comes to mind. Time and again, lower commodity prices have accompanied stock prices as they became much lower as well and I’m not sure why that will be different this time. Anyways, let’s get back to being off topic and discussing a crypto crash. 6 Impossible Things Before Breakfast I cannot come up with 6 impossible things before breakfast, but as the Queen suggested to Alice, you do need to practice. Let’s start with the premise of a crypto crash or crypto collapse. If it is impossible, then there is no point even thinking about it. However, not only is it possible, but I put the possibility of it occurring in the next year at 10% or higher. Still unlikely, but a high enough probability that I should think about what it would mean. Why a crypto crash or collapse seems possible: It has already happened. Luna/Terra is gone. Poof. XRP is down 80% from its highs, Cardano is down 85%, Bitcoin Cash (you got to love the name) is down 91%, and Dogecoin is down 90% as well. Dogecoin was allegedly started as a joke, which makes it all the more ironic (or moronic) that an SNL skit helped pump it to the moon. So, collapses and crashes have occurred in some segments of the market, which alone tells me that it is worth exploring more. This chart is precarious. Bitcoin continues to hover near levels that would ensure that no “hodler,” or someone who buys crypto and will never sell (diamond hands as opposed to lettuce hands), has made money on any purchase in almost two years. That is a long time to wait to make money (or to sit on large losses). FOMO is a big part of crypto trading, and we are on the precipice of declining to levels where many could decide to take their money and run. There is an ongoing theme in crypto that the “whales” keep buying dips, which might be possible, though it seems more likely to me that many have decided to lock in massive amounts of wealth into the much maligned (but useful) “fiat” currency. Crypto bounced here recently, but that was just the first test and I suspect that there were some heavily incentivized holders who went out of their way to support the price (there really are no rules in this space). This chart, by itself, doesn’t convince me that a crash is possible, but when I highlight the other issues, it certainly adds to that overall theme that a crash or collapse is a non-zero probability event. The chart isn’t much better.   The $13.5 billion trust, GBTC, is currently at a 32% discount to NAV. This isn’t an ETF, so it has the ability to trade at a discount or premium to NAV for extended periods. A 33% discount lets you buy bitcoin at the equivalent of under $14,000 ($21,000 * 67%). There is, to some extent, over $4 billion in “free” money in this stock if the discount closes to 0. It is bizarre and scary to me that the discount continues to widen. In ETF’s, I believe that discount/premium to NAV leads the way (cheapness begets lower prices and vice versa). While that view doesn’t quite translate given the nature of GBTC, it is cautionary to me. A lack of interest. Recently one of the largest asset managers on the planet announced plans to collaborate with one of the largest public companies focused on crypto to work on some crypto projects. Two years ago, I can only imagine the impact that headline would have had on bitcoin. My guess is $10k in a heartbeat, but we are already back below the price when that deal was announced. Every headline like that (a year or more ago) was met with thousands (if not millions) of social media posts touting ADOPTION! While adoption is growing and more big banks have announced crypto strategies, the response seems to be more like “well, of course they are going to see if they can make money in it” rather than “OMG, XYZ just endorsed crypto, BUY!” Subtle shift in response, but an important one (albeit subjective). The best “use” cases are diminishing. China, to me, has always been the best use case. A large population with enough money to matter. For all the talk about banking the unbanked, etc., which sounds nice, this isn’t what will drive crypto prices higher. There are stats saying that as many as 4 billion people are unbanked across the globe. According to the World Bank, about 700 million people make less than $2.15 per day. That is depressing, scary, and almost mind-boggling, but from the crypto perspective, it is not the poor that will drive prices (there just isn’t enough money). But China, where millions of “middle class” citizens exist under a regime where they may want to keep money outside of the system, it has always been a good use case. With the property market in tatters, a slowing economy, and the government continuing to crackdown on crypto (outside of the digital Yuan), that use case may be dropping rapidly. Sanction avoidance as a use case may also be diminishing. If you were illicitly trading embargoed products (like oil), crypto may have been the “currency” of choice. But with the U.S. looking to ease restrictions on places like Iran and Venezuela (hypothetically), maybe some of the alleged trade will come back onto the books. With China and India openly buying Russian oil and Chinese currency gaining in stature (at least amongst some nations), there is less reason to use crypto when the Yuan is about 10 times less volatile than bitcoin (30-day vol of 5.4 versus 53). Criminal activity still flourishes, though the ability to track and reclaim ransomware payments seems to be increasing. It’s about blockchain and blockchain technology. The number of pundits, experts, and companies that seem to be doing contortions to pitch themselves as blockchain rather than crypto is high. Again, this is subtle, but it seems that re-positioning oneself as blockchain rather than crypto is occurring, which doesn’t bode well for crypto. It’s a Ponzi scheme, but it’s our Ponzi scheme. There were always the slogans that accompanied crypto, like “have fun staying poor” but they often included passionate explanations about the greatness of crypto. The use cases would take up pages including such themes like it is banking the unbanked (already discussed), that it is an inflation hedge (hasn’t worked on that front for some time), that it is outside the reach of the government (it is being regulated more by the day, and many in crypto, after some recent highly visible failures, now seem to embrace this), that it is lower cost (costs remain high and there is little protection against mistakes or fraud, unlike with bank accounts or credit cards), or speed (but how many people really need to instantaneously shift large amounts of money, but aren’t already served by Venmo or Zell or some similar product?) I still see those arguments being made, but with far less enthusiasm. However, there is another “use case” that seems to be getting traction (at least in my social media streams). It basically amounts to the argument that convincing more people to participate will help. Kind of like “adoption” but with a more cynical tone. Basically, it is admitting that it only really works if more people get in (so get in, and get more people in). It has the advantage of being true and seems honest, but it seems like the last vestige of a pump and dump scam. I’m not sure about you, but that is enough for me to at least take a look at what a crypto collapse or crash would mean. Crypto Market Cap Let’s start with the market capitalization of crypto currencies as that is the most obvious and direct hit to investors. We will use coinmarketcap for this section (beware of using the link as it will ask to send notifications, know your location, etc., but I figured there should be a link to something to verify). Bitcoin at $21,262 has a market cap of $406 billion. Ethereum at $1,628 has a market cap of $199 billion. Binance Coin at $286 has a market cap of $46 billion. Then XRP, Cardano, and Solana come in between $13 billion and $17 billion. Dogecoin, Polkadot (love the name), and Shiba Inu are all about $7 billion, with Avalanche, Polygon, TRON, and Uniswap, all a bit over $5 billion. Let’s call it about $750 billion in total market capitalization for crypto. To make things “simple” let’s assume that after the top 3, most of the coins could disappear and people would hardly notice (I’m assuming that many of those coins are not widely held, and a few “whales” would lose a lot, but the average person wouldn’t lose much more than what they are already prepared to lose.) If you believe that this is an area where many have spent their “winnings” or took money made in bitcoin or Ethereum to really roll the dice (which I believe), that gives us further reason to argue that the hit here would be minimal on the economy (it also makes the analysis much easier as we only have to focus on a few key currencies). Stablecoin Market Cap We need to also consider the stablecoins. Terra/Luna was supposed to be a stablecoin. Stablecoins, in theory, are backed by assets of some sort, except those that were algorithmically backed (whatever that means). Tether (USDT) is still the biggest at $67 billion. I love how much everything is made to sound like dollars (USD) despite the rhetoric against fiat. This stablecoin, in particular, attracts a lot of negative posts about how it is backed. The company asserts that Tether is backed by T-bills, commercial paper, etc., but to my knowledge, it has never produced a detailed list of its holdings, let alone an audited list of its holdings. This behemoth of an account ($67 billion is large even in money markets) is unknown by any money market participant I speak to (albeit that is only a handful of people outside of Academy’s strong short-term liquidity desk). Someone recently pointed out that they apparently manage that much money without a Bloomberg terminal account (there is no Bloomberg account linked to a company called “Tether,” but they could use a different name on Bloomberg to obfuscate their existence, which isn’t unheard of). Tether has seen their market cap drop from $82 billion to $67 billion, and part of that could be that some investors, given what has gone on this year, have shied away from it. USD Coin or USDC (again, notice how much it tries to sound like the dollar) has a market cap of $52 billion. Its market cap only peaked at $55 billion, so it has gained at the expense of USDT. Circle, which is the company behind USDC, makes a big deal out of being transparent and regulated in the U.S. I’ve had brief conversations with people involved in the company and the pitch makes sense to me (though I have not yet gone through the effort of figuring out how granular that transparency is – that’s a project for another day). But they are clearly marketing themselves on the transparency issue and have surged relative to Tether over the past year or so. Binance USD (BUSD) weighs in at $18 billion and is a distant third and seems relatively tied to the Binance ecosystem. Vegan hotdogs. When I see all these names trying so hard to associate themselves with the dollar despite being part of an ecosystem designed to avoid the dollar, I can’t help thinking about vegan hotdogs and why vegans try to replicate an already weird food, when vegan food in its own right can be awesome! But I digress. My view is that stablecoins and their market caps are a function of the overall utility of cryptocurrencies. If crypto crashes, we should see a decline in the market cap of stablecoins. Two things could occur: Those backed by assets will have to sell the assets to meet redemptions. If it is a few billion and they are back by T-bills, then no sweat. Markets would digest that easily and no one would be impacted. But if the size is bigger (10s of billions) and the assets are less liquid (non-standard commercial paper programs for example) then we could see some friction in markets. Again, if we knew exactly what they held we could be more or less prepared. What they hold and the size of the selling would impact the knock-on effects of any unwind (Terra/Luna held nothing, so that didn’t spread to the greater financial system, but this could). If the stablecoins don’t truly hold sufficient assets or the assets are of low quality (there are all sorts of conspiracy theories out there on what it might be invested in that isn’t worth me repeating here, even if they intrigue me) then we could see what looks like a “bank run” occur not just in stablecoins, but ultimately in the assets they hold and asset classes that compete with what they hold. Let’s just pretend, for the moment, that they have money market lending that is off the radar screen, and presumably paid a lot, as it wasn’t standard. If they have to sell, that could cause prices to plummet, possibly to a level that more traditional players sell what they have to buy this stuff, creating that first domino effect. There is a circularity between crypto and stablecoins. They can bring each other down. While crypto losses themselves will be largely isolated to the holders (we still have to dig into that), the unravelling of stablecoins is likely to influence other markets, possibly quite negatively. Direct Losses The direct losses are relatively easy to figure out. Crypto losses. Let’s say $500 billion could be wiped out of crypto. While some evidence points to there being a small subset of “whales” that would bear the brunt of that loss, I think there is a broad enough swath of the population that would take a serious hit and it would affect spending in the near-term. Stablecoin losses. Stablecoins in theory should have an orderly unwind. If, and that remains a question, there is a disorderly unwind of one or more stablecoins, the losses would be in the 10’s of billions (which isn’t so bad). The problem is that unlike crypto losses, where investors presumably treated this as a risky portion of their portfolio, stablecoins are viewed as cash equivalents. Losing cash is always more problematic than losing risky investments. Something to watch. Public Company Losses. There are at least a couple of public companies that are linked to crypto. Then there are the miners, mostly listed on foreign exchanges. HIVE for example went from almost $2 billion to just over $400 million (higher than the recent lows of $237 million). Not a huge market cap loss, but only one of many miners out there. This would add up to more losses, some of which would hit mainstream funds. The bigger losses would likely be felt in the private domain as many of the companies in the space have not yet made the leap from private equity to public equity. The losses shouldn’t be material to the broader market, but would likely be concentrated enough to leave a mark disproportionate to the size of the losses. On the private equity side (even more than the public side) the losses will hit employees the hardest and that will hit spending. Jobs. If you consider day trading crypto and waiting for NFT drops to be a job, then there will be job losses. The companies I’ve mentioned, both the public and private ones, will be forced to let go of employees (that already will have lost significant paper wealth). These are skilled employees, so in theory, could find other jobs, but that could be more difficult to do in an environment where crypto losses cause investors (including private equity) to be more conservative across the fintech space. Domino or knock-on effects. Assuming the stablecoins hold liquid assets, that unwind should be handled easily (there is a risk that isn’t the case, at least for some stablecoins) but I won’t harp on it. There is not a lot of direct debt tied to crypto (though there are some bonds out there, but they are too small to have any material impact). I don’t see crypto being used as a major source of collateral. If bitcoin holdings, for example, were being used to leverage up stock investments, then I’d be very scared. I think some individuals may manage their personal wealth along those lines, but I don’t see it as a widespread issue (unlike housing in 2008, for example). Spending. How much spending is coming from this sector and what does that mean for us? Spurious Correlation or Real Threat You can take any two data series and potentially see a correlation. They may have nothing to do with each other, so we can stare at the “correlation” chart as long as we want, but it isn’t going to help us because there is no causation. Complicating matters further, we should be looking at correlations between the rate of change rather than correlations between asset classes themselves (I vaguely remember the reasons for this, but I will ignore that technicality for today). Here is the SOX (Philadelphia Semiconductor Index) versus bitcoin. I chose to use this index because it is more likely to be spurious and highlights how much more correlated some individual semi-conductor stocks are. Spurious correlation. The argument for “spurious correlation” is strong. It seems impossible that a small segment of the market, like crypto, could have a large effect on such a big diversified market. Many of the things that drove crypto were also driving other industries that placed huge demands on the chip industry (video conferencing, autonomous driving, big data, etc.). So crypto was just one of many things driving those industries and those industries should not be impacted by a crash in crypto. I could go on, but I can see heads nodding here, so I won’t spend any more time arguing what is a consensus (and probably correct) view. What if it is correlated? The wealth being generated by those in crypto was large. From the miners to the “exchanges,” there was a race to capture revenue and there was plenty of revenue to capture. The spending on chips (rigs to mine, servers to provide customer service, etc.) was large. Chip companies presumably saw this demand and knew that they could charge a premium to an industry where speed and timeliness meant everything. Were chips designed specifically for the crypto industry? Was production of generics shifted to higher profit margin lines? Not only were the companies (that succeeded) spending money, but many failed business ideas (or those just not yet successful) had money to spend as well. What if crypto spending went to web services (seems like it would). What if it went to advertising? (It did). What if that spending caused those companies to spend more? Maybe they needed to add systems, components, and people to keep up with the demand from the crypto industry. Did that spending then create more spending and make it very difficult (if not impossible) to figure out where crypto spending ended and where “regular” spending went? How much money was crypto spending on energy? At one time I saw stories that in terms of energy usage, crypto, if treated as a nation, would have been the 10th largest country in terms of energy use. Commodity prices are always affected by the marginal 5% or 10% of demand. Is it possible that part of energy inflation was due to crypto? Does that mean policy makers are responding to a problem (high inflation) while ignoring one of the causes (because it isn’t on their radar screen, except in China, which has been clamping down on mining in that country?) The case for crypto being a bigger driver than previously thought may seem weak, but I cannot help but believe that it is a risk we should be discussing more than I think we are. What if the correlation was a driver for exciting new technologies where enormous wealth seemed possible (to such an extent) that current spending or success was irrelevant? What if crypto’s decline and potential collapse may not be causal, but is correlated to some broader move in markets and the economy? Then in that case, it might be spurious, but is still dangerous. Impossible Things, Black Swans, and Thinking Out of the Box I do not think a crypto collapse is impossible. It isn’t my base case, but there is a real possibility that it occurs. Black swans are things that people didn’t think were possible (and turned out to be possible). We can get a pass on missing black swans, but not if we are looking at a grey swan and choose to ignore it. I’m not lying awake at night thinking about a crypto collapse because: It “probably” won’t happen. If it does happen, the damage to the economy “could” or maybe even “should” be minimal. But I am thinking more and more about it because if there is a correlation between crypto and the broader economy (and markets) or because crypto, the broader markets, and the economy are moving to the same theme, there is serious risk to the downside. Some of this risk may not be getting priced in based on some simple charts of crypto versus other asset classes. On this broader correlation theme, check out ARKK shares outstanding because something seems to have shifted in terms of the investor mentality there. For those who celebrate, enjoy bitcoin infinity day! It really seems weird that not only is that a thing, but on 8/21/21 the CEO of a public company enjoyed tweeting it out. I’m possibly too old and jaded, but stuff like that seems silly rather than compelling. Tyler Durden Sun, 08/21/2022 - 21:30.....»»

A Triple-Barreled Gun Is Destroying African Economies: Inflation, Government Debt, & Taxes Authored by Manuel Tacanho via The Mises Institute, Today it is conclusive that Africa's socialist experiments failed, as did the state-led development approach. Not only was the heavily statist approach unable to develop African economies, but it made poverty worse. In this context of repressive state-driven economic systems, most African countries are trapped in a morass of high inflation, high debt, high taxation, high dependency, worsening poverty, food insecurity, chronic mass unemployment, and other pervasive problems.  Barrel One: High Inflation Africa’s unstable and inflationary currencies have been a significant impediment to economic development because of their destabilizing and impoverishing effect. Organic and lasting economic growth must necessarily be driven by savings, not by debt, deficit spending, or money printing.  In the long run, inflation ends in the breakdown of the currency. This is what happened in Angola in the 1990s and in Zimbabwe in the first decade of the 2000s. Evidence from the past and present, from developed and developing countries, unequivocally shows that inflation is a government and central bank policy that cannot go on forever and that does come to a catastrophic end, however long the run may be.  Postcolonial Africa has been plagued by severe monetary instability due to inflation: currency crises, erratic currency fluctuations, currency devaluations, currency resets, and even hyperinflation. Such a chaotic, destabilizing, and impoverishing monetary situation is not accidental or natural. It is the inherent consequence of Africa’s fiat money systems in the context of monetary colonialism.  On the one hand, a stable and trustworthy currency spurs local capital formation (i.e., saving), leading to homegrown investment and entrepreneurship, which leads to organic, decentralized, and enduring economic growth. An economy based on a reliable currency (e.g., gold money), coupled with other factors like low taxes and economic freedom, also attracts more foreign capital and talent, which leads to broad-based prosperity.  On the other hand, untrustworthy and inflationary currencies, such as today’s African currencies, will have the opposite effect. In a context of monetary instability and rampant inflation, people will tend to save less, spend faster, and avoid long-term investments and business ventures. And capital formation, capital attraction, and long-term capital deployment are essential to industrialization and lasting prosperity. By shifting incentives from long-term thinking, savings, and production to short-term thinking, consumption, and short-term economic activities, inflationary currencies undermine economic development. They lead to deindustrialization and leave society more dependent on the state. Notice that the more a system depends on the state, the crueler, more oppressive, and thus unsustainable it becomes. Moreover, by maintaining monetary instability and high inflation, African governments are destroying local capital, undermining capital formation, and ensuring that local capital remains dismally scant. This keeps African countries poor and dependent on systemic aid (loans and grants) and foreign capital injections. This situation, created by misguided government policy, leaves African governments indebted and at the mercy of predatory foreign actors. Barrel Two: High Debt  Though debt is a global economic issue, debt burdens affect countries differently. The pernicious consequences of indebtedness are more crippling and swifter to manifest in developing countries than in developed ones. Unable or unwilling to see deficit spending for the ruinous model it is, many African governments are repeating past mistakes and driving their economies further into economic ruin by accumulating excessive debt (and consequently imposing heavier tax burdens). Although reports of an imminent debt crisis in Africa are likely an exaggeration, African countries’ debt buildup is alarming. Apart from Sudan, Eritrea, Cape Verde, Mozambique, Angola, Mauritius, and Zambia, which have debt-to-GDP ratios near or above the 100 percent threshold, the average debt-to-GDP ratio in Africa hovers around 60 percent, which is lower than the average ratio for developed countries, many of which have long passed the 100 percent benchmark. Still, Africa’s debt buildup is unwise, unsustainable, and dangerous.  Excessive debt is detrimental to African economies in eight ways: It perpetuates the state-led development approach, which has failed to generate economic prosperity and left most African economies in a precarious situation characterized by dependency, poverty, tyranny, corruption, rampant inflation, and deindustrialization. By perpetuating the state-driven development approach, debt-fueled government spending makes poverty worse, consolidates political and economic repression, and thus further delays promarket reforms that African societies urgently need to truly develop and weather global economic storms. Debt repayments further cripple already crippled economies by diverting increasingly significant portions of government revenue to debt servicing. Worse still, African countries pay much higher interest rates (5 to 16 percent) on their Eurobonds than developed countries, which, thanks to their central banks' artificial ultralow interest rates, tend to pay near-zero interest on their debt; Like most government spending, African government spending tends to be mired in corruption, cronyism, embezzlement, rent seeking, overbilling, and wastefulness, which ultimately means it does more harm than good. It leads only to further debt to keep the spending binge going—a vicious cycle that attracts more political and economic opportunists seeking office or to get rich on government spending and favor. It leads to injustice and a broader income and wealth inequality gap, as politicians and their associates (e.g., large businesses and other interest groups) benefit first and most from such money injections through various schemes. Debt-driven government spending also means a heavier (i.e., more oppressive) tax burden in the future. High taxes are one of the main impediments to economic development. Less development means more poverty, more human suffering, and more poverty-related deaths. Moreover, excessive debt leads to a situation where the people, their children, and even the unborn will have to be taxed to pay for today's largely wasteful and counterproductive government spending, which only makes politicians and associates rich. On top of all that, debt (loans and grants) traps African countries in poverty and vassalage to foreign governments (primarily Western states but others too, nowadays). Now, why do African politicians still willingly go for this ruinous model? Part of it is monetary colonialism; part of it is philosophical colonialism. But a significant reason is that this model is rather convenient politically. It enables politicians to make fairytale electoral promises. Barrel Three: High Taxation  Nnete Okorie-Egbe was a princess from Akwete in Nigeria who led a women's revolt against British colonial tyranny, particularly against oppressive taxation, in 1929.  Likewise, a famous folktale in Angola is that once, in protest against Portuguese colonial taxation, locals of the then village of Caxito did some magic and sent a crocodile with a bag of money in its mouth to the local colonial office to pay taxes. Although this is most likely a myth, the message is clear, and the symbolism is real. So much so that there is an alligator monument eternalizing this tale.  Protest stories such as these abound across Africa. This is unsurprising because the concept of permanent and excessive taxation is a colonial imposition that postcolonial African governments, instead of rejecting, have doubled down on. Precolonial Africa was characterized by little to no taxation due to the tradition of self-governance, free markets, and free trade. Stateless societies were ubiquitous in precolonial Africa. However, today’s Africa is characterized by such degrees of tyrannical taxation as would resuscitate Nnete Okorie-Egbe to lead another tax revolt or make the then villagers of Caxito send not one but a hundred crocodiles to the tax office in protest. Business Insider Africa reports that corporate tax rates are generally higher in developing countries. In Africa, the average corporate tax rate is 27.5%—the highest of any region. Chad, Comoros, Equatorial Guinea, Guinea, Sudan, and Zambia all tie for the second-highest corporate tax rate in the world at 35.0%. Many countries in the region also rank as the worse for ease of doing business, with high start-up costs and multiple barriers to entry. The fact that the poorest region has the highest business tax rates globally is both revealing and perplexing. Instead of maintaining some of the most oppressive tax regimes globally, Africa should boast the simplest and lowest tax burdens, which would greatly encourage local capital formation, investment, entrepreneurship, and lasting economic growth. Moreover, as we all know, developing countries can barely ever repay their debts because they lack a robust economy. Increasing the tax burdens in these precarious economies will only further impoverish already impoverished societies. In Closing Such is the triple-barreled gun with which most African governments, intentionally or unintentionally, bombard African societies. It is unclear why African, not colonial, governments would deploy such a destructive economic gun against the very people they should serve and uplift. What is clear is that by maintaining an environment of high inflation, high debt, and high taxation, African governments ensure that African societies remain trapped in tyranny, dependency, and poverty. Tyler Durden Sun, 06/19/2022 - 08:10.....»»

Goldman Warns 'Dollar Dominance On A Downtrend' As we have noted numerous times in the past (since 2014), nothing lasts forever... And while he falls short of the apocalyptic views of The World Bank's former chief economist: "The dominance of the greenback is the root cause of global financial and economic crises," Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. "The solution to this is to replace the national currency with a global currency." ...and Zoltan Poszar's recent warnings of the backlash against US weaponization of the dollar against Russia, noting that "...wars tend to turn into major junctures for global currencies, and with Russia losing access to its foreign currency reserves, a message has been sent to all countries that they can’t count on these money stashes to actually be theirs in the event of tension... it may make less and less sense for global reserve managers to hold dollars for safety, as they could be taken away right when they’re most needed." ...and Dylan Grice's fears over the end of dollar hegemony... never seen weaponization of money on this scale before…you only get to play the card once. china will make it a priority to need no USD before going for Taiwan. it’s a turning point in monetary history: the end of USD hegemony & the acceleration towards a bipolar monetary order — Dylan Grice (@dylangrice) February 27, 2022 Goldman Sachs' Zach Pandl argues that the Dollar’s role as the dominant international currency will likely continue to decline over the coming years, reinforcing his view that the Dollar will weaken over the medium term. Within a country’s borders, the typical money medium used by households and firms is largely dictated by government rules and regulations. At an international level, by contrast, currency users have a choice. For over six decades, the US Dollar has been the world’s dominant international currency, reflecting both the convenience of using the US currency and a lack of suitable alternatives. But the Dollar’s international role is now under pressure on both fronts. US foreign policy choices may discourage heavy reliance on the Dollar in some cases, while policy changes by other governments, as well as technological innovation, may help facilitate diversification away from it. The Dollar’s share of global foreign exchange reserves peaked at around 85% in the 1970s and fell to below 60% last year, a downward trend we expect to continue over the coming years as other nations pivot toward other fiat currencies and, potentially, alternative money mediums. US foreign policy doing the Dollar no favors Pressures on the Dollar’s dominant international role partly stem from US foreign policy choices, in particular, the US’ aggressive use of extraterritorial financial sanctions. Given that all transactions in Dollars eventually pass through the US financial system, preventing US banks and their subsidiaries from transacting with a sanctioned entity effectively shuts that entity out of the global financial system. For example, an EU business could be prevented from trading with Iran, even if it’s legal under domestic EU law, because its bank could run afoul of US sanctions. For this reason, the EU Commission has said that US sanctions and trade disputes with other countries represent a threat to the EU’s economic and monetary sovereignty. Overuse of sanctions by the US could discourage other countries from transacting in the Dollar in the first place, a risk that US officials are well aware of. Former Treasury Secretary Jacob Lew said in 2016 that the US “must be conscious of the risk that overuse of sanctions could undermine our leadership position within the global economy, and the effectiveness of our sanctions themselves… if they excessively interfere with the flow of funds worldwide, financial transactions may begin to move outside of the United States entirely—which could threaten the central role of the US financial system globally.” Similarly, former US Secretary of State Henry Kissinger said in 2014: “I do have a number of problems with the sanctions [on Russia for its annexation of Crimea]. When we talk about a global economy and then use sanctions within the global economy, then the temptation will be that big countries thinking of their future will try to protect themselves against potential dangers, and as they do, they will create a mercantilist global economy." Will the recent imposition of sanctions on Russia’s central bank over the war in Ukraine be the straw that breaks the camel’s back? Countries hold foreign exchange reserves as a store of value to use in times of crisis. But when the Russian government recently needed its reserves to stabilize the country’s financial system, they were immobilized by Western sanctions. As a result, other nations may worry that the value of their Dollar-denominated financial assets is only as solid as their relationship with the US at the time, which may motivate sovereign investors to search for alternative assets, including a more diversified mix of foreign currency holdings. Dollar facing stiffer competition Competition for the Dollar has also gotten stiffer, especially from China, which has taken significant steps to modernize and open up its financial system, leading to a wave of fixed income portfolio inflows in recent years. Since 2016, mutual fund and ETF holdings of Chinese bonds have increased sixfold and official reserve allocations to the Yuan have increased almost fourfold. We expect both of these trends to continue over the coming years, due to likely increases in China’s weight in major benchmark indices, as well as the Yuan’s relatively high nominal and real yields, its relatively cheap valuation, and China’s increasing strategic importance. The Bank of Israel, for instance, cited related considerations when explaining the ramp-up of its Yuan-denominated reserve assets this year. And China’s efforts to develop the first major central bank digital currency (CBDC) may also help facilitate international use of the Yuan, perhaps first by Chinese tourists abroad and partner countries in the Belt and Road Initiative. Separately, recent institutional upgrades to the EU—as well as the prospect of positive cash yields—could help the Euro compete with the Dollar in international currency choice over time. While the Euro functions as an international currency today, primarily in trade with its regional neighbors, it has fallen well short of the project’s initial aspirations, and is generally thought to be “punching below its weight”, for several reasons. First, the Euro area has lower macroeconomic stability than other highly-developed economies, due in large part to an incomplete fiscal union and therefore more persistent internal imbalances. Second, the Euro area lacks a large supply of the type of high-quality government bonds sought by sovereign investors. And third, Europe lacks the geopolitical reach of the US, in part because foreign affairs and defense policy are still conducted at the member state level. While the European Union has a coordinator for regional foreign policy, and arguably some aspects of “soft power”, it lacks the type of global military arrangements that help underpin Dollar dominance. However, Europe tends to take steps forward in times of crisis, and the policy responses to recent disruptions are likely building a better foundation for the single currency for the future. While not billed as an effort to speed up Euro internationalization, the EU Recovery Fund/NGEU project— Europe’s response to the Covid pandemic—helps address the Euro’s structural weaknesses, and may therefore have positive implications for the currency’s global use over time. The program addresses macroeconomic instability through intraregional transfers—in effect, a step toward fiscal federalism— and also creates a new supply of highly-rated government bonds, which should be attractive to sovereigns and other international investors. Russia’s invasion of Ukraine presents new challenges for the EU and Euro area, and may damage economic growth over the short term, but could be positive for the Euro over the long term if it results in an increase in defense spending and more “hard power” for the region. Lastly, while cryptocurrencies are still in their infancy today, the technology could eventually be applied to certain types of international payments, possibly displacing the Dollar. The Western conflict with Russia, for example, demonstrates the key challenge that cryptocurrency networks like Bitcoin aim to solve: the need for parties who may not know or trust each other to transact value. Gold often served this role as an alternative international money medium to fiat currency in the past. Before Bitcoin, there was no digital equivalent to gold, because digital payments required a centralized intermediary. While there is no guarantee that Bitcoin will serve this purpose in the future, its foundational blockchain technology demonstrates that a scarce digital medium can be created through cryptographic algorithms and the careful use of economic incentives, and some market participants may prefer this type of digital medium to traditional fiat currencies for certain types of international payments. Declining dominance, eventually a declining Dollar In recent days and weeks, the Dollar has continued to appreciate as markets have discounted even more monetary tightening by the Fed, and, over the near term, the outlook for rate hikes in the US relative to other economies will likely remain the primary driver of Dollar exchange rates. But over a medium-term horizon, the balance of risk around the Dollar is skewed significantly to the downside, in our view, due to the currency’s high valuation (more than 10% overvalued on our standard models) and three potential structural changes in global capital flows: (i) fixed income flows back to the Euro area as the ECB exits negative rates, (ii) outflows from US equities on any sustained underperformance, and (iii) de-Dollarization efforts by official institutions designed to reduce exposure to Dollar-centric payment networks. The Dollar maintains its role as the world’s leading international currency for many reasons - with reinforcing complementarities or “network effects” a key factor - so this structure will not change overnight. But the shifting tactical and structural trends reinforce our conviction in a weaker Dollar over the medium term. Tyler Durden Tue, 05/03/2022 - 21:25.....»»

Basic Solutions To Our Economic Problems That Establishment Elites Won't Allow Authored by Brandon Smith via Alt-Market.us, I think one of the great misconceptions about economic crisis is that solutions are always dependent on centralized government action. In truth, most financial disasters are actually caused by too much government action and involvement. Central banks like the Federal Reserve are also primary culprits; as I outlined in last week’s article their machinations, which are independent of government oversight, fall into the category of deliberate sabotage. The Fed bankrolls corruption through fiat money creation while government officials and corporations utilize that money to wreak havoc on our living standards. Ending the Fed would solve the fiat money problem, but there’s still a host of agenda driven politicians and bureaucrats to deal with before our nation can right the ship. One clear way to fix our system would be to first force government to interfere less. As a point of reference, consider the common media narratives surrounding the covid pandemic. Along with the White House the media has been the premier driver of irrational fear over the spread of covid, which ended up being a minor threat compared to the hype as the average Infection Fatality Rate was no more that 0.27%. Yet, in response to a virus that was a mortal danger to less than one-thrid of 1% of the population, bureaucrats declared a national emergency requiring insane and unconstitutional lockdowns. The lockdowns damaged the economy in ways people are only now beginning to comprehend, with hundred of thousands of small businesses lost across the country. Not only that, but the establishment responded to the economic implosion they created by printing over $6 trillion in new money through the Fed in 2020 alone. This helicopter money or beta test for UBI (Universal Basic Income) has expedited a stagflationary disaster and helped to push prices on necessities to 40 year highs (the official number). The media claims it is “covid that is causing the crash,” but this is a lie. It was the RESPONSE to covid that is causing the crash. The virus was incidental to the economic sabotage initiated by governments and central banks. As we saw in conservative red states that defied the lockdowns and the vax mandates, economic activity thrived while leftists blue states suffered. And what did these blue states get in return for their economic sacrifices? Nothing. Covid infections continued to rage in blue states and deaths often outpaced red states with similar sized populations. In other words, the lockdowns, the mask mandates and the attempts force vaccinations through medical tyranny saved ZERO lives and possibly made things worse. This is the legacy of government micro-management (And yes, let’s not forget that Trump went along with these lockdowns in the beginning of the pandemic also. Biden is just the dirt-bag that continued the measures despite the massive amount of evidence that they don’t work). While the covid event illustrates my point in a big way, there are a lot of deeply rooted problems that government intervention has caused that add up to one big fiscal calamity. Many of these threats require a basic but sweeping return to fundamentals that government elites will rarely address and will try to stop at all costs. Here are just a few examples… Inflation And Stagflation? Back The Dollar With Hard Commodities The federal reserve and their minions have spent the better part of a century trying to convince the public that a gold standard for our currency is what caused the Great Depression and what could cause future depressions. They claim that limitations on money printing strangle liquidity and disrupt velocity. This is a lie. Former fed chairman Ben Bernanke openly admitted in 2002 in a speech in honor of Milton Friedman that it was the CENTRAL BANK that actually caused the deflationary collapse of the 1930s, not the existence of the gold standard. This rare moment of truth from a fed official was perhaps due to the sheer amount of evidence that Friedman often cited that contradicted the original anti-gold propaganda. Or maybe it happened because the banking elites did not see Friedman as a particular threat, and figured no one among the public would read Bernanke’s speech anyway. In fact, a commodities foundation held the American economy together for centuries until the Fed came along and the government slowly began removing gold from the picture. All subsequent economic crisis events have been exponentially worse ever since. When a commodities standard is employed, stability always follows. Just look at what has happened in Russia recently; their currency was on a downward spiral due to international sanctions, yet, when they reopened markets this past week the Ruble skyrocketed back to normal. Why? Because Putin had the currency coupled to gold. It’s really that simple. The US and parts of Europe are facing their own inflationary disasters and this is largely due to the unchecked avarice of central bank stimulus and government spending. The ONLY way to secure the dollar’s existence as a stable store of wealth would be to back it with hard commodities like precious metals (among others). This might kill the dollar’s world reserve status because fiat printing would be impossible from that point on, but I got a news flash for those that hate the idea of grounding the dollar in commodities: We’re going to lose world reserve status anyway, and it’s going to happen soon. One third of the world’s population including Russia, China and India are already breaking from the dollar in bilateral trade. The US might as well accept this is the reality and prepare to mitigate the coming currency collapse by supporting the dollar with commodities. Oil Shortages And Energy Inflation? Stop Interfering With Oil Exploration In early February of this year the Biden Administration made legal filings which halted new oil and gas leases including exploration due to conflicts over “climate costs.” This interference with America’s oil independence is only one of many instances starting with Biden’s sabotage of the Keystone Pipeline in 2021. Interestingly, with gas prices doubling ever since Biden entered office, the White House now claims that they have nothing to do with energy inflation and are not preventing drilling in the US. During the same period Russia was establishing a decades long oil and gas contract with China and laying the groundwork for a major pipeline to be finished by 2025. And yes, China DOES in fact have the capacity along with India to absorb most of the oil and gas that might be shunned by Europe should they follow through with energy sanctions. Russia was planning ahead while the US was shifting from energy independence and net exporter status to once again becoming dependent on authoritarian regimes in the Arab world. Why? Biden’s excuse is usually climate alarmism. The Earth’s temperature has only risen by ONE DEGREE CELSIUS in the past 100 years according to the NOAA, so the main argument against oil production in the US is based on the fallacy that man-made carbon has any bearing whatsoever on climate changes. But maybe the carbon fraud is just a distraction from something else? To fix any supply and demand issues in the US, we only need to start producing once again at levels which were easily obtainable in 2020. But what if the issue of supply contraction is not the main cause of oil inflation? I would note that the dollar is not only the world reserve currency but also the global petro-currency. Until recently, almost all oil was traded internationally using dollars. The decline or collapse of the dollar’s buying power due to money printing and runaway inflation is more likely the direct cause of rising oil prices, and supply issues are secondary. If the dollar was about to collapse due to inflation, oil would be one of the first early warning indicators. With the establishment blocking new oil production and hindering the most cost effective method for oil transport (pipelines), an engineered decline in supply becomes a very effective smokescreen for the death of the dollar. The crisis caused by the government and the Federal Reserve’s currency destruction could then be blamed on supply chain issues and climate “peril.” This is the reason why the establishment will not allow any future growth in US oil production. They cannot allow the public to realize the precarious position our currency is in. Supply Chain Interdependency Leading To Shortages? Bring Back Manufacturing There are a lot of reasons why manufacturing has left the US, from greedy and corrupt labor unions driving up wages to higher taxes and land costs to extremely cheap shipping from overseas exporters. There is also the theory that US factories were outsourced to places like China in order to deliberately force the public into a global interdependency scheme. In other words were are stuck with the supply chain we have, not because it’s the best system, but because the globalists want it that way. It’s unlikely that the federal government and the elitist establishment would ever allow real manufacturing to come back to the US in a way that would make us more self sufficient. As long as our country relies on outsourced goods and raw materials from other nations we remain beholden to the global chain for our survival. Being completely independent might be impossible, but we could be producing far more domestically than we are today. State governments could create incentives to manufacture within their borders by removing property taxes, reducing state taxes and protecting businesses from certain federal obstructions such as carbon restrictions. As long as those companies do not support anti-freedom initiatives with the money they make, they should be aided so that real jobs and real production make a comeback in the US. I would also note that if states want to survive the coming financial crisis that is about to strike, they are going to have to start ignoring federal restrictions on land use and the production of raw materials (like oil or coal). Some environmental rules are good, but some are pointless and are only designed to control rather than protect. States will have to stand in defiance of these rules if anything is going to change for the better. Debt And Liquidity Crisis? Let States Establish Their Own Banks And Currencies The state of North Dakota has an interesting model for economic independence, which utilizes a state sponsored bank designed specifically to help businesses in ND. I would say it’s bizarre that this idea has not become popular across the nation, but I understand that if it did the federal government and the central bankers would be very unhappy. Here’s the thing, while it is true that the constitution explicitly states that the US Treasury be the only issuer of US currency, this was done at a time when our currency was backed by gold and silver and there was no corrupt middleman in the form of a central bank. In truth, the Treasury is now second fiddle to the Federal Reserve, and the constitutional regulations on money have already been broken. It’s time for a new currency model and new banking model. An official bank in each state could decentralize power away from the Federal Reserve in terms of how debt and interest rates are handled, creating something closer to free market discovery of interest rates rather than a rate dictatorship control by the Fed. By extension, each state could also issue currency scrip legal for use only within the borders of those states. This would create a secondary safety net against inflation in the dollar. In other words, we decentralize the banking system and we offer state alternatives which function not so much as competing currencies but as parallel or complementary currencies backed by and exchangeable in certain commodities. I believe very strongly that this model (along with a couple dozen other measures I don’t have space to cover here) could save our country from decades of economic mismanagement and bring us back from the brink of inflation and debt catastrophe. States could do this without the permission of the federal government or the Federal Reserve, but I have little doubt that the elites would be in an uproar. Make no mistake, states will have to move to decouple from the national financial system and build alternatives as soon as they realize that the dollar is tanking and stagflation is here to stay. And when they do, the establishment will declare such actions on par with “insurrection.” In the meantime, there are numerous preparations each individual can make in their local communities to insulate themselves from economic dangers. There are those that will say that local measures are only a stop gap and more national action needs to be taken. They are partially correct; in the long run there needs to be wider organization towards free markets once again, along with redundancies in state economies. In the short term we must do what we can. Ultimately, the most clear solutions to our fiscal fate are not pursued because the elites do NOT WANT to save the economy, at least not in a way that ends up with them having less power. They want even more power and centralization that extends beyond national boundaries into the realm of global management. Fixing the system can’t happen because they won’t let it happen. This means that the fix that will save us in the long run will be the one that allows all others to progress; and that fix is to remove these people from positions of influence and authority. You can’t really repair the body in the wake of an illness until the offending disease is eliminated. For now, all we can do is keep the country on life support until a cure is applied. *  *  * If you would like to support the work that Alt-Market does while also receiving content on advanced tactics for defeating the globalist agenda, subscribe to our exclusive newsletter The Wild Bunch Dispatch.  Learn more about it HERE. Tyler Durden Sat, 04/16/2022 - 17:30.....»»

Whither Bitcoin? Authored by Eric Yakes via BitcoinMagazine.com, The world stands on the precipice of a monetary restructuring, with bitcoin seemingly the most likely to be adopted... albeit slowly. INTRODUCTION The world is reorganizing. People are attempting to comprehend the implications of recent events across a variety of dimensions: politically, geopolitically, economically, financially and socially. A feeling of uncertainty has eclipsed global affairs and individuals are developing an increased reliance on the thoughts of those bold enough to attempt comprehension. Experts are everywhere, but the expert is nowhere. I am not claiming to be an expert on anything, either. I read, write and do my best to piece together an understanding of vague and complex concepts. I’ve spent some time reading and thinking through various concepts and believe we are witnessing an inflection point of global trust. My goal is to explain the framework that led me to this conclusion. I’ll generally avoid discussing geopolitics and focus on the monetary and financial implications of this shift we are witnessing. The best place to start is understanding trust. THE WORLD RUNS ON TRUST We are witnessing a shift in global trust, setting the table for a new global monetary order. Consider Antal Fekete’s introduction from his seminal work Whither Gold?: “The year 1971 was a milestone in the history of money and credit. Previously, in the world's most developed countries, money (and hence credit) was tied to a positive value: the value of a well-defined quantity of a good of well-defined quality. In 1971 this tie was cut. Ever since, money has been tied not to positive but to negative values -- the value of debt instruments.” Debt instruments (credit) are built on trust — the most fundamental construct of organization. Organization allowed humanity to genetically eclipse its ancestors. Relationships, whether between individuals or groups, hinge on trust. Societies developed technologies and social structures to reduce the need for trust through reputations, security and money. Reputations reduce the need to trust because they represent an individual’s pattern of behavior: You trust some people more than others because of how they’ve acted in the past. Security reduces the need to trust that others will not hurt you in some form. You build a fence because you don’t trust your neighbors. You lock your car because you don’t trust your community. Your government has a military because it doesn’t trust other governments. Security is the price you pay to avoid the costs of vulnerability. Money reduces the need to trust that an individual will return a favor to you in the future. When you provide an individual a good or service, rather than trusting that they will return it to you in the future, they can immediately trade money to you, eliminating the need to trust. Stated differently, money reduces the need to trust that positive outcomes will happen while reputations and security reduces the need to trust that negative outcomes won’t happen. When money became entirely unanchored from gold in 1971, the value of money became a function of reputations and security, requiring trust. Before then, money was tied to the commodity gold, which maintained value through its well-defined quality and well-defined quantity and therefore didn’t require trust. Trust at a global level appears to be shifting across reputations and security, and thus credit money: Reputations — countries are trusting each other’s reputations less. The U.S. government’s reputation throughout recent history has been a global pillar of political stability and standard of financial and economic prudency. This is changing. The rise of U.S. populism has hindered its reputation as a politically stable country that allies depend on and rivals fear. Unprecedented economic and financial policy measures (e.g., bailouts, deficit spending, monetary inflation, debt issuance, etc.) are causing international powers to question the stability of the U.S. financial system. A hindrance to the reputation of the U.S. is a hindrance on the value of its money, to be discussed below. Security — countries are witnessing a contraction in global military order. The U.S. has been reducing its military presence and the world is shifting from a unipolar to a multipolar structure of order. The U.S.’ withdrawal of its military presence abroad has reduced its role as the monitor of international order and given rise to the military presence of rival nations. Reducing the assurance of its military presence internationally reduces the value of the dollar. Money — countries are losing trust in the international monetary order. Money has existed as either a commodity or credit (debt). Commodity money is not subject to trust through the reputations and security of governments while credit money is. Our modern system is entirely credit-based and the credit of the U.S. is the pillar upon which it exists. If the global reserve currency is based on credit, then the reputation and security of the U.S. is paramount to maintaining international monetary order. Trust in political and financial stability impacts the value of the dollar as does its holders’ demand for liquidity and stability. However, it’s not just U.S. credit money that is losing trust; it’s all credit money. As political and financial stability decline, we are witnessing a shift away from credit money entirely, incentivizing the adoption of commodity money. U.S. DEBT IS NOT RISK FREE Most recently, the reputation of U.S. credit has declined in an unprecedented way. Foreign governments historically trusted that the U.S. government’s debt is risk free. When financial sanctions froze Russia’s foreign exchange reserves, the U.S. undermined this risk-free reputation, as even reserves are now subject to confiscation. The ability to freeze the reserve assets of another country removed a foreign government’s right to either repay its debts or spend those assets. Now, international observers are realizing that these debts are not risk free. As the debt of the U.S. government is what backs its currency, this is a significant cause for concern. When the U.S. government issues debt, and demand from domestic and foreign buyers of it isn’t strong enough, the Federal Reserve prints money to purchase it in the open market and generate demand. Thus, the more U.S. debt countries are willing to buy, the stronger the U.S. dollar becomes — requiring less money printing by the Fed to indirectly enable government spending. Trust in the U.S. government’s credit has now been damaged, and thus so has the credit of the dollar. Further, trust in credit is declining in general, leaving commodity money as the more trustless option. First, I will examine this shift in the U.S. which applies specifically to its reputation and security, and then discuss the shifts in global credit (money). U.S. Dollar Dominance Will foreign governments attempt to de-dollarize? This question is complex as it not only requires an understanding of the global banking and payment systems but also maintains a geopolitical background. Countries around the world, both allies and rivals, have strong incentives to end global dollar hegemony. By utilizing the dollar a country is subject to the purview of the U.S. government and its financial institutions and infrastructure. To better understand this, let’s start by defining money: The above figure from my book shows the three functions of money as a store of value, medium of exchange and unit of account, as well as the supporting monetary properties of each below them. Each function plays a role in international financial markets: Store of Value — fulfilling this function drives reserve currency status. U.S. currency and debt is ~60% of global foreign reserves. A country will denominate its foreign exchange reserve assets in the most creditworthy assets — defined by their stability and liquidity. Medium of Exchange — this function is closely tied to being a unit of account. The dollar is the dominant invoicing currency in international trade and the euro is a close second, both of which fluctuate around ~40% of total. The dollar is also 64% of foreign currency debt issuance, meaning countries mostly denominate their debt in dollars. This creates demand for the dollar and is important. Since the U.S. issues more debt than domestic and foreign buyers are naturally willing to buy, they must print dollars to buy it in the market, which is inflationary (all else equal). The more foreign demand they can create for these newly printed dollars, the lower the inflationary impact from printing new dollars. This foreign demand becomes entrenched as countries denominate their contracts in the dollar, allowing the U.S. to monetize their debt. Unit of Account — Oil and other commodity contracts are often denominated in U.S. dollars (e.g., the petrodollar system). This creates artificial demand for the dollar, supporting its value while the U.S. government continually issues debt beyond amounts domestic and foreign buyers would be willing to purchase without the Fed creating demand for it. The petrodollar system was created by Nixon in response to a multi-year depreciation of the dollar after its fixed convertibility into gold was removed in 1971. In 1973, Nixon struck a deal with Saudi Arabia in which every barrel of oil purchased from the Saudis would be denominated in the U.S. dollar and in exchange, the U.S. would offer them military protection. By 1975, all OPEC nations agreed to price their own oil supplies in dollars in exchange for military protection. This system spurred artificial demand for the dollar and its value was now tied to demand for energy (oil). This effectively entrenched the U.S. dollar as a global unit of account, allowing it more leeway in its practices of money printing to generate demand for its debt. For example, you may not like that the U.S. is continually increasing its deficit spending (hindering its store of value function), but your trade contracts require you to use the dollar (supporting its medium of exchange and unit of account function), so you have to use dollars anyway. Put simply, if foreign governments won’t buy U.S. debt, then the U.S. government will print money to buy it from itself and contracts require foreign governments to use that newly printed money. In this sense, when the U.S. government’s creditworthiness (reputation) falls short, its military capabilities (security) pick up the slack. The U.S. trades military protection for increased foreign dollar demand, enabling it to continuously run a deficit. Let’s summarize. Since its establishment, the dollar has served the functions of money best at an international level because it can be easily traded in global markets (i.e., it’s liquid), and contracts are denominated in it (e.g., trade and debt contracts). As U.S. capital markets are the broadest, most liquid and maintain a track record of secure property rights (i.e., strong reputation), it makes sense that countries would utilize it because there is a relatively lower risk of significant upheaval in U.S. capital markets. Contrast this idea with the Chinese renminbi which has struggled to gain dominance as a global store of value, medium of exchange and unit of account due to the political uncertainty of its government (i.e., poor reputation) which maintains capital controls on foreign exchange markets and frequently intervenes to manipulate its price. U.S. foreign intervention is rare. Further, having a strong military presence enforces dollar demand for commodity trade per agreements with foreign countries. Countries that denominate contracts in dollars would need to be comfortable trading away military security from the U.S. to buck this trend. With belligerent Eastern leaders increasing their expanse, this security need is considerable. Let’s look at how the functions of money are enabled by a country’s reputation and security: Reputation: primarily enables the store of value function of its currency. Specifically, countries that maintain political and economic stability, and relatively free capital markets, develop a reputation for safety that backs their currency. This safety can also be thought of as creditworthiness. Security: primarily enables the medium of exchange and unit of account functions of its currency. Widespread contract denomination and deep liquidity of a currency entrench its demand in global markets. Military power is what entrenches this demand in the first place. If the reputation of the U.S. declines and its military power withdraws, demand for its currency decreases as well. With the shifts in these two variables in front of mind, let’s consider how demand for the dollar could be affected. OVERVIEW OF THE GLOBAL MONETARY SYSTEM Global liquidity and contract denomination can be measured by analyzing foreign reserves, foreign debt issuance, and foreign transactions/volume. Dollar foreign exchange reserves gradually declined from 71% to 60% since the year 2000. Three percent of the decline is accounted for in the euro, 2% from the pound, 2% from the renminbi and the remaining 4% from other currencies. More than half of the 11 percentage point decline has come from China and other economies (e.g., Australian dollars, Canadian dollars, Swiss francs, et al.). While the U.S. dollar decline in dominance is material, it obviously remains dominant. The primary takeaway is that most of the decline in dollar dominance is being captured by smaller currencies, indicating that global reserves are gradually becoming more dispersed. Note that this data should be interpreted with caution as the fall in dollar dominance since 2016 occurred when previous non-reporting countries (e.g., China) began gradually revealing their FX reserves to the IMF. Further, governments don’t have to be honest about the numbers they report — the politically sensitive nature of this information makes it ripe for manipulation. Source: IMF Foreign debt issuance in USD (other countries borrowing in contracts denominated in dollars) has also gradually declined by ~9% since 2000, while the euro has gained ~10%. Debt issuance of the remaining economies was relatively flat over this period so most of the change in dollar debt issued can be attributed to the euro. Source: Federal Reserve The currency composition of foreign transactions is interesting. Historically, globalization has increased the demand for cross-border payments primarily due to: Manufacturers expanding supply chains across borders. Cross-border asset management. International trade. International remittances (e.g., migrants sending money home). This poses a problem for smaller economies: the more intermediaries that are involved in cross-border transactions, the slower and more expensive these payments become. High-volume currencies, such as the dollar, have a shorter chain of intermediaries while lower-volume currencies (e.g., emerging markets) have a longer chain of intermediaries. This is important because it is these emerging markets that stand to lose the most from international payments and for this reason alternative systems are attractive to them. Source: Bank of England If we look at the trend in composition of foreign payments it’s evident that the dollar's share of invoicing is materially greater than its share of exports, illuminating its outsized role of invoicing in proportion to trade. The euro has been competing with the dollar in terms of invoicing share, but this is driven by its usage for export trade among EU countries. For the rest of the world, export share has been, on average, greater than 50% while invoicing share has remained less than 20% on average. Source: Journal of International Economics Lastly, let’s discuss the volume of trade. A currency with high volume of trade means that it is relatively more liquid and thus, more attractive as a trade vehicle. The chart below shows the proportions of volume traded by currency. The dollar has remained dominant and constant since 2000, expressing its desirability as a liquid global currency. What’s important is that the volume of all major global reserve currencies have declined slightly while the volume of “other” smaller world currencies has increased from 15% to 22% in proportion. Source: BIS Triennial Survey; (Note: typically these numbers are shown on a 200% scale — e.g., for 2019 USD would be 88.4% out of 200% — because there are two legs to every foreign exchange trade. I’ve condensed this to a 100% scale for ease of interpretation of the proportions). The dollar is dominant across every metric, although it has been gradually declining. Most notably, economies that are not major world reserves are: Gaining dominance as reserves and thus world FX reserves are becoming more dispersed. Utilizing the dollar for foreign transactions in significantly greater proportions than their exports and limited by a long chain of intermediaries when attempting to use their domestic currencies. Hurt the most by long chains of global intermediaries for their transactions and thus stand to gain the most from alternative systems. Increasing their share of foreign exchange volume (liquidity) while all the major reserve currencies are declining. There exists a trend whereby the smaller and less dominant currencies of the world are expanding but are still limited by dollar dominance. Pair this trend with the global political fragmentation occurring and their continued expansion becomes more plausible. As the U.S. withdraws its military power globally, which backs the dollar’s functions as a medium of exchange and unit of account, it decreases demand for its currency to serve these functions. Further, the dollar’s creditworthiness has declined since implementing the Russian sanctions. The trends of declining U.S. military presence and creditworthiness, as well as increased global fragmentation, indicate that the global monetary regime could experience drastic change in the near term. THE GLOBAL MONETARY SYSTEM IS SHIFTING Russia invaded Ukraine on Feb. 24, 2022, and the U.S. subsequently implemented a swath of economic and financial sanctions. I believe history will look back on this event as the initial catalyst of change towards a new era of global monetary order. Three global realizations subsequently occurred: Realization #1: Economic sanctions placed on Russia signaled to the world that US sovereign assets are not risk free. U.S. control over the global monetary system subjects all participating nations to the authority of the U.S. Effectively, ~$300 billion of Russia’s ~$640 billion in foreign exchange reserves were “frozen” (no longer spendable) and it was partially banned (energy still allowed) from the SWIFT international payments system. However, Russia had been de-dollarizing and building up alternative reserves as protection from sanctions throughout previous years. Now Russia is looking for alternatives, China being the obvious partner, but India, Brazil and Argentina are also discussing cooperation. Economic sanctions of this magnitude by the West are unprecedented. This has signaled to countries around the world the risk they run through dependence on the dollar. This doesn’t mean that these countries will begin cooperating as they are all subject to constraints under an international spiderweb of trade and financial relationships. For example, Marko Papic explains in “Geopolitical Alpha” how China is heavily constrained by the satisfaction of its growing middle class (the majority of its population) and fearful that they could fall into the middle-income trap (GDP per capita stalling within the $1,000-12,000 range). Their debt cycle has peaked and economically they are in a vulnerable position. Chinese leaders understand that the middle-income trap has historically brought the death of communist regimes. This is where the U.S. has leverage over China. Economic and financial sanctions targeting this demographic can prevent growth in productivity and that is what China is most afraid of. Just because China wants to partner with Russia and achieve “world domination” does not mean that they will do so since they are subject to constraints. The most important aspect of this realization is that U.S. dollar assets are not risk free: they maintain a risk of appropriation by the U.S. government. Countries with plans to act out of accordance with U.S. interests will likely start de-dollarizing before doing so. However, as much as countries would prefer to opt out of this dollar dependency, they are constrained in doing so as well. Realization #2: It’s not just the U.S. that has economic power over reserves, it’s fiat reserve nations in general. Owning fiat currencies and assets in reserves creates uncertain political risks, increasing the desirability of commodities as reserve assets. Let’s talk about commodity money vs. debt (fiat) money. In his recent paper, Zoltan Pozsar describes how the death of the dollar system has arrived. Russia is a major global commodity exporter and the sanctions have bifurcated the value of their commodities. Similar to subprime mortgages in the 2008 financial crisis, Russian commodities have become “subprime” commodities. They’ve subsequently declined materially in value as much of the world is no longer buying them. Non-Russian commodities are increasing in value as anti-Russia countries are now all purchasing them while the global supply has shrunk materially. This has created volatility in commodity markets, markets that have been (apparently) neglected by financial system risk monitors. Commodity traders often borrow money from exchanges to place their trades, with the underlying commodities as collateral. If the price of the underlying commodity moves too much in the wrong direction, the exchanges tell them that they need to pay more collateral to back their borrowed money (trader get margin-called). Now, traders take both sides in these markets (they bet the price will go up or that it will go down) and therefore, regardless of which direction the price moves, somebody is getting margin-called. This means that as price volatility is introduced to the system, traders need to pay more money to the exchange as collateral. What if the traders don’t have more money to give as collateral? Then the exchange has to cover it. What if the exchanges can’t cover it? Then we have a major credit contraction in the commodity markets on our hands as people start pulling money out of the system. This could lead to large bankruptcies within a core segment of the global financial system. In the fiat world, credit contractions are always backstopped — such as the Fed printing money to bail out the financial system in 2008. What is unique to this situation is that the “subprime” collateral of Russian commodities is what Western central banks would need to step in and buy — but they can’t because their governments are the ones who prevented buying it in the first place. So, who is going to buy it? China. China could print money and effectively bail out the Russian commodity market. If so, China would strengthen its balance sheet with commodities which would strengthen its monetary position as a store of value, all else equal. The Chinese renminbi (also called the “yuan”) would also begin spreading more widely as a global medium of exchange as countries that want to participate in this discounted commodity trade utilize the yuan in doing so. People are referring to this as the growth of the “petroyuan” or “euroyuan” (like the petrodollar and eurodollar, just the yuan). China is also in discussions with Saudi Arabia to denominate oil sales in the yuan. As China is the largest importer of Saudi oil, it makes sense that the Saudis would consider denominating trade in its currency. Further, the lack of U.S. military support for the Saudis in Yemen is all the more reason to switch to dollar alternatives. However, the more the Saudis denominate oil in contracts other than the dollar, the more they risk losing U.S. military protection and would likely become subject to the military influence of China. If the yuan spreads wide enough, it could grow as a unit of account, as trade contracts become denominated in it. This structure of incentives implies two expectations: Alternatives to the U.S. global monetary system will strengthen. Demand for commodity money will strengthen relative to debt-based fiat money. However, the renminbi is only 2.4% of global reserves and has a long way to go towards international monetary dominance. Countries are much less comfortable utilizing the yuan over the dollar for trade due to its political uncertainty risks, control over the capital account and the risk of dependence on Chinese military security. A common expectation is that either the West or the East is going to be dominant once the dust settles. What’s more likely is that the system will continue splitting and we’ll have multiple monetary systems emerge around the globe as countries attempt to de-dollarize — referred to as a multipolar system. Multipolarity will be driven by political and economic self-interest among countries and the removal of trust from the system. The point about trust is key. As countries trust fiat money less, they will choose commodity-based money that requires less trust in an institution to measure its risk. Whether or not China becomes the buyer of last resort for Russian commodities, global leaders are realizing the value of commodities as reserve assets. Commodities are real and credit is trust. Bitcoin is commodity-like money, the scarcest in the world that resides on trustless and disintermediated payment infrastructure. Prior to the invasion of Ukraine, Russia had restricted crypto assets within its economy. Since then, Russia’s position has changed drastically. In 2020, Russia gave crypto assets legal status but banned their use for payments. As recently as January 2022, Russia’s central bank proposed banning the use and mining of crypto assets, citing threats to financial stability and monetary sovereignty. This was in contrast to Russia’s ministry of finance, which had proposed regulating it rather than outright banning it. By February, Russia chose to regulate crypto assets, due to the fear that it would emerge as a black market regardless. By March, a Russian government official announced it would consider accepting bitcoin for energy exports. Russia’s change of heart can be attributed to the desire for commodity money as well as the disintermediated payment infrastructure that Bitcoin can be transferred upon — leading to the third realization. Realization #3: Crypto asset infrastructure is more efficient than traditional financial infrastructure. Because it is disintermediated, it offers a method of possession and transfer of assets that is simply not possible with intermediated traditional financial infrastructure. Donations in support of Ukraine via crypto assets (amounting to nearly $100 million as of this writing) demonstrated to the world the rapidness and efficiency of transferring value via just an internet connection, without relying on financial institutions. It further demonstrated the ability to maintain possession of assets without reliance on financial institutions. These are critical features to have as a war refugee. Emerging economies are paying attention as this is particularly valuable to them. Bitcoin has been used to donate roughly $30 million to Ukraine since the start of the war. Subsequently, a Russian official stated that it will consider accepting bitcoin, which I believe is because they are aware that bitcoin is the only digital asset that can be used in a purely trustless manner. Bitcoin’s role on both sides of the conflict demonstrated that it is apolitical while the freezing of fiat reserves demonstrated that their value is highly political. Let’s tie this all together. Right now, countries are rethinking the type of money they are using and the payment systems they are transferring it on. They will become more avoidant of fiat money (credit), as it is easily frozen, and they are realizing the disintermediated nature of digital payment infrastructure. Consider these motivations alongside the trend of an increasingly fragmented system of global currencies. We’re witnessing a shift towards commodity money among a more fragmented system of currencies moving across disintermediated payment infrastructure. Emerging economies, particularly those removed from global politics, are postured as the first movers towards this shift. While I don’t expect that the dollar will lose primacy anytime soon, its creditworthiness and military backing is being called into question. Consequently, the growth and fragmentation of non-dollar reserves and denominations opens the market of foreign exchange to consider alternatives. For their reserves, countries will trust fiat less and commodities more. There is a shift emerging towards trustless money and desire for trustless payment systems. ALTERNATIVES TO THE GLOBAL MONETARY SYSTEM We are witnessing a decline in global trust with the realization that the age of digital money is upon us. Understand that I am referring to incremental adoption of digital money and not full-scale dominance — incremental adoption will likely be the path of least resistance. I expect countries to increasingly adopt trustless commodity assets on disintermediated payment infrastructure, which is what Bitcoin provides. The primary limiting factor to this adoption of bitcoin will be its stability and liquidity. As bitcoin matures into adolescence, I expect this growth to increase rapidly. Countries that want a digital store of value will prefer bitcoin for its sound monetary properties. The countries most interested and least restrained in adopting digital assets will be among the fragmented developing world as they stand to gain the most for the least amount of political cost. While these incremental shifts will be occurring in tandem, I expect the first major shift will be towards commodity reserves. Official reserve managers prioritize safety, liquidity and yield when choosing their reserve assets. Gold is valuable in these respects and will play a dominant role. However, bitcoin’s trustless nature will not be overlooked, and countries will consider it as a reserve despite its tradeoffs with gold, to be discussed below. Let’s walk through what bitcoin adoption could look like: Source: World Gold Council; Advanced reserve economies includes the BIS, BOE, BOJ, ECB (and its national member banks), Federal Reserve, IMF and SNB. Since 2000, gold as a percentage of total reserves has been declining for advanced economies and growing for China, Russia and the other smaller economies. So, the trend towards commodity reserves is already in place. Over this same period gold reserves have fluctuated between nine and 14% of total reserves. Today, total reserves (both gold and FX reserves) amount to $16 trillion, 13% of which ($2.2 trillion) is gold reserves. We can see in the below chart that gold as a percentage of reserves has been rising since 2015, the same year the U.S. froze Iran’s reserves (this was ~$2 billion, a much smaller amount than the Russia sanctions). Source: World Gold Council. Reserves have been growing rapidly in China, Russia and smaller economies as a whole. The chart below shows that non-advanced economies have increased their total reserves by 9.4x and gold reserves by 10x, while advanced economies have increased total reserves by only 4x. China, Russia and the smaller economies command $12.5 trillion in total reserves and $700 billion of those are in gold. Source: World Gold Council. The growth and size of smaller economy reserves is important when considering bitcoin adoption among them as a reserve asset. Smaller countries will ideally want an asset that is liquid, stable, grows in value, disintermediated and trustless. The below illustrative comparison stack ranks broad reserve asset categories by these qualities on a scale of 1-5 (obviously, this is not a science but an illustrative visualization to facilitate discussion): Countries adopt different reserve assets for different reasons, which is why they diversify their holdings. This assessment focuses on the interests of emerging economies for bitcoin adoption considerations. Bitcoin is liquid, although not nearly as liquid as fiat assets and gold. Bitcoin isn’t stable. Standard reserve assets, including gold, are much more stable. Bitcoin will likely offer a much higher capital appreciation than fiat assets and gold over the long run. Bitcoin is the most disintermediated as it has a truly trustless network — this is its primary value proposition. Storing bitcoin doesn’t require trusted intermediaries and thus can be stored without the risk of appropriation — a risk for fiat assets. This point is important because gold does not maintain this quality as it is expensive to move, store and verify. Thus, bitcoin’s primary advantage over gold is its disintermediated infrastructure which allows for trustless movement and storage. With these considerations in mind, I believe the smaller emerging economies that are largely removed from political influence will spearhead the adoption of bitcoin as a reserve asset gradually. The world is growing increasingly multipolar. As the U.S. withdraws its international security and fiat continues to lose creditworthiness, emerging economies will be considering bitcoin adoption. While the reputation of the U.S. is in decline, China’s reputation is far worse. This line of reasoning will make bitcoin attractive. Its primary value-add will be its disintermediated infrastructure which enables trustless payments and storage. As bitcoin continues to mature, its attractiveness will continue to increase. If you think the sovereign fear of limiting its domestic monetary control is a strong incentive to prevent bitcoin adoption, consider what happened in Russia. If you think countries won’t adopt bitcoin for fear of losing monetary control, consider what happened in Russia. While Russia’s central bank wanted to ban bitcoin, the finance ministry opted to regulate it. After Russia was sanctioned, it has been considering accepting bitcoin for energy exports. I think Russia’s behavior shows that even totalitarian regimes will allow bitcoin adoption for the sake of international sovereignty. Countries that demand less control over their economies will be even more willing to accept this tradeoff. There are many reasons that countries would want to prevent bitcoin adoption, but on net the positive incentives of its adoption are strong enough to outweigh the negative. Let’s apply this to the shifts in global reputations and security: Reputations: political and economic stability is becoming increasingly riskier for fiat, credit-based assets. Bitcoin is a safe haven from these risks, as it is fundamentally apolitical. Bitcoin’s reputation is one of high stability, due to its immutability, which is insulated from global politics. No matter what happens, Bitcoin will keep producing blocks and its supply schedule remains the same. Bitcoin is a commodity that requires no trust in the credit of an institution. Security: because Bitcoin cannot trade military support for its usage, it will likely be hindered as a global medium of exchange for some time. Its lack of price stability further limits this form of adoption. Networks such as the Lightning Network enable transactions in fiat assets, like the dollar, over Bitcoin’s network. Although the Lightning Network is still in its infancy, I anticipate this will draw increased demand to Bitcoin as a settlement network — increasing the store of value function of its native currency. It’s important to understand that fiat assets will be used as a medium of exchange for some time due to their stability and liquidity, but the payment infrastructure of bitcoin can bridge the gap in this adoption. Hopefully, as more countries adopt the Bitcoin standard the need for military security will decline. Until then, a multipolar world of fiat assets will be utilized in exchange for military security, with a preference for disintermediated payment infrastructure. CONCLUSION Trust is diminishing among global reputations as countries implement economic and geopolitical warfare, causing a reduction in globalization and shift towards a multipolar monetary system. U.S. military withdrawal and economic sanctions have illuminated the lack of security within credit-based fiat money, which incentivizes a shift towards commodity money. Moreover, economic sanctions are forcing some countries, and signaling to others, that alternative financial infrastructure to the U.S. dollar system is necessary. These shifts in the global zeitgeist are demonstrating to the world the value of commodity money on a disintermediated settlement network. Bitcoin is postured as the primary reserve asset for adoption in this category. I expect bitcoin to benefit in a material way from this global contraction in trust. However, there are strong limitations to full-scale adoption of such a system. The dollar isn’t going away anytime soon, and significant growth and infrastructure is required for emerging economies to utilize bitcoin at scale. Adoption will be gradual, and that is a good thing. Growth in fiat assets over Bitcoin settlement infrastructure will benefit bitcoin. Enabling a permissionless money with the strongest monetary properties will spawn an era of personal freedom and wealth creation for individuals, instead of the incumbent institutions. Despite the state of the world, I’m excited for the future. Whither Bitcoin? Tyler Durden Fri, 04/15/2022 - 13:00.....»»

"Nice Narrative" But No: Why One Strategist Thinks Zoltan Pozsar's "Bretton Woods 3" Is Never Going To Happen Ever since Zoltan Pozsar started echoing Zero Hedge circa 2010, and in note after feverishly-drafted note, the former NY Fed repo guru has been writing about a coming monetary revolution in which commodity-backed currencies such as the yuan become dominant and gradually displace the world's reserve currency - the US Dollar - which slowly fades into irrelevancy in a world where commodities are the fulcrum asset and where paper wealth is increasingly meaningless, there have been three reactions: i) those who have no idea what Zoltan is writing about (that would be about 98%), ii) those who agree wholeheartedly and believe that the USD should be dethroned as a reserve currency yesterday, and iii) those who are just a little bit "displeased" with all the attention the strategist (who has correctly called every major crisis and turning point in markets in the past decade) is getting and are starting to lash out at his stream of consciousness. Rabobank's Michael Every, himself a geopolitical status quo skeptic yet clearly misaligned with Zoltan as to what happens next (and in reality a believer that the broken system we have now will be the broken system we have for a long, long time to come), is in group three, and following a handful of "subtweet" shots across the Zoltan bow (which have barely registered in the financial media, especially Bloomberg, which Every continuously mocks yet reads religiously) the Rabobank strategist has (bravely) penned the closest thing to a Pozsar rebuttal we have seen.  Is he right, or is he just unhappy with how much attention Pozsar is getting? We leave it to readers to decide, and republish his latest note, "Why "Bretton Woods 3" Won't Work" in its entirety below. Why ‘Bretton Woods 3’ Won’t Work Nice narrative: but it’s just ‘mercantilism’ Summary Sanctions on Russia are seen as accelerating a dramatic shift towards a new global commodity-focused ‘Bretton Woods 3’ architecture However, this is actually a very old economic argument: mercantilism History, logic, trade data, and economic geography all show the US can do well in that kind of realpolitik environment By contrast, the opportunity to shift global trade flows away from USD to others is limited: fundamentally, neither CNY nor commodity currencies are set up to rival USD globally The USD will therefore retain its global role despite the ‘Bretton Woods 3’ hype Many bad sequels The world is experiencing dramatic changes in its security, political, economic, and financial architecture. Indeed, alongside war in Ukraine we see headlines about ‘Cold War 2’, ‘Bretton Woods 3’, and even World War 3. We will not comment on the risks of World War 3, as flagged by Russians such as Karaganov, given it is impossible to trade for. However, China and Russia are openly trying to build a new world order, which we argued would happen back in 2017: this report focuses on the viability of a global FX architecture remake to a so-called ‘Bretton Woods 3’ (BW3). We argue that: BW3 has an appealing narrative, and we agree with a lot of its core arguments. However, it is not a new concept at all, but an old one – mercantilism. That’s an environment that still suits the US and allies. As such, we can look at history, logic, trade data, and geoeconomics to see that BW3 will not work as sold. We may see some USD trade shift to CNY via offset or barter. However, the most this would cover is just 3.3% of global trade, vs. CNY’s current 2.6% share of global FX reserves. The more likely shift is just 1% of global trade. With much of this being offset, the impact on $6.6trn daily global FX markets would be negligible. Overall, the USD will retain its global role despite the BW3 claim of a new architecture ahead. The pitch Let’s first run through the key arguments made for B3W: (i) High inflation and supply-chain logjams mean Western central banks and economies can no longer rely on quantitative easing (QE) as a policy crutch: you cannot print commodities. More QE now just means more inflation and currency debasement. (ii) States instead need control of key commodities and supply chains, including maritime logistics, with military might required to secure them. (iii) Sanctions on Russia and possible secondary sanctions on others have “weaponised” the USD, euro (EUR), and yen (JPY). Fewer countries will want to hold such reserves if they can be frozen or appropriated, as happened with Russia and Afghanistan. These trends are accelerating a global shift to alternative FX, payment systems, and trading patterns. (iv) We will see a new commodity- and supply-chain based FX architecture replace the USD-centric system: Russia just called for BRICs countries to create exactly such a new FX system. (v) Commodity currencies and China’s renminbi (CNY) are seen as major winners in this new order. A good narrative isn’t enough Markets like a good narrative. BW3 has one given: high inflation and commodity prices; central bank impotence; concerns over the imminent withdraw of US QE – and fears over what having to restart it would imply; and talk of geopolitical and geoeconomic realignments and fracturing. Moreover, BW3 does not require the audience to suspend much disbelief. Relative US political, economic, financial, and military muscle has declined in recent decades. Even US soft power is fading: and China’s movie box-office has been larger than the US since 2018, dominated by local films. The famous ‘Sunset Boulevard’ line from a fading movie star is, “I Am Big. It's the Pictures That Got Small.” The US is still big, but others are no longer as relatively small as they were. However, BW3 is not new. Indeed, it takes us almost full circle in time and FX structure (Figure1). In short: The post-WW2 original Bretton Woods system had USD tied to gold in a divided Cold War world economy with stringent capital controls. That lasted 26 years before collapsing due to the Triffin Paradox (which we shall return to later) and the shift to fiat USD in the 1970s. Then we saw evolution to the recycling of so-called ‘petrodollars’ as oil prices surged following the 1973 Yom Kippur War. The end of the Cold War saw globalisation and higher USD capital flows into emerging markets... and the resulting Mexican (1995) and then Asian Crisis (1997-98) That led to the de facto BW2 of USD FX reserve hoarding and recycling, as emerging markets opted to run large current account surpluses rather than deficits. The 2000’s US-steered hyper-globalisation saw a boom in funding in the five-decade old Eurodollar, via both bank and shadow-bank channels. The Global Financial Crisis (GFC) and subsequent slump in Western growth saw a long-run shift to a reliance on central bank QE to try to stabilise markets and economies. That ‘new normal’ approach was brought to an end by populist discontent with the inequality it drives, and the fiscal response to Covid: yet Covid also showed reflationary fiscal policies are not possible without national control of commodities and supply chains. War in Ukraine is pushing us into Cold War 2 - and non-USD ‘reserve currencies’ backed by commodities. In short, BW3 is not forward, but backwards looking. We have seen many elements of it before. Yet past attempts at building BW3 frameworks created enormous problems! The post-war Bretton Woods timeframe left excludes it, but one could look to the fragmentation of the global monetary order and trading system in the 1930s, for one key --and worrying— parallel: however, that saw the end of the gold standard, not a move towards one. Indeed, we have long taken a historical and structural view of markets that leads us to agree on the BW3 view of the ineffectiveness of QE; the geopolitical importance of logistics; the necessity to control supply chains and trade to maintain currency power; and of the ongoing fragmentation of the global economy. We even linked this all to FX structures back in 2015. Furthermore, we agree we are heading not just to Cold War but to global Great Power struggles in which trade and currency will play key roles. Yet taking this kind of view, it becomes clear that BW3 will still work more in the USD’s favor than for any rival currency being touted. We will now look at the historical, logical, structural, trade- data, and geoeconomic reasons to briefly summarise Why B3W Won’t Work (WBW3WW). WBW3WW 1: history The global economy has seen commodity currency foundations in the past. The most obvious was the gold standard on and off 1815-1971, and in its purest form from 1815-1913. There are many key lessons we can draw from this period for BW3 proponents. The likes of Argentina saw more FX stability under it that is has since (Figure 2): and Argentina is still a commodity producer today that might be looking at BW3. However, inflation was only well contained on average by regular deflation (Figure 3). It is unclear that a modern economy would want to see such start-stop price swings. Moreover, a commodity standard restricts excessive growth of credit by either the government or the banking sector. While a positive case for both can be made, would any economy want to embrace that hairshirt approach? On the government side, the current vogue is for more, not less state spending in the name of national security: and for more, not less social welfare to narrow income gaps. Without the latter, the gold standard did not stop the many attempted revolutions of 1848 or 1870 in Europe: rather it encouraged them. One could expect the same under BW3. Russia, which runs a conservative fiscal policy, might be prepared to embrace that approach. However, China cannot. On the private side, China has seen an explosion of debt since 2008: tying itself to an FX commodity standard would mean implosive deflation in Chinese asset prices if new lending was capped. Moreover, China’s total public sector debt, including local governments, is already that of a European state, and the IMF says its augmented fiscal deficit was a staggering -16.5% of GDP in 2021. Geopolitically, the gold standard was zero-sum. With a (mostly) fixed stock of gold, states either gained the metal through trade, which was also zero-sum, or war. Free trade was tried at British behest, but Europe quickly learned the secret of British success was actually mercantilism and imperialism. It followed suite, with a lag – and so did WW1 (Figure 5). Indeed, ‘Debt: The First 5,000 Years’ (Graeber, 2011) echoes Polanyi (1944) in arguing past historical periods of exogenous money, such as gold, saw more war compared to endogenous, fiat/debt-based periods of expansion. Of course, when debt-based expansions end similar problems can arise, as we see today: yet embracing a global commodity currency standard would guarantee that outcome from the outset. WBW3WW 2: logic The four logical functions a global FX reserve currency must meet are: (i) store of value; (ii) method of accounting; (iii) means of exchange; and (iv) overcoming the Triffin Paradox. All of these still favor USD over any rivals. Store of value Commodity currencies are either pegged to the USD, in which commodities are priced, or are highly volatile (Figure 6). Unless global commodities are now going to permanently lose that volatility, and volatility is actually increasing in many of them, then commodity currencies will not lose theirs either. No rival global currencies offer the trust of US markets. Yes, USD (EUR, JPY, etc.) are now “weaponised” for Afghanistan, Russia, Belarus, and anyone who supports the invasion of Ukraine. However, CNY is highly politicized, as is RUB, and Chinese markets have seen net capital outflows since the start of the Ukraine War. Do any potential BW3 currencies inspire broad global trust, or just in pockets? High US inflation hardly backs the USD. However, the Fed is flagging rate hikes of as much as 325bp this year and quantitative tightening (QT). That backdrop will support USD: and that is true if that level of rates can be sustained, or if it can’t, and the US (and world) economy falls into recession – taking commodity prices with it. Only if the US re-embraces QE despite high inflation would the USD’s store of value be undermined. We agree that military power ultimately underpins global reserve currencies. On that front, while overstretched, the US still holds primacy, and its allies in Europe, Australia, and Japan are rearming rapidly. By contrast, Russia’s martial prowess has been called into question in Ukraine, and China’s remains entirely untested, despite the incredible growth rate of its armed forces. Method of accounting No other global currencies offer the scale of US markets or its ‘network effect’. Try to talk about trends in global GDP without using USD as the common denominator. In a reflexive logic, the more people who use a currency, the more the currency is used. This is particularly the case in terms of Eurodollars (offshore USD borrowing). The sheer scale --hence power-- of Eurodollar debt means setting up an alternative is a daunting task: even China had $2.7trn of FX debt as of the end of Q4 2021. Indeed, if one presumes USD will be pushed aside, one is logically arguing a lot of Eurodollar debt will default, as few will be able to earn enough USD to repay it. That would mean global market chaos. Means of exchange The USD is welcomed globally, and its high liquidity means low transaction costs. The same is not true for any other potential alternative currencies. Indeed, China lacks an open capital account, which means CNY is not free-moving or freely traded. This is an economic policy choice on China’s part which hugely limits CNY’s global attractiveness. Triffin Paradox The Triffin Paradox is that global demand for a reserve currency forces the country that owns it to run trade deficits. For fiat USD that also means offshoring industry (i.e., via foreign net exports to the US) and, as we now see, rising domestic inequality. There is growing pushback against this within the US, but no idea of how to maintain USD’s reserve status while doing so. Any BW3 currency trying to push USD aside would have to be willing to run large trade deficits too. However, if commodity prices are high, major commodity producers run trade surpluses, stopping the spread of their currency; and if commodity prices collapse, their currency does too, again limiting its global attractiveness. China also runs a large merchandise trade surplus (even if it also runs a huge commodities deficit) in order to support industrial employment, as well as to ensure the stability of CNY via the balance of payments. Combined with capital controls, this further limits any global reserve role that the currency could ever hope to play. How does one earn CNY? How do CNY get into the global system within BW3? WBW3WW 3: structure Fundamentally, BW3 does not work because of the structure of the global economy. The essential nature of commodities has been laid bare by the Ukraine War, but total global trade in them is still far smaller than other goods combined (Figure 7). That is a very low ceiling, or narrow base, to build a new world order on. Perhaps if all commodity exporters were united it might be possible – but they aren’t. Indeed, only a few major food exporters are pro-BW3 (Table 1). One can take out the Western producers: Australia, Canada, the EU, New Zealand, and the US. In terms of energy, there are again major Western producers --Australia, Canada, and the US-- but the majority are located in the Middle East. The US is the traditional hegemon there too. True, this situation may be changing as the US tries to pivot to Asia and is dragged back to Europe by Russia – but it is a huge geopolitical gap for China to fill, even presuming the US doesn’t pivot back. Moreover, global oil markets need a base currency that is: liquid, which CNY is not; freely tradable, which CNY is not; and stable, which CNY only is because it does not meet the other two criteria, and because it is soft pegged to the USD! Even a move to oil priced in a basket of currencies is hugely complex to maintain across all OPEC partners, which is why it has not happened yet. Hence energy producers are seen as ‘floating’ at best but are hardly set to rush to switch the USD for CNY (Table 2). In terms of mineral exporters, there are a large number of floating countries, and the same general cluster in the pro-West and pro-BW3 camps. The simple message is that BW3 has a significant tranche of global commodities behind it, but mainly because of Russia; the West has the same, but because of a broader range of resource-rich economies; and most of the world’s producers are looking on at the prospect of a global bifurcation with extreme discomfort. In short, BW3 does not yet have buy-in even from the majority of economies that are supposedly the primary beneficiaries of it. WBW3WW 4: more structure As just alluded to on oil, we have another issue: which currency will dominate BW3 trading? It’s one thing to say, “commodity currencies.” It’s another to explain how the BW3 would function if BRL, ARS, AUD, RUB, IRR, etc., were all commodity pricing currencies simultaneously. Who would clear this? At what exchange rate? In what system? Until that is resolved, the USD needs to remain the currency commodities are priced in, even if we see some offsetting BW3 transactions in local FX. Indeed, the proto-BW3 is attempting to keep the current global architecture while trying to cut some USD out of some trades, or to insert another currency where they were previously absent. To give three key examples: Saudi-China CNY oil sales: Saudi Arabia may export some oil to China and be paid in CNY for the first time. It exported $56bn of energy to it in 2019 – but that is a fraction of the $2.6 trillion traded global oil market. Because the Saudis’ own currency is pegged to USD, it would open itself up to FX volatility using CNY. As such, Saudi would price oil in USD and allow (some) payment in CNY; then the Saudis would sell the CNY back for USD. There are limits to what Saudi Arabia would sell in CNY, however, to avoid accumulating CNY of no use to them unless everyone else makes the same shift. Russia-India INR trade: Floated trade between Russia and India to avoid USD will also be priced in USD and transacted in INR. A bank account will be opened in India for Russia, and as Russian commodities (and weapons) arrive in India, INR will be credited to it: as Russia buys goods from India, the account will be debited. This is de facto bilateral barter, technically in INR, and leaves Russia with either the need to buy more than it needs from India, or to accumulate INR claims it cannot usefully transfer elsewhere. Europe-Russia RUB trade: Russia demanded to be paid in RUB for its gas, and perhaps all commodities, and Europe refused to do so. Yet a face-saving solution was found. Europe still pays for Russian gas in EUR or USD, but Russia insists on Gazprombank selling them for RUB to a Russian entity before both are then remitted back to Russia. Meanwhile, Europe appears intent on - slowly - decoupling from Russian energy completely. It should be clear that a BW3 anchor FX/clearing currency would have to be found. Even though China is huge commodity importer, not exporter, which runs counter to the whole BW3 concept, CNY is the obvious candidate as a BW3 anchor: only China has the economic scale. As already shown, CNY does not meet the criteria to be a global reserve currency because of its closed capital account and trade surpluses. However, for the BW3 commodity producers that China runs a deficit with, CNY may be able to play a larger role. (Figure 8.) Yet because CNY is still not going to be a true global alternative to USD for structural reasons, there are still rigid limits on how much bilateral China-BW3 trade we might actually see shift, as we shall now show. WBW3WW 5: trade data The numbers don’t add up for BW3 and CNY – at least not as a global game-changer. Total global exports and imports were $38trn in 2019 (Figure 10) to remove Covid/post-Covid distortions. The US accounted for $4.2trn; Canada, the UK, Australia, and Japan --all 5-Eyes geopolitical allies, or under the US defence umbrella-- $4.0trn; the Eurozone $5.2trn internally and another $4.0trn externally; China $4.6trn; and the rest of the world $16.2trn, most of it in USD. (NB the data are only available in USD!) In summary, China accounted for 12% of global trade vs. just 2.6% of central bank reserves at end of 2021 (Figure 11). On the surface, that appears a very bullish argument for the currency, BW3 or not – and BW3 argues it will rise. However, we need to dive into that $4.6trn/12% data to show why CNY is not doing better, and likely won’t do much better even under a proposed BW3. (Figure 12 shows China’s trade breakdown by region and separates Russia from the continent of Europe for obvious reasons.) First, China’s trade with Hong Kong ($561bn) is counted as external. We colour it red to show it is part of the national economy.  China could switch that to CNY but would undermine the role of Hong Kong and the HKD’s USD peg. Then we have Russia ($111bn); the Middle East ($263bn); Africa ($208bn); Asia excluding Japan, India, and South Korea ($728bn); and Latin America ($315bn) adding a further total of $1.6trn. All are shown in shades of orange to indicate they are open to doing trade in CNY. However, more than half of total trade ex. Hong Kong is with North America, Europe, Oceania, or parts of Asia that for geopolitical reasons will not trade in CNY. Moreover, China’s trade patterns (Figure 13) show how much it relies on surpluses with North America and Europe: the risk is that the more China backs BW3, the less the West trades with it, undermining its total trade surplus. In short, China’s maximum CNY global trade share is 4.3% vs. its current 2.6% share of CNY reserves globally. The primary targets for a major USD > CNY switch are in Asia ex. Japan , India, and South Korea (Figure 13). However, ‘orange’ countries might only shift some trade to CNY, not all of it: the trade logic says that will be the case. China imported $211bn of goods from Asia* in 2019, half primary goods/resources, where we presume it could be the BW3 anchor, half manufactures (Figure 14). It exported $517bn of low, medium, and high-tech items as part of electronics supply chains. This left a large trade surplus for China. If bilateral trade was all in CNY, Asia* would need Chinese FDI or loans to cover its trade deficit, with no means of net earning CNY. Moreover, many of the electronics goods it imported from China are re-exported to Western markets, earning USD. As such, the maximum Asian* countries would want to shift to CNY would equal their China exports, as an offset to their imports from China (the red area in Figure 14). So, the total shift in trade is not imports and exports ($728bn), but Asia’s* exports to China ($211bn) doubled, which is $422bn. Yet the number is likely even lower given the complexity of managing balanced CNY trade in so many categories of products. We could perhaps see the total of Asia’s commodity exports to China shift to CNY, so only $120bn. As such, total CNY trade might only be $240bn from a total of $728bn. And presumably those commodities would still be priced in USD – at least until the Middle East, from which Asia* buys energy, changes its currency peg. Similarly, China’s trade with the Middle East saw it import $146bn of mainly primary goods/resources, while exporting $116bn of a broad range of goods (Figure 16). China obviously wants to buy all its commodities in CNY. However, as already noted, the Middle East, with currencies mainly pegged to USD, would only consider switching trade to CNY to the total of their import bill from China, which is less than that total. In short, $116bn of Middle East commodity sales could shift to CNY and be doubled with $116bn of CNY flowing back in the other direction for consumer goods. That is the maximum CNY shift unless China sells a lot more to the region, which would arguably need to be military equipment. The geopolitical risks there should be clear! If oil and gas are still priced in USD, this would be de facto barter or countertrade avoiding USD more than real trade in CNY. Looking at Latin America (Figure 17), the region exported $149bn of commodities to China, and China sold it $151bn of goods of all kinds. Here we see a genuine argument for more CNY trade compared to the total bilateral trade being done. The picture is similar for Africa (Figure 18), where total exports to China were $95bn, of which $85bn were commodities, while China sold $113bn of goods to it. We should also add Russia (Figure 19), where Chinese exported $53bn and imported $57bn, with Russia running a slight trade surplus. For obvious geopolitical reasons, Russia is rapidly embracing CNY – but major Chinese firms from SOEs to Huawei are still wary of US and EU sanctions so far. Using this methodological approach for each region/economy China trades with, we can summarise the total global CNY shift we expect to see (Figure 20). The total theoretical CNY shift is if all trade moves to it under BW3. However, only some countries would and not all countries will do all trade in it: grey areas indicate where they will not. The major CNY shift (in light orange) is if all potential pro-BW3 countries maximize their CNY trade at the level of their total imports or exports, whichever is lower. The likely CNY shift assumes a lower move to CNY with an assumed coefficient driven by geopolitics. In Russia’s case we assume it is 0.8 (i.e., 80% of maximum shifts to CNY). For the Middle East, we assume 0.25 because of USD pegs; for Africa, 0.30 given geopolitical competition for its commodity exports from Europe, Japan, the US, and India; and for Asia* and Latin America 0.25 because of economic competition and/or ties to Japan or the US. The results are hardly a paradigmatic shift away from USD: The major CNY trade shift is worth $1,254bn, equal to 3.3% of global trade vs. a current CNY global reserve equal to 2.6% of the global total. As such, CNY holdings would rise by around a third in Africa, Latin America, the Middle East, and Russia – but nowhere else. (Figure 21.) The likely CNY trade shift is worth $381bn, equal to 1% of global trade. That is lower than the current holdings of CNY reserves: while some economies would add more, Western economies may hold less. (Figure 21.) In terms of FX trading, the major shift is only worth $4.8bn per working day, a drop in the ocean for the $6.6trn global FX markets, and much of that would be offset trading, not selling USD for CNY. In the more likely case, it is only $1.5bn a day, which would hardly be noticed. In short, BW3 is not looking like a global alternative to USD – just a cluster of Chinese hub-and-spokes offset/barter trades trying to avoid USD as middleman. WBW3WW 6: geoeconomics BW3’s prospects would be boosted if CNY was adopted by third parties globally: yet we have already explained why this is structurally very hard to achieve. Two countries that both run trade surpluses with China, e.g., Brazil and Russia, could decide to use CNY to settle some bilateral trade. However, given CNY would remain structurally locked out of the USD’s broader global role, this could arguably best occur within the specific industries that earn CNY: how much intra-commodity industry Brazil–Russia trade do we see? Not much at all. This is economic geography at work – and against BW3. Global trade-flows mean even if more commodity producers were on board with BW3 it would count for little because BW3 does not replicate the structure of commodity producers, goods manufacturers, and final consumer markets - which are mainly in the West. Commodity producers can try to force the West to take their currency, like Russia, via economic coercion. Yet countries running large trade surpluses don’t allow others to earn that currency to pay in it! Moreover, the West can walk away – as it is pledging to do from Russian energy. Unless every commodity producer backs BW3, there are alternatives - and/or technological innovation to reduce commodity intensity. And, to reiterate, if all key commodity producers walked away from the West, they would lose those markets for their commodities. The only way BW3 could avoid this problem would be if the global economy fragments into multiple value chains. The West still has key resources, technology, allies, a strong military, and could even onshore production if needed: could BW3 commodity producers (and China as importer) replicate or sustain value chains without Western technology and Western end consumers? Looking back, some BW3 countries tried that during the last Cold War – and import substitution did not work well for them (Figure 22). Moreover, look at the terrible demography in Russia and China, and their structural economic problems. Could either afford to walk away into a more isolated, combative realpolitik BW3? It seems highly unlikely Russian autarchy work this time given repeated failures over the course of history. How long until it can replace its foreign-built capital stock, foreign-designed cars, trucks, and planes, or high-tech goods? China could fill that BW3 technology gap: yet if so, it would lose Western markets. We would see geopolitical fragmentation – not horizontally, as BW3 commodity producers replace the West, but with parallel value chains from commodity producers to China and the West. Yet look back at Figure 13 and imagine what the loss of a net $430bn in EUR and USD net trade inflows would do for China’s economic and FX stability. That is more than China can hope to offset with lower use of USD under BW3. And what would decoupling mean for its commodity demand, which is where it is supposed to be the BW3 anchor? And let’s not forget China already has economic problems that call into question how long it will remain a giant commodity consumer (i.e., iron ore). Mapping out the problem To make these economic-geography points in another way, we created 3-D BW3 trade maps (Figures 23, 24) that show intra-BW3 trade by region, excluding India, Japan, and South Korea and China; and with China and the US. The conclusion should be immediately obvious: intra-BW3 trade excluding China is only a fraction of that between each of those regions and China,... or with North America – which can be seen is still a hugely important trade partner for most of them. In short, CNY will not be adopted by third parties either within BW3 or outside it. WBW3WW: conclusion Alongside dramatic world events ‘Bretton Woods 3’ has an appealing market narrative. Indeed, we agree with a lot of its core arguments, depressing as they are. However, it is not new. It is old. And in not looking back enough, it fails to look forward sufficiently. To argue that we are going to see shifts to Cold War and global Great Power struggles, and a world in which commodities, logistics, and the military all play key roles alongside finance and currency, and with a geopolitical need to run large trade surpluses, is to argue for an ancient economic philosophy: mercantilism. Modern economists may have forgotten the true meaning of that term, but it reigned as long as commodity currencies did – and it implies a highly realpolitik global environment. To be fair, BW3 implies the same without naming it directly. Yet is that backdrop negative for USD and positive for BW3? No. A mercantilist realpolitik environment is one in which the requisite set of resources and diverse sources of power, after some policy shifts(!), still rest more with the US and its allies and their military, soft power, and financial power, than with a cluster of commodity-producing states (and one commodity importer). That is especially true if that cluster want to create a parallel economic and financial structure from disparate net exporter polities, who do not trade horizontally together to any great degree, and while also still exporting to the rival West! As such, BW3 will not work, and USD will retain its leading global role – albeit perhaps with more sticks and fewer carrots. If we were to see fewer USD circulating internationally via trade, servicing Eurodollar debt will just get harder – and that will keep a structural bid behind USD. By contrast, borrowing in CNY will still be unattractive for almost every economy given China’s persistent trade surpluses and capital controls. As such, on BW3 all we will see at best, is a marginal increase in the ‘offsetting’ use of CNY ahead – and more rapid global decoupling, likely to its ultimate detriment. Tyler Durden Wed, 04/13/2022 - 19:00.....»»

Playing Pipeline Politics Authored by Pieter Cleppe via The Critic.co.uk, The Gulf countries may not be reliable partners against Russia... Earlier this month, Syrian president Bashar al-Assad was welcomed in Dubai, in the United Arab Emirates. To the dismay of the United States, the red carpet was rolled out for him, on the anniversary of the uprising against Assad, amid war mongering by his Russian ally in Ukraine. Just before, British PM Boris Johnson has been on a visit himself to both the United Arab Emirates and Saudi Arabia, not only to promote Global Britain, but also in a bid to convince both Gulf states to increase oil production. Johnson was acting as an emissary from the West, after the Gulf countries’ leaders declined to take a call from U.S. President Joe Biden to build international support for Ukraine and contain a surge in oil prices, signalling their unhappiness with the perceived Western lack of support for their security.   These grievances include concerns about Biden’s move to take Yemenite Houthi rebels off of America’s official list of global terrorist groups. Drone and missile attacks on U.A.E. capital Abu Dhabi, launched earlier this year by the Iran-backed rebel group, and the prospect of a restoration of the Iran nuclear deal have added to the U.A.E. and Saudi Arabia’s complaints.   It’s not just refusing to take Joe Biden’s calls, however. More broadly, the Gulf states are hedging their bets on the Ukraine issue. The Emirates abstained during a United Nations vote condemning Russia’s invasion, and the Emirati leader, popularly known as “MBZ”, referred to “Russia’s right to ensure its national security” in a call with Russian President Putin. There has even been speculation that the U.A.E. could help Russia avoid Western sanctions, with Emirati officials reportedly assuring Russians that they will not enforce sanctions unless mandated by the UN — something which Moscow would certainly veto.  On top of that, there is a deal between Russia and the Saudi-led oil cartel, OPEC, which the Saudis and Emiratis are reluctant to abandon, as it was hard-fought in 2020 and involved great concessions from Russia.  The OPEC question will become increasingly important, because the situation on the energy front is dire. The International Energy Agency has warned a global oil supply shock may be coming due to large-scale disruptions to Russian oil supplies, which would drive oil prices to even higher levels than today. While Saudi Arabia isn’t pumping oil at full capacity and has not yet pledged to do so, the U.A.E have promised to push OPEC to pump more oil, but this development has yet to materialize and wasn’t agreed upon with other OPEC members in advance. Despite the talk, actions on the ground further indicate the Emirates are moving away from the West, a shift which is in line with broader trends in the Gulf region.  King dollar no more?  Indeed, the sanctions which have cut off several Russian banks from the SWIFT international payments system and frozen reserves accumulated by the Russian central bank, have renewed debate on the role of the U.S. Dollar as global reserve currency, particularly in the Gulf.   Some have argued that “we are witnessing the birth of Bretton Woods III — a new world (monetary) order centred around commodity-based currencies in the East that will likely weaken the Eurodollar system.” For the moment, however, this remains a minority view, while the general consensus is that there is little alternative to the U.S. dollar in the short- to medium-term.  The lack of trust in China’s currency should stymy Beijing’s hopes of turning the yuan into a global reserve currency. Gold has proven to be a safe store of value, but despite the fiat money of governments being eroded to finance state spending, gold is not used as a regular payment method. The euro is still plagued by its shaky political underpinnings, while it is still an open question whether bitcoin will be able to resist state action banning it, if it will ever be widely adopted in the first place.   King dollar also retains its primacy due to the fact that oil sales are conducted in USD — at least for now. This week, it emerged that Saudi Arabia is considering accepting yuan instead of dollars for Chinese oil sales.   This is likely to be a bluff, or rather a Saudi cry for attention from Washington decision makers. Switching millions of barrels of oil trades from dollars to yuan every day could unsettle Saudi Arabia’s economy given that the Saudi currency is pegged to the dollar. Aides to the Saudi crown prince have apparently warned him of unpredictable economic damage which could result from moving ahead with the plan. It’s not hard to see how trading oil in a currency plagued by rampant capital controls could easily backfire — meaning that Gulf countries abandoning the imperfect dollar umbrella may soon find themselves in stormy weather.  UK faces “tough” talks with Gulf countries   The continued primacy of the U.S. dollar also makes the argument less convincing that Western sanctions against Russia will push into to a separate trading bloc led by China, creating a kind of dichotomy within the global economy. That is unlikely to happen fast. Not only is China far from enjoying the degree of trust required to offer the world’s reserve currency, it’s impossible for Russia to simply replace its trade with the West with Chinese trade, as the volume of Russia’s current trade with the West is simply too high.   The West, however, is determined to reduce that trade. Ahead of his trip to the Gulf, Boris Johnson vowed the world must “starve Putin’s addiction to oil and gas”, adding that “Saudi Arabia and the United Arab Emirates are key international partners in that effort.” Then, only one day after Johnson’s visit, UAE Foreign Minister Sheikh Abdullah bin Zayed pledged, during a visit to Moscow, to cooperate with Russia on bolstering global energy security.  Johnson’s government seems to be wary to embrace fracking, which before Putin’s war helped the United States enjoy gas prices that are only one sixth of the level in Europe. Unless Johnson revisits that stance, the UK has no choice but to become more energy dependent on the rest of the world, particularly petrol-rich states like the Gulf countries. So far, however, it’s unclear whether they’re ready to play ball. With UK talks with Gulf countries over increased oil production labelled “tough” and the Emirates gearing up to water down the effect of Western sanctions on Russia, something’s got to give.  Tyler Durden Fri, 04/08/2022 - 02:00.....»»

Edging Towards A Gold Standard Authored by Alasdair Macleod via GoldMoney.com, Commentators are trying to make sense of Russian moves... However, there is a back story which differs from much of the speculation, which this article addresses. The Russians have not put the rouble on some sort of gold standard. Instead, they have repeated the Nixon/Kissinger strategy which created the petrodollar in 1973 by getting the Saudis to agree to accept only dollars for oil. This time, nations deemed by Russia to be unfriendly will be forced to buy roubles – roughly 2 trillion by the EU alone based on last year’s natural gas and oil imports from Russia — driving up the exchange rate. The rouble has now doubled against the dollar from its low point of RUB 150 to RUB 75 yesterday in just over three weeks. The Russian Central Bank will soon be able to normalise the domestic economy by reducing interest rates and removing exchange controls. The Russians and Chinese will be acutely aware that Western currencies, particularly the yen and euro, are likely to be undermined by recent developments. The financial war, which has always been in the background, is emerging into plain sight and becoming a battlefield between fiat currencies, and it is full on. The winner by default is almost certainly gold, now the only reliable reserve asset for those not aligned with Russia’s “unfriendlies”. But it is still a long way from backing any currency. Putin is losing the battle for Ukraine President Putin is embattled. His army as let him down — it turns out that his generals lack the necessary leadership qualities, the squaddies are suffering from lack of food, fuel, and are suffering from frostbite. It is reported that one brigade commander, Colonel Yuri Medvedev, was deliberately run down by one of his own men in a tank, a measure of the chaos at the front line. And Putin is not the first national leader to have misplaced his confidence in military forces. Conventional wisdom (from Carl von Clausewitz, no less) suggested Putin might win the battle for Ukraine but would be unable to hold the territory. That requires the willingness of the population to accept defeat, and a lesson the Soviets had learned in Afghanistan, with the same experience repeated by America and the UK. But Putin has not even won the battle and word from the Kremlin is of accepting a face-saving fall-back position, perhaps taking Donetsk and the coast of the Sea of Azov to join it up with Crimea. There was little doubt that if Putin came under pressure militarily, he would probably step up the commodity and financial war. This he has now done by insisting on payments in roubles. The mistake made in the West was to believe that Russia must sell commodities, and even though sanctions harm the West greatly, the strategy is to put maximum pressure on the Russian economy for a quick resolution. It is obviously flawed because Russia can still trade with China, India, and other significant economies. And thanks to rising commodity prices the Russian economy is not in the bad place the West believed either. Besides nations representing 84% of the world’s population standing aside from the Western alliance’s sanctions and with some like India sorely tempted to buy discounted Russian oil, we would profit from paying attention to some very basic factors. Russia can certainly afford to sell oil at significant discounts to market prices, and there are buyers willing to break the American-led embargoes. The non-Western world is no longer automatically on-side with American hegemony; that is a rotting hulk which the Americans are desperately trying to keep afloat. Observing this, the Kremlin seems relaxed and has said that it is willing to accept currencies from its friends, but Western enemies (the “unfriendlies”) would have to pay for oil in roubles or, it has also been suggested, in gold. On 23 March the Kremlin drew up a list of these unfriendly countries, which includes the 27 EU members, Switzerland, Norway, the United States, the United Kingdom, Canada, Australia, New Zealand, Japan, and South Korea. Payment in roubles is easy to understand. We can assume that all oil and natural gas long-term supply contracts with the unfriendlies have force majeure clauses, because that is normal practice. In the light of sanctions, the Russians are entitled to claim different payment terms. And it is this that the Russians are relying upon for insisting on payment in roubles. Germany, for example, would have to buy roubles on the foreign exchanges to pay for her gas. Buying roubles supports the currency, and this was the tactic that created the petrodollar in 1973 when Nixon and Kissinger persuaded the Saudis to take nothing else but dollars for oil. It was that single move which more than anything confirmed the dollar as the world’s international and reserve currency in the aftermath of the temporary suspension of the Bretton Woods Agreement. That’s not quite the objective here; it is to not only underwrite the rouble, but to drive it higher relative to other currencies. The immediate effect has been clear, as the chart from Bloomberg below shows. Having halved in value against the dollar on 7 March, all the rouble’s fall has been recovered. And that’s even before Germany et al buy roubles on the foreign exchanges to pay for Russian energy. The gold issue is more complex. The West has banned not only Russian transactions settling in their currencies but also from settling in gold. The assumption is that gold is the only liquid asset Russia has left to trade with. But just as ahead of the end of the cold war Western intelligence completely misread the Soviet economy, it could be making a mistake again. This time, intel seems to be misled by full-on Keynesian macro analysis, suggesting the Russian economy is vulnerable when it is inherently stronger in a currency shoot-out than even the dollar. There is no need for Russia to sell any gold at all. The Russian economy has a broadly non-interventionist government, a flat rate of income tax of 13%, and a government debt of 20% of GDP. There are flaws in the Russian economy, particularly in the lack of respect for property rights and the pervasive problem of the Russian Mafia. But in many respects, Russia’s economy is like that of the US before 1916, when the highest income tax rate was 15%. An important difference is that the Russian government gets substantial revenues from energy and commodity exports, taking its income up to over 40% of GDP. While export volumes of energy and other commodities are being hit by sanctions, their prices have risen substantially. But it remains to be seen what form of money or currency for future payments will be used for over $550bn equivalent of exports, while $297bn of imports will be substantially reduced by sanctions, widening Russia’s trade surplus considerably. Euros, yen, dollars, and sterling are ruled out, worthless in the hands of the Central Bank. That leaves Chinese renminbi, Indian rupees, weakening Turkish lira and that’s about it. It’s hardly surprising that Russia is prepared to accept gold. Putin’s view on the subject is shown in Figure 1 of stills taken from a Tik Tok video released last weekend. Furthermore, Russia’s official reserves are only a small part of the story. Simon Hunt of Simon Hunt Strategic Services, who I have found to be consistently well informed in these matters, is convinced based on his information that Russia’s gold reserves are significantly higher than reported — he thinks 12,000 tonnes is closer to the mark. The payment choice for those on Russia’s unfriendly list, if we rule out gold, is effectively of only one — buy roubles to pay for Russian energy. By sanctioning the world’s largest energy exporter, the effect on energy prices in dollars is likely to drive them far higher yet. Additionally, market liquidity for roubles is likely to be restricted, and the likelihood of a bear squeeze on any shorts is therefore high. The question is how high? Last year, the EU imported 155 billion cubic meters of natural gas from Russia, valued at about $180bn at current volatile prices. Oil exports from Russia to the EU were about 2.3 million barrels per day, worth an additional $105bn for a combined total of $285bn, which at the current exchange rate of RUB 75.5 is RUB 2.15 trillion. EU Gas consumption is likely to fall as spring approaches, but payments in roubles will still drive the exchange rate significantly higher. And attempts to obtain alternative sources of LNG will take time, be insufficient, and serve to drive natural gas prices from other suppliers even higher. For now, we should dismiss ideas over payments to the Russians in gold. The Russian gold story, initially at least, is a domestic issue. Though it might spill over into international markets. On 25 March, Russia’s central bank announced it will buy gold from credit institutions at a fixed rate of 5,000 roubles per gramme starting this week and through to 30 June. The press release stated that it will enable “a stable supply of gold and smooth functioning of the gold mining industry.” In other words, it allows banks to continue to lend money to gold mining and related activities, particularly for financing new gold mining developments. Meanwhile, the state will continue to accumulate bullion which, as discussed above, it has no need to spend on imports. When the RCB’s announcement was made the rouble was considerably weaker and the price offered by the central bank was about 20% below the market price. But that has now changed. Based on last night’s exchange rate of 75.5 roubles to the dollar (30 March) and with gold at $1935, the price offered by the central bank is at a premium of 7.2% to the market. Whether this opens the situation up to arbitrage from overseas bullion markets is an intriguing question. And we can assume that Russian banks will find ways of acquiring and deploying the dollars to do so through their offshore facilities, until, under the cover of a strong rouble, the RCB removes exchange controls. There is nothing in the RCB’s statement to prevent a Russian bank sourcing gold from, say, Dubai, to sell to the central bank. Guidance notes to which we cannot be privy may address this issue but let us assume this arbitrage will be permitted, because it might be difficult to stop. And if Russia does have undeclared bullion reserves more than those allegedly held by the US Treasury, then given that the real war is essentially financial, it is in Russia’s interest to see the gold price rise in dollars. Not only would Eurozone banks be scrambling to obtain roubles, but the entire Western banking system, which takes the short side of derivative transactions in gold will find itself in increasing difficulties. Normally, bullion banks rely on central banks and the Bank for International Settlements to backstop the market with physical liquidity through leases and swaps. But the unfortunate message from the West to every central bank not on Russia’s unfriendly list is that London’s or New York’s respect for ownership rights to their nation’s gold cannot be relied upon. Not only will lease and swap liquidity dry up, but it is likely that requests will be made for earmarked gold in these centres to be repatriated. In short, Russia appears to be initiating a squeeze on gold derivatives in Western capital markets by exploiting diminishing faith in Western institutions and their cavalier treatment of foreign property rights. By forcing the unfriendlies into buying roubles, the RCB will shortly be able to reduce interest rates back to previous policy levels and remove exchange controls. At the same time, the inflation problems faced by the West will be ameliorated by a strong rouble. It ties in with the politics for Putin’s survival. Together with the economic benefits of an improving exchange rate for the rouble and the relatively minor inconvenience of not being able to buy imports from the West (alternatives from China and India will still be available) Putin can retreat from his disastrous Ukrainian campaign. Senior figures in the Russian army will be disciplined, imprisoned, or disappear accused of incompetence and misleading Putin into thinking his “special operation” would be quickly achieved. Putin will absolve himself of any blame and dissenters can expect even greater clampdowns on protests. Russia’s moves are likely to have been thought out in advance. The move to support the rouble is evidence it is so, giving the central bank the opportunity to reverse the interest rate hike to 20% to protect the rouble. Foreign exchange controls on Russians can shortly be lifted. Almost certainly the consequences for Western currencies were discussed. The conclusion would surely have been that higher energy and other Russian commodity prices would persist, driving Western price inflation higher and for longer than discounted in financial markets. Western economies face soaring interest rates and a slump. And depending on their central bank’s actions, Japan and the Eurozone with negative interest rates are almost certainly most vulnerable to a financial, currency, and economic crisis. The impact of Russia’s new policy of only accepting roubles was, perhaps, the inevitable consequence of the West’s policies of self-immolation. From Russia’s failure in Ukraine, Putin appears to have had little option but to go on the offensive and escalate the financial, or commodity-currency war to cover his retreat. We can only speculate about the effect of a strong rouble on the international gold price, but if Russian banks can indeed buy bullion from non-Russian sources to sell to the RCB, it would mark a very aggressive move in the ongoing financial war. China’s position China will be learning unpalatable lessens about its ambition to invade Taiwan, and Taiwan will be encouraged mightily by Ukraine’s success at repelling an unwelcome invader. A 100-mile channel is an enormous obstacle for a Chinese invasion that Russia didn’t have to navigate before Ukrainian locals exploited defensive tactics to repel the invader. There can now be little doubt of the outcome if China tried the same tactics against Taiwan. President Xi would be sensible not to make the same mistake as Putin and tone down the anti-Taiwan rhetoric and try the softer approach of friendly relations and economic integration to reunite Chinese interests. That has been a costless lesson for China, but another consideration is the continuing relationship with Russia. The earlier Chinese description of it made sense: “We are not allies, but we are partners”. What this means is that China would abstain rather than support Russia in the various supranational forums where the world’s leaders gather. But she would continue to trade with Russia as normal, even engaging in currency swaps to facilitate it. More recently, a small crack has appeared in this relationship, with China concerned that US and EU sanctions might be extended to Chinese entities in joint ventures with Russian businesses linked to sanctioned oligarchs and Putin supporters. The highest profile example has been the suspension of a joint project to build a petrochemical plant in Russia involving Sinopec, because of the involvement of Gennady Timchenko, a close ally of Putin. But according to a report from Nikkei Asia, Sinopec has confirmed it will continue to buy Russian crude oil and gas. As always with its geopolitics, we can expect China to play its hand with great care. China was prepared for the consequences of US monetary policy in March 2020 when the Fed reduced its funds rate to zero and instituted quantitative easing of $120bn every month. By its actions it judged these moves to be very inflationary, and began stockpiling commodities ahead of dollar price rises, including energy and grains to project its own people. The yuan has risen against the dollar by about 11%, which with moderate credit policies has kept annualised domestic price inflation subdued to about 1% currently, while consumer price inflation in the West is soaring out of control. China is not therefore in the weak financial position of Russia’s “unfriendlies”; the highly indebted governments whose finances and economies are likely to be destabilised by rising energy prices and interest rates. But it does have a potential economic crisis on its hands in the form of a collapsing property market. In February, its response was to ease the credit restrictions imposed following the initial pandemic recovery in 2021, which had included attempts to deleverage the property sector. Property aside, we can assume that China will not want to destabilise the West by her own actions. The West is doing that very effectively without China’s assistance. But having demonstrated an understanding of why the West is sliding into an inflation crisis of its own making China will be keen not to make the same mistakes. Her partnership with Russia, as joint leaders in the Shanghai Cooperation Organisation, is central to detaching herself from what its Maoist economists forecast as the inevitable collapse of imperial capitalism. Having set itself up in the image of that imperialism, it must now become independent from it to avoid the same fate. Gold’s wider role in China, Russia, and the SCO Gold has always been central to China’s fallback position. I estimated that before permitting its own people to buy gold in 2002, the state had acquired as much as 20,000 tonnes. Subsequently, through the Shanghai Gold Exchange the Chinese public has taken delivery of a further 20,000 tonnes, mainly through imports from outside China. No gold escapes China, and the Chinese government is likely to have added to its hoard over the last twenty years. The government maintains a monopoly on refining and has stimulated the mining industry to become the largest national producer. Together with its understanding of the West’s inflationary policies the evidence is clear: China is prepared for a world of sound money with gold replacing the dollar’s hegemony, and it now dominates the world’s physical market with that in mind. These plans are shared with Russia, and the members, dialog partners and associates of the Shanghai Cooperation Organisation — almost all of which have been accumulating gold reserves. Mine output from these countries is estimated by the US Geological Survey at 830 tonnes, 27% of the global total. The move away from pure fiat was confirmed recently by some half-baked plans for the Eurasian Economic Union and China to escape from Western fiat by setting up a new currency for cross-border trade backed partly by commodities, including gold. The extent of “off balance sheet” bullion is a critical issue, because at some stage they are likely to be declared. In this context, the Russian position is important, because if Simon Hunt, quoted above, is correct Russia could have more gold than the US’s 8,130 tonnes, which it is widely thought to overstate the latter’s true position. Furthermore, Western central banks routinely lease and swap their gold reserves, leading to double counting, which almost certainly reduces their actual position in aggregate. And if fiat currencies continue to decline we could find that the two ringmasters for the SCO have more monetary gold than all the other central banks put together — something like 30,000-40,000 tonnes for Chinese and Russian governments, compared with perhaps less than 20,000 tonnes for Russia’s adversaries (officially ,the unfriendlies own about 24,000 tonnes, but we can assume that at least 5,000 of that is double counted or does not exist due to leasing and swaps). The endgame for the yen and the euro Without doubt, the terrible twins in the major fiat currencies are the yen and the euro. They share much in common: negative interest rates, major commercial banks highly leveraged with asset to equity ratios averaging over twenty times, and central bank balance sheets overloaded with bonds which are collapsing in value. They now face rising interest rates spiralling beyond their control, the consequences of the ECB and Bank of Japan being trapped under the zero bound and being in denial over falling purchasing power for their currencies. Consequently, we are seeing capital flight, which has accelerated dramatically this month for the yen, but in truth follows on from relative weakness for both currencies since the middle of 2021 when global bond yields began rising. Statistically, we can therefore link the collapse of both currencies on the foreign exchanges with rising bond yields. And given that rising interest rates and bond yields are in their early stages, there is considerable currency weakness yet to come. Japan and its yen The Bank of Japan has publicly stated it would buy an unlimited amount of 10-year Japanese Government Bonds at a 0.25% yield to contain the bond sell-off. A higher yield would be more than embarrassing for the BOJ, already requiring a recapitalisation, presumably with its heavily indebted government stumping up the money. Figure 2 shows that the 10-year JGB yield is already testing the 0.25% yield level (charts from Bloomberg). Fig 2. JGB yields hits BoJ Limit and Yen collapsing As avid Keynesians, the BOJ is following similar policies to that of John Law in 1720’s France. Law issued fresh livres which he used to prop up the Mississippi venture by buying shares in the market. The bubble popped, the venture survived, but the livre was destroyed. Today, the BOJ is issuing yen to prop up the Japanese government bond market. As the issuer of the currency, the BOJ is by any yardstick bankrupt and in desperate need of new capital. Since it commenced QE in 2000, it has accumulated so much government and corporate debt, and even equities bundled into ETFs, that the falling value of the BOJ’s holdings makes its liabilities significantly greater than its assets, currently to the tune of about ¥4 trillion ($3.3bn). Ignoring the cynic’s definition of madness, the BOJ is doubling down on its commitment, announcing on Monday further unlimited purchases of 10-year JGBs at a fixed yield of 0.25%. In other words, it is supporting bond prices from falling further, echoing Mario Draghi’s “whatever it takes” and confirming its John Law policy. Last Tuesday’s Summary of Opinions at the Monetary Policy Meeting on March 17 and 18 had this gem: “Heightened geopolitical risks due to the situation surrounding Ukraine have caused price rises of energy and other items, and this will push down domestic demand while raising the CPI. Under the circumstances, it is necessary to improve labour market conditions and provide stronger support for wage increases, and therefore it is increasingly important that the bank persistently continue with the current monetary easing.” No, this is not satire. In other words, the BOJ’s deposit rate will remain negative. And the following was added from Government Representatives at the same meeting: “The budget for fiscal 2022 aims to realise a new form of capitalism through a virtual circle of growth and distribution and the government has been making efforts to swiftly obtain the Diet’s approval.” A virtuous circle of growth? It seems like intensified intervention. Meanwhile, Japan’s major banks with asset to equity ratios of over twenty times are too highly geared to survive rising interest rates without a bank credit crisis threatening to take them down. It is hardly surprising that international capital is fleeing the yen, realising that it will be sacrificed by the BOJ in the vain hope that it can continue to maintain bond prices far above where they should be. The euro system and its euro The euro system and the euro share similar characteristics to the BOJ and the yen: interest rates trapped under the zero bound, Eurozone G-SIBs with asset to equity ratios of over 20 times and market realities forcing interest rates and bond yields higher, as Figure 3 shows. Furthermore, Eurozone banks are heavily exposed to Russian and Ukrainian debt due to their geographic proximity. Fig 3: Euro declining as bond yields soar There are two additional problems for the Eurosystem not faced by the BOJ and the yen. The ECB’s shareholders are the national central banks in the euro system, which in turn have balance sheet liabilities more than their assets. The structure of the euro system means that in recapitalising itself the ECB does not have a government to which it can issue credit and receive equity capital in return, the normal way in which a central bank would refinance its balance sheet by turning credit into equity. Instead, it will have to refinance itself through the national central banks which being insolvent themselves in turn would have to refinance themselves through their governments. The second problem is a further complication. The euro system’s TARGET2 settlement system reflects enormous imbalances which complicates resolving a funding crisis. For example, on the last figures (end-February), Germany’s Bundesbank was owed €1,150 billion through TARGET2, while Italy owed €568 billion. It would be in the interests of a recapitalisation for the Italian government to want its central bank to write off this amount, while the Bundesbank is already in negative equity without writing off TARGET2 balances. Germany’s politicians might demand the balances owed to the Bundesbank be secured. This problem is not insoluble perhaps, but one can see that political and public wrangling over these imbalances will only serve to draw attention to the fragility of the whole system and undermine public trust in the currency. With Germany’s CPI now rising at 7.6% and Spain’s at 9.8%, negative deposit rates are wildly inappropriate. When the system breaks it can be expected to be sudden, violent and a shock to those in thrall to the euro system. Conclusion For decades, a showdown between an Asian partnership and hegemonic America has been building. We can date this back to 1983, when China began to accumulate physical gold having appointed the Peoples’ Bank for the purpose. That act was the first indication that China felt the need to protect itself from others as it ventured into capitalism. China has navigated itself through increasing American assertion of its hegemony and attempts to destabilise Hong Kong. It has faced obstacles to its lucrative export trade through tariffs. It has been cut off from Western markets for its advanced technology. China has resented having to use the dollar. After Russia’s ill-advised invasion of Ukraine, it now appears that the invisible war over global financial resources and control is intensifying. The fuse has been lit and events are taking over. The destabilisation of the yen and the euro are now as certain as can be. While the yen is the victim of John Law-like market-rigging policies and likely to go the same way as France’s livre, perhaps the greater danger is for the euro. The contradictions in its set-up, and the destruction of Germany’s sound money principals in favour of the inflationism of the PIGS was always going to be finite. The ECB has got itself into a ridiculous position, and no amount of conjuring and cajoling of financial institutions can resolve the ECB’s own insolvency and that of all its shareholders. History shows that there are two groups involved in a currency collapse. International holders take fright and sell for other currencies and assets they believe to be more secure. They drive the exchange rate lower. The second group is the public in a nation, those who use the currency for transactions. If they lose confidence in it, the currency can rapidly descend into worthlessness as ordinary people accelerate its disposal for anything tangible in a final crack-up boom. In the past, an alternative currency was always the sounder one, one backed by and exchangeable for gold coin. That is so long ago that we in the West have mostly forgotten the difference between money, that is gold and silver, and unbacked fiat currencies. The great unknown has been how much abuse of money and credit it would take for the public to relearn the difference. Cryptocurrencies have alerted us, but they are not a widely accepted medium of exchange and don’t have the legal standing of gold and gold substitutes. War is to be our wake-up call — financial rather than physical in character. Western central banks and their governments have been fiddling the books, telling us that currency debasement is good for us. That debasement has accelerated in recent years. But by upping the anti against Russia with sanctions that end up undermining the purchasing power of all the West’s major currencies, our leaders have called an end to the reign of fiat. Tyler Durden Sat, 04/02/2022 - 14:30.....»»

Unbeknown To Most, A Financial Revolution Is Coming That Threatens To Change Everything (And Not For The Better) Authored by Nick Corbishley via NakedCapitalism.com, Given how much is at stake, this financial revolution is among the most important questions today’s societies could possibly grapple with. It should be under discussion in every parliament of every land, and every dinner table in every country in the world. Around 90 central banks are either in the process of experimenting with or are already piloting central bank digital currencies (CBDCs). In a world of just over 190 countries that is a large contingent, but given they include the European Central Bank (ECB) which alone represents 19 Euro Area economies, the actual number of economies involved is well over 100. They include all G20 economies and together represent more than 90% of global GDP. Three CBDCs have already gone fully live in the past two years: the so-called DCash in the Eastern Caribbean, the Sand Dollar in the Bahamas and the eNaira in Nigeria. The International Monetary Fund, the world’s most powerful supranational financial institution, has been lending its expertise in the roll out of CBDCs. In a recent speech the Fund’s President Kristalina Georgieva lauded the potential benefits (on which more later) of CBDCs while heaping praise on the “ingenuity” of the central banks busily trying to conjure them into existence. Also firmly on board is the world’s largest asset manager, BlackRock, which helps many of the world’s largest central banks, including the Federal Reserve and the ECB, manage their assets while obviously keeping all potential conflicts of interests at bay. The fund was the largest beneficiary of the Federal Reserve’s bailout of exchange-traded funds during the market rout of Spring 2020. In his latest letter to investors, the CEO of BlackRock, Larry Fink, said the Ukrainian conflict has the potential to accelerate the development of digital currencies across the world. “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades As a result, a large-scale reorientation of supply chains will inherently be inflationary… “The war will prompt countries to re-evaluate their currency dependencies. Even before the war, several governments were looking to play a more active role in digital currencies and define the regulatory frameworks under which they operate… A global digital payment system, thoughtfully designed, can enhance the settlement of international transactions while reducing the risk of money laundering and corruption. Digital currencies can also help bring down costs of cross-border payments, for example when expatriate workers send earnings back to their families.” On Tuesday (March 22), the Bank for International Settlements published the findings of a study it had conducted with four central banks — the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank — into the practical challenges of executing cross-border payments between different central bank digital currencies. The report concludes that while major hurdles still remain, financial institutions could use CBDCs issued by participating central banks to transact directly with each other on a shared platform: The Bank for International Settlements (BIS) Innovation Hub, the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank today announced the completion of prototypes for a common platform enabling international settlements using multiple central bank digital currencies (mCBDCs). Led by the Innovation Hub’s Singapore Centre, Project Dunbar proved that financial institutions could use CBDCs issued by participating central banks to transact directly with each other on a shared platform. This has the potential to reduce reliance on intermediaries and, correspondingly, the costs and time taken to process cross-border transactions. The project was organised along three workstreams: one focusing on high-level functional requirements and design, and two concurrent technical streams that developed prototypes on different technological platforms (Corda and Partior). The project identified three critical questions: which entities should be allowed to hold and transact with CBDCs issued on the platform? How could the flow of cross-border payments be simplified while respecting regulatory differences across jurisdictions? What governance arrangements could give countries sufficient comfort to share critical national infrastructure such as a payments system? The project proposed practical solutions for addressing these issues, which were validated through the development of prototypes that demonstrated the technical viability of shared multi-CBDC platforms for international settlements. The findings of the experimental CBDC program could assist in the adoption of CBDC international settlement for G-20 nations, though given the rising geopolitical fissures in the so-called “international rules based order”, it is far from clear which countries would be willing to engage with one another in such a way. China has already launched its own digital yuan and is piloting its use in more than a dozen cities and regions. It has also been experimenting with its cross-border functionality. This has ignited fears in the West that that U.S. “financial leadership” is under threat — fears that have been magnified by the way US and EU sanctions against Russia, particularly the confiscation of a large chunk of Russia’s foreign currency reserves have backfired, encouraging not just Russia but many countries on the planet to seek out an alternative cross-border payments system. At the same time, the U.S. is determined to continue playing a leading role in the new global financial architecture. To that end, it has cobbled together a tentative consortium of “seven of the largest Western-aligned central banks, led in practice by the U.S. Federal Reserve and the European Central Bank… aimed at creating a system of ‘interoperable’ CBDCs,” reports Washington DC-based blogger and analyst NS Lyons in the article, Just Say No to CBDCs. But what are CBDCs? How will they work? What purposes could they serve? How might they affect the general populations of the countries where they are introduced? To answer the first two questions, here’s an excerpt from “Just Say No to CBDCs“: You might assume that you are already using “digital currency” regularly if you rarely use physical cash anymore and instead buy almost everything with a credit card or a digital payment app. In truth, the process of moving money from A to B is vastly more complicated than that. It involves a tangle of payment processors, banks, financial clearinghouses, and, if your money is crossing borders, international communication and exchange systems, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The money itself doesn’t move anywhere fast, so each intermediary institution must assume risks to fulfill your transaction by accepting promises, sending transfers, verifying receipt of funds, and so on. Many fees get collected along the way for such services. A CBDC system would be radically simplified. A customer would open an account directly with a country’s central bank, and the central bank would issue (create) digital money in the account. Crucially, this makes the money a direct liability of the Fed, rather than of a private bank. Using a simple smartphone app or other tools, the customer can then initiate direct transactions between Fed accounts. The digital money is deleted in one account and recreated in another instantaneously. Moving money across borders no longer requires something as complex as SWIFT or wire transfers, and currencies can be exchanged instantly as long as friendly central banks have agreements to do so. No promises or trust are necessary; every transaction is permanently recorded on a digital cryptographic ledger in real time—a bit like Bitcoin, but exquisitely centralized rather than distributed. This brings us to question 3: what purposes will CBDCs serve? The most commonly cited justification for launching CBDCs is to counter the risk posed by so-called “stable coins”, which are relatively new forms of cryptocurrency that are pegged to the value of a fiat currency (e.g, the dollar or the euro), to material assets such as gold or property, or to another cryptocurrency. There are also concerns that tech giants will begin challenging established banks and payment operators for market share in the financial sector, as already happened in China with Tencent and Alibaba. As a recent UK parliamentary report titled “Central Bank Digital Currencies: A Solution in Search of a Problem?!” put it, “the use of physical cash is in decline in many countries and some central banks are worried that this could undermine public confidence in the monetary system if individuals are unable to convert commercial bank money into cash, which is a direct claim on the state.” In March 2020, the Bank of England published a consultation which set out seven ways in which a CBDC could support the Bank’s objectives to maintain monetary and financial stability: By supporting a resilient payments landscape. By avoiding the risks of new forms of private money creation. By supporting competition, efficiency and innovation in payments. By meeting future payment needs in a digital economy. By improving the availability and usability of central bank money. By addressing the consequences of a decline in cash. As an enabler for better cross-border payments. In a speech to mark the launch of the G7’s report on central bank digital currencies, the UK’s Chancellor of Exchequer Rishi Sunak described CBDCs as “part of the wider story of digital innovation” that is sweeping the planet. But most people in the West are not even aware of CBDCs, let alone how they could impact their lives. According to a survey by G+D Currency Technology, one of the companies helping to develop CBDCs, less than 20% of people in the U.S. and Germany were respectively aware of the digital dollar or the digital euro. So how could CBDCs impact our lives? Here are four of the most important ways: It will grant central banks far more power over our payment behavior.  A central bank digital currency system will technically no longer require middlemen such as banks or credit card companies. That said, one can safely assume that the largest financial institutions, most of which have been helping to install the architecture for the CBDC system, will find a new role in the new digital reality. NS Lyons notes: [Central banks] will retain complete oversight and control over the creation, destruction, and “movement” of money, no matter where it is “held” or who “has” it. As Agustin Carstens, general manager of the Bank of International Settlements put it at a 2020 summit of the IMF: “We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today. The key difference with the CBDC is the central bank will have absolute control [over] the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.” That power could be used to “program” our spending.  One way central banks could use its expanded influence is to exert control over people’s spending habits. In June 2021, the Daily Telegraph reported (behind paywall) that the Bank of England had asked Government ministers to decide whether a central bank digital currency should be “programmable”. According to Tom Mutton, a director at the Bank of England, “There could be some socially beneficial outcomes from that, preventing activity which is seen to be socially harmful in some way.” This could bring huge advantages for both government and central banks, says Lyons: The Fed could directly subtract taxes and fees from any account, in real time, with every transaction or paycheck, if it wished. There could be no more tax evasion; the Fed would have a complete record of every transaction made by everyone. Money laundering, terrorist financing, any other unapproved transaction would become extremely difficult. Fines, such as for speeding or jaywalking, could be levied in real time, if CBDC accounts were connected to a network of “smart city” surveillance. Nor would there be any need to mail out stimulus checks, tax refunds, or other benefits, such as universal basic income payments. Such money could just be deposited directly into accounts. But a CBDC would allow government to operate at much higher resolution than that if it wished. Targeted microfinance grants, added straight to the accounts of those people and businesses considered especially deserving, would be a relatively simple proposition. Other potential forms of programming applications include setting expiry dates for stimulus funds or welfare payments to encourage users to spend it quickly. As the FT reported, central bank digital currencies will almost certainly have to go hand in hand with digital IDs: “What CBDC research and experimentation appears to be showing is that it will be nigh on impossible to issue such currencies outside of a comprehensive national digital ID management system. Meaning: CBDCs will likely be tied to personal accounts that include personal data, credit history and other forms of relevant information.” Combining digital currencies with digital IDs while phasing out, or even banning, the use of cash would grant governments and central banks the ability not only to track every purchase we make but also to determine what we can and cannot spend out money on. They could also be used to strongly encourage “desirable” social and political behavior while penalizing those who do not toe the line. As Lyons points out, “The most dangerous individuals or organizations could simply have their digital assets temporarily deleted or their accounts’ ability to transact frozen with the push of a button, locking them out of the commercial system and greatly mitigating the threat they pose. No use of emergency powers or compulsion of intermediary financial institutions would be required: the United States has no constitutional right enshrining the freedom to transact.” No limit on negative interest rates. Beyond having far greater control over people’s spending habits, central banks would also have the possibility of taking interest rates into far deeper negative territory. If there is no cash, there is no means for people to escape negative rates no matter how negative they go. This is one of the benefits often lauded by Harvard economist Kenneth Rogoff of a completely cashless society. Yet central banks continue to insist that physical cash will not be eliminated once the CBDCs are fully operational. But as I’ve noted previously, central banks are not exactly known for keeping their word. Financial exclusion on steroids. One of the most important benefits of cash is its universality, making it a vital public good, particularly for the poorest and most vulnerable in society. Also excluded in a purely cashless society would be anyone who objected to having others spy on their transactions (h/t hickory). As I note in my book, Scanned: Why Vaccine Passports and Digital Identity Will Mean the End of Privacy and Personal Freedom, if central banks and governments were to do away with cash or to vastly accelerate its demise by penalizing its use (while incentivizing the use of CBDCs), we would probably see a huge increase in financial exclusion: Even proponents of CBDCs admit that central bank digital currencies could have serious drawbacks, including further exacerbating income and wealth equality. “The rich might be more capable than others of taking advantage of new investment opportunities and reaping most of the benefits,” says Eswar Prasadm a senior fellow at the Brookings Institute and author of The Future of Money: Hoe the Digital Revolution Is Transforming Currencies and Finance. “As the economically marginalized have limited digital access and lack financial literacy, some of the changes could harm as much as they could help those segments of the population.” So, not only will the introduction of CBDCs strip global citizens of one of the last vestiges of freedom, privacy and anonymity (i.e., cash), it could also exacerbate the upward transfer of wealth and power that many societies have witnessed since the COVID-19 pandemic began. Lyons warns that CBDCs, “if not deliberately and carefully constrained in advance by law,… have the potential to become even more than a technocratic central planner’s dream. They could represent the single greatest expansion of totalitarian power in history.” Given how much is at stake, CBDCs are among the most important questions today’s societies could possibly grapple with - not only from a financial or business perspective but also from an ethical and legal standpoint. They should be under discussion in every parliament of every land, and every dinner table in every country in the world. Tyler Durden Sat, 03/26/2022 - 11:50.....»»

Traders Puzzled By Bizarre Mystery As Turkish Central Bank Inexplicably Posts "Unprecedented" $10 Billion Profit On Last Day Of 2021 In a world where central banks now openly engage in helicopter money paradrops and monetizing debt and deficits as far as the eye can see (knowing well that such actions always end in hyperinflationary tears but plowing on nonetheless), i.e., funding their respective governments, the literal printing of money by central banks to fill Treasury coffers is not nearly as exciting as it used to be. However, one place where money transfers from the central bank to the government (which in this particular case is represented by just one particular kleptocrat) are those in Turkey due to the absolute banana republic nature of the country, and which is closer than any other semi-developed nation to sliding into the hyperinflationary abyss; as such as all of its bizarre actions are scrutinized by a small group of fascinated onlookers who then try to extrapolate the Turkish experience to every other insolvent nation. Well, speaking of bizarre actions, an especially egregious one took place on the final day of 20021, when Turkey’s central bank posted an extraordinary and unexplained daily profit of around $10 billion, sparking questions on what caused this overnight boon that will trickle down to the nation’s Treasury. According to Bloomberg, the monetary authority disclosed an annual loss of around 70 billion liras ($5.2 billion) on Dec. 30 but just one day later, ended the year with 60 billion liras of profit, an unprecedented change of fortunes in a single day, according to its daily balance sheet. In February, the Ministry of Treasury and Finance -- as the central bank’s biggest stakeholder -- will begin collecting much of that sum as dividends. The biggest winner? Recep Tayyip Erdogan himself - after all he is the de facto government of Turkey - because in February, the Ministry of Treasury and Finance both of which are populated with Erdogan cronies and are the central bank’s biggest stakeholders, will begin collecting much of that sum as dividends. The bizarre and unexplained "profit" came after President Erdogan unveiled measures meant to compensate lira investors for any losses, a move which sparked a furious surge in the lira which however was also catalyzed by a huge buying spree by the central bank which rushed to stabilize the lira, effectively leaving itself without net FX reserves. Even with this gross manipulation the Turkish currency slid 44% against the dollar last year, largely as the central bank - egged on by Erdogan - slashed its benchmark rate by 500 basis points since September, a move which we contend is part of Erdogan's master plan to leave the Turkish economy in ruins so that his own personal embezzlement of billions can not be traced. Meanwhile, as discussed yesterday, the lira’s collapse fueled an explosion in inflation, with Turkey's CPI ending the year above 36%, the highest level since September 2002. The result has been a plunge of Erdogan’s popularity as 2023 elections approach, and speculation among some that Erdogan is rushing to pillage the rest of Turkey's wealth before he disappears forever. According to Bloomberg, the central bank declined to comment on the dramatic move on its balance sheet, which was first reported on Monday by the bank’s former deputy governor Ibrahim Turhan and ex-banker Kerim Rota, both members of the opposition Future Party. According to Turhan, one possible explanation for the sizable overnight profit boost could lie in the sale of foreign-exchange reserves to the Treasury, in other words, the central bank is giving dollars to Erdogan. The lira’s depreciation makes foreign reserves more valuable in local currency, but that can’t be logged in the profit column until the reserves are sold, he said. The same amount of dollars would then have to be bought back to maintain the reserves level, Turhan said. In other words, the central bank will have to purchase billions of dollars, a move which would send the lira crashing, but that of course assumes that Erdogan has some interest in preserving normalcy in his fiefdom, which by now everyone knows he does not. Erdogan, who has attacked elevated borrowing costs as a brake on economic growth, pledged to remove the “bubble” from inflation in a speech on Tuesday, calling exchange-rate fluctuations and “excessive” price increases “thorns” on Turkey’s path. His policy of cutting rates to bring down inflation goes against mainstream economic thinking.  Meanwhile, even with "guaranteed" returns on lira deposits, Turkish investors are still holding on to foreign currencies, undermining the Turkish leader’s plan to support the lira without raising interest rates. According to a separate Bloomberg report, companies boosted their foreign-currency holdings by around $1.6 billion in the seven days through Dec. 24, taking advantage of a rally that saw the lira almost double in value that week. While households trimmed their positions by just over $100 million, it hardly put a dent in total foreign-currency deposits, which rose to a record $239 billion, according to the latest central bank data. This dash for dollars in Turkey (and gold, and bitcoin) is a symptom of a monetary policy that for years has remained far too loose to put a lid on inflation and as a result debased the lira, but more importantly it highlights the challenges authorities face in convincing investors to shift their savings into the local currency, which has lost more than 85% of its value against the dollar since 2012. “The reason why people accumulated foreign-currency up until today was distrust, and the trust issue is still there,” said Evren Kirikoglu, an independent strategist based in Istanbul. As a reminder, instead of raise rates to lure savers into lira accounts, the government came up with some Frankenstein quasi hike according to which it will compensate lira holders for any currency losses that exceed the interest rate on their short-term deposits -- currently languishing around 19% points below headline inflation. Of course, good luck trying to make sense of such a purposefully opaque mechanism. And while the official narrative has been that this new financial instrument is a game changer - because it will sap demand for dollars and euros that has weighed on the currency, and at the same time allow for rates to remain low and spur growth - the reality is just the opposite, and while appetite for Erdogan's bizarre product remains virtually non-existent with just 84 billion liras ($6.3 billion) out of a total of 5.2 trillion liras of deposits moving into new foreign-currency linked deposits, the bulk of funds continues to flow out of lira and into foreign FX accounts. “People don’t seem to understand the new product and they are afraid that some future changes could prevent them from buying back the FX they sold,” Kirikoglu said, referring to dollars and euros they parted with to place money in these new lira accounts. Instead, as Bloomberg reports echoing what we said in December, the latest official reserves data suggest interventions in the currency market may have played a far larger role in spurring the recent advance in the local currency. In other words, if it wasn't for the continued drain of dollars by the central bank, the lira would be trading at hyperinflationary levels. As we extensively documented, last month the lira surged by as much as 79% from a record low of 18.3633 on Dec. 20 to a more than one-month high of 10.2512. That coincided with a previously noted $3.53 billion drawdown in the central bank’s net currency reserves in the week that ended Dec. 24, taking a drop since the end of November to $16 billion. Alas, none of these tactical short squeeze attempts change the dire fundamental picture: with inflation running at over 36% and Turkey’s official reserves dwindling, the question for some is how much longer policy makers can stand in the way of dollar demand. The size of recent interventions is reminiscent of operations carried out between 2018 and 2020, when state lenders routinely flooded the market with dollars unannounced to support the lira. The government has denied reports of so-called backdoor sales. Luckily, at the current pace of interventions, the central bank will soon be out of manipulation firepower. Turkey’s gross reserves stand at $110.9 billion. Yet net reserves, which many economists use as a gauge of how much firepower policy makers have at their disposal, is now just $8.6 billion, meaning that Erdogan has at most 2-3 weeks left before he loses all control of the lira. “I assume people won’t be rushing to dollars anymore but the key point is to attract FX holders to the system, otherwise the central bank cannot continue to meet citizens’ FX demand with its reserves,” Kirikoglu said. Tyler Durden Tue, 01/04/2022 - 17:05.....»»

   The transcript from this week’s, MiB: Edwin Conway, BlackRock Alternative Investors, is below. You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS:… Read More The post Transcript: Edwin Conway appeared first on The Big Picture.    The transcript from this week’s, MiB: Edwin Conway, BlackRock Alternative Investors, is below. You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, man, I have an extra special guest. Edwin Conway runs all of alternatives for BlackRocks. His title is Global Head of Alternative Investors and he covers everything from structured credit to real estate hedge funds to you name it. The group runs over $300 billion and he has been a driving force into making this a substantial portion of Blackrock’s $9 trillion in total assets. The opportunity set that exists for alternatives even for a firm like Blackrock that specializes in public markets is potentially huge and Blackrock wants a big piece of it. I found this conversation to be absolutely fascinating and I think you will also. So with no further ado, my conversation with Blackrock’s Head of Alternatives, Edwin Conway. MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio. RITHOLTZ: My extra special guest this week is Edwin Conway. He is the Global Head of Blackrock’s Alternative Investors which runs about $300 billion in assets. He is a team of over 1,100 professionals to help him manage those assets. Blackrock’s Global alternatives include businesses that cover real estate infrastructure, hedge funds private equity, and credit. He is a senior managing director for BlackRock. Edwin Conway, welcome to Bloomberg. EDWIN CONWAY, GLOBAL HEAD OF ALTERNATIVE INVESTORS, BLACKROCK: Barry, thank you for having me. RITHOLTZ: So, you’ve been in the financial services industry for a long time. You were at Credit Suisse and Blackstone and now you’re at BlackRock. Tell us what the process was like breaking into the industry? CONWAY: It’s an interesting on, Barry. I grew up in a very small town in the middle of Ireland. And the breakthrough to the industry was one of more coincident as opposed to purpose. I enjoyed the game of rugby for many years and through an introduction while at the University, in University College Dublin in Ireland, had a chance to play rugby at a quite a – quite a decent level and get to know people that were across the industry. It was really through and internship and the suggestion, I’ve given my focus on business and financing things that the financial services sector may be a great place to traverse and get to know. And literally through rugby connections, been part of a good school, I had an opportunity to really understand what the service sector, in many respects, could provide to clients and became absolutely intrigued with it. And what – was it my primary ambition in life to be in the financial services sector? I can definitively say no, but through the circumstance of a game that I love to play and be part of, I was introduced to, through an internship, and actually fell in love with it. RITHOLTZ: Quite interesting. And alternative investments at Blackrock almost seems like a contradiction in terms. Most of us tend to think of Blackrock as the giant $9 trillion public markets firm best known for ETFs and indices. Alternatives seems to be one of the fastest-growing groups within the firm. This was $50 billion just a few years ago, it’s now over 300 billion. How has this become such a fast-growing part of BlackRock? CONWAY: When you look at the various facets which you introduced at the start, Barry, we’ve actually been an alternatives – will be of 30 years now. Now, the scale, as you know, which you can operate on the beta side of business, far surpasses that on the alpha side. For us, throughout the years, this was very much about how can we deliver investment excellence to our clients and performance? Therefore, going an opportunity somewhere else to explore an alpha opportunity in alternatives. And I think being so connected to our clients understanding, that this pivots was absolutely taking place at only 30 years ago but in a very pronounced way today, you know, we continue to invest in this business to support those ambitions. They’re clearly seeing this as the world of going through a tremendous amount of transformation and with some of the challenges, quite frankly, in the traditional asset classes, being able to leverage at BlackRock, the Blackrock muscle to really explore these alpha opportunities across the various alternative asset classes that in our mind wasn’t imperative. And the imperative, really, is from the firm’s perspective and if you look at our purpose, it’s to serve the client. So the need was coming from them. The necessity to have alternatives and their whole portfolio was very – was very much growing in prominence. And it’s taken us 30 years to build this journey and I think, Barry, quite frankly, we’re far from being done. As you look at the industry, the demand is going to continue to grow. So, I think you could expect to see from us a continued investment in the space because we don’t believe you can live without alternatives in today’s world. RITHOLTZ: That’s really – that’s really interesting. So let’s dive a little deeper into the product strategy for alternatives which you are responsible for at BlackRock. Our audiences is filled with potential investors. Tell them a little bit about what that strategy is. CONWAY: So we’re – I think as you mentioned, we’re in excess of 300 billion today and when we started this business, it was less about building a moat around private equity or real estate. I think Larry Fink’s and Rob Kapito’s vision was how do we build a platform to allow us to be relevant to our clients across the various alternative asset classes but also within the – within the confines of what they are permitted to do on a year-by-year basis. So, to always be relevant irrespective of where they are in their journey from respect of liabilities, demand for liquidity, demand for returns, so we took a different approach. I think, Barry, to most, it was around how do we scale into the business across, like you said, real estate equity and debt, infrastructure equity and debt. I mean, we think of that as the real assets platform of our business. Then you take our private equity capabilities both in primary investing, secondary et cetera, and then you have private credits and a very significant hedge fund platforms. So we think all of these have a real role and depending on clients liquidities and risk appetite, our goal was, to over the years, really build in to this to allow ourselves for this challenging needs that our clients have. I think as an industry, right, and over the many years alternatives have been in existence, this is been about return enhancement initially. I think, fundamentally, the changes around the receptivity to the role of alternatives in a client’s portfolio has really changed. So, we’ve watched it, Barry, from this is we’re in the pursuit of a very total return or absolute return type of an objective to now resilience in our portfolio, yield an income. And so things that probably weren’t perceived as valuable in the past because the traditional asset classes were playing a more profound role, alternatives have stepped up in – in many respects in the need to provide more than just total return. So, we’re taking the approach of how do you have a more holistic approach to this? How do we really build a global multi-alternatives capability and try to partner and I think that’s the important work for us. Try to partner with our clients in a way that we can deliver that outperformance but delivered in a way that probably our clients haven’t been used to in this industry before. Because unfortunately, as we know, it has had its challenges with regard to secrecy, transparency, and so many other aspects. We need to help the industry mature. And really that was our ambition. Put our client’s needs first, build around that and really be relevant in all aspects of what we’re doing or trying to accomplish on behalf of the people that they support and represent. RITHOLTZ: So, we’ll talk a little bit about transparency and secrecy and those sorts of things later. But right now, I have to ask what I guess is kind of an obvious question. This growth that you’ve achieved within Blackrock for nonpublic asset allocation within a portfolio, what is this coming at expense of? Are these dollars that are being moved from public assets into private assets or you just competing with other private investors? CONWAY: It’s really both. What – what you are seeing from our clients – if I take a step back, today, the institutional client community and you think about the – the retirement conundrum we’re all facing around the world. It’s such an awful challenge when you think how ill-prepared people are for that eventual stepping back from the workplace and then you know longevity is your friend, but can also be a very, very difficult thing to obviously live with if you’re not prepared for retirement. The typical pension plan today are allocating about 25 percent to 28 percent in alternatives. Predominantly private market. What they’re telling us is that’s increasing quite substantially going forward. But you know, the funding for that alpha pursue for that diversification and that yield is coming from fixed-income assets. It’s coming from equity assets. So there’s a real rebalancing that’s been taking place over the past number of years. And quite frankly, the evolution, and I think the innovation that’s taken place particularly in the past 10 years, alternatives has been really profound. So the days where you just invest in any global funds still exist. But now you can concentrate your efforts on sector exposure, industry exposures, geographic exposures, and I think the – the menu of things our clients can now have access to has just been so greatly enhanced at and the benefit is that but I think in some – in some respects, Barry, the next question is with all of those choices, how do you build the right portfolio for our client’s needs knowing that each one of our client’s needs are different? So, I would say it absolutely coming from the public side. We’re very thankful. Those that had a multiyear journey with us in the public side are now allocating capital to is now the private side to because I do think the – the industry given that change, given that it evolution and given the complexity of these private assets, our clients are looking to, quite frankly, do more with fewer managers because of the complexion of the industry and complexity that comes with it. RITHOLTZ: Quite – quite interesting. (UNKNOWN): And attention RIA’s. Are your clients asking for crypto? At interactive brokers, advisers can now offer crypto to their clients and you could trade stocks, options, futures currencies, bonds and more from the same platform. Commissions on crypto are just 12-18 basis points with no hidden spreads or markups and there are no ticket charges, custody fees, minimums platform or reporting fees. Learn more at IBKR.com/RIA crypto. RITHOLTZ: And I – it’s pretty easy to see why large institutions might be rotating away from things like treasuries or tips because there’s just no yield there. Are you seeing inflows coming in from the public equity side also? The markets put together a pretty good string of years. CONWAY: Yes. It absolutely has. And many respects, I think, we’ve had a multiyear where there was big questions around the alpha that can be generated, for example, from active equities? The question was active or passive? I think what we’ve all realized is that at times when volatility introduces itself which is frequent even independent of what’s been done from a fiscal and monetary standpoint, that these Alpha speaking strategies on the traditional side still make a lot of sense. And so, as we think about what – what’s happening here, the transition of assets from both passive and active strategies to alternative, it – it’s really to create better balance. It’s not that there’s – there’s a lack of relevance anymore in the public side. It’s just quite frankly the growth of the private asset base has grown so substantially. I moved, Barry, to the U.S. in 1998. And it’s interesting, when you look back at 1998 to today, you start to recognize the equity markets and what was available to invest in. The number of investable opportunities has shrunk by 40 plus percent which that compression is extraordinarily high. But yet you’ve seen, obviously, the equity markets grow in stature and significance and prominence but you’re having more concentration risk with some of the big public entities. The converse is true, though on the – on the private side. There’s this explosion of enterprise and innovation, employment creation, and then I believe opportunities has been real. So, I look at the public side, the investable universe is measured in the thousands and the private side is measured in the millions. RITHOLTZ: Wow. CONWAY: And I think part of the – part of the part of the thing our clients are not struggling with but what we’re really recognizing with – with enterprises staying private for longer, if not forever, and with his growth of the opportunities that open debt and equity in the private market side, you really can’t forgo this opportunity. It has to be part of your going forward concerns and asset allocation. And I think this is why we’re seeing that transformation. And it’s not because equities on fixed income just aren’t relevant anymore. They’re very relevant but they’re relevant now in a total portfolio or a whole portfolio context beside alternatives. RITHOLTZ: So, let’s discuss this opportunity set of alternatives where you guys at Blackrock scene demand what sectors and from what sorts of clients? Is this demand increasing? CONWAY: We’re very fortunate, Barry. Today, there isn’t a single piece of our business within – within Blackrock alternatives that isn’t growing. And quite frankly too, it’s really up to us to deliver on the investment objectives that are set forth for those clients. I think in the back of strong absolute and relative performance, thankfully, our clients look to us to – to help them as – as they think about what they’re doing and as they’re exploring more in the alternatives areas. So, as you know, certainly, the private equity and real estate allocations are quite mature in many of our client’s portfolios but they’ve been around for many decades. I think that the areas where we’re seeing – that’s called an outside demand and opportunity set, just but virtue of the small allocations on a relative basis that exist today is really around infrastructure, Barry, and its around private credits. So, to caveat that, I think all of the areas are certainly growing, and thankfully, for us that’s true. We’re looking at clients who we believe are underinvested, we believe they’re underinvested in those asset classes infrastructure both debt and equity and in private credit. And as you think about why that is, the attributes that they bring to our client is really important and in a world where your correlation and understanding those correlations is important that these are definitely diversifying assets. In a world where you’re seeing trillions of dollars, quite frankly, you’re providing little to no or even there’s negative yield. Those short falls are real and people need yield than need income. These assets tend to provide that. So the diversification, it comes from these assets. The yield can come from these assets and because of the immaturity of the asset classes, independence of the capital is flowing in, we still consider them relatively white space. You’re not crowded out. There’s much room for development in the market and with our client’s portfolios. And to us, that’s exciting because it presents opportunities. So, at the highest level, they’re the areas where I believe are most underdeveloped in our clients. RITHOLTZ: So let’s talk about both of those areas. We’ll talk about structured credit in a few minutes. I think everybody kind of understands what – what that is. What – when you see infrastructure as a sector, how does that show up as an investment are – and obviously, I have infrastructure on the brink because we’re recording this not too long after the giant infrastructure bill has been passed, tell us a little bit about what alternative investments in infrastructure looks like? CONWAY: Yes. It’s really in its infancy and what the underlying investments look like. I think traditionally, you would consider it as – and part of the bill that has just been announced, roads, bridges, airports. Some of these hard assets, some of the core infrastructure investments that have been around for actually some time. The interesting thing is the industry has evolved so much and put the need for infrastructure. It’s so great across both developed and emerging economies. It’s become something that if done the right way, the attributes we just spoke of can really have a very strong effect on our client’s portfolios. So, beyond the core that we just mentioned, well, we’ve seen a tremendous demand as a result of this energy transition. You’re really seeing a spike in activity and the necessity transition industry to cleaner technologies, a movement, not away completely from fossil fuel but integrating new types of clean energy. And as a result, you’ve seen a lot of demand on a global basis for wind and solar. And quite frankly, that’s why even us at BlackRock, albeit, 10-12 years ago, we really established a capability there to help with that transition to think about how do we use these technologies, solar panels, wind farms, to generate clean forms of energy for utilities where in some cases they’re mandated to procure this type of this type of – this type of power. And when you think about pre-contracting with utilities for long duration, that to me spells, Barry, good risk mitigation and management and ability to get access to clean forms of energy that throw off yield that can be very complementary to your traditional asset classes but for very long periods of time. And so, the benefits for us of these – these assets is that they are long in duration, they are yield enhancing, they’re definitely diversifying. And so, for us, where – we’ve got about, let’s call this 280 assets around the world that we’re managing that literally generate this – this clean electricity. I think to give the relevance of how much, I believe today, it’s enough to power the country of Spain. RITHOLTZ: Wow. CONWAY: And that’s really that’s really changing. So you’re seeing governments – so from a policy standpoint, you’re seeing governments really embracing new forms of energy, transitioning out of bunker fuels, for example, you know, burning diesels which really spew omissions into the – into the into the environment. But it’s really around modernizing for the future. So, developed and emerging economies alike, want to retain capital. They want to attract new capital and by having the proper infrastructure to support industry, it’s a really, really important thing. Now, on the back of that too, one things we’ve learned from COVID is that the necessity to really bring e-commerce into how you conduct your business is so important and I think from the theme of digitalization within infrastructure to is a huge part. So, it’s not just the energy transition that you’re seeing, it’s not just roads and bridges, but by allowing businesses to connect to a global consumer, allowing children be educated from home, allowing experiences that expand geographies and boundaries in a digital form is so important not just for commerce but in so many other aspects. And so, you think about cable, fiber optics, if you think about all the other things even outside of power, that enable us to conduct commerce to educate, there are many examples where, Barry, you can build resilience into your portfolio because that need is not measured in years. Actually, the shortfall of capital is measured in the trillions so which means this is – this is a multi-decade opportunity set from our vantage point and one of which our clients should really avail of. RITHOLTZ: Quite interesting. And I mentioned in passing, structured credit, tell us a little bit about what that opportunity looks like. I think of this as a space that is too big for local banks but too small for Wall Street to finance. Is that an oversimplification? What is going on in that space. CONWAY: I probably couldn’t have set it better, Barry. It’s – if we go back to just the even the investable universe, in the tens of thousands of companies, just if we take North America that are private, that have great leadership that really have strategic vision under – at the – in some cases, at the start of their growth lifecycles are even if they maintain, they have a very credible and viable business for the future they still need capital. And you’re absolutely right. With the retreat of the banks from the space to various regulations that have come after the global financial crisis, you’re seeing the asset managers in many respects working behalf of our clients both wealth and institutional becoming the new lenders of choice. And – and when we – when we think about that opportunity set, that is really understanding the client’s desire for risk or something maybe in a lower risk side from middle-market lending or midmarket enterprises where you can support that organization through its growth cycle all the way to some higher-yielding, obviously, with more risk assets on the opportunistic or even the special situations side. But it – it expands many things. And going back of the commentary around the evolution of the space, private credit today and what you can do has changed so profoundly, it expands the liquidity spectrum, it expands the risk spectrum. And the great news is, with the number of companies both here and abroad, the opportunities that is – it’s being enriched every single day. And were certainly seeing, particularly going back to the question are some of these assets coming from the traditional side, the public side. When we think of private credit, you are seeing private credit now been incorporated in fixed-income allocations. This is a – it’s a yelling asset. This is – these are debt instruments, these are structures that we’re creating. We’re trying to flexible and dynamic with these clients. But it really is an area where we think – it really is still at its – at its infancy relevant to where it can potentially be. RITHOLTZ: That’s really quite – quite interesting. (UNKNOWN): It’s Rob Riggle. I’m hosting Season 2 of the iHeart radio podcast, Veterans You Should Know. You may know me as the comedic actor from my work in the Hangover, Stepbrothers or 21 Jump Street. But before Hollywood, I was a United States Marine Corps officer for 23 years. For this Veterans Day, I’ll be sitting down with those who proudly served in the Armed Forces to hear about the lessons they’ve learned, the obstacles they’ve overcome, and the life-changing impact of their service. Through this four-part series, we’ll hear the inspiring journeys of these veterans and how they took those values during their time of service and apply them to transition out of the military and into civilian life. Listen to Veterans You Should Know on the iHeart radio app, Apple Podcast or wherever you get your podcast. RITHOLTZ: Let’s stick with that concept of money rotating away from fixed income. I have to imagine clients are starved for yields. So what are the popular substitutes for this? Is it primarily structured credit? Is it real estate? How do you respond to an institution that says, hey, I’m not getting any sort of realistic coupon on my bonds, I need a substitute? CONWAY: Yes. It’s all of those in many respects. And I think to the role, even around now a time where people have questions around inflation, how do substitute this yield efficiency or certainly make up for that shortfall, how do you think about a world where increasingly seeing inflation, not of the transitory thing it feels certainly quasi-permanent. These are a lot of questions we’re getting. And certainly, real estate is an is important part of how they think about inflation protection, how client think about yield, but quite frankly too, we’ve – we’ve gone through something none of us really had thought about a global pandemic. And as I think about real estate, just how you allocate to the sector, what was very heavily influenced with retail assets, high street, our shopping behaviors and habits have changed. We all occupied offices for obviously many, many years pre the pandemic. The shape of how we operate and how we do that has changed. So, I think some of the underlying investment – investments have changed where you’ve seen heavily weighted towards office space to leisure, travel in the past. Actually, now using a rotation in some respects out of those, just given some of the uncertainties around what the future holds as we come – come through a really difficult time. But the great thing about this sector is between senior living, between student housing, between logistics and so many other parts, there are ways in real estate to capture where there’s – where there’s demand. So still a robust opportunity set and it – and we do think it can absolutely be yield enhancing. We mentioned infrastructure. Even if you think about – and we mention OECD and non-OECD, emerging and developed, when I think about Asia, in particular, just as a subset of the world in which we’re living in, that is a $2.6 trillion alternative market today growing at a 15 percent CAGR. And quite frankly, the old-growth is driven by the large economic growth in the region. So, even from a regional perspective, if we pivot, it houses 57 percent of the world’s population and yet delivers 47 percent of the world’s economic growth. So, think of that and then with regard to infrastructure and goes back to that, this is truly a global phenomenon. So if we just even take that sector, Barry, you’ll realize that the way to maintain that type of growth, to attract capital, to keep capital, it really requires an investment of significant amount of money to be able to sustain that. And when you have 42 million people in a APAC migrating to cities in the year going back to digitalization, that’s an important thing. So, when I say we’re so much at the infancy in infrastructure, I really mean it. It can be water, it can be sewer systems, it can be digital, it can be roads, there’s so much to this. And then even down to the regional perspective, it’s a – it’s a need that doesn’t just exist in the U.S. So, for these assets, this tend to be long in duration. There’s both equity and debt. And on the debt side, quite frankly, very few outside of our insurance clients and their general account are taking advantage of the debt opportunity. And – and as we both know, to finance these projects that are becoming more plentiful every single day, across the world, including like, I said, in APAC in scale, there’s an opportunity in both sides. And I think that’s where the acid mix change happen. It’s recognizing that the attributes of these assets can have a role, the attributes of these assets can potentially replace some of these traditional assets and I think you’re going to see it grow. So, infrastructure to us, it’s really equity and debt. And then on the credit side, like I mentioned, again, too, it’s a very, very big and growing market. And certainly, the biggest area today from our vantage point is middle-market lending from a scale opportunity standpoint. So, we think much more to come in all of those spaces. RITHOLTZ: Really interesting. And let’s just stay with the concept of public versus private. That line is kind of getting blurred and the secondary markets is liquidity coming to, for lack of a better phrase, pre-public equities, tells little bit about that space. Is that an area that is ripe for growth for BlackRock? CONWAY: Yes. We absolutely think it is and you’re absolutely correct. The secondary market is – has grown quite substantial. If you even look at just the private equity secondary market and what will transact this year, I think it will be potentially in excess of 100 billion. And that’s what were clear, not to mention what will be visible and what will be analyzed. And that speaks to me what’s really happening and the innovation that we mentioned earlier. It’s no longer about just primary exposure. It’s secondary exposure. When we see all sort of interest and co-investment opportunities as well, I think the available sources of alpha and the flexibility you can now have, albeit if directed and advised, I believe the right way, Barry, can be very helpful and in the portfolio. So, your pre-IPO, it is a big part of actually what we do and we think about growth equity. There is – it’s a significant amount of capital following that space. Now, from our vantage point, as one of the largest investors in the public equity market and now obviously one of the largest investors and they in the private side, the bridge between – between private to public – there’s a real need. IPOs are not going away. And I think smart, informed capital to help with this journey, this journey is really – is really a necessity and a need. RITHOLTZ: So let’s talk a little bit about this recent restructuring. You are first named Global Head of Blackrock Alternative Investors in April 2019, the entire alternatives business was restructured, tell us a little bit about how that restructuring is going? CONWAY: Continues to go really well, Barry. When you look at the flow of acid from our clients, I think, hopefully, that’s speaks to the performance we’ve been generating. I joined the firm, as you know, albeit, 11 years ago and being very close to the alternative franchise as a critical thing for me and running the institutional platform. To me, when you watched this migration of asset towards alternatives, it was obviously very evident for decades now that this is a critical leg of the stool as our clients are thinking about their portfolios. We’re continuing to innovate. We’re continuing to invest, and thankfully, we’re continuing to deliver strong performance. We’re growing at about high double digits on an annual basis but we’re trying to purposeful too around where that growth is coming from. I think the reality is when you look at the competitive universe, I think the last number I saw, it was about 38,000 alternative asset managers out there today, obviously, coming from hedge funds all the way to private credits and private equity. So, competition is real and I do think the outcomes for our clients are starting to really grow. Unfortunately, some – in some cases, obviously, very good, and in some cases, actually not great. So our focus, Barry, is really much on how can we deliver performance, how can we be a partner? And I think we been rewarded with a trust and the faith our clients have in us because they’re seeing something different, I think, from us. Now, the scale of the business that you mentioned earlier really gives us tentacles into the market that I believe allows us to access what I think is the new alpha which is in many respects, given the heft of competition sourcing and originating new investments is certainly harder but for us, sitting in or having alternative team, sitting in 50 offices around the world, really investing in the markets because that – the market they grew up with and have relationships within, I think this network value that we have is something that’s quite special. And I think in the world that’s becoming increasingly competitive, we’re going to continue to use and harness that network value to pursue opportunities. And thankfully, as a result of the partnership we’ve been pursuing with her clients, like, we’ve – we’re certainly looking for opportunities and investments in our funds. But because of the brand, I think because of the successes, opportunities seeks us as much as we seek opportunity and that has been something that we look at an ongoing basis and feel very privileged to actually have that inbound flow as well. RITHOLTZ: Really quite interesting. There was a quote of yours I found while doing some prep for this conversation that I have to have you expand on. Quote, “The relationship between Blackrock’s alternative capabilities and wealth firms marked a large opportunity for growth in the coming years.” This was back in 2019. So, the first part of the question is, was your expectations correct? Did you – did you see the sort of growth you were hoping for? And more broadly, how large of an opportunity is alternatives, not just for BlackRock but for the entire investment industry? CONWAY: Yes. It’s been very much an institutional opportunity set up until now. And there’s so much to be done, still, to really democratize alternatives and we certainly joke around making alternatives less alternative. Actually, even the nomenclature we use and how we describe it doesn’t kind of make sense anymore. It’s such a core – an important allocation to our clients, Barry, that just calling it alternative seems wrong. Just about the institutional clients. It ranges, I think, as I mentioned on our – some of our more conservative clients which would be pension plans which really have liquidity needs on a monthly basis because of the liabilities they have to think about. At about 25 plus percent in private markets, to endowments, foundations, family offices, going to 50 percent plus. So, it’s a really important part and has been for now many years the institutional client ph communities outcomes. I think the thing that we, as an industry, have to change is alternatives has to be for the many, not for the few. And quite frankly, it’s been for the few. And as we talked about some of the attributes and the important attributes of these asset classes to think that those who have been less fortunate in their careers can’t access, things they can enrich their future retirement outcomes, to me, is a failing. And we have to address that. That comes from regulation changes, it comes from structuring of new products, it comes from education and it comes from this knowledge transmission where clients in the wealth segment can understand the role of alternatives and the context of what can do as they invest in equities and fixed income too. And we think that’s a big shortfall. So, the journey today, just to give you a sense, as we look at her clients in Europe on the wealth side, on average, as you look from what we would call the credited investors all the way through to more ultra-high-net worth individuals, their allocation to alternatives, we believe, stands at around two to three percent of their total portfolio. In the U.S., we believe it stands at three to five. So, most of those intermediaries, we speak to our partners who were more supporting and serving the wealth channel. They have certainly an ambition to help their clients grow that to 20 percent and potentially beyond that. So, when I look at that gap of let’s call it two to three to 20 percent in a market that just given the explosion in wealth around the world, I think the last numbers I saw, this is a $65 trillion market. RITHOLTZ: Wow. CONWAY: That speaks to the shortfall relative to the ambition. And how’s it been going? We have a number of things and capabilities we’ve set up to allow for this market to experience, hopefully, private equity, hedge funds, credit, and an infrastructure in ways they haven’t in the past. We’ve done this in the U.S., we’re doing it now in Europe, but I will say, Barry, this is still very much at the start of the journey. Wealth is a really important part of our future given our business, quite, frankly is 90 plus percent institutional today, but we’re looking to change that by, hopefully, democratizing these asset classes and making it so much more accessible in that of the past. RITHOLTZ: So, we hinted at this before but I’m going to ask the question outright, how significant is interest rates to client’s risk appetites, how much of the current low rate environment are driving people to move chunks of their assets from fixed income to alternatives? CONWAY: It’s really significant, Barry. I think the transition of these portfolios is quite profound, So you – and I think the unfortunate thing in some respects as this transition happens that you’re introducing new variables and new risks. The reason I say it’s unfortunate and that I think as an industry, this goes back to the education around the assets you own, understanding the role, understanding the various outcomes. I think it’s so incredibly important and that this the time where complete transparency is needed. And quite frankly, we’re investing capital that’s not ours. As an industry, we’re investing our client’s assets and they need to know exactly the underlying investments. And in good and bad times, how would those assets behave? So certainly, interest rates are driving a flow of capital away from these traditional assets, fixed-income, and absolutely in towards real estate, infrastructure, private creditors, et cetera, in the pursuit of this – this yield. But I do – I do think one of the things that’s critically important for the institutional channel, not just the wealth which are newer entrants is this transmission of education, of data because that’s how I think you build a better balanced portfolio and that’s a – that’s a real conundrum, I think, that the industry is facing and certainly your clients too. RITHOLTZ: Quite interesting. So let’s talk a little bit about the differences between investing in the private side versus the public markets, the most obvious one has to be the illiquidity. When you buy stocks or bonds, you get a print every microsecond, every tick, but most of these investments are only marked quarterly or annually, what does this illiquidity do when you’re interacting with clients? How do you – how do you discuss this with them in and how do perceive some of the challenges of illiquid investments? CONWAY: Over the – over the past number of decades, I think our clients have largely held too much liquidity in their portfolios. Like, so what we are finding is the ability to take on illiquidity risk. And obviously, in pursuit of that premium above, the traditional markets, I mean, I think the sentiment they are is it an absolute right one. That transition towards private market exposure, we think is an important one just given the return objectives, the majority of our clients’ need but then also again, most importantly now, with geo policy, with uncertainty, with interest rate uncertainty, inflation uncertainty, I mean, the – going back to the resilience point, the characteristics now by introducing these assets into the mix is important. And I think that’s – that point is maybe what I’ll expand on. As were talking to clients, using the Aladdin systems, and as you know, we bought eFront technologies, albeit a couple of years ago, by allowing, I think, great data and technology to help our clients understand these assets and the context of how they should own them relative to other liquidity needs, their risk tolerances, and the return expectations are really trying to use tech and data to provide a better understanding and comprehension of the outcomes. And as we continue to introduce these concepts and these approaches, by the way, that there is, as you know, so used to in the traditional side, it – it gives them more comfort around what they should and can expect. And that, to me, is a really important part of what we’re doing. So, we’ve released recently new technology to the wealth sector because, quite frankly, we mentioned it before, the 60-40 portfolio is a thing of the past. And that introduction of about 20 percent into alternatives, we applaud our partners who are – who are suggesting that to their clients. We think it’s something they have to do. What we’re doing to support that is really bringing thought leadership, education, but also portfolio construction techniques and data to bear in that conversation. And this goes back to – it’s no longer an alternative, right? This is a core allocation so the comprehension of what it is you own, the behavior of the asset in good and bad times is so necessary. And that’s become a very big thing with regard to our activities, Barry, because your clients are looking to understand better when you’re talking about assets that are very complex in their nature. RITHOLTZ: So, 60-40 is now 50-30-20, something along those lines? CONWAY: Yes. RITHOLTZ: Really, really intriguing. So, what are clients really looking for these days? We talked about yield. Are they also looking for downside protection on the equity side or inflation hedges you hinted at? How broad are the demands of clients in the alternative space? CONWAY: Yes. It ranges the gamut. And even – we didn’t speak to even hedge funds, we’ve had differing levels of interest in the hedge fund world for years and I, quite frankly, think some degree of disappointment too, Barry, with regard to the alpha, the returns that were produced relevant to the cost. RITHOLTZ: It’s a tough space to say the very least exactly. CONWAY: Exactly right. But when you start to see volatility introducing itself, you can really see where skill plays a critical factor. So, we are absolutely seeing, in the hedge fund, a resurgence of interest and demand by virtue of those who really have honed in on their scale, who have demonstrated an up-and-down markets and ability to protect and preserve capital, but importantly, in a low uncorrelated way build attractive risk-adjusted returns. We’re starting to see more activity there again too. I think with an alternatives, you’ve really seen a predominant demand coming from privates. These private markets, like a set of growths so extraordinarily fast and the opportunities that is rich, the reality too on the public side which is where our hedge funds operate, they continue to, in large part, do a really good job. The issue with our industry now with these 38,000 managers is how do you distill all the information? How do you think about your needs as a client and pick a manager who can deliver the outcomes? And just to give you a sense, the difference now between a top-performing private equity manager, a top quartile versus the bottom quartile, the difference can be measured in tens of percent. RITHOLTZ: Wow. CONWAY: Whereas if you look at the public equity side, for example, a large cap manager, top quartile versus bottom quartile is measured in hundreds of basis points. So, there is definitely a world that has started where the outcomes our clients will experience can be great as they pursue yield, as they pursue diversification, inflation protection, et cetera. I think the caveat that I would say is outcomes can vary greatly. So manager underwriting and the importance of it now, I think, really is this something to pay attention to because if you do have that bottom performing at the bottom quartile manager, it will affect your outcomes, obviously. And that’s what we collectively have to face. RITHOLTZ: So, let’s talk a little bit about real estate. There are a couple of different areas of investment on the private side. Rent to own was a very large one and we’ve seen some lesser by the flip algo-driven approaches. Tell us what Blackrock is doing in the real estate space and how many different approaches are you bringing to bear on this? CONWAY: Yes, we think it’s both equity and debt. Again, no different to the infrastructure side, these projects need to be financed. But on the – as you think about the sectors in which you can avail of the opportunity, you’ve no doubt heard a lot and I mentioned earlier this demand for logistics facilities. The explosion of shopping online and having, until we obviously have the supply chain disruption, an ability to have nearly immediate satisfaction because the delivery of the good to your home has become so readily available. It’s a very different consumer experience. So the explosion and the need for logistics facilities to support this type of behavior of the consumer is really an area that will continue to be of great interest too. And then you think about the transformation of business and you think about the aging world. Unfortunately, you can look at various economies where our populations are decreasing. And quite frankly, we’re getting older. And so, were you’re thinking of the context of that senior living facilities, it becomes a really important part, not just as part of the healthcare solution that come with it, but also from living as well. So, single-family, multifamily, opportunities continue to be something that the world looks at because there is really the shortfall of available properties for people to live in. And as the communities evolve to support the growing age of the population, tremendous opportunity there too. But we won’t give up on office space. It really isn’t going away. Now, if you even think about our younger generation here in BlackRock, they love being in New York, they love being in London, they love being in Hong Kong. So, the shape and the footprint may change slightly. But the necessity to be in the major financial centers, it still exists. But how we weighed the risks has definitely changed, certainly, for the – for the short-term and medium-term future. But real estate continues to be, Barry, a critical part of how we express our thought around the investment opportunity set. But clients largely do this themselves too. The direct investing from the clients is quite significant because they too see this as still as a rich investment ground, albeit, one that has changed quite a bit as a result of COVID. RITHOLTZ: Well, I’m fascinated by the real estate issue especially having seen some massive construction take place in cities pre-pandemic, look over in Manhattan at Hudson Yards and look at what’s taking place in London, not just the center of London but all – but all around it and I’m forced to admit the future is going to look somewhat different than the past with some hybrid combination of collaborative work in the office and remote work from home when it’s convenient, that sort of suggests that we now have an excess of capacity in office space. Do you see it that way or is this just something that we’re going to grow into and just the nature of working in offices is changing but offices are not going away? CONWAY: Yes. I do think there’s – it’s a very valid point and that in certain cities, you will see access, in others we just don’t, Barry. And quite frankly, as a firm, too, as you know, we have adopted flexibility with our teams that were very fortunate. The technologies in which we created at BlackRock has just become such an amazing enabler, not just to help us as we mention manage the portfolios, help us a better portfolio construction, understand risks, but also to communicate with our clients. I think we’ve all witnessed and experienced a way to have connectivity that allows them to believe that commerce can exist beyond the boundaries of one building. However, I do look at our property portfolios and even the things that we’re doing. Rent collections still being extraordinarily high, occupancy now getting back up to pre-pandemic levels, not in all cities, but in many of the major ones that have reopened. And certainly, the demand for people to just socialize, that the demand for human connectivity is really high. It’s palpable, right? We see it here too. The smiles on people’s faces, they’re back in the office, conversing together, innovating together. When people were feeling unsafe, unquestionably, I think the question marks around the role of office space was really brought to bear. But as were coming through this, as you’ve seen vaccine rates change, as you’ve seen the infection rates fall, as you’ve seen confidence grow, the return to work is really happening and return to work to office work is really happening, albeit, now with degrees of flexibility. So, going back to the – I do believe in certain areas. You’re seeing a surplus. But in many areas you’re absolutely seeing a deficit and the reason I say that, Barry, is we are seeing occupancy in certain building at such a high level. And frankly, the demand for more space being so high, it’s uneven and this goes back to then where do you invest our client’s capital, making sense of those trends, predicting where you will see resilience versus stress and building that into the portfolio of consequences as you – as you better risk manage and mitigate. RITHOLTZ: Very interesting. And so, we are seeing this transition across a lot of different segments of investing, are you seeing any products that were or – or investing styles that was once thought of as primarily institutional that are sort of working their way towards the retail side of things? Meaning going from institutional to accredited to mom-and-pop investors? CONWAY: Well, certainly, in the past, private equity was really an asset class for institutional investors. And I think that’s – that has changed in a very profound way. I mentioned earlier are the regulation has become a more adaptive, but we also have heard, in many respects, in providing this access. And I think the perception of owning and be part of this illiquid investment opportunity set was hard to stomach because many didn’t understand the attributes and what it could bring and I think we’ve been trying to solve for that and what you’re seeing now with – with regulators, understanding that the difference between if we take it quite simply as DD versus DC, the differences between the options you as a participant in a retirement plan are so vastly different that – and I think there’s a broad recognition now that there needs to be more equity with regard to what happens there. And private equity been a really established part of the alternatives marketplace was once, I think, really believed to be an institutional asset class, but albeit now has become much more accessible to wealth. We’ve seen it by structuring activities in Europe working with the regulators. Now, we’re able to provide private equity exposure to clients across the continent and really getting access to what was historically very much an institutional asset class. And I do think the receptivity is extraordinarily high just throughout people’s careers, they have seen wealth been created as a result of engineering a great outcome with great management teams integrate business. And I do believe the receptivity towards private equity is high as an example. In the U.S., too, working with the various intermediaries and being able to wrap now private equity in a ’40 Act fund, for example, is possible. And by being able to deliver that to the many as opposed to the few, we think has been a very good success story. And I think, obviously, appreciated by our clients as well. So, I would look at that were seeing across private equity as well as private credit and quite frankly infrastructure accuracy. You’re seeing now regulation that’s becoming more appreciative of these asset classes, you’re seeing a more – a greater level of openness and willingness to allow for these assets to be part of many people’s experiences across their investment portfolio. And now, with innovation around structures, as an industry, were able to wrap these investments in a way that our clients can really access them. So, think across the board, it probably speaks the innovation that’s happening but I do think that accessibility has changed in a very significant way. But you’ve really seen it happen in private equity first and now that’s expanding across these various other asset classes. RITHOLTZ: Quite intriguing. I know I only have you for a relatively limited period of time, so let’s jump to our favorite questions that we ask all of our guests. Starting with tell us what you’ve been streaming these days. Give us your favorite Netflix or Amazon Prime shows. CONWAY: That is an interesting question, Barry. I don’t a hell of a lot of TV, I got to tell you. I am – I keep busy with three wonderful children and a beautiful wife and between the sports activities. When I do watch TV, I have to tell you I’m addicted to sports and having – I may have mentioned earlier, growing up playing rugby which is not the most common sport in the U.S., I stream nonstop the Six Nations that happens in Europe where Ireland is one of those six nations that compete against each other on an annual basis. Right now, they’re playing a lot of sites that are touring for the southern hemisphere. And to me, the free times I have is either enjoying golf or really enjoying rugby because I think it’s an extraordinary sport. Obviously, very physical, but very enjoyable to watch. And that, that truly is my passion outside of family. RITHOLTZ: Interesting stuff. Tell us a bit about your mentors, who helped to shape your early career? CONWAY: Well, it even goes back to some of the aspects of sports. Playing on a team and being on a field where you’re working together, there’s a strategy involved with that. Now, I used to really appreciate how we approach playing in the All-Ireland League. How we thought about our opponents, how we thought about the structure, how we thought about each individual with on the rugby field and the team having a role. They’re all different but your role. And actually, even starting from an early age, Barry, thinking about, I don’t know, it’s sports but how to build a great team with those various skills, perspective, that can be a really, really powerful combination when done well. And certainly, from an early age, that allowed me to appreciate that – actually, in the work environment, it’s not too different. You surround yourself with just really great people that have high integrity that are empathetic and have a degree of humility that when working together, good things can happen. And I will say, it really started at sports. But I think of today and even in BlackRock, how Larry Fink thinks about the world and I think Larry, truly, is a visionary. And then Rob Kapito who really helps lead the charge across our various businesses. Speaking and conversing with them on a daily basis, getting their perspectives, trying to get inside your head and thinking about the world from their vantage point. To me, it’s a huge thing about my ongoing personal career and development and I really enjoy those moments because I think what you recognize is independent of how much you think you know, there’s so much more to know. And this journey is an ever evolving one where you have to appreciate that you’ll never know everything and you need to be a student every single day. So, I’d probably cite those, Barry, as certainly the two most important mentors in my life today, professionally and personally quite frankly. RITHOLTZ: Really. Very interesting. Let’s talk about what you’re reading these days. Tell us about some of your favorite books and what you’re reading currently? CONWAY: Barry, what I love to read, I love to read history, believe it or not. From a very small country that seems to have exported many, many people, love to understand the history of Ireland. So, there’s so many books. And having three children that have been born in the U.S. and my wife is a New Yorker, trying to help them understand some of their history and what made them what they are. I love delving into Irish history and how the country had moments of greatness and moments of tremendous struggle. Outside of that, I really don’t enjoy science fiction or any of these books. I love reading, you name any paper and any magazine on a daily basis. Unfortunately, I wake at about 4:30, 5 o’clock every day. I spent my first two hours of the day just consuming as much information as possible. I enjoy it. But it’s all – it’s really investment-related magazines, not books. It’s every paper that you could possibly imagine, Barry, and I just – I have a great appreciation for certainly trying to be a student of the world because that’s what we’re operating in an I find it just a very interesting avenue to get an appreciation to for the, not just the opportunities, but the challenges we’re collectively facing as a society but also as a business. RITHOLTZ: I’m with you on that mass consumption of investing-related news. It sounds like you and I have the same a morning routine. Let’s talk about of what sort of advice you would give to a recent college graduate who was interested in a career of alternative investments? CONWAY: Well, the industry has – it’s just gone through such extraordinary growth and the difference, when I’ve started versus today, the career opportunity set has changed so much. And I think I try to remind anyone of our analysts who come into each one of our annual classes, right, as we bring in the new recruits. I think about how talented they are for us, Barry, and how privileged we all are to be in this industry and work for the clients that we do. It’s just such an honor to do that. But I kind of – I try to remind them of that. At the end of the day, whether you’re supporting an institution, that institution is the face of many people in the background and alternatives has really now become such an important part of their experience and we talked about earlier just this challenge of retirement, if we do a good job, these institutions that support the many, they can have, hopefully, a retirement that involves dignity and they can have an ability to do things they so wanted to do as they work so hard over their lives. Getting that that personal connection and allowing for those newbies to understand that that’s the effect that you can have, an alternatives whether it’s private equity, real estate, infrastructure, private credit, hedge funds, all of these now, with the scale at which they’re operating at can allow for a great career. But my advice to them is always don’t forget your career is supporting other people. And that comes directly to how we intersect with wealth channel, it comes indirectly as a result of the institutions. And it’s such a privilege to do that. I didn’t envision when I grew up, as I mentioned, my first job, milking cows and back in a small town in the middle of Ireland that I would be one day leading an alternatives business within BlackRock. I see that as a great privilege. So, for those who are joining afresh, hopefully, try to remind them that it is for all of us and show up with empathy, dignity, compassion, and do the best you can, and hopefully, these people be sure will serve them well. RITHOLTZ: And our final question, what you know about the world of alternative investing today you wish you knew 25 years or so ago when you were first getting started? CONWAY: I think if we had invested much more heavily as an industry in technology, we would not be in the position we are today. And I say that, Barry, from a number of aspects. I mentioned in this shortfall of information our clients are dealing with today. They’re making choices to divest from one asset class to invest in another. To do that and do that effectively, they need great transparency, they needed real-time in many respects, it can’t be just a quarterly line basis. And if we had been better prepared as an industry to provide the technology and the data to help our clients really appreciate what it is they own, how we’re managing the assets on their behalf, I think they would be so much better served. I think we’re very fortunate at this firm to have built a business on the back of technology for albeit 30 plus years and were investing over $1 billion a year in technology as I’m sure you know. But we need to see more of that in the industry. So, the client experience is so important, stop, let’s demystify alternatives. It’s not that alternative. Let’s provide education and data and it’s become so large relative to other asset classes, the need to support, to educate, and transmit information, not data, information, so our client understand it, is at a paramount now. And I think it certainly as an industry, things have to change there. If I knew how big the growth would have been and how prominent these asset classes were becoming, I would oppose so much harder on that front 30 years ago. RITHOLTZ: Thank you, Edwin, for being so generous with your time. We’ve been speaking with Edwin Conway. He is the head of Blackrock Investor Alternatives Group. If you enjoy this conversation, please check out all of our prior discussions. You can find those at iTunes, Spotify, wherever you get your podcast at. We love your comments, feedback and suggestions. Write to us at MIB podcast@Bloomberg.net. You can sign up for my daily reads at ritholtz.com. Check out my weekly column at Bloomberg.com/opinion. Follow me on Twitter, @ritholtz. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Mohammed ph is my audio engineer. Paris Wald is my producer, Michael Batnick is my head of research, Atika Valbrun is our project manager. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.   ~~~   The post Transcript: Edwin Conway appeared first on The Big Picture......»»

Bitcoin: A Second Chance For The Muslim World? Authored by Asif Shiraz via BitcoinMagazine.com, Bitcoin is the sound money that the Muslim world needs to accelerate into the future... The Ottoman suppression of the printing press is a poster child case of intellectual stagnation in the Muslim world. Although there was no outright ban, there is no denying of a massively missed opportunity here: A civilization’s failure to adopt a groundbreaking technological change happening right next door. In its golden age, this same civilization that gave the world universities and hospitals, optics and algebra, even a precursor to the printing press itself, got so left behind in the later acceptance of technology, that its very own holy book, the Quran, waited for its first mass publication almost 300 years after Johannes Gutenberg chugged out the printed Bible. THE DECLINE But Islam’s Genesis Block was entirely different in character: A spirited but sundry assemblage of women and men whose most remarkable trait was their openness to new ideas. The idea of one God in a multitude of divine contenders. The idea of one bitcoin in a multitude of shitcoins … oops... sorry... mixing up my chronology! So anyway, this fraternity of early Islam, along with its keen aspiration of ushering in a just social and economic order, is also remarkable in a novel way for its time: It represents a death cross of reason’s moving average overtaking that of intuition in religious history. Bringing intellectual inquiry at par with mystical experience, it paved the way for its scions to delve into scientific skepticism, empiricism and experimental inquiry, with Robert Briffault going so far as to say that “Roger Bacon was no more than one of the apostles of Muslim science and method.” But eventually, the music stopped, and the market corrected! There are many explanations for the downfall, most of them partially true, spanning decades and centuries, but if we want to point fingers, as human nature dictates, at some symbolic event, then it must be the Mongol destruction of the House of Wisdom, #SackOfBaghdad. In the age of manuscripts, so many books from Baghdad’s libraries were flung into the Tigris that a horse could walk across on them and the river ran black with scholars’ ink and red with the blood of martyrs. As the Muslim Ummah lost so many intellectuals and intellectual capital in this tumultuous period, its reaction has been, (understandably), like that of an intern finding herself in control of mission critical servers, where all the senior sys admins suddenly stepped down, died or disappeared. Your best reaction is this: I’m not touching this system, and the only commands I’ll ever execute are those handed down by the four illustrious system admins — founders of the established schools of jurisprudence. And so Islamic scholarship for hundreds of years has been in a maintenance mode. In Pakistan alone, over 12,000 Madrasa routinely teach the rules and regulations of exchanging gold and silver, centuries after its daily use has been replaced by fiat. SURVIVAL OF CORE TENETS But herein lies a wonderful irony. This code-freeze on innovation, which we otherwise disapprove of, did work to an extent as it was intended: It protected the core principles from being callously compromised or deliberately diluted in the hands of opportunists. Just like the extra caution and consensus in changing the U.S. constitution protected the principles of freedom and equality enshrined in it: Islamic law, too, enshrined core financial principles, that have been a thorn on the side of would-be reformers attempting to legalize fiat and modern banking in the name of Islamic Finance. The 12,000 semi-literate Madrasa students, parroting the provisions of the fair exchange of gold and silver from a 17th century syllabus citing a 9th century scholar, unwittingly become more correct than a Harvard doctorate in finance indoctrinated in the misguided larceny of fiat money! All because Muhammad ﷺ mandated sound money, just like Mises and Hayek after him, a tenet immutably crystallized in Fiqh — Islamic Jurisprudence. A business man himself, the Prophet of Islam possessed a sharp acumen for economics and finance. In modern parlance, he quickly rose the corporate ladder to become one of the youngest CEOs of his time tasked with turning around the failing business empire of the urbane female entrepreneur, Khadija. Impressed with the Prophet’s personality, Khadija quickly proposed to him, creating a power couple that changed the course of history. Just like Jesus turned out the money-lenders from the Second Temple, the Prophet of Islam, too, had a disdain for usury and outlawed most of the accompanying capitalist machinations, that contribute to the gross wealth disparities like 10% owning 76% of the assets. So he created some fundamental rules that constitute the bedrock of Islamic financial principles: Forbade usury (Riba), including interest. Still respecting the time value of money, the prohibition’s intent is to create a financial regime where profit and risk is shared between the entrepreneur and the investor. From a sound money perspective, it prohibits the core operation of issuing interest bearing bonds and T-Bills against which the central bank can inflate the money supply. Forbade uncertainty (Gharar), embodied in his famous quote, “Do not sell a fish which is still in the water.” Eliminates the possibility of fractional reserve, since outstanding debt cannot be monetized and traded further with, unless it’s paid. It also closes the tap on a myriad of derivative instruments that further inflate the money supply. Forbade speculation (Maisir), which includes outright gambling. Some scholars consider speculative market activity, like the Dogecoin phenomena, under the ambit of this ruling. Mandated sound money. The rules of obligatory charity tax in Islam are denominated in sound money. Muslim governments take the market price of gold, convert them to fiat prices, and announce the converted value to the public to pay the religious obligation of Zakat. But from a legal standpoint, it permanently establishes gold and silver (as well as a whole class of other products) as perpetual, religiously recognized money in Islam. These prohibitions are strong enough in Islamic theology that anyone who violates them is technically, “at war with Allah and his Prophet.” Which is why the Madrasa’s syllabus clings to “nature’s money” (Thaman-e-Khalqi): gold and silver. But of course, big governments, Muslim or otherwise, are a chip off the same block: Self-interest reigns supreme over ethical principles. In Pakistan alone, the religious case against fiat banking has been delayed and obstructed for over 40 years in the courts. The politics of deficit financing are so attractive that no one wants to surrender this magical money making wand. Voldemorts, all of them! In spite of these prohibitions, and in countries where religion dominates social values, Muslims still grew comfortable with paper money because it initially disguised itself as “warehouse receipts for gold” which duped the scholars into permitting it, but the jurisprudence failed to catch up with the subsequent thinning of this asset backing into its current meaningless extent. REFORM ATTEMPTS As the domino roll of national independences took place, four different threads of activity around banking spread in Muslim countries. First, the mainstream implementation of modern banking took root in every Muslim State, implemented in toto like its Western counterparts. Second, Islamic banking attempted to reshape things a little. Scholars familiar with both economics and Shariah attempted to “Islamize” banking via the new academic discipline of “Islamic finance.” But instead of faithfully creating platforms for risk-sharing and equity-based financing, it just followed the Medieval Triple Contract–like approach to practically clone existing financial products, accompanied by a plethora of research papers to justify it. Like a comedic quote from the cold war era, “Communism is the longest and most painful road from capitalism to capitalism,” contemporary Islamic finance, too, turned out to become the most painful and circuitous route from traditional banking to traditional banking, decorated with Arabic names! How the professional bankers duped these scholars and hijacked this effort is excellently explained by Harris Irfan in a podcast with our own Saifedean Ammous. Third, a large but silent majority of toothless Islamic scholars continues to exist who view all forms of banking with suspicion, but the growing chasm of knowledge gap between their education and the complexities of modern finance makes them unable to take back the narrative. Lastly, a much smaller band of Islamic scholars exist, like followers of the Sufi order of a British convert and his Basque disciple, as well as a scholar from Trinidad, who successfully identified the fundamental problem with modern banking from a Shariah perspective: its monetary foundation. You cannot “Islamize” a bank if you do not fix the money it operates on! Hence, their attempt to resuscitate the traditional Islamic gold dinar as a sound money alternative to fiat. GOLD DINAR: THE REAL ISLAMIC ALTERNATIVE Fiat money and its permissibility can be viewed through an important concept in Islamic theology, the Maqasid-e-Shariah: the goals or purpose of Shariah law. To illustrate this with a controversial example, consider a Shariah law which says you cannot punish a man or woman for adultery, unless you bring four eye witnesses to the sexual act (which is normally impossible). While Islam abhors adultery, the Maqasid is an attempt by scholars to understand why, instead of having a law that easily and swiftly punishes it, there exists one that makes it practically impossible to prosecute. They rationalized that it must be to shield people’s privacy and one-off slipups from society's nosy interference and appetite for punishment. According to Muhammad Asad, “… to make proof of adultery dependent on a voluntary, faith-inspired confession of the guilty parties themselves.” So the Maqasid points to some socially valuable goal that the law intends to achieve. The rationale of the financial laws of Shariah are similarly explained in terms of their goals: a just distribution of wealth, a money free from devaluation, a business contract free from usurious exploitation, and a regulatory regime that increases people’s wealth and well-being. Through a very elementary intuition, it is obvious that fiat currencies violate this principle of honesty and justice in the society: Money issuers steal the purchasing power of the people and devalue their money. To put a formal Quranic stamp to this reasoning, we can take verse 3:75, “There are some among the People of the Book (Jews and Christians) who, if entrusted with a stack of gold, will readily return it.” The modern Islamic bank, if entrusted with money equivalent to a stack of gold, returns you only 90% of its worth in purchasing power, owing to inflationary erosion, thus it’s part of a system that clearly violates the Maqasid. Islamic banks have thus thoroughly failed to espouse the core principle of risk sharing and eliminating interest (since interest exists in the very issuance process of the money they are built on). The only real Islamic alternative ever proposed was the Gold Dinar Movement. Starting in parallel (and in many respects earlier) than Islamic banking, (with the first modern Dinar minted in 1992), it was incisively accurate in its assessment and proposed remedy to the money problem: “The Return to the Gold Dinar.” This was an earlier time, when the golden tool in the fight against fiat was literally gold, which was then popularized by Austrian economics, advocated by upright leaders like Ron Paul, and adopted by grassroots activists like Bernard von NotHaus. The Muslim world saw its own spate of activism for sound money, led by its most vocal proponent, Umar Vadillo, and associated initiatives like Wakala Nusantara, Dinar First and my own Dinar Wakala. The Kelantan State government’s launch of Gold Dinar was our own El Zonte moment, full of euphoria and promise that made waves globally. The passion and courage of this vibrant lot of Warrior Sufis represented the best of modern-day Muslims: Profoundly knowledgeable people, engaged in grassroots activism, to fix the most pressing challenges of the contemporary world. However, the primary strength of gold, its physical indestructibility, came in the way of its adoption: Logistic and regulatory hindrances prevented free flow of physical gold coins across national boundaries. In the words of its founder, Shaykh Abdalqadir, “The defense mechanisms of today’s late capitalism and its crisis management surrounding the buying, moving and minting of gold have surrounded it with prohibitive pricing and taxation.” It continues to serve as a galvanizing symbol of the fight against Riba, but making it a practical inflationary hedge, or a broader Ummah-level movement for sound money, proved an elusive goal. Without the Gold Dinar, the horizon seemed all but bleak, except that a glimmer of hope came from the most unexpected of places: Where scholars, economists and revolutionaries had failed, nerds succeeded! Enter Emir Satoshi! ADVENT OF BITCOIN For us in the Gold Dinar Movement, Bitcoiners are our brothers in arms: fighting the same enemy, securing the same goal. This is what I have always advocated to my fellow activists in the dinar movement, from as far back as 2012. Our Prophetﷺ, as well as the Rashidun Caliphs, never debased money, nor profited from seigniorage, but gave us the right to choose our own mediums of exchange. This is fundamentally antithetical to the monstrosity of legal tender laws, which Islamic scholars have been duped into legitimizing under various pretexts (highlighting the need for increased financial literacy in this lot). This freedom to choose a currency constitutes the common ground that both us and the Bitcoiners can rally around together. “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust,” writes Satoshi. He recognized the problem with fiat and set out to fix it with Bitcoin, a miraculous epiphany that has let loose this growing, global band of fervid, somewhat bumptious Maximalists, as similar in essence and ethos to us, as they look different in appearance. I see Bitcoiners, not only in their pluck and guile, but also in the sly ingenuity of their weapon of choice, as nothing less than a modern-day David taking on the Goliath of traditional banking! From a Muslim perspective, the operating verse of the Quran in critique of the Bitcoin movement becomes 49:13, “O mankind, indeed We have created you from male and female and made you peoples and tribes that you may know one another. Indeed, the most noble of you in the sight of Allah is the most righteous of you. Indeed, Allah is Knowing and Aware.” In the realm of monetary matters, the most righteous and noble are those who support sound money. It is appropriate that Allah stresses his own divine attributes in the verse, as a warning that our religiously colored conception of righteousness may not necessarily be the same as that of the knowing, the aware. (The literal term Taqwa, means something that protects you from the wrath of God.) And to the best of my belief, protecting and uplifting the poor, the downtrodden from the entrapments of a prejudiced financial system is surely a winner with the God of Abraham! A SECOND CHANCE We Muslims had set out to establish a just and fair society, and for some time, to quote David Graeber, succeeded: “Once freed from its ancient scourges of debt and slavery, the local bazaar had become, for most, not a place of moral danger, but the very opposite: the highest expression of the human freedom and communal solidarity, and thus to be protected assiduously from state intrusion.” But gradually, as our political and intellectual leadership in the world waned, we now find ourselves economically bankrupt, submerged in a rigged financial system, and enslaved to the dictates of the International Monetary Fund (IMF). A major reason for this impoverishment was the widening gap of modern knowledge. The following vicious cycle of three circularly dependent factors is another way of modeling our current reality: Low capital allocation for education. A generally weak economy leaves little allocation for investment in education of both scientific and humanities disciplines, which is required for a productive human capital. Low human capital. The first factor results in low quality of education in the populace then manifests politically in bad national decisions, engagement in conflicts, economic mismanagement, acquisition of debt and failure to curb corruption. Economically, this unskilled workforce has low productivity, scarce entrepreneurship and ineffective technology adoption. Religiously, it permits violence and extremism to breed along sectarian fault lines. Low economic output. The second factor results in continued economic tribulations, since the whole society is now in KTLO mode, instead of “adding new features.” Which leads us again to item one. It is the standard cycle of poverty played out at a macro scale, which many competing power bases believe they can break. The military, the Mullahs, and the Liberals, far away, even the CIA has prescriptions on how to solve our problems. But such temporary political and economic interventions bear no lasting results, since nations are built by worthy men and women, over a span of many years, who, given a free and peaceful environment, fall back on their innate drive for excellence to create a better world. It is the job of the revolutionary and his meteoric jolt, or at a smaller scale, your social entrepreneur giving a small push, that breaks a segment of society free from this vicious cycle: A closed ecosystem of wealth circulation, comprising of learned individuals, equipped with better technology and empowered with more capital, shielded from outside influence, and stabilized by a fair social contract, to launch the virtuous symbiosis of economic prosperity and human development which prop each other to newer heights. This break can start in many ways: a national independence, some strong leadership, or in case of Islam, the founding of a new religion. Islam’s own trajectory gives us a generalized three-stage pattern on which any revolution can be modeled, an excellent blueprint for our bitcoin adoption. Education: A new world view is conceived, and people are educated toward it for voluntarily placing their faith on it — Iman. Separation: The model is physically deployed, separated from existing systems, so it can grow and thrive without any negative external influences — Hijra. Protection: When the model grows strong enough to threaten the status quo, but still weak enough to be fully destructible, it needs protection, usually requiring armed conflict — Jihad. We in the Gold Dinar Movement believed that the break in this vicious cycle will come from financial empowerment: When Muslim people and governments adopt sound money, free from the shackles of the IMF, it will allow our bankrupt economies to manage enough disposable income that can be invested in other avenues in society, putting us on a path to progress and human development. Gold would bring back the Golden Age, producing men and women who are worth their weight in gold! But it could not. Let me explain why, and how bitcoin makes it possible. BITCOIN: A TOOL FOR REVOLUTION Following our three-stage model of a revolution, let’s review how bitcoin resolves the challenges of each step. 1. Education The common man, humble about his knowledge of finance, expects, like John Galbraith remarked, a “deeper mystery to the process of money creation.” But which really is so simple, he goes on, that “the mind is repelled.” But the chasm in traditional and modern education keeps our scholars from being able to religiously evaluate the fiat system, for which they need three vital credentials: a traditional Mufti qualification, specialized research in the Fiqh of Muamalat, and a study of modern economics. Only a handful achieve this, like the globally revered Usmani, who become thought leaders in Islamic finance: The rest take the easy way out and follow what they posit. I once asked a certified Shariah advisor on LinkedIn, if he knew what fractional reserve banking meant. I expected some abstruse, rule-bending justification for it but was taken aback by his honest admission that he simply didn’t know what it was! So the first challenge was to educate both the people and the scholars about the fiat system. Then to enlist serious academic and industry practitioners to devise a working alternative based on gold and silver. Then to have its demand trickle down into the masses to eventually morph into enough political pressure for the government to adopt it, much to its own detriment. Highly unlikely. Except that with bitcoin, educating the people now becomes much more focused and result oriented. The wider goal of educating people about finance and economics remains indispensable in both gold and Bitcoin-based sound money solutions. But with bitcoin, we don’t have to wait for a third-world academia and archaic-minded scholars to sell the solution to an unwilling government: We take the narrative, and the prerogative of action, back from them. We go tactical, orange pill the masses with an Urdu translation of the bitcoin standard, and focus on what is minimally essential to achieve within our means: Teaching Muggles... sorry…. No-coiners, the very basics of money mechanics, the role of bitcoin in our strategic response, and the know-how to stack satoshis in a cold wallet! The rest will follow! Coming to think of it, my initial printing press analogy is poignantly relevant. The press encapsulated years of knowledge in a simple package easily disseminated to thousands, which could have overcome our knowledge gap had we adopted it earlier. Bitcoin, too, encapsulates the quintessential wisdom of centuries of humanity’s experience in what constitutes good money and allows it to be spread easily across the world. It is both knowledge, and a tool crafted out of that knowledge. If we miss the boat on it, we will not only lose to “usury capitalism,” but the Bitcoin movement, too, will be deprived of huge potential support from a quarter of the world population. We must join the rest of humanity in a last ditch attempt at wealth equality. 2. Separation After educating people about money mechanics and bitcoin, the second step is the Hejira, our separation from the existing system. An Islamic scholar, Abdassamad Clarke defined “usury capital,” as “the use of capital that is both generated by usury and operated according to usurious principles, which permits a tiny clique of individuals, by the principle of fiat money amplified by leverage, to wield extraordinary power and accumulate unheard of wealth in such a manner as to subject the rest of humanity as menial servants in their project of self-enrichment, whether in the tyrannies of the East or the so-called free-market capitalism of the West.” The fundamental philosophical difference between Islamic and Western economics is how we view interest. Islam holds firm to the classical Judeo-Christian prohibition, believing that the time value of money is more fairly accounted for in equity finance style risk sharing of the invested capital, instead of a guaranteed return favoring the capitalist. Among other things, its side effect is prohibiting both the monetizing of our “future income” to issue fiat, and prohibiting the money-multiplier effect of fractional reserve, through the rulings of Riba, Bai-al-Dain and Bai-al-Madum. Bitcoiners and libertarians rely on an entirely different philosophical foundation to reach partially the same conclusion in regards to fiat, that it’s perverse, unjust and socially destructive. The end goal for both is the same: To separate ourselves from the fiat system and carve out an entirely new, independent financial system: The original idea of decentralized finance (DeFi)! Unfortunately, the bubble effect we so dislike in TradFi — traditional finance — is now itself widespread in the non-Bitcoin crypto world, what Ellen Farrington cites as the immense amount of “rehypothecation, leverage, and securitization,” which if misused can cause systemic risks that affect everyone. The practical reality of contemporary DeFi in the non-Bitcoin world is quite far from its theoretical goal. Looking at this aspect of “crypto,” some Islamic scholars took the liberty of invoking the gambling prohibition clause, something whose motivation we can sympathize with, even though we disagree with the conclusion. A lack of regulation at the administrative level cannot be countered by religious pronunciation of Haram status. It’s kind of like declaring cars as Islamically forbidden, merely because some people are driving them too fast and killing others. But presently, we are far less interested in how scholars view “crypto” than we are regarding bitcoin. The DeFi world’s shiny new investments offering unsustainable returns, its shady ICOs and the casino-like frenzy and get-rich-quick dreams of novice retail investors are far removed from what we advocate, from what we are daring to call a second chance for the Muslim world: A Bitcoin-based sound money adoption as a medium of exchange and store of value! But what is nevertheless commendable in the crypto world (led, of course, by Bitcoin) is the attempt to create this entirely new, independent miniverse of alternative, decentralized finance, isolated from the existing system. Building and expanding this decentralization, based on Bitcoin, is the essence of the second step of our revolutionary blueprint: the Hejira. Migrating from the old to the new. As Iqbal would have said, “Blow away this transitory world, and build a new one from its ashes” — khakastar se aap apna jahan paida karay. The only serious prior attempt for sound money among Muslims was the Dinar movement. But it only works in a physical jurisdiction: Where to mint, where to store, how to transport, how to coordinate electronic payments, how to deal with banking regulations, taxes and government interference? Theoretically, it was possible to instantiate an entirely independent ecosystem of issuance, storage, transport and trade using gold, but real progress on it was very slow. At the same time, the Bitcoin ecosystem has matured so much to be classifiable as an independent and isolated system, free from all interference from legacy finance. The Core Bitcoin Timechain, Lightning and Layer 2 smart contract solutions, and the globally distributed miner, node operator and supporter community, all combine to form a platform on which we can build and experiment with truly Islamic financial contracts of the form that are not possible with TradFi. In this ecosystem, we can resuscitate Islamic social and financial institutions like the Bait-ul-Maal, the Suq, the Waqf, the Guilds, the Hawala, the Wahdiya, the Qirad and the Musharaka, free from the restrictions of any government, securities commission or central bank. 3. Protection And once this isolated system is deployed, we need to protect it. A story is told in Islamic lore, that when Abu Dharr Ghifari came looking to meet the Prophet, Ali told him to walk a few paces behind him, and if he senses anyone suspicious he will stoop down to tie his shoelaces and Abu Dharr should continue walking ahead. Kind of like a coinjoin to obfuscate where he was actually going. When you are small, you must remain in stealth mode and operate under the radar. Later on, when the small state of early Islam was established in a nearby city, it needed a number of armed conflicts to defend itself from being nipped in the bud! Deploying a sound money system, too, may need a precarious window in which the sapling would need fierce protection before it grows into a tree. The hellacious powers issuing the yuans and dollars of the world are way too formidable for any third-world nation state to get away with a head-on collision. In fact, we cannot even withstand assaults from individual speculators, let alone a concerted effort by the global financial cabal to preserve its status quo. El Salvador and the like are definitely interesting trailblazers to watch out for here, but it is too early to tell. If a sufficient number of first-world citizens band together to defy their government in adoption of sound money, the response of fiat-powered regimes would (probably) be much more restrained in handling them versus some rogue state from a third-world country attempting to defy the dominant currency. I was told by a prominent Islamic banker that when Mahatir toyed with the idea, he was sent a very stern signal to “cease and desist” by the powers that be! So, can a Muslim government adopt and get away with either the dinar or bitcoin? I believe only in the latter. Only bitcoin has the necessary technological edge in terms of its unstoppability and indestructibility that can substitute for the need of a national military power strong enough to protect a traditional sound money built on gold. THE ISLAMIC STATE VERSUS BITCOIN But many Islamic revivalists believe otherwise and their goal is usually larger in scope than financial reform alone. It is a more holistic quest to resuscitate the political, social and legal structures of precolonial Islamic governments. Encouraged by the spectacular rise of early Islam that dared challenge superior powers like Byzantine and Sassanids, they believe it possible to recreate the traditional theocracy along similar lines, one of whose side effects would be to eradicate fiat currency also. Such ambitious projects downplay the urgency of fixing our financial system: No need to separately struggle for it if it comes as a natural corollary to the larger political renaissance. Now the specter of such pan-Islamic revival has been thoroughly demonized in Western imagination, owing from our own side to violent extremism, owing from their side to a deep-rooted Islamophobia, and owing generally to ideas (or realities?) like the clash of civilizations. But my Bitcoiner friends — whose libertarian ethos is so refined to even self-censure the slightist hint of authoritarian enforcement in El Salvador’s legal tender adoption of bitcoin — will surely agree that it is entirely within the rights of the Muslim world to voluntarily experiment, on their land, with whatever form of government they fancy: caliphates, sultanates or kingdoms! But the reality of this dream in the minds of the majority of modern Muslims is quite different from what the world perceives. The moderate Muslim just wants Islamic principles to be the guiding source of their political and social order. But the strength of this desire is often encashed by opportunists, resulting in two recent distorted models of political Islam: 1.The Iranian model: Somewhat broad-based and sustainable but toothless and symbolic. They are the political twins of Islamic banks, offering no real change to the common man, except moral policing. Financially, there even exists the oxymoronic Central Bank of the Islamic Republic. Why would you have an Islamic bank if you were truly an Islamic republic? 2. Second, is the Taliban and ISIS model: Narrow-based, extremist and unsustainable, divorced from the comity of nations. ISIS did reportedly issue the Gold Dinar but to no one’s avail, except perhaps as a recruitment propaganda. News out of Kabul promises a more restrained and balanced government this time around, but is it a genuine change of heart or just political expediency? So, while the Muslim world waits for a true Islamic reformation, and the world holds its breath on how the next such attempt turns out, my issue with this ubiquitous political quest in the Muslim imagination is just NGMI — it’s not gonna make it! We can’t stall the effort of immediate financial reform on some future promise of a bigger change happening to facilitate it. As an Urdu saying goes, na nau munn tayl hoe ga, na Radha naachay gi: Neither shall the king be able to provision nine gallons of lamp oil, and nor will the stage ever be lit enough for his dancing girl, Radha, to perform! Nevertheless, assuming for a moment that a mature, viable, modern Islamic government does get established by some geopolitical miracle, faithful to Islam’s core tenets, and broad-based in popular support, the next and more pertinent question becomes: Will it have sufficient political, and if necessary, military power, to deploy a gold-based sound monetary system in their country, and then get away with the sanctions and isolation that follow? And this is where bitcoin, once again, outshines other alternatives. The one trait that sets it apart from all “crypto”, and indeed, all monies in human history: true, sovereign-grade censorship resistance, from both your own government and foreign powers. Without needing any battalions or bombs, bitcoin enables us to fight the good fight ourselves and win. And if the broader Islamic reformation materializes, bitcoin can support it, too, for bypassing potential sanctions and increasing national wealth! God has a knack for defeating evil by the simplest of designs — the mighty Goliath with a slingshot, the persecutors of the Prophet with a humble spider — as if to compound the humiliation of defeat by the plainness of its bearer. Who could have thought that the Kremlins, Zhongnanhais and White Houses of the world would be made helpless by the confluence of two elementary ideas: proof of work and difficulty adjustment! But this simple, easily overlooked and less understood killer combination of traits makes bitcoin an undefeatable tool in the hands of us, the 99%. We do not need to wait for anyone. We can do it ourselves with bitcoin. THE WAY FORWARD While the wallet addresses, exchange accounts, market cap, and of course, the hype around crypto is constantly rising in Muslim countries, much of this activity is from the perspective of a shiny new investment vehicle, a get-rich-quick bandwagon to which everyone wants to hitch! This has engendered the animated debate of investor protection, scam avoidance and the whole academic deliberation of whether they are at all Halal owing to a perceived lack of intrinsic value and being free from government control. While all of these objections on bitcoin from the Shariah perspective have been thoroughly refuted by various scholars and are easily searchable on the internet, the continuance of this superfluous debate is dangerously distracting: In the process, we are losing sight of the higher frequencies of this amazing once-in-a-lifetime phenomenon. Aye ahle-e-nazar zauq-e-nazar khoob hai laikinJoe shay ki haqeeqat koe na dekhay woe nazar kiya We need bitcoin, not because it’s a great investment (which incidentally it is), but because it’s a great store of value and a medium of exchange: A free medium of exchange, which can uplift us collectively if we just adopt it, en masse, as our money. To my fellow Muslims, here is a parting thought. We love and honor our Prophet to such an extent that even the minutest of his actions, Sunnahs, is recorded, revered and repeated, even if it be as simple as the table manners of cutting some fruit. But here is another Sunnah of bigger import: success. The change that he set out to achieve in the world, he did achieve it. As he breathed his last in the arms of Ayesha, he had already delivered on the promise he had made to his companions in the lowest ebb of their persecution: “... a traveler from Sana to Hadrarmaut will fear none but Allah.” Although bordering a little on logical fallacy, I would point out that he didn’t cite something more symbolic like the establishment of the Caliphate, or the conquests, or the subsequent power. He chose to cite, as evidence of success to what they were suffering for, the establishment of a certain social order: One in which an anonymous citizen would not fear physical or financial insecurity. I say anonymous, not a private citizen, because the choice of the word “traveler” is very telling. While you are known in your city, protected by your identity, and potential clout from a corporation or clan, it is suddenly removed when you are in a strange land. They do not even know your name, unless you tell them: You are just a wallet address. But this traveler is not afraid of loss of wealth, or being robbed, or not having the right passport, or the right vaccine passport! He can move himself, and he can move his money. We Dinarists and Bitcoiners always equate inflation with theft. Whether you snatch 50 rupees from a poor man, or the free fall of your currency leaves him with 50 rupees less of a purchasing power, it is the same. While every ill is not caused by our monetary system, there is the obvious administrative incompetence and a dismal economic performance to account for — but inflation is definitely a huge factor. And all our high talk, slogans, research papers, reform movements, activism and militarism have deviated from this one Sunnah: The success of delivering safety to this traveler again. Bitcoin can help us succeed. Like now! Not 20 years later. Not when some promised leader will part the seas for us again. But now, when the poor illiterate, helpless man on the street looks at us educated and privileged elites and asks: What did you do to level the playing field for me? The Islamic banker may say, “Oh, I developed this intricate Shariah compliant profit and loss sharing contract for you, approved by the council of scholars, and backed by the gold dinar, just wait for it to be deployed.” I will say, “Dude, here, let me help you buy a few satoshis and get you a Lightning wallet so you don’t have to revert back to the rupee when paying for your next meal!” I think you should do the same. Bitcoin deserves a fresh look from us Muslims. Let’s think about it. Let’s use it correctly. Let’s spread it. Let’s understand it. Let’s use Bitcoin. Tyler Durden Sat, 10/30/2021 - 19:30.....»»