Bitcoin Crisis, What Crisis?

Mt Gox was at one time the largest Bitcoin exchange. With its recent demise many have been bringing to the forefront the issue of regulating Bitcoin. I knew this would become the centre piece of discussion as Bitcoin became more prominent. Its important we all remember how regulation in our current financial system works; not only does if fail to prevent fraud but it creates a form of crony capitalism that we should all be rallying for its removal. 

Mt Gox was big. It had a market cap of around 7-8% of the entire Bitcoin economy. One thing I have noticed during its collapse is how little effect it has had on the network. The price of Bitcoin has remained remarkably stable. Other exchanges, businesses and the whole payment network are all working as normal. There are no taxpayer bailouts. There were no bonuses to "claw" back. We didn't have to hear superficial Government hearings where CEOs and Directors on multi-million dollar payouts give empty lip service along with their false apologies. 

People have lost money with Mt Gox. We all must remember that is the choices we make in life. Holding cash in bank, under a mattress, in stocks and shares; you name the choice, they all have risks. All those people who lost funds with Mt Gox will in the future realise the risks and will ensure a safer distribution of their funds. Exchanges in the wake of the collapse may wish to prove they are solvent to their customers. The Bitcoin ledger is public. All they need to do is prove their public addresses by moving money and publish such information (Mt Gox did years ago when they were the market leaders). New security mechanism will be created. People will realise if they don't own the private keys to their funds, they don't own the money.

Contrast this to the 2008 Financial Crisis. We had mountains of regulation but still, it happened. We had trillions of dollars of taxpayers money to bailout everyone. The incompetent were not punished; many empty apologies and false promises that it wouldn't happen again. State coercion forced taxpayers to protect deposits for all banks, including the weak ones. We all guaranteed loans for people who had been irresponsible, wreakless and spent like there was no tomorrow. Tomorrow came; unfortunately people who had been prudent were instead punished in the form of negative interest rates on their savings. The Government and Regulators have been actively promoting bad behaviour prior to the crisis and post crisis. Bad Bank? The Government will bail it out. Consumers choose a Bad Bank? The Government will bail you out. More big bank bonuses? The Government encourages reflation, so go nuts. Flipping Homes? Its the policy. Be prudent and save? The Government will punish you.

With all the Regulation we have in place another financial crisis will happen and they have ensured it will be much worse. The same signs are there again. It feels like we have rolled back the clock and I'm thinking the same thoughts I had back in 2005/2006. Flipping of houses encouraged by the Government is happening yet again. The Government continues to spend like there is no tomorrow, despite the liabilities they have taken on. Banks are being reckless once more. Interest rates are at rock bottom with people once more taking on huge debts. 

Regulation. Nothing has been learnt. In fact its history repeating once more only we won't have any more bullets to fight the next crisis. Reflation works; until it doesn't. It always fails in the long run. History has proven that. 

Back to Bitcoin. Mt Gox collapsed. The only people who lost out were the ones who voluntary took the decision to hold funds with them. The crisis lasted days but is now over. Contrast that to the 2008 banking calamity that is taking years to subside. I say 'taking' as its still ongoing. Bitcoin users have all learned a valuable lesson; diversify your funds and have the majority of your money stored with keys you control. Mt Gox was not Bitcoin. It was a business that failed and under Capitalism and free markets it has been liquidated. Resources have been relinquished to the more competent. Consumers have learned some valuable lessons. All this ensures a far healthy market moving forward.

Bitcoins big game changer is the very fact that it liberates finance for individuals. There are many other innovations in Bitcoin; transparency and secrecy (your choice); low transaction fees; amoral; deflationary; lightening fast payments, but personal finance is the big one. People own their money in the purest sense of the term. It can't be a ponzi scheme for this very reason. I am the only person that can access my bitcoins. I'm not dependant on another 3rd party to release my funds, therefore I can always access my money, whenever and wherever. You may think you own the money in your bank but in reality you don't. The bank owns it. If you wish to withdraw your money you have to ask the bank for permission. The Bank can dictate how you transfer your funds. Bitcoin fundamentally changes that. With Bitcoin you can own your private keys to your funds. 

Bitcoin works on public/private key cryptography. With conventional banking  your public key is your sort code and account number. We all give these out if we wish to accept payment. Your private key is your bank number (in reality the bank holds another private key, the ability for you to withdraw your money. Ask the public in Cyprus to hear about this). Bitcoin works on the same premise; public and private keys. You publish your public key to accept payment and keep your private key under your ownership. In this system the private key is really completely under your control. No one can stop you transferring money. No one can confiscate those funds. No one can really know you own those funds if you wish for that to be the case. It really is Gold 2.0. The catch? You are the sole gatekeeper to those funds. If you loose the keys there is no one to help you (In reality if you think Bitcoin will never take off due to this, think again. People are already talking about multi-signature transactions where you and a trusted 3rd party could access the funds. If one lost the keys then the other could recover them. If thats what you want, similar to old banking with more permutations). 

A limit of 21 million meaning your money will gain value; not loose it as we are all so indoctrinated to accept. A boarder-less currency; no more exchanging money for holidays. Funds that you alone have spread among as many wallets as you wish. Funds that can be taken with you if political tyranny is a problem. A currency that has no political liabilities; backed instead with Mathematics. Divisible down to 10 to the minus 8 (and potentially more). A ledger that is public for all to see and unlike the closed ones of your standard bank can't be hacked. From that list everyone will value at least one property; hence Bitcoin has inherent value. It takes a long time for the majority of people to see that value. Think of the Internet, electricity, cars. Members of the public took years to see the value of such creations.

Currency Crisis? Bitcoin has only been on the scene for 5 years yet I've seen many so called "collapses", the death roundabout of Bitcoin. When I started reading up about it in 2012 I read about the 2011 panic; people said it was doomed. I witnessed the April 2013 panic. And now another in 2014. It won't be the last and I look forward to them; it gives a good point to buy and in my opinion is a once in a lifetime startup type investment; only this one is affordable for us all. The difference between a Bitcoin Crisis and the conventional banking crisis we see is timespan and how efficient the free market is, when left alone. Its gone in days, not years or decades. With the crisis comes a more resilient and efficient system. The Mt Gox Crisis? Less than a week gone and Bitcoin veterans are already saying, what crisis?

Death and Taxes

The only guarantee in life is death and taxes. I can agree with death, there is never going to be an escape from that fate but taxes are far from inevitable. There is no need nor is there a benefit to general taxation. They lead to a wasteful use of scarce resources, appropriating the means of production from the competent, placing them in the hands of central planners with no such track record.

Taxes have been in the news of late for a number of reasons. Starbucks, the global coffee brand, has recently declared it will make 'charitable donations' to the tax-man here in the UK, highlighting the absurdity of taxes. The donation is a rational PR stunt to appease customers, the majority of the public still believe taxation is a noble cause. Google and Amazon on the other hand opted out. Eric Schmidt, Google's ex-CEO said it was Capitalism and was proud of the companies track record. Personally given a choice if I would prefer Google to have the money or the Government, I'd choose Google every time. They provide me with useful services for free (in many cases, they now give me hardware for loss prices, such as their Nexus products). On the other hand my Government continues to tax me more. It says I can't have a state pension until I'm over 70 which will no doubt rise further despite the fact I pay 10% of my income to National Insurance which is one giant ponzi scheme that will never pay out. Healthcare is rationed. I have to use badly managed transport systems currently under the grip of the state. I struggle to see the value for the thousands of pounds I pay in general taxation every year. 

Everyone likes to take the moral ground in relation to taxation both rich and poor. Many think taxes should be raised - so long as its not them. People on low incomes believe the rich should pay more. Billionaires such as Warren Buffet, presumably to appear charitable, asks for people on high incomes to pay more. He doesn't mention the fact that he himself does not have a high income, he earns his fortune in dividend payments and such. Of course for those earnings he campaigns for lower taxes - again, others should pay taxes, so long as its not me!

Taxation is such a farcical system and is only kept afloat along with the inefficiencies of the State by the co-exisitng free market. Mises long ago proved Socialism would collapse as it lacked a price mechanism in order to divert scarce economic resources. Taxation is a direct abolition of this price mechanism, there is no alignment with consumer demands and it abandons  entrepreneurship. In the end the systems collapses and needs to be re-managed with the guidance of prices. 

Tax avoidance is not a moral problem it is a rational human action, we all do it. Booze Cruise. Imported Cigarettes. Inheritance Tax, gifts to Children. Putting funds under other family members names to reduce the taxation on investment income. Contractors/Self Employed declaring income as company dividends. Everyone to some extent or other looks to avoid tax, however they then proceed to take the moral ground when a company or individual does the same. Jimmy Carr was demonised for using workarounds recently, but why? People on various levels of incomes do this all the time, it was nothing new. 

One day I believe taxation will be banished to the history books but the majority still believe it to be of benefit to them. Over half the population in the UK get some form of "benefit" payment from the state, reinforcing this belief. We can't give Heathcare or the Police to market forces, who will protect the most vunerable. Electronics, that great bastion of State run economics, the most vunerable now have widescreen TV's when once a TV was a luxury good, a case of more for less. Myths and fears ring in peoples minds keeping one to known conventions. A classic myth is Communist Cubas "Worldclass Healthcare".  Dig a little deeper, deeper than a Michael Moore propaganda film, and the truth comes out. In Cuba it is hard to get even basic medication such as Aspirin, we're not talking about some complex surgery, just a simple product that costs pennies in the West. Cuba's infant mortality rate is low for a reason and its not the healthcare. They simply don't count infant deaths below the age of 6 months or so. Of course this is when the most deaths occur, I could make a "WorldClass" healthcare system with statistics like that. In Western countries like the US they even include premature babies, the ones that only with modern Western Technology have the opportunity of life. In Cuba they die. Old Communist Russia used to fudge the numbers of people who died in hospitals by simply pushing patients outside the grounds when they thought they would die. Bribes were common. Anaesthetic - forget it. You were lucky to get a simple procedure like X-Rays due to rations on X-Ray film.

The UK's NHS heathcare system is bankrupt but there is still the dogmatic belief that people need state healthcare. Meanwhile regulation stifles private competition. Other half baked initiatives such as PFI amounts to nothing more than failed state planning being transferred to large corporations who have their nose at the trough. It won't work for the simple reason Governments will mismanage the funds as there is no price system, no consumer demand, no entrepreneurship. To solve such economic calculations, you need to remove all regulation and Government involvement. Only then will people on the lowest incomes derive greatest benefit.

Taxation is enshrined in law. If you don't pay you go to Jail. I don't believe this will change in the short term as there is not enough critical mass within the public for the abolition of taxes. I believe over time the Government will become bankrupt on a number of fronts and seek the markets help to run such 'sacred' services. Once the public sees the value for money, it becomes irreversible. Then people see what little the Government offers them and wake up to the fact that taxation is wasteful, increased public support for the abolition of taxation becomes more popular. Until that point I guess the majority of us will say we all need to pay more tax, so long as its not me.

Rick Santelli - Now theres an Idea

At least someone is speaking up for people who still believe in Individualism and the responsibility for ones actions. A new Brain Drain over the next 5, 10, 15 years? If these policies continue, I think so.

Interest Rates and Capital

“Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will always be needed.”
Mahatma Gandhi

“The highest use of capital is not to make more money, but to make money do more for the betterment of life.”
Henry Ford

"This weak republic throws its pieces of paper about wildly in order to enable its main party functionaries ... to feed at the trough"
Adolf Hitler


The use of paper money has become ubiquitous in modern times and with the introduction of computers in the past few decades, society has become accustomed to the further abstraction of money in the form of pixels, a series of 0's and 1's to represent money. We all use our nations currency either the paper or electronic form, and have complete trust and faith in what it represents and it's intrinsic value. Is this blind faith in pieces of paper justified? As we have only grown up in a society whose main medium of exchange is the use of government currency, should we place an almost religious belief that it will always retain its value? We have recently had a meeting between the G20 countries, to co-ordinate agreements towards a global fiscal stimulus package. The Bank of England cut rates by 1.5% with the base rate now at 3%. The Federal Reserve is down to 1%, with other nations Central Banks following the trend. However if we go back 6 years, weren't the low interest rates the main cause of the monetary problems we are now facing? Why do politicians always seek lower interest rates and why do we have central banks that try and impose a broad monetary policy on all financial institutions in our economy? We have become accustomed to Central Banks, almost conditioned, into the fact that their very presence is essential for a functioning modern economy. Contrary to what Central Bank are supposed to do, that is fight inflation, they are actually a huge inflationary mechanism that create the moral hazard we are now seeing and continually told about.

Central Banks are the Moral Hazard

When Mervin King the Governor of the Bank of England makes statements regarding moral hazards towards banks, its like a drug dealer giving a lecture on drug abuse to a drug addict. Central Banks amplify the effects of the boom, by flooding private banks with cheep money at the beginning of the boom. When the boom turns to bust, Central Banks begin a program of propping up private banks as the private banks always know they can turn to the Central Bank when the bust materialises. If you can't picture a modern economy without a Central Bank, then America had no central bank from the 1830's right up until 1913, just as it was becoming the industrial power of the world. The current central bank is the third America has had in its short history as a nation and is owned and controlled primarily by private banks. It was set up with the intention not in ensuring financial stability but for the purpose of increased profits for the banks, so they could load up even more with peoples debts with less need for capital. In a true free market there wouldn't be need for a Central Bank. Private banks would obtain capital and lend on their own accords. The setting of interest rates is just the supply and demand mechanism banks use in order to encourage people to either save with them, or borrow from them. If a bank has a lot of money in reserve then it lowers interest rates to increase demand for loans. If they have low reserves then they raise interest rates in order to encourage people to save and increase their capital base.

These aggressive cuts that we are witnessing bear no relation to the above supply demand dynamics detailed above. Many countries, in particular western nations, have pitiful low capital levels and huge levels of debts. What needs to be done is at least a stabilisation in interest rates, however an increase is required in order to incentivize people to save thus allowing banks to re-capitalise, capital based on human labour that has already been done. Debt is the modern Political-Monetary illusion of wealth, however its all a magic act with the money being taken from future human labour. Having a Central bank trying to set interest rates for the whole financial system is an crude instrument for influencing private institutions monetary policy, similar to the communist state planned centralised economy. It will always be inefficient.

Marx on Capitalism

Karl Marx, the most famous anti-Capitalist symbol in history, stated that sooner or later Capitalism would drown its markets in goods. It could only survive by continually cutting prices and real wages of the workers to below the point of subsistence. With markets ever expanding the Europeans would eventually branch into Asia, with ever more goods being produced but eventually the people of the world would revolt under these conditions and the global socialist system would emerge. So why has this not happened yet? One of the main flaws of a centralised state planned economy is its neglect of a suitable pricing mechanism.

The Capitalist Pricing Mechanism

Free market economics uses the basic premise of supply and demand to drive markets. This creates a pricing mechanism that is used to divert capital and labour to the required sectors of the economy in order to obtain economic efficiency. I'm not saying that capitalism is a fine tuned, super efficient economic model, far from it, I'm sure there is some economic model that has yet to be invented that is far more socially responsible. However for this reason a free market, operating under the direction of individuals and capital obtained from labour that has already been performed, induces a system of great productivity and material gains. This whole system relies on no monopoly and no centralised institution controlling a specific sector. Central Banks are a monopoly that prevent these very market forces. They prevent capital being used wisely and labour being re-deployed and used efficiently. Interest rates should always be driven by private institutions all in competition with one another, all responsible for their business actions, with no inflationary engine waiting in the background to bail them out or other businesses for their irresponsible decisions. Accountability has all but been ignored within finance recently as the bonuses were rewarded for short term decisions that were never beneficial to the bank and society.

Without a sufficient pricing mechanism Eastern Europe's Communist block collapsed as the planned state economy could not allocate resources efficiently. After the early illusionary productive gains obtained under the Stalinist Regime with the use of forced labour (the infamous Gulag camps) the economy began to collapse. The 1980's saw Mikhail Gorbachev introduce Perestroika, a policy to try and introduce a more efficient pricing mechanism, however it was too late as inflation and product shortages had become widespread.

The Capital of Asia

The IMF have recently begun to show the strain and how little capital they have. A world body that is supposed to ensure stability and provide capital for nations in need of it has now begun turning to the Japanese for money. They are increasingly seeking funds not from Western nations, but from Asian Nation states. The reality of the current situation in the global economy is the G7 and the IMF have very little capital. The real countries that hold the capital are now in Asia. An assumption that the West are the rich is simply not true the way things stand. Asian countries with savings rates of anything between 20% and 40% are now the people with capital, the west with negative savings rates are the ones who are now in poverty, relying on the external capital flows from Asia. It's only our high levels of debt, our old infrastructure that gives the illusion of wealth. Why do you think people were given 125% mortgages? Why do you think everything was on credit with no one saving? Why did you think people could buy a whole street of houses, with no money down, just the supposed capital gains of previous acquisitions? It wasn't because we had entered a new frontier of Western superiority. Asians were giving us their Capital. Capital that they obtained by expending human effort to produce goods for us to consume. They gave us more capital so that we could continue loading up with more debt and buy more goods from them and they further increased their capital reserves, buying bigger stakes in our economies. Now the global downturn has come, Asian economies are being hit more and more, and this 'agreement' above is beginning to break down. Capital, instead of going West is now in retreat back to China or Japan. This is what happens when you rely too much on foreign capital to fund your consumption. This is why in particular the US and the UK need savings. Tomorrow always comes and with it real problems.

Sterling Collapse?

One such country who was greatly reliant on external capital was Britain. It tapped foreigners for their capital and used London as the driver for this financial utopia. Britain has the second largest external liabilities behind the US. Recently the Shadow Chancellor George Osbourne has come out and said a future sterling collapse could occur due to the unfunded borrowing of the Labour government. What became interesting was the reaction his comments evoked. Rather than dismiss it, opposition politicians have labelled it as "irresponsible" or "dangerous". I thought our politicians were supposed to challenge and offer conflicting views. If there is a run on the pound, there will be a run on the pound not because of what one man said, but because of fundamentals relating to the UK economy. If they continue with inflationary policies, deficits continue rising with little internal savings as foreigners sell their pounds then a run seems likely.

Helicopter Ben

Ben Bernanke the current Chairman of Americas Central Bank has dedicated an academic life to the study on the causes of the Great Depression. Two of his economic heroes are Milton Friedman and the latters wife, Anna Schwartz, who some four decades ago co-authored a landmark book entitled "A Monetary History of the United States", on which he based a lot of his ideas regarding the Great Depression. In a recent interview that Anna Schwartz gave she said Ben Bernanke was getting Fed policy wrong and the problem does not lie with liquidity or money supply. It lies with the toxic securities that Wall Street has created. Her comments regarding these were,

"Because you cannot sell them, you don't know what they're worth, your balance sheet is not credible, and the whole market seizes up."

She went on and said that Paulson and Bernanke have now prolonged the crisis,

"They should not be recapitalizing firms that should be shut down ... Firms that made wrong decisions should fail."

Central Banks are just a monopoly, and just like any other monopoly are desperately inefficient. They create huge distortions during the boom and prolong the bust, punishing the prudent among us and propping up institutions that should be liquidated to create a more efficient economy. Capitalism's "Creative Destruction" has been replaced with "Monetary Creation". He still believes we had the Great Depression because the Central Bank didn't print enough money. The reason we had the Great Depression are the reasons given in the quotes above.

Weimar Germany

"I do not believe a word of the silly stories that the German Government could be so bold or so mad as to engineer on purpose what will in the end be a great catastrophe for their own people."

The most recent example in modern Western history of a nation experiencing serious inflation and its destructive effects was Weimar Germany just after the First World War. After incurring substantial debts during the war and the imposition of further debts by the victor nations, the Reichbank pursued inflationary policies through persistent trade and budget deficits and the increase of government spending. All the European countries incurred substantial debts during the First World War, Britain had debts amounting to 136% of GDP but Britain avoided hyperinflation. Inflation was high, running at around 22% but nothing like Germany which witnessed people wheelbarrowing worthless Marks to burn as a source of fuel. The currency was destroyed by irresponsible fiscal and monetary policies, Britain chose debt service, while Germany ramped up the printing presses. Just before hyperinflation became evident Germany experienced deflation, with inflation dropping to 2% with the Mark rallying, just before its spectacular collapse. I warned in one of my previous posts that the media and institutions would begin warning about the misconceived notion of the dangers of deflation, and we are beginning to hear more about it with Gordon Brown now mentioning it. Deflation is a natural function of a free market. We are not going to get a true deflationary bust that would happen in a truly free market as governments and Central Banks are now pursuing inflationist policies similar to the above, with economies that ill equipped to weather the storm.

One of the main causes for the rise of National Socialism and Adolf Hitler was the hyperinflation caused by Weimar Republic contrary to the conventional emphasis placed towards anti-semitism and First World War grievances. It destroyed peoples savings, capital that people had laboured for their whole life vanished in a matter of months. Whether any Western nation will experience hyperinflation remains to be seen and one hopes not, but as economies shrink, debt increases, trade collapses, deficits rise and more people claim benefits, we have the conditions for at best, mild inflation.

The quote given above is a comment made by economist John Maynard Keynes in November 1921, who was an advisor and influential figure towards German economic policy during those fateful post war years. A person whose inflationary economic theories have become biblical in recent decades.

The Last Bubble?

Western Government Bonds are shaping up to be the next bubble in a very long line of bubbles, from the Dot Com Stock Market bubble, to the Real Estate bubble now government debt is beginning its exponential climb upwards. However if this does become a bubble and bursts, its effects will be felt very quickly and violently in the nations it occurs in. If there are no buyers for government debt, then interest rate will have to rise in order to attract capital, how high it all depends on if investors think the government is solvent. For years the US has abused the Dollars status of world reserve currency, building up many enemies throughout the world through its Imperialist policies. From the teachings of Sun Tzu in China, to the chess culture of Russia, they are all waiting for their opponent to self destruct or make continued mistakes.

A Sound Currency

Money is not a new concept, it has been around for millennium used as a means of exchange between people, a store of human labour or something people value. Empires have come and gone along with currencies too, but there is one that has withstood the test of time. Gold. In our modern western culture it has been associated with extravagance with no intrinsic value, however when we step outside our conditioned frame of mind that has been shaped by the environment we have grown up in it becomes something different. If you took an ounce of gold a thousand years ago, to an ounce of gold now its purchasing power would be more or less the same. Gold is a rare metal that can't be printed out of thin air like banknotes can. That's why it has always held its value throughout time, throughout the world. Older generations always remark that a penny today isn't worth what it was 50 years ago, however people don't seem to realise that this is due to the inflationist policies of the people who regulate our currencies. The reason why we have more money then we did at any other time in history, is not due to the fact that everyone has become richer, its because more of it has been printed. This is why we always experience inflationary periods throughout life, market forces are always deflationary as economic efficiencies are made from capital that is re-invested. Its politically popular to increase the money supply, to give a short term illusion of wealth or to try and pay off excessive debts. People make statements asking why value is placed in an archaic metal such as Gold or Silver, but never ask the right question, why a set value is placed in a piece of paper with pictures on it. History has always shown precious metals to uphold their value as a store of human labour. All modern fiat currencies have shown persistent devaluation over time, especially when debt is as high as now.

Will it Work?

The favourite phrase in the media over the past year has been "Will it Work?". New policies are implemented with the same question repeated over and over again, now with interest rates falling we are told this is the latest silver bullet. The real question should be what are we trying to solve? The Credit Crunch isn't the problem, its the cure. Its brought about an end to reckless lending, a recapitalisation of banks, a break on consumption, the re-balancing of the economy, yet "remedies" to the credit crunch are formulated as though it is the problem. The patient is sick and just as the doctor was about to administer the medicine the "I know better" parent with no medical training stepped in to provide the "real cure". By delaying the treatment the patient becomes worse, until eventually the patient is no longer ill but becomes terminally ill, beyond help. The pricing mechanism for capital has been distorted by the Central Banks and Governments. The end result could be disaster for nations with little or no capital.