Power & Market
Caitlin Long, a 22-year Wall Street veteran and a leader in the cryptocurrency sphere, recently took to Forbes to write about the pros and cons of the Intercontinental Exchange (parent of the New York Stock Exchange) announcement that it is building "a new ecosystem for cryptocurrencies." As she explains, while this is a major leap forward in the "normalization" of crypto, she has some concerns about what a growing role for Wall Street in the industry:
Bakkt is yet more evidence that incumbent institutions are increasingly taking the “join ‘em” approach to cryptocurrencies, as explored in Part 1 of my 3-part series about the building rivalry between cryptocurrencies and Wall Street. Bakkt could bring many positives to cryptocurrencies:
it will likely attract more institutional investors to cryptocurrencies,
it may solve the custody problem that has so far kept large institutions from investing in the cryptocurrency asset class due to the absence of a qualified custodian, which the SEC requires for investment advisors that manage $150 million or more,
it may help regulators become more comfortable with the sector to see ICE involved, and
most importantly—it will probably attract corporate issuers to raise capital using the Bakkt ecosystem. Cryptocurrencies offer issuers the prospect of covenant-free and preference-free capital at low cost. Investors have proven their willingness—rational, in my view—to trade standard investor protections in return for the low friction costs involved with cryptocurrencies—there are no underwriters, trustees, transfer agents, exchanges, custodians, clearinghouses or central securities depositories involved in cryptocurrency issuance, and—very importantly—cryptocurrency trades settle instantly and with no counterparty risk. Moreover, issuers incur only a small percentage of the costs of being a public company, such as investor relations costs, proxy solicitation costs and the significant compliance costs related to public-company financial reporting and auditing. Additionally, cryptocurrency issuers can repurchase coins or execute a tender/exchange offer much more efficiently than for traditional securities.
I doubt it will be very long before major corporate issuers join Telegram and Eastman Kodak in raising capital via these markets. This is the good type of financialization—attracting new investors to the networks, each of whom (in proof-of-work blockchains) makes the networks more secure by bringing new computer resources to the networks, directly or indirectly on their behalf—and that, in turn, makes the networks more decentralized, resilient and immune to attack.
Kudos to ICE for being first!
But ICE’s news also has downsides. As explored in Part 2 of the 3-part series just two days ago, Wall Street's only shot at controlling cryptocurrencies is to financialize them via leverage—by creating more financial claims to the coins than there are underlying coins and thereby influencing the underlying coin prices via derivatives markets. It’s pretty much impossible at this point for anyone to gain control of the Bitcoin network (and likely the other big cryptocurrency networks too), so Wall Street's only major avenue for controlling them is to financialize them via leverage.
The financial system has perfected the art of leverage-based financialization, unfortunately, and ICE’s announcement about plans to launch a regulated, physical bitcoin futures contract and warehouse (subject to CFTC approval) in November means leverage-based financialization is likely coming to bitcoin in a big way.
This is exactly what I’d warned of in Part 2:
“As cryptocurrency markets develop further, here’s what I’ll be on the lookout for: financial institutions beginning to create claims against cryptocurrencies that are not fully backed by the underlying coins (which could take the form of margin loans, coin lending / rehypothecation, coin-settled futures contracts, or ETFs that don’t 100% track the underlying coins at any given moment). None of these are happening in the market yet, though.
“So far, regulators have only allowed bitcoin derivatives in cash-settled form among major derivatives counterparties. While cash-settled derivatives can affect the price of the underlying asset, the magnitude of the impact is lower than the impact if derivatives were settled in an underlying that is “hard to borrow” or “special” (using securities lending parlance). Bitcoin is especially “hard to borrow” so a requirement to deliver the underlying bitcoins into derivatives contracts would amplify bitcoin’s price fluctuations.
“Eventually it’s likely regulators will approve bitcoin-settled derivatives among major derivatives counterparties. At that point, banks will be looking to borrow the underlying bitcoin—and that’s when the custodial arrangements made by institutional investors will start to matter. Will custodians make their custodied coins available for borrowing in “coin lending markets” as they do with securities lending today? Or will they deem the cybersecurity risks of lending coins (which entails revealing private keys) too high relative to the extra return available for coin lending? And will institutional investors even allow coin lending by their custodians? Regardless, when bitcoin-settled derivatives appear on the scene, it’s very likely that cryptocurrencies will be “hard to borrow” for quite some time because HODLers (long-term holders) own most coins and rarely use custodians.” (emphasis added)
Why does this matter? Bitcoin has algorithmically-enforced scarcity, and that’s a big part of what gives it value. If Wall Street begins to create claims to bitcoin out of thin air, unbacked by actual bitcoin, then Wall Street will succeed in offsetting that scarcity to some degree.
Read the rest of the article here.
For more on this topic, listen to Cailtin Long's talk at our recent Future of Money conference in San Francisco.
Americans are being told that China's currency manipulations are causing harm to its trading partners, America being the main victim. Nothing could be further from the truth. China's currency manipulations certainly cause harm, but to China itself!
No country can cause harm to another by adopting any economic intervention. All economic interventions cause harm only to the country that adopts them. This applies to subsidies of home industries, quotas restricting import volumes, tariffs imposed on imports, and currency manipulations.
A nation typically manipulates its currency by giving more of its own currency in exchange for the currency of other countries. Thus foreign importers can buy more goods per unit of currency exchanged. In other words, if the free market exchange rate between the dollar and the yuan is six yuan per dollar, an importer would be able to buy goods costing six yuan by tendering one dollar. If the Bank of China arbitrarily decides to boost imports, it can give eight or ten yuan for each dollar presented. Chinese goods drop in price on the American market.
Protectionists such as President Trump view this as harm, but where exactly is the harm? A Chinese good that previously cost a dollar now may be purchased for sixty or eighty cents. Our American standard of living goes up at China's expense! The extra money in Americans' pockets may be used to consume or invest more. This is a very strange definition of harm.
The real harm occurs in China. The Bank of China sets off price inflation in its own country. It may try to mitigate this inflation by raising the interest rate on its own debt in order to withdraw the extra yuan from circulation. This is known as "sterilization". It then appears as if China has achieved greater exports with no price inflation. However, China's debt rises. Eventually holders of Chinese debt will desire to draw down their yuan-denominated debt. Demand for yuan for spending purposes will increase. At that point China will be faced with a dilemma. Either it can raise the interest rate high enough to entice enough marginal holders of debt to roll over their holdings or it can print yuan. The former causes a recession and the latter causes price inflation.
There is no such thing as a free lunch or an economic intervention that causes harm to others and not one's own country.
Calls for civility in politics are nothing new, and the incident involving White House spokesman Sarah Sanders at a restaurant has yielded plenty of smoke but little heat from both phony sides of this non-debate/non-issue.
I suppose we should be happy when property rights become part of the conversation. It's healthy when our Left progressive friends develop a situational private property ethic. Of course property owners have the unfettered right to remove people or refuse service. And of course we should all be civil with those who don't share our views. The day to day interactions that make any society at least tolerable, if not healthy, comport with customs and mutual-self interest, not positive laws.
But liberty requires property, and civility requires civil society. When politics and the state serve as the chief organizing principles in society, property rights and social cohesion necessarily suffer. Incivility is a feature, not a bug, of a highly political society. It is also a feature of an America where far too many things are decided by the federal government or its super-legislative Supreme Court.
What kind of healthy society devolves into cheering and jeering over judicial decisions, decisions swung by just a few judges voting one way or another? Should 320 million people have to worry so much about 5 or 7 Supreme Court justices?
It's hard to argue for civility in winner-takes-all political scenarios. In fact it's a recipe for hyperpartisanship, "othering," and tribalism. It's senseless to lament a loss of civility and then argue for overcoming our differences by voting harder and suing each other more.
Ludwig von Mises witnessed the collapse of the Habsburg civilization, the rise of Nazism in Austria and Germany, and two horrific European wars-- a series of events far beyond mere incivility. His answer to actual barbarity was real liberalism, distilled in its purest form to one word: property. "If history could teach us anything, it would be that private property is inextricably linked with civilization," Mises tells us in the aptly-titled Omnipotent Government.
But property is not part of the liberal program today; on the contrary, private ownership is under serious attack not only among rising "democratic socialists" like Alexandria Cortez and Bernie Sanders but also by protectionist and mercantilist forces in the Trump administration.
In fact only libertarians believe in full ownership--i.e. full control-- of private property. This is hardly an edgy argument at this point; Murray Rothbard made it 50 years ago. But nobody in politics or media actually believes this or argues for it. In the context of real estate, full property rights would require no property taxes, no zoning, no permits or building codes, complete freedom to alienate or sell at will, and most of all full control over who enters and who is required to leave. This kind of private property is not available to cake bakers or quaint southern restaurateurs.
America slowly but surely lost her sense of robust private ownership, the soul of a free society. It happened through the tax and regulatory state, by overturning the Lochner case and jettisoning economic substantive due process, through absurd readings of the Commerce Clause, through the creation of wildly extra-constitutional administrative agencies, and through the creation of an inferior form of property called "public accommodations."
By giving up property we gave up liberalism and civil society. By insisting on political control over vast areas of human affairs we gave up civility for force.
Remember, politics is zero sum. The restaurant owners view Sarah Sanders as a threat, as someone who is going to cause them harm if her (Trump's) administration prevails. That the owners acted absurdly is not the issue, nor is the incoherent argument that Trump somehow is beyond the pale relative to past presidents. The scene at the Red Hen restaurant was the result of the owners' not-unjustified perception that the US political system vanquishes people. To avoid being vanquished they must vanquish Trump, at least in their eyes.
Ideally, when asked to leave by the proprietors of the restaurant Ms. Sanders simply should have shrugged her shoulders and left quietly. Which is apparently what she did, although reportedly she was followed and harassed at a restaurant down the street. What's unfortunate is not merely the twitter incivility that followed, or the nasty news articles clamoring about a brewing civil war, but rather our blindness in understanding where "democracy," politics, and disrespect for private property lead.
As good as Washington is at making bad things happen, it is just as good at finding other people to blame it on. A great example of this is the push the last year to blame America’s opioid crisis on one of its favorite boogeymen: China. While it’s perhaps not so surprising to see such rhetoric from the Trump Administration, it’s a narrative that has received a bipartisan endorsement in Congress.
The argument is that it is far too easy for Chinese chemical manufactures to send products like fentanyl to the United States, and therefore China deserves blame for its role in overdoses. This argument, however, is absurd for a number of reasons - including that by Congress's own analysis, it's the United States Postal Service that is the preferred method of transport (perhaps this explain's Trump's new desire to privatize the post office?) In responding to the allegations in a press conference today, the Chinese government rightfully pointed the finger at the only government body that deserves blame: the Federal government.
"It's common knowledge that most new psychoactive substances (NPS) have been designed in laboratories in the United States and Europe, and their deep-processing and consumption also mostly take place there," said Liu Yuejin, deputy chief of China's National Narcotics Control Commission.
"The U.S. should adopt a comprehensive and balanced strategy to reduce and suppress the huge demand in the country for fentanyl and other similar drugs as soon as possible," said Liu, who comments coincided with the release of China's annual drug situation report.
"When fewer and fewer Americans use fentanyl, there would be no market for it."
While the Chinese officials didn’t go so far as to explicitly blame Washington for the problem, they would have been justified in doing so.
Last year Mark Thornton did a great job walking through how the opioid crisis is the direct result of misguided government policies that escalate the very issues politicians claim to want to fix:
The real cause of this epidemic is various government policies and the real solution is the dismantling of those same policies, in perpetuum.
The Four Causes
Let us start with drug prohibition which dates back to the Harrison Narcotic Act of 1914. Drug prohibition results in a black market where illegal products are not commercially produced and where suppliers are not constrained by the rule of law and product liability law. The result is that illegal drugs are more dangerous than legal drugs. Potency varies greatly from batch to batch and products often contain dangerous impurities and substitute ingredients. Opiate overdoses often occur when an addict is unaware that a particular dose is highly potent or contains Fentanyl, a pain medication that is 50 to a 1,000 times more potent than morphine.
The next cause is called the Iron Law of Prohibition, a phrase first used by Richard Cowan to describe the phenomenon that when drug law enforcement becomes more powerful, the potency of illegal drugs increases. One of the effects of enhancing prohibition enforcement is that suppliers will produce a higher potency drug. For example, during alcohol prohibition in the 1920s suppliers switched from producing beer and wine to highly potent spirits, such as gin and whiskey.
A second result of more rigorous prohibition enforcement is that suppliers will switch from lower potency drug types to higher potency drug types. For example, during Ronald Reagan’s “war on drugs” during the 1980s, smugglers switched from bulky marijuana to highly concentrated cocaine and domestic suppliers turned much of this cocaine into crack cocaine, resulting in the crack cocaine epidemic. The Iron Law of Prohibition explains why we see more and more dangerous drugs on the black market and why we see decreases in overdoses in states that have legalized cannabis.
Government intervention in the economy is a largely unrecognized cause of addiction. Intervention has at least two distinct channels of creating addicts. The first is war. War creates addicts through both painful physical injuries and painful emotional and psychological disorders, such as Post Traumatic Stress Disorders. The second cause is the general impact of widespread government intervention in the economy. Much of government interventionism results in the creation of privileges and monopoly power. For example, licensing requirements provide members of a profession, such as medical doctors, with monopoly profits by restricting the number of practicing physicians. This enriches licensed doctors and impoverishes potential doctors who must find work in another profession. These excess potential doctors thereby suppress wages in other labor markets. Given the pervasiveness of government intervention, this creates two classes in labor markets — the advantaged and the disadvantaged and addiction tends to develop in disadvantaged labor markets where people are more likely to be despondent and lack hope and economic resources.
The three above causes have been around for a long time creating the environment for drug overdoses, but at much lower levels than we see today. The final cause has only been around for a couple of decades, but it is now responsible for the majority of deaths. Alluded to above, Big Pharma undertook “aggressive marketing” in order to encourage doctors to write massive numbers of prescriptions for opiate painkillers and to change to pain prescribing guidelines in order to sell more of these heroin-like pills.
As a result, doctors began prescribing drugs such as Oxycontin and Vicodin, which are similar to opiates, such as morphine and heroin, for ordinary injuries and minor surgeries. The problem with this is that if you take these pills for 30 or 60 days, there is a distinct possibility that you will become physically addicted to them. The doctor is not going to write you refills for the prescription once the injury has healed.
This leaves the addict with three bad choices. One, you can enter a drug addiction rehabilitation program, but these programs are expensive and are not necessarily effective. Two, you can go cold turkey. However, detoxification comes with a slew of physical and psychological symptoms and can result in suicide and death. Three, you can go into the black market and buy illegal Oxycontin and Vicodin pills. The problem with this option is that such pills are expensive and have an unstable supply.
What happens if you choose this option, but run low on money or have trouble acquiring the pills? Well, very often the drug dealer who sold you the pills can also sell you heroin or tell you where to buy it. Heroin is often cheaper per dose and has a more stable supply. This is how people who would never even consider entering a room in which heroin was present become heroin addicts. This process is what has caused the major surge in drug overdoses.
So the solution to the opioid crisis is to end the failed policy of prohibition. While public demand has forced the Federal government to make some progress on respecting state sovereignty on marijuana, we are still far away from the Washington significantly re-evaluating its approach to drugs overall. As such, we are far more likely to see even tighter controls placed on legal pain medication – such as what we saw in Florida this year – which will tragically only make the epidemic of heroin and fentanyl deaths worse.
We will see who else Congress can find to scapegoat as a result.
The Chinese government has recently produced a lot of international news: the trade war with the U.S. government; the suspicious financing on Malaysia’s former corrupted ruling party; the suppression on Taiwan’s foreign and diplomatic space, etc. Excluding the news related to international politics, the Chinese government was also fighting against the Chinese internet users at the same time. What exactly is going on?
Let's review these entire events. During the first semi-final of the 2018 Eurovision Song Contest, Irish singer Ryan O'Shaughnessy's performance featured two male dancers expressing a gay love story. This might not be a big deal in Western countries, but in China, the program violates the latest media censorship regulations. Therefore, Eurovision's Chinese agent Mango TV deleted all of O'Shaughnessy's song performance . At the same time, by the new media censorship regulations, Mango TV also blurred the rainbow flag that appeared in the competition and the tattoo of another Azerbaijani contestant . Subsequently, due to the intervention from EBU, Eurovision had to retreat from the Chinese market temporarily.
In addition to this Eurovision incident, Peppa Pig, Winnie the Pooh, tattoos, and Hip-Pop are all prohibited from transmitting in media in various forms. Obviously, the Chinese government has recently intensified media censorship. In the ongoing 2018 FIFA World Cup, we will undoubtedly see many tattooed soccer players. But China's soccer players were also recently ordered to cover their tattoos on the match day, and due to the recent media censorship regulations, is the Chinese government ready for blurring all the tattooed players when the World Cup matches are live?
This series of Internet censorship incidents has spurred Chinese netizens to action. Faced with the Eurovision incident, Chinese Internet users directly criticized the media censorship regulations and Mango TV’s compromise with the government . In response to the previous incidents, on April 12, Chinese activists drove hundreds of cars at late night, passing through the entrance of the State Administration of Press, protesting its media censorship with horn.
We do not know the particular beliefs or motivation behind the Chinese officials enforcing censorship rules. But, what the government officials believe is not the most important factor. What matters most is that media censorship is an infringement of property rights and voluntary exchanges for information; and what is important is that this wave of protests, shows a general increased awareness of consumer sovereignty.
It is not known whether the Chinese politicians have realized that 40 years after the market-oriented reform, many people who benefited from the free exchange of markets and private property rights, especially young netizens, are less likely to behave like many in the older generations who had experienced the terrible Cultural Revolution, which brought widespread violations of individual freedom and the infringement of private property rights. This reality may also be a reminder to the Chinese government which has deliberately intensified the cult of the political leader: the rise of individualism is making it harder for China to return to Mao-era politics. Only by respecting individual freedom, and further advancing market-oriented reforms will it be a policy for all to win together.
One of the pieces of legislation Ron Paul pushed while leading the Congressional committee overseeing monetary policy was a bill to audit the US gold reserves. As one may expect when dealing with the Fed, there has long been a general lack of transparency with America's gold holdings. In fact, last year was the first time in over four decades that any member of Congress had been allowed inspect Fort Knox.
At a hearing on the topic back in 2011, Dr. Paul explained while this matter was so important:
Because the Government has for so long refused to provide substantive information on its gold holdings, it is not surprising that so much confusion abounds, both within and without the Government.
This gold belongs to the people, especially since much of it was forcibly taken from them in the 1930s, and the Government owes it to the people to provide them with the details of these holdings.
We would greatly benefit from a full, accurate inventory audit and assay with detailed explanations of who owns the gold and who is responsible for ownership, custody, and auditing.
For the first time since Dr. Paul's retirement from Congress, a member of the House has questioned the Federal Reserve and the Treasury about the Federal government's handling of its gold reserve.
In a letter yesterday addressed to Treasury Secretary Steve Mnuchin and Fed Chair Jerome Powell, West Virginia Congressman Alex Mooney asked the following questions:
1) Records in the archives of the historian of the U.S. State Department describe U.S. government policy in recent decades as aiming to drive gold out of the world financial system in favor of the Federal Reserve Note or Special Drawing Rights issued by the International Monetary Fund.
Is this still U.S. government policy toward gold? If not, what IS the U.S. government’s current policy toward gold?
2) I have heard complains that the U.S. gold reserve has not been fully audited for many decades, particularly as there seems to have been no acknowledgement of – or account for – “swaps” and leases of gold or arrangements for such to which the U.S. government has been a party.
Does the U.S. government, through the Treasury Department, the Federal Reserve System, or any other agency or entity, transact in gold or gold derivatives either directly or through intermediaries? If so, what are those transactions and what are their objectives?
3) Does the U.S. government undertake any transactions in gold or gold derivatives through the Bank for International Settlements, Bank of England, or other central banks or governments? If so, what are these transactions and their objectives?
Rep. Mooney also made headlines earlier this year for introducing legislation calling for the dollar to be re-pegged to a weight of gold.
As he wrote in the Wall Street Journal at the time:
The current Federal Reserve system benefits elites. The gold standard is equitable and puts “we the people” in control of the money supply. That’s why it was part of America’s founding and has been a key to the country’s long economic success.
As President Donald Trump continues to disappoint with his central bank nominees, it's nice to see a few voices in the swamp questioning the Fed.
In his ABC interview last Sunday, former FBI chief James Comey boasted endlessly of his devotion to truth, which he said “has to be central to our lives.” Touting his role in bringing down Martha Stewart, he declared, “The truth matters in the criminal justice system.” But, when he was FBI boss from 2013 to 2017, his agency duped the American public whenever convenient.
In 2014, Comey declared that “We do use deception at times to catch crooks, but we are acting responsibly and legally.” His comment was spurred by revelations that an FBI agent had masqueraded as an Associated Press reporter and fabricated an AP story. The Associated Press complained that the FBI’s tactics undermined “the vital distinction between the government and the press," while the Reporters Committee for Freedom of the Press protested that the ruse “creates the appearance that it is not independent of the government.” But Comey declared the technique was “proper and appropriate,” allowing such scams to continue.
The AP charade was chump change compared to the FBI’s next media flim-flam. After a high-profile confrontation between federal agents and Nevadan ranchers in 2014, the FBI created a bogus independent film crew that spent almost a year hounding the Cliven Bundy family and their supporters, taping their comments to propel federal charges against them. The feds eventually arrested and prosecuted Bundy family members.
This past January, federal judge Gloria Navarro dismissed all charges, denouncing “flagrant” and “reckless” misconduct by federal prosecutors. The FBI was exposed for lying for more than three years regarding its deployment of sniper teams around the Bundys’ ranch prior to the Bundys summoning supporters to protect them.
The Justice Department inspector general last month exposed Comey’s arguably deceitful tactics regarding his campaign to outlaw private encryption, which he perennially portrayed as a grave peril to public safety. After a Muslim couple gunned down 14 people in San Bernardino, Calif., the FBI invoked a 1789 law to sway a federal judge to order Apple to write anti-encryption software that would hand the FBI the keys to break into the terrorist’s iPhone (and all other iPhones).
Read the rest at The Hill
When lampooning the various arguments for trade barriers, Murray Rothbard would like to try to use the arguments offered against foreign trade to trade between states themselves.
As he wrote in Making Economic Sense:
The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa.
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure rip-off of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by less-efficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Unfortunately such "absurdity" has been ruled to be the law of the land in Canada. As the National Post reports:
After a legal battle fought all the way to Canada’s highest court, a New Brunswick man’s quest to be able to buy slightly cheaper alcohol in a neighbouring province has failed.
In a unanimous decision handed down Thursday, the Supreme Court of Canada ruled provincial trade barriers are constitutional as long as they’re aimed at a valid purpose within the province’s jurisdiction, with only an incidental effect on trade. Canada’s constitution simply “does not impose absolute free trade across Canada,” it declared....
On its face, the case was about booze. But had the challenge been successful, the precedent could have struck down a massive swath of provincial trade barriers, from agricultural supply management to e-commerce to environmental controls. Crown attorneys from every province had lined up at the Supreme Court to argue against the challenge, with the federal government siding with them.
The ruling declared that allowing “full economic integration” within Canada would “significantly undermine the shape of Canadian federalism, which is built upon regional diversity within a single nation.” Federalism means there must be “space to each province to regulate the economy in a manner that reflects local concerns,” the court ruled.
As Maxime Bernier, a Conservative Member of Parliament and a student of Austrian economics noted, "Sad day for defenders of economic freedom in Canada."