World Bank Chief Says Cryptocurrencies Are "Ponzi Schemes" | Zero Hedge
https://www.zerohedge.com/news/2018-02-08/world-bank-chief-says-cryptocurrencies-are-ponzi-schemes
In the latest swipe at bitcoin's credibility from a prominent member of the global financial and economic establishment, World Bank Group President Jim Yong Kim said Wednesday at a dinner in Washington that "the vast majority of cryptocurrencies" are essentially "Ponzi schemes", Bloomberg reported.
World
The plunge in the valuation of bitcoin and most of the hundreds of other digital tokens that were inspired by the virtual currency has appeared to validate criticisms from financial luminaries like Bridgewater's Ray Dalio, who famously called it a bubble late last year. He was one-upped this past week by NYU Economist Nouriel Roubini, who claimed that bitcoin is quite possibly "the biggest bubble of all time".
“In terms of using Bitcoin or some of the cryptocurrencies, we are also looking at it, but I’m told the vast majority of cryptocurrencies are basically Ponzi schemes,” World Bank Group President Jim Yong Kim said Wednesday at an event in Washington. “It’s still not really clear how it’s going to work.”
The development lender is “looking really carefully” at blockchain technology, a platform that uses so-called distributed ledgers to allow digital assets to be traded securely. There’s hope the technology could be used in developing countries to “follow the money more effectively” and reduce corruption, Kim said.
Crypto traders appeared to shrug off Kim's comments as valuations climbed Thursday, erasing some of the precipitous selloff that has sent the price of a single bitcoin down more than 60% since its late-2017 peak.
btc
While cryptocurrency technology has the potential to reshape global finance, concerns have been raised about its volatility and the potential for money laundering or other crimes.
Earlier this week, Bank of International Settlements chief Agustin Carstens - the former Governor of the Bank of Mexico - said there’s a “strong case” for authorities to rein in digital currencies because their links to the established financial system could cause disruptions. The desire to protect against this significant, undiversified risk is why credit-card lenders including Capital One, Bank of America, JP Morgan Chase & Co. and others prohibiting users from buying virtual currencies with their credit cards
Federal Reserve Chair Jerome Powell recently said that “governance and risk management will be critical” for cryptocurrencies. Yesterday, the heads of the SEC and CFTC appeared before the Senate Banking Committee to talk about the bitcoin and digital-token ecosystem, and their plans for overseeing a market that has been criticized for being rampant with fraud and abuse.
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Federal Reserve: "In A Dystopian World, Bitcoin Would Dominate Payment Methods" | Zero Hedge
https://www.zerohedge.com/news/2018-02-09/ny-fed-dystopian-world-bitcoin-would-dominate-payment-methods
Amid a relentless barrage of doom and gloom - and then some more doom for good measure - establishment forecasts about the future of cryptocurrencies, including everyone from Goldman, to the BIS, to the World Bank, all of which have been some iteration on how cryptos have no future, this morning an unexpectedly objective and somber view on the future of bitcoin came from none other than the organization that prints (out of thin air) the nemesis to bitcoin: the Federal Reserve.
While the emphasis of the Q&A with New York Fed economists Michael Lee and Antoine Martin, which we have republished below, is the issue of "trust" and how it defines monetary exchange, there are several things that attracted our attention.
The first is the Fed's take on what we have been saying since 2015, and the reason behind bitcoin's original surge in 2015/2016, namely its use for illicit purposes:
The Drug Enforcement Administration reports a sharp decline in bulk cash smuggling in 2016, which is the traditional payment method for drug shipments and suggests that payments may have shifted toward cryptocurrencies. Cryptocurrencies are more convenient than cash for many illegal activities that now take place online.
... cryptocurrencies are ideal for circumventing legal or regulatory authorities, because they aren’t governed by any. China, which actively controls capital flow, banned banks from dealing with bitcoin in 2013 (this was relaxed later), because it was thought to be used for money laundering. North Korea is reportedly responsible for state-sponsored hacks to steal cryptocurrencies, which help bypass economic sanctions that are enforced through the cooperation of financial institutions and countries.
This - the ability to hide and store dramatic amount of wealth in a tiny space - is also the reason why according to Goldman cryptocurrencies are really cryptocommodities, as they are not backed by a monetary authority like the Fed. This what Goldman said earlier this week: "Unlike other storage commodities like oil, gold, platinum, diamonds, and even cash, there is no need to hold much physical material to own bitcoin; even a technology as obsolete as the 3½ inch floppy disk can hold almost 30,000 private keys. There is no theoretical upper limit to the value of bitcoins in a wallet, but if we assume each wallet secured by this disk contains as much as the largest wallet today (180,000 BTC), this single disk could “hold” all bitcoins in existence and remain less than 0.5% full. Assuming a bitcoin market cap of roughly $190bn (as of late January), this disk would be the equivalent to either: 95% of the 4,583 tons of gold in Fort Knox, or 1,344 Very Large Crude Carrier supertankers of oil."
Next follows an exchange that many opponents of bitcoin have been leery to engage in, namely why does cryptos have value if they aren't backed by anything. The Fed's response - the admission that the dollar is in the same boat thanks to Nixon - is needless to say , surprising.
Q. If virtual currencies aren't backed by anything real, gold or some other physical commodity, does that mean they all eventually will be worthless?
A. You're right that they are not backed by a physical commodity, but then neither is the dollar and most other modern currencies. It’s long been known that currencies that are intrinsically worthless, mere pieces of paper, are recognized as valuable because payments with money are so much easier than the alternative, barter. The problem with barter, when everyone trades goods and services directly, is the dreaded “double coincidence of wants.” If I want to have dinner at my favorite restaurant but the cook is not interested in trading a meal for a bitcoin lecture, I have to keeping searching until I find a restaurant that I like where, coincidentally, the cook can’t hear enough about bitcoin.
Money, even intrinsically worthless paper money, cuts the “double coincidence” problem in half. I just need to find someone willing to pay me some of that paper for my lecture, then use that paper to pay for dinner. As long as I trust that someone will accept the paper, I’m willing to accept it in exchange for my lecture. It’s trust that the “worthless” piece of paper is actually worth something to other people that makes it an acceptable medium of exchange.
As a result, the price of bitcoin fluctuates with news that vendors or firms accept or decline bitcoin as a mode of payment. Late last year, bitcoin prices jumped after Square, a payments firm, was reported to be testing bitcoin. Wider adoption and acceptance of cryptocurrencies as a payment option naturally increases what they are worth.
All those points are rather spot on, and usually are remiss from the defense arsenal of some of the even staunchest bitcoin advocates.
What was most interesting, however, was the Fed's observation under what conditions cryptos could not only match, but supplant fiat as the dominant currency. The answer: bitcoin would dominate payment methods in a dystopian world, in other words a "decentralized" world, in which there is no more faith - or trust - in central banks.
Which, of course, is the whole point behind cryptocurrencies in the first place: to replace the dollar, and other fiat currencies, once the entire fractional-reserve lending platform, and last 100 years of monetary philosophy are exposed to be a fraud.
"Lunacy" you say? Well, it's a conversation worth having after the next market crash, one which most likely will wipe out what little faith remains in central banks, in fractional reserve lending, in conventional economics and in fiat.
Incidentally, this is precisely what Deutsche Bank's chief credit strategist, Jim Reid, predicted would be the ultimate endgame: the extinction of fiat, and the return to hard, or alternative, currency.
Here is the Fed:
Q: So are cryptocurrencies the future of money?
Martin: It will ultimately depend on how well they compete with other, already established payment methods—cash, checks, debit and credit cards, PayPal, and others. Cryptocurrencies arguably solve the problem of making payments in a trustless environment, but it is not obvious that this is a problem that needs solving, at least in the United States and other advanced economies. And solving that problem creates others. One is scalability; the process of picking random validators takes time, is expensive, and consumes tremendous amounts of energy.
Another issue lately is extreme volatility in the value of cryptocurrencies which makes them less useful as currencies. This volatility is an inherent feature by design. Since there is no central bank that adjusts the supply of bitcoin to accommodate changes in demand, bitcoin's value can swing sharply with demand. In a world where all things were priced in bitcoin, this would likely translate into massive swings in inflation and economic activity. In contrast, providing an “elastic” currency to promote financial and price stability is a goal shared by the Federal Reserve System, the European Central Bank, the Bank of Japan, and many other central banks.
The trust-proofing provided by cryptocurrencies also comes at the expense of another key feature of a payment method: convenience. If we lived in a dystopian world without trust, bitcoin might dominate existing payment methods. But in this world, where people do tend to trust financial institutions to handle payments and central banks to maintain the value of money it seems unlikely that bitcoin could ever be as convenient as existing payment means.
That said, bitcoin and other cryptocurrencies are trying to improve scalability and convenience so perhaps in the future one of these cryptocurrencies could realistically compete with current payment methods. But, fundamentally, we wonder whether a payment method designed to function where trust in institutions is completely absent can ever be as convenient as one where trust is required, but also already exists.
The punchline, again:
If we lived in a dystopian world without trust, bitcoin might dominate existing payment methods. But in this world, where people do tend to trust financial institutions to handle payments and central banks to maintain the value of money it seems unlikely that bitcoin could ever be as convenient as existing payment means.
Which begs the question: what happens when the "trust" dies? The answer, of course, is the very existence of cryptos: to create a world in which not one network is reliant on "trust" and the presence of a master node.
Here the Fed truly hits it on the head: in an environment of "trust" fiat is perfectly viable. It is what happens after, when the trust ends - in financial institutions, in central and commercial banks, in contract relationships - whether the result of a global monetary collapse, a systemic market crash, or something else, that will see the replacement of fiat with cryptocurrencies.
Full note below (link)
Bitcoin and other “cryptocurrencies” have been much in the news lately, in part because of their wild gyrations in value. Michael Lee and Antoine Martin, economists in the New York Fed’s Money and Payment Studies function, have been following cryptocurrencies and agreed to answer some questions about digital money.
Q: Let’s start simply. What even is cryptocurrency?
Martin: Cryptocurrencies are digital, or virtual, money. Bitcoin, which was created in 2009, is the first and probably the best known cryptocurrency, but many others have followed, such as Ethereum, Ripple, Bitcoin Cash, Litecoin, etc.
Q: Do they have utility that other forms of money lack?
Lee: Like any functioning form of currency, cryptocurrencies facilitate payments between parties and provide a store of value. What’s special about them is that they can serve those roles even in environments where trust—or lack of trust—is a problem.
Trust is implicit for practically any means of payment. Say I need to buy groceries. If I pay with a personal check, the grocer has to trust that the check isn’t “hot” (that I own the account and it has sufficient funds). Common payment methods, like debit or credit cards, also entail a surprising degree of trust. The grocer and I have to trust the banks that connect us when I swipe, trust the payment system or “plumbing,” whereby funds flow from my account to the grocers.
Some of these problems go away with cash because when I hand cash to the grocer, there is no need for trusted intermediaries. But if you think about it, even cash requires some trust. The grocer has to believe that the cash I pay with will retain its value and not be eroded by inflation or confiscatory monetary reforms. So she needs to trust the central bank.
Q: Have cryptocurrencies made progress toward solving the problem of mistrust?
Martin: One important element in any payment system is “validation,” determining which transactions can proceed through the system and which should be refused as invalid. For example, a validator could check if there are sufficient funds in the account of the person who wants to make a payment. If there is, the payment will go through. But if there isn’t, the payment will be refused. If you recall the last time you swiped your credit or debit card, the few seconds you had to wait was that validation. But if the merchant doesn’t trust the validator, and doubts she will ultimately be paid, she’s unlikely to accept your card.
With bitcoin there isn’t one designated validator. Instead, everybody in the bitcoin network could be picked, essentially at random, to validate recent transactions. The details are a bit technical and more details can be found in a recent St. Louis Fed paper on cryptocurrencies.
Q: Aren’t cryptocurrencies sometimes associated with illicit activities?
Lee: Definitely, and this is likely related to trust also. Criminals, who typically use cash for the anonymity and security it provides, may be moving to cryptocurrencies. The Drug Enforcement Administration reports a sharp decline in bulk cash smuggling in 2016, which is the traditional payment method for drug shipments and suggests that payments may have shifted toward cryptocurrencies. Cryptocurrencies are more convenient than cash for many illegal activities that now take place online. In 2013, following a government crackdown on Silk Road—an online marketplace that was used to trade illegal goods—bitcoin prices plunged. And for good reason too.
More broadly, cryptocurrencies are ideal for circumventing legal or regulatory authorities, because they aren’t governed by any. China, which actively controls capital flow, banned banks from dealing with bitcoin in 2013 (this was relaxed later), because it was thought to be used for money laundering. North Korea is reportedly responsible for state-sponsored hacks to steal cryptocurrencies, which help bypass economic sanctions that are enforced through the cooperation of financial institutions and countries.
Earlier, we talked about how a currency requires people to trust in its value. When Greece fell deeper into financial distress in 2015, Greek interests and trading in bitcoin rose quickly amidst fears of capital controls and the possibility of exiting the eurozone. Bitcoin became attractive as trust eroded.
Q: If virtual currencies aren't backed by anything real, gold or some other physical commodity, does that mean they all eventually will be worthless?
Lee: You're right that they are not backed by a physical commodity, but then neither is the dollar and most other modern currencies. It’s long been known that currencies that are intrinsically worthless, mere pieces of paper, are recognized as valuable because payments with money are so much easier than the alternative, barter. The problem with barter, when everyone trades goods and services directly, is the dreaded “double coincidence of wants.” If I want to have dinner at my favorite restaurant but the cook is not interested in trading a meal for a bitcoin lecture, I have to keeping searching until I find a restaurant that I like where, coincidentally, the cook can’t hear enough about bitcoin.
Money, even intrinsically worthless paper money, cuts the “double coincidence” problem in half. I just need to find someone willing to pay me some of that paper for my lecture, then use that paper to pay for dinner. As long as I trust that someone will accept the paper, I’m willing to accept it in exchange for my lecture. It’s trust that the “worthless” piece of paper is actually worth something to other people that makes it an acceptable medium of exchange.
As a result, the price of bitcoin fluctuates with news that vendors or firms accept or decline bitcoin as a mode of payment. Late last year, bitcoin prices jumped after Square, a payments firm, was reported to be testing bitcoin. Wider adoption and acceptance of cryptocurrencies as a payment option naturally increases what they are worth.
Q: So are cryptocurrencies the future of money?
Martin: It will ultimately depend on how well they compete with other, already established payment methods—cash, checks, debit and credit cards, PayPal, and others. Cryptocurrencies arguably solve the problem of making payments in a trustless environment, but it is not obvious that this is a problem that needs solving, at least in the United States and other advanced economies. And solving that problem creates others. One is scalability; the process of picking random validators takes time, is expensive, and consumes tremendous amounts of energy.
Another issue lately is extreme volatility in the value of cryptocurrencies which makes them less useful as currencies. This volatility is an inherent feature by design. Since there is no central bank that adjusts the supply of bitcoin to accommodate changes in demand, bitcoin's value can swing sharply with demand. In a world where all things were priced in bitcoin, this would likely translate into massive swings in inflation and economic activity. In contrast, providing an “elastic” currency to promote financial and price stability is a goal shared by the Federal Reserve System, the European Central Bank, the Bank of Japan, and many other central banks.
The trust-proofing provided by cryptocurrencies also comes at the expense of another key feature of a payment method: convenience. If we lived in a dystopian world without trust, bitcoin might dominate existing payment methods. But in this world, where people do tend to trust financial institutions to handle payments and central banks to maintain the value of money it seems unlikely that bitcoin could ever be as convenient as existing payment means.
That said, bitcoin and other cryptocurrencies are trying to improve scalability and convenience so perhaps in the future one of these cryptocurrencies could realistically compete with current payment methods. But, fundamentally, we wonder whether a payment method designed to function where trust in institutions is completely absent can ever be as convenient as one where trust is required, but also already exists.
~~~
Peter Schiff: Political Rhetoric Vs. Economic Reality | Zero Hedge
https://www.zerohedge.com/news/2018-02-09/peter-schiff-political-rhetoric-vs-economic-reality
Via SchiffGold.com,
Just over a week ago, President Trump delivered the State of the Union speech. The president gave a speech with a decidedly optimistic tone. This was certainly welcome with the increasingly fractured and divided American political landscape. But it’s important to focus beyond the political theater and take a hard look at where the US economy really is and where it is heading. Unfortunately, the political rhetoric doesn’t always line up with economic reality.
As Peter Schiff has said on numerous occasions, President Trump has taken full ownership of the current bubble economy. In doing so, he’s setting himself up as the fall-guy when things turn sour. Peter put it in pretty stark terms during an interview with Stock Pulse at the Vancouver Resouce Investment Conference.
He is so caught up in this bubble now in the stock market. He’s branded it … The stock market has a big ‘T’ on it for Trump, like one of his buildings.”
So, how exactly does the political rhetoric coming out of the Oval Office stack up against the current economic realities?
Dan Kurz at DK Analytics provided a pretty good breakdown of some key issues where the positive talk doesn’t line up with what’s actually going on.
1. What used to be an ugly stock market bubble that would be pricked by higher interest rates, according to candidate Trump, is now proof that president Trump is doing a great job. Yet, the S&P 500 is currently trading nearly 25x EPS, the broader Wilshire 5000 Index has rocketed higher, and margin debt is nearly $600 billion – a record.
2. In the interim, a recession, which is way overdue, will crush earnings; US aggregate debt rises between $1 trillion and $2 trillion a year; and interest rates are rising smartly, which will pummel valuations if it continues, especially with a recessionary EPS downdraft of 50% plus being likely in the near future based on precedents. (We review such a scenario in some detail in posts #25 and #24, wherein we quantify the rising interest rate impact on the S&P 500’s NPV and wherein we remind investors that markets are “reversion beyond the mean” machines, respectively.)
3. What used to be a fake unemployment rate when Trump was a candidate is now lauded as the “real deal,” even as the civilian labor force participation rate of 62.7% hovers near four-decade lows and two or three low-paying, no-benefit part-time jobs swell the employed ranks while full-time positions continue to be culled. This is insincere.
4. During the address, Trump also stated, “Under my administration, wealth is starting to return to America instead of leaving it.” Mr. President, sadly the opposite has been happening, at least so far, as evidenced by a continued rise in the US trade deficit, a substantial portion of which is due to rising oil import prices (and no, Donald Trump, we are not energy self-sufficient. We remain net importers of oil, and our gap could expand as the fracking bubble collapses). Once again, the president’s claims here are misleading at best.
5. President Trump talks a lot about regulatory reform liberating businesses to hire and invest. According to the American Action Forum outfit, regulatory relief of $560 million p.a. from Executive Order 13,771 (two struck for every new regulation or “reg”) can be expected. While praiseworthy, this is but a rounding error compared to an estimated $2 trillion-plus in annual regulatory compliance costs for US economy. While a sharp reduction in federal register pages (where federal rules and regs are published) from Obama’s “out the door” bloat looks promising, we wonder how any true or lasting reforms can be achieved until regulatory agencies are shut down and statist/leftist bureaucrats are fired, esp. given the risk that the GOP control of the fed government could prove only temporary — which Trump himself recently warned about.
6. Trump protectionism – a disconnect. On the heels of going to Davos and touting that America is again open for business thanks to tax cuts and regulatory reform, Trump was quick to slap high tariffs on solar panels, washing machines, and on select steel imports. Three issues here: first, lots of stuff just isn’t made in America anymore, so higher tariffs line government pockets and hurt consumers and producers alike — such as those installing foreign made solar panels that stand to lose customers or those using cheaper foreign steel in high value-added finished products that are exported — while they raise inflation. Second, raising tariffs on US imports will quickly result in higher tariffs on US exports. Third, we all know what can happen to the global economy if countries get into trade wars. It’s spelled Smoot Hawley, revisited and the 1930s depression.
7. Speaking of policy destructiveness; bloated federal government spending is up 3.8% year-over-year and is set to increase faster as Trump touts various new spending initiatives from (what will sadly ultimately prove to be) pork barrel, crony infrastructure projects to “offensive capacity” military spending growth de facto financed by the “rest of the world.” In the interim, tax rate reductions will pressure tax receipts. Finally, weaker economic growth will dramatically increase government spending on welfare and transfer payments. Talk about a perfect deficit-widening storm dead ahead! And this is before secular challenge known as an aging society and its impact on public sector solvency! Is any of this discussed, much less addressed, in Washington D.C.?
8. We could see a $1.5 trillion – $2 trillion plus dollar federal deficit within a few years if not sooner. And if the Fed really sells $600 billion of Treasuries a year, at what price — how high of a yield — will investors and the rest of the world be willing to soak up between $1.5 trillion – $2.6 trillion worth of US Treasuries possibly coming on to the market annually for a time?
9. The above is of particular concern as the rest of the world finances a US goods and services deficit that averages about $500 billion a year and expanded to $600 billion in 2017. Meanwhile, America is a net debtor nation to the tune of $8.4 trillion. In such a world, when you openly state that the US government would welcome a weaker dollar in a period of low interest rates, great external financing dependency, a weakening currency, and rising inflation, you are driving away potential investors and thus de facto raising the cost of borrowing, especially if sentiment shifts or confidences wanes. And, by the way, if currency debasement helped to reduce trade deficits, America, having the tailwind of a dollar that has fallen about 80% since Bretton Woods dollar-gold standard was terminated nearly 47 years ago, should have huge annual trade surpluses by now in place of gaping deficits.
10. You cannot simultaneously grow a spendthrift federal government, cut taxes, and then be sanguine. You can’t grow spending by $300 billion-plus, reduce tax revenues by an estimated $280 billion, and add it to a $666 billion deficit and over $21 trillion in debt and expect good things.
11. In short, Trump is NOT leveling with the American people in terms of what really needs to be done for the benefit of future generations who will otherwise be hobbled by mountains of debt and the related financing costs, namely: focus on cutting government spending, achieving a balanced budget, aggressively pursuing litigation reform (US liability costs are 2.6 times the EU average), securing long-lasting regulatory relief, and pursuing the solid money that Andrew Jackson pursued when he killed the second US central bank. Noteworthy, the portrait of Andrew Jackson, who Trump greatly admires, adorns the oval office.
12. America is some $68 trillion in debt when combining federal, state, corporate, and individual/family level debt. US GDP is nearly $20trn. Each one percentage point higher borrowing costs from abnormally low interest rates increases America’s cost of funding by roughly $680 billion p.a. (most debt, including the US government’s, is not long-term in nature, thus susceptible to higher refinancing costs if interest rates keep rising). In fact, if the average cost of borrowing rose by just two percentage points — say 10-year Treasuries yielded 4.8% — the US’s financing cost would quickly soar by $1.36 trillion or by 7% of GDP.
13. As we have stated and written, markets are reversion beyond the mean machines. And given the mountains of debt we have accumulated, both solvency and inflation risks (in terms of printing even much more money) suggest that we could easily have a 10-year Treasury that someday yields 7.8% or 8.8% — recall that we exceeded 15% during Volcker’s “tough love” in the early 80s with a fraction of the debt. Five percentage points higher funding costs than today would raise America’s aggregate borrowing cost by roughly $3.4 trillion p.a. from current levels, or by 17% of current GDP. A non-starter. Our point: given the huge indebtedness, relatively feeble manufacturing capacity, and income and debt constrained consumers, higher interest rates could easily choke off and even reverse the positive impact of lower tax rates because they are financed by yet more debt instead of through government spending cuts.
14. Sadly, too many of Trump’s policies will ultimately rely on the very printing press that has gotten us deeper and deeper into debt, into yield starvation, into huge misallocations, into cratering productivity growth, and into accelerating solvency risks and inflation risks. Inflation is the largest stealthy property thief for the average person, and especially for retired folks, who are dependent on a fixed income stream and bond investment returns.
15. Year-over-year wage growth is 2.4% overall and but 2.2% in supposedly robust manufacturing while inflation is picking up, the housing bubble has eclipsed the 2006 highs, and mortgage rates are rising briskly — in short, housing is increasingly unaffordable for most Americans. In a related sense, we wonder how a 65-year low in the unemployment rate and low wage growth rates are possible at the same time?
16. The personal savings rate has plummeted to 2.4% from 5.9% two years ago as record auto loans ($1.1 trillion) and student loans ($1.5 trillion plus) suggest tapped out consumers. It also implies substantial demand has been borrowed from the future, i.e., that it won’t be there this year or next. If the “consumption function” is over 70% of GDP, this isn’t an academic issue.
And in the past when confidence soared and the savings rate collapsed, things did not end well...
