Bitcoin found guilty of joyriding

After many months of time away from the website, and many interesting developments in the state of the economy, I have decided to come back and analyze the current state of certain markets. Namely, this post is about Bitcoin. If you have been watching over the past few weeks we’ve seen a rollercoaster in the Bitcoin exchange. Going from roughly $900 to $1140 then all the way down to $783! All of this has happened over the past week, and the question keeps coming up as, why?

Well let’s start with Bitcoin as a currency. Ludwig V. Mises, the scholar of the Austrian credit cycle, points out in his ‘regression theorem’ that money can not exist until an existing starting point based on a commodity. Namely, that a unit must have ‘use-value’ before it can create a binary value of ‘exchange-value’. This certainly is an interesting concept that sets the cornerstone for many theorists conception of what money actually is and how it comes into existence. So if this regression theorem is true, deductively, how do we explain Bitcoin as money? Well it seems we can examine two propositions, either A) it is not a money but is just speculative asset or B) it is a money and we can find problems in our understanding of the regression theorem. Before we set out on our quest to uncover the true meaning behind Bitcoin. I have to suggest that this is in no way the scholarly article or platform worthy of introducing this theoretical application to understanding the phenomena of Bitcoin; and I assure you I will be performing much more research to hopefully bring fourth our theory to a more scholarly platform.

Initially, what we must define money as is a unit to facilitate several purposes. These purposes are a medium of exchange, unit of account, and a store of value. What this means is that money must be exchangeable throughout the general population between multiple goods, or as stated above it must have ‘exchange-value’. It must be a unit of account, or people must be able to use it as a divisor between transactions to evaluate transactions. Also, it must be a store of value or something that can be saved and then exchanged at a future date. By the definitions above we can theoretically assume that Bitcoin does in fact facilitate all three of the purposes, yet not very well. This is because the nature of Bitcoin is prone to volatility; $300 fall in one day. So economists can mainly agree that it might not be a ‘good money’ due to its volatile attributes, but we have to remember that the volatility associated with Bitcoin can be because it is relatively new and prone to more market spikes. The important knowledge we gain from understating that, though so far it is not a good money, it still facilitates all three specified above. Then we have to understand that there could be a problem with our understanding of the regression theorem. This has already been questioned by Daniel Sanchez’ great article on Bitcoin. Initially, Sanchez suggest:

“No. It does modify it. But the essential core of the Regression Theorem is completely true and indispensable to economic theory. Some proponents of Bitcoin think otherwise, but only because of a common misunderstanding of what the essence of the regression theorem is.”

Seemingly the problem with us understanding how Bitcoin became money, so to speak, is to mischaracterize what Mises was actually attempting to do with his regression theorem.

What was Mises talking about? Well, as Sanchez suggests, he was ‘tying up a loose-end’ in terms of the circular reasoning of subjective valuation into monetary theory. I.e., if money derives its value from utility, then why should money exist since utility creates value? Mises explains that money comes from a good that has use-value but engages in exchange value based on past price valuations in the onset of future orientated entrepreneurs.

What we wish to explore is not the feats this argumentation and insight of Mises brought, but rather what this actually entails. What we are suggesting here is that prices are an abstract structure, if you will, of relative relationships. Initially, what Hayek set fourth was the exploration of the subtle prices that Mises was suggesting but in a much more complex manner. Meaning, Hayek went much more in-depth in his explanation of the pricing phenomena as a way to cover-up what Mises failed to address. As Hayek shows in Prices and Production is the interconnectivity between prices and stages of orders in the production structure. What this suggests is that there is a multiplicity of prices rather than just a general price. So naturally, we must ask why must the regression theorem apply only to commodity prices? If there is a good with a ‘use-value’ which is an exchangeable good within the margins of the stages of the production then certainly there already exists a pricing structure based on historical objectivity. So naturally, there could come fourth an existence of money in the sense of a producer’s goods that is not a commodity. Perhaps Hayek’s assessment in Denationalization of Money is about this understanding that the prices within the interconnectivity of production can bring fourth currency in the market based not only on consumers goods, or commodities, but can be brought forth by any good that serves a purpose; therefore economically any good at all.

If this holds true, then we must ask what is the purpose of Bitcoin? Well it has qualities like gold, of course, though unlike gold it does not act as a ‘commodity’. Like gold, however, it acts as a hedge against inflation. Therefore understanding this aspect of the digital age there is no reason to assume that the free-market would not create multiple fiat currencies and would only resort to gold. This suggests then, that even with the highly volatile nature of Bitcoin we see that not only has Bitcoin not violated the regression theorem, but Bitcoin has grown our understanding of prices and how money can come fourth from prices.

What has been stated above is not the proper venue or construction of this theory, however it might help us further our understanding of what Bitcoin is; which this article is attempting.

Why all the volatility then? Well, the markets are suggesting that it is a Chinese induced buying spree that has skyrocketed the price and subsequently dropped it in a manner of days. Does this mean that the markets were anticipating a problem in the Chinese economy? Looking back a little under 2 years ago, we saw the trends rising on Chinese margin debts, and the massive liquidation of margin debt during the market crash in the summer of 2015, below is a graph shown:
1x-1-3

We see a big drop in Chinese margin debt, which implies an economic scare due to leveraged trading. Below we see a chart of Chinese futures,

1x-1-2

Here we see market volatility during the Chinese market crash of 2015, and therefor we can seemingly assume that the Chinese markets were attempting to hedge their losses with futures, then sold the futures in a way that flooded the market and caused a massive bubble then which burst in a manner of a short period of time.

However, it looks like Bitcoin might have bottomed out and might be back on the rise, could it be another volatile swing such as the two bounds above in the futures market? We will wait and see, in the meantime we have to ask what the Chinese markets are expecting and why they are using Bitcoin to hedge? The seeming answer would be a hedge against inflation as a means of protecting financial solvency due to a faulty currency. This could be a multitude of things, such as the USD or the Euro due to all the political havoc we have witnessed in the past year.

So to answer the daunting question, what is the ‘use-value’ of Bitcoin? Well, it seems empirically that it could simply be a hedge against inflation. Therefor the balance sheets of corporations with a multiplicity of reserves find a ‘use-value’ of Bitcoin as a hedge against inflation. So it would suggest that financial capital instruments can facilitate as money; demonstrated by Hayek in the Denationalization of Money. Therefore, this would not disrupt the regression theorem, but expand our knowledge on what it exactly entails.

Please! Spare Me, Enough Already!

Recently, I overheard a discussion from a pair of Bernie Sanders fans about how horrible capitalism is because America allowed child labor in the 19th century, during our Industrial Revolution. These people complained that the “Robber Barons” only achieved their great fortunes because they exploited workers, created monopolies and jacked up prices on goods. Thank God, the government intervened in the market and set things right!

Where do we begin? There was so much bovine scatology flying around, one had to make sure their tetanus shots were up to date. First and foremost, when someone uses the term “Robber Baron” they are telegraphing to the recipient that they have a prejudice against someone having more wealth than they do. Those early entrepreneurs didn’t steal anything from anyone and America doesn’t have “barons” for there is no aristocracy. Evidently, someone lost at Monopoly too many times. The record shows that the prices of goods produced during the latter 19th century were actually decreasing at a steady pace, the same time wages were increasing, I might add. Nowhere does the actual history record show a monopolistic increase in prices. Nowhere. The era from the 1870s to about the early 1920s was the greatest increase of wealth this country had ever experienced. Standards of living rose to unimaginable levels in two generations.

Being no fan of the Rockefeller dynasty, I have to remain true to the facts that J.D. Rockefeller’s Standard Oil Company did more for saving the whale than any endangered species protection act ever could. Up to that time whale oil was used to light people’s homes and the plight of the whale population was at serious levels. Rockefeller’s innovation in marketing kerosene staved off the extermination of the whale. He was actually able to sell kerosene at a much cheaper price than whale oil and allowed even more people to escape the dark of night. Mind you, his intention was to extend the work day for his workers by allowing them to work at night. The positive side effect of his “corporate greed” was more families being able to afford lighting. Adam Smith’s “invisible hand” strikes again!

Secondly ask yourself, Why were all of those immigrants practically killing themselves to come to America only to be exploited in a sweatshop? The US had no welfare state at that time. No subsidized housing. No labor laws and very few regulations. If it was so god-awful during the 19th century in America, why did the US experience immigration at such gargantuan levels? Where capitalism channels self-interest into a net benefit, as with Rockefeller, so to with people wanting to be left better off. The standards of living on the farms and in poor European countries like Ireland, were low enough that a job in a dark dank factory was a step up. The wages alone outstripped those found in the agrarian regions. If it wasn’t for that Robber Baron, John Deere, America might of starved due to the lack of sufficient farm labor. Mechanized farming produced more food for the country than ever before, plus at lower prices. Capitalism 2, Socialism 0.

Now on to child labor. Yes, children worked in factories. They worked in coal mines. They worked in the farm fields. Children have always worked throughout human history. That is nothing new or unusual. It was either work or starve to death. That has been the normal state of affairs for human beings up to the advent of capitalism. As all developing countries experience, it takes time to amass enough capital through the free market system to relieve children from having to work. Once production increases, so to the standards of living. After the production from labor increased to the level that only the adults had to work, the children went to school for the day and received an education. They later were able to do something only the aristocracy of Europe could afford to do, namely, get a college education. Average people were able to get degreed and move on to professional occupations for the first time. Yes, capitalism did that. Another goose egg for the socialists.

Most importantly, before Sanders supporters try to convince America that more socialism is the answer, they first have to step over 100 million dead bodies. That’s right. Since the Bolshevik “Red October” Revolution in 1917, there have amassed over 100 million deaths due to socialism and its twin brother communism. Socialists still have to give an account for the likes of Lenin, Stalin, the Khmer Rouge, Pol Pot, Mao Zedong, Fidel Castro, Pinochet, Ceausescu, Che Guevara, Idi Amin Dada, East German Chancellor Ulbricht and his Berlin Wall and so many more atrocities done in the name of the new socialist man. So far only platitudes, denials and the typical, “If only the right people get in charge, then socialism can work.” Please, spare me. This fact alone leaves socialism morally bankrupt. Anyone denying the amount of totalitarian hardship and bloodshed that mankind had endured during the 20th century at the hand of State run socialism would have to be a liar or simply stupid. Over 100 million dead voices demand an answer.

Finally, according to the socialist gospel Das Capital, capitalism should have, by now, run America down the road of abject poverty for the worker, mass degradation of the infrastructure and extreme civil unrest of the masses. The workers were supposed to have united and overthrown their exploiters and took over the means of production. Well, still waiting. Of course, only the opposite is true. Average people today live better than the wealthiest monarchs of old. Our scarce resources produce even more goods than was ever conceived. Maybe with enough State injected socialism and intervention into the market they can finally achieve their goals. They can continue to put more people on the the government’s dole, run down the purchasing power of the worker’s wages through monetary inflation, invent more give-aways and run up even more national debt. A presidential win for Bernie should do the trick. I feel better now that I got that off my chest.

Thank you for listening.

Changing Economy… So What?

During the state of the union address a week ago, president Obama suggested that the economy of the United States is changing. He gave a forecast for economic “growth” as well as claimed job creation and claimed that the democrats pulled the economy out of the recession. Hillary Clinton did not leave any of this behind as she claimed that she was part of the administration that ended the great recession. They are either purposefully disingenuous or completely clueless. It reminds me of a Mark Twain quote, “Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.”

As I wrote earlier this month, the Stock Markets open is the worst in the history of the stock market. As we watch the markets drop our way into the new year, the IMF just released a new forecast where they had to cut global economic forecasts. The earnings in manufacturing is  now reporting that it is the worst earning season since 2009, as we watch the USD appreciate against commodities as well as foreign exchange. This shows that the entire rate hike of only .25%. Mainstream analysts are suggesting that we can maintain a profit recession outside the entire economy. Why would anyone invest in anything if there is a profit recession?

Well, there’s no doubt that we are in a changing economy, we are always in a changing economy. This is because people’s wants, valuations, as well as life goals constantly change. The question is how are we going to combat the downturn in the economy? Obama is assuming that he single-handedly fixed the recession caused by bush, all he did was prolong it. Today, the Chinese GDP report was released and it is the slowest growth in 25 years. Manufacturing is dropping in China, as the people’s bank decides over which stimulus to inject. The Chinese markets reacted to expected stimulus in the future. Yet at the end of the month the Fed will release their quarterly projections, and if it is negative that means the fed will have to admit we are in recession. Chinese exports are dropping  so there is really no point in the Chinese to devalue their currency. When the quarterly is released and the United States starts a stimulus on their currency, the Chinese might appreciate their currency which can lift the downward pressure on consumers in the emerging Asian markets, and re-adjust the Chinese manufacturing to domestic concerns at the expense of the dollar. Also, the Chinese will no longer buy US debt, so the trillions of dollars being soaked up by Chinese government will no longer occur; which suggests that the US economy will have a massive currency bubble pop, and if the Chinese appreciate their currency it will cause a restructure on the foreign markets. The inflationary pressure of the US combated with the appreciated Yuan will cause the Chinese long asked for Basked of currencies. This is a very likely future in the global economy. As Obama said, we are in a changing economy. Meaning, we are no longer the economic power house we used to be, and whether thats a good or bad thing, Obama’s economy definitely helped cause it

Too Little Too Late?

As the year of 2015 dwindled down to a slow close the markets sought the increased interest rate as a measure that insured financial stability as well as an economic recovery. This increase, with the promise to slowly increase rates over 2016, was a long-time waiting. Finally as financial traders and political economists released a sigh of relief as the doom days of endless QE come to a close, right?

Logically one must admit that the FED sure waited a while before being able to actually raise interest rates a historic .25% increase. Historic!? After years and years of printing money and propping up the stock market with artificial asset swaps and purchases, an increase of a .25% interest rate from a 0.25% interest rate is still lower then the Greenspan years, will help slow down the possible inflationary trends?

So while major financial analysts are now taking the position that 2016 is a year of recession, the question is what are the indicators? Well for start we see the Chicago PMI closing q4 at a horrible 42.9%, and layoffs have already started. Dow Jones is down near 500 points on the year, and retail is having a horrible ending quarter as shares dump.

All of this screams recessionary trends, yet the FED raises interest rates? This is due to the fact that the FED wanted to act like the economy is not as weak as it actually is. Currently, we see levels of dollar devaluation getting to extreme levels, and the FED is pretending to use the tools necessary to combat the inflationary trends of the currency printing. So while Janet Yellen raised the interest rates, the question of motive is still in play. Why now? Simple, because the recession is already here and in a few months from now when the FED finally accepts that we are in a recession, Yellen can reverse the interest rates and simply say that the rising of the rates were premature. Again, to escape blame from the endless QE policies.

This recession will not be an easy one, and the question then remains; what can we do to reverse the recession in the most allocative manner to stabilize the economy? Raise rates even more! Feel the blow, take the hit, power through a hard recession and liquidate all the bad assets that had been propped up by the horrid fiscal and monetary policies. We need to pop the bubble. However, what can we do in the meantime to protect our financial assets? Invest in foreign equities and hard metals like Gold. This is because Gold and Silver tend to do well in recessionary trends as well as historically during times of QE. If you look at the NASDAQ 10 yr chart you can see gold prices spike up in times of instigated recessionary tools like QE, during the great recession years, and drop when times of market confidence. This recession is going to hit like a storm, and it might be a good move to re-adjust financial assets now because this year will be a bad year for the global economy.

The real speculation everyone should be asking is if the political motives can continue to prop up wall street speculation. Yellen does not want the recession to fall at the end of Obama’s presidency; its much easier for propaganda reasons allow recessions to hit when a new president enters office. Will the FED be able to prop up Obama’s false legacy of fixing the economy? One thing is for sure, 2016 will be an astonishing year.

 

Free Colleges: More Students, Less Quality

„Bernie Sanders is wrong.“ It’s a phrase that we have heard so often over the last few months, often enough at least to even get a book with the title. That is no surprise considering how the candidate for the Democratic Party, who at the moment polls in second place behind Hillary Clinton, keeps uttering false facts, keeps promising freebies and keeps promoting the holy „democratic socialism“.

In an op-ed on October 22 for the Washington Post, Mr Sanders again got confused. This time he took a stance for free colleges and used some countries – including Germany, as examples of how great this system would work:

„In Finland, Denmark, Ireland, Iceland, Norway, Sweden and Mexico, public colleges and universities remain tuition-free. They’re free throughout Germany, too, and not just for Germans or Europeans but for international citizens as well. That’s why every year, more than 4,600 students leave the United States and enroll in German universities. For a token fee of about $200 per year, an American can earn a degree in math or engineering from one of the premier universities in Europe. Governments in these countries understand what an important investment they are making, not just in the individuals who are able to acquire knowledge and skills but for the societies these students will serve as teachers, architects, scientists, entrepreneurs and more.“

As a German who currently goes to universities in this country I couldn’t resist to write something about this.

First of all, it is true, here in Germany you can study (basically) for free. I for example only have to pay a fee of about 120 Euros each semester for a bus ticket. And it is true as well that this is not limited to German citizens only. Everyone can visit a college, no matter if he or she – or the parents for that matter, have ever paid into the system.

However, this has consequences: Erich Barke from academics.de took a closer look at the budget of a university in Germany, compared to one in the US. For that, he selected the Leibniz University in Hannover and the University of Texas at Austin – both of them are good universities, but not elite, compared to other colleges in the respective country. Even so, the differences in quality are enormous:

Bildschirmfoto 2015-11-26 um 00.57.06 (2)

Remember, this are two solid universities, so Barke also compared the Leibnitz University with two of the better institutions in the world (which are both located in countries with tuitions):

Bildschirmfoto 2015-11-26 um 00.57.10 (2)

Compared to the MIT and Stanford it’s even worse.

As you can see, the Leibnitz University has less funds per student and less staff and at the same time is financed nearly entirely by the government.

There’s no doubt that this miserable situation hurts the German universities. Actually, it’s pretty much demonstrable. Let me tell you two short anecdotes:

Just a few years ago, at the time I was still deciding which course I should choose, I visited an information event at a university in Munich. It was a presentation on civil engineering and the professor who introduced us to this course showed us the structure of it, the content etc. At one point he said that because tuitions have been cut (in Bavaria this happened only in 2013, so quite late), his faculty already has problems to finance research programs.

Since my first semester I have experienced this as well: To put it simply, there is not enough … enough of everything. There are not enough rooms for everyone, there are not enough employees, which leads to long waiting periods for students if there are problems or other requests, and there are not enough professors to teach (or they are totally stressed out). It’s an acute situation in which everyone is overextended and irritated.

It’s easy to see this drop in quality in global university rankings as well. Let’s take a look at the top five colleges from the US and Germany respectively in the most important lists and where they rank:

Bildschirmfoto 2015-11-26 um 00.57.29 (2)

Sources: QS 15-16: www.topuniversities.com/university-rankings/; Times Higher Education 15-16: https://www.timeshighereducation.com/world-university-rankings/2016/world-ranking#!/page/0/length/25; ARWU 15: www.shanghairanking.com/de/ARWU2015.html; CWUR 15: cwur.org/2015/; US News: www.usnews.com/education/best-global-universities

In the CWUR 2015 ranking, which lists the top 1,000 colleges on this planet, a total of 55 German universities are mentioned – compared to 229 for the United States.

At last, you can recognize a clear trend similar to the one in the United States: Because of the lower costs and easier access to these institutions there are more and more students and because of that, a Bachelor’s degree possibly won’t be enough soon. In 2009, the number of students passed the amount of apprentices, and it’s getting more extreme as the years pass by, as you can see in this chart (blue are the number of apprentices, red the students, the numbers are in millions):

infografik_1887_zahl_der_studierenden_und_auszubildenden_n

This are just some of the consequences of a free college system as Bernie Sanders proposes it, a system in which, as Mr Sanders says, „governments […] understand what an important investment they are making, not just in the individuals who are able to acquire knowledge and skills but for the societies these students will serve as teachers, architects, scientists, entrepreneurs and more.“

At the end of the day the result will be the following: More students, less job opportunities (or higher job requirements), less money for the universities and less quality. You can certainly #FeelTheBern in Germany already.