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:

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,


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.


Price raise and stabilized or dramitized

Well here we go again listening to all the amazing scientists explain to us why we can now increase rates with the strengthening dollar, and again for the third or maybe fourth time this year they are predicting a rate hike. Mainly we see bull markets smashing up the prices, and an appreciation of the US dollar. This is showing economists that the economy is in an upward swing. In a sense there is “economic growth” occurring in the United States, and the Chinese markets have stabilized. At least that is what they say. Unemployment rates are low, Chinese liquidation is halted, and everything seems to be great with the american assault on thrift.

First of all the unemployment rates are dropping and the economy is “expanding”. However, there has not been any actual job growth since the recession. Rather, the dropping of the unemployment is just a re-alignment of workers in response to the inflationary measures to combat the recession. After the Chinese dollar dump there was an influx of inflationary prices for the Chinese markets, not any stable growth. With the excess reserves the United States fed initially bought back debt from overseas and by doing so it appreciated the value of the dollar, as compared to the euro. This is why the prices have been rising in certain indexes that accept currency baskets for shares. This is not any actual growth, this is market reaction to inflationary signs of adjustment due to the massive devaluation of the Chinese bull, now bearish, market.

So, then, what does that tell us? We are seeing a shift of growth into full time work from part time work and this should not be happening. Especially with wage hikes, and with obamacare regulations. Since full time job growth is rising, it means labor is transitioning. However, labor is transitioning to full time work, while the regulations are calling for more part time work. This means that we are witnessing a transition of the labor market, which occurs during an inflationary boom. When the market feels inflationary pressure it expands, not in a “market oriented” fashion based on the outcome of the market but an artificial price increase. That price increase is unsustainable because the markets have been continually propped up by global policy, and the when the prices fully re-aligns to what the market actually calls for it will collapse from the pressure of the over bloated full time industry.

This is the sign of a coming recession, no matter what other scientists say. Remember, recessions happen when no one expects it. So diversify your currency, brace for the worse because probably after the holidays, and after the Chinese lift their security restraints, the market will fight back with vengeance and we will be moving into the “next recession”, completely oblivious to the fact we never fully recovered from the last.

Beginning of the end?

Major holders of US Debt, China, Russia, And Brazil have been massively liquidating US debt in what is reported as the biggest decline of US debt since “1978”. This means that other countries are initially dumping the dollar, which could be a strategic ploy by the BRICS banks. In a sense, these massive holders of debt were soaking up all the inflation the dollar devaluation has spurred, and retrospectively now amongst market slowdowns they are dumping the dollar in an attempt to increase yield returns with their domestic currency. In a sense we are seeing a global tightening of fiscal policy in response to the over devaluation, rather the United States is expanding.

However, mainstream economists are arguing that there are no market signs to even put on the breaks of expansionary policy, considering we are not seeing signs of growth it means that we need to continue to expand the money supply to stimulate the market contraction of 07 still to this day. Regardless of the ineptness of understanding markets or how they work, these economists do not even realize that we are facing a contractionary economy because we have devalued our dollar for far too long.

While initially boosting fiat paper currency and enacting an overvalued exchange rate we have created a currency bubble, and the foreign countries see this as true. So, with this historic dollar dump can it spark the stages of an overvalued currency bubble to pop? In a sense, considering we are now expanding the money supply at such a rapid pace, and yet we can no longer look at global markets to soak up the inflation  of the dollar, this petrodollar will begin contract.

As we started last week, we saw an increase in the NYSE index. This means that rather than a liquidation of domestic companies we are seeing a rise in asset prices. Is this rise in asset prices due to the dumping of the dollar? Is it due to the 0% rate change by Janet Yellen? Well, its probably a mixture of both, in a sense when these major inflation soaking countries turn around and liquidate their US debt, that debt must go somewhere. When that debt started hitting the NYSE it caused a surge of asset prices, and with that surge companies will now be soaking up the inflation of the central banks reckless printing, as opposed to foreign countries. In a sense, the already overinflated assets inside the NYSE, the ones that were in the process of liquidating the bad assets are now soaking up  more inflation, and ultimately doing the opposite of what the market should do.

This means, the stock market is yet again going into another hike in its index, then will turn around and we will see a massive liquidation in assets. As for China, it is a smart move to liquidate US bonds, however they are now taking the yuan they received from the US bond liquidation and attempting to now boost up the Shanghai Index, in a way to attempt to trick the traders of the shanghai composite. This will cause the Shanghai prices to rise while the government boosts up the prices, however, in the next few months the chinese markets will take a massive hit once the security controls are lifted. When this massive hit happens, we will see an export of capital from Shanghai, and an inflow of capital to other countries.

History Rhymes: A Look At Deutsche Bank

Many a free marketeer has made projections as to when this bubble infested economy may implode. Some rely on the weakening purchasing power in the world’s currencies as central banks devalue their currencies at an ever accelerating rate. Others look eastward as China begins to compete with the western central banking status quo. We see an emerging Shanghai Gold Exchange that will become the physical counter to the COMEX’s paper gold. The Asian Infrastructure Investment Bank (AIIB) which will be diametrically opposed to the IMF’s regime of extortion. An ever faltering Eurozone with Greece only being the salad before the main course. All of this may be true, but others are looking internally at the banking system itself. As a wise investor once said, “History may not repeat, but it does rhyme. In market terms, it tends to rhyme every seven years.” Let us not forget the catalyst that brought about the 2008 Financial Crisis, Lehman Brothers.

More exactly let us look at Deutsche Bank. The fly in the banking regime’s ointment of bail outs, equity and derivative purchases and quantitative easing has been in the Eurozone’s strongest economy all along. Deutsche Bank has been compared to Lehman Brothers on many levels, mainly because of it’s huge exposure to derivatives. With more than $75 trillion in derivative bets, it out paces a giant like JP Morgan by $5 trillion and the German GDP by twenty times. Many market analysts believe Deutsche Bank’s exposure is being severely understated. As Dave Kranzler of Investment Research Dynamics pointed out, DB isn’t like Lehman before the 2008 blow-up, it’s more like 2008 x 10. Deutsche Bank has declared an asset value of $1.5 trillion on top of $67 billion of net worth. A large portion of its assets are in loans and investment vehicles that are connected to Glencore (in trouble), Volkswagen (in trouble), the energy sector (in decline) and hard hit emerging market companies. If Deutsche Bank missed the actual market value of these assets by a simple 5%, its total net worth will be wiped out. For more on this listen to the podcast, “Deutsche Bank and the Coming Global Financial Catastrophe”.

If Deutsche Bank begins to falter the need for the ECB to create Euros will accelerate at an alarming rate. Think Wiemar. The Federal Reserve will probably be called upon for an emergency rescue as all of these zombie banks are being kept alive from the same beating heart. Think about those four words that killed capitalism, “Too Big To Fail”. The cascade of failures will be reminiscent of 2008, but much worse. In 2008 the middle class was wiped out, this implosion will wipe out the investor class. Once the dust settles only a handful of criminals will be left with all of any wealth that may be left after a global reset.

China is hedging its bet on its heavy gold and silver position. They hope as the west’s fiat regime descends into a fiery hell, the markets will turn east for a rescue and some simulation of sanity. But the western central banking power elite will not simply “let” a failure occur. Tensions in the middle east and Eurasia are a foreshadow that these crazies are gearing up for global war. Do not be surprised if a false flag event happens just as the markets begin to falter. Many Keynesian economists believe that a war spending regime could rescue a failing economy. They wrongly assumed WWII ended the Great Depression. Actually, as economist Robert Higgs pointed out in his book, “Depression, War and Cold War” the increase in private sector investment after the war is what ended the Great Depression. But governments rarely let facts influence their decisions when it comes to war.

In concluding, lets not ignore the aforementioned problems with the economy. That is, the currency wars, growing welfare dependency, distortions and manipulations in the investment markets and so on. These are all relevant and are cracks in the foundation of this shaky house of cards. Deutsche Bank still looms large as the biggest blip on the radar at this time. Never underestimate the level of incompetence of these elitists. In 2014, Deutsche Bank hired Tom Humphrey, a two decade executive at Lehman Brothers Holdings, Inc. to head the German’s investment-banking and securities business in North America. See, we’re all in good hands.