Fast forward a hundred years and the government of the United Kingdom has taken this plan to the next level. Ordinarily, when a government wishes to spend money, it issues bonds, sells them to the market and those bonds are usually purchased by pension funds (whose participants have no idea that’s what their compulsory saving are being compulsorily spent on).
Sometimes those pension funds get nervous though. When the situation gets a bit dicey, like now, the government leans on their friendly banker who might create some money, say $6 trillion. Friendly banker buys those bonds to prop up the price and sustain fund raising capability. In effect the debt is monetised, the holders of the currency pay the price and nobody really notices.
The UK however, are skipping a step. Why bother with the whole bond selling followed by prop up fiasco? Why not just get the bank to print the money and give it to us?. It seems nobody in the UK can come up with a reason why not and the Bank of England has now been engaged to “temporarily provide direct finance to the government”. One bond portfolio manager explained the situation as follows:
Bitcoin is volatile. I remind every investor and we talk about it here a great deal. Despite what has been a rough period, this year bitcoin is up 1% (USD7,100) and in the last 12 months it is up about 20%. Not bad.
By comparison I wrote some months ago about Virgin Australia bonds which were yielding about 8% at the time. Those yields appear to have exploded now as the price of the bonds collapses. The October 2021 bonds are yielding 68%, a generous rate indeed.
It’s an interesting comparison in risk assessment. Airlines nearly always go bust, they have huge capital requirements and are exposed in particular to wars, oil prices and now viruses. Yet, retail investors like airline shares and the they don’t mind participating in the odd bond issue either. Perhaps there is great re-assurance in visibility. We see the planes, we go on holiday on them and it’s all very tangible.
In bitcoin, it’s all very intangible, a bitcoin is a line of code which on its own means nothing. This makes relative risk computation very hard, what is the risk of total failure? Does this thing actually exist? That is why it tends be those people who work most closely with bitcoin that own proportionately more of it. This should be hugely re-assuring to anyone considering an investment. The people who code bitcoin (for example many bitcoin core developers) get paid in bitcoin. The largest bitcoin development house, Blockstream, pays its staff (partially) in bitcoin. I would wager that plenty of airline pilots don’t own a single share in an airline, they know too much about the cost base.
I take great comfort from the fact that when I meet people who work in bitcoin, they are all invested in it. Indeed, more invested than the general population. As a tool for risk analysis, I think that’s a rather good one. Like Taleb says, I don’t want your opinion, I just want to know what’s in your portfolio.
Where is the gold?
We discussed last week some of the issues in London and New York regarding the physical delivery of gold. You can tell there is a problem, because if you buy paper gold (ETF gold) it costs about $1,650 if you buy physical gold, it costs $1,750. A huge premium for something that is meant to be the same thing.
One of the issues is that US gold contracts are settled with 100 ounce bars and in London, contracts are settled with 400 ounce bars. If you have a London bar and want to settle a contract in the US, you can deliver it to Comex and they must melt it down and create four bars. Believe it or not, gold is indeed transported around the world in this way.
I see only two possibilities. The first, that the transport and delivery issues caused by the coronavirus are causing the physical shortage since deliveries are not getting to where they are needed. Secondly, the gold isn’t there and paper claims far exceed physical gold.
In fact, this is how the gold standard collapsed in 1971. Under the Bretton Woods monetary system operating at the time, countries traded internationally with US dollars. They could redeem the dollars for gold at a time of their choosing with the Federal Reserve. The war in Vietnam had caused American spending to rise dramatically, causing them to print a lot of dollars which were circulating the globe.
President De Gaulle of France smelled a rat and he sent the French navy across the Atlantic to collect French gold and deposit paper dollars. The American’s knew the game was up, if every country did the same they would know the gold wasn’t there. So, without notice, President Nixon temporarily closed the gold window in 1971 and 50 years later, it is still temporarily closed.
Indeed, to this day, America has refused an audit of its gold vaults at Fort Knox. So, here we are again, we had the original gold standard it collapsed in 1931 because it caused too much fiscal constraint, we had the post World War 2 system in Bretton Woods which collapsed because the gold wasn’t there and nobody could redeem their dollars. Now we have our current monetary system, and once again, the gold isn’t there.
De Gaulle stepped up French dollar redemptions in 1958, he sent the Navy in 1965, the system collapsed in 1971. It takes time.
This piece of code below, only 5 lines of it, defines the bitcoin money supply into infinity. The money supply grows with each bitcoin block by an amount known as the ‘subsidy’, as follows:
{nSubsidy = 50 x COIN
halvings = nheight/subsidy halving interval
nSubsidy >>= halvings [>> is a function in C++ that divides by 2]
if (halvings >= 64) return nFees
return nSubsidy + nFees}
It works like this.
nSubsidy : the block reward is 50 coins per 10 minute interval
Halvings: each halving divides the nsubsidy by two
if(halvings>=64): the last bitcoin will be mined around the year 2140
return nSubsidy + nFees: the miner will be paid the subsidy plus the fee and after 2140, just the fees.
That code has grown the bitcoin money supply in a perfectly predictable way from zero in 2009, to 18.3 million coins today and ultimately stops at 21 million coins in 2140. It grows at a steeply decreasing rate.
By contrast, below you will see the M3 money supply (cash + short term deposits) of the USA. The rate of growth is steeply increasing, it will only stop when the currency collapses, which it eventually will.
Fiat money has one job to do. It must provide a solid basis on which we can all measure the relative values of everything else. In itself it is useless, it is only useful because we can buy things with it and it is only useful because the government decrees it so.
To function properly money must have an anchor, a basis in something scarce, such that we as users can be confident it will consistently hold its value. For the first part of the 20th century, you could exchange your fiat currency for gold at your bank. Subsequently, as we have seen, under the Bretton Woods system you could redeem for dollars and ultimately, redeem that for gold.
In each case there was an anchor for relative value, gold. Then in 1971, the system ended. Money was backed by nothing, it’s still backed by nothing and here is what happened as a result.
The last chart (taken directly from a US government website) is the killer. All sector debt versus GDP. The system is so large ($70 trillion in debt and $20 trillion in GDP for the USA) that people cannot conceive that it could possibly be a ponzi scheme.
More charts can be found here. Suffice to say, money needs an anchor in scarcity or it is doomed.
