A real world use case for cryptocurrency exchanges

Every real world economy is filled with real people, and there are all kinds of people in the world. There are always criminals, grifters, scammers, market manipulators, thieves, frauds, and tax evaders.  There are always financially ignorant monomaniacal idealists: people who don’t grasp the difference between reality and their beloved simulations and fictions; people who believe that messy human authority and fallibility can be dispensed with and replaced by machines. There are always substantial numbers of naive gamblers and bagholders, lured into getting fleeced by their own avarice and ignorance.

Cryptocurrency exchanges may represent a natural economic evolution, nature’s way of attracting many of these elements out of the real economy and into a buggy, hackable, scammable, get-rich-quick speculative open source video game.

You can think of cryptocurrency exchanges as a heat sink.  A heat sink is a large thermal mass which carries destructive waste heat away from the parts of a system where that waste heat can do harm.

Cryptocurrency exchanges are like a heat sink, except for stupidity and vice rather than heat: they are economic stupidity-and-vice sinks.  The real economy is doing very well at present, despite what is technically a very long running bull market.  I wonder if that isn’t at least in part because a lot of the insanity which typically accompanies bull markets has voluntarily walled itself off in its own video game world.  A lot of the craziness that we saw in the dot com era has literally locked itself away from reality inside an electricity-wasting computer game, at a cost of less than six billion dollars taken out of circulation.

Some people predict that the price of cryptocurrencies will soon go to zero; that they will shortly be left behind in the dustbin of financial history.  Personally I have my doubts.  I think society produces enough stupidity and graft to keep cryptocurrencies running indefinitely.  They may well stick around for a long time, as the economy’s evolved way of avoiding sepsis from what amounts to an intestinal blockage of greed and stupidity.

 

Cloud products, usury, and the death of property

Human beings used to be reasonably capable of distinguishing reality from imagination, at least in the boots-on-the-ground world of day to day life.  Property at one time referred to something real, something which exists in its own right. Thus property could be possessed, repossessed, bought, sold, stolen, consumed, or destroyed independent of the property’s owner or of any other particular persons.

Human beings and possessions were understood to be different things, with the notable – but at least clearly delineated – exception of economic chattel slavery, not to be confused with prison.

Then along came widespread acceptance of usury. Liberal modernity counts, as one of its crowning achievements, the destruction of chattel slavery.  As with all of liberalism’s putative emancipatory achievements, this is illusory.  Rather than freeing humanity from the objectification inherent in chattel slavery, liberalism has merely driven this objectification into the subcutaneous socioeconomic metalayer, implanted it under the skin, making it that much more difficult to see and resist.  As always liberalism does not actually “free” us from authority as it pretends to do: it simply makes authority sociopathic.

The old tyrannies could at least be seen out in the open. A man knew where he stood. Now the tyranny comes cloaked as the seductress “freedom”. Liberal tyranny boils up from under layers of flesh, lurks inside clinging to the bones as it gnaws away at internal organs and releases its offal into the body. If paganism, Mohammedism, and Rabbinic Judaism are packs of hyenas harrowing Christendom, liberalism is a cancer that eats away at it from within, an alien embryo feeding on its host as it releases a thousand horrors.

But I digress.

Property is objective[1], that is, it consists of objects independent of any particular human subject or subjects.  Owners are human subjects, human beings independent of any particular property. Take away a man’s property and you still have a man.

You can tell who truly owns what by asking what happens when the music stops: by asking what, at the end of the day, secures each person’s claims. In a recourse mortgage the borrower “owns” the house and the lender owns the borrower, because the lender is contractually entitled to collect deficiencies from the borrower if selling the house does not fully discharge the borrower’s contractual obligations.  The situation is even worse than that though, because in the case of taxable real estate the sovereign really owns the property and leases it back to the tenant (whom we deceptively label the “owner”).  Real estate “owners”, then, don’t really own the actual property. The sovereign owns the property and what the “owners” really own is exclusive leasing rights: a kind of financial security.  That isn’t nothing, but there is much less there than meets the eye. Real estate “ownership” where there are property taxes is a form of lie: what is owned is not land and buildings, but a perpetual[2] and exclusive lease on land and buildings.

Products dependent upon cloud software represent a new, technologically enabled phase in non-ownership “ownership”.  Cloud software or “Internet of things” products require a “mother ship” somewhere on the Internet in order to work. Without the mother ship they become literally useless; “bricked” in the vernacular. For example you can spend years of your life producing work with a cloud based – or even just cloud licensed – CAD program, under the illusion that you own at least your own actual work product. You don’t own the software, it is merely ‘licensed’ to you, sure.  But in fact you don’t even really own your own work product which you produced with the software using your own hands and mind, because you cannot even continue to access your own work without regularly checking in with the mother ship to ensure that license terms are met . If the terms and conditions change, or the company goes out of business or the mother ship crashes for some other reason, you can’t even access the features of your own “property”; not even your own accumulated work.

Cloud products represent a kind of legalized ransomware.  As with usury there is a superficial resemblance to legitimate transactions; in this case a resemblance to having sold or leased you some tools with which you can produce your own  work; work which you then own. The work you produce with cloud-based ransomware looks like it belongs to you.

But when the music stops your hammer no longer works, there are no other hammers which will work, and all that you have built with the hammer is hostage to the true owner’s terms and conditions.  You were never the owner of your own work product in the first place: you rent your own work at the pleasure of the private party who really owns it.

When philosophical anti-realism invades the domain of property, the distinction between persons and property disappears.  This erodes the distinction between persons and objects in spheres beyond property and ownership.

If you would like to see the great dehumanization reversed, I can’t really offer much hope. But I’d be happy to hand you a shovel.

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[1] Nota bene: not physical or merely physical, since physicalism is false.

[2] At least for as long as the tenant continues to make payments, which can be increased at any time without his agreement.

Yippee ki-yay …

So called ‘gold standard’ currency is a scrambled mess of confused and opaque financial nonsense, a toxic mix of securities and commodities which poisons the finances of governments and the minds of economists. I’ve explained why fiat currency is more transparent and honest than gold standard currency any number of times. But of course many folks know all sorts of things that aren’t true about sovereign finance, and can’t tell the difference between a financial security and the media upon which it is printed; so they disagree.

Sometimes folks relate better to concrete stories than to dry and abstract explanation of financial concepts.  So in this post we’ll consider a hypothetical situation which will hopefully help the still-perplexed understand why fiat currency is more honest and financially transparent than ‘gold standard’ currency.

Suppose we are on a gold standard currency. The government issues official gold notes and for each gold note there is 1/40 gram of gold stored in the vault at Nakatomi Tower. Each gold note notionally entitles the bearer to 1/40 gram of gold, though in practice almost nobody ever actually turns in the notes in exchange for actual gold. The government accepts the gold notes it issues – and only those gold notes – for payment of taxes.

Hans Gruber and his merry band of faux-terrorists carry out a sophisticated paramilitary assault on Nakatomi Tower. Despite John McClane’s best efforts they escape with all of the gold and McClane’s selfish chunky feminist wife, whose constant whining causes half of the exceptional thieves to commit suicide. McClane reclaims his stolen children and lives happily for a while as a NYC cop, until he is killed in a Black Lives Matter terrorist attack on police orchestrated by the Clinton Foundation in conspiracy with a Saudi Arabian donor — a terrorist attack which gets blamed on Donald Trump, who at the time was innocently visiting Playboy Mansion but just for the articles.

Back in front of your iPad in suburbia, you have plenty of government issued gold notes and a tax bill that is coming due.

Should the government accept the gold notes that it issued from you, even though the gold is gone; or are you out of luck because your gold is in a non-extradition country earning 20%?  Now that all of the gold has been spirited away, is everyone holding government gold notes a tax evader with literally no available legal means to pay their taxes?

If the government should accept the gold notes that it issued to settle your tax bill – even though the gold is gone, the top of the skyscraper exploded along with the heads of numerous Austrian economists, and the Johnsons and their helicopters are no more – doesn’t that tell you that the presence or absence of the gold doesn’t really have much of anything to do with the value of the “gold notes” as a financial security issued by the government?

The things we know that aren’t true

Most not-financially-literate people think that sound financial management is about cash flow. This is wrong, even badly so, but it is at least somewhat workable for a household to a first approximation: as long as you keep bringing in more cash than you spend, the wheels stay on.

Institutions are nothing like that. (Even households aren’t really like that, but it kinda sorta works to a first approximation). What is more, what looks like cash flow for an institution like the United States Government, isn’t. So everything you think you know about USG finance is wrong: an illusion created by a superficial, outright false analogy.

In layman’s terms, a balance sheet is an inventory of all of the property that an institution controls and all of the various financial claims against that property. It is impossible to know the financial health of an institution, including whether things are getting better or worse financially, without understanding (under whatever labels) the institution’s balance sheet and the trajectory of its balance sheet; that is, the changes happening to its balance sheet.

In traditional accounting these are reported as balance sheet (at a point in time), profit and loss (over some interval), and cash flow (over the same interval). The first is a fundamental snapshot of the financial state of the institution; the latter two tell us specifically how the institution is changing financially.

Balance sheet is fundamental.  It provides the current financial state of the institution at a particular point in time.  The other two reports tell us what financial changes happened to the institution over the reporting period.

Profit and loss measures (roughly speaking) the gain or loss in ‘equity’, that is, it answers the question (in great detail) “what has happened to the value of all of the property on the balance sheet, minus the satisfaction of all of the remaining financial obligations against that property?”

Cash flow measures the flow of liquid property (“cash and equivalents”): property which can be easily and quickly traded for something else. Cash flow is of secondary importance: you have to keep an eye on it to make sure you keep enough liquid property on hand to pay your bills on time, but in general liquid property is not as productive as other capital so it is best to keep it to a manageable minimum.

People think that USG revenues, expenditures, and deficit  numbers give meaningful insight into cash flow. And many believe that the ‘national debt’ provides meaningful insight into the health of the (nonexistent) USG balance sheet.

They don’t. Intake and outflow of fiat dollars does not constitute cash flow or an approximation of it, and the balance sheet and P&L are a complete black hole.

The reason fiat dollar flow doesn’t constitute a USG equivalent for cash flow — as I have explained many times now — is that we can’t measure the change in balance sheet liquidity of an institution using securities issued by that very institution as a metric. Measuring Google ‘stock flow’ is not meaningful information, in itself, about changes in the health of Google’s balance sheet. And in the case of USG we don’t even know what kinds of things we ought to be using to measure, or what specifically we ought to measure, etc.

That is, we cannot answer the question “what is happening to the liquidity of USG’s balance sheet?” — BECAUSE WE DON’T HAVE A BALANCE SHEET.

We also cannot answer the question ‘what is happening to retained earnings’, or a thousand other pertinent questions.

What we actually have in terms of real information is no balance sheet, no P&L, no cash flow, and some back-and-forth in the institution’s own securities which create the illusion of something kinda sorta similar looking to cash flow as long as you don’t pay attention.

And the biggest danger here is not the things we don’t know. As some wag said, the biggest danger here is the things we know that aren’t true.

There is no national debt

Everything you think you understand about government finance is wrong. (You aren’t alone: everything that everyone thinks they understand about government finance is wrong. There is literally no way to accurately understand government finance: the accounting framework to do so does not even exist conceptually).

The ‘national debt’ isn’t debt. Debt is when an institution owes some property (actual property or third party securities) to a creditor.  (Institutional ‘owing’ isn’t like personal debt: it is an impairment of the balance sheet of the institution).

USG owing dollars to China is like a company owing shares of its own stock to China. T-bills are more like stock options than notes payable: they represent a claim for the future issuance of USG securities, not a claim against actual property or third party securities.

Dollars are securities which impair the balance sheet of USG. But nobody knows what the balance sheet of USG ought to look like, not even in theory as a conceptual matter, let alone what it actually does look like as populated with sound real world data.

That doesn’t mean ‘everything is fine, go back to sleep’. What it means is that neither the folks who say that everything is fine nor the folks who think we are on the brink of apocalypse can possibly know what they are talking about.

They are just expressing their feelings.

The Mickey Mouse world of intellectual property

I don’t have strong views about intellectual property. Modern understandings of property and commerce are perverse, immoral, and unreal. It seems likely that at least some of what IP law sanctions, asserts, and prohibits goes against the natural law. But I haven’t personally done the due diligence required to credibly advance particular arguments about particular laws or practices.

Generally speaking intellectual property has similarities to cash — once we have an adequate grasp of what cash actually is and is not.

The sovereign is, qua sovereign, the ‘owner’ of certain marketplaces: that is, he sets the terms upon which transactions are permitted and carried out in the marketplaces over which he is sovereign.

Cash – or more specifically, sovereign-issued currency[1] – entitles the bearer to engage in certain kinds of taxable transactions in the sovereign’s marketplaces. (People often use it for non-taxable transactions too, and in other marketplaces owned by different sovereigns: insulin is valuable for barter in trade by non-diabetics).

Fiat currency does not authorize all conceivable transactions, of course: various transactions such as selling yourself outright into slavery are not “allowed” (that is, enforced); and usurious contracts are allowed/enforced but should not be.

Intellectual property, then, is like a lease or easement in the sovereign’s markets. Leases and easements are a kind of financial security, that is, claims against property.  A patent permits the patent holder to sell the patented invention in the sovereign’s marketplaces, while forbidding other parties to sell the patented invention.  A patent, then, is a financial security; the property against which it entitles a specific claim is the sovereign’s marketplaces.

It is similar to Disney allowing only Starbucks to sell coffee in Disneyland.  When you are in Disneyland, you must commercially transact within the rules of Disneyland.

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[1] Modern economists use the label “money” to refer to many essentially different kinds of security: actual paper currency, individual currency-denominated claims against the balance sheets of banks, bank claims agains the balance sheet of the Federal Reserve, etc etc.  All mainstream modern economic theories — Austrian, Keynesian, Chicago, MMT, Labor Theory of Value, etc — are metaphysically anti-realist, that is, are disconnected from reality and therefore insane and incoherent. In fact I am not personally aware of any metaphysically realist economic theory (an economic theory which competently distinguishes between imaginary reality and actual reality) at all, mainstream or fringe.

Paper wealth, or, we’re going to Disneyland

People find paper or electronically recorded securities counterintuitive.  Why the heck does anyone value pieces of paper with ink on them, or numbers in computer memory?  Why the heck is anyone willing to trade a real working car in exchange for numeric balances stored by software in a data center somewhere?

In the Zombie Apocalypse legal title isn’t worth the paper upon which it is written, or the bits in which it is recorded. But short of the Zombie Apocalypse, securities have value because under the laws of the sovereign they entitle you – the owner or bearer of the security – to something other than the security itself.

The title to your car entitles you to your car.

The title to your house entitles you to your house.

Bank deposits entitle you to cash on demand up to the deposit amount through liquidation of some of the property on the bank’s balance sheet.

Exxon stock entitles you to proportional profits and residual liquidation value in Exxon.

A non-usurious note or interest-bearing bond entitles you to census payments against property and liquidation value of that property up to the principal amount of the note.

A usurious note entitles[1] you to the enslavement of the person making the personal guarantee until the principal and interest demands of the note are satisfied.

Self-referential securities entitle you to run around in circles looking for the thing of value to which you think you are entitled.  It must be somewhere!

And a sovereign dollar entitles you to make a transaction, in the sovereign’s marketplaces, for which the tax is one sovereign dollar.

It is manifest (whether folks like it or not, because nature doesn’t reconfigure itself based on what people don’t like) that the sovereign ‘owns’ various marketplaces, because he makes and enforces the rules for transacting – for bartering property and labor – in those marketplaces which fall under his sovereignty. Just as Exxon owns its capital infrastructure, the sovereign owns the outer capital infrastructure in which Exxon operates and transacts.  Economic reality is not reducible to nothing but private property.

If you go to Disneyland, you have to follow the rules of Disneyland.  If the rules say you have to pay ten Mouse Groats for every transaction in Disneyland, you’ll need Mouse Groats if you want to transact in Disneyland.  If the tax rules are more complicated than that you’ll still need Mouse Groats based on the transacting you want to do, the tax rules, and the supply of Mouse Groats. Mouse Groats are a securitization of Disney’s ownership of the marketplace in which you are transacting.

And it is all fun and games until the zombies come.

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[1] Of course, as an intrinsically immoral case of usury this entitlement may be enforced by the positive law, but it is not a genuine moral entitlement.

Gold backed currency: fiat dollars in a house of mirrors

In the previous post I gave a basic explanation of fiat dollars.  In this post I will argue that gold backed currency (or other sovereign-issued commodity-backed currencies) are actually less transparent than fiat dollars as a medium of marketplace exchange. Gold-backed dollars, in other words, simply are fiat dollars; but a perverse and distorted form of them.

Gold became a medium for barter, particularly over extended distances and time, because it had characteristics which made it particularly suitable.  A valuable quantity of it takes up very little space compared to alternatives, so it can be easily transported and defended; and it is very durable, so it doesn’t lose its intrinsic value quickly the way food and other perishables do.

Every useful application of a thing affects the market value of that thing, so the use of gold as a medium for barter (that is, as a currency) affects its market value.  If 90% of the time gold is used as a currency and only 10% of the time it is used for other applications, then its use as a currency will dramatically affect its market value.

When Caesar puts his face on gold coins and pledges to accept his minted coins for payment of taxes, those gold coins become a fiat currency – tax vouchers issued by Caesar – printed on gold.  So now the market value of each coin, and the corresponding value of equivalent weights of gold, are further altered from the value of gold apart from its application as a marketplace currency and tax voucher.  What has happened is that what used to be an advantage in a case of pure barter – how much a small volume of gold is valued in itself for applications other than currency or tax voucher – has become a distorting and obfuscating factor.

What we have at that point is still a fiat currency: it is just a fiat currency viewed through a house of mirrors.

Fiat dollars explained

The king has legitimate authority to levy taxes.  As with all human authorities this particular authority is inherently limited.  (We’ve discussed some possible moral limitations on the sovereign’s authority to tax before).

Suppose that initially the king decides to levy taxes in gold.  Gold is a useful industrial commodity and is relatively portable, which makes it convenient, and people are already using it for marketplace exchanges for those reasons.  So when a citizen comes to the king to pay his taxes, that citizen has to first get some gold. Perhaps the farmer sells some of his wheat in the marketplace for gold, and he brings some of that gold to the publican to pay his tax liability.

The king has many things that he has to pay for himself.  For example he has to pay wages to his soldiers.  He pays them with gold, which he acquires in all sorts of different ways, only one of which is through taxation.

But dealing directly in gold is rather unwieldy, for a variety of reasons.  The problems of physical transfer and security can be mitigated by keeping the gold stockpiled and, instead of physically transferring gold around, using a system of ‘banking’ to transfer title to gold around.  We call these titles-to-gold ‘dollars’, and everything proceeds as before except that now we don’t have to take unnecessary risks and waste resources moving lots of physical gold around.

(This ‘banking’ system will later develop into a system of fractional reserve lending, which I’ll probably discuss again in a later post.  For the time being and for the purposes of the present post the banks simply hold the gold for us and transfer title – ‘dollars’ – around, for a fee which we pay.  It is worth it to ‘depositors’ to pay the banker’s fees, because using the ‘bank’ is both more convenient and more secure.  Taking care of real property always and without exception carries risks and costs).

However, the king notices that using gold and titles to gold (‘dollars’) in this way for transactions creates market distortions.  Some people in niche markets still value gold for its usefulness as an industrial commodity, of course, but most people also value it as a means for settling tax liabilities and as a general currency for buying and selling in the marketplace. The settlement of public and private debts via gold and gold-titles however is itself distorted by the gold-qua-gold niche market: most people as it turns out have a lot more use for food, clothes, shelter, land, tools, etc than they do for gold, but a shortage (or overabundance) of gold can still cause all sorts of problems for a town or city or region when fluctuations occur.  Large numbers of people whose lives objectively depend not a bit on this one niche industrial commodity nevertheless find their flourishing has become slave to this one narrow market: the use of gold as universal currency distorts both the gold market qua industrial commodity and the markets in all sorts of other things.

So the king decides to issue tax vouchers, entirely independent of gold or other industrial commodities, which he pledges to accept from citizens to settle their tax liabilities.  Just to be confusing he calls these tax vouchers ‘dollars’, the same label which was previously given to gold-titles.  These fiat dollars have value, not because they entitle the bearer to some quantity of gold, but because they entitle the bearer to settlement of tax liability in the denominated amount.  These tax vouchers (fiat dollars) then replace the use of gold titles (so-called ‘hard currency’) as a convenient marketplace currency, precisely because using them to temporarily store and carry value is very convenient.  People are of course welcome to use whatever currency they like in private transactions, but when tax liabilities arise they must be valued in fiat dollars and settled by giving the king back the vouchers that he issued.

Because these tax vouchers have intrinsic value to the bearer, the king himself can use them to pay for things — the wages of soldiers, for example.  And like a corporation with theoretically plenary power to issue capital stock, the king has theoretically plenary power to issue more vouchers whenever he chooses.  However this power is, like the aforesaid corporation, limited by numerous practical and moral considerations.  If he issues too many at once (for example) then they become worth less, and his outstanding tax claims against citizens become correspondingly worth less.  In general the stability of the king’s fiat currency will reflect the supply of his tax vouchers (‘dollars’) in the marketplace and the public’s faith in his long term viability as a tax authority.

Property taxes: sovereign usury?

Lots of folks have suggested that fiat currencies and fractional reserve banking create fake economic value out of nothing and are therefore, if not usury strictly speaking, somewhere in the moral vicinity of usury.  So far when this has come up in discussion it has turned out that critics of both don’t really understand either.  The former are options issued by the government which allow the bearer to settle tax liabilities; the ‘created money’ in the latter are options against the balance sheets of banks, denominated in the former.  There is nothing usurious going on and no creation of fake wealth except to the extent that the balance sheets of banks carry usurious (as opposed to nonrecourse) loans.  This should be at least mildly familiar territory to anyone who has read and understood the Usury FAQ.

But there is one kind of government activity that does bear close resemblance to usury: the levying of property taxes.

Here is a (slightly modified) comment I left on Kristor’s Orthosphere post (which itself is less about property tax than it is a preamble to another subject, the beginning of what I hope will be a series of posts well worth following):

Another prudential reason to oppose property taxes is that they encourage treating all property as liquid and fungible, discouraging ownership of anything illiquid and making ownership of illiquid things into something less than real ownership.

Property taxes are like the sovereign’s version of usury: the sovereign demands a fixed percentage repeatedly every tax period until the owner is destitute, independent of the owner’s actual fortunes during the period. The sovereign qua publican doesn’t care about the owner’s fortunes a bit: he just demands his pound of flesh every year.

Transaction taxes (sales, income, VAT, etc) on the other hand are one-time levies directly tied to the activities and fortunes of the person taxed — including property owners, because property owners who work, invest, and buy goods and services in the inevitable struggle against entropy pay transaction taxes when they do those things.

Property tax in contrast is not merely a form of economic double-jeopardy: it is a form of economic infinite-jeopardy.   If property were a bucket of water, transaction taxes represent taking a scoop of water every time the bucket changes hands in public commerce.  Property taxes represent a hole in the bottom of the bucket, a limitless demand against property owners, in effect making the sovereign into the property owner and the notional “owners” into rent-paying tenants.  (Some folks might like it that way — but they ought to be forthright about the fact that their preferred social arrangement involves de-facto abolishment of private property).

More generally, taxes on nonexistent transactions in illiquid property are inherently unjust.  Property taxes are a particularly egregious species of this tax genus, because they repeat ad infinitum.

None of this excuses the property owner from his duty to steward his property well for the sake of the common good and those more directly in his care, of course — just as the sovereign’s authority does not excuse him from his duty to rule over his subjects well for the sake of the common good and those directly subject to him.

But it seems to me that deposing kings and stripping owners of all of their property (even when you rent it back to them) are serious matters requiring serious reasons, not to be undertaken in the ordinary course of things. The sovereign’s title to already-owned private property (as distinct from taking a share in public transactions) is like the poor man’s title to bread. I don’t think it is surprising that folks who are fond of democracy often tend to be fond of property taxes: they both reflect inherently brittle and cavalier modern attitudes about authority, where kingship and ownership are both forms of authority.