The Path to Bitcoin
“Further, the process of transformation, even if it brings revolutionary change, is likely to be a long one, absent some catastrophic and catalyzing event — like a new Pearl Harbor[i].”
Published one year ahead of the World Trade Center attacks of September 2001, the words of the neo-conservative agenda show that 9/11 has indeed served as intended, as America’s new Pearl Harbor, surging America into action in both Iraq and Afghanistan, the latter of which is now America’s longest running war on record. With military transformation and modernization objectives well underway, our greatest external threat is now economic in nature: our trillion-dollar annual budget deficit, reliance upon the Federal Reserve and foreign trade partners to finance our federal borrowing habit, and the need to upgrade our infrastructure to withstand extreme weather events, which now occur with increasing regularity. Indeed, the need for economic transformation is enormous, perhaps as great now as it was going into World War II when we transitioned America’s economy into the integrated war-fighting machine that ultimately routed the Nazi’s, subdued the Imperial Japanese and placed America atop the world’s great powers; and it seems that the Trump Administration agrees. While I have not found a similar report that outlines the economic agenda, a combination of economic policies, bitcoin bunkum and personal experience shines a light on the unseen threat behind the otherwise brilliantly conceived economic agenda.
In Part I of this series, I elucidated how politics have played a part to secure control of our access to information, and by proxy, public opinion as well, perhaps the most important resource in the American republic. With the support of the American people, those in control are able to stay in control, increasing their stranglehold on power over time. In Part II, I attempt to explain current events through the lens of economics, how the pieces fit together, impacts on liberty thereof, and how Bitcoin is a Trojan horse to tyranny that leads us further down the Keynesian path of illusory unimpeded growth at the expense of our planet. To be clear, I do not disagree with the threat assessment; it’s the manner in which we address those threats — at the expense of our civil liberties — that I take issue with. With that said, I learned in the military that one should only present a problem with a corresponding proposed solution. To that end, you can look forward to future articles about a nature-backed currency to align human activity, consumer behavior in particular, with nature and the requirements thereof for sustainable living. The nature-backed currency does not yet resolve some of my liberty-based concerns for economic freedom — blockchain-based money appears inevitable — however, it does at least provide for sustainable human development, without sacrificing profits, in concert with a healthy environment; and that is something that I believe all of us can get behind.
Bitcoin: The Next Reserve Currency
“Give me control of a nation’s money supply, and I care not who makes its laws.”
– Mayer Amschel Rothschild, Founder of the Rothschild banking dynasty, Forerunner to the modern Central Banker
In December 2017, I stumbled into a frustrating and yet quite enlightening experience. After trading the crypto markets successfully over a three-month period, it was time to withdraw my earnings and convert back to US Dollars. I initiated an overnight wire from my broker of choice, Bitfinex, to my bank. What should have been a one or two-day wire turned into 23 days in which Coinbase and others immediately closed my accounts after verifying my identity. In an email response from Coinbase, they closed my accounts due my to alleged badgering of their customer support representatives. Apparently, my please and thank you’s and request for explanation was too much to handle. I experienced the same at Kraken and other exchanges as well — immediate account closure upon confirmation of my identity. Emailing FinCEN, the Department of Treasury’s Financial Crimes Enforcement Network, proved fruitless as well. They simply referred me to the customer support department of the various companies, each of which provided nonsensical reasons for my exclusion from their exchange. It was in those 23 days that I deduced the extent of Treasury’s role in monitoring commerce — every electronic transaction everywhere — and personally experienced the potential for abusive, illegal governmental interference in our daily lives, and the role of bitcoin in global monetary control.
The US Treasury Department currently monitors transactions through a series of bank ledgers and transactions through The Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. It’s a suitable system for monitoring transactions today, and a blockchain-based system would significantly enhance the ease and speed of monitoring capabilities. In moving to an entirely electronic commerce platform, such as bitcoin, we are entrusting the bureaucratic authorities to adhere to their charge of monitoring for transactions related to terrorism — but who’s ensuring that they don’t overstep their mandate with a person’s economic freedoms by freezing the account of an innocent person or group of people? The United States has a history of freezing assets on the international level. Russia, Iran and Venezuela have each had assets frozen in the last few years for challenging American authority. Might it also be possible that our government could freeze the assets of Americans challenging American bureaucracy? We have a notable history of discrimination: from redlining to the rhetoric of pitting police rights against black rights, as if they are somehow mutually exclusive. Unfortunate as the case may be, the precedent for abuse is clear and the transition to blockchain-based currency, bitcoin or otherwise, increases the risk for abuse; a single keystroke could instantly halt a person’s ability to move and transact their assets within a given blockchain currency. It’s not just bitcoin either, any blockchain-based currency has the potential to eliminate privacy, sweeping liberty away with it. While crypto is currently sold to the public as an immutable public ledger for anonymous transactions, the “anonymous” portion of the description will be preserved only for government approved illicit transactions — the kind of transactions that must be hidden from public view for fear of public backlash. It may be possible to hide your identity for the time being as it relates to your crypto transactions, however, you can be sure that as crypto-currency, and bitcoin specifically, becomes more mainstream, governments will require that wallets be associated with real identities, as is the case with our current banking accounts.
At this point, you may note that I’m conflating the concepts of liberty and privacy as though they are intrinsically related. It’s true; I believe that there is a strong correlation. With that said, I understand the argument for radical transparency. Those that argue for radical transparency and the elimination of privacy do so because human beings tend to behave better when we know that we’re being watched. However, that only works if we’re all playing by the same rules, a condition, which, if history is any guide, most certainly will not happen.
To my point, a closer look shows that the true value of bitcoin is closer to 40 cents than $4,000 per bitcoin. As a former Investment Advisor, I research my investment recommendations before investing for myself and sharing my insights. I was quite enthusiastic about crypto going into it, but the more I researched, the more I realized that something was amiss. In “Can Terrorists Hack Bitcoin?”, I chronicled the 2010 hack of the leading crypto-currency. In short, a small team hacked the blockchain to create 184 billion extra bitcoin. After identifying the error, the early pioneers rewrote the blockchain and orphaned the 184 billion bitcoin, rendering them worthless as long as bitcoin maintained then current transaction security protocols. The bitcoin security structure changed on August 23, 2017, seven years later, when the bitcoin network officially adopted a technology called Segregated Witness. “Segwit”, as it is called in short, provides miners, transaction processors, with an incentive to disregard the transaction identification tags (post now removed) for valid inclusion into the blockchain, meaning that the previously orphaned 184 billion bitcoin can be reintroduced into the system provided that the miners choose to overlook the transaction identification tags. If this sounds confusing, read “Bitcoin’s Dirty Little Secret” in which I elaborate further. With consolidated control of the transaction processing network (mining), ownership of 99.99% of total potential bitcoin in circulation, and a much easier manner in which to monitor electronic transactions through the blockchain, this is a deception of massive proportions. With that said, the question remains, how does bitcoin become a global standard and what role, if any, does the Federal Reserve play in this?
For reference, here is the math: 21 million original cap / 184,021,000,000 new combined cap = .01%; $4,000 x .0001 = $0.40.
Rate Hikes Crash Risky Currencies
As a citizen of the United States, we live comfortable lives spending more than we earn and throwing our weight around on the international scene because our US dollar is the world’s reserve currency; most international transactions are settled in US dollars, hence greater demand for dollars than less used currencies. If the US dollar loses reserve currency status or if our financiers chasten in their appetite for US debt for fear of inability to repay, the dollar would succumb to inflation, perhaps even hyper-inflation as is the case with other nations who fail to maintain a balanced budget.
The most recent case of hyperinflation, Venezuela, provides a glimpse of how emerging markets tend to underperform in Federal Reserve rate hiking cycles. The reason is fairly simple. Using your home and job as a microcosm of how governments operate, imagine that you bought your dream home and took out a mortgage of $1,500 per month to pay for it. Now imagine that instead of earning dollars at your job, you instead earn Mexican pesos. If the peso drops in value against the dollar, you’re going to have a much more challenging time paying your mortgage every month. This was the exact situation that Icelanders faced in 2008; their krona devalued against the Euro and the Icelandic housing bubble burst. (The American housing bubble burst for reasons other than currency exchange variance.) The same happens for governments; when their dollar-denominated debt becomes too expensive to repay with their local currency tax revenue or when state owned oil revenue is cut off — both of which are true in the case of Venezuela; stock markets and currencies become susceptible to collapse. Hence, hyperinflation drives people to trade their local currency for other currencies and forms of exchange such as US dollars, sacks of sugar — and bitcoin, the use of which is soaring in Venezuela. With that said, it would take a lot: a sustained rate hiking cycle supported by a rock solid US economy and a stable or appreciating bitcoin price, to drive people from around the world to abandon their local currencies in favor of bitcoin.
Tax Cuts, Tariffs & Rate Hikes
President Trump campaigned on an “America First” platform of personal and economic security, smartly targeting those who have suffered the most from the export of America’s manufacturing jobs: working class white men, especially from Midwestern swing states, key to winning the electoral vote. By broadcasting his intent to restructure America’s trade relationships and couching the strategy in the safe cloth of job security, he paved the way to act aggressively on trade upon taking office — and act aggressively, he did.
The Trump Administration’s tax cuts and tariffs strategy is positioned to boost the US economy in the short term, bolster the manufacturing base in the medium to long term, and provide the basis for sustained domestic economic growth and rate hikes while exporting inflation to the rest of the world. This inflation, a destabilizing force to non-reserve currency economies, drives citizens of those higher risk economies to find stable currencies to protect the value of their savings. This is the perfect economic plan to transition the world to a new reserve currency.
The graphic below shows that Tax Cuts and Jobs Act of 2017 supported a trend towards greater growth, a necessary precursor to Federal Reserve rate hikes.
President Trump followed his tax cuts with tariffs. By disputing the status quo on trade with China, Europe, Mexico and Japan; the trading partners with which we have the largest trade deficits, the Trump Administration attempted to adjust the trade deficit in favor of the US in order to reduce our reliance on foreign borrowing while also repatriating the production of steel and aluminum, a national security imperative. Harvard Economist Martin Feldstein explains that trade and budget deficits are financed by foreign lenders, kind of like putting expenses on a huge national credit card. While foreign lenders, especially China and central banks, maintain interest in financing our spending habits at present, if our credit sours and the risk of default becomes a real threat, our lenders may stop buying American debt and cut off our access to credit just when we may need it most. Similarly, if we do nothing about our pervasive deficit spending, demand for the US Dollar and dollar-backed assets will decline, much like a stock declines due to risky financial practices. For a corporate corollary, read about Enron. Had China and other central banks not supported America in 2008 with $1.6 trillion in asset purchases, we’d be living in a very different America today. That’s the concern on the economic front: 2008 was bad; it could happen again; and next time, if we don’t clean up our spending habits, it could be much worse.
An intriguing side benefit to this tariff strategy is the likely increase in the value of the US Dollar regardless of how successful we are as a nation in curtailing spending, as described by Benn Steil and Emma Smith, economists on staff with the Council on Foreign Relations magazine. They note that if we fail to stimulate increased savings and investment within the US, we could become poorer as a nation, which in turn could lead to recession or worse. To that end, Federal Reserve Chair Powell began commenting on financial instability as a concern as part of his June 2018 press conference, in which he mentioned “financial stability” six times. In fact, financial instability is such a high priority that Federal Reserve Chairman Powell elevated “financial stability” to the level of a third mandate, alongside maximum employment and price stability, for the first time since 1929, just prior to the start of the Great Depression. This new triple mandate points towards a more aggressive stance on interest rates, which could stimulate greater savings while curtailing spending by both consumers and the federal government. In other words, contrary to popular belief, increasing interest rates does not boost the economy — it is actually a drag on the economy, which means that if we are to support a stronger dollar, we’ll need a strong economy to power it. In this scenario, the repatriation of steel and aluminum manufacturing and manufacturing in general could be the boon that the middle class needs to regain its footing.
With the Tax Cut & Tariff Strategy as a backdrop, the Trump Administration, inclusive of the Federal Reserve, has penned a brilliant strategy to foster the conditions for a much stronger dollar. This is good news: If the dollar is on the upswing, investors are likely to be buyers, not sellers, thereby extending the time horizon that we have to navigate this transition to sound financial footing. Nothing sinister here; this is sound financial management.
The Federal Reserve’s $4 Trillion Balance Sheet
There’s just one problem with the strategy as outlined above: Federal Reserve has $2 trillion of assets that are subject to losses in an aggressive rate hiking cycle.
(The other $2 trillion in assets on the Fed’s balance sheet are in the form of the dollars that we carry in our wallets and keep in our bank accounts. We pay the Federal Reserve around 6% per year for the right to use the dollar bills they print for us. By comparison, if you invest with Vanguard, you pay just 0.04%. In other words, we pay the Fed 150 times more than we pay Vanguard to manage our money. (.06 / .0004) If President Trump is trying to balance the federal budget, he might want to renegotiate our terms of payment with the Fed first.)
The Federal Reserve announced last year that they would like to reduce the size of their balance sheet. In other words, they want to sell a portion of their Treasury and mortgage bond portfolio. This is a good sign for the economy; when the economy is about to weaken, savvy investors will sell stocks and buy bonds. The reverse is true during expansion periods: buy stocks and sell bonds. That the Federal Reserve is selling bonds suggests that we’re not as late in the expansion cycle as we might think. While this is a good sign for America, it complicates matters for the Federal Reserve, as I described in my October 2018 article, Fed to Spike Rates, Spook Markets.
Historically speaking, as the economy strengthens, the Fed will take the opportunity to raise interest rates. This translates to higher borrowing costs for consumers and more interest earned by the banks and Federal Reserve; they lend us money for government programs, home mortgages, car loans, student loans, credit card debt and more. The debt service we pay, principal and interest, is paid to the banks and to the Federal Reserve. In return, we get the things we want sooner rather than later. There’s just one problem for the Fed: as they raise rates into a strong economy, their Treasury and mortgage bond portfolio will suffer losses, potentially offsetting any gains earned by higher interest rates. To escape this dilemma, they need to create a market for the bonds that they want to sell, which is precisely where Trump’s tax cuts come into play.
Trump’s tax cuts added fuel to a strong economy and an already appreciating stock market. This gave the Fed the room it needed to talk aggressively about raising rates, thereby creating the market for bonds, by spooking the market on fears of a forthcoming Fed-induced recession and to do so without actually sparking a recession. Indeed, this was the fear that took hold of the market in December as the Dow dropped from a high of 27,000 to below 22,000 in just 10 days. In those 10 days, I speculate that the Fed acted aggressively to sell their bond portfolio into strong demand on the fear of a recession. While this conduct may not be in line with what the public may expect of an organization charged with managing our economy, this is how smart investing tends to work, especially when you’re the one with the large balance sheet: buy when people are selling and sell when people are buying. More importantly, with a balance sheet that is less susceptible to rate hikes, the stage is set to for more aggressive rate hikes moving forward, and those hikes support the transition to bitcoin.
All Eyes on Congress
The last piece to the puzzle is perhaps the most challenging and the key component to creating a fortress America economy: a balanced budget. If Congress can come to an agreement on an affordable healthcare plan that improves the health of America and an update to Social Security to look less like a Ponzi Scheme and more like a pension plan, America will be independent of foreign lenders and free to let the dollar strengthen accordingly. Republicans have the bargaining chips to make this happen too. After President Trump shredded many of the policies that Democrats hold dear, healthcare and environmental protections in particular, there may be just enough to be regained through negotiations to provide the cover both parties need to make the necessary adjustments to healthcare and Social Security. Changes to these two programs and concurrent spending cuts on defense, a likely demand on part of the Democrats to justify changes to healthcare and Social Security, are likely enough to balance the budget.
Much of what I’ve described is sound financial management. I am 100% behind a balanced budget; effective healthcare; a clean, healthy environment; cost-effective support system and a strong middle class. Those are essential ingredients to a healthy, productive society. In fact, I’ve campaigned on those values for Michigan State Representative in 2002 and in 2014. That the economic policy is coordinated politically and militarily is a stroke of genius on part of those behind the plans. This is how things should work, except for the fact that the public is completely unaware of the plan, and in the case of bitcoin, entrusts absolute authority to the Federal Reserve and Department of Treasury. My concern is twofold: that centralized power through a single global currency, and potential for abuse thereof, can adversely effect individual liberty, the very essence of humanity; and that bitcoin has no connection whatsoever to the limited nature of finite natural resources. As long as free people remain inclined to cede liberty for security, the threat for abuse remains. Unfortunately, as fear drives security sentiment for the majority of America, fear also powers the march towards a global currency, placing our privacy at risk, and concentrating power and wealth in the hands of the few. Deductive reasoning points to the Federal Reserve as the organization best positioned to guide us to and benefit from a transition to bitcoin. If the phrase, “Absolute power corrupts absolutely,” has any truth to it, we should rally to reclaim national control and management of our currency.
Read: Hijacking America: Part III.
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