This is the second instalment of The Jackpot Chronicles: Four Possible Post-Coronavirus Scenarios.

Force Majeure means:

a chance occurrence or superior force that renders a contract unenforceable and frees all parties from their obligations under it.

We are frequently told that there exists some manner of “Social Contract” to which we are implicitly bound by virtue of being alive. This implied Social Contract confers legitimacy upon the institutions that order our world, the national governments, the central banks, the miltary and police. And by extension certain communication outlets and media are endowed with a status of official curators over the narratives around institutional power.

Under the Force Majeure Scenario, the first of four possible Coronavirus aftermaths posited in “Welcome to the Jackpot”, the overwhelming or superior force is not the pandemic itself, but rather the collapse of the debt supercycle, the monetary system that derives from it, and the structure of nation states that are burgeoned by it.

The last time we were here, when a systemic crisis has shaken the foundation of the social order, the policy response was favourable to one party of the social contract at the expense of the others.

The GFC, which I now call GFC 1.0 or GFC ‘08, saw the financialized class, those closest to the monetary spigots of the Central Banks enjoy accelerating prosperity as their asset values rose, whilst the rest of the population endured stagnation and a steadily increasing cost-of-living (which mainstream commentators refused to acknowledge as inflation).

The policy response from the last crisis has led us directly, in a straight line to this one. The only surprise being the exact nature of the catalyst which would pop the Everything Bubble, and perhaps the ferocity with which the air began to let out once it did.

The signs were certainly there that we were nearing some kind of archetypical “shoeshine boy”moment or phenomenon. Complacency in passive investing, extreme overabundance in the unicorn population, the fact that there exists (existed) an entire industry around arbitraging long term leases with short term rentals via AirBnB, there was a sense of Roaring 20’s around it all and all those vile contrarians were wondering “just how long can this go on?”

Under Force Majeure the public begins to understand that the people who populate institutions are just that, people. Despite specialized training perhaps, they are not endowed with any superhuman intellect or wisdom. Success within the matrix of the institutional elite comes from proxemics and adroitly navigating the system itself, not much more.

“An era can be considered over when its basic illusions have been exhausted”
— Arthur Miller

 

An era like this comes to an end when the public realizes that their betters aren’t intellectually superior but rather institutionally privileged. Now facing an existential crisis of their own making, they are completely out of touch with the public mind and out of their depth to deal with it.

Then The System Finally Comes Unglued. Now what?

The central banks and national governments have fired their bazookas in unison yet despite a typical relief rally in the form of a standard issue dead cat bounce, reality continues to insist on asserting itself. On a recent Jelly Donuts podcast, Grant Williams talks about forthcoming GDP numbers coming off 30% “truly apocalyptic”.

Yet, the incumbent institutional custodians will continue to deny reality and to discredit themselves, what will it look like then the populace comes to realize that the old social order, and the institutions that curate it are being deprecated?

Breaking: A new bull market has begun. The Dow has rallied more than 20% since hitting a low three days ago, ending the shortest bear market ever. https://t.co/06YS0XqWGP

— The Wall Street Journal (@WSJ) March 26, 2020

Ontario Premier Doug Ford recently advised citizens who couldn’t pay their looming rent bills at the first of the month to simply “not pay”. He later tried walking that back, but when this sentiment gets writ large, with governments printing money and sending out cheques, what happens when people and businesses simply decide not to pay their taxes either?

Can political leaders say, with a straight face, that citizens should stiff their landlords or mortgage lenders but not the State?

And if the State can simply print up money and send out cheques, why do we need taxes anyway? Have we arrived at full MMT?

All of the central bank and fiscal stimulus portends a secular shift from deflation to inflation and I don’t think very many people understand what that means.

It means a whole lot of broken clocks are gonna be right for once, but at a time it counts the most.

Now, every company that levered up on debt to buy back their own shares over the last 10 years wants a bailout. Grant Williams points out in Things That Make You Go Hmmm that the airline industry spent 47B on buybacks since 2010, they want a 50B bailout.

What the chart, right, doesn’t show is the total dollar amount spent by the airlines on buying back their own shares between 2010 and 2019.

That number is $47.3 billion (of which American Airlines – whose negative cumulative free cash flow between those dates was $7.9 bln – contributed $13 bln).

Even the private jet industry wants a bailout.

And what will public citizens get? Those whose businesses have been ordered to close, whose jobs have already been lost? They’ll get a check for $1,200, or a tax deferral until August. Bfd.

Charles Hugh Smith’s books speak a lot about this type of secular wane in institutional relevancy, which we discussed on our podcast once and it bears repeating here:

MJ: when I look at  Pathfinding [Our Destiny] like part seven where where we’re talking about what the way forward looks like, that it’s outside of the control of the of the establishment, that it’s outside of the system I get this sense that for society to flourish and adapt around this and evolve. I guess that’s the key word, we’re going do this around the institutionalized hierarchies.

They’re not going to get religion one day, we’re not going to elect the right candidate, we’re not going to have the right party gain power that’s suddenly going to say “I read this great book by Charles Hugh Smith and this is how we’re going to do it”.

It’s going to be something like institutionalized hierarchies will just lose more and more relevance as these new social and business and financial configurations start gaining more and more relevance.

CHS: That’s an excellent point and I think if anything I didn’t emphasize that enough. That really what we’re talking about is kind of like hacking the system in in the old time sense that a hack was a workaround. It wasn’t like you were breaking into the system to steal something, you’d created a workaround for a kludgy system that just didn’t work anymore.

And so I think you’re absolutely right, it’s going to be working around us and and Bitcoin is one example of how workarounds are manifesting and of course the status quo is going try to suppress those and/or co-opt them but what we’re really talking about is when systems fail at a systemic level you can’t reform them. You’re not going to make a policy tweak that’s going to fix higher education or the health care system. It just isn’t going work.

People are going to start working around that and they’re going be starting to pay cash for for medical care from pop up providers or remote physicians. Or there’s lots of different solutions to that in education. What I see the model that’s going to emerge whether people like it or not and is that students are going to start taking control of their own education and they’re going start organizing their own education.

They don’t need this bloated structure that charges them $70,000 a year and so that’s where technology, the internet and networking has really enabled a whole suite of solutions that basically bypass all the institutions that now hold the wealth and power, that have all this as you say institutionalized lethargy as as their their model.

It’s actually quite an exciting time but for those who are dependent on the system within these institutions it’s a very disturbing time

Under Force Majeure as the institutions become understood to be out of touch with both the causes and remedies to the immediate crisis, they begin to signal their own hypocrisy and irrelevance more intensely.

It will not be long before citizens will face the dilemma of continuing to observe the edicts of their governments, whose policies inexorably stripped them of their ability to weather any kind of economic speed bump. They will come to realize that despite what the government decrees, especially if that means keeping their businesses closed or their jobs on hold for much longer, they may be better off working around that.

That’s when myriad alternative economies and ecosystems will explode, black markets, grey markets, Local Exchange Currencies, private blockchains, invisible agoras.

As governments at all levels teeter on insolvency and their inability to control their own populace everywhere or to be in a position to guarantee security and order, I could envision neighbourhood watch groups morphing into localized militias. I would anticipate an explosion in private security and ex-military contractors.

Don’t be surprised to see Facebook resurrect their Libra, either under that monicker or some rebranded version as the large corporations, the ones that have revenues larger than most national GDPs begin to reassert some of their plans which may have been impeded earlier.

However it plays out, the key points to bear in mind are that:

• It would be a mistake to think of the next 20 years as a linear, albeit accelerated version of the previous 20 years (a la Chris Martenson)
• We are about to undergo a change in secularity from deflation to inflation (a la Grant Williams, Peter Schiff and many others)
• The incumbent institutions of the fiat currency era are about to be swept away, akin to the way the royal houses of Europe were after World War 1 (the last major “Force Majeure” transition period that comes to mind for me).

It will all be very reminiscent of Neal Stephenson’s “Snow Crash”

If you want to receive the rest of the Jackpot Chronicles series, or get on the list for my Business Survival Blueprint (available to subscribers only), sign up for my mailing list.

 

“[Bitcoin] won’t end well, it’s a fraud…worse than tulip bulbs…[but] if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,”

— Jamie Dimon: CEO, JP Morgan

Headline: JPMorgan Guilty of Money Laundering, Tried To Hide Swiss Regulator Judgement

— via Cointelegraph

 

(Read on Medium)

Given the current, latest successive series of spikes to all time highs for Bitcoin, the detractors are working overtime to make the case that the crypto-currency is a Ponzi, a scam, a phantasm or at the very least, a bubble. Oddly, many of these same detractors spend a lot of time cheerleading the other bubble, that everything-bubble, stocks, bonds, real estate, even ETFs of ETFs, you name it.

It’s easy to make superficial apples-to-screwdrivers comparisons about why Bitcoin is doomed to fail. Until you really take some time to look into it. When first was exposed to the idea back in 2013 and researched it, I realized that “this really is different”, and the reason why was because of something John Kenneth Galbraith had once written which (until then) had invariably held up as true. In A Short History of Financial Euphoria Galbraith said:

“The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.”

(emphasis added)

When one looks at the history this accurately maps every financial bubble from Tulipmania (which we will debunk as a suitable metaphor for Bitcoin shortly) right up to 2008 and beyond.

However one place where it isn’t applicable, is to the phenomenon of Bitcoin. Crypto-currencies, at least at present, have no leverage and are near impossible to purchase on credit. In other words, if asset bubbles get that way largely through leverage, and there is comparatively no leverage in Bitcoin, then something else has to be driving it.

That said…

The Price of Bitcoin is a Side Show.

Granted, at the moment it’s a very exciting sideshow for those who are on the train. A long time customer emailed me as I was writing this asking “at what point has easyDNS’ profits from accepting and holding bitcoin exceeded the actual operating profits of the company?” I had never considered that but some quick math revealed that even after cashing a chunk out to buy gold (not my greatest trade), that happened last year.

But the price action around this isn’t what is exciting about Bitcoin and the crypto-currency revolution. What is exciting is that the centralized, bankster controlled monopoly over the issuance of money itself is finished. It’s over. Even if they successfully manage to co-opt some major crypto-currencies or issue their own, Gresham’s Law will assert itself as capital managers will select a truly decentralized crypto-currency wherein they control, or have the option to control, their own private keys to safely store their wealth while they’ll use the government version to pay taxes, etc.

Whatever state issued digital cash comes out in the near future, I’m suspecting it will be centralized with mandatory key private key custody or escrow. When that happens it shouldn’t even be called crypto-currency, call it something else like “pseudo-crypto” or “fauxcoin” to differentiate.

Given the mostly bad analogies and unfounded criticisms being levelled at Bitcoin, let’s first take a serious look at what Bitcoin isn’t. Then in Part II we’ll look at what it is and why its different.

What Bitcoin Isn’t

Backed by nothing

This is the goto criticism for people who simply don’t understand that crypto-currencies are based upon mathematics, zero-trust, open-source and consensus. They think that bitcoins can simply be created at will and are backed by nothing.

They also say that as if the world’s reserve currency, the US dollar, isn’t, literally, backed by nothing and hasn’t been since 1972; and as if can’t be created at will, which it most certainly has, with a vengeance.

Indeed as Galbraith continued in our earlier passage:

“This was true in one of the earliest seeming marvels: when banks discovered that they could print bank notes and issue them to borrowers in excess of the hard-money deposits in the banks’ strong rooms”.

All fiat currencies today really are backed by nothing and can be created at will (that’s what the word “fiat” actually means), and perhaps unbeknownst to many we are right now in a protracted, global currency war. Every nation is racing to the bottom, trying to devalue their currency against their trading partners so they can:

1. give their exporters a competitive advantage
2. pull stronger currencies in to make money on the exchange, and
3. service their ever expanding debts back with devalued, cheaper currency

This is why everybody’s purchasing power is going down despite tenured academics and central bankers incessantly complaining about low inflation and political spokesmodels always talking up a strong currency.

Bitcoin isn’t: Backed by nothing
What is? The USD and every other fiat currency in the world.

Bitcoin is a ponzi

The idea that Bitcoin or most crypto-currencies are a Ponzi is easily debunked by understanding what a Ponzi actually is.

As observed in CryptoAssets (Burniske & Tartar, 2017), it’s very simple: new investors pay old investors.

It is important to realize that in a Ponzi, the earlier investors are literally paid with funds being injected by the new investors in a flow through fashion (as distinct from later investors having to pay higher prices to earlier ones to induce them to part with an asset).

As long as the number of new investors and thus the influx of funds is growing at a rate faster than the payouts to the earlier investors, the Ponzi scheme thrives. When the expected payouts exceed the rate of input, it dies.

One doesn’t have to look very far to find mechanisms that fit the definition exactly: Social security programs are all classic ponzis. The demographic reality today is that with the entry of the Baby Boom generation into retirement, given that the subsequent generations are so much smaller in size, additionally penalized by falling real wages, rising or multiple taxation, decaying purchasing power on their money and returns on any savings they can eek out suppressed into negative nominal yields; this Ponzi is in its terminal phase.

(Given that these exacerbating headwinds which face later generations can be summed up with the phrase “financial repression”, it is only logical that capital would flee to some asset or currency which appears resistant to them.)

Granted, the current ICO craze probably includes some ponzis. The Cryptoassets book describes the OneCoin Ponzi as well as how to spot a ponzi in crypto-currencies. I would have been hesitant to even call OneCoin a crypto-currency at all. It wasn’t open source and had no public blockchain.

In Bitcoin or other true crypto-currencies, early holders are not receiving bitcoin from later entrants. In fact, quite the opposite is happening. Later entrants must entice earlier ones to part with their bitcoin. Since Bitcoin cannot be created at will, it must be mined at a rate that drops over time (this year approximately 640K new bitcoin will be mined, about 3.8% of the total supply).

Demand for bitcoin is simply outstripping supply of new coins being mined (for reasons we will discuss in Part II). If said price action rises dramatically (like for example, Bitcoin suddenly became the highest performing asset class in the world) then a feedback loop would occur.  Ever higher prices would be required to induce earlier holders to sell.

Bitcoin Isn’t: A ponzi
What is: Social Security

Tulipmania

What is described above is the same dynamic that occurs in any bull market, as buying begets more buying, and fear of missing out (FOMO) kicks in. It is said one of the most accurate gauges of happiness correlates closely to how much wealth one has when compared to one’s brother-in-law.  Alex J Pollock describes it in Boom and Bust: Financial Cycles and Human Prosperity, as “The disturbing experience of watching one’s friends get rich”.

The trick would be to have some understanding of when a strong bull market has crossed into Bubble territory. One of the more popular analogies for Bitcoin is Tulipmania: the financial bubble that occurred in 1630’s Amsterdam with none other than tulip bulbs. Bitcoin is compared to Tulipmania so often I decided to take a closer look at Tulipmania to see if the comparison was valid.

What I found was that it most of what we know today about Tulipmania is superficial and self-referential, deriving primarily Charles Mackay’s chapter on Tulipmania in his seminal Extraordinary Delusions and the Madness of Crowds (1841). It is a scant 9 pages and is purely anecdotal, describing ridiculous prices paid by the otherwise pragmatic and level-headed Dutch and then it all just blew up like all bubbles do.

Finally I found Anne Goldgar’s Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age, which is the most in-depth investigation to the rise and subsequent fall of Tulipmania extant today. In it we learn about the circular references that went on to inform our present time about Tulipmania:

“If we trace these stories back through the centuries, we find how weak their foundations actually are. In fact, they are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism. From there we have our modern story of tulipmania.”

She traces the lineage of MacKay’s chapter:

“Mackay’s chief source was Johann Beckmann, author of Beytrage zur Geschichte der Erfindungen, which, as A History of Inventions, Discoveries and Origins, went through many editions tions in English from 1797 on. Beckmann was concerned about financial speculation in his day, but his own sources were suspect.

He relied chiefly on Abraham Munting, a botanical writer from the late seventeenth century. Munting’s father, himself a botanist, had lost money on tulips, but Munting, writing in the early 1670s, was himself no reliable eyewitness. His own words, often verbatim, come chiefly from two places: the historical account of the chronicler, Lieuwe van Aitzema in 1669, and one of the longest of the contemporary pieces of propaganda against the trade, Adriaen Roman’s Samen-spraech tusschen Waermondt ende Gaergoedt (Dialogue logue between True-mouth and Greedy-goods) of 1637. As Aitzema was himself basing his chronicle on the pamphlet literature, we are left with a picture of tulipmania based almost solely on propaganda, cited as if it were fact.”

(emphasis added)

Goldgar helps the reader in pursuit of truly understanding Tulipmania by rewinding to the late 1590’s, when there were no tulips in what is now Holland, or in fact Europe. Gardens were purely functional, for growing food, herbs or medicinals. Then tulips and other curiosities began coming into the country and Europe from merchant vessels trading in the Mediterranean and Far East.

The flower garden arose for the first time, and it was spectacular – giving rise to an entire movement of collectors and aficionados, whom in the early days were as a rule well-to-do and affluent. In later years, more people sought out, and then speculated in the tulip trade to not only profit, but to lay their own claims on what they perceived to be a higher economic class or status.

At the risk of over simplifying her work, the Tulip trade became intertwined and inseparable from, art.

“The collecting of art seemed to go with the collecting of tulips. This meant that the tulip craze was part of a much bigger mentality a mentality of curiosity, of excitement, and of piecing together connections between the seemingly disparate worlds of art and nature. It also placed the tulip firmly in a social world, in which collectors strove for social status and sought to represent themselves as connoisseurs to each other and to themselves.”

The more I delved into understanding Tulipmania, the more I couldn’t escape thinking that the analogy was much more applicable to a different asset class which did enjoy a momentous bubble in recent times, but it wasn’t bitcoin or crypto-currencies. To belabour my point, Bitcoin was impelled not by art, beauty or any semblance of collectibility but emerged primarily as a resistance to financial repression.

Something that was driven by uniqueness and fostered an aristocratic in-club all it’s own and until recently enjoyed stratospheric price action, was the aftermarket in domain names. This isn’t the place to conduct a post-mortem on that bubble, but suffice it say that the distinct characteristics of domain names more closely resembled that of tulip bulbs than Bitcoin does. (For the reader interested, I have written at length about the domain aftermarket here and here).

Bitcoin isn’t: Tulipmania
What was like Tulipmania? Domain names.

If Bitcoin isn’t a digital fiat backed by nothing, nor a ponzi nor Tulipmania, then what is it? Why has this come out of literally nowhere to become the strongest performing and fastest growing asset / currency in the world?

When I started writing this post I wasn’t sure myself. I had to go back through my library and look at history and try to find some historical antecedent for what was happening. After looking back through the origins of money itself and working forward I still wasn’t any closer to a mental model that “worked”.

Then around 2am the other night I woke up with the idea that I was looking in the wrong place, and it hit me with such force that I had a hard time getting back to sleep – even though I had made an off the cuff tweet that captured the basic idea of it a few weeks earlier (which I can’t find now).

I’ll take you through it in Part II. (Hope to have it up soon). But in the meantime, I’ll leave you with another megabank CEO who’s take on all this is very different from Jamie Dimon’s. Goldman Sachs’ CEO Lloyd Blankfein here muses on why it’s entirely plausible that money may evolve from being based on fiat to being based on consensus. Some truly extraordinary remarks coming from a man in his position.

Also See:

• This Time is Different (Part 2): What Bitcoin Really Is