Cashing In

It was as inevitable as the sun rising in the east. The far east, in this case, over the Land of the Rising Sun.

The Mt. Gox currency exchange in Tokyo, where buyers and sellers dealt in the unofficial currency Bitcoin, collapsed recently. As it disappeared, so did some $400 million. That money may have been lost, or stolen. Nobody’s sure. What many are sure of is that this collapse shows the need for more regulation.

“The clear ends of Bitcoin for either transacting in illegal goods and services or speculative gambling make me wary of its use,” Sen. Joe Manchin, D-W. Va., wrote. “I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.”

And that’s the easy, almost automatic, political reaction these days. When something goes wrong, bring in a new layer of regulators. When Enron defrauded investors, Congress passed Sarbanes-Oxley. When banks struggled in 2008, Congress passed Dodd-Frank. If Bitcoin exchanges don’t work, it must be because of a lack of oversight.

It’s worth asking, though: who was hurt when Mt. Gox went belly-up? Bitcoin is an exotic currency swapped by computer geeks and speculators hoping to make a quick buck. It’s not a legal tender issued by a government, as a dollar or a yen or a ruble is.

The Washington Post notes that the exchange’s collapse was expected for weeks before it actually happened. Surely those buying and selling on this exchange understood the risks they were taking, and they chose to go ahead anyway. Caveat emptor and all that.

Further, as the Post reported a week after the collapse, the currency itself is doing fine, “trading nearly 10 percent higher Saturday than a week before. Each Bitcoin is worth more than $600 in recent trading.”

So instead of reading a eulogy for Bitcoin, let’s explore why people are turning to non-government issued currencies in the first place.

Modern legal tender is fiat money. It’s essentially created out of thin air by governments, which declare it acceptable for “all debts, public and private.” That means the government will accept the currency to pay taxes.

In their book “Rethinking Money,” Bernard Lietaer and Jacqui Dunne explain that legal tender is multiplied by loans made through the banking system. That requires exponential growth, or else the system grinds to a halt.

Moreover, while most people are wary about debt, the money system actually requires tons of it. “One is obliged in the current monetary system to incur debt and compete with others in order to perform exchanges and pay the resulting interest to the banks or lenders,” they explain. “If all debts were paid, money would simply disappear, because the entire process of money creation would reverse itself.” In fact, there would be a deficit because of all the interest that had been factored in but not paid, as when the bank loses out when a customer pays off a house or car loan ahead of time.

Bitcoin’s success shows that there’s nothing sacred about money. A $100 bill can buy groceries for a family, or be used in a drug deal (90 percent of paper money in the U.S. has traces of cocaine on it). It’s only valuable because people believe it is valuable.

People are looking for alternate ways to complete exchanges, and that’s a positive. Competition in a market makes products better. Cell phones, computers, cars: they’re all better than they were 25 years ago. So it can’t hurt to have a little competition for currencies as well.

Especially since so many dollars are, eventually, going to be used to pay off debt.

Our federal government now owes more than $17 trillion, more than the value of everything produced in this country in 2012. No government has ever owed so much, therefore no government has ever been faced with the prospect of paying off so much. Politicians in Washington may decide to reduce that debt by issuing more money and inflating the debt away. So people are looking for ways to diversify, whether with Bitcoin or gold or some other investment.

Of course regulators in Washington want to get control of Bitcoin, as they already control the dollar through the Federal Reserve. But there’s no need. Markets created Bitcoin, and they’ll regulate it as well.

This is the con, and I don't agree with its necessity argument unless you're a banker looking to entrap people into lifelong slavery.

China no longer supports the US Bond markets, in fact it is dumping US securities. This fact has forced the Federal Reserve to monetize US Debt (trade fiat fed notes for fiat treasury bond paper). This started about 4 years ago.

The monetizing of US Debt is done with finesse; the Fed doesn't buy US Treasuries direct, they buy it via their investment bank members. Money created from nothing goes to investment banks and US Bonds are placed with the Fed as collateral.

Inflation controls are originated from Fed policy that dictate to member banks that bonds are not to be bought from corporations unless approved, that only Treasury bonds are permitted for open purchase, and interest is paid by the Fed to member banks who borrow from the Fed. In other words, "Here's money I printed that I am loaning to you, hold a portion of it and I will pay you interest", in other words again, negative interest rates.

But income from interest on Treasury instruments piles up and is allowed to bubble up in the equity exchanges along with the Yen carry trade. Thus, stock markets are driven higher and higher and the retail investor is crushed by the microsecond front running of stock exchange computers. So inflation is held in check or very little of it is computed.

Inflation is felt in food but food is not included in inflation computations; how convenient. And now the con risks exposure from GDP estimates but now GDP is calculated differently to include things never before included; how convenient.

The dems proclaim they are better at 'managing' the economy. They are certainly better at managing misery while allowing their cronies and supporters to be rewarded. The Fed is mostly concerned with propping up their part of the banking system and assisting in financing various intelligence operations. Their monetary policy restricts money flow into the consumer sector and allows the federal government to take on massive obligations with the approval of Congress (actually holding a gun to the head of Boehner).

For government types, Obama and Fed policy are a windfall. And there's no reason for the con to stop, unless of course the Tea Party terrorists get power.

It is common knowledge that Americans are more miserable than ever, and that the Beltway class is swimming in prosperity. But awareness only comes to those who have a picture of the con diagram in their heads. Americans have had enough excuses that blame Bush 6 years after the fact and what is blamed now is the Tea Party terrorists in Congress. But that is a weak attack strategy. Upping the minimum wage as a counterargument also has diminishing returns.

So we head into 2014 and the game for the democrats is to hold the Senate or control the republican membership. That means their media will back candidates such as McConnell, Graham, Alexander, Roberts and any newcomers the dems can help the GOPe to foster.

If conservatives fail to oust McConnell and replace Boehner, the GOPe House and the new GOPe Senate will 'work with the President' to continue the present policy.

If conservatives gain more control of Congress, the game of chicken with Obama will be on. And if a conservative President takes the helm in 2016 and the present con scheme is ended, democrats will help set off financial bombs to unleash Hell on the US economy.

But there is a way out that allows conservatives to come out brilliantly. I'll comment how it plays out in a later post.

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