The insanity of the 1929 replay continues this morning with stocks set to open another 200 points higher by the Dow. Even more astounding is that Bitcoin is now seemingly comfortable over 11,000 – and perhaps could go to $20,000 within a month (or three) at present rates.
Yes, indeed, the world is nuts, but that’s the nature of manias and we seem looked into a 1929-like blow-off based on lots of pressures, but not the least of which is the “free money” notion that backs up cryptocurrencies.
This morning we see another warning, a move to back a cryptocurrency with a commodity, and Canada keeps edging toward digital money. Each of these is a very big deal so let’s run through a few impact notes…
The first item to ponder is this story: “Why Vanguard Legend Jack Bogle Says You Should ‘Avoid Bitcoin Like the Plague’.” The rationale here is very simple, explains Bogle. (Like us) he points out that there is no intrinsic rate of return. He even says (as we’ve said) that the only way to make money on cryptos is to find someone who will pay more than you did for them.
The way crypto currencies work is simple: Bitcoin, for example, claims there will never be more than 21-million created and today we’re past the 16.5-million mark. But they don’t convert into anything. But that may be about to change.
Enter the second major story on the “made-up money” front, a Reuters report: Enter the ‘petro’: Venezuela to launch oil-backed cryptocurrency.
The quickie on this is that president Madura likes cryptos, and like us, sees that they need to be backed by something tangible. So he proposes what sounds like a “stew” of oil, precious metals, and diamonds.
What he doesn’t address are the two obvious problems with such a scheme.
The first is that in order for such a crypto to work, you’d have to buy-in to the notion that Venezuela can actually stand for delivery in the event you wanted to convert a Petro for however much oil. You see, Maduro isn’t talking about backing with barrels of light sweet crude in 42-gallon units which would be viable. No, he’s talking about oil and gas reserves.
OK, problem number 1 is? Do you trust the government of Venezuela (no) and do you want to weasel around U.S. sanctions (double no).
There IS however, a light at the end of the tunnel: And it’s actually pretty graceful: Since the problem is that promises are not “solid” – who do you trust, right? – what we need is a cryptocurrency that stands as a deliverable contract and is enforceable.
Now, you’d be talking about something of value and something that would overcome my objection (and presumably Jack Bogle’s) that there’s not internal rate of return.
Right now, we have just one critical aspect of a cryptocurrency. They can’t be copied. But the exchange rate – such as Maduro has floated as an idea – is not intrinsic to the currency.
IF there was an enforceable conversion to X units of something, then cryptos would actually begin to fulfill the notion of setting up a global system of “honest money” – something that could not be “watered-down” by the central governments.
Remember, in the longer-term, convertibility is NOT acceptable to governments. Which is why the U.S. government allowed the big switcheroo years back, that allowed the (not really) Federal Reserve to pull in all of those actually meaningful Silver Certificates that were nominally exchangeable for a measure of silver at a Federal Reserve Bank.
Instead, today, all the money in your pocket is ONLY backed by the “full faith and credit” of the United States. As we explained in this weekend’s Peoplenomics report, the National Debt of the U.S. is not the $20.5-trillion the press lies to us about. It’s really more on the order of $61- trillion. Think unavoidable, unforgiven interest.
The reason is that government debt is associated with essentially irrevocable interest charges (hence, the additional $40-trillion owing) that no one talks about.
In reality, if you have a $20,000 loan balance outstanding on your car, you could legitimately claim that loan debt payoff is $20,000. Maybe you win the Lottery or get an inheritance. Point is, there are circumstances where the principal could be paid off immediately.
Government is not so lucky. There aren’t enough Powerball tickets in the galaxy to bail us on this one…
Paying off the U.S. Debt will therefore never happen. $20.5 -trillion is roughly the total output of all the goods and services made in America in a year.
People are not going to work and starve for a year to pay off the Federal Debt. Let’ alone three years.
And let’s not forget that agency (intergovernmental) debt carries a higher interest rate (around 7.8%) and correct me if I’m wrong, but I believe it can’t be paid without an interest penalty.
See, on the private side, if you pay off a house or car early, most consumer loans don’t provide for pre-payment penalties. But in government? The interest payments on intergovernmental debt are critical to keeping things like Social Security from blowing up.
Bottom line here is the U.S. is locked into the “making up money” (but only their money). For now, they have ruled that cryptocurrencies are personal property which, when exchanged for anything else of value, are subject to income tax on what they decree to be a “taxable event.”
Since the U.S. can’t even remain faithful to its Depression-era promised of convertibility (don’t even start me on the Fort Knox discussion!) why would anyone trust a cryptocurrency? Well, fact is convertibility to anything tangible and even without anyone standing for good delivery of a commodity, people think it’s a better bet than the U.S. government.
(Do remember, what’s obvious to you and me becomes obvious in government in 1 to 3 years and doesn’t become policy for 5 usually…)
Which means there is a YUGE opportunity for some government, somewhere, to make the commodity-backed, irrevocable cryptocurrency. That will be the one to buy.
Will it be Canada? There a lot of hype about how things MAY be headed that way. Take this Bitcoin press release, for example: Bitcoin Pushes Canada Toward State Crypto Coin.
EXCEPT, we would expect that Canadian politicians, being as weasel-like as any of our Fools on the Hill, will never remain faithful to any pledge of a fixed convertibility rate.
Instead, what they would do is tie the crypto to their currency – which just floats a new round of (digitally-facilitated) currency speculation.
Might I suggest that before you put a lot of money on this notion that you consider rehab, first?
UK pushing to include Bitcoin under money-laundering rules. Wanna bet the do-nothing Congress will follow suit?
With the Tax Scam’s passage (a break now, screw you down the road a ways) last week after the close, the Dow is set to pop nearly 250 points at the open this morning. With Bitcoins at $11,300 when I checked, I’ve got $12,000 in sight before the week is out.
We’re in the classic Depression-era replay. The Flappers of the Roaring Twenties are the LBGTQR(& whatevers) and the government has no option but to keep making-up money. It’s a period of frenzy and madness and it won’t end till something comes in from left field and changes how people think.
In today’s Coping section, we surmise that North Korea is a pretty good candidate and that the January/February timeframe would be a good guess.
But it’s only that…or is it?
The Art of Selling at the Top
Here’s another fine indicator for you: Oil tycoon Pickens puts Texas ranch on market for $250 million.
It’s just the place if you need a 33,000 square foot lodge for when you have guests over and you don’t have room in the 12,000 square foot lake house.
(Call me for where to send the referral fee if you buy it!)
Meanwhile, Back On Earth
We now turn to the Monday Trump Bash-o-Matic: “Mueller aide fired for anti-Trump texts now facing review for role in Clinton email probe.”
Don’t hold your breath. Get used to saying “President Pence” before this is all over.
Ah, the Media
Help me here…this headline isn’t making sense to me: Nobel Peace Prize Winner’s Son Says Missile May Be Chance for North Korea Talks.
So the son of a former South Korean president? This is like quoting the Obama children…good grief!
OK, he’s older, but still…
Reminds me of my old newsroom motto: We will find the New or Make It Up!
Why? Is there a shortage of grab-ass in DC we missed?
And Among the Falling Stars…
Forget all that: I want to know if I can buy up the Powdermilk Biscuit Company, hook it up to social, and flip an IPO before this pant-load of nonsense stops….
How about we launch a new line of Powdermilk Gluten-free? No? How about Rainbow Biscuits for your politically-correct friends, then?
The mind boggles…the coffee’s gone. Time to watch another dawn. Burma-something…