Modern Finance is the Fraud
Paragraphs rearranged for clarity.
“Bitcoin is a sort of tulip… it is an instrument of speculation but certainly not a currency and we don’t see it as a threat to central bank policy.”
Vitor Constancio, ECB Vice President, September 2017
“You can’t have a business where people can invent a currency out of thin air… it is fraud and worse than tulips bulbs.”
Jamie Dimon, CEO JP Morgan, September 2017
If one describes Bitcoin as a fraud, how would one describe a ‘financial cloud’ that is at least 4x-5x larger than the underlying economies? It is unlikely that US$400 trillion+ of financial instruments circulating around the world would ever be repaid and most are now backed by assets that are already either worthless or are diminishing in value. How does one describe rates and the yield curve that are either directly determined by Central Banks (BoJ or PBoC) or heavily influenced by them (Fed or ECB)?
While we maintain that despite the presence of US$7.5 trillion of excess reserves (amongst G4+Swiss central banks), global deflationary pressures are so strong that break-out of inflationary pressures is unlikely. However, if public sectors continue to insist on suppressing business/capital market cycles, then some form of full credit market nationalization and/or currency debasement becomes inevitable.
Dimon’s statement on Bitcoin represents the irony of the year. Euros, dollars, etc. are precisely fabricated out of thin air.
That was not always the case for dollars. They were once exchangeable for gold. But euros right from the start were a complete fabrication.
The Eurozone problems we see today are a direct result of the fraudulent nature of Target2 guarantees on top of the fraudulent nature of the euro itself.
Is Bitcoin a Currency?
Yap Island Stones, Gold, Bitcoin
Although the official currency of Micronesia is the US dollar, limestone discs, some of which weigh more than a car, are also currency.
People know who owns each stone and its value. Although the stones sit out in the open, there is no risk of theft.
Yap Island Stones, Bitcoin, and physical gold ownership (in your home, at GoldMoney, at BitGold or other reputable storage locations), have one thing in common: All of them have no associated debt. They represent no liabilities of any counterparty.
Fractional Reserve Lending Constitutes Fraud
If someone had a Yap Island stone and wanted to lend out three of them, that would not be possible. Nor can one have $100,000 worth of gold or Bitcoin and legally lend out $1,000,000 of it.
If someone tried to do so they would be convicted of fraud. Yet, via fractional reserve lending, banks can lend out money they do not have, and few think anything of it.
There are two distinct problems with fractional reserve lending as it exists today.
- Duration Mismatches
- Money Creation Out of Thin Air
CDs provide an easy to understand example duration mismatches. A person buying a 5-year CD gives up the right to use his money for 5-years in return for an agreed upon interest rate. Bank can and do lend out such money for 20 years.
Historically, borrowing short and lending long caused numerous bank runs and financial crises.
Note that there are no reserves on savings accounts. Banks can lend that money out while guaranteeing you availability.
If everyone tried to get their money at once, the system would implode. We have seen numerous examples in Europe recently.
Duration Mismatch Not the Only Problem
Fractional reserve lending problems go far beyond duration mismatch. Here are few key points.
- Fraudulent lending (banks lending more than they have ownership of) pushes up assets prices and favors those with first access to cash (banks and the wealthy). The housing bubble was a result of such fraud.
- The existing fractional reserve system allows lending of money that is supposed to be available on demand. Lending of money banks have no ownership of is outright fraudulent.
- Excessive credit backed only by artificially inflated asset prices is simply another form of fraud. Moreover, such lending also sends false signals to the market about the true state of the economy.
- In the ensuing and inevitable busts, the central bank inevitably punishes savers by artificially holding rates too low.
Reflections on “Legitimate” Right-To-Use
Some Libertarians argue that as long as customers agree to various banking schemes it is OK.
However, it’s not OK because such lending is nothing more than a gigantic kiting scheme. It affects others because it cheapens the value of money and pushes up asset prices for the benefit of those with first access to money, the banks and the wealthy.
Logically, two people cannot have the right to use the same money at the same time, whether they agree to such a scheme or not!
Fractional Reserve Lending is Fraudulent and Must Stop Entirely
Lending what you do not have “ownership of” is the issue. Duration mismatch is a form of that problem, but it is not the only form of that problem. Numerous complications arise when multiple people have immediate access to the same money at the same time.
Housing and credit lending bubbles constitute unmistakable proof that fractional reserve lending in any form is fraudulent and must stop entirely.
The solution is to abolish the Fed (central banks in general) and have a free market in money. I am confident the public would select gold, but if the public selected Bitcoin or beaver pelts, I would not object.
Confusing Bubbles and Capital Flight with Inherent Fraud
Dimon’s comment that Bitcoin is widely used a the mechanism for capital flight from China is beside the point. That China needs capital flight rules reflects on the instability of the yuan and the US dollar more than anything else.
There is nothing remotely fraudulent about bitcoin itself. And I fully understand why people want it to succeed.
That does not mean I see value in bitcoin at these prices. Others do. That’s what makes a market.
Trillions of dollars, euros, yen, and yuan backed by nothing and created out of nothing have been lent.
Bitcoin, Gold, and Yap Island stones have no such issues.
We need a free market in money. Given a choice people would not freely select something inherently fraudulent.
Target2: Italy, Spain, and Greece owe close to a trillion euros to Germany that cannot possibly be paid back. The ECB guarantees those transactions against the founding charter of the Euro. That constitutes fraud on top of the fraudulent nature of the euro itself.
Bitcoin Valuation: I do not like Bitcoin at these prices. Even if I did like Bitcoin at these prices I would be against the constant cheerleading and hype.
Gold Hype: I am consistent. I do not like the end-of-the-world talk regarding gold. On September 14, 2017, leading hypester Jim Rickards said “Next Financial Crisis 6-8 Months Away” Got Popcorn? Gold?
Hyperinflation proponents are consistently amusing if nothing else. But hey, hype sells.
Viktor Shvets’ viewpoint is similar if not identical to mine: “Global deflationary pressures are so strong that break-out of inflationary pressures is unlikely. However, if public sectors continue to insist on suppressing business/capital market cycles, then some form of full credit market nationalization and/or currency debasement becomes inevitable.”
MMT Foolishness: Modern Monetary Theory (MMT) suggests that debt does not matter and governments can print at will creating a virtual utopia of constant growth. MMT, Keynesian, and Monetarism all suffer from the same fatal flaw: They promise something for nothing, in various ways.
Those who believe in the absurdity that a benevolent government would spend the money wisely, cancel all the debt or pay interest to itself and everyone will essentially live happily ever after, seriously needs to investigate my reading list.
By the way, MMT cannot possibly be correct for a reason I have not heard anyone else state: It’s based on fraud.
I do agree with Rickards that a currency crisis is coming. I do not know if it starts tomorrow, five years from now, or a decade from now. Little would surprise me at this point.
I believe gold will be the beneficiary, but I am unwilling to set a price target. However, the $10,000 target of Rickards on gold is far more realistic than the $1,000,000 price target of some Bitcoin advocates.
Meanwhile, Jamie Dimon is far off base in more ways than one.
Mike “Mish” Shedlock