 | | The Daily Reckoning | Friday, June 3, 2011 |
- The story of one "cyber-crypto" currency and the $140,000 pizza,
- Boots-on-ground reporting and what makes the world tick,
- Plus, Bill Bonner on the growling bear, things that suck and plenty more...
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|  | | | An Emerging Free Market Currency | | Debating the Pros and Cons of Bitcoin | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
"I'd feel a little stupid buying these things," a dear friend of your editor's recently remarked. "But that's probably not, in and of itself, a bad thing. After all, I felt pretty stupid buying gold back when it was still $250 per ounce."
Our friend was referring to a peer-to-peer (P2P) cybercrypto currency called bitcoin. What is bitcoin? How is it used? What are the risks? Let's begin where all good non-Tarantino stories begin...at the beginning.
The demand for a totally free market currency arose, naturally, out of the dismal state of the current monetary environment, in which governments around the world systematically debase the value of their printed monies in order to pay for the various welfare-warfare states they promised but can't possibly afford. The resulting inflation is sometimes referred to as a "sneaky tax," one that silently, insidiously infiltrates the marketplace, with each freshly-inked dollar compromising the value and integrity of each and every currency unit already in circulation.
This is by no means a new phenomenon, as we remarked in this space last Friday:
"The history of centrally controlled monies is a history of theft, inflation and, eventually and invariably, defaults. From coin clippings during the Roman Empire through to debasement of German marks under the Weimar Republic...to hyperinflationary corruption of, in no particular order, Hungarian pengos...Zimbabwean dollars...Greek drachmai...Brazilian cruzeiros...Polish zlotych...Chinese yuan...Nicaraguan córdobas...US continentals...Peruvian soles...Angolan kwanzas...Russian rubles...Argentine pesos...
"...and the list goes on (and on...and on...)."
It is hardly a surprise, therefore, that after having labored under the state's unquestionable, unchallengeable monopoly on counterfeiting, and enduring the capricious, inflationary whims of the central banker class, the free market would demand - and will eventually provide - a superior alternative.
At various times throughout history, this has meant chaining the Feds to a gold and/or bimetal standard. Alas, as we know too well thanks to the likes of FDR and Nixon, the temptation to inflate is matched only by politicians' reliable tendency to make promises they can't keep. And so, gold standards are frequently tossed out the window at moments of manufactured convenience, proving further that entrusting the state to maintain the integrity of its currency is about as effective as locking them in a cell and giving them the key.
The free market requires something better, something beyond the grasp of the state and its many and varied manipulators and do-good meddlers. So, what's the solution? Again, from this space last week:
"Advocates of a small but fast-growing digital currency network called bitcoin think they've found the answer (or, at the very least, an answer). If it is successful, claim its adherents, this totally- decentralized, peer-to-peer (P2P) currency could supplant the world's central bank-issued money, potentially providing savvy speculators with an opportunity to cash in on the greatest politically motivated market distortion of our time."
Which brings us back to our original questions. First, what is bitcoin? An article that appeared on Yahoo! News this morning provides as good a definition as any (and a hint that the mainstream is catching on). Bitcoin is "a peer-to-peer system of electronic money that allows payments to be sent directly between two parties without the need for a financial institution."
The currency also makes redundant the concept of a central bank, Federal Reserve or any other such easily corruptible nonsense institutions. For starters, bitcoins are not generated, but rather awarded to miners - individual computers participating in the network - as a reward for processing transactions and securing the bitcoin currency network, thus providing an entirely decentralized, highly competitive marketplace, much like the Internet itself. What's more, the amount of bitcoins is strictly (mathematically) limited to 21 million coins. There are currently about 6.5 million coins in circulation and anywhere up to half a million dollars worth (at today's exchange rate) changes hands daily. As more and more coins are mined, the difficulty (amount of CPU required to mine each coin) increases exponentially, ensuring a steady (though ultimately finite) supply.
As more and more vendors begin accepting bitcoins as form of payment for goods and services, the universe expands against the number of available coins in circulation, thereby driving the value of the currency ever higher. (When we mentioned bitcoin last Friday, it was trading for about B$1 = US$8. Today it hit B$1 = US$14.25.)
As you might expect, bitcoin has its fair share of skeptics; maybe even more than its fair share. Bitcoin has appreciated at an incredible rate since it "took hold" in the online community, especially over the past few months. One of the first ever transactions using bitcoin, according to the forums, involved a consumer who paid B$10,000 for a pizza online one year ago. Those same bitcoins are today worth about US$140,000. Not a bad tip for the delivery guy. Still, such phenomenal currency appreciation has led many to assert that bitcoins are in a "bubble." And maybe they are...but not for the simple reason that they have appreciated against other currencies.
Value, as Ludwig von Mises described it, is not determined by the nature of objects themselves, but through our interactions with and appreciation for them. "Value is not intrinsic, it is not in things," he wrote in Human Action. "It is within us; it is the way in which man reacts to the conditions of his environment."
Is Google Inc., to take a real world example, in a bubble because it has more or less quintupled since IPOing in 2004? Or is it fairly priced at US$525 (or one third an ounce of gold...or B$37.5) because buyers and sellers of the stock agree, in this moment, that's what it is worth?
Another cause for concern among bitcoin skeptics is that, as the economy of the free market currency expands it will inevitably begin posing a threat to the state's own money-printing racket. It will, thereby, raise the ire of bankers and politicians who will have every incentive to make the currency illegal in order that they may protect their own monopoly and continue cheating their citizens of the value of their president-stamped notes and coins. Given the state's nature when it comes to these matters (and here we refer readers to the recent and despicable case against Bernard von NotHaus) there is every reason to expect that it will indeed crack down...and hard.
Here we expect all the usual arguments from all the usual suspects: Bitcoin transactions are anonymous and therefore provide cover for peddlers of child pornography and drug traffickers, they will contend.
But the astute reader knows in his gut there is something very wrong with this line of thinking right from the beginning. Cash is anonymous too. People by things deemed illegal by the state with state-issued currency all the time. So what? Does this mean US dollars should be banned? Some people drive their cars recklessly, with little or no regard for their own safety or for others'. Should we ban cars?
The question, however, is not whether the Feds should do something (moral considerations have rarely, if ever, stopped them before), but whether they could do something, even if they wanted to...
Whether or not you agree with the organization itself, the WikiLeaks scandal did nothing if not expose the limited power of government when it comes to policing the cyber world. Presented with every motivation to "take down" the WikiLeaks site, the Feds went after them in typically cumbersome fashion. Within a few days of the attack on their site, 10,000 WikiLeaks mirror pages had sprung up around the world. Six months after the largest leak of sensitive, highly-classified and obviously embarrassing state documents found its way into the light of virtual day, the organization now has more followers and supporters than ever before. Go figure.
Your editor has no idea whether bitcoin is a great idea or simply a great scam. Maybe it's both. And maybe it is in a bubble of epic proportions due to implode promptly at high noon tomorrow. And maybe the Feds can and will crush its rapidly expanding base of freely associating participants. Who knows?
In any case, the fact that the market has demonstrated the motivation and, arguably, the means to challenge state-sponsored currency manipulation is good news for freedom lovers everywhere. Bravo!
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| | The Daily Reckoning Presents | | The New World Order | |  | | Chris Hunter |
My job takes me all over the world.
So far this year, I've traveled on your behalf to visit Singapore, Cambodia, Thailand, Vietnam and Brazil. And we're not even at the halfway point yet!
These trips make up the backbone of my research into the best investments the world has to offer. I pound the sidewalk. Talk to locals. Meet with experts on the ground. And do my best to get "under the hood" of the places I visit.
I always have one question in mind when I travel: What makes this place tick? Sometimes the answer is the polar opposite of the Wall Street consensus. Then I know there's a real opportunity to profit.
But not all my research is carried out on the ground. I also find myself staying up late at night reading research reports with boring titles, such as the latest one from the World Bank - a 174-pager called "Multipolarity: The New Economic Order."
Now, I'll be the first to admit: It doesn't exactly scream excitement.
And truth be told, I'd much rather have my boots on the ground somewhere exotic than be wading through chapters with names like "Macroeconomic policy disparities, selected actual and potential growth poles among advanced and emerging economies."
But sometimes these kinds of reports contain invaluable nuggets about the big-picture outlook for the global economy. And the recent World Bank report doesn't disappoint.
You see, according to the report, by 2025 the dollar's reign as the world's reserve currency will be well and truly over.
Or as the economists at the World Bank put it (emphasis added):
The international monetary system is likely to cease being dominated by a single currency. Emerging-market countries [...] will become key players in financial markets. In short, a new world order with a more diffuse distribution of economic power is emerging.
If you have been following International Living Investor for some time, the idea that the dollar's days as the world's reserve currency are numbered won't come as a surprise.
But the World Bank report sheds new light on the issue. In 2025 - just 14 years from now - the World Bank says the world economy will be run according to a "multi-currency" understanding, one in which the dollar is joined by the euro and Chinese yuan (also known as the renminbi).
It's no wonder the dollar hit a three-year low versus a basket of other major currencies recently. The smart money sees the writing on the wall for the buck: It's now a matter of "when" not "if" it will be knocked off its reserve currency perch.
On Wednesday, I recommended you add shares of the Wisdom Tree Emerging Currency Fund (NYSE:CEW) to your global portfolio.
This easy-to-buy ETF gives you exposure to a basket of emerging market currencies, including the Mexican peso, Brazilian real, Chilean peso, South African rand, Polish zloty, Israeli shekel, Turkish lira, Chinese yuan, South Korean won, Taiwanese dollar, and Indian rupee.
If you make one currency diversification play this year, make it CEW.
But if you're looking for a more targeted play on the new currency world order coming down the pike, consider the Wisdom Tree Dreyfus Chinese Yuan Fund (NYSE:CYB).
This seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the yuan relative to the dollar.
As the Chinese currency takes a more central role in global trade, CYB will climb...and provide a great hedge against a weakening dollar.
The new world order is coming. You can either prepare for it now. Or you can watch the value of your dollar-based savings erode over time.
The choice is yours.
Good luck and good investing.
Chris Hunter
for The Daily Reckoning
Joel's Note: In addition to his hectic travel schedule and editorial duties over at International Living, Chris also contributes to the Bonner & Partners Family Office project, a research service created by Bill Bonner to help readers build and preserve "multi-generational wealth." If you'd like to learn more about their investment insights and globetrotting adventures,check out their invitation here.
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| | | | Bill Bonner | | Economic Growth Still a Long Way Off | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
On Wednesday, the US stock market took its biggest drop of the year. Thursday, the Dow shed another 41 points.
Treasury yields - on 10-year notes - fell below 3%.
US financial stocks took their worst beating in 10 months.
Even gold gave up ground yesterday, with a $10 drop.
What spooked investors?
Maybe they're catching on. There's already a 'double-dip' in the housing sector. Now analysts are talking about a double-dip in the entire economy. They don't know it, but the economy has probably already dipped. Properly adjusted for inflation, growth is negative. Further adjusted per capita, it is even worse.
The ISM manufacturing index dipped in May.
"Horror for US economy as data falls off cliff" says a CNBC headline.
CNBC seems to be hiring writers from the London tabloids. The story continues:
"It seems that almost every bit of data about the health of the US economy has disappointed expectations recently," said Mark Riddell, in a note sent to CNBC on Wednesday.
"US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn't revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing.
"And that's just in the last week and a bit," said Riddell.
"And right now, the economic data is suggesting that however measly you may think a 3 percent yield is on a 10-year Treasury, the yield should probably be a fair bit lower given what's going on in the US economy," said Riddell.
"You've also got to wonder at what point the markets for risky assets start noticing, too."
"QE3 anybody?" asks Riddell. Riddell is right. Almost all the news is bad. The press talks about a 'soft patch' for the recovery. But there is no recovery.
The latest jobs report puts the number of jobs created last month about 140,000 short of expectations. There were 177,000 new jobs created in April - barely enough to keep up with population growth. But in May the number of new jobs, according to ADP, dropped to 38,000.
And here's the report from AP:
WASHINGTON (AP) - Hiring may be slowing after months of healthy job gains that helped drive economic growth.
The government's May jobs report, to be released Friday, is expected to cement evidence that the economy has weakened in the face of high energy prices, scant pay raises and a depressed housing market. Analysts have been rushing to scale back their forecasts for job creation.
Persistent economic weakness could also imperil President Barack Obama's prospects in the 2012 election. Pressure to focus on debt reduction was heightened Thursday by a warning from Moody's Investors Service. The credit rating agency said it might downgrade the nation's credit rating if the government failed to make progress in raising the debt limit in coming weeks. Republicans say they will agree to raise the limit only if Democrats back deep spending cuts.
Higher gas prices have left less money for consumers to spend on other purchases, like furniture, appliances and vacations. And average wages aren't even keeping up with inflation. As a result, consumer spending, which fuels about 70 percent of the economy, is growing sluggishly.
In recent days, economists have sharply reduced their expectations for hiring in May. Nomura Securities now projects a gain of 85,000, down from 175,000 earlier this week. The consulting firm High Frequency Economics cut its estimate to only 50,000, from an earlier target of 200,000. And don't talk to us about housing!
And more thoughts...
Want to know what else sucks?
Associated Press adds a few things:
- The number of people applying for unemployment benefits remains stuck at a level that signals weak job growth.
- Factories received fewer orders for computers, autos, industrial machinery and other goods in April.
- Small businesses are hiring less. May marked a second month of weakness after solid gains in February and March. And we'll add some things of our own. Australia, for example. Its economy is shrinking at a 4% annualized rate. And car sales...especially sales of small cars - GM's sales went down 1% in May, just when people should be preparing for their summer motoring vacations. And China. No one knows what is going on there, but we're sure something sucks.
Always looking on the bright side, we ask: so where is the light at the end of this tunnel?
Answer: a long way off.
*** Société Générale is either a great bank...or merely an absent- minded one.
Most banks won't tolerate analysts with original - or negative - ideas. SocGen is an exception. The headquarters is in Paris. But in London, it has several strategists and analysts who are some of the best thinkers in the business.
Maybe they get away with it because the French managers in Paris don't know what they are up to.
Our friend Dylan Grice, for example, is calling for hyperinflation in Japan. And here is another SocGen strategist, Albert Edwards, predicting that the yield on the 10-year T-note will fall to 2% and the S&P will drop 70%.
Dear Readers will notice that this is not a happy scenario. They will also be quick to identify it: it's a Great Correction!
*** The poor bear. He took a good whack at the stock market in '08-'09. And then, chased by the feds, he retreated to his lair. And there he has waited...patiently...brooding, preparing his next move.
This week, we heard him growl. Whether he has come out at last...and whether he will give investors a good chase...we don't know. Only time will tell.
Stay tuned.
Regards,
Bill Bonner,
for The Daily Reckoning
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