 | | The Daily Reckoning | Thursday, June 9, 2011 |
- Senators go after bitcoin...as the free-market currency doubles
- A look into the future of the US economy...
- Plus, Bill Bonner on a manipulated stock market and a bit of good advice from a beautiful country road...
|  | | | The War on Digital Currency | | Bitcoin, Silk Road, and the Two Senators Who Would See Them Destroyed | |  | | Joel Bowman |
Reporting from a cyber-bunker somewhere in Buenos Aires, Argentina...
A joke for you, Fellow Reckoner: How many Senators does it take to change a light bulb? Oh, wait, we've got a better one: How many Senators does it take to dismantle a cryptographically secured, completely decentralized, Peer-to-Peer (P2P) network of voluntary, free market traders exchanging goods and services across six continents using tens, perhaps hundreds, of thousands of individual computers and some of the most advanced cyber technology and software coding known to date?
Answer: we don't know...but Senators Charles Schumer (D, New York) and Joe Manchin (D, West Virginia), seemingly immune to common ignominy, have taken on the challenge anyway.
Your editor has no idea of the cybercryptography aptitude of the two senators but, as with most endeavors undertaken by politicians in the name of "your own damned good," practical experience and a sufficient understanding of the issue at hand are rarely prerequisites for intervention, again, "on your (unsolicited) behalf."
The two erstwhile wonks took to the presses this week, demanding something be done about one particular free-market affront to authority.
We are referring, of course, to the latest furor surrounding bitcoin, a P2P cyber currency setting the virtual - and, some would argue, actual - world ablaze. (We first brought you the story a couple of weeks ago, when bitcoins were trading for roughly B$1 = US$7.5. As of this morning, they've shot up to B$1 = US$31.5. See here and here for a "bit" of background about them and about the pitfalls of government- backed currencies in general.)
Long story short, bitcoin is a limited supply, decentralized digital currency; a free market alternative to state issued notes and coins. As such, it poses a direct - though entirely non-violent - threat to the state's monopoly on counterfeiting. This, cry the powers that be, must not be tolerated. Of course, before any politico can act, they must first have a distraction, a fall boy, a pretense, a reason for rescuing us from the horror that is our own decision-making capacity. We picked it in that first column, the relevant portion of which is reprised here:
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... Now that we have a little background, let's get back to those busybody senators. As one might imagine, a virtually untraceable currency - such as bitocin or...umm...CASH! - might find use as a medium of exchange to purchase both white and black market products like, say, drugs. Such was the case with Silk Road, a website where users (literally) can buy illegal substances with bitcoin.
Said Senator Chuck of Silk Road and bitcoin in a news conference on Sunday:
"Literally, it allows buyers and users to sell illegal drugs online, including heroin, cocaine, and meth, and users do sell by hiding their identities through a program that makes them virtually untraceable." Apparently, the senator wants Silk Road shut down immediately with bitcoin, no doubt, soon to follow. The pair have written to Attorney General Eric Holder and the DEA asking that action be taken to crackdown on Silk Road.
Now that the pair have their straw man, we can be sure it will be used as a pretense to attack free-market currencies themselves. Stay tuned as the story unfolds on that front...
For now, we wonder what users of bitcoin are to do now that the self- appointed invigilators of free market activity are on their case? Well, for the past few weeks at least, they've been rejoicing. The currency has almost quadrupled in value since the Silk Road issue came to the fore.
Bitcoin enthusiasts may wish, therefore, to thank Senators Schumer and Manchin for, without their commitment to proffering illogical, largely ignorant remarks in the nation's mainstream press, bitcoin might have taken a while longer to reach the critical mass on which it must now surely be verging. "Bravo, Senators," we can almost here the cyber underground chorus, "Thanks for the free publicity!"
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| | The Daily Reckoning Presents | | Our Economic Future: From Best to Worst Case | |  | | Doug Casey |
There is a great deal of uncertainty among investors about what the future of the US economy may look like - so I decided to take a stab at what's likely to happen over the next 20 years. That's enough time for a child to grow up and mature, and it's long enough for major trends to develop and make themselves felt.
I'll confine myself to areas that are, as the benighted Rumsfeld might have observed, "known unknowns." I don't want to deal with possibilities of the deus ex machina sort. So we'll rule out natural events like a super-volcano eruption, an asteroid strike, a new ice age, global warming, and the like. Although all these things absolutely will occur sometime in the future, the timing is very uncertain - at least from the perspective of one human lifespan. It's pointless dealing with geological time and astronomical probability here. And, more important, there's absolutely nothing we can do about such things.
So let's limit ourselves to the possibilities presented by human action. They're plenty weird and scary, and unpredictable enough.
THE MARKET FOR PROGNOSTICATION
People are all ears for predictions, whether from psychics or from "experts," despite the repeated experience that they're almost always worthless, often misleading and more than rarely the exact opposite of what happens.
Most often, the predictors go afoul by underrating human ingenuity or extrapolating current trends too far. Let me give you a rundown of the state of things during the last century, at 20-year intervals. If you didn't know it's what actually happened, you'd find it hard to believe.
1911 - The entire world is at peace. Stability, freedom and prosperity prevail almost everywhere. Almost every country in Europe is ruled by a king or queen. Western civilization has spread to nearly every corner of the world and is received with appreciation. Stunning breakthroughs are being made in science and technology. There's no sign of a gigantic world war about to come out of nowhere to rip apart the political and cultural map of Europe and bankrupt everybody. Who imagined that a dictatorial communist regime would arise in Russia?
1931 - It's early in a disastrous worldwide depression. Attention is on economic troubles, not on the virtually unthought-of possibility that in less than 10 years a new world war would be under way against Nazism and a resurgent Germany.
1951 - Except for Vietnam, all that remains of the colonies the West had established in the 19th century are quiescent. Nobody guessed almost all would either be independent, or on their way, in 10 years. China has joined Russia - and many other countries - as totally collectivist. Who imagined that Germany and Japan, although literally leveled, would be perhaps the best investments of the century? Who guessed that the US was already at its peak relative to the rest of the world?
1971 - Communist and overtly socialist countries all over the world seem to be in ascendance, soon to be buoyed further by a decade of rising commodity prices. The US and the West are entering a deep malaise. Little significance is attached to rumblings from the Islamic world.
1991 - Communism has collapsed as an ideology, the USSR has disappeared, and China has radically reformed. Islam is increasingly in the news.
2011 - The world financial/economic crisis is four years old, but things are still holding together. Islamic terrorism and collapse of old regimes in the Arab world dominate the news. China is viewed as the world's new powerhouse.
BAD AND WORSE
Regrettably, I'm not much of a linguist. But I do pick up interesting semantic trivia. In Spanish they don't say "in the future," as we do in English, which implies a definite outcome. Instead they say "en un futuro" - in a future - which implies many possible outcomes. It's a better way of assessing reality, I think.
Here are three 20-year futures to consider. There are, obviously, many, many more - but I think these encompass the three most realistic broad possibilities.
BEST CASE - FACTS GET FACED
Realizing what a disaster the complete destruction of their currencies would be, most governments decide to endure the pain of allowing interest rates to rise and limiting increases in the money supply. Poorly run corporations and banks are left to fail. Talk of abolishing the Federal Reserve, and using a commodity for money, becomes serious and widespread.
Shaken, the US ends its profligate ways, in part because it lacks the means to continue, and in part because everyone but collectivist ideologues has actually learned something from the brutal '10s and '20s.
Amidst massive protests, the government closes much of its counterproductive apparatus, eliminates many taxes, and lets 30% of its employees go. It also, albeit reluctantly, liberalizes its regulation of the economy because it has become impossible to deny that the US has been falling behind in all areas.
Although there is a resurgence of libertarian thought - reminiscent of the Reagan-Thatcher era - simple practicality is mainly responsible for forcing the government's hand. For one thing, it can't afford the bureaucracy needed to enforce detailed interference. For another, entrepreneurs are increasingly just doing what they please, partly from necessity and partly from a growing sense of righteousness. Interest rates go to 25%, to compensate for high levels of inflation. That's high enough to make it worthwhile for people to save, and the capital base starts growing. The stock market has collapsed to its lowest level in living experience (in real terms), but the values available encourage people to become investors. Business is restructured on a sound, debt-free basis, with little speculation.
The US radically cuts its military spending and pulls almost all troops out of their foreign bases and wars. The War on Drugs comes to an end, and the crime rate in both the US and Mexico plummets.
The government solves most of its overhanging financial problems with a seriously devalued - but not hyperinflated - dollar. The Social Security deficit is eliminated by abstaining from benefit increases and by inflating away much of what had been promised before. Most Americans suffer a severe drop in their standard of living, as they're forced into new patterns of production and consumption. A generation of college students find that their degrees in sociology, political science, economics, English lit, Black studies, gender studies and underwater basket weaving are of no real value.
When it's all over, the tough times that started in '07 prove to have been no more than a cyclical bump in the road, like all the other recessions since WW2, just much bigger.
A rough and memorable ride, but it ends with a return to prosperity.
MIDDLE CASE - FACTS ARE IGNORED
The world's governments continue under the delusion that printing massive quantities of paper money will solve problems when, in fact, printing lies at the base of the problems. Most currencies lose most of their value. Some lose it all. This destroys the most productive people in society, the middle class, who produce more than they consume and save the difference... in currency.
And it injures successful corporations that have billions, or even tens of billions, in cash. Few of their managers know what to do with such sums other than to hold currency; at best they'll buy their own and other companies' stock. The result is a stock market boom in the midst of a grim depression. But only one person in a hundred will be in a position to benefit from it, because most will be living too close to the edge, and the stock market will be the last thing on their minds. The destruction of capital sets technology back quite a bit in the US, Japan and Europe. Chindia increases its relative strength.
The US government, believing it has both the obligation and the ability to "do something," redoubles its control of the economy. Price controls and capital controls are the order of the day. Petroleum products are rationed. Enforcement of new regulations is assigned to a new agency, the "Economic Recovery Administration," which resembles the TSA in most regards - except it has many plain-clothes employees, to better ferret out violators.
People think increasingly of politics as the way to get what they want. More and more Americans move abroad - although things are deteriorating in most places in the world. Poor, backwater countries offer the best opportunities because their governments are either weak, or corrupt, enough to allow new economic activity.
To be continued...
Regards,
Doug Casey,
for The Daily Reckoning
P.S. Hear more investment advice from Doug and the Casey team, as well as 35 renowned experts who gathered at the recent Casey Summit in Boca Raton. Get your Double-Dip Crisis Bundle today - the full Summit CD set with more than 20 hours of audio recordings PLUS one year of The Casey Report at a huge discount. Details here.
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| | | | Bill Bonner | | The Central Bank Stock Market Indicator | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Country roads, take me home
To the place I belong.
- John Denver Yesterday, we drove back from a financial conference. It was held way out in western Pennsylvania. Such a beautiful area; we wondered why so few people live there.
More about that in a minute...
First, let's check the world of money.
"Bernanke comments keep equities in check," says a headline in The Financial Times.
Sure enough. The Dow ended down again - 21 points down. It's been going down for five weeks. But it's still above 12,000. So there's nothing to be alarmed about.
What did Ben Bernanke say? Not much really. He allowed as to how the economy was not as strong as he had hoped. But he said things were getting better. And he didn't mention QE3.
So why was the market unhappy? What difference did it make what Bernanke said?
Ah...that's the funny thing. Stock prices are now the responsibility neither of willing buyers nor sellers, neither of the bears nor the bulls...but of the US central bank.
Bernanke said he wanted higher stock prices. He used QE2 to boost them. He said the "wealth effect" would make people feel better off. Then, they'd spend more money. And then, they'd actually be better off.
Of course, you can see the problem with that. If it were that easy to make people richer, why not give them more QE every day of the week?
Instead, investors know how the game works. They know you "don't fight the Fed." So, if the Fed is trying to push up stock prices with cash and credit, you go along for the ride. You buy stocks, confident that the Fed has your back.
The economy actually gets worse...as higher prices sit on family budgets like a fat cowboy on a skinny horse.
And so, the stock market comes to reflect neither the economy nor what stocks are worth. Instead, it shows what speculators think they can make from anticipating Ben Bernanke's next move. They watch the Fed. If Bernanke looks like he is going to pump in more money, they buy. If they're not sure, they wait. If they think the Fed is pulling out of the stock market, they sell.
Right now, they're selling...because they see QE2 ending...and no QE3 starting up.
'Wait a minute, Bill, are you saying that the Fed is manipulating the stock market?'
Yep.
'Isn't that against the law?'
Yep.
'How does the Fed get away with it? How come the SEC doesn't come down hard?'
Oh, you silly goose. Stop asking stupid questions. The market is fixed. The SEC is in on it. It's all part of the zombie system of finance. The dollar pretends to be real money. Debt pretends to be capital. And regulators pretend to be smarter than capitalists. Details to follow.
And more thoughts...
We promised yesterday to tell you more about what we think Mr. Market may be up to. You'll recall that Mr. Market is wily. Sometimes cruel. Always inscrutable.
One thing Mr. Market will not do: he will not do what people expect. Why not? Because he would have already done it. In other words, if everyone thought stock prices were headed higher, they would already be higher.
From that bit of logic we infer that Mr. Market will generally do what most people do not expect...the very thing that will cause them most pain and suffering.
What's that?
Well, what lesson have investors best learned over the last 20 or 30 years? They've learned that things go up. Since 1980, stocks are up about 12 times, even after the slipping and sliding of the last 10 years.
After such a powerful performance investors trust stocks, over the long run. Indeed, many analysts refer to the last 10 years as a reason stocks should go higher over the next 10.
'It is so unusual for stocks to do so badly,' they say. 'Surely, they wouldn't do that two decades in a row.'
Oh yeah? Stay tuned.
*** We saw yesterday that the federal government's real debt has risen to $62 trillion. No way are the good citizens of the United States of America going to put their heads down and pay that kind of debt. They couldn't do it even if they wanted to.
The history of the last 30 years is a history of debt accumulation. The future...perhaps for the next 10 to 20 years...will be a story of debt cancellation, restructuring, write-offs, defaults and foreclosures.
Psst. Want to make some easy money?
If you're one of the 15 million Americans who is underwater, it's easy. If your house is worth less than the mortgage outstanding against it, simply walk away.
Why not? Do you think the bank would stick with a losing position? Uh uh. It would cut its losses. You should too.
*** Over the years, The Daily Reckoning has given dear readers two bits of good advice (and probably many bits of bad advice!)
We told readers to "buy gold on dips; sell stocks on rallies." That has been an unfailing formula, with profits every single year...and capital gains of 500% since 1999.
But there was another bit of advice we recalled yesterday. We were driving through the mountains of Western Pennsylvania, in an area called the Laurel Highlands. Full of green meadows. The kind of country roads that made John Denver a fortune. Timber just waiting for a chainsaw. And stones so well cut, by nature, they practically lay themselves into a wall.
How many people are underwater here, we wondered. Probably not many. Because there are few new houses. Instead, the houses are old - many of them designed in the disgraceful hick style...in a variety of cheap shapes and sizes...and falling apart.
It would be so easy to live well here!
Which reminds of us our advice. In 2005 or 2006, we advised dear readers to sell their expensive digs in New York or California...and to relocate where prices were low and living was easy. Between the average house in southern California and the average house in rural Texas, Tennessee or Pennsylvania there was a difference of about $300,000.
"Use it to buy gold," we advised.
Western Pennsylvania would still be a good bet. Prices are low because it is far from metropolitan areas. We did not have time to do any research, but we'd be surprised if you couldn't find a nice piece of property - perhaps with a teardown house - for less than $100,000. Then, with so much timber and stone around, it would be easy to build a nice house. You could plant a garden too. And live an idyllic life, far from the concerns of suburbia.
"But what would you do there?" asked Elizabeth when we divulged our plan.
"Never mind," we replied.
Regards,
Bill Bonner,
for The Daily Reckoning
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