The fiat experiment: Stopping time

[aminorex]

Fiat currency was imposed upon the modern world on a global scale in 1971, when Nixon finally decoupled the dollar, the global reserve currency, from the price of gold.  Thus, it is a relatively novel experiment, and unlikely to prove stable in the long run.   Since the default of 1933, when debts payable in gold were invalidated,  the US dollar has lost roughly 19/20ths of its value.   This trend is likely to accelerate:  Exponential expansion in debt creates a strong constituency for hyperinflation.

Indeed, in the developed world today, money is debt.  Specifically, debt which accrues interest.  As every schoolchild should know, interest accumulates exponentially when it is compounded.  Sovereign debts have demonstrated compounding for decades, without meaningful surcease.  With substantial volatility, debt overall has increased exponentially since banks were granted control over monetary policy.

Although I would not wish to be tasked with managing such a system, it is conceivable that an exponentially expanding debt could be serviced by an exponentially expanding economy.  This would not be desirable, because all ownership would rapidly accrue to a small interest-receiving class, while the vast majority of the population, the interest-paying class, would be effectively enslaved.  Such regimes always end in blood.  Nonetheless, until social injustice forced the issue, the system would be balanced.  Not stable, mind you, but balanced.  However, exponential expansion of the physical economy requires exponential expansion of physical resource consumption, which is simply impossible, even in a short run, on the surface of a finite planet.

Therefore, resource restriction will destabilize the inherently unstable debt money system, even if brutal repression suffices to prevent popular uprising from overthrowing it.  Any other outcome is so improbable as to be discounted out of hand.  A failure of one of the 5 major sovereign powers (ECB, FRB, BOJ, BOC, BOE) is likely to rapidly spread to the remainder, and the bulk of fiat currency worldwide become worthless.  If this occurs during a window of opportunity, when the infrastructure is adequate, and before it is superceded or co-opted, the largest portion of the resulting vacuum will be taken up by bitcoin.

I solicit discussion of the estimated time for a forthcoming sovereign crisis, and its relation to that window of opportunity.  How can the instabilities of the debt system be usefully modeled?  What are the critical missing elements (scalability, usability, workflow integration) necessary to ready bitcoin for a role as global reserve currency, and how soon can they be ready?  Will bitcoin save civilization, or will the internal politics of software development make that impossible, and doom us - the survivors, at least - to neolithic population levels and lifestyles?

[EuroTrash]

+1

What he said

[HairyMaclairy]

No sign of hyperinflation in any advanced economy today.  Maybe come back in 10 years and check again. 

[Wilhelm]

No sign of hyperinflation in any advanced economy today.  Maybe come back in 10 years and check again. 

What's your definition of advanced economy?

[HairyMaclairy]

Apparently a loaf of bread costs 47p.  Does that sound like hyperinflation to you?

http://www.dailymail.co.uk/news/article-2439907/David-Cameron-I-dont-buy-value-sliced-loaf--Ive-got-breadmaker.html

[EatonABooger]

No sign of hyperinflation in any advanced economy today.  Maybe come back in 10 years and check again. 

Yes, but isn't it true that when hyperinflation has happened in the past, it has been very quick and without warning?
Based on the articles I have read and the folks who are supposed to have done a good job in investigating such events, true hyperinflation will come almost overnight and almost no one will see it until it is too late.

I have not idea, just asking...

[HairyMaclairy]

Yes lightning strikes happen quite quickly too. 

[aminorex]

It is certainly true that there is not present hyperinflation, at large.  In fact, there are profound deflationary forces at work, and it is surprising to me personally that inflation is as large as it is.  I tip my hat to the global cabal of central banks, who, by coordinated global devaluation, have managed to achieve near price stability during a period of strong deflationary bias.  

It always feels like you're having a luxurious and speedy trip, as you speed along the autobahn at 180kph in your S class, the moment before you collide with the pillar.  That wonderful feeling of progress and comfort should not deter you from looking out the windshield to see what is in front of you.  Most of us can do nothing to influence the driver.  But now with bitcoin, we have been given rocket-powered ejection seats, and our lives are in our own hands once again.

[HairyMaclairy]

Traditional hedges include gold and real estate.  Bitcoin is certainly very promising as another defensive asset class.

[aminorex]

It has been said that being right prematurely is the same as being wrong.

I'm hoping that this thread can elicit views which shed some sort of light on the question of when the inherent instabilities of the current regime will diverge.  Above I mooted the hyperinflationary scenario, but a deflationary scenario is also looming:  A whitepaper from the SF FRB suggests on the basis of correlated demographics that the S&P P/E will trend towards 8.4 ca. the year 2024.   Today's Well's Fargo mortgage origination numbers, and the recent workforce participation rate numbers could conceivably be taken as a jump in that direction.  It is precisely to avert such outcomes that the central banks have sat on the print button for the past 5 years.

Given the importance placed on job security, not to mention head-neck-body integrity, by bankers and politicos, it seems likely to me that a major goal will be preventing market nominal valuations from declining, while P/Es are contracting.  This would be deflationary in the sense of being correlated with declining economic activity, even while it would be inflationary in the proper sense, the sense of corresponding to an increase in nominal money supply.  Precisely that combination tends to result in a hyperinflation.  The last time it seemed as likely to occur as it does in recent years was during the early 1970s, when the gold window closed, and "stagflation" predominated.  The intensification of the Cold War and the draconian rate measures of Paul Volcker were sufficient, in tandem, to shake the U.S. out of that valley of despair, but today -- given sovereign debt levels -- can anyone realistically imagine a central bank allowing rates in excess of 20%?  Die Volckerie will not ride into this gotterdamerung, I fear.


  

[aminorex]

One of the indicators of divergence might be backwardation in monetary metals.  Certainly this case has been bandied about extensively.  GOFO rates are interesting in this regard.  The failure of Germany's efforts to repatriate its gold is interesting.  The various efforts to bilateralize trade, in RMB and in oil, are interesting.

I remember when the Bear Stearns CFO suddenly quit in 2007.  If you read that event correctly, the subsequent failure of the bank was not a big surprise.  What rats would leave this sinking ship, and on what mooring lines?  Having a good list of these would be almost as good as having a drop-dead date.

[Chalkbot]

Thanks for the rhetoric, aminorex.  You've really got the cogs spinning in my head this morning.

[aminorex]

Traditional hedges include gold and real estate.  Bitcoin is certainly very promising as another defensive asset class.

I'm fond of the notion that the best defense is a good offense.

[Holliday]

Traditional hedges include gold and real estate.  Bitcoin is certainly very promising as another defensive asset class.

At first glance these do indeed seem like effective hedges against inflation, yet when you add capital gains tax to the mix, some of the wind is taken from the sails.

[aminorex]

Traditional hedges include gold and real estate.  Bitcoin is certainly very promising as another defensive asset class.

At first glance these do indeed seem like effective hedges against inflation, yet when you add capital gains tax to the mix, some of the wind is taken from the sails.

I question the effectiveness of gold as a hedge against inflation.  For the past few decades it has been more of a hedge against negative real interest rates.  But anything so easily manipulated by unaligned interests does not feel very hedgey to me.  Base metals seem more hedgey.  Lead certainly, but Zinc and Steel as well.  Kyle "Nickels" Bass famously took an asymmetric tail hedge by buying $1mm in nickels, US 0.05 coins made with nickel. 

But an inflation hedge and a hyperinflation hedge are two very different creatures.

[aminorex]

Thanks for the rhetoric, aminorex.  You've really got the cogs spinning in my head this morning.

I am eager to learn what they have ground out.

[afbitcoins]

Its a great opening post but I don't think bitcoins will fill that void. There is a flaw in bitcoins which is that the blockchain is increasing exponentially in size . So far it doesn't look like a problem but with compounding it will become a problem, that is certain and might hit sooner than we think. How it is going to be handled is not yet established! At the moment 14G is already a hassle, it takes days to sync with the blockchain. What when it is 14Terrabytes ? This will be too big for peer to peer decentralisation. More and more specialised bitcoin nodes will be needed or to put another way more and more centralisation of the bitcoin network. I'm on the bitcoin bandwagon for now as the profit potential is still there but this concern has bugged me for a while. I've yet to see a response that makes sense.  If I put a tinfoil hat on I might even think this has been a design feature that centralisation will eventually be required.

[HairyMaclairy]

Traditional hedges include gold and real estate.  Bitcoin is certainly very promising as another defensive asset class.

At first glance these do indeed seem like effective hedges against inflation, yet when you add capital gains tax to the mix, some of the wind is taken from the sails.

Who cares when your mortgage is reduced to pennies (in real terms). And we all know that bitcoin is also subject to capital gains tax.

If serious inflation arrives you will know about it.  If the price of gasoline suddenly doubles then pay attention.  If the price of bread doubles pay attention.  If the price of computers (measured in flops) doubles then run around screaming.

But futures indexes are piss poor predictors of the future (otherwise we would all be rich).  You can sit and draw lines on charts all day long and it means bugger all in the real world.  

If you really care about this write code that scrapes real time pricing data off websites for basic commodities and do your own real time inflation index.  Work with real data in real time not bullshit from gold bugs.  If you are good enough at it you can front run the Fed inflation figures and make your fortune that way.

[afbitcoins]

Further to my above post I suggest that if you are already wealthy from bitcoins, it would be appropriate to convert a portion of that bitcoin gains to hard assets, eg gold or silver which by any stretch is looking remarkably cheap at the moment. Bitcoins may yet have another bubble or two, and rise to even greater heights however in the end it will either be an unwanted unwieldy currency or it will be the money of the new world order and have morphed into a centralised network.

In the UK gold and silver sovereign coins are not subject to capital gains tax however silver does have VAT tax when you buy it! Which is the way the powers that be try to stop investors buying silver.

[Tzupy]

Its a great opening post but I don't think bitcoins will fill that void. There is a flaw in bitcoins which is that the blockchain is increasing exponentially in size . So far it doesn't look like a problem but with compounding it will become a problem, that is certain and might hit sooner than we think. How it is going to be handled is not yet established! At the moment 14G is already a hassle, it takes days to sync with the blockchain. What when it is 14Terrabytes ? This will be too big for peer to peer decentralisation. More and more specialised bitcoin nodes will be needed or to put another way more and more centralisation of the bitcoin network. I'm on the bitcoin bandwagon for now as the profit potential is still there but this concern has bugged me for a while. I've yet to see a response that makes sense.  If I put a tinfoil hat on I might even think this has been a design feature that centralisation will eventually be required.

Maybe not quite exponentially, but close, 3x during the last year versus 5x in 2012. At this rate it's going to be unusable in a couple of years, without major changes.
Those changes may have to decrease security, making the network somewhat vulnerable. It's probably a difficult problem to solve, and it's looming closer.