This morning we get more non-sense from the banks yet again: they trimmed their GDP forecasts for 2022 by -100bps (-1%) because of the demise of the BBB bill. In their Keynesian thinking, if you remove stimulus spending, the economy will go down. This is wrong, it is very superficial and simplistic thinking. Here is what they get wrong:
When you have a recession, you need to stimulate the economy with broad stimulus. The decline is broad-based and affects every sector the economy and therefore the stimulus needs to be broad. You need to leave it to the Private Sector to reallocate capital to the new industries from the old industries during the recession. This is what Larry Summers screwed up in 2009: instead of giving broad stimulus in a recession, Larry Summers gave targeted stimulus. If you give targeted stimulus in recession, some parts of the economy will never recover because they aren’t stimulated by government and the private sector doesn’t have the money/savings to recover them either. That is how we got into a state of permanently lower growth after 2008. You need to give broad stimulus and give the private sector the money and ability to reallocate funds to sectors in need. In 2021, Ron Klain did it correctly by pushing through broad stimulus with the American Rescue Plan (ARP) and that is why today the economy is in top shape.
However, when the economy recovers fully and the labor market has no more workers in it (the output gap is closed), further broad based stimulus increases inflation without increasing the productive capacity of the economy. If you pour more money on an economy whose output is fixed, you simply get a higher price level. That in turn obliterates the savings that have been accumulated. When you obliterate savings, you reduce the private sector’s incentive to work and save. When people don’t want to work anymore, you reduce the aggregate capacity of the economy. Thus broad stimulus in an expanding economy is counterproductive – it reduces the productive capacity of the economy through the inflation channel.
That is why communism doesn’t work – forever broad stimulus to everybody doesn’t work in the long run. Broad stimulus only works in recessions. It doesn’t work in economies operating at their full capacity. I will use the following analogy: pouring gasoline on a fire only makes the fire bigger. You can’t do that when the fire is already big. While pouring gasoline on embers helps the embers turn into a fire that heats you in your fireplace, pouring more gasoline on an already big fire enlarges the fire beyond the fireplace and burns down the house. Long story short: you can’t overdo broad stimulus.
Therefore, once the economy gets to expansionary phase the government has to move from a policy of Broad Stimulus to a policy of Targeted Stimulus – only stimulate the parts of the economy that are hurting and be very careful not to disrupt what is already working. The inflation we are seeing today is because the government continues to apply broad stimulus (Childcare Tax Credit or CTC) to an economy that is already at full capacity by many measures (unemployment rate is 4%). Continuing that broad stimulus policy next year and beyond will further impoverish the population without achieving higher output. Broad stimulus needs to be scrapped here and that is what Manchin is doing by killing the BBB. What Manchin was trying to get the idiots in Progressive Caucus to understand for the last 6 months is that you need to start targeting stimulus once the economy has recovered. But the Progressives are ideologues, they simply don’t understand the practical limitations of broad stimulus policy. Progressives think because it worked it in 2021, it will work in 2022. That’s not how it works, comrade. And that is why we have this negotiation debacle.
Another thing that Goldman gets wrong here is a little more subtle: the labor market is at full capacity today only because of universal basic income (UBI). The CTC is UBI. If you remove UBI, there will be new entrants into the labor force because these people will need to replace their income. There is clearly 5 million people who are still out of work today. At least 50% of those (2.5 million people) can be brought back to work with the right policies – which is removing their subsidy. Thus removing UBI here actually EXPANDS the productive capacity of the economy by expanding the labor pool. If you expand the labor pool and thus the economy’s productive capacity, GDP will go up, not down. You simultaneously lower inflation and increase output. Thus killing BBB here is actually the right policy for the economy and good for GDP. I know Goldmanites aren’t really experts in MMT and they are learning it real time, but no worries, it is simply time for yet another lesson. 2021 taught Goldman one lesson (broad stimulus works in recession really well) and 2022 will teach it another (removing UBI expands GDP when economy is in expansion). Instead of lowering their 2022 GDP projection by -1%, Goldman should be raising it by +0.5%.
Originally sent to VIXCONTANGO subscribers on July 16th, 2021
In the last newsletter, I covered Central Bank Digital Currencies (CBDC) and stablecoins (USDT, USDC and BUSD) which is what Wall Street, central banks and governments around the world are talking about right now. In this piece, I want to talk about stablecoins as the crypto industry views them because they are a completely different animal. I will call these “algorithmic stablecoins” to differentiate from the proper stablecoins like USDC. It is important for you to understand what is going on with the algorithmic stablecoins because you can lose a lot of money there and very quickly at that. One thing I want to mention is that algorithmic stablecoins have gotten no market traction and practically nobody is using them. All the real action is in proper stablecoins like USDT and USDC and that is what regulators currently are concerned about and looking to regulate. Algorithmic stablecoins aren’t really on the regulators radar yet because they are not big enough. But still you need to know about them because the crypto media talks about them incessantly and many people have been duped and lost money in them.
According to the ethos of the crypto world stablecoins like Tether’s USDT carry at least 3 different “centralization” risks: the collateral is a risk, the collateral manager/management is a risk and the custody is a risk. What does that mean? In Tether’s USDT, Paolo Ardonio is the fund manager of the assets (commercial paper, treasuries, cash deposits, etc) that back the USDT stablecoin. Paolo Ardonio may decide to sensor some USDT holders and invalidate their holdings of USDT without their knowledge (make the addresses holding USDT invalid). He may do it because some government is forcing him to do it. This is “custodial risk”. Paolo Ardonio makes discretionary decisions about what collateral to back USDT with. He may stop buying commercial paper and instead buy more risky financial instruments without telling anybody. This is “collateral management risk”. And finally, Paolo Ardonio may own commercial paper but then the commercial paper issuers decide to not redeem their paper for US dollars because the government told them to stop doing business with Tether. This is “collateral risk”.
A stablecoin like USDT presents all kinds of problems for crypto people who believe in censorship-resistance. That was the original idea behind Bitcoin – the government can’t take it from you or at the very minimum you can evade government controls quickly. Serious DeFi applications don’t like Bitcoin as a settlement currency because it is very volatile vs US dollar which is what proper businesses pay taxes in. DeFi apps want to use a settlement currency that is more stable. That is what led to the rise of USDT and USDC over the past 2 years. But for some crypto users they are not good enough because they are too centralized along these 3 vectors. So degens have made a number of different attempts to create algorithmic stablecoins that decentralize custodial risk, collateral risk and collateral management risk. Please note that in some white papers/articles about stablecoins, the word “collateral” is replaced with “reserve”. I am going to mostly use the world “collateral” here but “reserve” and “collateral” mean the same thing.
The first type of algo stablecoin is the one that tries to decentralize custody. The custody of the collateral is algorithmic and can’t be influenced by a single individual. Maybe you have a DAO (decentralized autonomous organization) that makes decision about the algorithm’s main parameters but by and large the custody is done programmatically by a decentralized network of computers. In other words, the FBI can’t go and order that protocol to freeze your assets like they could do with Paolo Ardonio. Such algo stablecoin is DAI on Ethereum network. And pretty much all algo stablecoins feature decentralized custody.
Decentralized Collateral/Reserve Management
This type of algo stablecoin looks to take Paolo Ardonio (the stablecoin fund manager) out of the selection process of fiat assets that back the stablecoin. Instead, an algorithm is used that automatically buys and sells the financial instruments backing the stablecoin depending on market conditions. Such a stablecoin is again DAI. DAI is over-collateralized – in other words, they might take commercial paper but it will take $1.20 of commercial paper to issue $1 DAI. Then the algorithm monitors the market conditions of the commercial paper and if the price starts to go down towards $1, it liquidates it (sells it) and gives the commercial paper back and gets 1 US dollar. Then 1 DAI can be redeemed for $1. DAI automates both the custody and collateral management but the collateral is still fiat assets like commercial paper, US treasuries or stablecoins like USDC. Many people consider DAI to be the equivalent of an algorithmic fiat bank. Note that all major algo stablecoins like Empty Set Dollar (ESD), Frax (FRAX), Fei Protocol (FEI) or TerraUSD (UST) also feature decentralized/algorithmic collateral management.
In addition to automating the collateral management process, degens want to decentralize the collateral itself. They don’t want it to be the US dollar. They want a synthetic US dollar – some kind of combination of assets that adds up to 1 US dollar. That combination of assets can be of 3 different kinds:
Fractional fiat backing – this is equivalent to fractional banking. You don’t have a full $1 of assets as collateral, instead you have some US dollar assets (let’s say 25%) but the rest are crypto assets (75%). Then the algorithms buys and sells the crypto according to market conditions to maintain the peg. Such a coin is Frax (FRAX) or TerraUSD (UST). This approach hasn’t worked very well for Frax at all. For UST, the implementation is considered to be more successful probably because the protocol’s invests in POS (proof-of-stake) coins and their rewards are help to stabilize the crypto portion of the collateral.
Full crypto backing – in this type of stablecoin there is no fiat backing in USDC or any other fiat asset at all. Crypto coins like Ethereum (ETH) are used to back the coin and then the ETH held in reserve is being bought and sold to keep the peg at $1. Such coin are Empty Set Dollar (ESD). ESD has been quite the debacle. ESD currently trades at 11 cents and has been a non-stop trip down.
No collateral at all – in this type of stablecoin there is no collateral held in reserve at all. Not even crypto as collateral. Instead there is some buying and selling of some protocol created token that supposedly keeps the price at $1. Such a coin is Fei Protocol (FEI). A normal person would ask – how can that be? How can there be no collateral? I ask the same question myself and I don’t understand it. All you need to know though is that FEI dropped a lot on the day of issuance and many people lost a ton of money. FEI came out around April 1st and after this debacle the crypto market topped. A lot of Ethereum people lost a lot of money in that fiasco and the disappearance of those funds certainly hurt the crypto rally. I think FEI is closer to $1 and seems to maintaining the peg but again, this is a “synthetic” US dollar. There is nothing behind it. FEI usage has remained very low.
Decentralized Peg / Universal Value Stablecoin (UVS)
The final type of algo stablecoin is one with decentralized custody, collateral and collateral management but one which is not pegged to the US dollar or any other sovereign currency. Instead it is its own entity which has been programmed to have low volatility against the US dollar or other sovereign currencies. You can think of it as similar to the Chinese Yuan in that the Yuan is kind of pegged to the US dollar but can move against with some pre-determined daily volatility. Also the Yuan can strengthen or weaken against the US dollar over time but generally speaking within 2-3% annual volatility. There maybe years where the Yuan strengthens or weakens against the US dollar by 5 to 10% but those years are rare. A universal value stablecoin will behave like this – with limited daily and annual volatility. The Facebook’s Libra (currently called Diem) concept is something similar – a stablecoin not pegged directly to any specific currency but is pegged to a basket of sovereign currencies. In the UVS case, the backing will be a basket of cryptocurrencies (Bitcoin, Ethereum, Cardano, etc) and the reserve management mechanism will be swapping in and out of those to keep that universal value stable and not very volatile against the US dollar.
No such UVS exists currently as far as I can tell, but Cardano’s Charles Hoskinson just teased a whitepaper for a stablecoin called the Djed Stablecoin which might attempt to have this design. Hoskinson envisions that stablecoin to be the settlement currency inside the Cardano DeFi ecosystem. Hoskinson does not view ADA as a settlement currency for Cardano – he views it correctly as a token which represents share of the usage of the Cardano network. Nor does he view the US dollar as a settlement currency for Cardano. I haven’t read the Djed paper because it is not out yet, but from preliminary descriptions by Hoskinson, I assume the above description is somewhat representative.
I haven’t covered algo stablecoins over the past 2 years for a reason, even though there has been a lot of action in that space. The simple reason is that I think algo stablecoins are a total scam. While maybe you can technically come up with a formula that prints digital US dollars out of other digital tokens (whether they are fiat or crypto), the LEGAL and ECONOMIC reality is that you are printing unauthorized liabilities of the US government. Which you simply can’t do. You can’t conjure up liabilities of the US government out of thin air (or out of crypto). Only the US government (or more specifically the Fed) can print US dollars. No other private or public entity in the world can print US dollars. So my issue with algo stablecoins is that they are the modern equivalent of alchemy. Before modern times, aristocrats were trying to convert lead to gold by hiring chemists. This is the same thing – trying to convert digital tokens to US dollars. You simply can’t do it. If the digital token is fully backed by dollar denominated stable assets and redeemable to $1 like USDC, yes, then it is a digital dollar. Any other combination simply can’t yield $1 even if the math works out. Fractional backing is a scam. All crypto backing is a scam. No backing is an even bigger scam. At best algo stablecoins create a “synthetic” US dollar. It is not real. If you could print synthetic US dollars, you can devalue the US dollar to zero tomorrow by printing digital tokens. That’s obviously not going to happen. And the US government will not only delegitimize these attempts in law but will also hunt down and incarcerate the people making and trading these synthetic dollars. Creating counterfeit US dollars is a serious crime. The US government doesn’t allow its paper currency to be forged why would it allow the digital representation to be forged? It won’t. And the penalties for forgery are pretty rough. So I have never taken any of these attempts seriously and I wouldn’t touch them with 10 foot pole. FRAX, FEI, ESD, UST, I am not going anywhere near these. These are counterfeit US dollars. They are illegal in every sense of the world.
An algo stablecoin that can’t be pegged to the US dollar is the only viable attempt at this. The peg must be decentralized. Maybe it can have limited volatility versus the US dollar but it most certainly can’t be pegged against it and perceived as a liability of the US government. A universal value stablecoin also can’t have sovereign currencies as a collateral like Diem does. A private entity would be creating liabilities for all the governments involved which it simply can’t do. That’s why I have always been skeptical of Diem. However, a non-pegged stablecoin backed by a basket of digital tokens can make sense.
Long story short – use USDC for US dollar stablecoin and avoid all the unbacked Ethereum experiments. Also avoid Diem.
Originally sent to VIXCONTANGO subscribers on July 1st, 2021
The big discussion this summer in Fed and Wall Street circles is outlining a digital strategy for the US dollar. The topic of the Jackson Hole conference this year is central bank digital currencies (CBDC) as Jay Powell has already announced. The US is hardly the only country looking to create a central bank digital currency. Country after country (most notably China) is making announcements on that topic. Over in crypto world, degens are trying to create an all-together different kinds of stablecoin. I will look at both what is happening at central banks and the crypto industry and give you a framework for how to understand the debate and the topics involved. The algorithmic stablecoins by the degens will be discussed in subsequent mailer.
History of Public Sector Money vs Private Sector Money
Before I dive in, I want to preface with a quick run down through the evolution of money technology through history. I think this is needed to understand correctly the CBDC vs stablecoin debate. The origins of money in pre-historic man is trade – trade a horse for a cow for example. We have exchange of value for value. Obviously, once distances got bigger trade required travel and the roads became full of danger. Various power structures (armies, bandits, warlords) would demand a tariff (or a tax) if a merchant wanted to pass through their territory with his valuable goods safely. Obviously, taking everything would cause trade to halt completely and 100% of zero is zero so the warlords had to keep the tariff to a reasonable level where merchants would still have an incentive to pass and enrich both themselves and the warlord. Feeding an army isn’t cheap. However, a warlord can only get so many in-kind payments such sheep and cows. Warlords are mobile so they have to be able to carry their wealth around with them. Or actually better yet – hide it somewhere. Obviously cows are hard to hide. Overtime, warlords started demanding to be paid in precious metals like Gold and Silver because these metals are easy to carry and more importantly – easy to protect and hide. They don’t rust, can be subdivided and also molded into jewelry and other status symbols that can be worn (self custodied). Overtime warlords became kings and created governments. The tariffs became taxes. Their accumulated gold started to reside in the King’s treasury where it was protected by an army. That treasury was then used to buy armies who would then conquer enemies and then take their gold. To incentivize the population to work, the kings issued coins from the king’s treasury and then demanded them back as tax payment. For a couple of millennia Gold was money in the form of government issued coins – both a store of value, unit of account and medium of exchange. However, once all enemies are conquered, you have to dig Gold out of ground and that got more and more difficult and expensive over time (in terms of human effort). As population grew, there wasn’t enough Gold to go around. So Kings started to devalue their gold coins. They put less Gold in them and more of other less valuable and less scarce metals like Bronze and Silver.
Fast forward to the invention of the printing press and the Medici in the 1500s figured out that you can use paper as medium of exchange instead of a gold or silver coins which were heavy to carry around. So the Medici’s put all their clients gold in a building with an army around it and gave out paper certificates of ownership. Voila – the world’s first private sector bank. Medici’s were the first merchants to become bankers and then heads of state since before that was primarily the province of military aristocracy. There were able to survive all the attacks by the military folks because the economy during their reign was good. How were they able to expand the economy? Through fractional banking. They figured out that people just keep the Gold in their bank forever and never actually use it as medium of exchange to make payments. People would use the paper certificates to make payments (bad money crowds out good money principle). They were clever enough to decide to issue more paper than the Gold they had on hand giving birth to fractional banking. And because they literally conjured up money out of thin air they were able to expand the economy beyond the supply of Gold reserves that they had. Their aristocratic opponents were completely befuddled – the Pazzis never could calculate where the heck this money is coming from. Obviously, that was a good trick until others figured out and when they did that is when bank runs started. If people figured out that the bank doesn’t have enough gold for all the redemptions, they would rush to be the first to drain the gold reserves of the bank.
Medici style private bank credit decisions in relation to their gold reserves was what created money in the economy (instead of just gold and silver mines like before the Medicis) for a few more centuries until we arrive at Abraham Lincoln and Treasury Secretary Salmon Chase and the Civil War. To finance the Civil War, Lincoln needed the banks to lend him money to build an army and they did that on the promise that they will get income from taxation of the conquered Southern territories. The banks bought war bonds (ie gave money to Lincoln to build army) and in return got paper certificates (Treasuries) that gave them a right to collect interest payments from the US treasury. This created a dual system of money in the United States where you had public money issued by the US treasury and private money issued by banks. They were both called US dollars but where different. Once was a private bank note representing a client deposit, the other was a US treasury note. One is a liability of the bank (ie the bank owes the deposit to its client), the other is an asset of the US government (they can collect it via tax and also backed by the US government’s gold). One I call Medici money (private sector bank deposits), the other I call Lincoln money (public reserves financed from taxation). One is private sector money (Medici), the other public sector money (Lincoln). In the Guilded Era, we have quite a few bank runs on these private banks but no runs on the US treasury and fast forward to 1914 and we have the Fed created to stop these constant bank runs by merging the Medici (private sector) and Lincoln (public sector) money into one Central Bank which will guarantee all money in the United States including private sector bank money up to a point (it is called federal deposit insurance today and bank deposits are insured up to $250,000).
Fast forward to 1974 where Nixon completely decouples the US dollar from Gold after a few international bank runs from Europe to drain the US treasury from its Gold. US dollar now has no linkage to Gold (ie it is not redeemable for Gold) which was considered base money for a couple of millennia and was what fractional banking was based on originally. That doesn’t mean that Gold doesn’t have value or that it isn’t a monetary asset. Quite the opposite. It remains a bank reserve asset and its value skyrocketed. However, it now has to share the status of bank reserve asset alongside US treasuries. It is not the only money anymore as JP Morgan once said. Now the ability to tax the US population is just as much money as Gold (libertarians cringe in horror here).
Notice that despite the gold delinking, the dual system of money never left the US. You still have private sector money and public sector money. That is why bankers are as powerful as they are. You have private property rights, their money is theirs – not the government’s. Bank deposits (ie private sector money) to this day remain the vast majority of money in the US economy. Countries with successful economies delegate money creation/credit creation decisions to their banks. The USSR centralized credit creation decisions in a central bank and failed miserably over a period of 50 years. Guess what China did? The opposite. They decentralized credit creation decisions to a thousand banks in 1980 after observing the failure of the centralized banking system in the USSR. And as a result the Chinese economy thrived. As much as communists want to get rid of the private sector, that’s a road to ruin. And as much as libertarians want to get rid of the public sector, that is also a road to ruin. The truth is somewhere in the middle, a thriving economy needs both a public and private sector and thus both public and private sector money. That’s why the FOMC board has consists of bank appointees (Regional Fed Presidents) representing private sector money and government appointees (Governors) representing public sector money.
Fast forward to 2008 – the Financial Crisis. The banks turned out to be horrible stewards of private sector money and after the Housing Bubble pops, there is a massive run on the banks. The Fed has to step in and start printing central bank reserves to stem the bank run and literally stuff the private sector bank balance sheets with public sector money in order to restore confidence in the fractional banking system and make sure that all redemptions are paid. In other words, Lincoln money (public sector money) became more powerful and Medici money (private sector money) became less powerful because the bankers screwed up.
The US dollar now has more backing by the US government’s ability to tax as opposed to the private sector economy. The US dollar is more Lincoln than Medici now. This is a sad result but that is what the private sector gets for making massive mistakes like 2008. Because Medici money is weaker that is why Gold has gone nowhere for many years. For Gold price to go up, you need Medici money to be more powerful than Lincoln money (see 70s). Because there is fewer private sector money to go around, that kills the price of Gold. On the other hand, there is more Lincoln money to go around and that makes Treasuries very expensive (ie yields are low). I know people want interest rates to be higher (or Lincoln money to be cheaper) but that’s not how it works. The US government has to screw up and the private sector has to become dominant for that to happen. Unfortunately, the private sector remains the screw up and the US government remains the entity bailing out the private sector. And for so long as that is the case, Lincoln money will be expensive (ie interest rates will be low) and Medici money will be cheap (Gold price cheap). Notice that the only time when interest rates rose recently was during the Trump administration where his incompetence punctured confidence in Lincoln money (Treasuries) in favor of Medici money (Gold). That is why we saw Gold go up from $1200 to $2000 under Trump and interest rates rise so high in 2018. Now that confidence is back in the US government under Biden, predictably Gold is down and Treasuries are up.
Public Sector Central Bank Digital Currency
We arrive at the present and the American dual system of money is influencing the debate around CBDC. Should the CBDC be a digital coin issued by the Fed as public money advocates want or should it be digital cash issued by private sector entities like banks or stablecoin issuers like Circle (USDC) and Tether (USDT)? This isn’t a simple question to answer. Let’s look at the benefits and drawbacks of each scenario.
Quick note here: CBDC won’t replace physical cash or any of the current things that the Fed issues. Instead it will complement them. Cash still will be there. CBDC will be just another technology through which the US dollar gets distributed.
In the first scenario, the Fed issues a CBDC itself directly to the American public. What that means is that there is some kind of a phone app or a web page where every American can open an account directly at the Fed. Americans can go to that app and make transfers back and forth to their bank accounts if they wish or they can just hold their money at the Fed account. And if Americans don’t have bank accounts, maybe the Fed might even have to run bank branches for customer support. There is about 8 million unbanked Americans. This design would allow the Fed to target future stimulus in a way that it can’t today. Today the Fed has to give stimulus money to banks which make the credit decisions and often times stimulus never reaches the intended recipients simply because they don’t have bank accounts or the banks hoard the money for whatever reason. QE has resulted in a lot of wealth inequality over the last 15 years and the reason for that is that the banks are distributing the Fed stimulus, not the Fed itself. At the end of the day, banks are private sector entities and if customers don’t churn out profit for them, they don’t serve them. There is a discrepancy here. The Fed wants to help everybody in the economy even if they are not productive whereas banks are by statute prohibited from serving clients who produce losses (banks must make profit and make positive return on investment). Many people are unbanked because they are unprofitable for banks to serve. A Fed issued CBDC theoretically can reach these people and thus the Fed can be more successful in stimulating the economy. However, I don’t think the Fed wants to be in the business of serving US retail. The Fed then becomes like an Apple or JP Morgan. It has to run servers and a big computer infrastructure that serves the vast American public. It has to secure that infrastructure. It becomes a technology provider. It has to hire top technologists to do that and computer guys are hard to find. It also has to keep up with the latest technology which changes faster than laws can be changed. It also becomes a central point of failure and a magnet for subversive efforts both from foreign states and random anarchists. It is a question if the Fed can do this, whether it wants to do this and whether this falls within the parameters of its mandate to provide full employment and stable prices.
The answer is that is not the Fed’s job. The Fed’s job is to provide monetary stimulus not provide banking services to the unbanked population of the US. What I think will happen here is the US will create a new Public Bank whose job will be to serve the unbanked population in the US. A public bank can carry unprofitable customers. The Post Office branches can double as Public Bank branches. The Fed then can issue CBDC to that US Public Bank and let the bank deal with the American public. Every American can open an account there in addition to their existing private sector bank accounts. If people want to get stimulus directly from the Fed, they have to open those public bank accounts. I imagine such a scenario will be opposed by the existing banks like JPM and Bank of America because it is direct competition. However, if there is a public bank, the Fed won’t have to require banks to adhere to the Fed rate for savings accounts. So to attract capital banks can start offering higher interest rates on savings. A US Public Bank will have 2 mandates – distribute targeted Fed stimulus and serve the unbanked. This retains private sector banking (JPM, Bank of America, etc) as the main credit decision maker in the economy. So I think having a public bank is actually going to be a much better outcome for the private sector banking industry. BTW, Germany has a set of public banks today so having something like this is not unprecedented in the Western world. Bank of Canada and Commonwealth Bank in Australia were also public (government) banks in the past.
There is another potential solution that some will consider where the existing private sector banks will take on the job of managing CBDC accounts on behalf of the Fed and assist the Fed in providing both stimulus and services for the unbanked population. Presumably banks already have the expertise to serve retail. That they do, but again will banks want to serve people that don’t make profit for them? I doubt it. We are also looking at multiple implementations of the same functionality in different organizations and as we saw with the PPT loans that was not an ideal solution at all. Stimulus reached different groups at different times, some organization struggled to find the additional resources to implement the new federal requirements and there were questions about corruption and so forth. A bank implementation of CBDC would face the same concerns. So I think the private sector bank solution will be looked at and ultimately discarded in favor of a public bank solution.
Private Sector US Dollar Stablecoins
Now we get to the second scenario – privately issued stablecoins. We already have Circle’s USDC and Tether’s USDT. Private sector entities can keep up with the latest trends and innovate. They can support as many blockchains as underlying technology as they wish. Currently Circle intends to offer USDC over something like 10 chains in addition to the current ones – Ethereum, Algorand and Solana. There is also more privacy in using a private sector entity where the government can’t overreach and censor individuals directly or at minimum government overreach can be checked by the private sector. As much as people think the US government and private sector are one and the same, they aren’t. Private sector censored Trump while he was President – something the US government never would have happened while Trump was the executive (or even if he wasn’t the executive). So there are privacy and distributed censorship benefits to privately issued stablecoins over a Fed coin (CBDC).
The Fed can serve as a backstop to private sector stablecoin issuers and should require that stablecoin issuers register with it. A stablecoin issuer shoudn’t be all that different from a bank from a regulatory standpoint. One area which the Fed has to regulate is what assets can back the stablecoins that are issued. Tether and Circle need to be regulated by the Fed and they need to have transparency about their asset holdings. For example Circle hasn’t revealed its assets even though it is assumed that its USDC is overcollaterized. But nobody knows by how much. There is no such public report made available yet. USDT (Tether) issued a report about its asset holdings and it turns out most of it is backed by commercial paper. USDT is not as overcollaterized as some thought. Only 0.37% (or leverage ratio of 289 to 1). For example, Fannie Mae and Freddie Mac had overcollaterization of 1.5% (leverage ratio of 60 to 1) and became insolvent with that during the Financial Crisis in 2008. So Tether is not as secure as some may think. Tether is similar to a money market fund but a bit more risky. Yet that is not exactly the same as a Fed issued US dollar particularly if the market is under stress like it was in 2008 where a number of money market funds “broke the buck”. So these are definitely issues that the Fed needs to regulate for private stablecoin issuers. At the end of the day, the US dollar is liability of the US government and other entities can’t simply conjure up US dollars out of thin air. The Fed needs to be intimately involved in US dollar creation wherever in the world it happens and whichever way it happens. For US Dollar stablecoins to have credibility especially among the retail public, strong regulation by the Fed is exactly what is needed here. Not in terms of how stablecoin issuers technically implement the stablecoin, but what mix of assets is acceptable to be backing a USD stablecoin.
The benefits of the private sector stablecoin solution is decentralization (many issuers) and reduction of single point of failure risk, the ability to experiment with different asset backing strategies (financial innovation), outsourcing of technological upgrades (technology, blockchain innovation) and consumer privacy (stablecoins are more like cash as opposed bank accounts that carry identity). The drawbacks are that Fed won’t be able to target stimulus or guarantee that the unbanked population will be served.
Here is one big benefit of US dollar stablecoins that I hear rarely discussed: they can dramatically expand the reach of the US dollar abroad. People abroad can only use their local banks and therefore only hold money in their local currency. However with USDC, anybody anywhere can create a USDC wallet on any computing device. They can do it on exchanges or on self-custody mobile apps or computer programs. Now people in a country like Venezuela can have US dollar deposits. As you can imagine only the rich in Venezuela have dollar bank accounts. The rest are unbanked because they are not profitable customers for the local banks. A US dollar stablecoin can change all of that. At the end of the day people abroad don’t want the volatile Bitcoin as a day to day medium of exchange. They want the stability and liquidity of the US dollar if it was only accessible. USDC and USDT make the US dollar more accessible to world-wide audience at all income levels more than ever before.
BTW, this low cost accessibility of CBDC is why China is pushing ahead quickly with its Digital Yuan project. They want to target the unbanked population of Africa, Latin America and the Muslim countries in the Middle East. They want to capture that market first. If you are an unbanked person in Africa and you are given an app where you can store Chinese Yuan which is basically pegged to the US dollar, you will do for it in a heartbeat. That person won’t care about all the other macro considerations that makes professional investors pick a US dollar over the Chinese Yuan. All unbanked care about is stable money on their phone. Digital Yuan is stable enough. But then through this side door, the Chinese Yuan becomes a global reserve currency. If the US wants to combat the Digital Yuan effectively it needs to articulate and push a digital US dollar strategy as soon as possible. There can’t be any delays here. This is a space race of the 2020s – the digital currency race. And the US actually has the heads up. USD stable coins are more than $100 billion asset class now. The Fed needs to get to work and give them US government legitimacy and from there they will spread like weed abroad through the private sector. The US government also needs to make sure it funds a private sector effort targeting the unbanked in Africa, Latin America and the Middle East.
Ultimately what I think happens here is that the US government will do the following:
Regulate private sector US dollar stablecoins and pass laws to legitimize them and set rules of the road. This potentially could be an issue for USDT and BUSD – USD stablecoins issued by foreign entities. This could be a boon for Circle’s USDC.
Establish US Public Bank to distribute Fed stimulus and serve unbanked US population
The US government will choose one official private stablecoin like Circle’s USDC to be used for US Public Bank accounts. Then when the Fed prints digital dollars for economic stimulus, it will be creating USDC and transferring them to the US Public Bank to target to individual accounts.
Allow banks to issue stablecoins (in addition to standalone stablecoin issuers). In that respect, Circle may be purchased by a bank like JP Morgan in the future.
Provide funding for international adoption of US dollar stablecoins in unbanked populations in Africa, Latin America and Middle East
At the end of this, the US dollar will be bigger than it has ever been and its reach in the global economy bigger than ever. Potentially this expansion of US dollar use globally could be on the scale of that accomplished after World War 2. A company like Circle could become enormous in its global reach. In its attempt to take out the US dollar, the only thing Bitcoin will accomplish is make it bigger. The President of El Salvador is pushing Bitcoin wallets on smartphones as a way to serve the unbanked population of his country. Within 6 months what will actually happen with El Salvador’s unbanked population is they will be using and transacting with USDC on their phones.
The Fed currently has an initiative called FedNow underway that is researching the digital currency space and is implementing some form of a solution. This project is supposed to be out in 2 years. I think it needs to move faster. The Fed’s Fedwire Funds Service processes $4 trillion in payments every day. The private-sector ACH (Automated Clearing House) settles $2 trillion in payments every day. That gives you an idea how big the USD stablecoin market can get. It is currently $100 billion. Getting to $6 trillion is a 60x from here. There will be massive amounts of innovation happening over the next 2 years with the Digital Dollar.
Originally sent to VIXCONTANGO subscribers on August 12th, 2021
In 1517, almost exactly 500 years ago, Copernicus invents the Quantity Theory of Money. In its modern form that theory can be reduced to the following famous equation: M * V = P * Q, or
Money Supply * Velocity of Money (transaction frequency) = General Price Level * Real Quantity of Goods
Keep this in mind as we will need it later. Fast forward to 1992 and Professor Richard Werner (pictured above) proposed a new theory of money creation called the “Quantity Theory of Disaggregated Credit” or more simply “Quantity Theory of Credit” which builds upon Schumpeter’s credit theory of money (that money is credit, not a metal). In 2014, he published the first empirical evidence that each bank creates credit when it issues a new loan. He is a well-known academic in both the East and West with public and private sector experience. In 1995, while he was living and working in Japan, he proposed a new monetary policy called “Quantitative Easing” to deal with banking crises which was published in the Nikkei magazine (in Japanese!) and later adopted by the Bank of Japan. Richard Werner is the Father of Quantitative Easing. QE in the US is often associated with Ben Bernanke but it was Werner who created the academic theory that powers this monetary policy. The Bank of Japan ran QE a decade before the US. Werner’s 2001 book “Princes of the Yen” was number one general bestseller in Japan. He also has the honor of being designated as a “Global Leader of Tomorrow” by the World Economic Forum in Davos.
Today I want to cover Werner’s theory because it is critical to understand what is going on in markets and finance today. He gave a great speech at the SORA Economic Forum (the guys behind Polkaswap) which you can watch here. I am basically reprinting what he said in that speech.
There is no “economic growth”. We know this from physics – the laws of thermodynamics. You can’t create energy, you can only transform it. Economic growth is a statistical illusion created in national income accounting by adding up “value add” transactions connected to goods and services but not subtracting the costs such as depletion of natural resources. This “economic growth” concept was created by large banks a century ago in order to find out how much interest they could charge governments when lending to them. This explains why nominal ten-year yields of government bonds (long term interest rates) follow nominal GDP growth and are usually of similar size. If the banks charged more than economic growth (i > g), a “debt trap” would follow. A debt trap is bad because it would cripple the economy and the banks as well because if the debtor defaults the creditor is in trouble. A parasite like the banks needs the host alive so really not a good idea for them to charge usury rates in the long run. The maximum the big banks can charge in interest is the economic growth rate. The banks can also charge BELOW the economic growth rate as it is currently happening. Nominal US GDP growth right now is around 10% while TNX (10-year Treasury Yields) are stuck at 1.5%. That condition is actually very good for the economy if not as profit maximizing for the banks as they would like. Even though banks are printing record earnings numbers as we speak.
Ultimately, “economic growth” is a monetary concept since it measures only monetary transactions taking place in markets and paid for with money. Financial transactions are not part of GDP since GDP tries to measure “value add” transactions. Financial transactions are simply purchases or sales of assets between counter-parties which is just ownership transfer. Ownership transfer is not a “value add” activity – it is a zero sum game. By contrast, activity that produces new goods and services like entrepreneurship adds new value and everybody is better off. Economic growth means that those value add transactions that are part of GDP have increased this year compared to last year.
How do you increase economic growth? If we use Copernicus’ equation M*V = P*Q, to have economic growth that means that you need to have a positive change in M*V and that change should equal the change in P*Q. In other words, Δ (P*Q) = Δ (M*V). Increase in the value of transactions can only come if there is an increase in the money used for these transactions. In other words, for economic growth to be possible, the money supply must grow. To get more Q you need more M if you assume P and V are constant. There is no economic growth without money supply growth. That is a concept that Gold bugs have never been able to understand.
In Neoclassical Economics, or what we call Econ 101 class taught to everybody everywhere, there is the concept of equilibrium between supply and demand that determines prices. That equilibrium makes a breathtaking number of assumptions:
Market participants have perfect information
Markets are complete
There is perfect competition between players
Price adjustments are instantaneous
There is zero transaction costs
There are no time constraints for price setting
All agents are rational and seek to maximize profits
Nobody is influenced in any way by the actions of others
Except that those assumptions are really bad and don’t actually happen in the real world. People don’t have perfect information, not everybody is in the market all the time, perfect competition is rare, transaction costs are very heavy (see the Island of Manhattan built by transactions costs), there are time constraints all the time, market agents aren’t rational – there is a lot of price manipulation and you have to be a fool to think that there isn’t herding behavior – people absolutely are influenced by societal trends. In Alice in Wonderland, the Queen said that she believed six impossible things before breakfast. In modern day economics, you have to believe 8 impossible things all the time! If probability of all these assumptions are true are 60%, the combined probability is 60% to the power of 8 or barely 1%. And reality is that the individual probability of any of those actually happening is less than 10%.
In other words, perfects markets don’t exist. Textbook economics is a fairy tale. Demand does not equal supply. Markets are rationed. Rationing in one market affects other markets. Information, time and money are all rationed – there is a limit to them and distribution isn’t perfect. Different market players have different levels of information, time and money or simply put different “market power”. In rationed markets, market power is the primary driver behind market prices. Market power is used and abused. Rationed markets are determined by quantities, not prices. The outcome is determined by whichever quantity is smaller – demand or supply (the “short-size principle”). Thus, government intervention in markets is a “distortion” and “undesirable” only in the theoretical world of Econ 101 general equilibrium economics (which is what libertarians believe so strongly). Since markets are rationed and skewed, government intervention can actually improve market outcomes by checking market power abuse.
There were 3 main theories of banking:
Financial Intermediation Theory
Fractional Reserve Theory
Credit Creation Theory
“Financial Intermediation Theory” says that banks are intermediaries in the private sector and they gather deposits from savers and then lend them out to productive enterprises (or debtors). That theory forms the basis of what we call “private money” and what I called “Medici money” in prior writings. And this is the theory of banks and money that most people are familiar with and accept easily. In this theory, banks don’t create money supply neither individually nor collectively. Money comes from client deposits (already exists).
In “Fractional Reserve Theory”, there is a Central Bank and all banks put a reserve aside with the central bank. This reserve is used to clear interbank payments and allows banks to make payments to each other. New loans in the economy are extended out of new reserves. New reserves can get created by the central bank. This is the basis for “public money” or what I also called “Lincoln money” in prior writings. In this theory, banks create money collectively but not individually. In other words, a committee of private sector and government bankers like the Fed jointly creates new money when they increase the reserves or loosen the reserve requirements. This fractional banking theory has much resistance in the public because it is a little bit more complicated and centralizes the power of money creation to the mysterious Central Bank. And in addition, money can be lent out that doesn’t exist and people simply don’t want to believe in magic. Whether the public likes this theory or not, you can in fact lend more than you have in deposit since depositors rarely pull out their deposits over time and particularly those at the Central Bank. Banks can leverage those deposits as much as 8x according to international banking regulations (Basel III). The only reason Central Bankers get away with this “atrocity” is because this is a key way to produce economic growth that wouldn’t exist otherwise. If banks could only lend what they had on deposit, the economies would be much smaller.
The 3rd theory is called “Credit Creation Theory” of banking and says that banks aren’t just intermediaries – they are the center of the economy and money gets created only when they lend. Thus banks create money ex nihilo (out of nothing) both individually and collectively. Werner did empirical tests of all 3 theories and found out that Financial Intermediary and Fractional Reserve theories are wrong and not consistent with evidence and that only the Credit Creation Theory is correct and consistent with real-world evidence. Or in other words, banks are the center of the economic universe and they create money out of thin air when they make lending decisions. Any theories and economic models that don’t reflect this reality about banks (that they create money individually and collectively) can’t be used to describe our economy.
There is a BIG discrepancy in how neoclassical economists (and therefore the public) view banks and the banks’ actual status in the real economy. Economists think that banks are deposit taking firms that lend money. In the real world banks don’t take deposits and don’t lend money. Get a load of that! Banks actually “borrow” money from their clients. In law, client “deposits” are loans to the bank. When I put my money in the bank, the money is not on “deposit” (held in custody by the bank). It is owned and controlled by the bank, not the depositor. That is because the “depositor” lends money to the bank and becomes a “general creditor” to the bank. The bank records a “credit” on behalf of the customer in its records of its debts. When it comes to “lending”, banks don’t lend money either. They purchase “securities” – the loan contract is a “promissory note” (or a “security”) that the bank acquires. The bank does not payout the money referred to in the loan contract. Instead, the banks records a “credit” on behalf of the customer in its records of its own debts to the public.
This is how money gets created: when the bank lends, it in fact “purchases” a loan contract from the borrower and records this as an asset. The bank now owes the borrower and has a liability. The bank records this in the 2-sided accounting ledger as a fictitious customer deposit to balance the assets and liabilities. The bank pretends the borrower has deposited the money. And voila, we have a new money in the system. The money appears out of thin air since obviously it wasn’t transferred from anybody else. It appears because a loan was made!
This dynamic confers a new status on banks – they are special! Banks create the money supply. Unlike non-bank financial institutions, banks create money via credit creation. Bank credit and deposits are created simultaneously. Credit creation is a unique measure of money as it is injected into the economy and that measure can be disaggregated by the use the new money is put to. Banks decide who gets newly created money and for what purpose. Banks reshape the economic landscape through their loan decisions. Now we know why central banks conduct their “true” monetary policy by guiding bank credit. When new money is created by the central banks, it can either land in non-GDP transactions (which is Asset Markets like stocks/real estate) or in GDP transactions (Real Economy). The Real Economy is further subdivided into Consumption (consumer purchases) and Investment (productive purposes such as productivity enhancement, technology innovation, etc). Roughly, the formula looks like this
Δ CR = AM + I + C
Δ CR = new credit/new money
AM = Asset markets like stocks, bonds and real estate
I = Investment into products and services (supply side)
C = Consumer consumption (demand side)
Where the money lands in the economy is further guided by the legislative branch or Congress in what is called Fiscal Policy. Fiscal policy can redirect the money to Investment or to Consumption (consumers) via tax cuts, subsidies and other forms of stimulus. If Congress does NOT direct new money creation into the Real Economy, then all the money goes into Asset Markets like stocks and bonds and inflates their prices. Before the COVID pandemic in 2020, most of the new money creation in the economy via QE ended up exclusively in the asset markets because Republicans (in the Presidency, House or Senate) don’t believe in “picking winners and losers” in the economy and thus refrained from directing the flow of new credit coming from QE to Investment or Consumption. There is a particular reason GOP doesn’t like directing new credit to Consumption – inflation. Money that goes to consumer spending but not to investment results in more dollars chasing the same amount of goods and thus results in consumer price inflation which is unsustainable and not perceived to be good for society. On the other hand, if you direct money to Investment, you get more goods for a fixed amount of consumption and then you get deflation which GOP views as positive and contributing to real wealth (buying more stuff for the same amount of money). This is what has been going on pre 2020 and if you remember many libertarian Gold bugs argued in 2008 that QE will result in consumer price inflation and were proven to be dead wrong over the last decade. Inflation went nowhere for a decade. Why? Because new credit wasn’t directed to consumption. The only directing of credit were tax cuts which directs money to Investment which puts a lid on prices. So the Gold bugs were simply dead wrong. I mean you can’t possibly be any more wrong than that! Absent fiscal policy directing money specifically to Consumption, you simply can’t get consumer price increases at all. It just can’t happen.
During the COVID pandemic we saw a different paradigm emerge – some of the money went to the Consumer (pandemic UI, broad stimulus checks, etc) and some went into Investment (Pfizer vaccine production, military spending, etc). As a result we see CPI readings that are higher. But those higher CPI readings are going to be transitory because we are not printing $2000 checks for each family every few months. The new fiscal policy by the Biden administration is not THAT expansive. There was certainly an output gap to be filled last year and earlier this year. However, the Biden administration is not going abandon Consumption entirely – the child tax credit is a move in that direction to firm up consumption and thus inflationary readings. If there was any criticism of monetary policy in the 2010s is that it didn’t achieve the 2% inflation target that it set for itself. Why? Because all money went into Asset Markets and Investment. That in turn pushed interest rates lower which then gave the government a lower capacity to stimulate the economy without additional money printing in the case of a recessionary shock. The Fed does want inflation to be 2% and interest rates to 2% so that it can stimulate the economy with the least amount of money printing. By that standard, the 2010s were a debacle. Which is not surprising because that is the first time US politicians and government administrators were learning how the Quantity Theory of Disaggregated Credit works. But from what we have seen so far from the Biden administration, they are much better practitioners than the GOP policy makers that preceded them and that is encouraging.
What is one side effect that can go egregiously wrong under this model? Obviously, lack of Fiscal Policy to direct money to Investment and Consumption can result in all the new credit creation/new money going to the Asset Markets. When you have sustained broad bank credit growth exceeding nominal GDP consistently for a long time, you end up with a banking crisis. Too much of the money in the economy is trapped in the banking sector. That is what led to the banking crisis in Japan in 1990 and in the US in 2008 – mismanagement of bank credit creation. Now the question is why do bank crises keep happening if Central Bankers know all of this? The answer is “Revealed Preference”. Central bankers actually do want this to keep happening. Warner calls this “Central Bank Risk” or giving way too much power to central planners (like the Central Bankers) and not ensuring meaningful accountability. You could see this complete lack of accountability and dangerous hubris in 2019 when for absolutely no economic reason, Powell lowered interest rates from 2.75% to 0.5% and launched QE of $80 billion per month in September of 2019. That was done for nakedly political purposes to ensure that the economy is juiced up above its normal capacity ahead of the 2020 election and ensure that Republicans retain majority in the Senate and Trump gets reelected. We really just witnessed one of the worst Central Bank mismanagement in the history of the US. And Jay Powell was a chief actor in those decisions.
Warner calls this regulatory preference to generate crises “Regulatory Moral Hazard”. Bureaucrats create crises and then help defuse the crises and as a result they get rewarded with bigger regulatory powers by Congress. In effect, central bankers get rewarded for each crisis they create. As result, over the past 50 years Central Bankers have become more powerful than ever before. During that time period the amplitude and frequency of business cycles has increased. They actually are not business cycles anymore but credit creation boom/bust cycles. These are now recurring boom/bust cycles artificially created by banking crises of the central bankers own invention.
Over the past 20 years, Central Banks have used monetary and regulatory intervention to reduce the profitability of ordinary and small banks driving them out of business. Over 5000 small banks disappeared in the US and Europe for a total of 10,000 during this time. As a result credit creation has increasingly been centralized in a few big banks. Now via a central bank digital currency (CBDC), Central Banks want to enter into a competition with their private sector counterparts (JP Morgan, Bank of America, etc) which they regulate and start to control the credit creation process directly. A recent speech by Fed government Chris Waller addressed some of these issues brilliantly and you should read it. Such a move means that banks will be driven out of business entirely and will disappear.
The next banking crisis will finish the banks off and push all the credit creation into the hands of the Central Bank (the Fed). Werner doesn’t like that because this is what led to the decline of the Soviet Union. This new West banking model looks a lot like Soviet-style central monetary authority. Warner credits the demise of the Soviet Union and the ascent of China on the centralized and decentralized nature of their banking systems and resulting centralization/decentralization of credit creation. After the fall of the Soviet Union in 1990, China established thousands of regional banks and delegated credit creation to them. Warner credits the resurgence in the Chinese economy with this decentralized credit creation process and mourns the centralization happening in the West at present. He thinks that economic growth will go to zero if we adopt a centralized central bank model of money creation.
That is why central bankers prefer the “degrowth” narrative and claim that we need “zero growth” for environmental reasons. This is not true in reality because economic growth isn’t harmful to the environment since if you remember the start of this article – economic growth is simply a statistical illusion and entirely a monetary phenomenon. What is harmful to the environment are harmful activities and those need to be regulated directly instead of regulating the banks in an attempt to achieve that same result. Green economic activity instead can be a boom sector and can result in high economic growth – if banks are allowed to create money for this activity. Werner bemoans that Central Banks have propagated the abolition of cash in order to be able to enforce negative interest rates (withdrawals from your bank account) and have proposed universal basic income (UBI) to deal with large-scale unemployment by implementing a central bank digital currency (CBDC).
Ultimately, Werner tacks in the other direction entirely and favors a high level of decentralization of the banking system and of credit creation. He points out that countries with large amounts of banks also have healthier and recession-proof economies. He points out that Germany has the highest number of “industry champions” – companies that are in the top 3 of market share in their industry. Not coincidentally, Germany also has the highest number of banks by a factor of 3 or 4 over peers like United Kingdom, Spain, Italy or France. The propensity to lend to small companies is in small banks. Big banks don’t lend to small businesses. The fact that small banks lend to small businesses in a weaker economy tends to smooth out the boom/bust cycles. Werner points out that Germany’s highly decentralized banking system has resulted in smoother boom/bust cycles over the past 20 years. Germany has 70% of money creation generated by 1,500 community banks.
Werner proposes the following reforms to the banking system:
Ban bank credit transactions that don’t contribute to GDP (asset transactions)
Create a network of many small community banks which lend for productive purposes and return all gains back to the community creating real choice and options in banking.
Competition in banking is only ensured if large commercial banks are forced to compete against such community banks. This is partially what is happening with crypto right now where you have decentralized lending protocols like AAVE and KAVA put credit decisions in the hands of the public. Ultimately, you have to look at crypto industry as an industry whose goal is to decentralize credit and money supply creation back into the hands of the public and act to counterbalance the ongoing centralization of credit creation activity in the establishment (big banks and central banks).
Originally sent to VIXCONTANGO subscribers on November 24th, 2020
Yesterday, the Wall Street Journal reported that Janet Yellen is going to be Biden’s pick for Treasury Secretary. That shouldn’t be a surprise since we identified her a month ago before the election when we discussed Biden’s incoming economic cabinet.
The reaction by libertarian traders on Twitter was predictable. They think she is a “dove”, that she is Wall Street pet and will be a backstop for markets like she was during the Obama years. But that is not exactly how I remember it. In 4 years from 2014 to 2018, Yellen hike rates 5 times. She has done more rate hikes than Bernanke did in 8 years (4) and Powell did (also 4). Only Greenspan has done more rate hikes than her from the last 4 chairmen. So she is not exactly a “dove”. Yellen actually wanted to start rate hikes in 2015 but was derailed by the Oil Crisis which knocked down inflation for a couple of years. It is hard to do rate hikes when the oil sector which is a significant job creator is in trouble. I thought Yellen was very competent and I have no issues with her track record as a Fed chair. I trust her judgement. She was known as the best forecaster on the Fed team and I think she did a stellar job as Chairwoman. Also I thought Trump should have let her stay on for another term, but clearly Trump wanted a loyalist in the job who will make the institution his crony. He put Powell in there to wreck the Fed and Powell certainly did that in very short order.
When you listen to trader opinions on Twitter keep in mind that many of them are libertarian which means that they are against any government intervention in the economy. Regardless of who it is, they won’t like the appointment. They won’t like Powell, they won’t like Yellen, and they won’t like Warren. They won’t like anybody in government. They think the Fed and the Treasury shouldn’t exist. They don’t think the IRS should exist. Financial Twitter is full of people with extreme right-wing views. They are against government, all the time. As if a libertarian mafia state where you pay exorbitant extortion fees to every warlord around like in some countries in Africa is a better way to run a country. Most importantly, keep in mind that you will never meet a person in real life who espouses these opinions. It’s almost comical how extremist financial Twitter is relative to the general population.
The more important part about Yellen as a Treasury Secretary is that it is a groundbreaking appointment. It really is an earthquake. It’s not that she is the first woman to be Treasury Secretary. She is that, but what I am talking about is something else. The Treasury Secretary position is the 2nd most important position in the cabinet after the President and certainly the most important position with regards to the economy. Traditionally, the Treasury Secretary is a spot given to man of incredible business accomplishments, a titan of industry. In that spot you have seen a Goldman Sachs CEOs , high ranking private equity partners or multinational corporation CEOs. We are talking the Boss of Bosses. Let’s look at the backgrounds of the prior Treasury Secretaries. Mnuchin – private equity partner and youngest Goldman Sachs partner ever. Jack Lew – private equity partner and COO of Citibank. Geitner – private equity partner and head of the New York Fed. Hank Pauluson – CEO of Goldman Sachs. John Snow – Cerberus private equity partner and corporate CEO. Paul O’Neal – Alcoa CEO. Robert Rubin – Goldman Sachs partner and Citibank director. You have had big men at Treasury from Alexander Hamilton who combined the debt of the states to Salmon Chase who consolidated banking reserves to finance the Civil War to Andrew Mellon who was head of the Alcoa industrial cartel and one of the biggest robber barons of his era. Andrew Mellon was Treasury Secretary for 3 Republican Presidents – Herbert Hoover, Calving Coolidge and Warren Harding. It was said that 3 Presidents served under Mellon.
The Treasury which oversees the IRS has always been managed by a titan of the business community, by somebody who is Wall Street blue blood from top to bottom. Actually, a few generations of Wall Street. You don’t get some random government apparatchik to run the Treasury. That’s why I thought names like Sarah Bloom Raskin for the spot were preposterous. She is simply unqualified. Janet Yellen is probably the only human being that is not a titan of industry to make it through Senate confirmation for that position. And therein lies the big misunderstanding that I see on FinTwit.
When Yellen becomes Treasury Secretary, she will be the first “layman” in that position. Notice, I am calling a “layman” a former Federal Reserve chairman and titan of academia and government. Yellen, after all, has created entire schools of economics and is one of the top economists of her lifetime. What I mean is the first regular person who is not a titan of industry.
What that means is that the entire tax code for corporations and individuals will be for the first time run by somebody who doesn’t preach the gospel of the Chamber of Commerce. Congress leaves many judgements to Treasury and Yellen’s judgement will be radically different than Mnuchin who was the most pro-business extremist in that position ever. Even Hank Paulson wouldn’t dare to make some of the rulings that Mnuchin made. A lot of them are probably illegal if we had the time to prosecute stuff like this during the Trump years. It is not me that says it – it is Republican senators who called Mnuchin’s rulings on GILTI and BEAT a “violation of the spirit of the 2017 tax law”. Mnuchin was and is an extremist.
Do you remember how upset Wall Street was with Jack Lew and his inversion rulings? Jack Lew is the only other Treasury Secretary that wasn’t really a titan of industry. Janet Yellen is way more pro-labor than Lew will ever be. For me personally, for the first time ever I will be able to trust Treasury’s rulings and IRS judgements. I think the SPX earnings we will get under Yellen will be the first “REAL” corporate earnings recorded in years. The earnings during the Trump era were heavily distorted. Also the IRS didn’t make an effort to collect any taxes under Mnuchin. Under Yellen, we will have a Treasury that collects taxes and doesn’t always rule in favor of business. Larry Summers estimates that US treasury can collect $1 trillion more in taxes if it just bothered to collect them. And more importantly, it will be very difficult for Wall Street and the business community to be overtly attacking Janet Yellen. Wall Street felt at easy attacking Jack Lew. That’s not going to work with Yellen. Not only is she a former Fed chair, she is highly respected and has enormous political capital. Taking on Yellen will be a suicide mission for Wall Street executives. And that is why I think her stint at Treasury will be groundbreaking and ultimately very good for the country.
However, that doesn’t mean that Yellen is good for stocks. I think it is the opposite. It will be good for stocks once stocks are cheap enough and earnings numbers have been adjusted lower and are trustworthy. Don’t forget that Yellen will now be a direct regulator of Virtu, Citadel and other market makers and dealer as well as all the Big Banks. There were a lot of market shenanigans that took place in the Trump years that will be rolled back and investigated. The overnight stock bid will end. Some people that abused their market making powers under Trump will be kicked out of the industry. The practice of scheduling company earnings in a certain order to prop up the stock market during earnings season (putting the best earners first) will be discontinued. I think SPX analysts will be forced to provide more realistic estimates of future company earnings instead of these fictional numbers they post today. There is a lot of false advertisement in the financial industry and I think all of that lying will be dialed back by Yellen. She has direct control over all of that activity. The Treasury can suspend companies and take them out of business. While I don’t think Yellen will be a hunter like Elizabeth Warren, I think we will see a Treasury that for the first time makes sense to the ordinary American. Rich people will get audited instead of poor people. We will not see this distorted libertarian/crony capitalist lunacy that we saw under Mnuchin. Frankly, I consider the market abuses under Trump and Mnuchin criminal and I think they should see jail time for their abuses of power in the markets. It is one thing for a government to peg an asset for 3 to 6 months like any country is allowed to do. It’s another to be pegging markets at all-time highs for 3 straight years through recessions and all kinds of economic chaos to bribe Americans for reelection purposes. That is a crime.
This is not about me and my trading. This is about my daughter and the other 30 year olds entering the investing world today. They have to start saving for their kids today. What are they given? 40 PE multiples, 30 price-to-sales ratio and all kinds of other fraud. Who can rationally invest in such an environment? Based on what? On implicit promises by the Fed to peg prices? When was the last time price controls worked? When the Fed issues an official proclamation that SPX price doesn’t go below a certain level, that’s when I buy it. I don’t believe implicit promises. The Fed will not buy “my” stocks. They will buy the bank inventory, not my inventory. If I have to make a decision as an independent person, I can’t invest in these prices. The non-sense in markets needs to end. The boomers aren’t the last generation on Earth. The stock market needs to function for the younger generations as well. They need to build savings as well.
From an investment perspective, I think the Trump/Mnuchin peg on stocks will be gone. I think initially we will see market volatility until asset prices get adjusted to more normal levels. If Yellen implements some facilities with the Fed, it will be about helping state and local governments, not corporate bonds and corporate boards. Yellen is not going to be bailing out corporate bonds or stocks unless the situation gets really dire. Workers first. We are very far from dire situation for stocks. SPX is up 15% this year on ridiculous multiple expansion. I would stay away from junk bonds (HYG), stocks (SPX). Yellen is bullish for Treasuries and duration as Yellen likes low rates given that she is a labor economist. I think she will push the Fed to do Yield Curve Control. We will see her force banks to lower rates on mortgages, car loans and credit cards. There is a lot that can happen there to compress consumer credit spreads, but I am not sure how you can invest in that. That’s the most bullish investment theme I can think of for Yellen – lowering credit spreads. In the long run, I don’t think Yellen is bullish for Gold, but Gold still needs to hit $3000 given the size of the Fed balance sheet. Ultimately, I think the best performing asset during the Yellen years will be crypto. It will become mainstream and it’s a very small asset class poised to grow by leaps and bounds. Once stocks correct, they will be investable too as I think the economy will get back to good shape after 2022. But the next 2 years should be difficult since we will be dealing with the virus and with big earnings and economic downgrades.
Once Yellen becomes Treasury Secretary, America will become a different country. A more respected country. Let’s hope she fulfills the promise.
Originally sent to VIXCONTANGO subscribers on September 10th, 2017
After the Bitcoin network was around for a while and it turned out to work pretty well for sending money from one account to another, at some point it was time to move onto the next phase. Many people wanted to make improvements to the Bitcoin network, whether to make mining easier or fairer or to make transaction processing faster. We discussed some of those technical improvements in our prior emails. But some others thought of the Bitcoin revolution in a completely different way.
As a payment system, the Bitcoin network was created as a direct competitor of the US dollar. Since World War 2, all international transactions have to be settled in US dollars. It used to be gold, but now it is electronic dollars. The US abuses this powerful mechanism to persecute people, groups or countries that don’t agree with its interests or agenda and for a long time there has been a desire in the international community for a replacement or at the very least for a viable competitor of the US dollar. Simply put many individuals, corporations and nations want to be able to make payments between each other outside of the control of the US government. From the ether of nothingness came Bitcoin, created by an unknown software architect, adopted by the open source anarchists and beloved by the outcasts. Seedy as its beginnings may have been, the Bitcoin network managed to do what no government, corporation or other institution has been able to do since WW2. Conduct business outside the iron hand of the sophisticated US government and its dominant military.
So if the US government and other governments use payments for control, what else can be used for control? How about computing power? Every computing activity, whether storing files, transmitting files, etc is done on some computer that pays for its electricity in some currency that is controlled by a government. Every computer application is provided by a corporation or an individual that is ultimately depended on the government in some way. Most of the computing resources we use these days is either email from Yahoo, search from Google, a spreadsheet or word processing from Microsoft, music from Apple or video from Netflix or Amazon. It is a few corporations that have enormous control over our lives because they provide the computing power and most important usages of that computing power.
Vitalik Buterin was born in 1994. He is barely 23 years old today. At 17 (2011) he started running a magazine focused on Bitcoin called appropriately “Bitcoin Magazine” which was the first news source for cryptocurrencies. He did that for a couple of years but he quickly grew frustrated with the limitations of bitcoin and with members of the Bitcoin community who treated the original source code of Bitcoin like the tablets of Moses and were resistant to any changes. He foresaw the larger revolution that Bitcoin unlocked and wanted to push the action in that direction. So while most people his age try to figure out how to date a girl, Vitalik Buterin attempted something far simpler – create The Distributed World Computer.
The core concept of Ethereum is rather simple – to provide a distributed computer network whose job is to provide computing power. Basically a Giant World Computer that anybody can use to run whatever application they want on it. You can think of it as a giant Cloud Computer that is not run by Microsoft or by Google or by Amazon, but by the same amorphous and anonymous group of people that run Bitcoin – a bunch of miners that can be located anywhere in the world, live in any jurisdiction. They can be anybody. For all it cares, the miners can be just computers that run in outer space. Completely free and unfettered. This Giant World Computer can then allow developers to create applications that live on this Giant World Computer free from corporate or nation state control. Those are applications that can’t be killed by censorship or by law enforcement actions. Vitalik Buterin wanted to circumvent how everything is done today and base it on a distributed network that can exist by using the same redundant and self-preserving reward mechanisms that bitcoin uses. To put it simply, if somebody will take out Google one day or at least form a viable competitor, it will most likely be an application built on the Ethereum network. If you want to get a true uncensored Twitter, it would most likely be on the Ethereum network. There are a lot of moral questions to think about when you think about a truly decentralized network and what that means, but the question here is not what the moral implications are but whether it can be done or not. And it seems like it can be done.
So from the get go, Ethereum is more than just a protocol to send money. It is an operating system on top of which you can program applications. And since Ethereum is more developer friendly than Bitcoin, it almost immediately got the support of Microsoft. While much of Silicon Valley is betting on Bitcoin, Microsoft is betting big on Ethereum. Ethereum has its own computer language called Solidity. The Ethereum Virtual Machine now runs on Azure and Microsoft Visual Studio has a plug-in that allows people to write Solidity code that can run on the Ethereum network. Having the backing of Microsoft and allowing Solidity access to Microsoft’s army of 30 million developers is no small deal. Without going into much detail, the reason why developers like Ethereum a lot is because it allows them to tinker with every aspect of it. Unlike Bitcoin which is like an Apple computer where everything is set in place, Ethereum is like Windows computer – to one person it can look one way and to another a completely different way. Thus long term Ethereum will be heavily adopted by the business community which can tweak it in ways that it suits their purposes best.
Ether is the currency that is used by the Ethereum network. Ether is what is mined. In order to use resources of the Ethereum network you have to use Ether to pay. You can purchase and store Ether in a Coinbase wallet using US dollars. Ether can be traded for Bitcoin on almost all cryptocurrency exchanges like GDAX, Gemini, BTC-e, Poloniex, Kraken, etc. Ethereum is just as easy to buy and sell and store as Bitcoin. As a result of this relatively quick mainstream adoption, Ethereum has gone from $12 to $380 this year. And I have to say its actual industrial adoption is still in its infancy. So who knows where the limit of this is if it is trading at $380 already.
Unlike Bitcoin, there is not going to be a fixed amount of Ether for all time. The Ether supply is not limited but will expand over time. About 60 million Ether were created during the Ethereum Initial Coin Offering in Aug of 2014 for about 18 million USD. The actual price was 2000 ETH for one bitcoin. After that offering, Ether creation is capped at 18 million Ether per year. 5 Ether are created during each block and each block is mined every 15 seconds. So most people put estimates that about 10 million Ether will be created each year. So right now there is about 100 million Ether give or take (rouhgly 95 million is the actual number) and the market cap is about $36 billion (with a B). Next year there will 110 million ether, in 2019 120 million, in 2020 130 million and so on. While the supply keeps increasing, it will increase by a smaller percentage as time goes on, so Ether while not as tight as Bitcoin, will still be a somewhat limited commodity as time progresses.
So while the concept of the Distributed World Computer is very exciting to modern day revolutionaries and one day may actually become a reality and we might even have usable distributed applications (DAPPs) running on it that, for example, allow us to search the internet or write a document, we are only at the infancy of this technology and as such not much can be done with it today. Most serious applications are at least a few years out because it takes a long time to make a good usable application. But there is one BIG thing that can be done with it today. There is a killer app that has fascinated the business community and this app is the reason why we are talking about Ethereum today. This app is the Smart Contract.
What is a Smart Contract?
As you understand by now, Bitcoin is a way to make payments without a government or corporate intermediary that can shut down the flow of payments for an arbitrary reason. Payments are pretty much what business is all about and what business contract law is all about. People enter into financial contracts in order to figure out when to make or receive payments and under what conditions. A traditional contract is written on a piece of paper, usually with the help of a lawyer. If some data is required to be collected that are specified in the contract, an Audit is performed. If people are confused about the terms of the contract, they go to a judge that says who should get what and how much. Then the government (the judge) has the power to withhold wages, block people’s financial accounts and do all kinds of things to collect the money that a person needs to pay to honor the contract.
With the advent of Ethereum, now it is possible to automate law and the execution of a financial contract. Instead of writing a contract on a piece of paper, you can write it using a computer language (in Ethereum’s case that language is Solidity). That contract can then be stored on the Blockchain and when the conditions of the contract are met, then a payment can automatically be taken from one account and sent into another. Think about that for a second? You can use computers to automate one of the most inefficient parts of the economy – CONTRACT LAW.
People don’t know this but writing was not invented so that a boy and girl can tell each other how much they love each other. There have been non-verbal ways to express love since the beginning of time. Writing was originally invented to record and collect debts. To write rules of the law. Writing finds its origins in law and in finance. What Ethereum allows, far better than Bitcoin or any other technology, is to move LAW into the computer age.
It is not difficult to see widespread applications for this. For example, sports betting. An example smart contract is 2 people put money in an account and then depending on the final score of the game one guy gets the money and the other doesn’t. All automatically executed. What about a will? A person can specify the terms in a smart contract and once his death is recorded on the blockchain, then certain accounts automatically get funded. Some applications can go even further and target the connected home. Imagine you have door locks that are connected to the internet. You set up a smart contract with a renter. If the renter doesn’t make a monthly payment, the door doesn’t open. You can rig a car in a similar way. If the person doesn’t make the monthly lease payment, the car doesn’t start. There can be many applications of smart contracts living on the Ethereum blockchain.
Essentially, Ethereum becomes a competitor of the established payment and settlement systems. Real-time settlement systems are many. Fedwire is the one operated by the US Federal Reserve Banks. CHIPS is the Clearing House Interbank Payments System. CHAPS – Clearings House Automated Payment System of the United Kingdom. CNAPS – China National Advanced Payment System. TARGET2 – settlement system for the Euro currency. Ethereum competes with all of those. There are more than 400 billion transactions processed every year in the world and the transaction volume increases about 7% per year on average. VISA for example processes about 50 billion transaction per year or roughly 12% of the total. If Ethereum gets anywhere near that it will have to have VISA’s market cap which is about 250 billion. Mastercard’s market cap is 150 billion. The major payment companies in the word have a total market cap of about $500 billion today. Ethereum current market cap is $40 billion.
Some think that SmartContracts will one day be a replacement for lawyers. While I can definitely see automation of law, I think it is a bit premature to say that we will not need lawyers. We will still need lawyers, but lawyers will have to also double as software developers. Or maybe have paralegals with software skills. It won’t be enough to pass 3 years of graduate law schools, the lawyers of the future will also have to have BS in Computer Science as well. As always, things only get more complicated.
Smart Contract as law has already had some problems. Hackers have been able to misuse the contract language to bleed money out of a Smart Contract. Famously, somebody took around 5 million dollars out of the first Decentralized Autonomous Organization (DAO) last year using a perfectly legal loophole. Before the investors in the DAO could react and fix the code, somebody drained the money and to this day they don’t know who it is. Obviously, real world law also has loopholes that get misused all the time, but Smart Contracts may be subject to loopholes or just plain bugs if the code is not written correctly. In the real world there are institutions that allow certain protections to investors. So far Smart Contracts which are supposed to get around those institutions haven’t been able to provide the same protections. But it is still early and that doesn’t mean that a solution won’t be created at some point.
It is hard to value Ethereum given that it can participate in so many different industries. But it definitely has a bigger potential than Bitcoin. It has terrific growth ahead of it and that growth will be alongside Bitcoin. I don’t think there is single winner here. Both cryptocurrencies can grow big over time.
Initial Coin Offerings (ICOs)
Imagine you wanted to invest in a start-up. In order to do that you have to be a qualified investor (net liquid worth of $2.1 million excluding your house + 200K in annual income), then you have to invest in a venture capital fund where your money is potentially tied for many years before you can take it out. But even if you skip the venture capital fund, your investments in a start-up company is not very liquid. Over the past decade there has been a rise in exchanges where people can trade their private equity stakes, but it is still a rather difficult and heavily regulated process (for obvious reasons). Investing in promising companies early on is certainly not as easy as pulling up a ticker and entering a trade like you can do with publicly traded companies.
Initial Coin Offerings change all of that and make investing in venture capital companies possible for everybody. How does that work? An ICO is basically the first popular implementation of the Smart Contract concept. In an Initial Coin Offering, a special coin is created. A special coin is basically like a share of stock issued in an initial public offering that has some rules attached to it described in a Smart Contract. For example, McDonalds Russia can create a coin that pays a reward for every Big Mac sold. Let’s call it RusskiMcCoin. Investors can buy millions of RusskiMcCoin to fund the creation of McDonald branches in Russia. When those McDonalds branches sell Big Macs, the Smart Contract automatically generates RusskiMcCoin and gives them to the investors as dividend in addition to the RusskiMcCoin they already have. If investors at some point want to sell their RusskiMcCoin they can go to many cryptocurrency exchanges and sell their RusskiMcCoin in exchange for Ether or Bitcoin and from there they can turn them into US dollars or Russian rubles or whatever else. So Initial Coin Offerings can really revolutionize finance given that they are on an distributed network like Ethereum and thus completely unregulated.
The most common ICOs to date are some new crypto coins with interesting rules that people think are better than Ethereum or Bitcoin. Many companies that want to create decentralized apps, create coins to raise money for themselves instead of going to Venture Capitalists. It is just like crowdfunding but the rules are written by the issuer of the coin instead of some crowdsourcing company. Biggest ICO to date is FileCoin which raised $250 million dollars in August of 2017. FileCoin is a decentralized storage network that will run on Ethereum (which was one of the original dapps envisioned by Vitalik Buterin). Roughly the way this will work, you can become a Filecoin miner and allow your computer to be one of the many that will store files. In exchange for your computer power being used to stored files, you will earn FileCoin which then you can sell later.
The way most ICOs work, about 10-20% or some percentage of the total coin issuance is being held by the issuer of the coin (a foundation) with the rest designated for a specific purpose (let’s say mining reward). The Ethereum ICO was the first ICO out there and was able to raise 18 million in 2014 and was considered a very successful ICO and laid the model for all subsequent ICOs. Big venture capitalists like Andreessen-Horowitz or Tim Draper have gotten in the ICO game this year and so far, nearly $2 billion has been invested in various ICOs! You can find ICOs listed on websites such as CoinList.co or Coinstaker.com
Where and What To Invest In
First of all, investing in ICOs is not a macro bet. This is more like investing in stocks – you need to know the management team, the rules of the coin – basically you need to be a venture capital investor. The chances are high that you will encounter fraud. I have made a couple of tiny investments like that and they have all gone caput. I would advise following the major venture capital players if you are to invest in ICOs, but as a general rule I highly recommend that you don’t invest in ICOs simply because the venture capital game is not for everybody and even the masters have a 10% hit rate.
For investing, I would simply consider the macro investments – Bitcoin and Ethereum. Those are the platforms on top of which everything else is built and their price grows as the ecosystem grows. They are limited commodities with very well understood rules and I think it makes sense to make a secular long term bet on them.
What does that mean in terms of investing – basically buy and hold. I would not buy the rips however, I would buy the dips. Bitcoin routinely has -25% drops, you can wait to buy one of those. I think in the not so distant future we will have a replay of 2014-15. There are a lot of miners who will eventually want to turn their investment into hard currency and there will be a lot of selling at some point. I can very easily see Bitcoin get back to the $2000 level and even the $1000 level. Going from $4000 to $1000 is a 75% decline and such a decline has happened before and I think it will happen again. In no way is bitcoin as stable a currency as the US dollar or anything like that. You have to invest with the knowledge that it can go down -75% at any point and scale accordingly. However, on a -75% drawdown I would seriously consider tripling down.
One way to invest is basically have a portfolio that is 80% cash and 20% crypto (bitcoin/ethereum) and then every 3 months rebalance. If your crypto currencies are up, you sell them for cash but leave some to ride. If they are down, you buy them back. This way you can ensure that you take some profits along the way and not get exposed fully to a big drawdown.
2020 was a very difficult year and unfortunate year, but in retrospect we will look at it as a very transformative year for American economic policy. Faced with the COVID pandemic, US government performed a series of large actions which in retrospect could be compared side by side and lessons could be drawn from. We had the Pandemic Stimulus which comprised of sending every American a check by the US Treasury, the enhanced Pandemic Unemployment Assistance (PUA) which increased basic state level unemployment insurance by $600/week and we had the Paycheck Protection Program (PPP) which gave small businesses 10 weeks of employee pay (up to $100,000 per employee).
When you look at US government policy over the past 4 decades we see that it has been driven largely by extreme right-wing and left-wing ideologues. On the Right Wing, there is a religious effort underway by the likes of the Heritage Foundation, American Enterprise Institute and the Tax Foundation to flatten the progressiveness of the individual income tax code and even completely eliminate corporate income taxation. Right-wing ideologues like Stephen Moore and Art Laffer have been pushing taxes lower, particularly on corporations and richest people for over 4 decades. As levels of redistribution have declined in a material way from these FLAT TAX policies, a bigger portion of the American population find themselves in poverty and debt and as result can’t participate in the consumer economy and support strong economic growth. Levels of economic growth have declined dramatically over the years. US GDP growth peaked during the Carter years and ever since Reagan implemented tax cuts, US GDP growth has steadily declined through a series of Republican administrations – Reagan, HW Bush, W Bush and Trump. Each Republican administration has passed large tax cut legislation early in its terms and each Republican administration have found themselves constantly battling a recession by the end of their terms. Reagan oversaw 2 recessions, HW Bush oversaw the 1990 recession, W Bush brought on the Financial Crisis of 2008 and Trump brought about the COVID crisis in 2020. If you reduce levels of redistribution, the US economy weakens. It is automatic. The relationship between levels of redistribution and economic growth can be simply described in the picture below. But the correlation is pretty obvious as well. As top marginal tax rates have declined over the decades, so has economic growth. In America the argument today isn’t “capitalism vs socialism”, but “unregulated capitalism vs regulated capitalism”. Clearly regulation and redistribution is the way to go. The only way is how much regulation and redistribution results in a stable combination of good economic growth and social order.
On the Left Wing, after the fall of the Soviet Union, the argument for central command of the economy was abandoned among progressives in favor of the “Third Way” – implementing TARGETED STIMULUS measures to help the people in need. While targeted stimulus clearly hasn’t been the debacle that Republican flat tax policies have been, targeted stimulus has wrecked the body politic of the United States. People that don’t get stimulus are angry at people that do get stimulus. Targeted stimulus measures over the last 2 decades directly led to the rise of Trump. The US government constantly stimulated people that don’t work and penalized people that do work by not stimulating them. The US government never helped small business owners whose business suffer greatly during a recession. In the Financial Crisis, sales and income of small business owners and contractors declined at least -50%. Those people suffered real economic pain and couldn’t pay their bills just like people who lost their employment. Yet, there is no unemployment insurance for small businessmen. There is no government income support for them during a recession. Small business people don’t run large cloud computing companies. They run retail, Main Street stores that sell mostly discretionary spending items which are the first thing that gets cut in a recession when people only spend on necessities. During the Financial Crisis, Obama didn’t give small businessmen any help. He didn’t send unemployed small businessmen $600 checks. Instead, Obama chose to raise health insurance premiums by bundling health care services and eliminating choice. Obama’s higher health insurance premium are a tax on small businessmen. Not only did Obama not help, he and his liberal economists hurt small businessmen. His economic policies were atrocious and that is why Republicans reclaimed the House and held it for his entire 2nd term. Obama and his economists actively chose to harm America’s small businessmen and harm America’s economic engine. All of the “targeted stimulus” measures under Obama didn’t help the middle class and exacerbating wealth inequality in the country. Some Obama Third Way economists like Jason Furman to this day continue to preach targeted stimulus measures to Biden which wrecked the country and help give rise to populist ideologues like Trump. Those voices have had their way in the 2010s and don’t need to be heard from again. They failed.
One thing that people forget is that TARGETED STIMULUS needs government bureaucracy to implement the targeting. Targeted stimulus makes the government bigger and more inefficient by clogging it with paperwork. Many people in the economy who need stimulus actually can’t get it because they can’t climb over the wall of paperwork. Bureaucracy and paperwork increase economic friction. They delay and deny the distribution of stimulus. Thus targeted stimulus is really less stimulus because it doesn’t get to its target.
Over the past 40 years, when Republicans have been in power we have pursued FLAT TAX policies which reduce redistribution levels and hurt economic growth and when Democrats have been in power we have pursued TARGETED STIMULUS policies which don’t help people in need, increase the size of government and also hurt economic growth. In 2020, we actually got a real world lesson in how TARGETED STIMULUS is a failure when compared to a BROAD STIMULUS. PPP was a “targeted stimulus” measure while Pandemic Stimulus was a “broad stimulus” measure. PPP applications immediately hit with charges of fraud, big corporations like the LA Lakers or successful hedge funds were given funds ahead of small businessmen. Small companies struggled to fill out the paperwork and couldn’t get over the paperwork challenge and failed to get funds. The one program that was universally successful instead was Pandemic Stimulus every American a $1200 check. Money went out quickly, was received by everybody and we saw immediate economic boost. It was implemented through the IRS which has all the relevant financial information for all Americans and was done quickly and efficiently.
So let’s think about this with clear eyes. Instead of discharging PPP stimulus through the IRS which already has corporate financial information, we chose to discharge PPP stimulus through banks and the Small Business Administration which doesn’t have that payroll and tax information? Then we asked American businessmen to submit paperwork for information which the US government already has? That makes no sense. This is so stupid, it is actually hard to believe. So it is not a surprise that PPP program failed. PPP was so hard to implement, it’s as if the intent of PPP was to not stimulate the economy. A total disaster.
Going forward, America needs a new way of dealing with stimulus and taxation. I call this NEOCENTRIST WAY because it is not driven by left-wing or right-wing ideology. It simply looks at the issue from a practical standpoint: what is the most efficient way to generate economic growth using government resources?
The NEOCENTRIST way is to implement BROAD STIMULUS and help everybody now and then use PROGRESSIVE TAXATION to remove stimulus from people that don’t need it. The fact of the matter is rich people aren’t that many. Sending $1200 checks to billionaires is less costly than hiring an entire federal department of employees with $100,000 salaries to determine whether small businessmen in need pass the means-test. Broad stimulus gets money to people now and juices economic growth now. Later on, when you don’t have an economic emergency, you can spend the time to remove stimulus from the people that don’t need it. At tax time, the IRS can say “Jeff Bezos, your taxes have a $1200 surcharge for that $1200 stimulus check you got because you don’t need it. You make enough money already”
The NEOCENTRIST WAY also calls for using the IRS to dispense and remove stimulus from the economy because the IRS already has the financial data of American individuals and businessmen. The IRS is in the best position to see who is hurting and who is not in a recession. Instead of building IRS like functionality and duplicating it in other federal departments, we can just use the IRS. This also helps stop the proliferation of private financial data to other federal departments which are vulnerable to hacking.
We are all trying to get our heads around what is going on in America right now. And I always look to history to find answers.
Pictured above is Pickett’s Charge, a defining moment in the Civil War during the battle of Gettysburg. Pickett was a Confederate commander of a division which Robert E Lee sent on a frontal assault against Union forces. Lee was duped to believe that this Union position was a weak point in the Union defense despite the position being on a high ground, in the middle of a big field, with the presence of heavy artillery and a defensive stone wall built by Union forces. General Longstreet who was Pickett’s commander knew that he would suffer minimum 50% casualties during this charge and was against it. Lee overrode him. Lee’s strategy in the previous battles (which he won) was also to do frontal charges with heavy casualties. The idea was to overwhelm the firepower of the Union forces with manpower and capture their superior artillery and then use the Union’s own cannons against them. The reason for doing all of that is because the Confederates couldn’t produce their own cannons. This worked in the first few battles as Lee lost more and more manpower while acquiring firepower. Lee severely underestimated the Union defenses in Gettysburg, however, and the entire Pickett’s division was mowed down. It was a killing field. People were walking forward, getting shot at by cannons and firing squads. It was a massacre. Nearly 30,000 Confederate soldiers were mowed down that day during that charge. When Pickett came back from the field and Lee asked him to organize his division for retreat, Pickett famously said: “General, I have no division”.
During his series of reckless engagements, Robert E Lee kept telling his troops that every battle is “THE BATTLE” after which the Union would crumble. He gave significant importance to each battle to convince his soldiers and subordinate generals to go to certain death on these reckless operations. In addition, the Confederate strategy from the start was to inflict a few quick losses on the Union and get them to capitulate quickly to the independence demands of the Confederate states. Ironically, the battle of Gettysburg was 2 years into the Civil War, long past the time of “quick” engagement. But Lee’s continued on his delusional course. In Gettysburg, his latest hope was that he would win Gettysburg, march to Philadelphia, surround it and force a quick end to the war.
Robert E Lee recklessness and desire for quick outcomes is the direct opposite of George Washington’s strategy during the Revolutionary War which lasted 7 years. George Washington avoided major engagements with the British and chose to bring Britain down through a long war of attrition and guerilla warfare and hope the costs of engagement piled up for the British which would eventually force them to cut their losses and leave. Which is what happened.
The reason why I bring up Robert E Lee and George Washington today is for two reasons.
The first reason is that people, both in the US and abroad, need to understand that there isn’t one America. There are two Americas. There is Confederate America and Union America. They happen to be represented by 2 parties – Republican Party and Democratic Party. While who calls themselves a Republican and Democrat has changed over the years, the divisions nonetheless are exactly the same. One party represents the interests of Confederacy while the other party represents the interests Union. These two parties tussle for power in the United States. Since World War 2 the Republican Party has become the party of the Confederacy and has become increasingly autocratic. The have had 2 Presidents impeached for abuse of power – Nixon and Trump. In other words, the GOP no longer wants to play by democratic rules and respect the Constitution. Worse yet, GOP goals are to use the Constitution to gain power, then cancel elections and never surrender that power. You see that with Trump refusing to accept the result of the elections today and the entire Republican Party consisting of Senators from Confederate States going along with it.
This has the practical implications that there is the real and present danger that America’s large nuclear arsenal can come under the command of a cabal of irrational racist maniacs. To me, the Confederates are just as insane as Hitler. If the last 4 years of Trump don’t convince you of that, I don’t know what will. We should not forget how racist, how religious and how irrational the Confederates are. They went to a massive war to preserve slavery and slaughtered over 600,000 people in defense of that cause. This remains by far the deadliest war in American history. American elections for President don’t get decided by a popular vote. They get decided by the Electoral College which really means that 100-200,000 people in swing states like Michigan, Wisconsin and Pennsylvania decide the fate of the country and who holds the US nuclear arsenal. The reality is that those 100-200,000 people don’t vote on issues such as “do we give nukes in the hands of Confederate maniacs with Hitlerian tendencies”. They vote for cutting taxes or tariffs on China or some other issue which not related to the geopolitical issue of America’s nukes. This is a five-alarm fire for the world. Nobody really worries about who controls Russia’s nuclear weapons, China’s, France’s, UK’s or Israel’s nuclear weapons. These are countries with very stable regimes from that standpoint. People worry about North Korea, Pakistan and India. And now people are worried about the United States.What is happening in America right now is shattering the world’s confidence in America’s ability to be a stable country. And the blame for that falls entirely on the Republican Party. Or should I call it, the Confederate Party. Look no further than McConnell who refuses to acknowledge Biden as a winner of the 2020 election.
The 2nd reason to look to Robert E Lee and George Washington’s examples is to evaluate America’s response to COVID. The Confederate States and the Union States take entirely different approaches to the COVID crisis. The Confederate States don’t care about casualties. Robert E Lee never cared about casualties. Slavers don’t value human life. A slave’s life or an indentured servant’s life is just an economic number. Slaves are expendable and interchangeable. That attitude permeates the Confederate States response to the crisis. They don’t care that dead men don’t do business. They only care about the business of the living men. And that is why they allow the COVID to spread. That is why they believe in their erroneous interpretation of “herd immunity” – getting everybody infected with it. “Herd immunity” is obviously a vaccination concept, not a mass murder concept like the Confederates think. Trump’s “optimism” about COVID – that “it will just go away” – is really Robert E Lee’s “this is the final battle” cry reincarnated. It’s just a delusional statement aimed at making people freely accept their own death. Trump is essentially asking people to jump from a bridge and they go and do it willingly. This is the type of hold autocratic cult leaders like Robert E Lee and Trump have. I don’t know why Confederates think that way. Maybe the sun and humidity is melting their minds. Who knows? But I don’t care why. I care that they act that way.
The Union state COVID response is obviously different, rational and resembles Western Europeans countries like France and Germany. You really have to think of Confederate America as a banana republic and Union America as a Western European state. The two have very little in common. That doesn’t mean that Union state COVID response is perfect, but at least it is based on scientific reasoning and practical considerations as opposed to misguided religion or ideology.
The Worst of COVID is Ahead
In the US yesterday, 7 states had higher daily infection rates than New York had in April. In New York, the 7-day average peaked around 7,000 in April. Yesterday, Illinois, Texas, California, Michigan, Ohio, Wisconsin and Florida were all around 7,000 and above. All of those state are New York in April. The country overall had 180,000 infections, the highest daily increase yet. 7-day average is 150,000 per day. You have to understand that these COVID infections reported today are people that got infected 2 weeks ago, given the virus’s incubation period. They got the virus 2 weeks ago and finally now they felt ill and went to get tested. So the numbers in the next 2 weeks will be massive and will continue to double up. There is still mostly no restriction to mobility anywhere in the US, particularly in Confederate States. So COVID will continue to burn and overwhelm hospital systems. The problem with COVID in America is that there are 2 response. And half the country has basically chosen to do nothing about it. It is the most bewildering thing if you look at this situation as a Western European or as a Chinese.
The worst is yet to come and 2021 will as bad with COVID as 2020 was. Hopefully, we get enough vaccines to inoculate the doctors and nurses. But beyond that, the death we will see in the next 6 months will be monumental. This is despite all the medical improvements over the summer. What will happen is hospitals will get overrun with COVID and people will die from non-COVID issues simply because health care is rationed. This is already happening in Wisconsin and Illinois. The IHME model projects 440,000 deaths by March and without national mask mandate they see nearly 600,000 deaths. We are not getting a mask mandate while Trump is around so you have to assume the higher number. We just hit 250,000 deaths after 10 months of COVID. Over the next 5 months, we will double it.
I know everybody wants this to be over and to go back to January 2020 quickly. I know everybody wants to believe in Robert E Lee promise – “the next battle is the final battle”. But that is not how it works in real life. The Union proved to be a resilient enemy and COVID has proven to be a resilient enemy. It mutates. The COVID virus that is ravaging Europe now is a strain that came from a mink farm in Spain. Who would’ve thought that? The vaccines will be always behind the new strains. It is important for Americans to lose their irrational “optimism” and their Robert E Lee-like delusions and face reality. And the reality is grim. The Civil war didn’t last 10 months. It lasted 4 years. And so will COVID pandemic. For all practical purposes, 2021 will be just as bad as 2020 from a COVID and economic perspective – without obviously the initial shock. But COVID will remain with us in a material way.
It is rare that I miss some big input parameter in my election models, but for the 2020 election, I did miss something big. And that is the increased Trump turnout. And it turns out I shouldn’t have missed it because there is plenty of historical precedent for it. If you look at the total vote data, Republican incumbents tend to see a huge increase in turnout in their re-election campaigns. And believe it or not that increased turnout tends to average around 12 million. I am calling this the “Autocrat Bandwagon Vote” – these are people who won’t vote for a Republican if he is not a President, but once that he is cloaked in the legitimacy of the Presidency, they vote for him. Note that Democrat Autocrat Bandwagon vote is almost non-existent. This Autocrat Bandwagon Vote is a unique phenomenon that only happens for Republicans. That is because Republican voters vote for personalities and for strongmen while Democratic voters vote for issues. Below are the numbers. Bush got 11.5 million more to vote for him from 2000 to 2004. Reagan got 10.5 million more from 1980 to 1984. Nixon got 15.3 million more from 1968 to 1972. By comparison, Obama lost -3.5 million voters while Clinton added only 2.4 million. On average, Republicans gain 12.5 million from the 1st term to the 2nd term while Democrats lose about half a million voters.
In that light, Trump increasing turnout by 10 million should NOT really be considered a surprise. Trump got 63 million in 2016 and is on track for about 73 million in 2020. That is actually slightly less than the GOP average. If anything, Trump’s turnout is worse than Bush, Reagan and Nixon at this point. Trump is the worst incumbent getter of them all. Not a surprise given his divisive and toxic personality. I am excluding George HW Bush from this study because he lost 20 million Republican votes to Ross Perot in 1992.
Unfortunately, this does not bode well for Republicans going forward. After Nixon and Reagan turned out their Autocrat Bandwagon Vote in 1972 and 1984, down ballot Republicans didn’t manage to galvanize it in following years and Democrats won in Senate and Congressional races. The Autocrat Bandwagon Vote only shows up for Republican Presidents because Republican voters like autocrats with absolute power. It doesn’t show up for Senators and it sure as heck doesn’t show up for Congressmen. Absent the strong autocratic personality (“Volcanic Protector Man”), Republican voters don’t care. That is a huge problem for Republicans over the next 4-5 years in Congressional and Senatorial races.
One of the subs asked me to discuss how I went from being pro-Trump to anti-Trump over the past 4 years. To explain my transformation, let’s do a little Government 101 class first.
In a civilized country, there is a conflict in how different citizens would solve particular problems (these are called “issues”). Groups of citizens then organize to suggest how these “issues” need to be solved. These issue-based organizations (“political groups” or “political constituencies”) team up in larger groups (“political parties”) in order to get elected and resolve the issues in their favor by using the “authority” of government. The government has “authority” because it has the “consent” of the people. Once in power, political parties can resolve a lot of issues in their favor. This is called “power projection”. Some issues can be resolved even against the consent of the super-majority of the citizenry – this is called “policy overreach”. Political parties tend to lose power if they abuse their power projection too much and overreach on too many issues and force the citizenry to change who is in power to realign issue resolution back to the popular will. That happens in all kinds of governments – democracies, republics, autocracies, monarchies or theocracies. “We The People” get what they want one way or another.
To understand my views on Trump, one has to first understand my stances on various “issues”. I happen to be a Christian conservative (I am an Eastern Orthodox, not a Protestant or Catholic) and I think 3rd term Abortion needs to be outlawed (partial repeal of Rove-Wade). If a child can survive outside the mother’s womb, I don’t think it should be legal to kill it unless it saves the mother’s life. While I understand the practical needs for marriage equality and that people can happen to be gay, I don’t think the society needs to promote gender switching for a slew of practical reasons – competition leagues, medical reasons, societal costs, loss of productivity due to mental illness, etc. Boys in girl’s bathrooms makes no sense to me or to the women in my household. So I am a social conservative.
I am also an economic protectionist. I think America gets a lot of things right on the economy, however since the Clinton era I think the US economy has become too liberalized, too globalized and that extra degree of liberalization is hurting the country’s economy and the economic prospects of many fellow Americans. Globalization needs to be regulated because outsourcing has resulted in the depopulation and de-industrialization of Midwest and the permanent unemployment of 40 million people (a country the size of Romania). I also think there is NOT enough redistribution. The rewards of the economy go to too few people because of automation, network effects and outsourcing and there isn’t enough resources available to the rest to maximize overall economic performance and happiness.
In addition, I think US government provides too few services to the American people for the taxes that we pay. Over the past 30 years, the internet has liberalized the US economy from the dominant “capital/labor” paradigm of the post-WW2 years. Most services in the US today like health insurance and unemployment insurance are built with that “capital/labor” model in mind. Health care and unemployment insurance is provided only if you work in a big company. If you get laid off, the government then pays you for a minimum existence and bad health care. We now have over 50 million contractors/small businesses that don’t work for a big corporation or participate in a big labor union. Those people are priced out of health care insurance whose premiums can only be paid by profits made by big corporations. The businesses of those small business people are also very cyclical and the current unemployment insurance paradigm doesn’t provide any economic security for them. These people also don’t pay in or accrue Social Security retirement benefits like regular workers. Generally speaking, I am not a small government person, I think the US government needs to deliver more goods for the size it has. The US government needs to be more efficient in delivery of public services and needs to deliver more of them. In other words, I don’t want less for less, I want more for same. I am distinctly different from libertarians and your rank-and-file Tea Party Republicans who want a Jeffersonian small government. Nor am I a socialist since I still think the private sector should be the biggest sector of the economy. However, I think the private sector is vulnerable to monopolism due to automation, network effects and outsourcing which in turn hurts the economic dynamism of the economy. Ultimately, I think the government sector needs to provide viable options to private sector monopolies even if not with the same extensive feature sets. The contractor/citizen population that is not locked in the capital/labor paradigm needs to be able to choose between expensive feature-rich private sector options and cheaper feature-poor public sector options. I think there needs to be cheaper public-option health care, cheaper public banking and a whole host of other government services. Government can operate at scale and derive efficiency of scale that no private sector entity can.
Trump’s political constituencies in 2016 were American ethno-nationalists, white nationalists, celebrity groupies, libertarians (small government people), pro-business groups (financial advisors and businessmen), isolationists (no wars abroad), pro-gun groups, Christian conservatives and economic protectionists (anti-globalists/free market people). I voted for Trump because of his social conservatism and economic protectionism. I aligned with him on a couple of issues I felt strongly about. I also thought Trump’s background as a businessman will result in more efficiency in government and thus delivery more government goods for the same taxes paid.
Trump turned out to be a disappointment on almost all issues with the notable exception of social conservatism.
The first issue is he didn’t want to make the government deliver more goods for the same amount of taxes, he just wanted to cut taxes and regulations and just make the government smaller. In this respect, Trump is a standard issue libertarian. He has a different understanding of the word “efficiency”. And frankly, he misled us. That was a broken campaign promise. The “Better Way” GOP tax plan in 2016 was revenue neutral. It taxed Chinese production (or consumption of Chinese goods) via BAT (Border Adjusted Tax) to finance a lower marginal tax rate for Americans. Instead Trump capped the SALT deduction which is basically hiking the property tax rate for suburban homeowners. So instead of taxing consumption of foreign production to finance a corporate tax cut, they taxed property to finance a corporate tax cut. I find this absurd. As a conservative, this is the most ridiculous thing ever. The interests of Globalists and foreign governments overrode domestic American constituencies. I couldn’t believe the “conservatives” in America would pass such a change in the tax code. It’s one of the worst examples of “policy overreach” I have seen. So that right there led to a big disillusionment with Trump and his Republican Party.
The 2nd issue was the regulation of globalization or the China trade war. While I think the US needs to be more protectionist, Trump talked a lot but did nothing. The US trade deficit with China increased under Trump. He put tariffs on goods that didn’t matter to anybody. Ultimately, he didn’t force insourcing instead simply choosing to make China weaker and force outsourcing out of China to Vietnam, India Mexico and other low cost locations. I am not a China hater, I simply want the US to protect the jobs inside its jurisdiction. Trump had no interest in that beyond the demagoguery that would get him votes. Despite all his propaganda to the contrary, Trump is all talk, no action on trade and outsourcing. Trump promised trade interventionism, but he didn’t really do it.
The 3rd issue was what led to his impeachment – using the levers of power to prosecute political opponents – in this case Biden. This is, after all, the reason why Nixon was forced to resign. Trump openly wants to jail Biden. He wanted to put Hillary in jail, now Biden, next Obama. Where does it end? He not only did that, but also started sending the American military against US citizens and politicized the Department of Justice in a way we have never seen in America. That’s just a total no-no for me. Any use of government power to stile political opposition, I don’t like.
The 4th issue is his stock market peg. I simply find it ridiculous that Trump artificially inflated a stock market bubble in order to bribe Americans to reelect him. He spent $6 trillion between Fed balance sheet expansion and budget deficit expansion this year to do that. That is one very expensive reelection campaign. This is a bubble of Dot Com era proportions. It is a complete absurdity. And just like the 2000 bubble hurt the economy for a decade, so will this one. I still believe in markets and price discovery but I think the US government should just let markets work themselves out. Rigging the indicator of the economy to paint a false picture is Autocracy 101. Trump’s stock market interventionism is a total no-no for me.
And finally the 5th issue is the mishandling of the COVID pandemic. Public health is one of the main jobs of government. Without public health you end up with a bad economy very quickly. We now have tens of millions of unemployed and a smaller economy and it will be a while before the economy gets back to its former size. Big sectors like entertainment, travel and restaurants are all wrecked. Trump doesn’t seem to think that health is something the government should provide and that is why he doesn’t involve the US government in the public health efforts. That in turn has the US with 20% of the world’s deaths despite having only 5% of the world’s population. In every way possible, his handling of the pandemic is a debacle and we need a President who will reverse course on this issue. The private sector can’t ensure public health. It is not its job to do that. Trump lack of understanding of health care is why “his” health plan in 2017 failed. He didn’t know what he was doing at all. One of the main issues that America needs to address next is come up with a public health care option for its large population of small businessmen, contractors and part-time workers. We have 50 years of private sector health care and it is clearly not up to the task of providing health care to that population. And we need to lower drug prices.
All in all, I was excited about voting for Trump in 2016 but I was quickly disappointed by him on many issues. He engaged in egregious policy overreach on many other issues. His Presidency revealed his lack of professionalism and competence in 2017. Trump didn’t stop his descent in 2018 and 2019 and ultimately he became the worst President in US history in 2020 with the pandemic screwup. And currently he is still digging. He never reached rock bottom. At this point, anybody else would be better. By now I would have rather voted for Hillary in 2016 than Trump. I am not one to regret my decisions often but I certainly have regretted that one.
I often think of an alternate world, one in which Trump passed the Border Adjusted Tax in 2017 and where the outsourcing issue gets resolved naturally without singling out, aggravating and humiliating China. There is no COVID then. The Midwest sees revitalization. I think of a world where Trump came up with some form of public-option health care or just any viable alternative to Obamacare’s private sector debacle for the freelancer population. I think of a world where the monopsony powers of Big Tech are regulated and that in turns results in great economy dynamism and much bigger corporate formation. Instead, we have an “animal spirts” economy of gamblers who sit around and do nothing but day trade 5 stocks because the economy is closed due to a virus and because there are only 5 viable business models due to massive corporate concentration since government regulation is absent. We have a smaller economy because Trump embarrassed China so badly that they sent us virus. Make no mistake about it, this virus is Trump’s fault and his ridiculous Art-of-the-Deal approach of maximum humiliation of his opponents (in order to “soften” them). That might be an approach that works in business, but not between nation states. Diplomacy is very important and necessary. All of Trump’s bad economic policies got exacerbated by a disastrous foreign policy. Even the easiest monetary and fiscal policy ever and $10 trillion more in debt in just 4 years can’t rescue us from this debacle now. It didn’t have to be this way, but it is. And that’s why the Trump Presidency is ending.