Ethereum and The Distributed World Computer

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.

Smart Contracts

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.

Neocentrist Rethink of Taxation and Stimulus

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.

BROAD STIMULUS + PROGRESSIVE TAX > FLAT TAX + TARGETED STIMULUS

Let’s hope the Biden administration learns from 2020, sidelines the failed voices from the Obama years and pursues efficient and impactful neocentrist economic policies going forward.

The Dangers of America’s Confederate Resurgence

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 2^nd 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.

Republican Incumbency Vote is 12 Million

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 1^st term to the 2^nd term while Democrats lose about half a million voters.

Reelection Turnout

Popular Vote in US Elections

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.

Trump Presidency Post-Mortem

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 3^rd 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 2^nd 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 3^rd 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 4^th 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 5^th 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.