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Fed Operations Look More Like a Ponzi Scheme Than Bitcoin or Ethereum

Less discuss Ponzi scheme and the biggest one that hardly anyone sees.
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Let's Talk Ponzi

Bitcoin vs Central Bank Manipulations

I am not a crypto fan but I have commented on many occasions that it is a free market construct. 

And although some cryptos may be Ponzi schemes, neither Bitcoin nor Ethereum is in that class. 

Modern central bank operations are far removed from free market constructs. And central rate setting central bank manipulations that require lower and lower interest rates and ever-increasing amounts of debt for Peter to pay back Paul have all the hallmarks of one giant Ponzi. 

One Giant Ponzi     

That is the thought-provoking assessment of Wolfgang Münchau in his Eurointelligence column Let's talk Ponzi

Macroeconomists have been hyperventilating recently about bitcoin and other cryptocurrencies as Ponzi schemes, the original snowball investment scheme. Behind this assessment lies a combination of wishful thinking and ignorance. I would acknowledge that some of the critics understand bitcoin on a technical level. The ignorance is about why people want to use non-fiat money, and why it was created in the first place.

In his take-down of bitcoin, the Berkeley economic historian Barry Eichengreen writes that bitcoin does not fulfil the traditional functions of money: as a means of transaction, a unit of account and a store of value. This statement is technically correct, and at the same time misses the point. The time-honoured classification of the uses of money has certain categorical aesthetic to it, but it ignores that there may be other reasons for people to hold money than to transact and save. Satoshi Nakamoto, the pseudonymic author of the Bitcoin protocol, created the currency as a means of payment not subject to the control of governments. One can easily think of money laundering, or worse. But there are perfectly legitimate reasons to transact outside official channels. In oppressed countries, bitcoin might be the only source of funding for opposition politicians.

Another legitimate use is crypto-finance. The bitcoin protocol is not suited for that. But Ethereum is, and it may end up as the more successful of the two big crypto platforms. Its cryptocurrency, the ether, mainly serves the purpose of acting as a transaction currency for the Ethereum network, rather than in its own right.

Crypto-finance has the highly desirable property that it eats into the oligopoly profits of the financial sector. Crypto has the promise to cut out the financial middleman. The fact that the price of bitcoin is volatile in dollar terms makes bitcoin a speculative asset, whose value may well crash at some point. But that does not make it a Ponzi scheme. The bitcoin protocol has been operational without interruption since 2009.

What I think will happen is that the old world and the new world will coexist. A good analogy is the media industry. Radio did not kill newspapers, just as television didn’t kill radio. The internet brought change to the media industry. But it did so not by killing it but taking away the oligopoly profits: the fabled licence to print money.

This is literally what will happen to the central banks. They for sure have a licence to print money. Crypto takes away the ability to abuse that privilege, for example by creating inflation. Crypto may not have all the characteristics of money, but it has some of them. It also has some of the characteristics of gold.

It is conceivable, too, that modern central banking has more characteristics of a Ponzi game than crypto-currencies. For example, central banks may not be able to offload their asset purchases because of fiscal dominance. While I can think of hypothetical events that could do real damage to the euro, I am really struggling to think of a scenario that would trigger the collapse of bitcoin or ether.

Most likely, the two will coexist. The future of fiat money will be similar to that of printed newspapers today. They are definitely past their glory days. Central banking will become less glamorous. And their power to create inflation will be vastly diminished.

And this brings us to the real reason why economists are hyperventilating. The crypto community hates them. There are no jobs for economists in that area. There are no monetary policy committees in the bitcoin world. There are no Davos meetings where they can mingle with the rich. And the only papers that get written are by people who are anonymous.

Amazingly Well Stated

I corrected some typos in which Münchau multiple time misspelled Ethereum. 

Nitpicking aside, Münchau let's cut to the chase. Bitcoin isn't a store of value but central bank manipulations and instance on inflation prove the dollar isn't.

When Nixon ended convertibility of gold, all fiat currencies began looking more like Ponzi schemes than anything else. 

The Fed has a dual mandate of price stability and full employment.

Consumer Credit

Consumer Credit Billions Seasonally Adjusted 2021-11

Does that look stable? At what interest rate can that debt be paid back?

Housing Prices

CS National Top 10 Metro CPI OER INDEX 2021-10

Does that look stable?

Hell no, and the Fed does not even call that inflation!

Rising home prices benefit the banks, the wealthy, and the asset holders. Those on the outside have a very hard time getting in. 

When they finally do, it's usually at the wrong time. That's what happened in 2006 and 2007. It took NINJA loans (No Income, No Job, No Assets) to keep the Ponzi going.

But Ponzi schemes inevitably burst when the customers run out.  

Price Stability 

Price Stability at 2% Inflation

The Fed defines price stability as 2% increases in prices every year from now until eternity. 

That does not look stable to me.  Moreover, the Fed ignores assets in its definitions of inflation and stable.

Price Stability at 2%, 4%, 6% Inflation

Price Stability at 2%, 4%, 6% Inflation

Home prices are following that 6% path if not more. But the Fed does not call that inflation.

Reader Shares Fascinating Household Expense Data, the Same House for 80 Years!

Annual Expenses for the Same House for 80 Years

On Saturday I posted Reader Shares Fascinating Household Expense Data, the Same House for 80 Years!

Reader Holly just sold a house for $860,000 as a teardown that he grandfather paid $3,000 for. The house was in bad shape and needed hundreds of thousands of dollars of repairs.

The post elicited a couple of replies


I beg to differ. But yes, this is how compounding works. The house went up about 7.2% per year. 

Scroll to Continue


Wages most assuredly did not go up 7.2% a year. 

To make it seem to work, the Fed has had to drop interest rates on houses to record low prices. 

The concern about a deflationary spiral shows economic ignorance. 

Historical Perspective on CPI Deflations: How Damaging are They?

A BIS Study show routine price deflation is a benefit. Central banks have not caught on.

For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

Historical Perspective On CPI Deflations

In its March 2015 report, the BIS took a look at the Costs of Deflations: A Historical Perspective. Here are the key findings.

Concerns about deflation – falling prices of goods and services – are rooted in the view that it is very costly. We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.

Once we control for persistent asset price deflations and country-specific average changes in growth rates over the sample periods, persistent goods and services (CPI ) deflations do not appear to be linked in a statistically significant way with slower growth even in the interwar period
. They are uniformly statistically insignificant except for the first post-peak year during the postwar era – where, however, deflation appears to usher in stronger output growth. By contrast, the link of both property and equity price deflations with output growth is always the expected one, and is consistently statistically significant.

The exception to the general rule was the Great Depression but, that was also an asset bubble deflation coupled with consumer price deflation.

When asset bubbles burst, and they always do eventually, deflation problems kick in. 

Meanwhile, David Cervantes would be concerned if prices were not going up. That's nice, especially when you depend on financial bubbles and asset inflation, damn the consequences. 

Back to Crypto 

With Ponzi financing now out of the way, let's return to a couple of statements made by Münchau.

  1.  I am really struggling to think of a scenario that would trigger the collapse of bitcoin or ether.
  2. The future of fiat money will be similar to that of printed newspapers today. They are definitely past their glory days. Central banking will become less glamorous. And their power to create inflation will be vastly diminished.

Regarding point one, Münchau isn't thinking hard enough.

Bitcoin Supporters Cannot Answer One Simple Question

What would happen to the price of Bitcoin if the US did not allow merchants and banks to make Bitcoin transactions?

The question inevitably gets nonsensical responses like "It's Impossible".  While it's true Bitcoin is decentralized, getting money into or out of it isn't.

Q: If governments banned financial transactions in Bitcoin, how do you get money in nor out? 
A: You can't! No bank will accept Bitcoin. No merchants will accept Bitcoin. 

You have your Bitcoin, no one can take it. Mining does not stop. But all you can do with it is barter. In essence, it becomes worthless. 

My position is not remotely debatable. The only aspect that is debatable is whether governments would ever be threatened enough by it to do such a thing. 

It is that threat that has kept me out of Bitcoin. 

Regarding point 2,Central Banks certainly can cause inflation. Nothing stops negative rates or even expiring money.

And the nuclear option comes if they are ever threatened enough by cryptos. All they have to do is ban financial transactions in them. 

Nonfinancial, record transactions still have a use, but the crypto would have zero use as money. 

Praise and Pans

Thanks to Münchau for an exceptional article. Thanks to the BIS for an accurate assessment of deflation. 

Negative thanks to the Fed for Ponzi schemes, ignoring assets bubbles, and absurd measures of price stability.

Four Related ideas

  1. The Homeownership Dreams of Zoomers and Millennials Shattered by Prices
  2. Every Measure of Real Interest Rates Shows the Fed is Out of Control.
  3. Real Hourly Wages Have Risen Less Than a Penny a Year Since 1973
  4. The Fed Expects 6 Rate Hikes By End of 2023 - I Don't and You Shouldn't Either

The Fed is truly out of control and has been for a long time. But those who like financial bubbles and depend on them for a living are cheering for still more.

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