Posts

Showing posts from July, 2017

Bitcoin and bimetallism

Image
I wrote a piece on Forbes recently in which I described a bimetallic system of coinage and suggested how such a system might work - or rather, fail to work - for Bitcoin. These are the relevant paragraphs:
In a bimetallic system, there are effectively two currencies which are linked by a fixed exchange rate set by fiat. At the end of the 19th century - the time of Bryan's speech - Britain's copper penny was worth 1/144 of one pound. Other denominations of coin were created by multiplying up the penny: so the silver sixpence was unsurprisingly worth six copper pennies, and the silver shilling was worth twelve pennies, or 1/20 of a pound. All these relationships were fixed by fiat. So, suppose that instead of using bitcoin as the medium of exchange, we use some other coin - let's call it "satoshi". We decide that this other coin is worth 1/100m of 1 bitcoin. Of course, in the Bitcoin system, there is no government "fiat": the nearest they have to this ap…

Crypto-tulips

Image
Here is a very familiar financial bubble, in pictorial form:


And this is what it looks like, charted:



In those days, of course, tulips at least had to be able to flower. But things have changed since then.

There are three key stages in the lifecycle of a financial bubble:

The "Free Lunch" period. A long, slow buildup of price distortion, during which investors convince themselves that rising prices are entirely justified by fundamentals, even though it is apparent to (rational) observers that they are buying castles built on sand.The "This is nuts, when's the crash?" period. Everyone knows prices are far out of line with fundamentals, but they carry on buying in the irrational belief they can get out before the crash they all know is coming. Speculators pile in, hoping to make a quick profit. Prices spike. The "Every man for himself" period (sorry, FT, I couldn't find a reference for this one). Prices crash as everyone runs for the exit. This can h…

Asymmetric herding

Image
Ten years ago today, Chuck Prince, then chief executive of Citigroup, dismissed fears of a financial crisis. “When the music stops, in terms of liquidity, things will be complicated," he said in an interview with the Financial Times in Japan. "But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

He wasn't dancing for long. Less than a month later, the first bank failed. Over the weekend of 27th-29th July, IKB Deutsche Industriebank AG, one of Germany's key "Mittelstand" lenders, was bailed out by a consortium of German banks after credit markets refused to provide it with liquidity. The music had stopped. 
The reasons for IKB's failure are now all too familiar. Anxious to diversify beyond its traditional core market of German small and medium-size businesses, IKB had set up an SPV called Rhineland Funding Capital Corporation. Rhineland issued US dollar-denominated commercial paper, and invested the proceeds in…

The Worst Political Storm In Years

Image
A year ago, I attempted to look beyond the shock of the Brexit vote and its associated economic disruption, and see into the distant future. I saw a completely different political paradigm, though I could not discern its shape. And I saw a possibility that, like Hong Kong in 1997, the fears of economic disaster would prove baseless, and Britain would have a bright future, though one which I could not imagine. I called on everyone to try to make Brexit work:
Not for a long time has the future been so uncertain. In the short-term, there will be pain. But in the longer-term, the future could be exciting. I did not vote for this, but this is what my compatriots chose, and I accept their decision. So this is what we - collectively - have chosen. Now we must embrace it, fully. For only by committing to our post-Brexit world can we have any hope of making it work. While we hanker after the past, and try to find ways of hanging on to it, we remain condemned to a stagnant future. Risk is life…