"Game Changer"

Authored by Paul Brodsky via Macro-Allocation.com,

Investors understand that asset markets are experiencing dynamic change (think ETFs), but have not yet broadly recognized that the fundamental nature of wealth itself is changing too. Before the decline of active asset management runs its course there will be an imperative to focus on active currency management. Wealth maintenance and creation demands a clear understanding of this transformation. 

Debt Tokens 

The majority of us are not as rich as we think. Our wealth is held in debt tokens or assets denominated in them with increasingly dubious prospects. Some accounting identities are in order.

Classically, an asset is something with intrinsic value that transcends time and money. It has some value no matter how or when one measures it. Only two people – a potential buyer and seller – need to value something for it to be an asset.

A currency, meanwhile, is a unit of account that provides users with a means of measuring and exchanging value. In a hypothetical barter economy, production itself is would be currency. Currencies representing saved wealth are necessary because we need to value goods, services and assets relative to each other.

Modern currencies are widely misunderstood. They are actually the product of bank system double-entry accounting – ultimately un-reserved, 100 percent faith-based obligations of centralized entities (governments, central banks or currency boards) to manufacture enough actual base money in the future (i.e., inflate) to settle all claims for money that was already created by private banks through the lending process. It is important to note that credit and credit-currencies are claims on money, not claims on assets. Depending upon how one counts, there is either 3 times (M2), 5 times (bank assets), 12 times (total credit market debt), or 25 times (total unfunded liabilities) the amount of claims on US dollars than the amount of actual US dollars in existence (base money). There are no plans to remedy this overwhelming leverage. In fact, this month the Fed is beginning to increase currency leverage again by reducing the size of its own balance sheet, which will effectively re-leverage banks by reducing bank reserves.

This state of monetary affairs is a big deal for financial asset investors. As it stands today, investors could not hypothetically exchange all assets (or liabilities) for base money, or even for credit currencies (M2), at or near current prices. To do so, banking systems would have to first create new liabilities, which in turn would dilute and diminish the purchasing power value of currencies in which assets are denominated.

To be good money, a currency must also be a store of value, meaning it also has to be an asset or be backed by an asset. In the current regime, there are no assets with quantifiable value directly associated with fiat currencies…other than the ability to tax.

The ability to tax is indeed an asset of governments, but one with greatly diminished value. In the US, fiscal year 2016 tax revenues were $3.3 trillion.1 Meanwhile, baseline government spending was about $3.4 trillion, including $1.06 trillion for Medicare and Medicaid; $910 billion for Social Security; $600 billion for non-defense discretionary spending to fund federal departments and agencies; $585 billion for the Defense Department; and $240 billion for interest on federal debt.2 These expenditures are rising faster than tax revenues and do not include truly discretionary government spending. (It seems legislators only have true discretion over how they deficit-spend.) 

While the incalculable value of assets of the United States government (including its strong military and hegemonic control over shipping lanes and bilateral trade) may exceed its currency obligations, such assets cannot be transferred to creditors (i.e., dollar holders) to satisfy obligations. Thus, from both stock (leverage) and flow (budget deficit) perspectives, the US dollar is a very poor credit in real terms. Indeed, other fiat currencies may be worse and all of them are effectively unreserved debt tokens.

The quantity of systemic liabilities – including debt-based credit and credit-currencies – has come to vastly exceed the forward real value of unencumbered assets (adjusted for necessary currency devaluation). It is not possible to net all assets against all liabilities without dramatically reducing the real purchasing power value (PPV) of assets. What does this imply for assets denominated in credit-currencies? Today’s wealth has been borrowed to such an extent that it cannot be broadly recognized in the currencies in which assets are currently denominated. Looking forward, we think the most influential input into wealth creation will be getting the underlying currency right.

If today’s currencies are, in realty, unreserved debt tokens, and assets are denominated and measured in them, then how does one value assets in real terms? Here’s three-step logic we think makes sense:

1. Take the nominal value of an asset priced in a certain currency


2. Adjust the nominal value by the implicit leverage embedded in that currency


3. Present Value the future nominal cash flows of the asset against future currency dilution

Applying this metric makes clear that assets – equity, debt, plant, equipment, labor, goodwill, whatever – priced in certain currencies may hold significantly more or less value today than similar assets priced in other currencies with similar nominal asset valuation metrics (i.e., P/Es, Price to Book, Cap Rates, etc.).

Not surprisingly, assets have taken on many of the qualities of currencies, which makes sense given that both are effectively unfunded obligations. Neither assets nor currencies can have intrinsic value. Currencies may only be valued against other currencies and assets may only be valued against other assets. Is it any wonder that financial asset markets have become places to “save” and that low-cost passive investment vehicles like ETFs are becoming the vehicles of choice? It was inevitable that today’s government-sponsored, bank-executed monetary system would eventually be disintermediated, and the shift to “saving” through passive investing in asset markets is a step in that process.

Value Exchange

What happens when value begins to be exchanged directly on the internet itself, rather than through centralized portals that sit atop it like toll booths? Block chain technology is effectively an open source triple-entry accounting system that includes all participants in the value transfer process. The combination of the technology, its applications, and its accessibility are genuinely transformative.

What will happen to the value of highly-leveraged credit-currencies relative to less leveraged or zero leveraged stores of value that arise from this transformation? What will happen to Foreign Exchange (FX) cross rates in a peer-to-peer world where nothing is foreign? What about the real value of assets?

Looking forward, a growing portion of value, regardless of what form it takes, will be exchanged peer-to-peer, and any value leftover will be stored in whichever form counterparties agree – fiat currencies, cryptocurrencies, commodity-backed currencies, maybe even direct claims for commodities, goods, services or equity.

Value Exchange (VX) rates could look something like the hypothetical table below:

Table 1: Hypothetical Value Exchange Rate (VX) Table - 2027

We should expect value to flow directly between producers and consumers of that production, rather than through public and private sector intermediaries charging them rent. Rentiers and sovereign authorities will formally embrace this brave new world – not out of a sense of altruism, but because the technology is already here and human incentives cannot be denied.


tmosley OCnStiggs Thu, 10/12/2017 - 19:44 Permalink

Neither does gold.If you claim gold has anything backing it, you are an ignoramus. "Backing" is something used to give something cheap more value than it inherently possesses. You have to be able to trade the paper for that thing at some teller window at a fixed rate. You can't trade gold for a unit of "history", or any such nonsense. It is simply money and valued according to its rarity and utility.Cryptos are the same way.

In reply to by OCnStiggs

Peak Finance tmosley Thu, 10/12/2017 - 19:55 Permalink

I want to take the "next step" but I am having a hard time wrapping my mind around what a block-chain nominal ledger would actually look like and how it would be implemented.I did a search and found several articles similar to this:https://www.finextra.com/blogposting/12870/blockchain-a-case-for-the-ge… there no real details here. No "meat" someone can post some links or a github framework or something that would be cool. 

In reply to by tmosley

tmosley Peak Finance Thu, 10/12/2017 - 20:08 Permalink

Banks and other financials like to fantasize that they aren't an outdated business model, and that they are somehow going to be able to adapt to this new technology and thus remain in business.That is a ludicrous idea.Blockchain means anyone can do anything on their own, or directly with a counterparty. Anything that needs to be publically known, or known to some set of parties that don't necessarily trust each other will use some form of this technology. For those that trust each other, like employees of the same business, just a regular ledger on an excel file will be adequate. Most of the types of tasks that (((people))) charge ridiculous sums of money to perform will be done for free or extremely cheaply via some service (likely with no employees) over the internet.Not exactly sure what kind of "meat" you are looking for, but here is a detailed technical explanation of blockchain: https://www.youtube.com/watch?v=bBC-nXj3Ng4&t=2sOne thing though: if you could imagine what this technology will look like, well, you'd be a billionaire. It hasn't been built yet. The infrastructure we have now is primitive, but improving at an exponential rate. I like exponential things that I own a set percentage of.

In reply to by Peak Finance

Peak Finance tmosley Thu, 10/12/2017 - 20:18 Permalink

Well, the "Full" ledger would be old fashioned I guess and stay the way it is for GAAP purposes.I guess you can have multiple shared sub-ledgers "on the blockchain" one for each financial relationship. Each shared ledger with it's own blockchain address. Each specific sub-ledger would be shared between you, your customer / vendor and the "third party" that would or could be a bank or a processor like coinbase.  You would end up with a ton of sub-ledgers, but who cares since all that processing / housekeeping is simple and would be automatic. No reconciliation process since everything either happens or does not happen, no waiting for shit to clear.So reconciliation is a bitch so I guess removing this from the equation and the instant transfer of assets speeds up the process quite a lot.IF I need to go from bitcoin to USD I guess this process hits a brick wall.  

In reply to by tmosley

tmosley Peak Finance Thu, 10/12/2017 - 20:36 Permalink

Such is currently handled via a Visa debit card, as I have heard. I don't have one or know much about the service, but something like that seems like a way for users to bypass the dollar entirely. Only the merchants see dollars. Those that accept BTC will have the obvious advantage of avoiding credit/debit card service fees.

In reply to by Peak Finance

Blue Steel 309 tmosley Fri, 10/13/2017 - 00:12 Permalink

crypto is nothing more than a dollar proxy at this point. It has no value without the dollar being tied to it. It is bought and sold in dollars.

It can be used to trade directly, but that is only because of the frangibility with the dollar.

There is no guarantee the crypto won't become extinct exactly when the dollar does. It has never been done before.

In other words, crypto is entirely speculative and should not be purchased with dollars you can't afford to lose.

In reply to by tmosley

JustUsChickensHere FreeShitter Fri, 10/13/2017 - 04:40 Permalink

XMR (Monero) is a good long term one as well. Still a bt rough for end users.It is already the currency of choice wherever true privacy is required. It is the only other crypto besides Bitcoin with reasonable support from merchants on the dark web. As usual, crime, corruption and porn tend to be leading indicators of some tech trends.

In reply to by FreeShitter

tmosley Rapunzal Thu, 10/12/2017 - 20:17 Permalink

Intrinsic value is not the issue here. A bottle of water is worth a ton of gold to a man dying in the desert.Though you are getting warmer with your thoughts about the cost of production.Real money can be made by ANYONE, and the most efficient producers will be able to produce said money at a profit. Bits of paper cost pennies, yet are supposed to be worth up to a hundred dollars. That is what fiat is. Unearned privilege. It will eventually return to being worth the same amount it costs to produce.Bitcoin is already worth about what it costs to produce. As is gold. That is a major part of where their value comes from, and why they are money.

In reply to by Rapunzal

jaxville tmosley Fri, 10/13/2017 - 05:10 Permalink

 So what is  bitcoin worth to a farmer when you are starving to death?  Ridiculus pretzel logic is all you have there.  Same sort of arguments were made for tulips and radio stocks in the past.   Those hyping bitcoin and similar scams imply one is a luddite if they are not buying in.  The fact is that statistically almost no transactions are settled in bitcoin.  In my community I can get fancy coffee for it or convert at over 10%.  Sure you can get stuff over the internet but why bother with the headache or the volitility when credit card settlement is much easier and still cheaper?  Don't hand me bitcoin transactions free bullshit when there is no where you can convert at par without paying a premium.  I can get organic beef, vegetables (many sources), honey, eggs and soon likely ammunition for silver.  That is in my community.  Hope you can find suckers with stuff to take your bitcoin when it really matters.

In reply to by tmosley

Dick Buttkiss Rapunzal Thu, 10/12/2017 - 20:37 Permalink

Sorry, Rapunzal, but that's the long-debunked, Marxian, labor theory of value — i.e., the value of something is a measure of the labor required to produce it, no matter what the demand for the product might be, whether at all or at some price.  No wonder, then, that you capitialized Labour and added a u, thus rendering it a political term and a decidely British one at that. 

In reply to by Rapunzal

tmosley Dick Buttkiss Thu, 10/12/2017 - 20:55 Permalink

Yes, that is where he was off. If someone develops an easier way to get gold, the supply will increase and the price will fall. Ultra-abundent energy or AGI robots/automation would both have such an effect, and both are coming sooner than most realize.Nice thing about bitcoin is that more efficient mining doesn't produce more bitcoins. It's just that the most efficient miners get the reward. This is why the price can rise despite all the money being thrown at mining. Quite genius, really.

In reply to by Dick Buttkiss

True Blue tmosley Thu, 10/12/2017 - 22:17 Permalink

Even if someone develops an easier way to mine gold, there is only so much of it to be mined. Supply/demand. Ultra abundant energy would drop the bottom out of every price and would bring unimaginable deflationary benefits to the whole planet -but it will never happen. Maybe 'never be allowed to happen' is more accurate, for manifold reasons; the very first being that a 'weapon' (from 'pointy stick' to the hydrogen bomb) is simply a machine to manipulate energy for the purpose of killing and/or destruction -can't have the 'little people' getting their hands on that in unlimited quantity, now can we? 

In reply to by tmosley

Dick Buttkiss tmosley Fri, 10/13/2017 - 00:40 Permalink

In a truly free society — one unencumbered, among other things, by government money that can be produced at essentially no cost ad infinitum — the global economy (by definition the only economy) would grow in proportion to increased productivity, and prices would fall proportionately, just as increased productivity results in falling prices in the computer elctronics industry (despite massive government interference).  Fortunately, as the global economy overall becomes computerized (digitized), digital (but non-governmental) currencies will not only assure that productivity increases as prices decrease but that prices decrease to the vanishing point and that, eventually, general abundance wil overcome the disparities of wealth and poverty.While never discussed (so far as I can tell), this is implicit in the coming technological Singularity and the wonders that will be produced in the run-up to it, to say nothing about what come after: https://futurism.com/ray-kurzweils-most-exciting-predictions-about-the-… 

In reply to by tmosley

TheEndIsNear Rapunzal Thu, 10/12/2017 - 21:44 Permalink

The labor and energy required to mine, refine, and mint gold is NOT what gives it intrinsic value. It is the UTILITY of gold, and especially silver as well as many other precious metals coupled with their scarcity that make them valuable. Silver has many industrial uses since it is the best electrical conductor there is, as does gold since it does not tarnish, and can be formed into any size or shape desired down to the atomic level. I've read that Isaac Newton made himself a pair of sunglasses by hammering gold into a very thin sheet of the desired thickness. Gold has been highly valued throughout the centuries as exemplified by ancient pharaohs having statues and death masks made from gold.

What is the usefulness or utility of a string of binary bits "in real life"? What can I manufacture with a so called crypto "coin"?

In reply to by Rapunzal

TheEndIsNear tmosley Thu, 10/12/2017 - 22:21 Permalink

But in order to make an entry in the shared ledger, a "miner" must produce a number with predetermined qualities just as prime numbers must have the predetermined quality of not being the product of two or more factors. I can see the value of a shared or distributed ledger and the distributed nature of the Internet is what makes it feasible, but a bit "coin" itself is nothing more than a binary integer of a particular form is it not?

In reply to by tmosley

JustUsChickensHere tmosley Fri, 10/13/2017 - 04:33 Permalink

Your down voters do not understand the difference between a debt token (which has a counterparty), and an unencumber bearer object (which has no counterparty)... Gold, Silver and most cryptos are bearer objects.The ratio of 5 upvotes and 15 downvotes (at the time I write this) is probably a reasonable guide to the percentage of smart people who still fail to understand the basics behind the seminal invention of mankind - money.

In reply to by tmosley