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Thursday, August 18, 2016

Everything is a pyramid scheme



What is Steemit?

Launched in March and gaining prominence in July, Steemit, a self-described "blockchain-based social media platform", has seen this level of notoriety in just its first few months of operation. To date, it has polarized blockchain experts while winning scores of newcomers to the technology.

The brain-child of Daniel Larimer, founder of BitShares, and Ned Scott, a former financial analyst, Steemit aims to provide a place for individuals to create content, promote the content they believe is good and comment on stories — all while earning money.

But Steemit is more than just a website for earning spare change.

It’s an actual blockchain built on a piece of technology developed by Larimer called Graphene, which allows for the deployment of application-specific blockchains.

Scott, in interview with CoinDesk, explained that the team only had the idea for Steemit back in January and, because of the Graphene framework, they were able to quickly roll the project out.

The rest, like most things in the blockchain space, is a bit difficult to explain...

Translation: It's a pyramid scheme.

Crypto-currencies are pure fiat, just like government legal tender, except they don't have an armed government with a legal market to back them up. They will be exchangeable for real goods and services, until they won't be. The subtext to all this: if you can't explain what you're about in one declarative sentence, you're probably a pyramid scheme.

The Twitter thread above got me thinking about this old post titled, "Storing Paco" [reminder - it's all been said on here already]:
Tyler's metaphor, his pet dog Paco, refers to the fact that savers now have to pay the banks to store their money (Paco) instead of having their money run around and play (generate positive returns). Negative interest on deposits basically transforms cash into gold, implying huge, zombie-army levels of risk, like a survivalist who incurs storage and opportunity costs in order to hoard canned beans and ammo. But the risk doesn't seem to be out there, with healthy profits and positive consumer confidence. So this implies, to Tyler, that there is some barrier to new investment. (He loses me at this point--economic stagnation? wealthy entrepeneurs cashing in their chips?)

Tyler continues: "I liked Paco (more importantly Paco liked me), but I do not enjoy living in a Paco economy. I think of the calm before the storm and wonder how to reconcile the observed calm and the potential for the storm. I do not like the most obvious attempts at reconciliation."

In other words, something really obvious should be happening to explain negative interest rates (which, as a practical matter, are economically impossible) but darned if anybody can find it.

So what is "it?" And I think I've found "it." Every person I talk to is seeing their margins squeezed. Competition is pretty brutal on an inter-connected planet of 7 billion people. This doesn't mean we're all going to die; it just means our profits are going to be ever lower. Add in a constant stream of new money, and quality trends downward and more and more people see their living standards fall, thus driving high-IQ people who want to make a lot of money into value-transference activities like Steemit instead of, say, discovering how to repair damaged neural tissue.

Thus the conundrum for the rich: there really isn't any "next big thing" left out there, and bank deposits are only insured up to $250,000, so they're storing their money in cash equivalent: government bonds. There are a lot of externalities in play as well which I won't go into. But what this also means is there is a lot of over-valued trash and the rich know it, which is why they're stockpiling cash. Note too that they are counting on the current bond issuers (the EU, the US government et al.) still being around to honor their debt obligations. Of course, the issuers are going to do this by pure money-printing but productivity and markets seem to be growing just enough that this is not a problem for the debt holders. Yet.

The system is fragile in that the over-valued trash (like Steemit) must eventually reflect the underlying fundamentals, and the government is borrowing too much. I suspect the situation will flip and the flight to real assets (land, gold, ammo, vodka) will come when it's obvious that the future mean-90 IQ peoples of the US and Europe will not and cannot repay the obligations incurred by mean-100 IQ Americans and Europeans. So good news for my fellow 52-year olds: the system has about 30 more years left in the tank.

Finally, apologies for the delayed posting. I am going to try and follow my friend the Rat-Faced Man's advice and post weekly, even if (when) the quality suffers.

10 comments:

Scott said...

They will be exchangeable for real goods and services, until they won't be.

As opposed to what else, exactly? You have just described everything from toilet paper to gold bullion.


Mostly agree with the rest, but why so down about it? It's hard to be a kleptocrat when all returns (and ergo any arbitrage) are zero. Imagine that -- having to produce value for a living... poor, poor Soros...

one word -- decentralization.

The Anti-Gnostic said...

Because they have no utility other than that they are currently accepted for real goods and services. Public fiat currency is more valuable, since it has bigger markets with laws to enforce impersonal exchange and lots of guns to back it all up. Private fiat currency has no store of value, unlike gold or toilet paper.

The down part is, the current economy must and will contract, probably by trillions. Millions will lose their livelihoods and the government safety net will disappear.

August said...

I don't see the value in this one, but Bitcoin seems to be doing well.
All of these things have to be grown in some way, because the underlying value is the network.
Most of Silicon Valley still thinks the value of a network is N squared, but I found a paper long ago suggesting it is N(log)n. There's a big difference, especially at the beginning levels. If you have ten people in a network, Silicon Valley would call it 100 and then multiply it by whatever monetary value they were applying to people. But the latter equation suggests ten people are pretty much just ten people. I value the latter equation because its output seems to track well with actual human societies.

Anyway, I think some of these currencies could grow to the point where they are basically backed by the value of the network. The way Bitcoin did it is one way. Another way might be to just back the currency until there's enough people in the network. But a lot of these newer projects don't make much sense.

The Anti-Gnostic said...

Yes. I don't disagree entirely with Scott or with you. Fiat currency is backed by all the goods and services available for exchange. The bigger, higher trust, and more resilient the network, the more valuable it is. This still puts the government's money way ahead.

But back to the larger thesis: there is really not much out there anybody can find to invest in--competition and scale have delivered the economists' dream of near-zero margins--so everybody is piling into cash or its equivalent. How sustainable is this?

August said...

It just slows to a crawl, though, as along as the banks have an unfair advantage, they will dominate. They don't lend money- they create it. When you want a loan, they don't loan you what they have, they create both an asset and a liability and let them balance each other out. Of course, the interest is their profit. Debt eventually chokes out the economy. Workers get laid off in favor of automation. The businessmen don't really notice things are getting bad until demand drops to the point where they start struggling to meet their debt payments.

Japan has been doing this for what, twenty years longer than us? Since I have had an Austrian perspective for so long, I imagine there must be a natural end to this, but I have started to worry it doesn't crack up, but goes on like a zombie.

The back to the land, off grid, local movements- the intuitive need to get out from under this nonsense.

Porter said...

Several years ago a friend asked if I'd heard of something called "Bitcoin." I said yes, but only the conceptual framework.

He described being very interested in using some spare infrastructure to stand-up a small mining operation, and asked if I would look at the numbers to offer an opinion. I told him I thought the only way mining made sense was through price appreciation, and if that was his sole investment thesis he ought to save himself the headache and just buy coins directly in the amount he was considering on capex. So he did...at $4/per. I didn't buy any.

He likes reminding me.

Scott said...

Because they have no utility other than that they are currently accepted for real goods and services.

Right, and I think you pretty much got this with the 'network' argument, but basically this is true of everything -- value is subjectively imputed, in the case of money, that means people accepting and trading in it. Which is not bitcoin -- today. But that may not always be the case. Gold worked so well in part because it was difficult to 'hack.' Right now the value of liquidity > the value of security, but that might change. I don't think it's an intrinsically bad system.

But back to the larger thesis: there is really not much out there anybody can find to invest in--competition and scale have delivered the economists' dream of near-zero margins--so everybody is piling into cash or its equivalent. How sustainable is this?

Yes, the possibility of a bad contraction, etc, and leaving people in the lurch is bad. But I'm not 100% sure it's in the cards.

Let's stop being Austrians for a moment and just think about it -- why should production go down? Really? I've seen a lot of ideas about why interest rates are so low, and I think the best I've seen is the idea that depreciation is killing things. Basically, there's so freaking much innovation right now, nobody wants to invest, because nobody has the slightest clue what the economy is going to look like in 10 years. As Austrians, we like to blame everything on monetary mismanagement, but there actually is a real economy, too. The simple fact is that despite a large monetary base, there's near zero demand for credit. (Again -- low rates, obviously.) Nobody wants to take responsibility. But that means there can't be inflation, either. So no -- low rates are not being driven by inflation, for the most part. They can't be. It's something *real.*

But depreciation 'risk' killing interest rates (supposing that actually is the answer) hints that maybe it's because so many radical new production technologies look about to go critical mass, so nobody wants to build a billion dollar auto manufacturing plant today -- that's just not going to be the economy of the future. And if that's the case, how is that not good for average people?

Let's say, in the broadest sense, production does balloon, or at least continues to go up, somehow or other. And further, that capital is abysmally cheap (as we see in interest rates today). Okay -- capital, labor, land -- who's going to get that income? Somebody has to get it, and land and capital are plentiful for the most part. That's part of the 'problem'. Yes, maybe you can't account for how everything is going to run, but again, why should production stall? I fail to see why it should. Capitalists must compete for a return on their capital, or else they won't get to be capitalists anymore. And I think the geniuses of finance see this coming -- why space? Why now? Market barriers, that's why -- the earth's gravity well. The rest of it here on the ground is becoming too much of a level playing field. Thin margins.

Further, if this is the way it's gonna be, where are you going to invest? EastAsia Inc. has pretty much proved that every additional increment of capital from here to infinity is going into permanently vacant commercial buildings and empty residential high-rises. I really don't see that panning out for them, or enticing more investment -- so by default, as bad as you might otherwise say we have it, the West is gonna get flooded with capital.

Again -- low interest rates. Good for labor.

Yes, I don't know exactly how it's gonna be, but I don't think doom and gloom is an absolute certainty. And, to be honest, I kind of like that serious issues are getting in front of people -- finally. I'm glad people have their eye on the kitty, because it's less likely to be raided that way.

The Anti-Gnostic said...

So maybe, say, Peter Thiel offers subscriptions to his Bitcoin fiefdom and provides the market and rule of rules.

That's where the great Hans-Herman Hoppe seems to think we're headed.

August said...

The rules are already hard coded. To me, the biggest problem bitcoin currently has is that most of the big players are trying to stay legit. They follow the 'know your customer' rules, and should it get popular enough, governments could look at the blockchain and figure out the transactions. In order for a new network to take over, it has to be able to keep its own profits.

It is a similar problem on the other end of the scale- how to have a good community, small town, etc...- protections must be established so that the people can cohere and produce in a way that is good for them.

So far at least, we remain exposed to exploitation, while the trend is to put us all out of business via automation. They'll practically have to give us money if they want to continue to keep this roadshow going.

Anonymous said...

Have you been reading Marx?

I'm only half joking. This is basically what Marx argues. He says that the falling rate of profit inevitably leads to the collapse of capitalism.

Negative interest rates are not only possible, they're the norm when taking into account demurrage:

https://en.wikipedia.org/wiki/Demurrage_(currency)

They often haven't been the norm though because people with money have been able to get the state to subsidize a positive interest rate by lending money to the state, which has the military force to make war and collect taxes to subsidize a basic positive interest rate. This subsidizes and raises all other interest rates in the economy, because borrowers have to offer higher rates than the basic, safest rate subsidized by the state.