Category Archives: digital currency

Cruz Champions Sound Money

By Barry Elias | Thursday, 03 Dec 2015 11:05 PM

The primary function of the Federal Reserve should be to stabilize the U.S. Dollar.

This view has been voiced recently by former Federal Reserve Chairman Paul Volcker and 2016 republican presidential candidate Senator Ted Cruz from Texas.

By stabilizing the dollar, real income for the masses will once again increase tremendously, thereby reversing a 40-year trend of income stagnation for the bottom 90 percent (the striving majority), according to Put Growth First, an organization that advocates for pro-growth monetary stability and supply side tax reform, and has provided advice to the several 2016 republican presidential candidates, including Senator Ted Cruz of Texas.

(Disclosure: I am an economic advisor to Put Growth First.)

Annual inflation-adjusted GDP growth from 1790 to 1971 averaged nearly 4 percent.

However, since 1971 – the advent of the floating paper dollar backed only by empty political promises, but no real intrinsic value – yearly growth slid to 2.8 percent, and since 2000, it fell further to 1.7 percent per annum.

Moreover, the future prospects are dismal: the Congressional Budget Office and Social Security Trustees now project real economic growth of slightly more than 2 percent.

From 1948 through 1971, the bottom 90 percent experienced a cumulative rise in real income of 85 percent according to the 2012 World Income Database.

Why was this happening?

During this time, the value of the dollar was stable and the Fed did not employ a single labor market variable on its dashboard of indicators. It was up to business to invest so productivity kept pace with wage growth.

A stable dollar permitted more stable material costs for businesses and less demand for expensive financial hedging.

This allowed capital to flow toward more productive investments that generated employment and income for the many – instead of exotic financial products that tend to rely on arbitrage and speculation that extract equity rather than enhance wealth.

The result was faster economic growth. And, despite strong income growth for the striving majority, business profits relative to GDP remained strong and steady.

The situation changed drastically in 1971 when the U.S. dollar lost its intrinsic value anchor and began floating. Since then, real income for the bottom 90 percent (the striving majority) stagnated while that for the top 10 percent grew an additional 140 percent.

Lost economic activity due to the lower growth rate since 1971 totals $104 trillion: $75 trillion since 2000 and nearly $9.2 trillion in 2013 alone. The total inflation-adjusted cost of all U.S. military wars is $7.7 trillion, according to the Congressional Research Service and Stephen Daggett, a specialist in Defense Policy and Budgets. In other words, stagnation has caused more destruction than all wars combined.

Had the 1948-1971 trend for real income of the striving majority continued, the bottom 90 percent would be earning 2½ times more than they do now. If income for the striving majority was 2½ times greater today, how many of our current problems would still be problems?

What happened?

Since the dollar was no longer stable, the Fed surreptitiously began targeting wage growth as an indicator of inflation that needed to be curtailed.

This is because inflation was redefined to mean an increase in a price index rather than a decline in the value of the dollar. To keep the index from going up, they have raised interest rates every time we’ve had decent wage growth in the last 30 years. This squelched the growth along with wages and employment opportunities, causing volatile business cycles and stagnation.

This theory was promoted in the 1970’s, which suggested there was a tradeoff between unemployment and money wage inflation as depicted in the Phillips Curve.

However, empirical evidence has contradicted this model over several decades and it has become more apparent that inflation is a function of the supply and velocity of money relative to the total quantity of goods and services provided in the general economy.

Also, the Fed was given a dual mandate by Congress in the late 1970s, to minimize and stabilize unemployment in addition to inflation. Unfortunately, the Fed lacks proper tools to deal with unemployment, since it involves fiscal policy to a large degree.

In essence, the Fed was acting in a reactionary manner, since inflation and unemployment are lagging indicators, have subjective measurements and are constantly revised.

Moreover, the policy intervention has lag built into it; by the time it became operational, the underlying conditions that were being addressed may have changed. Therefore, too often we were treating the wrong problem with the wrong solution at the wrong time, causing severe business cycle volatility.

During Senate testimony, Janet Yellen (now Federal Reserve Chairwoman) said, “A key lesson of the 1970s is the critical importance of maintaining well-anchored inflation expectations so that a wage-price spiral like we saw back then does not break out again.”

There have been numerous times that Yellen has referenced strong labor market conditions as a potential source of inflation, which the Fed needs to keep in check – primarily via increased interest rates.

However, the goal of the Fed should be to maintain the stability of the dollar as a unit of measure, and not guided by fiscal parameters, such as wage levels, that the Federal Reserve Bank has little control over.

Partially backing credit and currency formation with the production of real assets, such as gold, silver and virtual currencies using market-driven pricing, would couple money supply growth with the productive use of resources, including land, labor, and capital, and lead to more productive investment of that credit. In addition, business borrowing will be predicated on well-developed ideas that have greater likelihood of being executed effectively.

As a result, the increase in money supply will be absorbed by money demand in a more timely and complete manner, thereby maintaining a stable and predictable value of the U.S. Dollar – a requisite frame of reference, since all economic activity is based on its value.

Real time, market based prices of commodities, foreign currencies and future investment opportunities (bond yields) provide better signals for altering the money supply. The market would set interest rates and determine the money supply, which would require much less monetary intervention by the Federal Reserve.

In fact, it is advantageous for wages to rise so long as they are met with commensurate gains in productivity.

This will ensure cost-effective unit production and strong purchasing power, where unit wage increases tend to be small, stable and roughly equivalent to unit commodity price increases over similar time frames.

Predicating credit creation on the production of real assets will help ensure strong productivity gains in the future, thereby creating an environment ripe for employment, economic growth, moderate and stable inflation, and strong and stable purchasing power.

Direct domestic investment has been weak over the past few decades as a result of this misguided monetary policy. This is the worst economic recovery precisely because this is the worst recovery in business investment.

A volatile dollar inhibits business investment. Business investment acts as the fuel for the train engine that drives economic growth. Consumption is the caboose that follows: it does not push the train. One only consumes what has already been produced.

Currently, Put Growth First is actively working with members of Congress, including the House Freedom Caucus led by Rep. Jim Jordan, R-Ohio, and will soon launch a Growth Task Force with input from caucus members such as Rep. David Schweikert, R – Arizona.

Put Growth First has also been involved in helping to advance House of Representatives bill 1176 in the previous 113th Congress, sponsored by Rep. Kevin Brady, R.-Texas, that would establish a Centennial Monetary Commission to examine United States monetary policy, evaluate alternative monetary regimes, and recommend a course of monetary policy going forward. It was reintroduced to the House of Representatives on June 25, 2015, as H.R. 2912: Centennial Monetary Commission Act of 2015.

Senator Cruz is right to promote a stable U.S. Dollar, which is backed by real assets that are produced with an efficient use of limited resources.

It will increase business investment, productivity, income and purchasing power over the long term for the masses.

It is important to couple this sound monetary policy with a pro-growth tax reform plan to ensure optimal results.  I will elaborate on my tax proposal in the following column.

© 2015 Newsmax Finance. All rights reserved.

Bankers Battle Banks

By Barry Elias | Friday, 09 Oct 2015 07:27 AM

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Bank profit margins are expected to decline at an accelerating pace over the next five years as bankers team up with technology firms to provide more cost-effective products and services.

Technological competition is expected to reduce profits from non-mortgage retail lending, such as car loans and credit cards, by 60 percent and revenues by 40 percent over the next ten years. Profits and revenues for mortgages, wealth management, small and medium-sized lending, and payments processing are also slated to fall between 35 and 10 percent, and earnings on some financial products may decline by nearly two-thirds, according to McKinsey & Company, a global management consulting firm.

Technology firms are focusing on the most lucrative segments of bank portfolios, especially those that involve customer relations. This will return banks to their roots as a utility: one that manages balance sheet assets and liabilities. McKinsey says banks generated $1.75 trillion of revenues in 2014 from origination and sales activities, earning a 22 percent return on equity, compared with $2.1 trillion of revenue and only a 6 percent return on equity for managing balance sheet net interest.

McKinsey calculates banks earned a record $1 trillion last year with a 9.5 percent return on equity. Nearly two-thirds of banks in developed markets and a third of those in emerging markets earned a return on equity below the cost of equity, causing their equity prices to fall below book value.

McKinsey expects this rate of return to plummet rapidly as bankers continue to enter technological finance as advisors, investors, board members, and company executives, such as former JP Morgan executive Blythe Masters, who is the current Chief Executive Officer of Digital Asset Holdings, a start-up that provides ledger and settlement services for digital and mainstream assets.

Thirteen more banks are now collaborating with R3CEV, a New York based start-up to develop a private, distributed ledger system for financial institutions, bringing the total to twenty-two financial institutions. In contrast, the bitcoin blockchain platform permits access to all and is secured by a digital token.

These 13 banks are: Citigroup, Bank of America, Morgan Stanley, HSBC, Bank of New York Mellon, Deutsche Bank, Mitsubishi UFJ Financial Group, Commerzbank, National Australia Bank, Royal Bank of Canada, SEB, Société Générale and Toronto-Dominion Bank.

Nasdaq is also using the blockchain to set up a private share trading platform with Chain, a start-up that has received funding from Nasdaq, Citi Ventures and Visa.

The bitcoin blockchain methodology ensures more timely, efficient, cost-effective and secure asset ownership transfer. This will be especially useful for the syndicated loan market, where settlement can take 20 or more days to finalize.

The New York State Department of Financial Services recently approved two firms to operate Bitcoin exchanges: Gemini, founded by Cameron and Tyler Winkelvoss, and ItBit. The Wicklevoss brothers are also working on a bitcoin-backed exchange-traded fund, which is expected to trade on the Nasdaq exchange and awaits regulatory approval.

Banks are beginning to brace for the coming seismic shifts of the financial terrain.

© 2015 Newsmax Finance. All rights reserved.

Banks Bank on Saving Billions Using Bitcoin Blockchain

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By Barry Elias | Friday, 25 Sep 2015 09:36 AM

Banks are investing millions of dollars in the development of the bitcoin blockchain technology in the hopes of saving billions of dollars down the road.

Nine investment banks are collaborating with start-up R3CEV, a New York-based group of trading and technology executives, to develop governing standards and procedures to implement a more effective and efficient settlement system for asset movements between counterparties. They have invested several millions of dollars in seed capital with R3CEV thus far for the research, experimentation and design of prototypes.

The blockchain methodology is viewed as an instant, real time update of payment ledgers in multiple locations without a single, centralized authority overseeing the process. Banks, financial exchanges, and settlement clearinghouses are exploring how to harness this technology for the automatic execution of contracts that could potentially save billions of dollars in bank operational expenditures.

The nine investment banks are Goldman Sachs, JPMorgan, Credit Suisse, Barclays, Commonwealth Bank of Australia, State Street, RBS, BBVA, and UBS. Many banks, including Barclays and UBS, are working toward their own blockchain model or partnering with other start-ups, as a way to hedge their bets and align with the best possible option in the future.

Advocates of this industry collaboration point to the successes of other ventures such as the Depository Trust Clearing Corporation, to clear trades for corporate stocks and bonds, municipal bonds, and money market instruments; the CLS, to clear funds for global currency trades; and the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global financial messaging system.

Circle Internet Financial recently became the first firm to be issued a BitLicense by the New York Department of Financial Services (DFS), permitting it to offer digital-currency services in New York. The company was founded two years ago and backed by Goldman Sachs.

The DFS said 22 firms applied for the license, including CoinSetter, Consensys, Gemini (founded by Cameron and Tyler Winklevoss), ItBit, and Symbiant, and it expects more approvals shortly.

The BitLicense was originally introduced by then- DFS Superintendent Benjamin Lawsky in January 2014. The license allows digital-currency firms to expand their services while protecting clients with anti-money-laundering compliance and cybersecurity protocols.

Circle is able to offer mobile payment services to receive, hold, and send U.S. dollars and bitcoins via text messaging that does not require conversions from one form to the other.

Circle is pursuing this same option with other currencies, such as the euro.

There seems to be no turning back from bitcoin.

© 2015 Newsmax Finance. All rights reserved.

Bankers Getting On-Board With Bitcoin Blockchain

By Barry Elias   |   Friday, 04 Sep 2015 12:50 AM

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Bankers are going bonkers for the bitcoin blockchain.

Go figure. Several years ago, the financial industry was abhorrently opposed to the introduction of bitcoin, a virtual currency that would revolutionize the way we conduct our banking business. Fearful of a massive professional upheaval, the financial cognoscenti steeled themselves in undermining this virtual currency.

Fast forward a few years, and ironically, Wall Street is now the largest proponent and investor in this space and the momentum continues to grow.

The financial industry has taken exceptional note of the possible applications of the blockchain distributed ledger methodology that underpins the bitcoin technology. Essentially, the blockchain functions as a trusted “third party” to verify the validity of a digital asset transfers. However, this third party is comprised of the entire universe of bitcoin market participants, rather than a centralized authority subject to unpredictable behavior. Digital miners independently confirm that all the ledger transactions are bona fide, for which they are compensated.

The blockchain method is now being viewed as a way to digitize any good or service so its ownership can be transferred accurately, timely, cheaply, transparently, and securely. In particular, the financial industry has its eye on utilizing this ledger system to trade currencies, public and private equities, corporate bonds, and syndicated loans.

Goldman Sachs, Santander and BBVA have invested in start-ups that focus on harnessing this technology. Citigroup and JP Morgan have been conducting internal groups to assess how best to enter this area. And Barclays would like to implement this technology to offer consumer products that are less expensive than credit cards and direct money transfers.

Bank of America and more than a dozen financial institutions have met with R3Cev to coordinate a foreign currency exchange platform using the blockchain ledger apparatus. This has huge implications, since the daily trading of foreign currencies was $5.3 trillion in April 2013, according to the September 2013 Triennial Survey of the Bank of International Settlements.

Nasdaq OMX Group has embarked on what may be the largest project in this area. It would like to use the blockchain to process privately held equity transfers. Currently, these transactions take as long as several weeks to complete. The Nasdaq Group believes this new methodology is more efficient, transparent and secure than the current techniques.

The U.S. Federal Reserve Bank and the Bank of England are also in the mix.

Further, the applications for other industries are significant, since this model provides a more effective and efficient accounting system. Governments are looking into this for more robust record keeping and the music industry sees potential in tracking and tabulating artist royalties based on internet download activity.

The consensus now among bankers is the blockchain technology is here to stay. The new question is not when it will be adopted, but how.

© 2015 Newsmax Finance. All rights reserved.

Finance Returns to Its Roots – A Utility

Over the past few decades, the financial industry grew at the expense of its clients. Technology is beginning to change this – fast.

Technological finance, such as virtual currencies, is paving the way for the financial community to return to its original mission: helping consumers and business grow, which provide employment opportunities, stimulate economic activity, and promote prosperity.

A friend, who left a hedge fund to work at a major U.S. bank, recently informed me of his disillusionment when the bank wanted him to keep the good products for the bank and give the bad products to the client: He elected to resign.

As a share of the economy, finance grew 60 percent from 4.9 percent in 1980 to 7.9 percent in 2007 prior to the financial crisis, according to Harvard Business School professors Robin Greenwood and David Scharfstein, in a recent study.

Further, more than 20 percent of all corporate profit sits with the financial industry, according to The Federal Reserve. These data exclude the high levels of compensation received by financial employees in the form of salary, stock options, healthcare, and other benefits.

Intense political lobbying and rampant insider trading have distorted the competitiveness of the financial marketplace. Algorithmic trading is based on a model of receiving proprietary information ahead of others and manipulating the market accordingly to maximize profit at the expense of economic growth for the many. Similar sentiments were echoed this week to me by a friend, who is one of the chief economists for a global financial institution.

We are now witnessing the movement of Wall Street elites into this digital space at a quickening pace.

In the mid-1980s, Daniel Masters entered the oil trading market when it was volatile, relatively illiquid and lightly regulated. He had a successful career in this sector with Shell, Philbro and JP Morgan Chase – until 2013 when slow Chinese economic growth precipitated price declines in commodities and investor outflows. (I presaged the slowdown in this piece more than four years ago.)

Daniel Masters now sees the same opportunities in the virtual currency space that he saw with oil 30 years ago. New Jersey recently approved his Global Advisors fund, which trades bitcoin using an arbitrage strategy to leverage price volatility.

Initially driven by the libertarian-tech community, which favored anonymous, cross-border transactions that eliminated much unnecessary financial intermediation, high profile financial folks are now entering this market segment, despite the recent market turmoil: the collapse of Mt. Gox, the largest trading platform of bitcoin at the time; extreme price volatility; and a large price reduction, from nearly $1,200 at its peak in November 2013 to roughly $300 today.

Lawrence Summers, former treasury secretary, and John Reed, former Citibank chief executive, are now advisory board members of Xapo, a bitcoin startup. Barry Silbert, a former investment banker and founder of SecondMarket – a provider of liquidity for restricted securities – and a prolific angel investor in the bitcoin space, recently launched the Bitcoin Investment Trust that enables investors to trade its shares on an over-the-counter marketplace, though not registered with the Securities and Exchange Commission.

Blythe Masters, former wife of Daniel Masters and former chief financial officer and head of Global Commodities at JP Morgan Chase, is now the chief executive officer at Digital Asset Holdings, a virtual currency start-up that plans on settling digital and financial assets using the bitcoin blockchain ledger technology.

She was instrumental in creating credit derivative products in the 1990s, including credit default swaps that ignited the global financial and economic collapse of the Great Recession.

Separately, Cameron and Tyler Winklevoss, who both had early involvement with Facebook, are now venture capitalists and await approval for their bitcoin exchange-traded fund.

The total market capitalization of bitcoin is slightly more than $4 billion, a pittance relative to the $5.3 trillion of daily turnover in the global foreign currency market, according to the Bank for International Settlements in 2013.

Daniel Masters suspects demand for bitcoin will continue to grow due to its convenient, low cost transaction model for small purchases that integrate more effectively and efficiently with our digital economy: a utility and opportunity unparalleled by today’s payment systems.

The key here: unlike many bitcoin aficionados, Daniel Masters believes the digital currency movement offers significant synergies to the legacy financial institutions, such as banks, and can prosper with proper transparency and regulation: views sympathetic to the financial community and government, which I, too, support.

Where I differ with Daniel Masters is the future pricing of the virtual currency market. Masters expects strong price appreciation for bitcoin. In my view, the purpose of this currency is to ensure more stable purchasing power over time. This suggests the price of bitcoin will rise commensurate with the general price level of goods and services, and offer little in terms of unearned capital appreciation.

Either way, the future is bright for bitcoin.

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