Tag Archives: public policy

Bankers Getting On-Board With Bitcoin Blockchain

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


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.

The End of Federal Taxation as We Know It

By Barry Elias

The way we tax is obsolete.

It’s safe to say, in the century since the federal income tax was instated, the system has become broken.  The complex, voluminous tax code (included in the 70,000+ page CCH Standard Federal Tax Reporter) needs a revolutionary overhaul.

The current system doesn’t raise nearly enough money, social security is nearing insolvency, the administrative cost is exorbitant, and economic growth is actually impeded.

The purpose of the federal tax is to collect enough revenues to foot the government’s annual expenditures: nearly $3.5 trillion in fiscal year 2013.  Last year we only collected $2.8 trillion. The shortfall must be borrowed, and we pay interest on that debt.

Furthermore, we forgo tax revenue due to deductions, exclusions and other preferential tax treatments.  Last year alone, that amounted to $1 trillion. New types of transactions have spawned an underground economy that is valued at close to $2 trillion per annum, which goes completely unreported. Consider teenage babysitters, sales on eBay, the room above your garage that you rent to a college student, domestic help, sales of Bitcoin, lemonade stands, illegal drug deals….the list is endless.

We estimate an annual loss of $400 billion of tax revenue. In addition, Social Security taxes are only collected on the first $117,000 of earned income. The professional athlete earning $10 million, for example, pays no Social Security tax on nearly 99% of his pay.

To make matters worse, complying with the current arcane system (that looms as a nuisance on our calendars in the months leading up to April 15) has a hidden cost approaching $1 trillion annually. This includes tax preparation; advisers, attorneys and lobbyists; IRS agents; plus the time spent by all parties involved.  Nearly 6 billion hours are invested in this activity each year.

There’s also a negative environmental impact from cutting down forests to print forms, instruction manuals, etc. Tax compliance actually impedes economic growth. We can use those 6 billion hours more productively to grow the economy. Our focus should shift towards making value-added goods and services at more competitive prices.

To summarize, lost revenue and the cost to comply with the current federal tax system probably exceed $2.5 trillion. This is a big problem!

Big problems have been tackled at other times in our history. At the dawn of the 20th century, when the NY Central Railroad was forced to convert  from steam locomotive to electric trains, the $70 million cost nearly matched their $80 million of annual revenues. Nevertheless, management figured out a way to lay new tracks underground, while the railroad continued to operate. Incidentally, this investment created a huge, unexpected economic boom. As it turned out, Park Avenue was built over the tracks, permitting air rights to be leased to developers.

Herculean problems call for out-of-the-box measures. Our solution to the current tax conundrum is streamlined and elegant.  Instead of focusing on income, we propose capturing two flows:  money saved and money spent.

Revenues can be generated from both.  We believe that savings should be assessed at a lower rate than consumption, since a dollar saved generates more jobs and income for society than a dollar spent.

Savings in the form of cash deposits, bonds and equities total nearly $67 trillion (and that doesn’t include the $2 trillion underground economy).  Instead of reporting dividends, interest and capital gains, financial institutions would report an average of the total financial assets on hand over the course of the year. We assume that most people will not stash their cash under their mattress, as they would forgo a return on their money (and because it’s not safe).

Americans consume $11.8 trillion annually in goods and services, as reported by the Bureau of Economic Analysis.  We believe the consumption of essential products and services – such as food, housing, healthcare and education – should be assessed at a lower rate than luxury items (e.g. the purchase of a loaf of bread would be assessed at a lower rate than a yacht).

Here’s one example of how our method might work. We would assess $11.8 trillion in consumption at an average rate of 13.5 percent (less for essentials; more for luxury items), generating $1.6 trillion. We’d also assess $69 trillion of savings at 2.75 percent, generating $1.9 trillion. Together, $3.5 trillion would balance the federal budget.

Our plan eliminates all federal taxes: income, social security, Medicare, capital gains, dividends, interest, inheritance, and corporate profits. Existing social programs will remain in place, including social security, Medicare, and welfare.

We believe our plan will have mass appeal.

The poorest will no longer pay 15 percent for social security and Medicare. Instead they’ll pay 2.75 percent on their savings and a small percentage on essential purchases.

The wealthy would no longer pay any of the above mentioned federal taxes. Expenditures on estate planning would be negligible. Wealth will be preserved, since the average annual return on investment will most likely exceed 2.75 percent.

The middle class would benefit from all of these proposals, including a shift from household spending on tax compliance to household spending on essentials.

Corporations will experience tax-free profits and lower costs of production, including tax-free labor and capital and severely reduced tax compliance expenditures.  As a result, there will be downward pressure on the price of goods and services offered to the masses.

On the government side, our strategy would virtually balance the budget and make Social Security more solvent.

Our simple method of assessment offers relatively low and stable rates.  This would allow us to focus on creating value-added products instead of  minimizing tax liability.

This environment will likely promote greater investment and net capital inflows, manifesting in greater employment, productivity, and economic growth. Liberals and conservatives alike believe my tax proposal is fair, effective and elegant in its simplicity.

The time has come to end federal taxation as we know it. _______________________________________________________

My wife Billie Elias provided valuable assistance with this piece.

An updated article of mine on this topic can be found here.


Gold: The Next Global Reserve Currency

Gold is on a path to become the next global reserve currency.

A macroscopic perspective of our global economy suggests the world’s financial crisis was caused by an inordinate accumulation of debt relative to GDP.

However, the excess debt relative to income was the result of fiat currency regimes.  These regimes are based on the faith and credit of governing institutions, not physical capital reserves, and permit an infinite amount of credit and undercapitalized debt formation.

Well capitalized debt formation is predicated on a stable currency regime that cannot be easily manipulated, one that is partially backed by tangible capital reserves.

Global macroeconomic environment remains highly overleveraged, where total debt (private and public) relative to GDP is still unacceptably high.  Future economic prosperity requires further debt reduction.

A sustainable level of total debt/GDP is roughly 150% – 200%.  During the US depression, this figure reached 260%.  By 2008, it was over 350%.

According to the Bank for International Settlements, total debt/GDP in the advanced economies grew from 167% in 1980 to 314% today.  Further debt reduction is essential to improve the global economy.

Debt accumulation also hindered long term investment.  Both severely undermined the economic multiplier, or monetary velocity.  Monetary velocity is the number of transactions per unit of currency over a given time period, where GDP equals Money Supply multiplied by Monetary Velocity.  Given a stable money supply, income rises as the monetary velocity rises.

From 1980 through 2008, monetary velocity in the US fell over 50% and investment as a percentage of GDP dropped 32%. This level of investment is roughly half the global average of 24% and is a major impediment to long term economic prosperity.

Healthy economies produce a monetary velocity greater than 1.5.  Today, this figure is below 1 for the entire world. Debt reduction and increases in investment are needed for global economic recovery.

Debt reduction and an increase in long term investment require a stable medium of exchange backed by tangible assets, such as gold.

Gold possess unique attributes that mitigate geoeconomic and geopolitical uncertainties.  Therefore, it tends to preserve purchase power parity and wealth over long periods of time and across geographical locations.

Attributes of gold include the following:

1.  Gold production is a proxy for general economic activity in terms of resourceallocation and input productivity (i.e., the cost of labor, capital and raw materials per unit of output).  The cost structure for gold production more accurately reflects that of other essential commodities, thereby preserving purchase power parity more readily.

2.  Gold is a physical product that cannot be manipulated easily, since the marginal cost of production per ounce ranges between $500 and $1,000.

3.  Gold is highly durable and reusable, such that the total supply continuously increases.

4.  Gold possesses economic diversity:  this includes investment, both industrial and financial, and consumption (i.e., 10% industrial, 40% financial, 50% consumption).

5.  Gold serves as a historic medium of exchange.

6.  Annual production of gold increases total supply by approximately 2% per annum.

Some believe the supply of gold may be inadequate to support future economic activity.  This may not be the case for the following reasons:

1.  According to the World Gold Council, known supplies will maintain this rate for the next 25-50 years

2.  Future technological innovations may increase gold supplies.

3.  Should future supplies wane, lower capital reserves provide a better stabilizing force than fiat currencies.

4.  Given a constant supply, price appreciation will protect purchase power parity.

If additional capital reserves are needed, other tangible assets with similar properties can be incorporated..

At this time, gold seems to be the most effective candidate based on its economic diversification.  Silver would be a likely addition in the future.

The demand for gold has been increasing significantly.  Currently, there are significant public and private financial resources available to satisfy this increase in gold demand.  These resources include sovereign currency reserves of nearly $12 trillion and private financial assets of $200 trillion.  Investment in gold represents only 0.2% (2/10ths of 1%) of private financial assets and 10% of sovereign currency reserves.

Future portfolio allocations that provide greater weight in gold seem very likely.  Recently, many governments have made large gold acquisitions, especially China.

The global market value of gold is approximately $8.5 trillion and the global narrow money supply totals approximately $26 trillion.

A stable currency regime using gold as a reserve asset can be achieved if the total value of gold approximates the total value of the narrow money supply.  This implies a three-fold increase in the value of gold, from $8.5 trillion to $26 trillion. Therefore, I anticipate a three-fold increase in the unit price of gold in the future.  Deteriorating global economic conditions, including the Eurozone and elsewhere, place greater pressure on achieving this equilibrium more rapidly.

A decade or two is a plausible and realistic time frame for this to occur.  During this time, I expect the price of gold to reach $4,000 per ounce.

The lack of confidence in undercapitalized fiat currencies is accelerating at a rapid pace.   Stable, long term economic prosperity is predicated on a different global reserve currency.

In my view, gold represents the most likely candidate as the next reserve currency.

Copyright 2012 Barry Elias.  All rights reserved.

Elias Economics

Elias Economics provides an objective analysis of economics, public policy and politics with a global perspective.

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