Tuesday, 2 January 2018

Predictions For 2018 - Part 3

Bitcoin Goes To Zero

As I wrote recently, Bitcoin is not money. It has no value. To be money a commodity must itself have value, it must be itself a representative of a certain quantum of necessary social-labour-time. In fact, as Marx sets out in TOSV all commodities are money in that, as such representatives of social labour-time, they can be used to exchange for an equal amount of value, they are equivalent forms of value. What makes a particular commodity, such as gold or silver, into the money-commodity is only that it is singled out from amongst all others to act as the universal equivalent form of value. But, Bitcoin is not a commodity that has value. Its only use is as an object of speculation, and its price is only a manifestation of that speculation.

As I set out, in my previous post, to be money a commodity must be capable of acting as unit of account, store of value, means of circulation and of payment. Bitcoin has none of those features, because it does not itself possess value, and unlike money tokens that act as fiat currency, such as coins or notes, backed by the state, it is not a representative of such value, guaranteed by the state. That is why its price can go to zero.

On one single day, recently, the price of Bitcoins rose to $20,000 and then fell to around $10,000, before recovering, later in the day, to around $15,000. No monetary system could function with that kind of volatility. Just to consider the requirement of money to act as unit of account it would mean that the prices of commodities would swing from doubling to halving, and back again within the space of a trading day, so that the buyers and sellers of those commodities, would have no certainty as to whether they could produce and sell their output profitably or not. Or consider its requirement to act as a store of value. If you were saving to buy a house, one day your savings would be equal to 90% of the value you required to buy the house, and the next day, might be worth only 10% of the value you require to buy the house. And, such volatility means that it cannot function as a means of payment or circulation either.

Bitcoin is really just a pyramid scheme. Pyramid schemes operate on the basis that the products that the scheme is set up to sell are not the real basis of anyone actually making money from it. Rather than being actually about selling products to end consumers, pyramid schemes work by a small number of people, drawing in a larger number of people to whom the products are sold, whose incentive to buy these products is that they will, in turn, draw in an even larger group of people to whom they sell, and so on. The problem with such schemes is that, ultimately, the number of people who must be drawn in at the base of the pyramid, so that those immediately above them are able to make any money, becomes so large as to be impossible. It is another example, of the “bigger fool” principle. Once those, at the bottom of the pyramid find they cannot draw in any “bigger fools” prepared to buy from them, in the hope of being able to sell on, the bottom layer stops buying from those in the layer above them, and so on, and the whole pyramid collapses. Usually, by that time, the initiators of the scheme, have long since taken their money, and disappeared. 

Most of these pyramid schemes usually do have some actual product or range of products that they are based upon such as cleaning products, or herbal remedies. Bitcoin does not even have that. The only reason to buy Bitcoin is the expectation that its price will be higher tomorrow than it is today. It is the epitome of the speculative bubbles that have been blown up over the last thirty years, and encouraged by the actions of states and central banks, as a means of encouraging the concomitant blowing up of debt bubbles, so that workers were encouraged to keep consuming and spending, despite stagnating wages, by taking on ever larger amounts of unsustainable debt. Often when such phenomenon find their most extreme form, it marks the point where the contradictions inherent within the phenomenon are resolved via the outbreak of a crisis.

The fundamental basis of the bubble in Bitcoin is the same as the bubble in stock and bond markets and in property prices. Each is based on the existence of some “bigger fool” coming along prepared to pay an even more outrageous price, fearful of losing out on a yet further rise in that price, and in the mindless expectation that some other “bigger fool”, will be prepared to buy these assets from them, at an even more outrageous price. The only difference with Bitcoin compared to shares and bonds, and property, is that these latter at least do have some underlying value, even if it is only a fraction of the inflated price. Bitcoin has no value whatsoever.

200 years after Adam Smith wrote, and explained the actual basis of “The Wealth of Nations”, the crowning glory of orthodox economic theory is that today that understanding has been completely lost. Smith understood and explained that value is produced by purposive labour. Wealth is the maximisation of the quantity of use values produced by that purposive labour, and so the basis of the Wealth of Nations is that the productivity of labour must be raised so that more and more of these use values are produced with less and less labour. Indeed, as Marx and Engels explain, it is this fundamental contradiction, at the heart of the commodity, between use value and exchange-value, that leads to crises of overproduction under capitalism, because the more productivity is driven up, the greater the quantity of these use values that are thereby produced, whilst the unit value of each of these use values, is constantly driven drown.

But, for modern orthodox economics, the act of production is treated almost as a sideshow. Modern orthodox economics sees value only as exchange-value, and only thereby being created in the process of exchange. Within this process, the explanation for profit is thrown back to the theories of the Mercantilists, like Sir James Steuart, as being some kind of surcharge, or the result of unequal exchange, an idea that Smith and the Classical economists disposed of more than two centuries ago. So, it is no wonder that modern orthodox economics has engendered the idea that wealth can be created simply on the basis of inflating asset price bubbles. If A buys an asset for £10, and sells it for £20, to B, they have increased their wealth by £10. If B then sells it to C, or even back to A, for £30, then B has increased their wealth by £10. This kind of Voodoo economics is what leads Donald Trump and others to proclaim the huge bubble in the Dow Jones Index as being a huge increase in US wealth. It is what leads so many into the delusion that because the price of their house has doubled, they have somehow become wealthier, whereas in reality higher house prices, just as with higher stock and bond prices, or higher prices of bread, make people poorer, because it means you can buy less of them! It is then no wonder that so many people see such speculation as the means to increase wealth, and such delusions always continue until such time as reality asserts itself, and the bubble bursts, with the so called wealth then vanishing far more quickly than it took to accumulate.

The last thirty years have been unprecedented in that regard. There have been many instances of speculative bubbles in history, going back at least to the Tulipmania, in the 17th century, and going through the South Sea Bubble, John Law's Mississippi Scheme, to the Railway Mania of the 1840's. But, these periods of speculative frenzy have usually been short lived, lasting no more than a few years, until such time as the bubble burst. What is different about the last thirty years, is that capitalist states, took the idea put forward by John Law, and the Pereire Brothers, and systematised it, and pursued it to a degree that the latter did not dare, and did not have the tools to be able to do.

John Law set up the Banque Generale in France, and persuaded the government that the country's wealth could be expanded by simply printing more paper notes. Rather like today, with QE, whereby states have inflated away much of the debt they took on to provide fiscal stimulus in the wake of the 2008 financial crisis, by printing money and using it to buy government bonds, three-quarters of the Banque Generale's capital consisted of French government bonds, and notes. Of course, as with QE what it actually did was not to stimulate the real economy, but to stimulate financial speculation, which led to a bubble which then burst, leaving Law's name to go down in financial infamy. The shares in Law's Mississippi Company, having been inflated to astronomic levels by this speculation collapsed by more than 70%, and indeed its frequently the case that when such bubbles burst, the collapse in prices is around 70-80%.

Today, central banks, like the US Federal Reserve, or the Bank of England, or the ECB have far more firepower than did the Banque Generale. But, in the last thirty years they have used that firepower on a huge scale. The US Federal Reserve, as a result of QE has expanded its balance sheet to $4 trillion. A third of UK debt, or about £500 billion, is owned by the Bank of England, as a result of its QE programme. Back in Spring of 2009, I predicted precisely this point that governments would inflate away the debt they had incurred by printing money via QE, which would cause asset prices to rise sharply, simultaneously depressing yields. Had Labour have continued in office, and not imposed the crazy austerity measures the Tories inflicted on the economy, then there would also have been a higher level of general inflation too, as the economy grew at a faster pace. In fact, in the last quarter that Labour could take credit for in 2010, the UK economy was growing at a rate of 1%, or around 4% annualised. That is a pace of growth the Tories have never equalled in any subsequent quarter, as their pronouncements and actions sent the economy into a long period of decline, that led to them having to reverse many of their austerity measures in relation to capital spending, which created the basis for some economic recovery in 2014.

Since 2010, conservative governments across the globe have had to balance two conflicting factors. Firstly, the model they have built over the last thirty years has been based upon inflating asset prices, and the private wealth of capitalists is now overwhelmingly in that form, as opposed to the ownership of real capital. They have then sought to keep all of those asset prices inflated, and that requires that interest rates remained low, because the prices of those assets are the capitalised revenues they produce. For interest rates to remain low, economic growth could not be allowed to rise too fast, as it had been doing prior to 2008, because that led to rising wages, a squeeze on profits, a higher demand for money-capital relative to the supply of money-capital, which causes interest rates to rise. On the other hand, governments could not allow growth to fall too low, or go into recession, as happened in the UK after 2010, because not only does that undo the work done to stabilise the system after 2008, but stagnation or recession means falling tax receipts, and it means that the debt to GDP ratio rises. That is what happened in Greece, as a result of austerity, and it is what happened in the UK, under the Tories, which is why they more or less doubled the amount of debt, failed to eliminate the budget deficit by 2015, as they had promised, and were led to reverse course on their proposed cuts in capital spending.

For thirty years, from around 1987, conservative governments in the US, and UK, in particular, but also in other developed capitalist economies, sought to keep asset prices inflated. Asset prices inflated in the 1980's, initially because, the rate of profit began to rise, whilst new technologies raised productivity, and reduced the value of capital. It meant that the supply of money-capital rose relative to the supply, as the period of stagnant growth of the early 1980's, also reduced the demand for money-capital. Rising rates of profit, and falling rates of interest were a recipe for rising asset prices, and that was the reason that the Dow Jones index rose by around 1300% between 1980 and 2000, whilst US GDP rose by only 250%. It is the reason that house prices in the UK quadrupled during the 1980's, before dropping 40% in the crash of 1990.

But, what happened in the 1980's, was emblematic of the difference in this period from all previous ones. In 1987, the Dow Jones stood at around 2,200. That was nearly three times the level it was at in 1980. But, that year, stock markets across the globe had the biggest crash in history. The Dow dropped 22% in a single day. Similarly, that quadrupling of UK house prices in the 1980's, which had increased in tempo in the later 1980's, resulted in the crash of 1990. In the past, such crashes would mark the end of such speculative frenzies, and those who had been burned by the experience would take a long time to get over it, and begin to make the same mistakes all over again. But, in 1987/90, so much of the conservative economic model was based on keeping these asset prices inflated, that the state and central banks felt impelled to have to intervene. It gave rise to the so called Greenspan Put, whereby, whenever the US economy seemed to falter, or asset prices began to waver, the Federal Reserve would step in to cut its official interest rates, and that would be sufficient to cause the speculative frenzy to resume. Of course, what it meant was that this medicine became less effective with each dose, and every attempt to raise official interest rates, such as in 1994, or 2007 led to a sharp sell off in financial assets and property.

Eventually, the Federal Reserve and other central banks had reduced their official interest rates so much that they had effectively no more room to reduce them further. They had reached the so called zero lower bound. That did not completely stop them, because the ECB, for example, introduced negative interest rates, charging commercial banks for depositing funds with them, as a means of trying to get them to lend out those funds. And, the Federal Reserve and Bank of England responded to the need to keep asset prices inflated, by printing money, and using it to buy up those assets, causing their prices to rise, and yields to fall. But, the problem becomes for any speculator that the more these asset prices rise, the yield they produce falls. Holding assets to obtain a revenue, therefore, becomes less and less viable. On many shorter dated bonds, the yield has actually become negative, meaning that you are paying to lend your money. The only reason to buy such bonds is the expectation of capital gain, the expectation that because the central bank is standing by to buy them up to inflate their price, the bond will be worth more next year than it is today. But, the higher those prices rise, the harder it is for the central bank to keep that up.

In Europe, the ECB, has even found that it has bought so many bonds that it is now finding it difficult to find enough bonds to be able to buy, that meet its criteria. The incentive becomes for the owners of the smart money to sell their holdings of these assets to central banks whilst they can. That was what happened with a lot of Greek debt, held by banks and private owners, who offloaded it to the ECB, and other EU institutions. Its what happened with much of the debt from the 2008 financial crisis, where the banks and private money-capitalists were bailed out by the state to the extent of trillions of dollars, and some of it is offloaded on to retail speculators, and workers whose pension funds, and mutual funds buy up this worthless paper at massively inflated prices.

Meanwhile, the speculators themselves still need somewhere to put their money, in the hope of capital gains. One asset class after another, therefore, became the object of speculation. Property prices were inflated, and individuals with savings were encouraged to provide for their pension by becoming buy to let landlords. Many of those will be left holding near worthless properties, and sometimes large mortgages on them, long after the big landlords have got out of the market ahead of the next crash. But, as one asset class after another rose to levels where the probability of a crash exceeded the probability of further capital gains, so hot money found some other asset to speculate in, whether it was gold, silver, wine, art, classic cars, classic vinyl records, or Bitcoin.

Bitcoin is just the last, and most extreme form of this speculation, because unlike any of these other assets it has absolutely no value. Despite all of the ranting of the Austrians and their ilk over fiat currency, the fact is that even the much maligned Dollar, despite all of the money printing has been a more stable unit of account, and store of value than say gold. Gold prices rose from $250 an ounce in 1999 to nearly $2,000 an ounce in 2011, before dropping back to $1200 an ounce. If you had been measuring prices in gold, rather than Dollars that would have created a sizeable degree of instability during that period. And, the reason for that swing in the price of gold, during that period had nothing to do with any change in the value of gold as a commodity, but everything to do with the fact that gold became an object of this speculation. Yet, gold unlike Bitcoin, does have value. It is the product of purposive labour, it has a use value, as a commodity, for use in jewellery, for electronic circuitry and so on. Bitcoin has neither value nor use value. It is merely emblematic of this phase of speculative mania that central banks and states have perpetuated for the last thirty years, as a means of trying to protect the fictitious wealth of private capitalists. As something that is worthless, and yet whose price has soared so spectacularly, it is an indication of the logical termination of such speculation, and as such an indication that the speculation itself has reached the end of the road.

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