Crypto Crap Crashes

Yesterday, I wrote that global inflation was rising, fuelled by the oceans of liquidity that central banks have pumped into the system, and which are now flowing out in huge tsunamis of monetary demand for commodities, causing prices to rise rise rapidly. I also pointed out that increasing demand for money-capital was causing interest rates to rise, which would reduce the inflated prices of assets from shares to bonds to property and Bitcoin. Sure enough, later that day, Iceland became the first European country to raise its official interest rates; China announced that it was introducing new restrictions on crypto-currencies like Bitcoin; and crypto-currencies promptly crashed by up to 40%, losing their owners around $500 billion!

Iceland raised its official interest rates, as its central bank became concerned about rising global inflation. In the last global financial meltdown, Iceland suffered very badly, so its perhaps not surprising that it has acted first in Europe. Where its led, others will soon follow, whatever they are saying now. Larry Summers has spoken out about the financial dangers created by the policy of excess liquidity having been continued for so long, and later, yesterday, Minutes of the Federal Reserve came out showing that, at its last meeting, there was discussion of starting to withdraw its current bond buying programme, which would, at least, end the additional liquidity being pumped in, if not yet, reducing it. Similar concerns are being expressed in European financial circles.

China has also seen the signs of inflation, and the impact on blowing up bubbles in its financial system, which is already viewed as being more or less simply a casino.

In theory, as Marx set out, in any such casino, the effects of financial crashes are just that some of the players lose huge chunks of their wealth, and others who made the right gamble take it off their hands. That happened to all those gulls who lost their shirts betting on Gamestop, and those who lost thousands of Dollars yesterday on the crash in crypto crap. But, as 1847, 1857 and 2008 demonstrated, in practice, very large financial crises can impact the real economy, not because this financial gambling itself has any connection to, or relevance for the real economy, but because, where large financial institutions themselves lose money, or worse go bust, their other functions in the real economy can be affected, leading to a break down of the money transmission systems, spikes in short-term interest rates, as credit crunches arise, and so on. China has seen crypto-crap as a symbol of this dangerous speculation, and stepped in to limit it. Combined with the previous comments of Elon Musk, who within a matter of weeks went from being a source of a surge in Bitcoin prices, as he announced he'd bought $1.5 billion of the stuff, and Tesla was accepting it in payment, became a source of its price dropping sharply, as he said Bitcoin mining was environmentally unsustainable, it was enough to crash the prices of all crypto-currencies.  It shows the dangerous and unstable nature of all this speculative crud.

Reminiscent of the first tremors of the stock market crash of 1929, various big hitters came out to support the crypto-crap, and try to stop the slide. Cathie Wood of Ark Investments came out to say that she still thought that Bitcoin could go to $500,000 per coin. Well, of course, it could. Indeed, it could go to $1 million, $10 million, or more per coin – in theory. It could, because, Bitcoin has no value, it is not a commodity, like say gold, and its price is determined solely on the basis of speculation, of demand and supply of it, and of what price the bigger fool is prepared to pay for it, in the expectation that some other bigger fool will come along prepared to pay even more. If we take, an actual commodity like gold, its price, in the short term, is also largely determined by such speculation. Its why, after rising to $800 an ounce, in 1980, it steadily fell, reaching $250 an ounce, in 1999, and then rose to nearly $2000 an ounce, in 2011. But, when the price of gold goes way above its price of production, it means that surplus profits can be made by gold miners, who then mine for more of it, seek more efficient means of extracting it, and so on. The additional supply of gold, then results in the speculative price being undermined, and the price falling back to its price of production.

That can't happen with Bitcoin. If its price rises, it simply encourages additional speculative demand. Unlike gold, the total amount of Bitcoin available for mining is absolutely limited, and most of it has already been mined. So, the supply cannot be rapidly increased in response to its rising price. Moreover, with gold or other commodities, it is possible to reduce the cost of mining by improved technology and so on. That is not possible with Bitcoin, and other crypto-crap. Finally, when gold was used as the money commodity, one of its advantages was that its composition is homogeneous, and it can be divided. So, if the value of gold increased substantially, it is possible to buy smaller quantities of it, and these smaller quantities can also be used then as coins and so on. That is not true of Bitcoin. If you want to buy one, you have to buy, or mine the whole thing, whether its price is $1 or $100,000. Its one reason it can never actually function as currency, and is simply a confected vehicle for speculation. So, yes, these factors mean that so long as there are gullible people prepared to hand over large amounts of good money for it, in the expectation that other gullible people will be prepared to hand over even more good money for it, in the future, this speculation necessarily leads to its price rising without limit, much as happened with tulip bulbs, and other objects of speculative manias. By the same token, when no bigger fool appears in the market to buy it, the price crashes even faster.

Yesterday, Bitcoin fell to $30,000. It was still at least $30,000 more than it was worth. The fact that with all the big Bitcoin promoters coming on to the media to boost it, the price rose to $40,000, still down more than 7%, and a third below its recent highs of over $60,000, does not change that, any more than, in 1929, after the first sell-offs, the actions of J.P. Morgan and others to raise the market, prevented it ultimately crashing. A few years ago, when Bitcoin was at $20,000, I predicted it would fall to zero. Its price in that year fell to $5000. It wasn't worth it then, and its certainly not worth it now.

There were also other indications of the rising global inflation, yesterday. Argentina is facing 50% inflation. One manifestation has been rising beef prices. The Argentine authorities have responded by banning meat exports. That, of course, means that this lack of supply from Argentina is likely to cause a further rise in global meat prices. Similar action by Argentina has been taken in the past, and it had negative consequences. The idea is that if Argentinian cattle producers can't export their beef, the supply into the domestic market will rise, so that the increased supply will depress domestic prices. But, the cattle producers are themselves facing that same 50% inflation causing their production costs to rise for wages, cattle feed, equipment and so on. So, with rapidly rising costs, but with falling prices for beef, the beef producers face making losses. The last time that happened, it simply resulted in some beef producers going bust, and others reducing their production. That then caused domestic prices of beef to rise again, but now with a much lower production of beef and cattle, which had a negative impact on the Argentinian economy, in which cattle form an important part.

In a similar vein, the UK government, desperate to try to salvage something from their Brexit disaster that has seen Britain's exports drop by huge amounts, and large parts of its crucial financial services industry decimated, has become split over a trade deal with Australia, in which Australia would have tariff free access to Britain for its cattle and sheep producers. Indicating the extent to which Brexit has undermined the negotiating power of Britain, the Australian exporters would see their exports to Britain expand by 83%, compared to just a 10% increase in British exports to Australia. Some Tory Ministers recognise that the impact will be to destroy British cattle and sheep farming, which will not be able to compete with their Australian rivals, who produce on scales more than ten times that of British farmers. That is particularly damaging for the Tories in Scotland and Wales, where existing opposition to Brexit is also fuelling increased demands for independence.

The Tories Misean cohort, of course, argue that Britain will benefit from the much lower prices of agricultural produce, though, if large numbers of people lose their jobs in the process, its hard to see how this is beneficial to them, and if food prices fell, the obvious consequence is that the bosses would simply see this as good reason to reduce wages, not to allow workers to enjoy it in higher living standards. Of course, there are advantages in terms of greater efficiencies, and lower costs from free trade, but that is precisely what the EU was designed to achieve, and what the Tories have taken Britain out of. Moreover, for any state, its not just those efficiencies that are determinant. A state has to take into consideration also its strategic interests, in case of war or other emergencies. A state will want to ensure that it is not reliant on others for feeding its population, for energy and so so on. It will have to protect and maintain such industries, even if it has to expend large amounts of its wealth to do so that could have been better used in other ways. Its again why Brexit was an insane idea, because for a relatively small state like Britain, having to expend these amounts to maintain such strategic industries, drains its resources that could have been better used in other ways. For a large state, like the EU, this does not apply, because it can obtain all of the advantages of free trade within its own borders, as well as the advantages of economies of scale from specialising production in favourable locations, and so on, whilst still being able to have the production from all the strategic industries it requires.

But, again, as global inflation rises, Brexit means that Britain will be put at an even greater disadvantage for these reasons, seeing its important industries undermined, and driven out of global markets, whilst its costs rise more sharply than for its competitors, and it is forced to divert resources that could have been used more effectively, instead into protection for its strategic industries. Brexit is such a ridiculous policy that it cannot possible survive in the long-term, and as rising inflation and rising interest rates brings about a crash in the speculative bubbles, whilst global economic growth increases spectacularly, that will become ever more apparent.