April 2022 - cypherpunks@lists.ogf.org

Russia starts World War in alliance with Nazi's
by professor rat 16 Apr '22

16 Apr '22

On 17 September 1939, the Soviet Union invaded Poland from the east, sixteen days after Germany invaded Poland from the west https://en.wikipedia.org/wiki/Soviet_invasion_of_Poland

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Rape during the occupation
by professor rat 16 Apr '22

16 Apr '22

The exact number of German women and girls raped by Soviet troops during the war and occupation is uncertain, but historians estimate their numbers are likely in the hundreds of thousands https://en.wikipedia.org/wiki/Rape_during_the_occupation_of_Germany

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Ukrainian woman raped, killed by Russian troops found in mass grave in Bucha
by professor rat 16 Apr '22

16 Apr '22

The body of a 23-year-old Ukrainian woman has been discovered among hundreds of corpses in a mass grave in Bucha after she was raped, tortured and shot in the head https://nypost.com/2022/04/14/ukrainian-woman-raped-killed-by-russian-troop…

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People Power outside parliament
by professor rat 16 Apr '22

16 Apr '22

Power to the people of anarchic Ceylon https://www.france24.com/en/live-news/20220416-sri-lanka-declares-5-day-sha…

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Long-distance quantum cryptography closer
by professor rat 16 Apr '22

16 Apr '22

The study, "Quantum channel correction outperforming direct transmission," has been published in Nature Communications. https://phys.org/news/2022-04-quantum-teleportation-lane-traffic.html

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US uncovers “Swiss Army knife” for hacking industrial control systems – Ars Technica
by jim bell 16 Apr '22

16 Apr '22

https://arstechnica.com/information-technology/2022/04/us-uncovers-swiss-ar… "Malware designed to target industrial control systems like power grids, factories, water utilities, and oil refineries represents a rare species of digital badness. So when the United States government warns of a piece of code built to target not just one of those industries, but potentially all of them, critical infrastructure owners worldwide should take notice. On Wednesday, the Department of Energy, the Cybersecurity and Infrastructure Security Agency, the NSA, and the FBI jointly released an advisory about a new hacker toolset potentially capable of meddling with a wide range of industrial control system equipment. More than any previous industrial control system hacking toolkit, the malware contains an array of components designed to disrupt or take control of the functioning of devices, including programmable logic controllers (PLCs) that are sold by Schneider Electric and OMRON and are designed to serve as the interface between traditional computers and the actuators and sensors in industrial environments. Another component of the malware is designed to target Open Platform Communications Unified Architecture (OPC UA) servers—the computers that communicate with those controllers. "This is the most expansive industrial control system attack tool that anyone has ever documented," says Sergio Caltagirone, the vice president of threat intelligence at industrial-focused cybersecurity firm Dragos, which contributed research to the advisory and published its own report about the malware. Researchers at Mandiant, Palo Alto Networks, Microsoft, and Schneider Electric also contributed to the advisory. “It’s like a Swiss Army knife with a huge number of pieces to it.” "Dragos says the malware has the ability to hijack target devices, disrupt or prevent operators from accessing them, permanently brick them, or even use them as a foothold to give hackers access to other parts of an industrial control system network. He notes that while the toolkit, which Dragos calls “Pipedream,” appears to specifically target Schneider Electric and OMRON PLCs, it does so by exploiting underlying software in those PLCs known as Codesys, which is used far more broadly across hundreds of other types of PLCs. This means that the malware could easily be adapted to work in almost any industrial environment. “This toolset is so big that it’s basically a free-for-all,” Caltagirone says. “T

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Cryptocurrency: Whither Bitcoin?
by grarpamp 16 Apr '22

16 Apr '22

https://bitcoinmagazine.com/markets/whither-bitcoin-monetary-restructuring Whither Bitcoin? by Eric Yakes The world stands on the precipice of a monetary restructuring, with bitcoin seemingly the most likely to be adopted... albeit slowly. https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.622.6336&rep=rep1… INTRODUCTION The world is reorganizing. People are attempting to comprehend the implications of recent events across a variety of dimensions: politically, geopolitically, economically, financially and socially. A feeling of uncertainty has eclipsed global affairs and individuals are developing an increased reliance on the thoughts of those bold enough to attempt comprehension. Experts are everywhere, but the expert is nowhere. I am not claiming to be an expert on anything, either. I read, write and do my best to piece together an understanding of vague and complex concepts. I’ve spent some time reading and thinking through various concepts and believe we are witnessing an inflection point of global trust. My goal is to explain the framework that led me to this conclusion. I’ll generally avoid discussing geopolitics and focus on the monetary and financial implications of this shift we are witnessing. The best place to start is understanding trust. THE WORLD RUNS ON TRUST We are witnessing a shift in global trust, setting the table for a new global monetary order. Consider Antal Fekete’s introduction from his seminal work Whither Gold?: “The year 1971 was a milestone in the history of money and credit. Previously, in the world's most developed countries, money (and hence credit) was tied to a positive value: the value of a well-defined quantity of a good of well-defined quality. In 1971 this tie was cut. Ever since, money has been tied not to positive but to negative values -- the value of debt instruments.” Debt instruments (credit) are built on trust — the most fundamental construct of organization. Organization allowed humanity to genetically eclipse its ancestors. Relationships, whether between individuals or groups, hinge on trust. Societies developed technologies and social structures to reduce the need for trust through reputations, security and money. Reputations reduce the need to trust because they represent an individual’s pattern of behavior: You trust some people more than others because of how they’ve acted in the past. Security reduces the need to trust that others will not hurt you in some form. You build a fence because you don’t trust your neighbors. You lock your car because you don’t trust your community. Your government has a military because it doesn’t trust other governments. Security is the price you pay to avoid the costs of vulnerability. Money reduces the need to trust that an individual will return a favor to you in the future. When you provide an individual a good or service, rather than trusting that they will return it to you in the future, they can immediately trade money to you, eliminating the need to trust. Stated differently, money reduces the need to trust that positive outcomes will happen while reputations and security reduces the need to trust that negative outcomes won’t happen. When money became entirely unanchored from gold in 1971, the value of money became a function of reputations and security, requiring trust. Before then, money was tied to the commodity gold, which maintained value through its well-defined quality and well-defined quantity and therefore didn’t require trust. Trust at a global level appears to be shifting across reputations and security, and thus credit money: Reputations — countries are trusting each other’s reputations less. The U.S. government’s reputation throughout recent history has been a global pillar of political stability and standard of financial and economic prudency. This is changing. The rise of U.S. populism has hindered its reputation as a politically stable country that allies depend on and rivals fear. Unprecedented economic and financial policy measures (e.g., bailouts, deficit spending, monetary inflation, debt issuance, etc.) are causing international powers to question the stability of the U.S. financial system. A hindrance to the reputation of the U.S. is a hindrance on the value of its money, to be discussed below. Security — countries are witnessing a contraction in global military order. The U.S. has been reducing its military presence and the world is shifting from a unipolar to a multipolar structure of order. The U.S.’ withdrawal of its military presence abroad has reduced its role as the monitor of international order and given rise to the military presence of rival nations. Reducing the assurance of its military presence internationally reduces the value of the dollar. Money — countries are losing trust in the international monetary order. Money has existed as either a commodity or credit (debt). Commodity money is not subject to trust through the reputations and security of governments while credit money is. Our modern system is entirely credit-based and the credit of the U.S. is the pillar upon which it exists. If the global reserve currency is based on credit, then the reputation and security of the U.S. is paramount to maintaining international monetary order. Trust in political and financial stability impacts the value of the dollar as does its holders’ demand for liquidity and stability. However, it’s not just U.S. credit money that is losing trust; it’s all credit money. As political and financial stability decline, we are witnessing a shift away from credit money entirely, incentivizing the adoption of commodity money. U.S. DEBT IS NOT RISK FREE Most recently, the reputation of U.S. credit has declined in an unprecedented way. Foreign governments historically trusted that the U.S. government’s debt is risk free. When financial sanctions froze Russia’s foreign exchange reserves, the U.S. undermined this risk-free reputation, as even reserves are now subject to confiscation. The ability to freeze the reserve assets of another country removed a foreign government’s right to either repay its debts or spend those assets. Now, international observers are realizing that these debts are not risk free. As the debt of the U.S. government is what backs its currency, this is a significant cause for concern. When the U.S. government issues debt, and demand from domestic and foreign buyers of it isn’t strong enough, the Federal Reserve prints money to purchase it in the open market and generate demand. Thus, the more U.S. debt countries are willing to buy, the stronger the U.S. dollar becomes — requiring less money printing by the Fed to indirectly enable government spending. Trust in the U.S. government’s credit has now been damaged, and thus so has the credit of the dollar. Further, trust in credit is declining in general, leaving commodity money as the more trustless option. First, I will examine this shift in the U.S. which applies specifically to its reputation and security, and then discuss the shifts in global credit (money). U.S. Dollar Dominance Will foreign governments attempt to de-dollarize? This question is complex as it not only requires an understanding of the global banking and payment systems but also maintains a geopolitical background. Countries around the world, both allies and rivals, have strong incentives to end global dollar hegemony. By utilizing the dollar a country is subject to the purview of the U.S. government and its financial institutions and infrastructure. To better understand this, let’s start by defining money: The above figure from my book shows the three functions of money as a store of value, medium of exchange and unit of account, as well as the supporting monetary properties of each below them. Each function plays a role in international financial markets: Store of Value — fulfilling this function drives reserve currency status. U.S. currency and debt is ~60% of global foreign reserves. A country will denominate its foreign exchange reserve assets in the most creditworthy assets — defined by their stability and liquidity. Medium of Exchange — this function is closely tied to being a unit of account. The dollar is the dominant invoicing currency in international trade and the euro is a close second, both of which fluctuate around ~40% of total. The dollar is also 64% of foreign currency debt issuance, meaning countries mostly denominate their debt in dollars. This creates demand for the dollar and is important. Since the U.S. issues more debt than domestic and foreign buyers are naturally willing to buy, they must print dollars to buy it in the market, which is inflationary (all else equal). The more foreign demand they can create for these newly printed dollars, the lower the inflationary impact from printing new dollars. This foreign demand becomes entrenched as countries denominate their contracts in the dollar, allowing the U.S. to monetize their debt. Unit of Account — Oil and other commodity contracts are often denominated in U.S. dollars (e.g., the petrodollar system). This creates artificial demand for the dollar, supporting its value while the U.S. government continually issues debt beyond amounts domestic and foreign buyers would be willing to purchase without the Fed creating demand for it. The petrodollar system was created by Nixon in response to a multi-year depreciation of the dollar after its fixed convertibility into gold was removed in 1971. In 1973, Nixon struck a deal with Saudi Arabia in which every barrel of oil purchased from the Saudis would be denominated in the U.S. dollar and in exchange, the U.S. would offer them military protection. By 1975, all OPEC nations agreed to price their own oil supplies in dollars in exchange for military protection. This system spurred artificial demand for the dollar and its value was now tied to demand for energy (oil). This effectively entrenched the U.S. dollar as a global unit of account, allowing it more leeway in its practices of money printing to generate demand for its debt. For example, you may not like that the U.S. is continually increasing its deficit spending (hindering its store of value function), but your trade contracts require you to use the dollar (supporting its medium of exchange and unit of account function), so you have to use dollars anyway. Put simply, if foreign governments won’t buy U.S. debt, then the U.S. government will print money to buy it from itself and contracts require foreign governments to use that newly printed money. In this sense, when the U.S. government’s creditworthiness (reputation) falls short, its military capabilities (security) pick up the slack. The U.S. trades military protection for increased foreign dollar demand, enabling it to continuously run a deficit. Let’s summarize. Since its establishment, the dollar has served the functions of money best at an international level because it can be easily traded in global markets (i.e., it’s liquid), and contracts are denominated in it (e.g., trade and debt contracts). As U.S. capital markets are the broadest, most liquid and maintain a track record of secure property rights (i.e., strong reputation), it makes sense that countries would utilize it because there is a relatively lower risk of significant upheaval in U.S. capital markets. Contrast this idea with the Chinese renminbi which has struggled to gain dominance as a global store of value, medium of exchange and unit of account due to the political uncertainty of its government (i.e., poor reputation) which maintains capital controls on foreign exchange markets and frequently intervenes to manipulate its price. U.S. foreign intervention is rare. Further, having a strong military presence enforces dollar demand for commodity trade per agreements with foreign countries. Countries that denominate contracts in dollars would need to be comfortable trading away military security from the U.S. to buck this trend. With belligerent Eastern leaders increasing their expanse, this security need is considerable. Let’s look at how the functions of money are enabled by a country’s reputation and security: Reputation: primarily enables the store of value function of its currency. Specifically, countries that maintain political and economic stability, and relatively free capital markets, develop a reputation for safety that backs their currency. This safety can also be thought of as creditworthiness. Security: primarily enables the medium of exchange and unit of account functions of its currency. Widespread contract denomination and deep liquidity of a currency entrench its demand in global markets. Military power is what entrenches this demand in the first place. If the reputation of the U.S. declines and its military power withdraws, demand for its currency decreases as well. With the shifts in these two variables in front of mind, let’s consider how demand for the dollar could be affected. OVERVIEW OF THE GLOBAL MONETARY SYSTEM Global liquidity and contract denomination can be measured by analyzing foreign reserves, foreign debt issuance, and foreign transactions/volume. Dollar foreign exchange reserves gradually declined from 71% to 60% since the year 2000. Three percent of the decline is accounted for in the euro, 2% from the pound, 2% from the renminbi and the remaining 4% from other currencies. More than half of the 11 percentage point decline has come from China and other economies (e.g., Australian dollars, Canadian dollars, Swiss francs, et al.). While the U.S. dollar decline in dominance is material, it obviously remains dominant. The primary takeaway is that most of the decline in dollar dominance is being captured by smaller currencies, indicating that global reserves are gradually becoming more dispersed. Note that this data should be interpreted with caution as the fall in dollar dominance since 2016 occurred when previous non-reporting countries (e.g., China) began gradually revealing their FX reserves to the IMF. Further, governments don’t have to be honest about the numbers they report — the politically sensitive nature of this information makes it ripe for manipulation. Source: IMF Foreign debt issuance in USD (other countries borrowing in contracts denominated in dollars) has also gradually declined by ~9% since 2000, while the euro has gained ~10%. Debt issuance of the remaining economies was relatively flat over this period so most of the change in dollar debt issued can be attributed to the euro. Source: Federal Reserve The currency composition of foreign transactions is interesting. Historically, globalization has increased the demand for cross-border payments primarily due to: Manufacturers expanding supply chains across borders. Cross-border asset management. International trade. International remittances (e.g., migrants sending money home). This poses a problem for smaller economies: the more intermediaries that are involved in cross-border transactions, the slower and more expensive these payments become. High-volume currencies, such as the dollar, have a shorter chain of intermediaries while lower-volume currencies (e.g., emerging markets) have a longer chain of intermediaries. This is important because it is these emerging markets that stand to lose the most from international payments and for this reason alternative systems are attractive to them. Source: Bank of England If we look at the trend in composition of foreign payments it’s evident that the dollar's share of invoicing is materially greater than its share of exports, illuminating its outsized role of invoicing in proportion to trade. The euro has been competing with the dollar in terms of invoicing share, but this is driven by its usage for export trade among EU countries. For the rest of the world, export share has been, on average, greater than 50% while invoicing share has remained less than 20% on average. Source: Journal of International Economics Lastly, let’s discuss the volume of trade. A currency with high volume of trade means that it is relatively more liquid and thus, more attractive as a trade vehicle. The chart below shows the proportions of volume traded by currency. The dollar has remained dominant and constant since 2000, expressing its desirability as a liquid global currency. What’s important is that the volume of all major global reserve currencies have declined slightly while the volume of “other” smaller world currencies has increased from 15% to 22% in proportion. Source: BIS Triennial Survey; (Note: typically these numbers are shown on a 200% scale — e.g., for 2019 USD would be 88.4% out of 200% — because there are two legs to every foreign exchange trade. I’ve condensed this to a 100% scale for ease of interpretation of the proportions). The dollar is dominant across every metric, although it has been gradually declining. Most notably, economies that are not major world reserves are: Gaining dominance as reserves and thus world FX reserves are becoming more dispersed. Utilizing the dollar for foreign transactions in significantly greater proportions than their exports and limited by a long chain of intermediaries when attempting to use their domestic currencies. Hurt the most by long chains of global intermediaries for their transactions and thus stand to gain the most from alternative systems. Increasing their share of foreign exchange volume (liquidity) while all the major reserve currencies are declining. There exists a trend whereby the smaller and less dominant currencies of the world are expanding but are still limited by dollar dominance. Pair this trend with the global political fragmentation occurring and their continued expansion becomes more plausible. As the U.S. withdraws its military power globally, which backs the dollar’s functions as a medium of exchange and unit of account, it decreases demand for its currency to serve these functions. Further, the dollar’s creditworthiness has declined since implementing the Russian sanctions. The trends of declining U.S. military presence and creditworthiness, as well as increased global fragmentation, indicate that the global monetary regime could experience drastic change in the near term. THE GLOBAL MONETARY SYSTEM IS SHIFTING Russia invaded Ukraine on Feb. 24, 2022, and the U.S. subsequently implemented a swath of economic and financial sanctions. I believe history will look back on this event as the initial catalyst of change towards a new era of global monetary order. Three global realizations subsequently occurred: Realization #1: Economic sanctions placed on Russia signaled to the world that US sovereign assets are not risk free. U.S. control over the global monetary system subjects all participating nations to the authority of the U.S. Effectively, ~$300 billion of Russia’s ~$640 billion in foreign exchange reserves were “frozen” (no longer spendable) and it was partially banned (energy still allowed) from the SWIFT international payments system. However, Russia had been de-dollarizing and building up alternative reserves as protection from sanctions throughout previous years. Now Russia is looking for alternatives, China being the obvious partner, but India, Brazil and Argentina are also discussing cooperation. Economic sanctions of this magnitude by the West are unprecedented. This has signaled to countries around the world the risk they run through dependence on the dollar. This doesn’t mean that these countries will begin cooperating as they are all subject to constraints under an international spiderweb of trade and financial relationships. For example, Marko Papic explains in “Geopolitical Alpha” how China is heavily constrained by the satisfaction of its growing middle class (the majority of its population) and fearful that they could fall into the middle-income trap (GDP per capita stalling within the $1,000-12,000 range). Their debt cycle has peaked and economically they are in a vulnerable position. Chinese leaders understand that the middle-income trap has historically brought the death of communist regimes. This is where the U.S. has leverage over China. Economic and financial sanctions targeting this demographic can prevent growth in productivity and that is what China is most afraid of. Just because China wants to partner with Russia and achieve “world domination” does not mean that they will do so since they are subject to constraints. The most important aspect of this realization is that U.S. dollar assets are not risk free: they maintain a risk of appropriation by the U.S. government. Countries with plans to act out of accordance with U.S. interests will likely start de-dollarizing before doing so. However, as much as countries would prefer to opt out of this dollar dependency, they are constrained in doing so as well. Realization #2: It’s not just the U.S. that has economic power over reserves, it’s fiat reserve nations in general. Owning fiat currencies and assets in reserves creates uncertain political risks, increasing the desirability of commodities as reserve assets. Let’s talk about commodity money vs. debt (fiat) money. In his recent paper, Zoltan Pozsar describes how the death of the dollar system has arrived. Russia is a major global commodity exporter and the sanctions have bifurcated the value of their commodities. Similar to subprime mortgages in the 2008 financial crisis, Russian commodities have become “subprime” commodities. They’ve subsequently declined materially in value as much of the world is no longer buying them. Non-Russian commodities are increasing in value as anti-Russia countries are now all purchasing them while the global supply has shrunk materially. This has created volatility in commodity markets, markets that have been (apparently) neglected by financial system risk monitors. Commodity traders often borrow money from exchanges to place their trades, with the underlying commodities as collateral. If the price of the underlying commodity moves too much in the wrong direction, the exchanges tell them that they need to pay more collateral to back their borrowed money (trader get margin-called). Now, traders take both sides in these markets (they bet the price will go up or that it will go down) and therefore, regardless of which direction the price moves, somebody is getting margin-called. This means that as price volatility is introduced to the system, traders need to pay more money to the exchange as collateral. What if the traders don’t have more money to give as collateral? Then the exchange has to cover it. What if the exchanges can’t cover it? Then we have a major credit contraction in the commodity markets on our hands as people start pulling money out of the system. This could lead to large bankruptcies within a core segment of the global financial system. In the fiat world, credit contractions are always backstopped — such as the Fed printing money to bail out the financial system in 2008. What is unique to this situation is that the “subprime” collateral of Russian commodities is what Western central banks would need to step in and buy — but they can’t because their governments are the ones who prevented buying it in the first place. So, who is going to buy it? China. China could print money and effectively bail out the Russian commodity market. If so, China would strengthen its balance sheet with commodities which would strengthen its monetary position as a store of value, all else equal. The Chinese renminbi (also called the “yuan”) would also begin spreading more widely as a global medium of exchange as countries that want to participate in this discounted commodity trade utilize the yuan in doing so. People are referring to this as the growth of the “petroyuan” or “euroyuan” (like the petrodollar and eurodollar, just the yuan). China is also in discussions with Saudi Arabia to denominate oil sales in the yuan. As China is the largest importer of Saudi oil, it makes sense that the Saudis would consider denominating trade in its currency. Further, the lack of U.S. military support for the Saudis in Yemen is all the more reason to switch to dollar alternatives. However, the more the Saudis denominate oil in contracts other than the dollar, the more they risk losing U.S. military protection and would likely become subject to the military influence of China. If the yuan spreads wide enough, it could grow as a unit of account, as trade contracts become denominated in it. This structure of incentives implies two expectations: Alternatives to the U.S. global monetary system will strengthen. Demand for commodity money will strengthen relative to debt-based fiat money. However, the renminbi is only 2.4% of global reserves and has a long way to go towards international monetary dominance. Countries are much less comfortable utilizing the yuan over the dollar for trade due to its political uncertainty risks, control over the capital account and the risk of dependence on Chinese military security. A common expectation is that either the West or the East is going to be dominant once the dust settles. What’s more likely is that the system will continue splitting and we’ll have multiple monetary systems emerge around the globe as countries attempt to de-dollarize — referred to as a multipolar system. Multipolarity will be driven by political and economic self-interest among countries and the removal of trust from the system. The point about trust is key. As countries trust fiat money less, they will choose commodity-based money that requires less trust in an institution to measure its risk. Whether or not China becomes the buyer of last resort for Russian commodities, global leaders are realizing the value of commodities as reserve assets. Commodities are real and credit is trust. Bitcoin is commodity-like money, the scarcest in the world that resides on trustless and disintermediated payment infrastructure. Prior to the invasion of Ukraine, Russia had restricted crypto assets within its economy. Since then, Russia’s position has changed drastically. In 2020, Russia gave crypto assets legal status but banned their use for payments. As recently as January 2022, Russia’s central bank proposed banning the use and mining of crypto assets, citing threats to financial stability and monetary sovereignty. This was in contrast to Russia’s ministry of finance, which had proposed regulating it rather than outright banning it. By February, Russia chose to regulate crypto assets, due to the fear that it would emerge as a black market regardless. By March, a Russian government official announced it would consider accepting bitcoin for energy exports. Russia’s change of heart can be attributed to the desire for commodity money as well as the disintermediated payment infrastructure that Bitcoin can be transferred upon — leading to the third realization. Realization #3: Crypto asset infrastructure is more efficient than traditional financial infrastructure. Because it is disintermediated, it offers a method of possession and transfer of assets that is simply not possible with intermediated traditional financial infrastructure. Donations in support of Ukraine via crypto assets (amounting to nearly $100 million as of this writing) demonstrated to the world the rapidness and efficiency of transferring value via just an internet connection, without relying on financial institutions. It further demonstrated the ability to maintain possession of assets without reliance on financial institutions. These are critical features to have as a war refugee. Emerging economies are paying attention as this is particularly valuable to them. Bitcoin has been used to donate roughly $30 million to Ukraine since the start of the war. Subsequently, a Russian official stated that it will consider accepting bitcoin, which I believe is because they are aware that bitcoin is the only digital asset that can be used in a purely trustless manner. Bitcoin’s role on both sides of the conflict demonstrated that it is apolitical while the freezing of fiat reserves demonstrated that their value is highly political. Let’s tie this all together. Right now, countries are rethinking the type of money they are using and the payment systems they are transferring it on. They will become more avoidant of fiat money (credit), as it is easily frozen, and they are realizing the disintermediated nature of digital payment infrastructure. Consider these motivations alongside the trend of an increasingly fragmented system of global currencies. We’re witnessing a shift towards commodity money among a more fragmented system of currencies moving across disintermediated payment infrastructure. Emerging economies, particularly those removed from global politics, are postured as the first movers towards this shift. While I don’t expect that the dollar will lose primacy anytime soon, its creditworthiness and military backing is being called into question. Consequently, the growth and fragmentation of non-dollar reserves and denominations opens the market of foreign exchange to consider alternatives. For their reserves, countries will trust fiat less and commodities more. There is a shift emerging towards trustless money and desire for trustless payment systems. ALTERNATIVES TO THE GLOBAL MONETARY SYSTEM We are witnessing a decline in global trust with the realization that the age of digital money is upon us. Understand that I am referring to incremental adoption of digital money and not full-scale dominance — incremental adoption will likely be the path of least resistance. I expect countries to increasingly adopt trustless commodity assets on disintermediated payment infrastructure, which is what Bitcoin provides. The primary limiting factor to this adoption of bitcoin will be its stability and liquidity. As bitcoin matures into adolescence, I expect this growth to increase rapidly. Countries that want a digital store of value will prefer bitcoin for its sound monetary properties. The countries most interested and least restrained in adopting digital assets will be among the fragmented developing world as they stand to gain the most for the least amount of political cost. While these incremental shifts will be occurring in tandem, I expect the first major shift will be towards commodity reserves. Official reserve managers prioritize safety, liquidity and yield when choosing their reserve assets. Gold is valuable in these respects and will play a dominant role. However, bitcoin’s trustless nature will not be overlooked, and countries will consider it as a reserve despite its tradeoffs with gold, to be discussed below. Let’s walk through what bitcoin adoption could look like: Source: World Gold Council; Advanced reserve economies includes the BIS, BOE, BOJ, ECB (and its national member banks), Federal Reserve, IMF and SNB. Since 2000, gold as a percentage of total reserves has been declining for advanced economies and growing for China, Russia and the other smaller economies. So, the trend towards commodity reserves is already in place. Over this same period gold reserves have fluctuated between nine and 14% of total reserves. Today, total reserves (both gold and FX reserves) amount to $16 trillion, 13% of which ($2.2 trillion) is gold reserves. We can see in the below chart that gold as a percentage of reserves has been rising since 2015, the same year the U.S. froze Iran’s reserves (this was ~$2 billion, a much smaller amount than the Russia sanctions). Source: World Gold Council. Reserves have been growing rapidly in China, Russia and smaller economies as a whole. The chart below shows that non-advanced economies have increased their total reserves by 9.4x and gold reserves by 10x, while advanced economies have increased total reserves by only 4x. China, Russia and the smaller economies command $12.5 trillion in total reserves and $700 billion of those are in gold. Source: World Gold Council. The growth and size of smaller economy reserves is important when considering bitcoin adoption among them as a reserve asset. Smaller countries will ideally want an asset that is liquid, stable, grows in value, disintermediated and trustless. The below illustrative comparison stack ranks broad reserve asset categories by these qualities on a scale of 1-5 (obviously, this is not a science but an illustrative visualization to facilitate discussion): Countries adopt different reserve assets for different reasons, which is why they diversify their holdings. This assessment focuses on the interests of emerging economies for bitcoin adoption considerations. Bitcoin is liquid, although not nearly as liquid as fiat assets and gold. Bitcoin isn’t stable. Standard reserve assets, including gold, are much more stable. Bitcoin will likely offer a much higher capital appreciation than fiat assets and gold over the long run. Bitcoin is the most disintermediated as it has a truly trustless network — this is its primary value proposition. Storing bitcoin doesn’t require trusted intermediaries and thus can be stored without the risk of appropriation — a risk for fiat assets. This point is important because gold does not maintain this quality as it is expensive to move, store and verify. Thus, bitcoin’s primary advantage over gold is its disintermediated infrastructure which allows for trustless movement and storage. With these considerations in mind, I believe the smaller emerging economies that are largely removed from political influence will spearhead the adoption of bitcoin as a reserve asset gradually. The world is growing increasingly multipolar. As the U.S. withdraws its international security and fiat continues to lose creditworthiness, emerging economies will be considering bitcoin adoption. While the reputation of the U.S. is in decline, China’s reputation is far worse. This line of reasoning will make bitcoin attractive. Its primary value-add will be its disintermediated infrastructure which enables trustless payments and storage. As bitcoin continues to mature, its attractiveness will continue to increase. If you think the sovereign fear of limiting its domestic monetary control is a strong incentive to prevent bitcoin adoption, consider what happened in Russia. If you think countries won’t adopt bitcoin for fear of losing monetary control, consider what happened in Russia. While Russia’s central bank wanted to ban bitcoin, the finance ministry opted to regulate it. After Russia was sanctioned, it has been considering accepting bitcoin for energy exports. I think Russia’s behavior shows that even totalitarian regimes will allow bitcoin adoption for the sake of international sovereignty. Countries that demand less control over their economies will be even more willing to accept this tradeoff. There are many reasons that countries would want to prevent bitcoin adoption, but on net the positive incentives of its adoption are strong enough to outweigh the negative. Let’s apply this to the shifts in global reputations and security: Reputations: political and economic stability is becoming increasingly riskier for fiat, credit-based assets. Bitcoin is a safe haven from these risks, as it is fundamentally apolitical. Bitcoin’s reputation is one of high stability, due to its immutability, which is insulated from global politics. No matter what happens, Bitcoin will keep producing blocks and its supply schedule remains the same. Bitcoin is a commodity that requires no trust in the credit of an institution. Security: because Bitcoin cannot trade military support for its usage, it will likely be hindered as a global medium of exchange for some time. Its lack of price stability further limits this form of adoption. Networks such as the Lightning Network enable transactions in fiat assets, like the dollar, over Bitcoin’s network. Although the Lightning Network is still in its infancy, I anticipate this will draw increased demand to Bitcoin as a settlement network — increasing the store of value function of its native currency. It’s important to understand that fiat assets will be used as a medium of exchange for some time due to their stability and liquidity, but the payment infrastructure of bitcoin can bridge the gap in this adoption. Hopefully, as more countries adopt the Bitcoin standard the need for military security will decline. Until then, a multipolar world of fiat assets will be utilized in exchange for military security, with a preference for disintermediated payment infrastructure. CONCLUSION Trust is diminishing among global reputations as countries implement economic and geopolitical warfare, causing a reduction in globalization and shift towards a multipolar monetary system. U.S. military withdrawal and economic sanctions have illuminated the lack of security within credit-based fiat money, which incentivizes a shift towards commodity money. Moreover, economic sanctions are forcing some countries, and signaling to others, that alternative financial infrastructure to the U.S. dollar system is necessary. These shifts in the global zeitgeist are demonstrating to the world the value of commodity money on a disintermediated settlement network. Bitcoin is postured as the primary reserve asset for adoption in this category. I expect bitcoin to benefit in a material way from this global contraction in trust. However, there are strong limitations to full-scale adoption of such a system. The dollar isn’t going away anytime soon, and significant growth and infrastructure is required for emerging economies to utilize bitcoin at scale. Adoption will be gradual, and that is a good thing. Growth in fiat assets over Bitcoin settlement infrastructure will benefit bitcoin. Enabling a permissionless money with the strongest monetary properties will spawn an era of personal freedom and wealth creation for individuals, instead of the incumbent institutions. Despite the state of the world, I’m excited for the future. Whither Bitcoin?

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Interrogating Leaky Spies: The Lie Behind Lie Detectors, and...
by grarpamp 16 Apr '22

16 Apr '22

https://brianclegg.blogspot.com/2022/04/review-tremors-in-blood.html Fascinating true crime account of the origins of the polygraph (lie detector), featuring its unlikely inventors and its role in some terrifying 1930s crimes. Emphasises this is as scientific as astrology. https://antipolygraph.org/lie-behind-the-lie-detector.pdf If you face an upcoming polygraph "test" and need to learn what to expect as quickly as possible, you may wish to proceed directly to Chapters 3 and 4 and come back to Chapters 1, 2 and 5 later. Polygraph abuse was rampant in the American workplace dur-ing the late 1970s and early 1980s. The Lie Behind the Lie Detector 5th edition by George W. Maschke and Gino J. Scalabrini AntiPolygraph.org http://www.innercitypress.com/sdnylive88schultefurman041322.html https://backdrifting.net/post/057_what_is_ddosecrets https://archive.ph/1rTBJ Twitter suspends @BarrettB for pointing out Anonymous and DDoS's connections to the intel community.

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Cryptocurrency: NymTech and Mixnet and Privacy, Consider SpyTraps
by grarpamp 16 Apr '22

16 Apr '22

In a world of spy vs spy, can cryptos that have a lot of sponsors and influencer hype be good cryptos, or traps... https://www.youtube.com/watch?v=pdwOXWmAs8Y @nymproject Listen in on the discussion on Bitcoin Privacy and Mixnet from @BitcoinMagazine with our CEO @harryhalpin and @adam3us https://blog.nymtech.net/nym-wallet-version-1-0-2-is-out-2432ef47fe0c https://www.youtube.com/watch?v=yxltn2gE_go a16z dcg nymtech.net t.me/nymchan

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Cryptocurrency: Fiat's Continual Fail Validates Gold Silver Crypto and more
by grarpamp 16 Apr '22

16 Apr '22

The Failure Of Fiat Currencies & The Implications For Gold & Silver https://www.goldmoney.com/research/goldmoney-insights/the-failure-of-fiat-c… by Alasdair Macleod This is the background text of my Keynote Speech given yesterday to European Gold Forum yesterday, 13 April. To explain why fiat currencies are failing I started by defining money. I then described the relationship between fiat money and its purchasing power, the role of bank credit, and the interests of central banks. Undoubtedly, the recent sanctions over Russia will have a catastrophic effect for financialised currencies, possibly leading to the end of fifty-one years of the dollar regime. Russia and China plan to escape this fate for the rouble and yuan by tying their currencies to commodities and production instead of collapsing financial assets. The only way for those of us in the West to protect ourselves is with physical gold, which over time is tied to commodity and energy prices. What is money? To understand why all fiat currency systems fail, we must start by understanding what money is, and how it differs from other forms of currency and credit. These are long-standing relationships which transcend our times and have their origin in Roman law and the practice of medieval merchants who evolved a lex mercatoria, which extended money’s legal status to instruments that evolved out of money, such as bills of exchange, cheques, and other securities for money. And while as circulating media, historically currencies have been almost indistinguishable from money proper, in the last century issuers of currencies split them off from money so that they have become pure fiat. At the end of the day, what constitutes money has always been determined by its users as the means of exchanging their production for consumption in an economy based on the division of labour. Money is the bridge between the two, and while over the millennia different media of exchange have come and gone, only metallic money has survived to be trusted. These are principally gold, silver, and copper. Today the term usually refers to gold, which is still in government reserves, as the only asset with no counterparty risk. Silver, which as a monetary asset declined in importance as money after Germany moved to a gold standard following the Franco-Prussian war, remains a monetary metal, though with a gold to silver ratio currently over 70 times, it is not priced as such. For historical reasons, the world’s monetary system evolved based on English law. Britain, or more accurately England and Wales, still respects Roman, or natural law with respect to money. To this day, gold sovereign coins are legal tender. Strictly speaking, metallic gold and silver are themselves credit, representing yet-to-be-spent production. But uniquely, they are no one’s liability, unlike banknotes and bank deposits. Metallic money therefore has this exceptional status, and that fact alone means that it tends not to circulate, in accordance with Gresham’s Law, so long as lesser forms of credit are available. Money shares with its currency and credit substitutes a unique position in criminal law. If a thief steals money, he can be apprehended and charged with theft along with any accomplices. But if he passes the money on to another party who receives it in good faith and is not aware that it is stolen, the original owner has no recourse against the innocent receiver, or against anyone else who subsequently comes into possession of the money. It is quite unlike any other form of property, which despite passing into innocent hands, remains the property of the original owner. In law, cryptocurrencies and the mooted central bank digital currencies are not money, money-substitutes, or currencies. Given that a previous owner of stolen bitcoin sold on to a buyer unaware it was criminally obtained can subsequently claim it, there is no clear title without full provenance. In accordance with property law, the United States has ruled that cryptocurrencies are property, reclaimable as stolen items, differentiating cryptocurrencies from money and currency proper. And we can expect similar rulings in other jurisdictions to exclude cryptocurrencies from the legal status as money, whereas the position of CBDCs in this regard has yet to be clarified. We can therefore nail to the floor any claims that bitcoin or any other cryptocurrency can possibly have the legal status required of money. Under a proper gold standard, currency in the form of banknotes in public circulation was freely exchangeable for gold coin. So long as they were freely exchangeable, banknotes took on the exchange value of gold, allowing for the credit standing of the issuer. One of the issues Sir Isaac Newton considered as Master of the Royal Mint was to what degree of backing a currency required to retain credibility as a gold substitute. He concluded that that level should be 40%, though Ludwig von Mises, the Austrian economist who was as sound a sound money economist as it was possible to be appeared to be less prescriptive on the subject. The effect of a working gold standard is to ensure that money of the people’s choice is properly represented in the monetary system. Both currency and credit become bound to its virtues. The general level of prices will fluctuate influenced by changes in the quantity of currency and credit in circulation, but the discipline of the limits of credit and currency creation brings prices back to a norm. This discipline is disliked by governments who believe that money is the responsibility of a government acting in the interests of the people, and not of the people themselves. This was expressed in Georg Knapp’s State Theory of Money, published in 1905 and became Germany’s justification for paying for armaments by inflationary means ahead of the First World War, and continuing to use currency debasement as the principal means of government finance until the paper mark collapsed in 1923. Through an evolutionary process, modern governments first eroded then took away from the public for itself the determination of what constitutes money. The removal of all discipline of the gold standard has allowed governments to inflate the quantities of currency and credit as a means of transferring the public wealth to itself. As a broad representation of this dilution, Figure 1 shows the growth of broad dollar currency since the last vestige of a gold standard under the Bretton Woods Agreement was suspended by President Nixon in August 1971. >From that date, currency and bank credit have increased from $685 billion to $21.84 trillion, that is thirty-two times. And this excludes an unknown increase in the quantity of dollars not in the US financial system, commonly referred to as Eurodollars, which perhaps account for several trillion more. Gold priced in fiat dollars has risen from $35 when Bretton Woods was suspended, to $1970 currently. A better way of expressing this debasement of the dollar is to say that priced in gold, the dollar has lost 98.3% of its purchasing power (see Figure 4 later in this article). While it is a mistake to think of the relationship between the quantity of currency and credit in circulation and the purchasing power of the dollar as linear (as monetarists claim), not only has the rate of debasement accelerated in recent years, but it has become impossible for the destruction of purchasing power to be stopped. That would require governments reneging on mandated welfare commitments and for them to stand back from economic intervention. It would require them to accept that the economy is not the government’s business, but that of those who produce goods and services for the benefit of others. The state’s economic role would have to be minimised. This is not just a capitalistic plea. It has been confirmed as true countless times through history. Capitalistic nations always do better at creating personal wealth than socialistic ones. This is why the Berlin Wall was demolished by angry crowds, finally driven to do so by the failure of communism relative to capitalism just a stone’s throw away. The relative performance of Hong Kong compared with China when Mao Zedong was starving his masses on some sort of revolutionary whim, also showed how the same ethnicity performed under socialism compared with free markets. The relationship between fiat currency and its purchasing power One can see from the increase in the quantity of US dollar M3 currency and credit and the fall in the purchasing power measured against gold that the government’s monetary statistic does not square with the market. Part of the reason is that government statistics do not capture all the credit in an economy (only bank credit issued by licenced banks is recorded), dollars created outside the system such as Eurodollars are additional, and market prices fluctuate. Monetarists make little or no allowance for these factors, claiming that the purchasing power of a currency is inversely proportional to its quantity. While there is much truth in this statement, it is only suited for a proper gold-backed currency, when one community’s relative valuations between currency and goods are brought into line with the those of its neighbours through arbitrage, neutralising any subjectivity of valuation. The classical representation of the monetary theory of prices does not apply in conditions whereby faith in an unbacked currency is paramount in deciding its utility. A population which loses faith in its government’s currency can reject it entirely despite changes in its circulating quantity. This is what wipes out all fiat currencies eventually, ensuring that if a currency is to survive it must eventually return to a credible gold exchange standard. The weakness of a fiat currency was famously demonstrated in Europe in the 1920s when the Austrian crown and German paper mark were destroyed. Following the Second World War, the Japanese military yen suffered the same fate in Hong Kong, and Germany’s mark for a second time in the mid 1940s. More recently, the Zimbabwean dollar and Venezuelan bolivar have sunk to their value as wastepaper — and they are not the only ones. Ultimately it is the public which always determines the use value of a circulating medium. Figure 2 below, of the oil price measured in goldgrams, dollars, pounds, and euros shows that between 1950 and 1974 a gold standard even in the incomplete form that existed under the Bretton Woods Agreement coincided with price stability. It took just a few years from the ending of Bretton Woods for the consequences of the loss of a gold anchor to materialise. Until then, oil suppliers, principally Saudi Arabia and other OPEC members, had faith in the dollar and other currencies. It was only when they realised the implications of being paid in pure fiat that they insisted on compensation for currency debasement. That they were free to raise oil prices was the condition upon which the Saudis and the rest of OPEC accepted payment solely in US dollars. In the post-war years between 1950 and 1970, US broad money grew by 167%, yet the dollar price of oil was unchanged for all that time. Similar price stability was shown in other commodities, clearly demonstrating that the quantity of currency and credit in circulation was not the sole determinant of the dollar’s purchasing power. The role of bank credit While the relationship between bank credit and the sum of the quantity of currency and bank reserves varies, the larger quantity by far is the quantity of bank credit. The behaviour of the banking cohort therefore has the largest impact on the overall quantity of credit in the economy. Under the British gold standard of the nineteenth century, the fluctuations in the willingness of banks to lend resulted in periodic booms and slumps, so it is worthwhile examining this phenomenon, which has become the excuse for state intervention in financial markets and ultimately the abandonment of gold standards entirely. Banks are dealers in credit, lending at a higher rate of interest than they pay to depositors. They do not deploy their own money, except in a general balance sheet sense. A bank’s own capital is the basis upon which a bank can expand its credit. The process of credit creation is widely misunderstood but is essentially simple. If a bank agrees to lend money to a borrowing customer, the loan appears as an asset on the bank’s balance sheet. Through the process of double entry bookkeeping, this loan must immediately have a balancing entry, crediting the borrower’s current account. The customer is informed that the loan is agreed, and he can draw down the funds credited to his current account from that moment. No other bank, nor any other source of funding is involved. With merely two ledger entries the bank’s balance sheet has expanded by the amount of the loan. For a banker, the ability to create bank credit in this way is, so long as the lending is prudent, an extremely profitable business. The amount of credit outstanding can be many multiples of the bank’s own capital. So, if a bank’s ratio of balance sheet assets to equity is eight times, and the gross margin between lending and deposits is 3%, then that becomes a gross return of 24% on the bank’s own equity. The restriction on a bank’s balance sheet leverage comes from two considerations. There is lending risk itself, which will vary with economic conditions, and depositor risk, which is the depositors’ collective faith in the bank’s financial condition. Depositor risk, which can lead to depositors withdrawing their credit in the bank in favour of currency or a deposit with another bank, can in turn originate from a bank offering an interest rate below that of other banks, or alternatively depositors concerned about the soundness of the bank itself. It is the combination of lending and depositor risk that determines a banker’s view on the maximum level of profits that can be safely earned by dealing in credit. An expansion in the quantity of credit in an economy stimulates economic activity because businesses are tricked into thinking that the extra money available is due to improved trading conditions. Furthermore, the apparent improvement in trading conditions encourages bankers to increase lending even further. A virtuous cycle of lending and apparent economic improvement gets under way as the banking cohort takes its average balance sheet assets to equity ratio from, say, five to eight times, to perhaps ten or twelve. Competition for credit business then persuades banks to cut their margins to attract new business customers. Customers end up borrowing for borrowing’s sake, initiating investment projects which would not normally be profitable. Even under a gold standard lending exuberance begins to drive up prices. Businesses find that their costs begin to rise, eating into their profits. Keeping a close eye on lending risk, bankers are acutely aware of deteriorating profit prospects for their borrowers and therefore of an increasing lending risk. They then try to reduce their asset to equity ratios. As a cohort whose members are driven by the same considerations, banks begin to withdraw credit from the economy, reversing the earlier stimulus and the economy enters a slump. This is a simplistic description of a regular cycle of fluctuating bank credit, which historically varied approximately every ten years or so, but could fluctuate between seven and twelve. Figure 3 illustrates how these fluctuations were reflected in the inflation rate in nineteenth century Britain following the introduction of the sovereign gold coin until just before the First World War. Besides illustrating the regularity of the consequences of a cycle of bank credit expansion and contraction marked by the inflationary consequences, Figure 3 shows there is no correlation between the rate of price inflation and wholesale borrowing costs. In other words, modern central bank monetary policies which use interest rates to control inflation are misconstrued. The effect was known and named Gibson’s paradox by Keynes. But because there was no explanation for it in Keynesian economics, it has been ignored ever since. Believing that Gibson’s paradox could be ignored is central to central bank policies aimed at taming the cycle of price inflation. The interests of central banks Notionally, central banks’ primary interest is to intervene in the economy to promote maximum employment consistent with moderate price inflation, targeted at 2% measured by the consumer price index. It is a policy aimed at stimulating the economy but not overstimulating it. We shall return to the fallacies involved in a moment. In the second half of the nineteenth century, central bank intervention started with the Bank of England assuming for itself the role of lender of last resort in the interests of ensuring economically destabilising bank crises were prevented. Intervention in the form of buying commercial bank credit stopped there, with no further interest rate manipulation or economic intervention. The last true slump in America was in 1920-21. As it had always done in the past the government ignored it in the sense that no intervention or economic stimulus were provided, and the recovery was rapid. It was following that slump that the problems started in the form of a new federal banking system led by Benjamin Strong who firmly believed in monetary stimulation. The Roaring Twenties followed on a sea of expanding credit, which led to a stock market boom — a financial bubble. But it was little more than an exaggerated cycle of bank credit expansion, which when it ended collapsed Wall Street with stock prices falling 89% measured by the Dow Jones Industrial Index. Coupled with the boom in agricultural production exaggerated by mechanisation, the depression that followed was particularly hard on the large agricultural sector, undermining agriculture prices worldwide until the Second World War. It is a fact ignored by inflationists that first President Herbert Hoover, and then Franklin Roosevelt extended the depression to the longest on record by trying to stop it. They supported prices, which meant products went unsold. And at the very beginning, by enacting the Smoot Hawley Tariff Act they collapsed not only domestic demand but all domestic production that relied on imported raw materials and semi-manufactured products. These disastrous policies were supported by a new breed of economist epitomised by Keynes, who believed that capitalism was flawed and required government intervention. But proto-Keynesian attempts to stimulate the American economy out of the depression continually failed. As late as 1940, eleven years after the Wall Street Crash, US unemployment was still as high as 15%. What the economists in the Keynesian camp ignored was the true cause of the Wall Street crash and the subsequent depression, rooted in the credit inflation which drove the Roaring Twenties. As we saw in Figure 3, it was no more than the turning of the long-established repeating cycle of bank credit, this time fuelled additionally by Benjamin Strong’s inflationary credit expansion as Chairman of the new Fed. The cause of the depression was not private enterprise, but government intervention. It is still misread by the establishment to this day, with universities pushing Keynesianism to the exclusion of classic economics and common sense. Additionally, the statistics which have become a religion for policymakers and everyone else are corrupted by state interests. Soon after wages and pensions were indexed in 1980, government statisticians at the Bureau of Labor Statistics began working on how to reduce the impact on consumer prices. An independent estimate of US consumer inflation put it at well over 15% recently, when the official rate was 8%. Particularly egregious is the state’s insistence that a target of 2% inflation for consumer prices stimulates demand, when the transfer of wealth suffered by savers, the low paid and pensioners deprived of their inflation compensation at the hands of the BLS is glossed over. So is the benefit to the government, the banks, and their favoured borrowers from this wealth transfer. The problem we now face in this fiat money environment is not only that monetary policy has become corrupted by the state’s self-interest, but that no one in charge of it appears to understand money and credit. Technically, they may be very well qualified. But it is now over fifty years since money was suspended from the monetary system. Not only have policymakers ignored indicators such as Gibson’s paradox. Not only do they believe their own statistics. And not only do they think that debasing the currency is a good thing, but we find that monetary policy committees would have us believe that money has nothing to do with rising prices. All this is facilitated by presenting inflation as rising prices, when in fact it is declining purchasing power. Figure 4 shows how purchasing power of currencies should be read. Only now, it seems, we are aware that inflation of prices is not transient. Referring to Figure 1, the M3 broad money supply measure has almost tripled since Lehman failed, so there’s plenty of fuel driving a lower purchasing power for the dollar yet. And as discussed above, it is not just quantities of currency and credit we should be watching, but changes in consumer behaviour and whether consumers tend to dispose of currency liquidity in favour of goods. The indications are that this is likely to happen, accelerated by sanctions against Russia, and the threat that they will bring in a new currency era, undermining the dollar’s global status. Alerted to higher prices in the coming months, there is no doubt that there is an increased level of consumer stockpiling, which put another way is the disposal of personal liquidity before it buys less. So far, the phases of currency evolution have been marked by the end of the Bretton Woods Agreement in 1971. The start of the petrodollar era in 1973 led to a second phase, the financialisation of the global economy. And finally, from now the return to a commodity standard brought about by sanctions against Russia is driving prices in the Western alliance’s currencies higher, which means their purchasing power is falling anew. The faux pas over Russia With respect to the evolution of money and credit, this brings us up to date with current events. Before Russia invaded Ukraine and the Western alliance imposed sanctions on Russia, we were already seeing prices soaring, fuelled by the expansion of currency and credit in recent years. Monetary planners blamed supply chain problems and covid dislocations, both of which they believed would right themselves over time. But the extent of these price rises had already exceeded their expectations, and the sanctions against Russia have made the situation even worse. While America might feel some comfort that the security of its energy supplies is unaffected, that is not the case for Europe. In recent years Europe has been closing its fossil fuel production and Germany’s zeal to go green has even extended to decommissioning nuclear plants. It seems that going fossil-free is only within national borders, increasing reliance on imported oil, gas, and coal. In Europe’s case, the largest source of these imports by far is Russia. Russia has responded by the Russian central bank announcing that it is prepared to buy gold from domestic credit institutions, first at a fixed price or 5,000 roubles per gramme, and then when the rouble unexpectedly strengthened at a price to be agreed on a case-by-case basis. The signal is clear: the Russian central bank understands that gold plays an important role in price stability. At the same time, the Kremlin announced that it would only sell oil and gas to unfriendly nations (i.e. those imposing sanctions) in return for payments in roubles. The latter announcement was targeted primarily at EU nations and amounts to an offer at reasonable prices in roubles, or for them to bid up for supplies in euros or dollars from elsewhere. While the price of oil shot up and has since retreated by a third, natural gas prices are still close to their all-time highs. Despite the northern hemisphere emerging from spring the cost of energy seems set to continue to rise. The effect on the Eurozone economies is little short of catastrophic. While the rouble has now recovered all the fall following the sanctions announcement, the euro is becoming a disaster. The ECB still has a negative deposit rate and enormous losses on its extensive bond portfolio from rapidly rising yields. The national central banks, which are its shareholders also have losses which in nearly all cases wipes out their equity (balance sheet equity being defined as the difference between a bank’s assets and its liabilities — a difference which should always be positive). Furthermore, these central banks as the NCB’s shareholders make a recapitalisation of the whole euro system a complex event, likely to question faith in the euro system. As if that was not enough, the large commercial banks are extremely highly leveraged, averaging over 20 times with Credit Agricole about 30 times. The whole system is riddled with bad and doubtful debts, many of which are concealed within the TARGET2 cross-border settlement system. We cannot believe any banking statistics. Unlike the US, Eurozone banks have used the repo markets as a source of zero cost liquidity, driving the market size to over €10 trillion. The sheer size of this market, plus the reliance on bond investment for a significant proportion of commercial bank assets means that an increase in interest rates into positive territory risks destabilising the whole system. The ECB is sitting on interest rates to stop them rising and stands ready to buy yet more members’ government bonds to stop yields rising even more. But even Germany, which is the most conservative of the member states, faces enormous price pressures, with producer prices of industrial products officially increasing by 25.9% in the year to March, 68% for energy, and 21% for intermediate goods. There can be no doubt that markets will apply increasing pressure for substantial rises in Eurozone bond yields, made significantly worse by US sanctions policies against Russia. As an importer of commodities and raw materials Japan is similarly afflicted. Both currencies are illustrated in Figure 5. The yen appears to be in the most immediate danger with its collapse accelerating in recent weeks, but as both the Bank of Japan and the ECB continue to resist rising bond yields, their currencies will suffer even more. The Bank of Japan has been indulging in quantitative easing since 2000 and has accumulated substantial quantities of government and corporate bonds and even equities in ETFs. Already, the BOJ is in negative equity due to falling bond prices. To prevent its balance sheet from deteriorating even further, it has drawn a line in the sand: the yield on the 10-year JGB will not be permitted to rise above 0.25%. With commodity and energy prices soaring, it appears to be only a matter of time before the BOJ is forced to give way, triggering a banking crisis in its highly leveraged commercial banking sector which like the Eurozone has asset to equity ratios exceeding 20 times. It would appear therefore that the emerging order of events with respect to currency crises is the yen collapses followed in short order by the euro. The shock to the US banking system must be obvious. That the US banks are considerably less geared than their Japanese and euro system counterparts will not save them from global systemic risk contamination. Furthermore, with its large holdings of US Treasuries and agency debt, current plans to run them off simply exposes the Fed to losses, which will almost certainly require its recapitalisation. The yield on the US 10-year Treasury Bond is soaring and given the consequences of sanctions on global commodity prices, it has much further to go. The end of the financial regime for currencies >From London’s big bang in the mid-eighties, the major currencies, particularly the US dollar and sterling became increasingly financialised. It occurred at a time when production of consumer goods migrated to Asia, particularly China. The entire focus of bank lending and loan collateral moved towards financial assets and away from production. And as interest rates declined, in general terms these assets improved in value, offering greater security to lenders, and reinforcing the trend. This is now changing, with interest rates set to rise significantly, bursting a financial bubble which has been inflating for decades. While bond yields have started to rise, there is further for them to go, undermining not just the collateral position, but government finances as well. And further rises in bond yields will turn equity markets into bear markets, potentially rivalling the 1929-1932 performance of the Dow Jones Industrial Index. That being the case, the collapse already underway in the yen and the euro will begin to undermine the dollar, not on the foreign exchanges, but in terms of its purchasing power. We can be reasonably certain that the Fed’s mandate will give preference to supporting asset prices over stabilising the currency, until it is too late. China and Russia appear to be deliberately isolating themselves from this fate for their own currencies by increasing the importance of commodities. It was noticeable how China began to aggressively accumulate commodities, including grain stocks, almost immediately after the Fed cut its funds rate to zero and instituted QE at $120 billion per month in March 2020. This sent a signal that the Chinese leadership were and still are fully aware of the inflationary implications of US monetary policy. Today China has stockpiled well over half the world’s maize, rice, wheat and soybean stocks, securing basics foodstuffs for 20% of the world’s population. As a subsequent development, the war in Ukraine has ensured that global grain supplies this year will be short, and sanctions against Russia have effectively cut off her exports from the unfriendly nations. Together with fertiliser shortages for the same reasons, not only will the world’s crop yields fall below last year’s, but grain prices are sure to be bid up against the poorer nations. Russia has effectively tied the rouble to energy prices by insisting roubles are used for payment, principally by the EU. Russia’s other two large markets are China and India, from which she is accepting yuan and rupees respectively. Putting sales to India to one side, Russia is not only commoditising the rouble, but her largest trading partner not just for energy but for all her other commodity exports is China. And China is following similar monetary policies. There are good reasons for it. The Western alliance is undermining their own currencies, of that there can be no question. Financial asset values will collapse as interest rates rise. Contrastingly, not only is Russia’s trade surplus increasing, but the central bank has begun to ease interest rates and exchange controls and will continue to liberate her economy against a background of a strong currency. The era of the commodity backed currency is arriving to replace the financialised. And lastly, we should refer to Figure 2, of the price of oil in goldgrams. The link to commodity prices is gold. It is time to abandon financial assets for their supposed investment returns and take a stake in the new commoditised currencies. Gold is the link. Business of all sorts, not just mining enterprises which accumulate cash surpluses, would be well advised to question whether they should retain deposits in the banks, or alternatively, gain the protection of possessing some gold bullion vaulted independently from the banking system.

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