Socio-Economic Crisis Grow In The Shadow Of Denial. Is Decentralized Capitalism Part Of The Solution? Are Fin-Tech & Digital Currencies Forces Of Disintermediation, Or Merely Factors Of A Growing Economic & Cultural Divide?
A Global Macro Thesis
Polarizing political ideologies & wealth disparity are symptoms of obsolescent traditional economic architecture & culture in need of an overhaul. The legacy of central banking/financial regimes at the end of a long term debt cycle is the cause. Utilizing existing current tools, no amount of financial engineering or sustained workforce productivity, will provide sufficient escape velocity to service the deflationary burden of global liabilities. To avoid the hardship of a disorderly global deleveraging exercise, greater public awareness of the underlying issues and productive debate are needed. Some key transmission mechanisms capable of steering us towards a new era of prosperity; (1) Economic Disintermediation, (2) Cultural Change & (3) Emergent Tech.
Historical cycles of debt, inflation, and war are related.
In this editorial, we’ll explore implications of the long-term debt cycle, quantitative-easing, deflation, generational rifts in technological literacy and media bias. We’ll also explore; decentralized finance, digital currencies, and fin-tech as factors/solutions of a growing cultural divide. I am politically agnostic, and have no agenda other than to promote fair transparent markets, encourage conscience capitalism, and perhaps spark forward looking conversation. For the sake of expedited publishing, I leave many open ended questions, and touch upon many topics that deserve more explanation. This is a live document, with hypothesis/conjecture open to further revision. The analysis, images, commentary are for public education, and editorial use.
These historical cycles often coincide with breakthrough technological innovation.
Global credit issuance is at historic highs relative to global GDP.
An anecdote to keep in mind when reading this….
In the land of plentiful resources, a primary driver of behavior is avoiding inconvenience. Think about it, when resources are available we hire assistants to free up time, nannies to watch the kids, fly first class while avoiding the line at airports, etc. In some respects, the quest to eliminate day to day hassle/stress/nuisance, is another way to describe the pursuit of wealth or even the American Dream. Upon realizing a comfortable lifestyle, the danger of settling into “Why not have somebody else deal with it” mindset; can have serious consequences. We oftentimes lose motivation to tackle unsavory tasks, rationalize our conduct with denial, and unknowingly shed responsibilities or even liabilities onto others. The prevalence of this mindset describes much behavioral phenomena we see happening today.
In our current era of populism, discussion of serious issues has been shelved. The prospect of deleveraging global debt, while accelerating technological innovation force radical change on industry/workers alike, has proven to be an unaddressable conundrum. It’s as if inconvenience has lulled global leadership into a state of willful blindness, as converging tidal waves of risk crest overhead. Ignoring fallout from global debt issuance & exogenous tech innovation, may shake the foundation of our cultural identity, and usher in an era of unprecedented volatility. Make no mistake, the shroud of these dueling issues are akin to an economic/sociological eclipse, unwitnessed in multiple generations.
Lets look at some data under the hood of the American & Global Economy….and you judge for yourself.
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1st Factor To Consider(Global Liabilities)
Younger generations have inherited the liabilities of a leveraged global economic regime on the verge of insolvency. With equity markets at historic highs, unemployment rates dropping and job openings skyrocketing, voicing contrarian perspectives on Main Street will likely be met with ridicule. Within America, youth are putting off major life events due to finances…why?
This expansion has not translated into increased workforce productivity.
Labor participation rate within the US is lower than the previous 5 recessions. Participation hasn’t increased despite the S&P climbing to all time highs.
Personal savings rates are plunging while nominal GDP growth has increased.
Most Americans have no savings whatsoever, and are servicing interest payments on credit cards at the highest average rates in 30 years..
Social Mobility is at historic lows. Younger generations are less likely to achieve a lifestyle equal too or better than their parents.
The cost of living is increasing at a rate that exceeds income.
Income growth has been limited to the upper echelon of wealth in society. The middle class is shrinking. 80% of income growth has occurred within the top 20% of the earners.
Birth and fertility rates are dropping.
These are just a fraction of the unaddressable issues buried under the rubble of rhetorical inconvenience, which we can explore in detail another time. The takeaway is that there are gaping holes in the preverbal ‘safety net’ upholding the American dream. If these statistics come from the best of times, just think how they’ll look in the worst of times. How will these issues drive behavior in adverse market conditions? ‘Fake news’ could blossom into a culture where refuting facts and forcefully silencing dissent is normalized. Who knows what populations are capable of when under extreme duress. Things are going to get worse and more polarized until we address these pink elephants.
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In reference to foreign markets
One could argue that America is in the “least worst”(as opposed to best) position to rebound in the face of unforeseen market risk.
The 2nd largest economy in the world China, has 250% private debt to GDP. Can the Chinese Government maintain order over their population during a prolonged recession?
The 3rd largest economy in the world Japan has just under 250% government debt to GDP, and a shrinking population due to the forces of deflation stifling the potential of youth. How long can the Japanese Government maintain the confidence of international markets in their ability to service these debts and exit a quagmire of this magnitude?
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2nd Factor To Consider(Where We Are In Bull/Bear Market Cycles)
We are currently in one of the longest economic expansions since WWII. What will happen when this bull runs outta steam? How will this affect interest rates?
The average bull market lasts 1,651 days. This expansion has been going on for over a decade. The average bear market lasts 362 days. The longest bear markets occurred during the 70’s, and coincided with rampant inflation & unprecedented interest rate hikes.
Both bull/bear markets have increased in duration over time…why?
Bouts of Extreme deflation & extreme inflation occurred frequently before the Federal Reserve was created. What will happen if market participants lose faith in the Fed, or more broadly central banking?
History shows us that exogenous inflationary events cause interest rate spikes, and thus a rise in cost of service on interest bearing financial instruments. 20% of America has a negative net worth, and servicing credit card debt at exorbitant rates. What affect would an extended bear market have on society in light of the aforementioned issues?
From the microcosm to the macrocosm…
Prolonged uncertainty and duress often compromise an individuals ability to make rational decisions. Anyone whose witnessed a friend or family go through bankruptcy, has witnessed the face of desperation. Lives are shaken, professional identity is self-questioned, there is blaming of others and clinging to improbable solutions that offer hope out of the crushing abyss of untenable debt service. Taking this into consideration, imagine what the world would look like if a billion people across the globe simultaneously experience symptoms of bankruptcy, lose faith in government, with limited professional skills to rebound.
I’m not trying to fear monger, nor am I predicting an apocalyptic future where the aforementioned scenario is a foregone conclusion. However, optimistic sentiment from this current bull market discounts the urgent necessity of addressing burgeoning risk factors that are not part of public conversation. When(if) the tide goes out, we’re gonna find out a lot of deflated folks are swimming naked.
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3rd Factor To Consider(Exponential Increase In Rate of Tech Innovation)
McKinsey estimates 30% of current job market will be automated out of existence within the United States by 2030.
“An analysis of the history of technology shows that technological change is exponential, contrary to the common-sense ‘intuitive linear’ view. So we won’t experience 100 years of progress in the 21st century — it will be more like 20,000 years of progress (at today’s rate).”
-Kurzwel
The rate of technological innovation growth is accelerating exponentially. This trend will produce an infinite amount of unknown unknowns, and force radical shifts on all aspects of daily life.
If automation threatens to kill 73 million American jobs, what new skills are required in the digital economy for job seekers?
The future global economy will be built on a foundation of data-driven computer science innovations whether its popular or not. As tech adoption accelerates in the workplace, how will our labor force adapt? Who will finance the enormous costs of professional retaining & education for over 70 million people?
Another anecdote…
Try telling a baby boomer (who spent his life climbing the corporate ladder and saved up for retirement), that universal basic income(UBI) might possibly be on the horizon due to the integration of tech like AI, or Robotic Processing Automation(RPA). You may be marginalized from social circles, miss out on opportunity for advancement at work or perhaps even labeled a socialist or communist. Regardless of the consequences in revealing data/facts to the uninformed, the persistence of these trends are irrefutable…but at what cost?
Generational rifts in technological literacy & culture stonewall timely flow of investment, education & retraining.
What appears to be happening. Business productivity isnt keeping up with technological change.
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How Did We Arrive Here?
*The Federal Reserve adjusts interest rates in part on Consumer Price Index(CPI), which does NOT take into account stock prices.
Quantitative easing(QE), also known as large-scale asset purchases, is a monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy. (-wikipedia)
The fed has injected over 4 trillion into financial systems since 2008. These injections strengthened the durability off our banking system, but perhaps failed to address archaic lending policies. Many people have no access to cheap capital.
ZIRP(Zero Interest Rate Policy), NIRP(Negative Interest Rate Policy), coupled with QE experiments rewarded those with existing wealth through stock & asset inflation. Most beneficiaries of QE, are either unaware or in denial that a significant portion of earned capital gains since 2008 are due to central bank stimulus, cheap credit, and to a lesser extent value creation.
The returns on the S&P 500, are highly correlated to liquidity injections from central banks.
The Fed Fund Rate is at historic lows since 2008. What will happen if they raise rates? Is it even possible? Inflation isn’t rising…are we already caught in the throngs of a deflationary liquidity trap?
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The Momentum Of Status-Quo
We are on auto pilot, drunk off the liquidity from unprecedented monetary & fiscal stimulus. As raging animal spirits crescendo in the final phase of this bull market, draining the liquidity from central banks may be impossible.
Both democrat & republican leadership in America have been running budget deficits since the 70’s(aside from the Clinton Administration).
Us debt is almost 22.5 trillion and exceeds 106% to gdp.
Wealth creation since 2008 has extremely low velocity. Most of this liquidity is unproductive and not moving through financial systems. QE may have remedied systemic banking risk…but it also brought into question the validity of trickledown economic theory.
Reversing QE and gov deficit-spending, could reveal a toxic abyss of structural obsolescent economic/cultural architecture, with a huge portion of youth holding the bag. Many analysts doubt we can engage in further fiscal and monetary tightening for the foreseeable future…me included. Just another known unknown to add to the list.
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Repercussions of Quantitative-Easing
A repercussion of stimulus can be seen in the perpetuation/emboldenment of cognitive/perception biases of QE beneficiaries, most of whom have already secured the American Dream. This cultural overhang has a stranglehold on politics, public narrative, resources, and paralyzes our nations ability to timely pivot.
QE has enabled unproductive corporations to access credit facilities at historically low rates. The cost of prolonging the inevitable demise of obsolete businesses, is just another known unknown. How many other companies balance sheets look similar to GE’s?
1.6 trillion in student debt is a big drag on youth today.
Students are paying inflated education costs financed with non-expungable recourse loan facilities…even after bankruptcy. Meanwhile, obsolete businesses have access to expungeable non-recourse cheap credit facilities. How do these lending practices service the greater good?
Many QE beneficiaries are baby boomers, who are looking in the rear view mirror while blindly driving society into the future. There’s no blame or disrespect intended toward elders here, quite the opposite. Fallout from central banking policy is to blame for postponement of restructuring.
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Mixed Messaging From Leadership
The CEO of JP Morgan Jamie Dimon, recently stated that we live in the most bifurcated market in American history. This is also the same man who said that Bitcoin is the biggest scam in the history of mankind.
A year later JP Morgan announces the creation of its own cryptocurrency and blockchain. There are obviously big differences between decentralized public crypto currencies like bitcoin, and JPM’s centralized blockchain. That being said, Mr. Dimon remains silent on the topic on this discrepancy, and fails to give any further clarification during interviews.
These behaviors are reactionary and reek of denial. I mean no insult to Mr. Dimon, he just happens to be a global leader within banking. Conflicts in messaging and action from leadership on all fronts, leave us to conjecture, and erode trust in our institutions. Leaders should be humble and willing to admit when wrong, or admit when they don’t understand something.
Distributed computing innovations like blockchain & decentralized databases…perhaps could’ve averted the possibility of this hack. Where is the forward guidance on it’s broad implementation?
“So the whole war is because we can’t talk to each other.” — Ender’s Game
One could argue that financial resources in America are predominantly controlled by older generations, yet the majority of tech savvy intellectual capital exists within younger generations. Perhaps this is one contributing factor to cultural immobilization. What are other contributing factors?
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Media As A Factor
Turn on the tv and see traditional media broadcast intellectually dishonest polarizing noise to consumers. Public mindshare is kept in a holding pattern through socially engineered sensationalist content and divisive agendas. It’s big business for media to capture & subvert attention. The de facto guardians of status quo drive advertising revenue by preying upon the attention of distracted, overworked, elderly and uninformed youth. Syndicating escapism is like disseminating SOMA pills, anesthetizing the populace to glaring signals of a rapidly evolving Brave New World. With 70% of the domestic economy based on consumer spending, TV is the perfect medium to drive the economic machine into oblivion.
One of the most popular shows in the history of television is a zombie show called the Walking Dead. A zeitgeist of our time is apathy.
It’s also no coincidence that our current president is also a former reality television star. Consumers are captivated by lavish lifestyles and the charisma of business authority figures who’ve seemingly climbed to the top of the food chain. Another cultural zeitgeist of today, is the obsession with being right and winning, which comes with a cost.
Productive debate within politics both domestically & internationally have been replaced with vicious character attacks. Instead of solving problems, machinations within government fortify feelings of distrust, divide society and entrench a culture of denial.
We are witnessing how an entrenched culture of denial, facilitates the establishment of an opioid addicted, debt laden/angry populace with compromised intellectual & critical thinking facilities. This could be the ideal recruiting ground for military personnel in a future world ruled by authoritarian regimes. In the absence of an acceptable economic system driving behavior strongmen may fill the void of leadership, scapegoat a common enemy and justify war as a means to unify…classic rhetoric of totalitarian ideology. We can see this manifestation is Southeast Asia today.
A broken Philippine economy, lead to rampant drug addiction, and the rise of strongman Rodrigo Duterte. Duterte, the former Police chief in Manila, won the popular election with the agenda of “quit drugs, or be killed by law enforcement.” The police have the authority to kill drug users/dealers indiscriminately without recompense. Many of Duterte’s political rivals and vocal critics have been jailed.
I’m not here judging Duterte’s methods to avert crisis, it’s easy to criticize from afar. The take away is, absent a stable/acceptable economic system driving behavior…strongmen/authoritarians are often commissioned to tackle unsavory, painful problems. Empowering schismatic personalities within government, risks further polarization within the nation, and the infliction of wounds that take generations to heal.
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Back To America…..
84% of the value in US stock market is held by the richest 10%. How can anyone expect youth of today to maintain the integrity of markets they have no stake in?
Money has no intrinsic value, its value is given to it by is participants. Exclusive capitalism is a form of authoritarian capitalism…which has no legacy or future. Perpetuating our current status quo only serves to increase the frequency/serverity of volatility and probabilities of black swans occurring down the road.
“It’s the economy stupid.” — James Carville
What Are Some Plausible Solutions?
- Deleveraging
What is deleveraging?( from Wikipedia)
At the micro-economic level, deleveraging refers to the reduction of the leverage ratio, or the percentage of debt in the balance sheet of a single economic entity, such as a household or a firm. It is the opposite of leveraging, which is the practice of borrowing money to acquire assets and multiply gains and losses.
At the macro-economic level, deleveraging of an economy refers to the simultaneous reduction of debt levels in private sectors and the government sector. It is usually measured as a decline of the total debt to GDP ratio in the national account. The deleveraging of an economy following a financial crisis has significant macro-economic consequences and is often associated with severe recessions.
Under normal conditions, the Short-term business cycle averages 8.6 years in length, and deleveraging occurwithin a frequency of 5–7 year intervals. The Long-term business cycle averages 54 years in length, and deleveraging occur within a frequency of 25–50 year intervals. The current expansion is on its 11th year, and no significant deleveraging at the government level has occurred in +80 years. Where is the discussion of deleveraging? Perhaps political populism and deleveraging are mutually exclusive…
2. Decentralization & Economic Disintermediation
The process of decentralization/disintermediation via Distributed Ledger Tech, is one(of many) key transmission mechanisms capable of steering the globe toward an orderly deleveraging. Capitalism and decentralization are NOT mutually exclusive, but rather comprise core synergistic forces in the changing paradigm of the new digital world.
Decentralized fintech is at the epicenter of value-creation/opportunity in this revolution, bridging divides in finance & computer science. With a cultural foundation rooted in mathematics, automation & technology, decentralized fintech solutions offer a veritable medicine to cure many inefficiencies plaguing mature economies of today. Before the bull runs outta steam, the optimist in me believes a window of opportunity may exist to accelerate the migration of our bricks & mortar systems to a digital substrate.
This assumption is contingent upon government & society’s capacity to retrain/mobilize a skilled workforce, in an effort to restructure many obsolete/inert components within our global economy. Through education and proactive effort, we may still pivot and mollify many growing risks of contagion derived from traditional boom/bust cycles. The goal is to avoid the hardship of a forced migration after a hard landing. Serious challenges exist to set this agenda in motion.
Contributing Factors To Economic Subcultures Like Bitcoin & Digital Currencies
A tech-savvy libertarian grassroots culture fuels the global digital currency speculative hype machine. The anonymous Bitcoin white paper appeared in January 2009, during the height of the financial crisis. Perhaps time will tell if crypto exists for a reason, necessity is the mother of invention right? Maybe not, the distribution of opinions favor only binary future outcomes. Instead of regurgitating another redundant list of reasons why Bitcoin is going parabolic or to zero, let’s discount the obvious with a more centrist view and discuss why it will at least maintain its current value.
1 Bitcoin is resilient, durable and global. Since inception, it continues to survive countless hacks, volatility and government cease & desists. The emergence of borderless communication like social media networks, allow people to interact in unaccustomed ways. Perhaps this is a natural causation of converging technologies. Historical prescience offers little wisdom on how policy-makers should engage this known unknown. In certain contexts, crypto currency appears to be an existential threat to authority & status quo. Regulatory intervention remains the biggest risk to the asset class.
2 Public crypto markets are adaptable and constantly evolving. The limitations of ‘today’, may not exist ‘tomorrow’. The rate of innovation within these markets are in line with accelerating technological innovation trends…an argument against its lack of scalability. Although the gini coefficient of digital currencies is more bifurcated than traditional markets, this is still a nascent ecosystem with only a decade of history. New projects and ongoing developments to address such issues within the ecosystem, can be viewed on sites like Github.
3 Initial Coin Offerings(ICO’s,IEO’s,etc.) appeal to underserved retail entrepreneur/speculator interests. Many crypto enthusiasts believe capital markets ‘are rigged’ and/or promote exclusive capitalism. ICO’s are basically a non-exclusionary unregulated IPO, without institutional capital participation. The ICO craze in 2017 was probably the first time ever, where retail investors participated in the capitalization of an asset class without/before institutional involvement. As previously mentioned, 84% of the equity in financial markets In America is owned by 10% of the population. One could argue that growing public malaise/disinterest in financial markets, draw increased fascination to the cryptoverse.
4 Digital currencies are fully exposed to market forces, bolstering resiliency . Bitcoin has been through almost 10 bull/bear markets cycles since inception. Each cycle results in greater global adoption, and increased capitalization.
These boom/bust occurrences may be part of a multi-phase maturation cycle.
As public adoption accelerates, capital inflows increase, and the longer the cycles become.
No central banking system exists to mute the volatility, so entrepreneurs/users of these blockchain substrates are forced to innovate/restructure/reorganize rapidly or die. As a result, this ecosystem is in a constant state of flux and evolution. For example, during the last bull market cycle, critics pointed out that Bitcoin’s volatility represented a limitation to global adoption.
The ecosystem responded with the creation of fiat collateralized stable coins, which are pegged 1:1 to The US Dollar, Euro, Yuan etc.
The advent of collateralized stablecoins, reinvigorated public interest in the ecosystem to participants with an aversion to volatility.
How many new public onboarding innovations like stablecoins, need to be created before public aversion/disinterest vanishes? Is there enough time and momentum for more organic growth to occur? Many scholarly critics don’t seem to think so.
Traditional Market Economist Perspectives
Many traditional market economists have difficulty quantifying the intangible value and/or accept the cultural phenomenon fueling its popularity. Nourial Roubini is a prime example of a brilliant economist who’s ‘tethered’ his reputation to the collapse of this asset class, and seemingly lost his objectivity in the process. I’m not here to say his assessment is right or wrong, however stigmatizing the crypto ecosystem as a whole is unproductive. Nobody is qualified to render a final judgment on this grassroots phenomenon in its current phase of maturation.
In a recent debate with Bitmex founder Arther Hayes, the crux of Dr. Roubini’s fear-based arguments were predicated upon crypto market participants being idiots, degenerate gamblers, and criminals. Contrary to popular belief, these markets are not just a means for criminals to launder money, nor are hackers unequivocally going to steal your money. Those are legit risks, but they do not capture the whole narrative.
No asset class grows from ZERO, to a hundred+ billion dollar market cap within a decade, without inspiring popular interest, and establishing some legitimacy. Perhaps when economic scholars devise solutions to wealth disparity, opioid addiction, and socioeconomic immobility, the primary drivers of support for growing economic subcultures like bitcoin will vanish. So are digital currencies and fintech forces of disintermediation, or merely factors of a growing economic & cultural divide? That’s for you to decide….I bring no prescient ability or hubris to render a final verdict here.
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IN CONCLUSION
An unspoken epidemic of our time is quality of attention derived from clashing perception biases. The wisdom of our collective efforts are at loggerheads, because there’s no consensus on what the actual underlying problems are. The fundamental attribution error is when individual behavior is attributed to character rather than circumstances. The probability of attribution errors driving policy grow exponentially in adverse market conditions. When individual identity is perceived to be under assault, fanatical ideologies tend to emerge as coping mechanisms.
When faced with the unknown, fear is the natural reaction. Cultural change doesn’t occur overnight, it takes generations to occur. The obsessive drive for profits, lifestyle, materialism has eroded our ability to address inconveniences. When searches for George Boole exceed searches for Kim Kardashian, perhaps we will have succeeded in redirecting cultural values away from consumerism to efficiency. Imagine interest in Boole’s primer “the laws of thought” exceeding interest in Reality TV…..NOT likely.
Progenitors of the fintech ecosystem have the capacity to propagate culture where thoughtfulness, creativity, and intellectual curiosity are virtues upheld at the protocol layer.
In a world where computer science is law, decentralized idea-based meritocracies can flourish. More importantly, service the cause of inclusive prosperity, and award individuality through consensus and open-source collaboration.
The alternative is to be consumed by the zombified hoard of group think, and continue to kick the can down the road. An unprepared workforce incapable of quickly adapting to changing economic realities… may not only stall progress, but drag us back into the dark ages.
Bottom line, the financial and cultural cost of in-action, could be the mother of all lost opportunities to embrace the future without the spirit of fear, hysteria and hardship at the helm. The time to mobilize is now while more options are available and less extreme measures can be taken to pivot. The question of our time is whether we choose to seek the unknown unified & prepared, or cling to the obsolete dogma that brought us here in the first place.
-Autodidakt
