Wednesday, March 22, 2017

The Gold and BitCoin tussle.

Round one to Darth Vader.
The parody I scripted about a year ago, pitching Darth Vader representing crypto-currencies against Blackbeard the Pirate representing gold, in jostling for position as a viable option to fiat currencies, may have become less sardonic.

The price of one BitCoin has overtaken the price of an ounce of gold for the first time – touching on $1300, with gold at about $1240 on the day. Since then, both have eased, swopping lead positions in a market dance, but with gold being distinctly outpaced. Of course, one can make too much of it. Each market has its own peculiarities and driving forces.

Crypto currencies in particular are still in a very volatile stage. BitCoin rose to record levels on speculation around a BitCoin ETF, and falling nearly $300 on the application being turned down; but bouncing back remarkably to about $1250 this week. points to other supporting factors in “Increased regulation from Chinese authorities, demonetization in India, recently passed legislation in Japan, as well as the general instability of fiat currencies”. Analysts share a wide range of future price predictions. Gold on the other hand, has its own woes with U.S. interest rates, a dance partner it prefers over crypto-currencies and depressing the price to below the $1200 resistance level this week.

The BitCoin/gold paring may deserve more coverage than it has been given in the financial media because of what they have in common – a shelter for flight from our current troubled means of exchange. The picture that I painted of the past and the future doing a dance on the corpse of the present is not as abstract and futuristic as it may first appear. That context deserves repeating.

We now have three potential forms of money, each with their own element of fiction. If you strip gold of its ancient allure, its historic backing of paper currencies and its investment and adornment image, you could certainly posit the Keynes view that it is a “barbarous relic”. If you interrogate BitCoin’s mysterious and anonymous founding, creation structure and block chain security, you could equally have some qualms. But both do not come near the degree of fiction that permeates Fiat currencies. Debt is a fiction. It is nothing more than a promise to pay sometime in an ever-delayed future -- a very empty promise considering the increasing extent to which the gap between debt creation and the means to pay is beyond redemption.

In stating the case for crypto currencies, quotes Adam Davies, a consultant at Altus Consulting, saying. “People are unsure about what is going on in the world, and digital currencies unlike the U.K. pound sterling have been hit badly because of Brexit, so people are looking to divest into BitCoin. There is a definitely upward trend. So the drivers will be hedging against currency fluctuations and insecurity in the markets”.

Similar arguments have been made for gold since the world went off the gold standard, terminating its role as backing for paper currencies. But it is still used as a reserve asset by many central banks and private investors. In effect, it is much more than a commodity and has maintained monetary elements. Despite a near doubling of the gold price since the 2007 crash, many have expected much more from gold in a world of escalating financial insecurity. It could certainly be argued that it is under-priced, in part because of market short-term thinking; low consumer price inflation and high asset price inflation, and being overwhelmed by derivative trading.

While a return to the gold standard has solicited much debate, mostly against, the value of such a disciplining instrument in monetary policy may have been vastly under-stated. I came across this graphic compiled by the Bank of England, and included in a report by Chris Dillow on the website

A twenty year annualized view is useful in suppressing short-lived productivity gains, and highlighting longer term impact. Still, there may be some pitfalls in making too much of this. Co-incidence does not necessarily equal cause and the statistics are U.K. specific. In his accompanying article, Dillow may have connected too distant dots in arguing that it shows that neo-liberalism has failed to make people better off. But it is perhaps more than academic that the decline coincided with Milton Friedman’s influence, Reaganomics and Thatcherism, contrary to their acknowledged short term validity.

An observation that has been made in the Keiser Report may be somewhat counter-intuitive but is far more telling and intriguing: that the decline started shortly after the gold standard had ended. That makes some sense. With gold backed money, ill-discipline and national debt lead to a bleeding of your gold reserves. Without it you have endless money creation based on debt and declining interest rates which is not conducive to long term investment in productive capacity, but rather encourages capital to flow to rental income, assets and capital gains. This is one explanation for the Dow hitting record highs, despite months of declining company earnings.

It is tempting for gold and crypto-currency champions to want greater “official recognition” of these assets in monetary policies like holding BitCoin as a reserve asset. Nothing prevents a big central bank or monetary authority from starting their own crypto currency or asset that can be traded publicly and rival others. That seems unlikely in the foreseeable future, and may even be counter-productive because of the inevitable controls that will be imposed on trading in them. All these assets, including gold, should simply be left to be traded freely.

Their time will come. Perhaps sooner than we may think.

Friday, March 10, 2017

Creating customers creates jobs.

Is the focus on the role of capital too singular and misplaced?

You have to hand it to the capital supremacists. They have convinced many, including a good number of naïve political policy makers, that capital creates jobs, economic growth and prosperity – in its availability, accumulation, concentration, control and deployment.

Small wonder then that those same policy makers will see control of capital as the quick and easy instrument to uplifting the masses, not only feeding into populist misconceptions, but indeed labelling those who do own, control and manage capital assets as enemies of economic freedom. And if you can put a label to it like “white monopoly capital” you have created a convenient personified demon to become the scapegoat for all kinds of ills. We’ve seen much of that recently, revived under the “radical social and economic transformation” slogan. But it’s a subject rife with alternative facts and misconceptions that have to be challenged and unpacked in all three dimensions – ownership, control and management – and the relationship between them, before embarking on remedial policies.

More worrisome is the persistent notion that redistribution of assets and income is a superior remedy to disparities to economic growth itself. But blame that notion on the success of the capital supremacy spin. To be sure capital is vital to economic growth. It is the air that economies breathe. But economies do not live merely to breathe, and air is simply one enabler for a full economic life. That spin has disingenuously ignored a long standing intuitive truth: “Enterprise leads; capital follows”. And so do skills and other factors without which enterprise will be as hamstrung as it would be without capital.

Enterprise itself responds to the needs and wants of fellow human beings that makes up demand. In meeting those needs and wants it becomes supply, giving rise to another existential truth that supply exists because it serves demand. All I have done in my own writing, is to change the phrase from “supply exists because it serves demand” to “supply exists to serve demand”. That bit of impudence immediately raises the hackles of capital supremacists because it implies that customers rank above shareholders in an enterprise.

Their hysteria then drowns out important appendices:
·        That all transaction has to be guided by the three free-market pillars of supply, demand and price, and invariably problems arise not because the principles fail, but because they are severely warped by behaviour; and
·        That sensible wealth distribution has to meet the legitimate expectations of all of the stakeholders and encourage further contribution.

The ultimate reality is that tangible value, or wealth, can only be created when something useful is made for others – when it makes a contribution to other people’s lives. Wealth creation is indeed a reflection of service to another, and the source is customers, not capital, labour or even government. You can ascribe as many motives to the process as you like, but that existential truth will remain. Customers create jobs. Motives are irrelevant.

Rarely does one see a showdown between customers and shareholders. We witnessed one recently when the big bad builders joined an on fire Economics Minister Ebrahim Patel to announce the ownership and control transformation in the construction industry. Despite soothing platitudes of state/private sector co-operation in doing “the right thing”, which frankly it was, the handful of industry representatives were clearly uncomfortable – more like school-boys in the principal’s office. Patel held all the aces. Not that of judge and adjudicator of their collusive misbehaviour and not even as lawmaker. The ultimate power that he unleashed was that of being by far the industry’s biggest customer and the FOMO on a slice of huge infra-structure spending.

Of course Patel represents a single powerful customer. The power of ordinary individual customers is deeply and widely fragmented. When that comes face to face with large corporate entities driven primarily by shareholder interests, it crumbles and has recourse only to Consumer Protection bodies or courts. South African consumers seldom bother. But occasionally, perhaps not frequently enough, these entities are called to account, and shareholder-value arrogance is challenged. 

We had the perfect case study in the Ford Kuga incident. Those lengthy “procedures-to-be-followed” recourse on car recalls, and the view that recalls themselves are an admission of guilt, are clearly moulded by “cost/benefit” analyses that are such an integral part of maximising shareholder benefit. In the process, a model brand has been destroyed forever, and the outcome can still be hugely costly to the company. We’ve seen much of that globally recently. As clichéd as this may sound, you can never go wrong by doing the right thing. And the right thing is always to act in the customer’s interest first.

And then enter Rand rigging banks. Not a completely new story, and certainly not surprising to someone who has regularly cautioned about the power and potential parasitic behaviour of the financial services industry. But a puzzling, if not bizarre outcome all of these events is the surprising allegiance from the ruling party and even the E.F.F to the protection of free market integrity. Terms such as “break up cartels and collusions”; and “price fixing will not be tolerated”; and “price fixing creates distortions in the economy”, at best indicate some greater appreciation of working with markets rather than trying to control or ignore them. Hopefully it also reflects appreciation of an essential role of government in designing and enforcing the rules of fair play in free and open transactions.

To be sure, all markets are highly contaminated, especially those three essential pillars of supply, demand and price. But here’s the supreme irony: the biggest contaminators of these pillars, especially of price, are governments themselves. In South many critical prices such as energy, rail and road tariffs are arbitrary to say the least. And of course one of the biggest and most important prices in the economy – tax, or the cost of government – is completely removed from individual choice. The real question is whether this seemingly new and modest appreciation of the merits of free enterprise will temper its own behaviour as an important actor in the economy.

Emphasis on wealth distribution or redistribution will always be divisive. Emphasis on wealth creation, which translates into always putting the customer first, creates a common, unifying purpose.