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Recession, Basel III and Xrp


jag216
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7 minutes ago, lucky said:

What do you mean with "this"? Are you now trying to link the effect of colonialism, the Industrial Revolution, WW1 and WW2 to the theory that "fixed supply monetary systems are not stable"??

For example, every crisis in the highly seasonal U.S. economy (agriculture) spread to England, which is why the Europeans bullied the Americans into starting the Fed in the first place. 

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1 hour ago, lucky said:

What an utter nonsense. Gold as a physical form of payment has been used for thousands of years. If anything, time has proven it to be very stable. The same cannot be said of banknotes with a promise printed on it.  Even less about digital IOUs referring to non-existing bank notes. You cannot possibly call the system we now have stable. It nearly completely collapsed in 2008, and it may still collapse any moment.

I think @jcdenton is arguing along the correct lines. I think the problem is the word "stability" and our understanding of it. In economics, a stable vs. an unstable system has a very particular meaning. In English, however, "stable" can also apply to "gold being used as a means of settlement for many years", for example. We are both using the term correctly, and both having totally different conversations.

You are correct, people continually return to fixed settlement systems because the governance of elastic systems suffers from political problems. JCDenten is arguing correctly that the elasticity of our current financial system is what prevented the total collapse of our economic system--which is what would have occurred if gold was the settlement mechanism, for example. And, when I say total collapse, I mean that it would have been the end of global civilization as we know it--this is a point which cannot be over emphasized. Flexible systems exhibit poor outcomes, and wacky states, but they do not collapse. 

When I say collapse, it means the balance sheets of all banks globally cease to exist, and all payment systems would cease to function. There is no longer any capacity for paying for goods and services, the unemployment rate tends to 1, the political system collapses, and the result is, historically, war, or, if the political system acts pre-emptively, a debt jubilee, such as those recorded in early Sumaria.   

The interesting thing about the xrp ledger is that during the collapsing phase, the last ledger remaining is the base xrp ledger--it continues to exist as long as there are active participants. Which is very novel, this resolves the elimination of the payment system due to deflation, but, it does not eliminate the recurring deflations--it exasperates them, by increasing their frequency and amplitude. 

Edited by Wandering_Dog
fat fingers
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5 minutes ago, Wandering_Dog said:

during the collapsing phase, the last ledger remaining is the base xrp ledger--it continues to exist as long as there are active participants.

Interesting. There are so many ways this could play out in a crisis. I strongly believe crypto is fundamentally good because it increases optionality for practically every person on Earth. What an invention! 

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There is a ton of technical and non-technical literature on the gold standard, and on instability, although the latter is often more technical. A quick google scholar search turns up lots.

Here is a piece I'm not personally familiar with but seems to have a non-technical approach that may be sufficiently palatable for some.  

Edited by Wandering_Dog
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3 hours ago, Wandering_Dog said:

Awesome, so what's the growth rate, and what's it a function of, according to the model they used in that picture?

 

I don't know, what do you think is fair? 2.5 percent long term annual growth for an advanced economy?  The point is, the debt levels are growing faster than GDP, and that is not a good sign.  Also, I bet all these graphs don't take into account recessions, depressions which the USA economy is not adequately prepared to weather this time around.

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On 12/13/2018 at 3:22 AM, Wandering_Dog said:

@jag216 I'm not following your argument here. 

Regarding B3 capital requirements, systemically large banks are not constrained by capital requirements. An example of this is the Barclays-Qatari loan-for-shares agreement in 2008. As a systemically large bank has the legal authority to manipulate its own balance sheet as it sees fit--a bank which creates assets is bound by its ability to convince a borrower to purchase bank shares, which can generate infinite equity, this is just one example of the non-constraint of so-called capital 'requirements'. 

Edit: You have argued that as the USD supply contracts, banks will repatriate USD_reserves from the Foreign CB Fed Reserve account because of inflation in a foreign country? Can you elaborate on this point, given that you are fundamentally describing deflation, which is the basis for the contagion in the first place?

Furthermore, you have suggested banks will behave in the following way: either as their assets contract, or their access to USD_reserves in the wholesale market is restricted, that these banks will purchase a non-regulated, speculative, volatile asset of fixed supply as a store of value during a deflation, is that correct? Why would banks make such a choice?

Finally, you suggest that a fixed quantity supply settlement system, such as the gold standard, is superior to an elastic supply settlement system, despite the fact that the elastic supply system was the solution to problems associated with the gold standard. Can you elaborate on how fixed supply settlement systems are superior to elastic supply systems?

For point one, I agree here - the B3 accords are voluntary even as I understand it - they are guidelines and not legislation. They are what banks agree to in order to put a floor on systemic capitulation. I can't speak to how dishonest banks may be about fulfilling their reserve requirements for leveraged assets, or how ratings agencies may face regulatory capture. Yes, we can all get fooled again, but this makes blockchain adoption more interesting - it draws a line in the sand, so to speak, in terms of transparency to some degree.

Point two, I have argued that, as domestic reserve requirement and creditworthiness tightens due to raising interest rates, banks will claw back their correspondent banking reserves to provide more liquidity at home - but those banks already hooked into RippleNet may actually get a jump on this scenario and pull this back in advance because they will be able to source liquidity for cross-border payments in a radically cost-effective way. It isn't the inflation in other countries that is the concern - it is the shortage of reserves to provide liquidity through the extension of credit at home. All the belts tighten as rates rise, but banks connected to RippleNet can lose the weight in advance.

Point three, by the time they consider purchasing XRP, the system will have to have already proven itself to be both viable and valuable because of the circumstance I have mentioned in point two. Being able to pull back correspondent capital and yet still maintain (if not accelerate) cross-border liquidity over a few months may provide regulators with enough data to determine the stability of the asset. By the time banks are actually getting around to doing this, the sector will no longer be dominated by retail traffic. We should already see a reasonable price for XRP - and stability through utility. It may take a full fiscal year of use in the marketplace for this decision making to even start. I wouldn't expect anyone to rule on the nature of XRP until it has survived a fiscal year in the trenches.

Point four, elastic solutions are necessary when it comes to extending credit to pay for war. If we go to war - at today's debt to GDP ratio, there will be a final fiat bubble and catastrophic collapse:

CBO%20forecast.jpg

If you consider our international incursions leading up to 9/11 as a sort of World War I event, and the great recession to be parallel to the great depression, then the parabolic rise in GDP to debt ratio during World War II could find a corresponding rise in global conflict event that raises the GDP to debt ratio to nearly 150 or more. At this point, your guess is as good as mine in terms of how that sort of currency inflation will affect the dollar, particular when other countries will certainly develop their own trade networks outside the hegemony of the petrodollar by that time.

Fixed supply asset-backed currencies - not like gold, which is easy to fake and dilute, hard to divide, can be shaved, etc. etc. - but like cryptographically protected and audited ledgers of real-world assets cannot stop countries from inflating their own digital currencies, but adherence to these standards will certainly create a multi-tier segregated marketplace where those trading on fixed-supply assets will refuse to trade in currencies that are inflationary.

The reason they will do this is because of the effects of Gresham's law - if you allow good money to trade with bad money, the good money will be pulled from circulation/hoarded - like junk silver. This is one factor that makes cryptocurrency attractive internationally. When compared to local system of high inflation, despite the volatility of price in local fiat, the principal of fixed supply on a network that has commercial value makes cryptocurrency closer to the 'good money' category than the 'bad money.'

In terms of our latest credit crisis, it was clear that 'good money' in the system - trustworthy and appropriately underwritten extensions of credit - was co-mingled with bad paper - 'bad money' - into mortgage backed securities that then were given AAA 'good money' ratings - well suddenly the production of these sliced and diced securities was no longer a matter of selling off the bad paper they already had on the books. Suddenly there was a market for CREATING MORE bad paper - because it could be easily sold as good paper when tied to enough good paper to satisfy ratings agencies. Lots of fees, commissions, etc. to inspire NINJA loans and such. Fun times!

What makes this whole mess even more interesting is the deep leverage people are applying to the purchase of bitcoin. When you purchase cryptocurrency on margin or by taking out credit that you have no intention to pay until you receive your gains, you are doing the same thing folks did when they used rent income as part of stated annual income while buying more houses and fabricating their income statements to leverage further and further into debt. So long as the price of houses kept going up, this scheme could continue, but once the prices flatten or collapse, the house of credit cards falls to the ground. Those folks with 3-4 houses in 3 years? Foreclosures galore.

It would not surprise me if there are elements at work now trying to flush out the 'bad bitcoin' - the folks who purchased bitcoin on credit with money they didn't really have expecting the price to continue to rise indefinitely. If BTC goes down to $2k-$1k and flushes the bad money out of the system in a mini recession as a result of what we are seeing this year, that's fantastic - it will create a perfect opportunity for patient good money to get back in.

But there will always be bad actors - we will hopefully have more regulation in place to lift the barrier to entry. Why do you think so many localities made it impossible to purchase bitcoin using credit cards? Unsecured loans become bad money very quickly in an economic downturn - particularly when the base interest rate rises.

Edited by jag216
Gold is easy to transport. Duh.
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48 minutes ago, jag216 said:

... [#2: As interest rates rise, and USD reserve liquidity is reduced, xRapid participants may increase their own USD reserve liquidity (one-time event) by converting foreign reserves to USD reserves.] 

Ok, I can agree here. This is the point of xRapid. I'm betting that the time for a correspondent bank to implement xRapid, an experimental and unregulated technology, won't be the 11th hour of a liquidity crisis. I'm also unsure of why said bank can't go to the Fed for reserves, or why the Fed wouldn't simply restart QE--which is a more likely outcome, IMO, than a sudden, wide adoption of xRapid. But yes, a bank which uses xRapid can have higher reserves on their domestic balance sheet--whether this matters I'm not sure, considering they still have those reserves on the foreign subsidiary balance sheet, which is part of the same firm, and the ability to convert those Foreign reserves to USD reserves is unaffected by the liquidity crisis, afaik

 

48 minutes ago, jag216 said:

... [#3: xRapid use will stabilize XRP price, which will lead to xRapid use]

Circular argument, and it's tough to argue this point without more data. We don't know what will happen to XRP price given xRapid adoption. If xRapid use is a pre-requisite for xRapid use, we are naturally very interested in that exogenous "animal spirit" who adopts xRapid prior to the 'adoption criteria' being met. And empirically we're seeing no one use xRapid beyond testing. So, as with most things monetary, it takes a government to push the system into motion. Without gov involvement, either through the acceptance of crypto for tax payments, or the explicit approval of xRapid for banks' use via the Fed, you will never see xRapid adoption outside of a testing environment.  

I see what you are saying though: liquidity crisis --> convert foreign reserves to domestic reserves --> use xRapid --> XRP price stabilizes --> "brand improvement" --> wide xRapid adoption. I think it's unlikely. More likely is this: Liquidity crisis --> CB's restart QE. 

 

48 minutes ago, jag216 said:

Point four, elastic solutions are necessary when it comes to extending credit to pay for war. If we go to war - at today's debt to GDP ratio, there will be a final fiat bubble and catastrophic collapse:

If you consider our international incursions leading up to 9/11 as a sort of World War I event, and the great recession to be parallel to the great depression, then the parabolic rise in GDP to debt ratio during World War II could find a corresponding rise in global conflict event that raises the GDP to debt ratio to nearly 150 or more. At this point, your guess is as good as mine in terms of how that sort of currency inflation will affect the dollar, particular when other countries will certainly develop their own trade networks outside the hegemony of the petrodollar by that time.

I'm breaking this section into a few parts because you've touched on several different topics. Do you have a source for the argument that war economies require elastic money supply and peace economies do not? The inter-war period (peace) is an example against your statement, I posted a paper on it above--the fixed money supply system (gold standard) precipitated WW2. All economies require an elastic money supply system capable of expanding and contracting to meet the demands placed on the system. Mehrling and many other cover this topic. 

 

48 minutes ago, jag216 said:

Fixed supply asset-backed currencies [...] cannot stop countries from inflating their own digital currencies, [...] [fixed or decreasing supply] standards will certainly create a multi-tier segregated marketplace where those trading on fixed-supply assets will refuse to trade in currencies that are inflationary.

The reason they will do this is because of the effects of Gresham's law - if you allow good money to trade with bad money, the good money will be pulled from circulation/hoarded - like junk silver. This is one factor that makes cryptocurrency attractive internationally. When compared to local system of high inflation, despite the volatility of price in local fiat, the principal of fixed supply on a network that has commercial value makes cryptocurrency closer to the 'good money' category than the 'bad money.'

 IMO there are no laws in economics, there are many peculiar examples of behaviour in many different human systems, why one behaviour is law and the others not suggests a narrative rather than a law. 

Anyway, IMO, generally, this argument is self-defeating. First the commodity value of crypto is 0, or negative, if you account for the costs of hardware and electricity to use it. Fiat cash can be burned to keep you warm in winter :sarcastic:, while commercial bank deposits suffer from a similar no-commodity value problem. You simply can't apply this behavioural phenomenon here. Second, and more importantly, you are actually arguing that crypto will be hoarded and never used, which is the opposite of your argument that xrp will be widely used. Saying Gresham's Law --> Fiat   is the inverse of what Gresham's Law states, unless I'm missing something there. 

 

48 minutes ago, jag216 said:

In terms of our latest credit crisis, it was clear that 'good money' in the system - trustworthy and appropriately underwritten extensions of credit - was co-mingled with bad paper - 'bad money' - into mortgage backed securities that then were given AAA 'good money' ratings - well suddenly the production of these sliced and diced securities was no longer a matter of selling off the bad paper they already had on the books. Suddenly there was a market for CREATING MORE bad paper - because it could be easily sold as good paper when tied to enough good paper to satisfy ratings agencies. Lots of fees, commissions, etc. to inspire NINJA loans and such. Fun times!

 

The proportion of "good money" to "bad money" in the crisis can be seen below (IMF) [if such a simplification can be made with a diverse array of monies over time and given institutional intervention]. The quantity and the prices of the "bad money" was comparatively so small as to be unnoticeable in the world economy, but yet the entire system nearly collapsed. This is because monetary systems collapse as a part of normal operations--and this is why an elastic system is so important.  

 

image.png.ff7010d20254d4279912c9a4e496fe09.png

 

48 minutes ago, jag216 said:

What makes this whole mess even more interesting is the deep leverage people are applying to the purchase of bitcoin. When you purchase cryptocurrency on margin or by taking out credit that you have no intention to pay until you receive your gains, you are doing the same thing folks did when they used rent income as part of stated annual income while buying more houses and fabricating their income statements to leverage further and further into debt. So long as the price of houses kept going up, this scheme could continue, but once the prices flatten or collapse, the house of credit cards falls to the ground. Those folks with 3-4 houses in 3 years? Foreclosures galore.

It would not surprise me if there are elements at work now trying to flush out the 'bad bitcoin' - the folks who purchased bitcoin on credit with money they didn't really have expecting the price to continue to rise indefinitely. If BTC goes down to $2k-$1k and flushes the bad money out of the system in a mini recession as a result of what we are seeing this year, that's fantastic - it will create a perfect opportunity for patient good money to get back in.

But there will always be bad actors - we will hopefully have more regulation in place to lift the barrier to entry. Why do you think so many localities made it impossible to purchase bitcoin using credit cards? Unsecured loans become bad money very quickly in an economic downturn - particularly when the base interest rate rises.

I'm curious about this as well--just what amount of leverage has gone into crypto. My fear is that crypto is more of a virus than anything, forcing everyone to HODL, until successive speculative waves destroy the banking sector, leaving only narrow banks, CBDC, and crypto--which isn't necessarily bad, but why go through the pain of that when we can set the system to that state outright. 

 

 

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