The Universal Bank

(~10-minute read) 

    In the future, our primary monetary relationship will be with an artificial intelligence that determines the amount of interest-free credit we can have based on our potential and projected earning power, so let’s examine how interest-free money would work for an individual, a business, and the government. 

The Individual

     The amount of interest-free credit will be restrained by the discretionary income of the individual, but what about teenagers in high school before they have a job and expenses? How would they position themselves to qualify for an interest-free college tuition? Could the system truly be designed to create equal opportunity for all?  

     Obviously, not everyone has the same starting point in life, or the same degree of intelligences and skills, but the additional challenges of growing up in an impoverished home - whether financial or psychological - or in a violent part of town, or the many other circumstances that create extraneous hardships is beyond the scope of this article, which will focus solely on merit. 

     Keeping track of a student’s performance through a combination of their grades and teacher assessments from kindergarten through high school would create an academic snapshot of each person’s intellectual and emotional aptitude, ambition, and discipline. Think of qualifying for interest-free credit for college as distinguishing yourself in the eyes of an artificial intelligence that is continually assessing your future ability to pay back the loan through feedback from the education system. 

     Another piece of an academic snapshot could include a psychometric personality test the A.I. analyzes to help project the future income potential of the individual. The overall assessment would qualify everyone for an amount of interest-free credit to use for college with a predetermined payment schedule that automatically garnishes their future paycheck at a reasonable pace that isn’t burdensome. Being able to open your digital wallet and see the amount of tuition you qualify for as it continually adjusts to your academic performance would inspire and motivate students from junior high school through university, particularly if it was contrasted to basic living expenses to display how much discretionary income they would have on the path they’re currently on, and what it would take to improve it.  

     Once an individual is in the workplace, their digital wallet would have several accounts of interest-free credit available to them based on their personal balance sheet for a house, a car, and credit cards. The available credit in each of these accounts would grow or shrink based on their real-time finances, and their wallet could project future credit based on increases or decreases in income and expenses. 

     If the person loses their job, payments could be automatically (and temporarily) frozen, or the repayment timeline extended, or even some degree of forgiveness if an unfortunate circumstance like injury or disability caused a loss of earning power, but since there’s no 3rd party issuers of the credit, or a predatory collection process, there’s no need for bankruptcy proceedings. You owe what you owe. The artificial intelligence will automatically extract it at a reasonable pace, and limit the possibility of exceeding the capacity to repay it.

     The credit in each account is created out of thin air but backed by their future labor, which is the exact same process as a bank loan today except without the bank. For those mired in double-entry bookkeeping, the debt is a liability for the individual and an asset on the ledger of the system itself, which acts as a universal bank. Every paycheck would be automatically garnished according to a predetermined formula to slowly pay off the loans over time. When the debt is paid off, it’s retired the same way debt is extinguished at a bank. 

     There’s literally no difference in the credit creation process except for the elimination of a middle man collecting interest, which also eliminates the interconnected chain of counterparty risk and exotic derivatives between mammoth centralized institutions using a common currency vulnerable to the boom/bust business cycles that cause a domino effect of credit impairment that puts the whole system at risk. With every individual creating their own credit it’s like millions of currencies backed by their houses, cars, credit card purchases, and labor, but siloed from each other, which eliminates the risk of credit contagion and “too big to fail” because there wouldn’t be any centralized institutions at the source of it. It’s simply transferring the power of currency creation from banks to individuals, who would be algorithmically restrained by their discretionary income. This is how you create the liquidity needed to replace our current system’s dependency on single sovereign currencies. The legacy banking system would dramatically shrink in size, so any distress it faced from defaults on its interest-bearing loans would truly be a tempest in a teacup. 

    I cannot overemphasize how transformative this would be.  

A Business

     The main difference with interest-free credit for a business is how the corporate legal structure protects an individual from the consequences of the business failing, much like a politician disconnected from the consequences of their spending, so a business would have to qualify for credit creation. I’m sure a mathematician could analyze the stats of thousands of businesses and develop a formula based on things like how long the business has been established and profitable, debt vs equity, market size, etc....to distinguish between Joe’s Rocket To Outer Space Inc., and Apple.   

    A startup or a growth company wouldn’t qualify because their business model is either unproven, unestablished, or has too much debt. One way to align the consequences of the people making decisions with their actions is requiring the board of directors to maintain 50% of their net worth in the company stock, and when it’s bought back, 50% in the company currency.  Allowing deeply established companies like Apple to create their own currency backed by their products and services supplements the liquidity of currencies created by individuals to transition the monetary system from dependency on single sovereign currencies to truly decentralized credit. The size of the stock market would dramatically shrink in size and it would free the overall economy from dependency on its performance. This would temper the boom/bust cycle from the extremes of mania and depression to a slow, steady, balanced growth. And it would relieve the Fed from its mandate drift of constantly juicing the stock market higher. 

     Most likely, there will never be a company that survives forever, so the entire point of having thousands of currencies is to diversify the risk from single government currencies that perpetually get diluted by politicians and central bankers whose actions aren’t linked to their consequences with currencies from as many viable sources of productivity as possible, so any failures of single businesses would be siloed and isolated from contagion because each currency would be like .1% (or less) of the savings and purchasing power in each person’s digital wallet.     

The Government

      The government doesn’t actually exist as an independent entity. It sits on top of the productive layer of the economy and extracts taxes from the profits of viable businesses to fund itself. Meaning, if you take the government away, the private sector still exists; but if you take the private sector away, the government does not because it's not self-sustaining. Sure, it could create its own currency, but without the ownership incentive to self-organize productivity, a government currency would have nothing sustainable to back it except the power to mandate its acceptance as legal tender and jail its citizens for disobedience - until it collapsed. 

     The reason capitalism works is because ownership stake incentivizes innovation, efficiency,  and hard work to compete for every penny of profit since the owner(s) get to keep the excess once all the expenses are paid. Ignoring the incentive of ownership stake is the main flaw of Modern Monetary Theory and why Socialism fails. For example, I know someone who was hired as the head of maintenance for a local school district. During his first year he thought he was doing a great job saving the department money, but at the end of the year when his boss found out how much money he saved them, he was told to spend the rest of their budget on anything or it would get cut the following year. That wouldn’t happen in a business with ownership stake, and it’s the perfect example of government waste. The MMT proposal of buckshot government spending to fill the bathtub of aggregate demand is not grounded in the personal incentives that create and sustain the price discovery of a productive free market economy. 

    The real question is not how a government currency would work - it’s why should the government create its own currency at all? When the incentives of politicians are to appease the voters, they’re actually incentivized to be fiscally irresponsible, so they need to be restricted in their ability to spend, or the public debt will continually expand until the currency collapses. 

     The answer is simple: all government spending must come from taxes. If it’s worthwhile and necessary spending, the bill will get passed. If a natural disaster or World War Three pushes us over the budget, THEN a bond with a specific purpose can be issued with a repayment schedule that extinguishes the debt after it’s paid. The public will recognize when emergency spending needs to happen. The public will recognize when a military intervention is in the best interest of the nation, so the money to fund it will come from savings and not the monetary debasement programs of the Fed that steals purchasing power from the masses. All spending should be extracted from the current generation of taxpayers and not foisted upon people who aren’t even born. And the idea that a government who issues its own currency can never default is disingenuous. If the principal is repaid with money that lost half its purchasing power, that’s a default.   

     Alternatively, once we have thousands of currencies to choose from, and the ability to reject the government currency at will, go ahead with MMT - let the politicians spend like drunken lotto winners; it wouldn’t matter because blank check MMT spending restrained by inflation would quickly hit its limit and force raising taxes to save the plummeting currency. It’s the choice of competing currencies that would restrict politicians from profligacy. If you allow individuals and businesses to create thousands of currencies, and every merchant and customer has the choice to save and transact in whatever ones they want as legal tender, the value of the government currency would be kept in check by the public’s willingness to hold it.  

Implementation

     This system would run as a layer two application on one, or multiple, decentralized crypto currencies. It wouldn’t even matter if it was a decentralized government blockchain if it had the right design because it’s the protocol in charge, but I suspect the coming FedCoin whitepaper will reveal a permissioned centralized ledger, which will be resoundly rejected as an extremist continuation of failing institutions. 

     The recent fuss over AML and KYC regulations is not even the warmup act. The real fight will be about the legal tender status of alternative currencies in developed world economies. The government simply cannot allow mainstream adoption of cryptocurrencies as legal tender because the value of the dollar would collapse. It’s literally a national security threat. There is no cryptocurrency, no matter how well designed, that will be allowed to slowly replace the dollar as legal tender in everyday transactions. The only way for an alternative system to be implemented is through the legislative process. And the only way to generate enough political pressure from the public to truly change the system is if the new way is so beneficial to the general population that they don’t have to be convinced to fight for it because they will do it naturally. 

     This is why none of the cryptocurrencies will succeed in mainstream monetary adoption without the system of interest-free credit I am proposing. Most people don’t care what currency they use in their daily life, nor do they care enough to learn why cryptocurrencies would benefit them, so they won’t fight for cryptocurrencies alone. That revolt would look like Occupy Wall Street. In contrast, everyone would fight for interest-free credit. That revolt would look like American Revolution 2.0. In fact, a change of this magnitude would likely require a constitutional convention, so other important amendments could be included like campaign finance reform, terms limits, and other fundamental changes to course correct a corrupt Congress.   

     First, this alternative system of interest-free credit needs to be created and implemented in the developing world (like Africa) where this technology is needed to create their cultures with property rights, fair elections, and a sound currency. Once the system is operating in real-time and proves the concept, it won’t be hard to find support to implement it everywhere. Do you know anyone who would like to not pay interest on their house, car, credit cards, and college loans? I’m thinking 7.9 billion people would be interested in that once the vision is expressed. 

I'll end with one of my favorite quotes:

     “If you want to build a ship, don't drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea.” - Antoine de Saint-Exupery

An Open Letter To Charles Hoskinson

 ~5300 words 

Dear Charles,

(The first half of this article is for context since you know it better than me. It’s the real revolution of the second half that I’m writing to you about.) 

     I’ll start with my conclusion: in ten years Cardano will be the largest market cap of any corporation or cryptocurrency in the world, and I believe I can help you. Here’s a quick background of my unfortunate relationship with crypto so far: I found Bitcoin when it was a dollar, studied it for weeks, and came to the conclusion that it will never work due to security issues. A couple of years later I realized it also won’t work because it’s a proof-of-work protocol. I have the same opinion today. Much to my dismay, the world hasn’t figured out that Bitcoin will occupy a corner in a museum and be studied by historians while Cardano changes the world.  

     Around 2016 I checked back in with crypto and thought Ethereum’s smart contracts were a game changer, but it was still based on proof-of-work, so I checked back out. Then I found Hedera and thought it was exciting, but I felt something was missing. A few months ago I stumbled upon your whiteboard video explaining Cardano, which caused me to watch a few other videos, and I recognized in you what I’ve been waiting for. 

The Perfect Recipe

 

     Your approach of interoperability and scaling while including governance with funding through a treasury and the use of a proof-of-stake protocol is the perfect design. And your Africa strategy is brilliant. Bitcoin bulls have been preaching about adoption for years, but investment adoption is meaningless; it’s real-world adoption that matters, and that’s where Africa fits in.

     Truthfully, the developed world doesn’t need this technology. We have rule of law, a justice system, a voting and banking system, a medical records system etc. (albeit siloed and flawed), and while all of it would be drastically improved through the immutable record of a blockchain, it’s the developing world that needs this technology to build their culture with property rights, identity, fair elections etc.. 

     Creating digital identities and gaining real-world adoption in developing nations will establish the network effects and proof-of-concept for the developed world to be disrupted in its wake (some of it simultaneously). Many people compare the blockchain revolution with the internet in the late 90’s, but there is a massive and very critical difference. The internet was the best thing that ever happened to the government in the form of dramatic increases in economic activity and therefore tax revenue. Blockchain, however, is an actual real-world threat to the power structures of both the government and banking systems unlike anything this world has ever seen. Where the internet helped, blockchain will disrupt, so let’s distinguish the disruptions.

Distinguishing Disruption

     

     There are four main disruptions happening simultaneously, but only one of them threatens the government:

1. Tokenization

2. A peer-to-peer payment system

3. Smart contracts 

4. A digital currency   

     The first three will facilitate an economic boom as they disrupt nearly every industry on the planet; the last one is a threat to the power structures of this world. I do believe the government does not want to stifle the innovation of the first three, but they will defend their fiat monopoly like their job depended on it. While AML and KYC regulations are certainly coming to level the playing field with legacy banks and to track taxation, the existential threat to government would be bypassing fiat currency as legal tender to pay for real-world expenses, so it will never be allowed to happen - without the missing piece in the second half of this article.  

Risky Banksness 

     Bitcoin evangelists preach that we can be our own bank, but why would anyone want to be their own bank? Banks were invented for a reason. How many times did Yosemite Sam have to break into houses by gunpoint and steal everything valuable until the need for banks arose? Not only are banks the guardians of our assets, but they have fraud protection and risk protocols that would be stripped away in a purely peer-to-peer payment system, leaving the end user with no protection or recourse if their entire life savings were stolen. 

     Settlement and bank transfer delays in the developed world are mostly the result of risk management, not technology issues. I don’t know if it’s possible, or even desirable, to eliminate third party custodians when it comes to the implementation of a mainstream monetary system because the ensuing fraud would force the government to crack down with stifling regulations or ban peer-to-peer payments altogether. Trusted third parties are not the problem. The problem is the centralized power we grant banks to issue credit with interest, and a monopoly of single sovereign currencies that allows the government to socialize losses and put the whole system at risk because the incentive structure of the people in power is skewed toward fiscal and monetary profligacy to appease the voters. A fiat monopoly is like being forced to hold a penny stock that keeps getting diluted but you can’t sell.  

Power Vacuum (and not a Kirby)

      

     I know you have Libertarian roots, as do I, but I’m a pragmatist, as are you, so I hope you’ve accepted the same annoying but fundamental truth that life has taught me. There are two options in this world: a power structure that protects and defends freedom and fairness; or a power structure that represses it. The absence of the former creates a power vacuum for the latter to emerge. When humans are involved there is no decentralization of power. Someone will always seek to be in charge - to either enforce their way of life on others, or protect it from being enforced upon.  

     Personally, I think war is the most economically wasteful activity humanity can engage in. I remember in the idealistic days of my 20s questioning why we waste so much money every year on a foreign military presence when there are people starving on the street, but the unfortunate reality is if we don’t provide the global power structure to protect and defend freedom, China and Russia will fill the vacuum left behind. (Crypto provides a solution to this, but more on that later.)

     Likewise, our monetary system needs a power structure to protect the masses from criminals. Cryptocurrencies have not been truly tested in everyday life with people constantly exposing their wallets in transactions on a mass scale, which will attract cybercriminals from stealing credit cards to hacking wallets by installing spyware and keyloggers etc..  

Call 1-800-Bitcoin

     When someone makes a purchase at a store with their credit card, the terminal sends metadata from the transaction to the processor through the payment network to the card issuing bank, which scans for fraud, the buying pattern of the customer (ie strange location, transaction size, known scams), then approves or declines the transaction. If approved, a receipt is printed, signed, and the customer funds are frozen, then there’s a delay of hours to days before the funds are transferred to the merchant’s bank account. This is not caused by outdated technology. The funds could be instantaneously transferred, if desired, but they’re delayed as risk prevention to give the bank and customer extra time to recognize fraud.  

     Cryptocurrencies eliminate the intermediaries of the credit card processor, payment network, and issuing bank to allow peer-to-peer transfers of value at the point of sale, but it transfers the risk of fraud from banks to customers and merchants. If someone steals your credit card, there is recourse. Banks take that risk and absorb the loss as the cost of doing business within the larger profits they make from lending. 

     With cryptocurrencies, there’s no 1-800-Bitcoin to call if Yosemite Sam hacks your wallet and steals everything you own. And what about chargebacks?  What if the merchant doesn’t uphold their refund policy?  In peer-to-peer transactions there’s no larger authority to reverse the transaction, so small claims court cases would boom. 

     And what exactly is gained? Eliminating the custodians of our assets and their risk and fraud management systems is all risk and no reward, and iIt’s not the point of decentralized platforms.  

Restrict Me, Please 

     The pragmatic answer is to implement a hybrid approach of utilizing a multi-step and customizable digital wallet that connects to a trusted custodian who provides insurance. There’s a universe of difference between people locking up a percentage of their liquid assets in cold storage on the moon in anticipation of the great monetary system of the future, and the reality of people exposing their entire life’s savings every time they enter the password of their digital wallet to buy Cheetos. The monetary future of cryptocurrencies will be determined by security. 

     For ease of daily use, let’s say a digital wallet on your phone holds a user chosen amount of $1000 and it’s programmed so any spending under $100 happens with just a fingerprint, but depending on the person’s spending habits, maybe the next gate is $300, which requires both a fingerprint and a retinal scan. Maybe anything over $500 also requires voice recognition, and transactions over $1,000 involve the custodian. 

     Maximum transactions in a day could also be a gate, so the first 3 require nothing special, then increasing levels of approval are required to prevent a malicious bot from siphoning $1 a thousand times. Ideally, at a specified time near the end of each day, the wallet owner would get an email or text showing their transactions during the day and how the wallet topped off their $1000 daily balance by transferring the funds from the custodian to their wallet while the rest of their life savings, stocks, bonds, house & car titles etc. are safely stored and insured. So the most they could lose if they got hacked is $1,000.

     If it’s not a bank acting as custodian who also makes profit by loaning out deposits and paying interest to people to save with them, then a pure custodian/insurer would have to charge a fee, so it better be way less than 1% or it’s the same thing as losing that percentage a year to inflation in fiat currencies protected by banks. No matter how secure the wallet, once the masses are using it in everyday transactions and attracting criminals, if there isn’t a third party custodian with insurance, the regulations in the wake of the ensuing fraud will sabotage all the hard work of this industry. 

     I hope creating this security functionality along with the other features of a robust digital wallet (and possibly being the custodian) is a top priority of Cardano. As this technology matures, the safest, most trusted crypto platform with the least fees and most functionality will win, and if you want something done right, you have to do it yourself. 

The Immutable Reputation Incentive

  

     If there’s anyone reading this who still doesn’t understand the revolution of blockchain, here’s a practical example to extrapolate. I know someone who recently bought a puppy from a store, then a few months later looked into doggie day care while she went to work. The daycare place needed proof the pup had its kennel cough and rabies vaccinations. She had a rabies certificate from the vet, but there was only a date written on the store paperwork for the kennel cough, so she called the store who called the breeder and found out there’s not an individualized (and therefore trackable) label on the kennel cough bottle to prove it was given. 

     If an immutable blockchain system existed, the vaccination bottle could be given an individualized barcode tracked by the blockchain from its source so it could only be used once. The puppy could be microchipped with a digital identity created on the blockchain and its health record attached, which transfers to the store and then the final owner. The vaccinations at the vet could be added to the health record, so the daycare facility would have access to an immutable chain of ownership and health records they could trust. 

     Obviously, supply chain tracking depends on the honesty of the breeder, the store, and the vet along the way, so it’s not foolproof, but linking each person to some kind of reputation tracker like Google reviews incentivizes everyone to do the right thing. Even the reviewers could have reputation scores so someone with a political agenda couldn’t falsify reviews to make companies or people look bad without it reflecting poorly on themselves because their integrity would come to light from people they know (a feature Google does not currently have). 

Extrapolate This

 

     If you extrapolate this to the titles of cars, mechanical work, oil changes, and transfers of ownership, or the deeds of houses recorded with the county, you’d be able to track any component of anything you own back to its source. Whether it’s a TV, computer, or a couch, it would be possible to track where it was manufactured, so each company of each component could be linked to a reputation tracker where employees or other vendors and customers could share their experience of working with them. Giving consumers access to more awareness of where their products and services come from would create bottom up pressure on companies to treat everyone in a way that complements, informs, and transcends top down regulations. The obvious example is China.   

     This kind of pragmatic, real-world utility of the platform creates value. Whether it’s storing and tracking our own medical records in our digital wallet, simplifying health insurance administration, revolutionizing our voting system, making campaign donations transparent (even if anonymous), the instant settlement of stock trades, controlling what data we want to share with online advertisers, using simple contracts between landscaper and homeowner that execute upon job completion, or the infinite other use cases of smart contracts, the entire world is about to be blockchained, and none of it requires the horse and buggy technology of Bitcoin. The value is the platform, and the platform must provide security, desired functionality, and infinitesimal transaction costs (looking at you Ethereum).   

N-moFo-ing-T

     Non-fungible tokens demonstrate another aspect of blockchain that will revolutionize the entertainment industry, in particular, especially for content creators who can collect royalty payments whenever their work is sold, or even played. There wouldn’t be a need for subscription models like Spotify or Netflix or cable TV because the artist and/or production company could host their work on the blockchain and get paid every time it’s played. 

     Why does someone have to pay Netflix except for the things they produce themselves?  And why would content creators sell to Netflix when they can easily get paid by going directly to the consumer? One simple community-fueled review site could aggregate ratings into the Top 100 trending movies, TV shows, songs, documentaries etc. with links directly to the content, which sends payment from the wallets of every view or listen to the creator. Maybe subscription models could survive due to the ease of distribution to subscribers, but affiliate programs that pay people to promote their favorite shows to their peers could be more effective than centralized marketing. The Spotify or Netflix algo that recognizes patterns of people with similar tastes and makes recommendations doesn’t seem difficult to replicate for free.   

     Sports and concerts tickets wouldn’t really need a middleman either. Maybe for promotion, but the tickets would be secure and transparently owned by digital wallets, so they could be safely transferred. Why wouldn’t every seat of a hot ticket be owned by season ticket holders who sell the nights they’re not going to be there on a website designed for that purpose because the people and venue could trust they aren’t counterfeit?  

     Companies could issue stock directly to buyers who could trade peer-to-peer, so there wouldn’t be a need for a brokerage, or a stock exchange, or a clearing house. No more commissions on anything. Optimal asset allocation strategies created by algos would be abundant and could be selected from a menu by the wallet owner, so why would anyone need a human to recommend stocks? Pretty much every middleman will be eliminated as the world becomes direct-to-consumer and peer-to-peer, if it’s done securely.      

     

The Matrix

     Where blockchain technology will really flourish without any threat to the government is in the realm of video games and virtual reality. The entire movie and television industry will become obsolete as virtual reality technology develops. Why would anyone want to watch the stories of other people on a TV or movie screen when you can be fully immersed in worlds upon worlds in a metaverse where everything is happening to you directly?    

     Virtual reality will allow us to live multiple lives simultaneously that will be (eventually) indistinguishable from the physical one (I wrote a screenplay about this). Blockchain allows virtual worlds to operate monetary systems in a way that can be both trusted in the internal logic of the virtual world itself and allow a transfer of value back to the physical world (or from one virtual world to another). The ecosystem of video games and virtual reality will merge with the physical world economy. You could level up by slaying a dragon and win a coveted diamond sword and then buy a pizza with it because your wallet could exchange its value instantaneously. There’s literally no limit to the number of worlds that could operate with trustless transactions and transfers of value, and the creation of these worlds would be an economic boom unlike anything in history. Imagine the possibilities when general artificial intelligence fueled by quantum computing is creating all the worlds.

     But despite the exciting and immeasurable promises of the future, the real revolution is disrupting the monetary monopoly of the world we live in now.    

The Real Revolution

 

     The underlying problem with our monetary system is a disconnect between incentive and consequence. Politicians are actually incentivized to be fiscally irresponsible, so we are legally forced to use the currency they dilute as legal tender, or we would abandon it for an alternative that maintained its purchasing power over time by being outside the influence of their spending. The value of the dollar would collapse if we weren’t forced to use it. 

     It’s the lack of currency choice that prevents the self-correcting mechanism of the free market from restricting government spending by sending a signal to stop via the plummeting value of the dollar. Fiscal and monetary recklessness could not happen if the free market could choose to transact in alternative currencies. 

     This is why Bitcoin bulls who think the developed world central banks are going to adopt an inelastic, uncontrollable, decentralized currency are profoundly misguided. That would be like Superman choosing to eat Kryptonite. It would be asking them to voluntarily give up control and restricting themselves with a monetary straight jacket. The sovereign currency monopoly is not a problem that can be fixed by politicians proactively changing the law because it would require a majority of politicians to put the good of society over themselves (and it could be reversed when the next generation takes power anyway).     

      The obvious solution of allowing people a choice of currencies to use as legal tender in everyday transactions requires the digital replacement system to already be in place, then the real revolution can begin as the people and businesses, who are the real value creators, pressure the politicians to enact a change for the benefit of us all. But that requires a new understanding of money and a system that properly incentivizes its adoption. This is the purpose of cryptocurrencies. 

The Real Source of Value

  

     A definition of money needs to apply to every situation universally throughout all time, so we have to consider how it worked thousands of years ago before land ownership when people created products (ie food, clothes) from the natural resources in their geographic area. What exactly is the value being exchanged when two farmers trade wheat for clothes?  

     Each farmer has to come up with a price for their goods based on their time, energy, and cost of previously acquired resources, as well as other factors like demand and the nearby supply of other farmers with the same product. The underlying universal principle to define the value being exchanged is simply everything the free market factors into the price of the product. 

     The medium of exchange used to facilitate the transfer of that value is secondary as long as it has qualities that make it hard to counterfeit or duplicate. Gold was the chosen medium of physical exchange for centuries because it had those qualities, but the gold itself is not what’s valuable. It simply transferred the value within the products and services flowing through the economy.   

Beyond Interest

     In our current system, money comes into existence mostly through bank loans, which provides the funding for buying a house, a car, a business, or the many products and services of the economy with a credit card. Obviously, any credit created beyond the level of deposits in a fractional reserve system is inflationary and dilutes the purchasing power of the money already in existence. A fractional reserve system pulls forward future economic activity, which is something a hard money system with 100% reserve ratios doesn’t allow, but there’s nothing innately wrong with borrowing from your future revenue if the issued debt doesn’t exceed the productive capacity to repay it. The monetary system must be elastic. 

     Government spending beyond what it collects in taxes is funded by issuing treasuries, but we need to distinguish whether those treasuries are purchased with money already in existence or with money created out of thin air. Shadow banks, and now decentralized crypto lending pools, also issue loans, but, again, the distinguishing feature is whether they are collateralized with money already in existence, which is sterilized, or created out of thin air, which is inflationary. 

     At the heart of the money creation and lending process is a middleman (whether it’s a defi smart contract or not) who charges interest based on the prevailing time value of money and the credit risk of the borrower established by the market (and influenced by the Fed). Decentralized finance is certainly game-changing for the unbanked in how it can provide credit to developing nations, but it’s the same exact process we have now, except the lender is not a centralized institution. How is replacing centralized banks who charge interest with decentralized lending that charges interest any different? It’s still interest bearing debt that is owed to someone trying to generate a yield. 

     In our current system, if someone applies for a credit card, the bank will analyze a number of factors including their credit history, debt-to-income ratio, employment situation, house equity etc, then determine the amount of credit they qualify for and the interest rate. All of that can be done with a smart contract and an application layer that allows people to generate a currency in their own name, which they are legally obligated to repay and shows up on their credit report, so they are restricted in the amount they can create to a percentage of their projected discretionary income. The monthly payment schedule could be created upon issuance but with no interest attached. Maybe large purchases like a house require another step of human supervision, but there’s no reason a bank can create money out of thin air and an individual can’t. A smart contract could perform the same function of qualifying creditworthiness based on the financial situation of the borrower. 

     The time value of money only exists when there’s a middleman trying to collect interest on the loan. The real revolution, and the true potential of cryptocurrencies, is to decentralize the money creation process by allowing businesses and individuals to borrow from their future revenue by creating their own currencies backed by their products, services, and labor. This distributes credit creation from the banks and government to businesses and people with an elastic system that algorithmically restrains any private or public actor from abusing it. 

     Interest-free, endogenous money not only can be done, it will be done. 

Corporate Currencies

   Real value IS the products and services of our economy. The medium of exchange, and the payment mechanism, is irrelevant. The power of currency creation needs to be connected to, and restrained by, real world economic activity. If large scale viable businesses created the currencies by paying their employees, expenses, and supply chain in a currency they create, the money supply would be anchored to real-world production capacity, flow through the economy and provide liquidity, then get redeemed for the products and services created. Without this, the entire crypto revolution will amount to nothing more than replacing our current system with one that’s more efficient and hosted on a decentralized platform. Banks charging interest will become defi pools charging interest. The true potential of distributing credit creation among the value creators of the economy will be unrealized. 

     The current cryptocurrencies are just government fiat in digital clothes. The whole crypto world is built upon the layer of single sovereign currencies, and because the government will never allow the widespread use of cryptocurrencies as legal tender in everyday transactions it’s necessary to have channels back to fiat to pay your expenses. The only way the single sovereign currency system can fundamentally change is if the replacement system is so beneficial to the majority of people transacting within it that they become naturally motivated by the incentives to force the change.     

     Unless someone can get paid in their currency of choice, and pay all of their expenses with their currency of choice, nothing is solved. Unless the citizens can operate their lives without using government fiat, nothing is solved. Unless businesses can pay their employees and supply chains with their own currency created by the production process itself, nothing is solved. The only way to transcend the sovereign currency monopoly in a sustainable way is through a distributed, elastic system of money creation anchored to the production process itself. 

     Corporate currencies of AAA rated companies would flow through the transactions of the economy as the first medium of exchange in history that reflects true value as they return to the originating source upon redemption. (I’ve explained this in detail in an article called The Universal Dollar. By allowing businesses and individuals to create their own currency, which would be restricted by their balance sheet, credit rating, and projected income, the debt created would be owed to the system itself and not require interest because there’s no middleman trying to collect a yield. 

     The question is: how would thousands of currencies get valued against one another?  

The Universal Unit of Account   

     A few years ago, when I wrote about The Universal Unit of Account as the way corporate currencies could be valued against one another, I didn’t understand the difference between the platform layer of a native cryptocurrency and the application layer on top of it. I’ve recently realized the universal unit of account can actually be the native currency of ADA while an application built on top of it would allow corporations and individuals to create their own currencies (like tokens) in their name but denominated in ADA. 

     This would allow truly decentralized credit. The defi lending pools, and a smaller form of our current banking system, which use interest rates, will always exist for riskier, unproven credit, so the hunt for yield will be focused solely on this. Once corporations can issue their own currencies, the largest, safest ones would no longer need a corporate bond market, or stock issuance. As their currencies, backed by their products and services, flow through the economy, most of the financial world would transcend the time value of money and operate interest-free, which would make financial crises obsolete.   

      While interoperability allows many different platforms to operate in harmony, and it’s certainly possible we end up with several cryptocurrencies interacting with gov’t stablecoins, it’s also likely this ends up “winner take all” determined by the platform that can handle the transaction load, support a native digital wallet with the necessary anonymity (to control our data) and security features that connects to a custodian with insurance, and includes the application layer allowing corporations and individuals to create their own currencies, which will usher in a golden age of decentralized prosperity that transcends the boom/bust cycles of history. Smart contracts from the losing platforms will simply migrate to the one with the least fees, most functionality, and ability to evolve as real-world adoption creates a self-fueling network effect.    

     As the Cardano smart contract era rolls out and developers realize the superiority of the platform and migrate from Ethereum, and Bitcoin bulls realize the value of a cryptocurrency is about the functionality of its platform and not about scarcity, money will flow to Cardano. 

     Over the next decade, it’s entirely possible Cardano consumes the entire economy as everything becomes coded on it. Once ADA fully integrates the world economy by disrupting every industry with its smart contracts, the system will be in place for people and businesses to pressure the politicians into making it the non-sovereign unit of account and settlement layer between government coins, which means the final stage of denominating all the world’s goods and services in one unchanging universal unit of account would be complete, so if you went to the grocery store to buy bread the price would be 2.45 ADA. Toyota, Apple, and Microsoft currencies would be denominated in ADA. The digital wallet of individuals would spend according to user-selected currency ratios and keep the system in balance by returning the currencies in circulation back to the source as redemption for their products and services. 

     This is the real revolution, and real potential, of cryptocurrencies.

 The Torch of Hope

     Real-world adoption is a marketing game. Countries can’t adopt what they don’t understand or know exists. Local boots on the ground in Africa can surely win the trust of their leaders, but what Cardano needs are dynamic marketing videos - both long-form and bite-sized - to express why the design of Cardano is superior, and how it will revolutionize the world. After full adoption in the developing world, a long-formed documentary that inspires people and businesses in the developed world with the vision of transcending interest rates with truly decentralized credit will force the politicians to enact the change. 

     I don’t believe our politicians and central bankers conspire against us. They are normal people who are pressured into choices by the warped incentives of our system, and none of them can change this through the legislative process without the backup system being in place and an angry, or inspired, populace who remind them who votes and funds their political campaigns. 

     An inspired idea, clearly expressed, cannot be stopped. As a safe, secure platform like Cardano revolutionizes both the developed and developing worlds, as blockchain penetrates and disrupts every industry on the planet, as the custodial infrastructure develops, the people and business leaders of the world will be incentivized to pressure the politicians. Once corporations can issue their own currencies, and every value in the world fluctuates against a stable unit of account, which doesn’t change in value from the actions of politicians and central bankers, financial crises will become obsolete. When the government can no longer spend at will without crushing the value of its own stablecoin in real-time, and their expenses must be paid with real-time tax revenue, it will be impossible to create and sustain war. Empires will become obsolete because governments will finally be restrained, permanently. 

     If that sounds like a golden age of prosperity and peace it’s because it is. It’s a revolution on a global scale that is both inevitable and knocking on our door.   

     I can help you design and strategize marketing videos to inspire this vision of hope. Give me a shout.

Sincerely,

Jeff

BATTLE SONG: Since this is going to be a fight, here’s the battle cry I picture in the hearts of humanity. The middle gets me every time. 

Knights Of Cydonia

DISCLAIMER: I have 5% allocated to Cardano. I am riding it to the largest market cap in the world, or zero. When global regulations come out, the entire space could get crushed, so this is not investment advice.  Unfortunately, I’ve been so busy, in the time it took to write this, Cardano has more than doubled. I think it’s 200x from here, but that doesn’t mean it can’t go down by 80% first, and it doesn’t mean I’m right. I’m just a schmo like you trying to figure it out. 

Sold To You!

FANTASY:  I picture the old S&P pits from the 80s with mobs of intense buying pushing the market to all-time highs, and there I am hovering above the chaos, rigged to a wire like a character in a stage play that allows me to hover over the clamoring arms and sprinkle pink tickets on them like the petals of a rose - sold to you! - sold to you! - and yet the buyers can't get enough, so I attach a dispenser to my rear that unravels pink tickets by the hundreds, and I glide across the room in the Heisman trophy pose with my right arm straight out, doing a slow-motion bicycle kick while I crop-dust the eager buyers with pink confetti flying out my arse - sold to you! - sold to you! - sooooooold to you!  Oh, baby birds, little robins, eat it up, daddy's got more where that came from - SOLD TO YOU!

That image has played through my mind all summer.  

SUMMARY: With stocks priced to perfection, it's time to look ahead and calculate the baked-in degree of delusion by considering how the election and second wave risks will affect different asset prices. I'm thinking we get mean reverting reversals into the election to shake people out of their position. Covid is an unknown, but I don't see why anyone should believe the worst is behind us. 

Things to consider: 

The expected short-term rate of change improvements in the data is probably close to over, but the virus uncertainties are clearly not, and yet the market is priced like the worst of the Covid is behind us and it's all rainbows and unicorns from here. 

There won't be any Fed action anytime soon, so the only positive catalyst left is a fiscal package, which, even if it does happen, why wouldn't it be sell the news?!  And if not, how come?  You can make the case that the fiscal and monetary actions of the last six months has replenished the missing economic activity, but now what?  People need more money.  What about all the closing businesses, reduced hours, layoffs etc., and that's before we even find out if there's a real second wave that makes it all much worse.  

It seems to me this is the worst risk/reward for stocks in all of recorded history. And that's not even considering the algo dynamics of shaking people out of their position like the last election. In the face of all this known economic damage, the Fed on pause, and the uncertainty of a second wave, my question to you is: how will the buyers maintain a bid into the most binary event in years?  

But to start the selling, we need a catalyst, right?  The obvious ones are the upcoming NFPs, or the Fed meeting, or sometimes stocks get marked up into quarter end, or Sept OPEX etc.  For someone who doesn't have clients to appease, selling here is a no-brainer.  Even if the market breaks out for real, does anyone think it's not going to come back and test these levels after the election, after we know whether there's a second wave?  Then why should I hold through all of that uncertainty if I can get back in at the same level or better after there's more clarity?  It's this thinking spreading like a virus that should cause the market to rollover. If this was poker, staying long is like going for the gut-shot straight draw on the river.  Sure, it could work, but you won't be winning many tournaments if you do that a lot. 

Selling longs is not the same as getting short, however, I am looking for a signal to short the ES, but I plan on buying ATM calls against it to limit the damage if I'm wrong.  I'd like to see a breakout in the ES on one of those potential catalyst days that fails. The smart thing to do is to actually wait for the reversal signal to close back below the high, and it should be on a weekly candle, but I'd rather be part of trying to stuff it - if I happen to be available on the day, and I'll buy the offsetting calls to limit the loss to under half a percent.  

Then, if there's continuation to the downside, I'll either drop the calls, or more likely sell deeper OTM calls against it to make it a pure short or close to it.  If the breakout holds, I bet I could get out for less than half a percent because it would only be a couple of days.  I'd be willing to try this twice.  It's probably 10-1 for account sizes that can get in and out with a few clicks of a button (although, I personally recommend to never short stocks).  If I was a hedge fund that can't be that nimble, I'd sell futures into a breakout to hedge my long book, which doesn't mean it's going to work, but this game is the same as poker: if you consistently play positive risk/reward setups the positive expectancy will play out over time in your favor. 

I honestly don't know why some people stake their entire reputation on a particular call. Anyone who puts real money on the line could not care less when someone else gets something wrong, or right. It's all in your head. I've made money being wrong, and lost money being right many, many times. It seems fairly self-evident that it's not a good idea to tie your self-esteem to predicting the unknowable. And that's not to say there isn't a fun endorphin rush being right, or a torrid wave of worthless shame being wrong, but if you turn the volume down on that and not overly indulge in either, there's a freedom that comes with it that's priceless, so, seriously, pumps the brakes on the self-loathing - no respectable person cares if you get something wrong. 

It's not often that we have massive upcoming catalysts and now there's two in the months ahead: election scenarios, and Covid second wave risks. Someone smarter than me will put more time into these possible election scenarios, but here's a start.  The first two seem straightforward to me:

1. Trump + blue houses = crazy infrastructure spending and retaining the lowered taxes because Trump will become a Democrat with no nothing to lose and only a legacy to gain.  I would think this would be: dollar bearish, gold & silver bullish, stocks bullish, oil bullish, and bonds I don't know-ish, probably bearish. 

2. Biden + blue houses = higher taxes so stock market goes way down initially, but then it gets priced in, and the realization that insane fiscal and monetary policies are coming is bullish for everything, so stocks go way up over his term. This is the most direct path to inflation because it's likely the only way Universal Basic Income gets passed - like for real, not just patchwork periodic Acts.  (I will add, though, option one is also a way UBI could happen because Trump's only belief is whatever will cause the stock market to go up, he will do.)  Dollar bearish, gold & silver crazy bullish, stocks bullish even crazily so in the right ones, oil back to $100, and bonds bearish but capped by yield curve control, so it doesn't make a lot of sense to short bonds.  

The split house route is much more murky:

3.  Trump + split houses = dragged out fights over everything, so somewhat of a restraint on fiscal, but they'll still get things passed because that's what politicians with no accountability do, so MORE EVERYTHING, however, it's not as clear as option number one in how it will affect the different asset classes.  Bonds would likely stay firm with stocks more volatile, the dollar rangey, oil who cares, gold rangey, and silver restrained.  This one would suck. And so would the next.   

4.  Biden + split houses = stocks way down with a more difficult path back up. I suppose you could argue split houses will make tax hikes impossible, so maybe stocks don't react that much, but after long battles the Republicans would likely say if you keep taxes low, we will spend like drunken sailors on infrastructure.  So the two split houses scenarios will likely still continue to expand the everything bubble, but in a much more restrained, difficult path.  In all of the above, I think stocks eventually go back up and way higher, but how low do they go in the meantime is dependent on the scenario. 

*And it should be noted I'm only trying to grease the wheels in your own mind. We just have to react to what the market does, but I find it helps conviction if the market responds in the way you anticipate. 

The Covid risk is more important because it will trump any scenario above in the short and medium term. I read an article the other day suggesting that fading antibodies doesn't matter because people still develop long-term immunity after infection, which would be great if true, but it still means we need to develop herd immunity, which requires massive virus spreading and long-lasting economic damage. I don't find much hope in a vaccine because it will take so long to rollout and so many people won't do it anyway, myself included. I'm not letting the government stick a rushed vaccine into my arm.  

All I know is if schools reopen, kids don't care like adults do, and winter is when other colds and flus cause coughing and sneezing and mucus and indoor life for the north with people touching doorknobs and faucets with infected hands etc., so I don't see a reason why anyone should be expecting the worst of Covid to be behind us. The fact is no one knows, and despite all the figuring of election scenarios, the real risk is the degree of a possible second wave.  

ES Weekly.  I'm looking for at least a 10% - 15% pullback to 2900-3000, and if the wrong election result happens, or a second wave occurs, then it's back to the March lows to form a giant W, which honestly should be the base case. Good Covid news really should be a welcome relief, not the base case, meaning, if you think a virus that's asymptomatic for two weeks, and this contagious, will be contained, what are you basing that on?   

   

DXY weekly.  A mean reverting bounce would be pretty normal, mostly because it's going to be hard to maintain conviction into the election, but sometimes there's that one last annoying move lower, which requires either small position size or a stop out and another try.  Even with this reversal candle it's still in a downtrend. A higher high would happen above 93.91.  

Unless it happens on a catalyst day, I likely won't get involved.  95 is an important level the bears would want to defend.  If you apply the "what is the nastiest thing that could happen" mindset to this, it would be: a poke higher through 93.91 that reverses back down, then a new low below 92 that reverses back up and moves into 95 for the election, then a big spike into the triangle during the election debacle that reverses and closes back below the triangle. I probably don't need this in my life right now.    

EURUSD weekly. This is exactly where you would think a reversal would happen. If this market is going to breakout higher it likely needs to pullback and/or consolidate for weeks and then assault this level again.  I don't see why it will continue this relentless upside into the uncertainty of a binary event.  Note: the giant triangle finally broke to the upside, but what about a quarterly close back inside it at the end of September?  Doh.  

GC weekly. Gold will try to hold its old high at $1923, and maybe it succeeds because there's really no end to future  monetary and fiscal easing, but a deeper pullback is probably likely and shouldn't be ruled out. I'm hoping to see it come down and reverse off the $1800 consolidation level. If it did, I'd add to a core position, and if there's some kind of sharp reversal, I'd play a spec position from there as well. 

END GAME: deflationary vs inflationary 

This is the main macro thing to figure out in an overall outlook.  Will the dollar spike uncontrollably upward and force a Plaza Accord devaluation, or will it plunge all-time lows and force the Fed's hand to tighten, thereby ending the secular everything bubble?  

Ten years ago, my natural way of being was an inflationary end game person, but then I morphed into a deflationary person (mostly because I anticipated the dollar bull run), then last year I morphed back into an inflationary person.  It seems to coincide with where I think the market is going in the next six months.  If it wasn't for the flawed structure of the Eurozone, this would be easy: the dollar is toast. 

I understand the "global dollar short" argument, and maybe it's right, but I think all those reasons are why the dollar will go down, not up, as we've seen over the last few months.  Every liquidity and solvency event will be met with fiscal and monetary fire hoses. There is no limit - UNTIL a plunging dollar forces their hand. THEN you get the deflationary spike. If you add a Democrat controlled political structure and UBI then the inflationary scenario is a lock.  The only concern is if the Eurozone hits a wall about debt mutualization and comes under political pressure to breakup. Then you get the dollar spike that forces intervention.   

So, to me, if Covid worsens, and solvency events happen, that's dollar bearish. If a blue wave takes power, that's dollar bearish.  If Trump wins, Covid resides, and the Eurozone comes under political unrest, that's dollar bullish.  So, unless there's a return of the Eurozone fracturing narrative, all dollar strength and gold weakness is corrective within their respective larger trends. And the upside to gold is still staggering in potential. You just have to remember pacing. A move up from its breakout last year is supposed to consolidate for awhile before advancing again.  That could happen through time, or price. 

Bonds weekly.  I don't see why bonds won't breakout and test those highs, especially if stocks selloff into the election.  If Dems sweep, I wouldn't want to be long bonds. It could work if stocks selloff as a risk-off play, but the anticipated flood of treasuries would worry me.  There's certainly spec plays into the election, but not through it. At least not unhedged - as a position in a portfolio or with protection.     

AAPL Weekly.  I'm a buyer of Apple around $325, which is $81 after the split. I hope I get the chance. 

In closing, I'd like to remind you that I don't know anything, and it wasn't long ago I had pink confetti flying out my arse.