Bitcoins are forever

This is a story of mania, panic, and crash. It’s not new. 

Today’s market cap is roughly $150 billion. Averaged over, say, 3 million holders, that’s $50,000 each. Peanuts, if you belong to the 1%.

The trick is to kite the price to anywhere from 5 to 20 times the current level of $4,000.

The sales are essentially wash sales, as coins just go round and round. That’s why they’re coins, see.

Spectators – the victims – then want in, and the insiders pump and dump swimmingly, until the 3 million can get out with huge profits, at the expense of the latecomers.

The end is a classic Minsky Moment, when the latecomers try to sell. The algorithms in the trading platforms would ask: ‘To whom?’ And the price spirals to nothing.

Question for economists: Can the end trigger a financial or economic crisis? A dire scenario is that the latecomers’ loss results in bankruptcies and loan defaults, a retrenchment in purchases of housing and consumer durables, or in a general malaise in business and consumer confidence. Banks may fail if they finance bitcoin purchases.

With the benefit of foresight, monetary authorities will likely institute safeguards. Trading platforms are like banks, and will need adequate capital in case of an epidemic of ‘fails,’ which can happen if traders engage in short sales, or in margin trading. The Know Your Customer rule will have to be integrated into the block chain data base, and imposed by banks on customers operating trading platforms. 

Of course, theoretically, since virtual currencies can function as money, all trading can take place outside the banking system. If that were the case, the ponzi won’t work: How would the victims’ money enter into the bitcoin system? The price would go up and down forever, but that’s all. It’s funny money after all.

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EC 12. Pointers No. 8

FAQs on Chs. 10-14, and Epilogue of Backhouse

Ch. 10:

  1. What is Keynesian economics?
  1. What is the role of ‘animal spirits’ in Keynesian economics? [Try to research what Robert Shiller has written about animal spirits.]
  1. Who put forward the idea that would later be called the Keynesian multiplier? Explain this idea.
  2. Before Keynes came along, what were the most prominent theories of the business cycle?
  1. How did Irving Fisher think of the interest rate?

Ch. 11:

  1. What are the most important ideas in general equilibrium theory? What’s wrong with it?
  1. What is game theory? Is it a good alternative to general equilibrium theory? Why or why not?
  1. How is equilibrium defined in game theory? What is a Nash equilibrium?

Ch. 12:

  1. What is “welfare economics”?
  1. What is Pareto optimality?
  1. What is Kenneth Arrow’s “Impossibility Theorem”?
  1. How did Backhouse assess the contribution of welfare economics to economic thought?
  1. What is “market failure”?
  1. Explain the Coase Theorem.

Ch. 13:

  1. What is the main difference between the ideas in Keynesian economics and the so-called New Classical Macroeconomics?

  2. What are the main theories of economic growth in ‘development economics’? What is the ‘Washington Consensus’? Would the Washington Consensus be applicable or relevant to the Philippines? Why or why not?
  1. What did Hyman Minsky contribute to economics? (extra credit: not in Backhouse)

Ch. 14:

What is Austrian economics? Summarize the ideas of Austrian economics. Who are the main figures of Austrian economics? Is Austrian economics useful for understanding the Philippine economy?

Other topics (not in Backhouse):

What is the Tragedy of the Commons? Explain.

Epilogue:

  1. What is the so-called “neoclassical synthesis”?
  2. Discuss and compare the two different ideas of competition in economics? (The first is the competition as imagined and written about by Adam Smith and Friedrich Hayek; the other is competition in the sense of perfect competition in neoclassical economics.)

The Holy Grail of investments – Part 3

The problem of survival

In two earlier posts, I outlined the problems of the little guy trying to survive in the stock and bond markets. The problem is that markets are notoriously variable, even turbulent at times, and difficult to predict. This must be so because if the markets were predictable, the efficient markets theory would be reality, and there would be no practical point in investing/dis-investing. Stock and bond prices would reflect the best information then available, and on average investment returns ex ante and ex post across all asset classes would be equalized. The historical experiences of individual investors would differ, but this can be attributed to plain luck or lack of it.

Despite the markets’ inherent unpredictability, still, some rules of thumb have worked historically.

Continue reading “The Holy Grail of investments – Part 3”

PIMCO plays (or PIMCO’s play)

I’ve listened to this for the nth time and still can’t figure it out. So I must be very dumb. Gross is saying easy money will backfire (why I can’t tell), and fiscal policy can’t be relied upon because of politics. It leads to a story of double dip. But with bond yields already low, and PIMCO supposedly holding cash, they want you to think they will prop up stocks.

It could be a soccer play. They want you to buy stocks as they sell short; then later get you scared so you sell back as the economy tanks.

I suspect they also have a way of betting on interest rates falling some more without having to hold bonds. And when they think interest rates are as low as they can sell, they will short bonds while also publicly knocking them with an inflation scare story.

But what if stocks don’t fall, and bond yields rise “too soon”?

… Will PIMCO get bailed out just like LTCM?

Hysteria and Armageddon

This piece by Sebastian Mallaby is fundamentally flawed. It doesn’t matter if the Chinese government sold US bonds. They are US-dollar-denominated, and the Fed can of course print US dollars. This makes the US different from everyone else who issues debt in a foreign currency.

The dire consequences of Egypt’s Suez canal debacle do not apply, unless, which is unlikely, the dollar ceases to be accepted as an international currency. For now, the euro, yen, or even renminbi are way behind the dollar in acceptance.

The stock market crash of 1937

This is a notable event because it is the second worst crash in US history, and one not anticipated by that famous economist John Maynard.  (The worst was not in 1929, but 1930-32.)

It was apparently caused by a premature tightening of both monetary and fiscal policies.  The Keynesian doctrines had not yet become mainstream even within the advisory circles of Pres. Roosevelt.

Moral lesson for today:  Pres. Obama has to be careful in his struggle with the fiscal “orthodoxy” of the Republicans.  If he loses, there goes another crisis.