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The geopolitical and financial significance of Bitcoin

Giancarlo Elia Valori

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Bitcoin and the other “cryptocurrencies”, namely Ethereum and Litcoin- although there are 33 additional currencies arriving on the Internet – are a brand new phenomenon on the currency market.

Currently we are all in the so-called “fiat money” regime, namely any money declared by a government to be legal tender, which is a currency not backed by gold reserves – a currency which is always and anyway accepted by everyone.

Hence it is also fiat money, like the first “lire” of the Kingdom of Italy.

This means it is a State-issued currency that is not convertible by law to any equivalent value in gold or other hard currencies.

Fiat money is stable as it is controlled, almost on a daily basis, with the money demand from the economic system.

When there is an excess of money supply, we talk about inflation.

This is, indeed, the true meaning of the alltoowell-known concept of “inflation”, not the mere “price increase” which, at most, can be an indicator of excessive growth in money supply, not one of its causes.

Accepting the Dollar, the French or Swiss Franc, the Euro, the Ruble or any other currency (albeit, in fact, the situation would be somehow different for the Russian currency) is always mandatory by law.

Hence also seigniorage is mandatory, namely the act of legal magic with which each issuing bank decides that a small piece of paper is worth 100 nominal euro – although costing  only 3 cents to the issuing bank for producing it.

The difference between the face value of money and the cost to produce it (plus fixed costs such as equipment, staff salaries and taxes) is, in fact, seigniorage.

The latter, however, should not be demonized, as done by some theorists who – by using a silly contemporary language dogma – are called “radicals”.

Reasonably, the possible alternative is the intrinsic value money, like the medieval coins – molten gold marked as shown on the coin front or back. Nevertheless the King often “reduced the value” of coins or melted gold and silver with non-monetary metals, such as copper (although the United States was to use it in the future) or even bronze.

Today we would say it was a form of “seigniorage” “with criminal relevance and implications”.

The primal scene – just to quote a concept by Sigmund Freud -stemmed from the 1971 “Smithsonian Agreement”.

It was the American agreement Nixon had wanted as from August 15, 1971, signed in the Smithsonian Museum of Washington. It was signed by what we would currently call the G7 and reestablished an international system of fixed exchange rates without the backing of gold. It certified the end of FED’s obligation to pay for gold up to the fixed rate of 35 US dollars per ounce.

It was the end of the gold-backed currency – the “fiat money” no longer pegged to intrinsic money – occurring after the Allies verifying that the American currency was severely overvalued.

The costs borne for the Vietnam War, the end of the Johnsonian cycle of Great Society and the crisis of US products on European markets, were all factors which led De Gaulle, at first, to ask – without further ado – the payment of the US debt in gold or in hard currencies. Later many other allies who were reluctant to put in place non-tariff barriers against US products followed suit.

To put it more brutally, Nixon shifted the burden of the US super-inflation onto his allies of the Bretton Woods Agreement, which Europeans were forced to pay since they had to buy highly overvalued dollars for their international trade.

As the US Treasury Secretary, John Connally, said at the time to his European colleagues: “The dollar is our currency but your problem”.

In other words, cryptocurrencies are the result of this long historical process.

The currency based on Nothing, the postmodern point of arrival point of the disembodied monetary instrument.

A currency that is believed to be good because everyone thinks so – a financial transposition of Andersen’s tale “The Emperor’s New Clothes”.

As you may remember, it is the tale about two weavers who promise an Emperor a new suit of clothes that they say is invisible to those who are unfit for their position, hopelessly stupid or incompetent – while in reality, they make no clothes at all, making everyone believe the clothes are invisible to them. When the Emperor parades before his subjects in his new “clothes”, no one, including his Ministers, dares to say they do not see any suit of clothes on him for fear that they will  be seen as stupid. Finally, a child in the crowd, too young to understand the desirability of keeping up the pretense, blurts out that the Emperor “is not wearing anything at all” and the cry is taken up by others.

The same will happen to the contemporary monetary equilibrium, but it will certainly not be a child who will get  bankers and the public at large to open their eyes.

Hence today banks create money, which is mandatory to consider valid, with a fiat -namely ex nihilo – from the Void of Value. Or from their debt or even from the State debt.

Just issue securities having another name.

Hence, what is currently money? It is what the Auctoritas decides to be so.

Or, to be precise, the money supply currently issued by the central banks or other banking institutions, which is not based on savers’ deposits or on debt repayment forecasts,  but it is only the sign of a debt, the “promise of a settlement”which, however, is spent immediately.

And hence it is confirmed in its Value. The Value lies in theshift from a currency to another or from a currency to real goods or assets.

Obviously banks still earn interest on the money supply, regardless of its source.

Bitcoin, however, is not a currency like any other, guaranteed by internal law and interbank agreements.

The cryptocurrency is based on a mechanism like the one of online sales, namely the peer-to-peer one, which is gradually accepted by all those who now operate with Bitcoins.

Hence, while the final Bitcoin supply is defined – as always happens – our Internet currency is completely volatile.

Therefore it cannot certainly be a unit of account.

Hence Bitcoin varies- programmatically – as demand changes. In fact, last year its value increased by 47 times.

The reason is simple: it is a monetary supply that adapts to demand, but is also able to stop so as to create sufficiently long Bitcoin income and returns to attract average investors.

In January 2018,the cryptocurrency is worth approximately 900 dollars – a value that will probably increase when, in all likelihood, the Internet currency will be accepted by large commercial and distribution chains.

If it is a currency that influences markets by adapting to buyers’ requests (or artificially reducing supply in an instant), the only ones that can reap benefits are the Great States, the International Crime Organizations or the new networks of global Banks.

Never let them tell you that the small investor of Grand Rapids or Varese can determine the first “peer-to-peer” that, by repetition, triggers the chain off.

It is another fairy tale like the one of the movie Mary Poppins pointing to the magical growth of the penny deposited in a London bank, growing out of all proportion and turning into huge amounts of money.

The fairy tale is the expected automatic growth of funds denominated in Bitcoins, from 10 euro up to millions of millions, like the stars.

In fact, nothing is closer to the world of Andersen or the Brothers Grimm than some bad finance.

We can wonder whether the cryptocurrency is nothing more than a “Ponzi e-Scheme”.

You may recall the Ponzi Scheme or pyramid scheme, in which the high interest rates granted to capital providers -attracted precisely by the rates that are promised – are paid with new investors’ fresh capital.

In fact, what is striking is that the production of Bitcoins is sometimes artificially low because there are many people  who want to buy them.

An issuing bank à la carte.

In fact, the many people who are waiting for buying Bitcoins hope that their value will increase, but only after they have managed to buy them.

A self-fulfilling prophecy.

A mechanism which is exactly the same as the Ponzi Scheme.

As the best US financial advisers say, do not follow the crowd.

Hence the Bitcoin is a “bubble”. A bubble probably bound to last, but still a bubble.

A bubble born in 2016. The primary year, while everybody makes reference to 2009, when the production of notes was no longer enough and the debt to be repaid was huge, while the West was entering its darkest crisis since the 1929one.

The trigger,i.e. the banking panic and the unaware laissez-faire approach of the US Presidency, were the same in both cases.

Two crises – the old and the new -broken out precisely in the United States, the burden of which was later shifted onto  the rest of the West.

With a view to overcoming the first crisis, the huge costs borne for the Second World War were needed.The Rooseveltian stimulus had been to little avail.

The second crisis, much closer to us, which was triggered by the subprime crisis, has needed liquidity injections even greater than those needed during the 1929Great Depression – injections which have not ceased yet.

In the latter case, the exit from the crisis is ensured by the creation from nothing of the largest mass of money in human history, also through the Internet.

In fact, the Internet currencies have allowed to create exchange value, purely financial values ​​that have strongly contributed to multiplying global liquidity in collaboration with standard currencies, which have been distributed indiscriminately to just any market – with helicopter money – by the US Governors and then by the ECB Governor, although certainly in much smaller proportions than his US counterparts.

On the other hand, when there is a liquidity crisis- a crisis caused by an excess of debt – every issuing bank prints money or rather creates money from debt securities. There is no other solution.

Contemporary Value arises from the mastery of a Name and from the artificial dissociation between this Name and a New Name.

Furthermore,in any case, the presence of cryptocurrencies only on the Internet and with a system along the lines of the peer-to-peer mechanism of normal online sales has allowed hackers’ systematic theft of 14% of all cryptocurrencies existing on the worldmarket.

A theft worth 1.2 billion US dollars, with revenues equal to at least 200 million US dollars.

In less than ten years, however, the technology generatingBitcoins will be vulnerable to cyber-attacks launched by quantum computers, which will become more widespread  than they are today.

The attacks on virtual currencies have already cost governments and private companies owning them asmany as 113 billion dollars of turnover.

Nevertheless, who is currently inflating the Bitcoin value, which has more than doubled compared to January 2017 –  a value that is now around 125%?

The main reason for this is China. Beijing is now the first market  for the exchange of cryptocurrencies in the world.

As early as 2015 China alone traded 80% of Bitcoins.

Today, the top 4 among the 32 major exchange platforms of these new currencies mainly trade yuan.

One of these platforms has opened a mining station for  “creating” Bitcoins – an operation which is highly energy-intensive and consuming – on the slopes of Tibet, where there is abundant low-cost energy.

Every time the yuan depreciates, the Bitcoin appreciates, because there are so many Chinese who pocket their capital to avoid government’s control and hence buy Bitcoins.

The yuan is depreciating and the capital flight from China is ongoing. The tool is often the conversion of the yuan masses into Bitcoins.

We may wonder whether the e-currency is used as a tool of  “indirect war” against China.

Moreover, the current growth on the US and on some other European Stock Exchanges has occurred with credit money, borrowed at zero interest rate, which has been provided to  major investors by central banks.

Another possible reason justifying the Bitcoin growth.

Virtual money may havealso been created to avoid the investors’ traditional rush to gold – the “tribal residue”, as Keynes called it – and hence not to increase the dollar value, currently maneuvered downward?

On January 15, one of the most active US-listed banks on the Bitcoin market ceased to convert cryptocurrencies into “traditional” currencies, but especially into dollars.

The beginning of the fall in the Bitcoin value, but the preservation of market liquidity, so as to prevent it from converging towards gold, in particular, or European hard currencies or, even worse, towards the Chinese or Russian financial markets.

Hence the Bitcoin is a pseudo-currency that serves to control the volatility and trends of global financial markets, as well as to keep it artificially high and avoid some currencies becoming “full” or sovereign like the Swiss Franc.

In fact, in 2018 a referendum will be held throughout the   Helvetic Confederation on the so-called “full” or sovereign currency, i.e. on a Swiss Franc created by the national central bank and not by international banks.

“True Francs on our accounts”. Only the Swiss National Bank can create e-money, where necessary.

These are the goals of those who have proposed the referendum.

Let us hope for the best. Those who almost invented modern finance – the Swiss merchants of the Middle Ages, the link between Italian ports and large Central European markets -now realize the dangers of creating value from nothing, the Faustian (and darkly malicious) mechanism currently governing the magical and alchemical transformation of banks’ and States’ debt into credit for individuals.

Let us hope that the financial world will come to its senses, just in time.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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Economy

Afreximbank Meets Ahead of Russia-Africa Summit

Kester Kenn Klomegah

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The African Export-Import Bank (Afreximbank) plans to hold its 26th annual meeting in Moscow on 18-22 June. A series of closed sessions will be held as part of the event including the meeting of Board of Directors of Afreximbank and a meeting of Shareholders of Afreximbank, as well as the open Russia-Africa Economic Conference.

The African Export-Import Bank, the Roscongress Foundation, the Ministry of Finance of the Russian Federation, and the Russian Export Centre are the key organizers of this event. The Afreximbank Annual Meetings is a high-level event, bringing together political and business leaders from across Africa to discuss the issues of trade, industrialization, export, and financial stability and efficacy.

Key themes planned for the economic conference are: State of Russia-Africa Relations: An Overview; Mining Industry: An Integrated Approach to the Fields Development; Prospects for Multilateralism in an Era of Protectionism; Railways Infrastructure as the Key Element for Development in Africa; South-South Trade: Path for Africa Integration into the Global Economy.

The other topics are Emerging Trends in Sovereign Reserves Management; Reflections on the Transformative Power of South-South Trade; Launch Afreximbank ETC Strategy; Cyber Solutions and Cyber Security for Solving Governmental and Municipals Tasks; Financing South-South Trade in Difficult Global Financing Conditions; The Future of South-South Trade and Infrastructure Financing.

Over 1,500 delegates are expected to attend the economic conference, including shareholders and bank partners, government representatives, members of the business community and media representatives. The conference will be a crucial stage in preparation for the full-scale Russia-Africa political summit and the accompanying economic forum, scheduled for October 2019 in Sochi.

“Russian and African countries are basically on the track of bilateral strategic partnership and alliance based on openness and trust. The fact that the Afreximbank Annual Meeting is to be held in our country gives a positive momentum for the mutually beneficial cooperation of the parties ahead of the full-scale Russia-Africa Political Summit that will take place in Sochi in October, and will add to the inclusive nature of the events,” emphasized Anton Kobyakov, Advisor to the President of Russian Federation.

Following the setup of the Organizing Committee for the Russia – Africa summit and other Russia–Africa events in Russia in 2019, Russian officials have described that this year truly as a year of Africa for Russia.

“We witness the clear growing interests from the both sides to establish the new level of relationships, which means a perfect timing to boost the economic agenda. All economic events planned for this year will become a platform to vocalize these ideas and draw a strong roadmap for the future,” Russian Export Center’s CEO, Andrei Slepnev, argued in an emailed interview with Buziness Africa.

In December 2017, Russian Export Center became a shareholder of Afreximbank. Russian Export Center is a specialized state development institution, created to provide any assistance, both financial and non-financial, for Russian exporters looking for widening their business abroad.

On March 19, the Organizing Committee on Russia-Africa held its first meeting in Moscow. President Vladimir Putin put forward the Russia-Africa initiative at the BRICS summit (Russia, Brazil, India, China, and South Africa) in Johannesburg in July 2018.

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The silent revolution

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Jamaica is well known for its beautiful beaches, Bob Marley, and reggae music. But what is less known is that the Caribbean island started a silent revolution after being one of the most indebted developing countries in the world. Jamaica has shown a macroeconomic turnaround that is quite extraordinary.

As Bob Marley said, “It takes a revolution to make a solution”. After decades of high debt and low growth Jamaica has changed its growth trajectory, with positive economic growth for 16 consecutive quarters and growth getting closer to two per cent.

During that period, the Jamaica Stock Exchange went up more than 380 per cent.The credit agency Fitch upgraded the island’s debt to B+ rating with a stable fiscal outlook, and unemployment hit eight per cent in January, the lowest in decades.

The Government had a wake-up call when its debt overhang peaked at almost 150 per cent of GDP in 2013. With the support of the International Monetary Fund, the World Bank and the Inter-American Development Bank, the country embarked on an ambitious reform programme. These efforts have paid off. Jamaica is now one of the few countries that has successfully cut public debt by the equivalent of half its gross domestic product in a short time frame.

The fiscal turnaround and economic transformation were possible because of the strong commitment across political parties over two competing administrations and electoral cycles. The country also critically benefited from a sustained social consensus for change and the strong backing of the private sector.

The country has generated primary fiscal surpluses of at least seven per cent of GDP for the last six years, and remains steadfast in its commitment to fiscal discipline. These fiscal results make Jamaica a top performer internationally.

For this silent revolution to continue and bring greater prosperity to all its people, Jamaica will need to further boost the investment climate, strengthen economic and climate resilience and invest more in its people to build human capital. These are necessary complements to the maintenance of a strong macroeconomic framework and would help boost economic growth and job creation. There are encouraging signs that Jamaica is taking action in these areas.

With regard to the business climate, the National Competitiveness Council has adopted a road map to fast-track reforms to improve the business environment. Jamaica features in the top 20 countries in the world for its comprehensive credit reporting systems and ranks among the best globally in the area of starting a business, according to the World Bank’s 2019 Doing Business report. It only takes two procedures and three days for an entrepreneur to start and formally operate a business.

There have been advancements on public-private partnership investments. For instance, the Norman Manley International Airport public-private partnership was recently completed with advisory support from the International Finance Corporation — the private sector arm of the World Bank Group.

Jamaica is also a front-runner among Caribbean countries in promoting climate and financial resilience in the face of natural disasters. The economic cost of these disasters for the Caribbean is substantial, exceeding US$22 billion between 1950 and 2016, compared with US$58 billion for similar disasters globally. One serious storm or natural disaster could set back the country’s growth prospects and development achievements of recent years. To tackle this, the Government has adopted a Public Financial Management Policy Framework for Natural Disaster Risk Financing to facilitate the availability of dedicated resources for recovery in the face of disaster risks.

In order to further support Jamaica in its efforts to strengthen the economy, build resilience, and support human capital development, the World Bank will expand its financing by US$140 million. This financing package will be for a series of two operations to help Jamaica be better prepared to mitigate the financial impact of natural disasters and build stronger infrastructure, and an additional project to strengthen social protection.

Despite unemployment at a new low, still too many young people are struggling to find a job. For Jamaica to continue to grow and prosper, it also needs to develop the skills for the workforce of tomorrow, especially in the areas of technology and digitalisation. This requires a sharp focus on creating the conditions for youths to strive and succeed in the modern business world and close cooperation with the private sector in this respect.

Today, more than ever before, young Jamaicans can dream of a brighter future where “every little thing is gonna be alright”. This is the generation that must aim higher and can write a new chapter for its country.

As we celebrate the 55th anniversary of the World Bank-Jamaica partnership, we look forward to working together to build on the success of the past few years and promote growth, jobs and resilience for Jamaica.

World Bank

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With or without sanctions, Iran needs to say goodbye to oil money

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Except Norway, almost all oil producing countries have made themselves more or less reliant on oil money.

Only oil producing countries with a small population, such as Kuwait and Qatar which is also a great gas exporter, have so been safe from fluctuations in the oil market. But, countries with large population, such as Iran, are prone to volatility in the oil market, let alone the mad sanctions introduced against the country.

There is no doubt that oil money has affected politics, economy, management system, culture, spending and consumption habits and many other issues in oil rich countries.

For example, Iran now has one of the cheapest energy prices in the world. This has led to an extravagant use of energy, especially an excessive use of private car, in the country.

Let’s make an example to clarify that oil money is not the road to progress and a vibrant economy. In the 1970s, Iran was more developed than South Korea, but now South Korea is much more successful than Iran in terms of economy and technology. South Korea does not have oil, but it has provided an opportunity for a competitive economy and capitalized on its talents.

It is true that the war imposed on Iran in the 1980s hindered Iran’s progress and inflicted about 1 trillion dollar in damages on the country, yet officials failed to take serious steps toward creating a competitive economic atmosphere with a focus on research and technology. The oil money has been the main blame for such an economic approach.

According to the successive five-year development plans which end on 2021, Iran had to reduce dependence on oil to a great extent, however, successive administrations, with varying degrees, did not fully act based on the development plan.

Iran is now subject to the toughest ever illegal sanctions by the Trump administration. Just on April 22, the United States ended sanctions waivers on Iran’s exports and announced it wants to zero out Iran’s oil exports by May 1.

Whether the Trump administration succeeds or not to implement its oil threats is an issue that we should wait and see, but it is necessary that Iran take a departure from oil export how much painful it will be.

Sorena Sattari, a graduate of Sharif University of Technology who serves as vice president for scientific affairs, told a meeting in Hamedan on Tuesday that sanctions have provided an opportunity that knowledge-based companies to intensify their efforts. Sattari also said plans have been drawn up to manufacture equipment and machinery that are subject to sanctions. 

Also, whether we like it or not, fossil fuels, especially crude oil, are losing their importance as renewable energy resources are gradually taking the center stage.

Saying goodbye to easily-gained oil revenues is a bitter pill that Iran should swallow. To do so, though very difficult under tough sanctions, officials need to find other sources of income.

They can invest on tourism as Iran is among the top countries in hosting touristic sites, establish an environment for a transparent competitive economy, close loopholes of corruption, involve competent persons in managerial posts, introduce a sound and workable tax system, end unnecessary subsidies, and more importantly prioritize research and development (R&D).

First published in our partner Tehran Times

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