The Bond Bubble Has Burst

I am calling it. What we are seeing in the markets right now is the start of the next big financial crisis. The huge bubble in government debt has begun to burst. It took a few years, but investors have finally realized that western governments in general, and the US in particular, are trapped in a low interest rate, money printing environment. As always, the downturn arrives at the peak of optimism, when hardly anyone was expecting it. So far, it appears to be just a correction in the stocks and bond market. It will take some time, before main street and the central banks will realize the scope of what is happening. At this point, however, there is no putting the genie back into the bottle.

The common narrative so far was that everything is well. The economy is strong, and growth is accelerating. We have finally managed to escape the slump of the 2009 financial crisis and everything is on its way back to normal.

This narrative is completely false. As I said before, if the economy was as rosy as government statistics would make us believe, we would have not seen things like Brexit or the election of Donald Trump. The so called recovery has not reached most people, and the masses making their frustration heard, by voting against the establishment.

In short, most economists use GDP growth to measure the strength of the economy. This is a mistake. GDP is not a good tool to assess productivity. It merely measures the amount of money being spend. But even if we were to accept GDP as an accurate tool, the official numbers are almost certain too high. That is because the official inflation numbers, which are used to deflate the GDP value, is manipulated down, through accounting tricks.

The only thing that kept the economy somewhat above water was a tsunami of fiat money. Since 2009, central banks around the world have printed more than $14 trillion to keep governments solvent and asset prices inflated. But this party is about to end. The FED is the first of the major central banks to try to normalize interest rates, and clean its balance sheet. Other central banks are expected to follow. This is why, fiat currencies are still trusted. People always assumed that printing money was a temporary policy, and not a permanent tool to finance governments.

The problem is, interest rates cannot rise, and the money printing cannot stop, without crashing the economy, and endangering the solvency of governments. Cheap money is like a drug. Once addicted, one cannot withdraw it without getting seriously ill. And more and more of it is needed, at an accelerating rate, to keep the party going. Western economies are still addicted to cheap debt. With rising interest rates, we are going to see a massive wave of private bankruptcies, which consequently will crash the economy.

That in itself would not be such a huge problem. Sure, a lot of people, who are currently indebted, would be personally hit hard. However, for the economy as a whole, if everything was left to market forces, we would only see a short, but severe, economic crises. Once the government is out of the way, however, real, free market price discovery would kick in immediately. Bad debt would be written off, and resources would be allocated to the truly best use. Within a year or two, maybe even less, the free market would have cleared all the distortion, and the economy would be booming again.

The problem, which will make this crisis most likely bigger than anything else we have seen, is that governments too are addicted to debt. And they have much more tools to defer an insolvency, until the problem is maximized. Kicking the can down the road has definitely already been the name of the game for many years.

Probably most states in Europe will not be able to pay back their debt. And things do not look better on the other side of the Atlantic. The US has already an official debt to GDP ratio way north of 100%. And that is calculated with a GDP number artificially inflated by cheap money. In addition to that, these numbers do not even include unfunded liabilities like pensions.

By any accounting standard, most western governments are factually bankrupt. That, however, is a too painful truth to sell to voters. In order to tackle the problem, governments would need to massively, and I mean really massively, cut the size of the state. In addition to that, they would probably need to think about increasing taxation to get more revenue. The ability to steal more, however, aside from being immoral, is limited by the fact that taxation most likely already is somewhere near the peak of the Laffer curve.

Neither cutting spending, nor increasing taxes can be easily done in a democracy. People do not tend to vote for their standard of living to be cut. Amazingly, raising taxes seems to be actually easier than cutting spending. What better indication that, in addition to being immoral, the state is also a completely dysfunctional organization.

President Trump, being the ruthless populist that he is, knows this full well. Therefore, he is currently doing the exact opposite of trying to avert an insolvency crisis. He has cut taxes for many people, and simultaneously seem to go bananas on new spending. And it is this which has spooking the markets last week. Investors are waking up to the fact that the party of the last few years will soon come to an end. In fiscal 2019, the US will have to borrow at least $1.2 trillion, a lot more than ever before in its history. At the same time, the FED will be a seller of about $600 billion of US treasuries. So the question arrises, who is going to buy all that debt?

In the years since 2009, governments could rely on central banks to buy a lot of their bonds. Draghi, Yellen and co., have bought them, no matter what the price. This has inflated an enormous bubble in government debt. Consequently, governments did not need to worry about how to finance themselves.

Some governments, like Germany or Switzerland, could even borrow at negative interest rates. That means, investors have paid for the privilege to lend money to Merkel. In reality, of course, this was a front running of the central banks. It was a save version of greater fool investing, since the central banks had made clear that they would always be the greatest fool. This has destroyed any honest price signaling on these markets. What a fantastic paradise for politicians, trying to buy votes.

But governments are now being driven out of this paradise. When central banks stop buying debt, and raise interest rates, governments will need to find real buyers, with real capital to buy their debt. And these real buyers are not going to invest in it at any price.

Given the enormous amount of new debt needed, and the risk involved in lending money to insolvent governments, it is inconceivable that the US government will be able to attract all that capital without significantly higher interest rates. The law of supply and demand will not be kind to politicians. In the media we can hear worst case scenario numbers of 3.5% or maybe even 4% on the US 10yr treasury.

But in what world is that a worst case scenario? Historically, the average yield on a such a bond was more around 6%. And that was at times when the US was very much solvent and did not need to borrow anywhere near as much money. When central banks now stop their price controls on government debt, it seems more likely that the bottom will drop out of that market. In other words, 6% is way too optimistic. But the US governments cannot even afford 4%.

Interest rates on US debt have already risen for month. At the beginning of February, the interest on the 10 year treasury bond hit 2.85%. That was too much for stock investors, and the sell off began. Pretty soon, one of three things is going to happen, each one of which will lead to a major crisis.

The first possibility is that governments openly default on their debt. I would say the chances of that happening in an honest, non-inflationary way are pretty much zero. No politician is going to take the responsibility for this policy, least of which Trump.

A second option is to raise taxes and massively cut spending. Since western government are democracies, and cutting spending in any meaningful way would seriously alienate a lot of voters, the chances of that to happen are also very slim.

That leaves us with the third option. Central banks call their bluff and reverse their plans to tighten. We would see another round of even bigger QE and a prolonging of low interest rates. This is the option that historically most states have picked. And it is almost certainly the one that the US government is going to pursue.

But for how long will they be able to get away with it? After all these years of QE and low interest rates, a failed attempt to exit these policies would make it very obviously that governments are trapped. They cannot exit the cheap money environment without causing a major financial crisis in the economy, and a solvency crisis of governments. A reversal of tightening will therefore cause a crisis of confidence in the central planners, which will most likely result in a currency crisis. The latter will lead to either a massive inflation in the Dollar, Euro etc, or it will force governments to eventually default after all, in order to save their currencies.

The verdict is not out yet, which of the two latter options we are going to get. But either way, buckle up, because things are about to get very rough.

Why Intrinsic Value Matters To Crypto Currencies

Crypto currencies were one of the big stories of the now ending year 2017. These once geeky little software projects have truly hit the mainstream, and exploded in price. Bitcoin valuations are now featured in pretty much any major newspaper. Some believe that cryptos will take over the world monetary system, others think it is a fraud.

I myself have gone on record twice this year, arguing that cryptos are in a classic financial bubble, which will burst eventually. Given the popularity of crypto currencies, I got a lot of criticism for my opinion. A lot of smart people think that I got this one wrong. Getting critical feedback is always helpful. Ultimately, however, the critics have not convinced me. Of course, it is possible that I am missing something, but so far I have not heard any really convincing arguments for the case, that crypto valuations are justified.

Many of the arguments made against critics are ad hominem. These range from accusing critics of simply being jealous for having missed out, to having a special interest in preserving the currently rotten world monetary system. The most common rationalization, for not having to listen to critics, probably is the accusation that they simply do not understand blockchain technology.

While these arguments might be true for some people, simply attacking the integrity of a critic is a rather weak way of arguing. Either crypto currencies work or they don’t. Whatever the motivation of a critic, they are either right or wrong. The truth can only be settled looking at the actual arguments. If we want to understand what is going on, it is not helpful to start with the conclusion, and then cherry pick the evidence accordingly. This is never a pathway to truth, and particularly in finance, it may cost you a lot of money. I am talking from experience here!

Being an anarchist, the idea of an anarchic monetary system is actually very appealing to me. It would be awesome if we had a simple, technological solution to one of the most evil state monopolies. That is why I initially loved crypto currencies. But having examined the arguments, I simply cannot believe that cryptos will be able to establishing themselves as a true alternative to government money.

To me, the key argument against computer code functioning as money is the fact that it lacks any kind of use outside of trying to be money. In other words, it does not seem to have an intrinsic value. But crypto currencies believers have come up with two arguments why this is a false criticism.

Do Cryptos Have An Intrinsic Value?

The first one is to argue that cryptos do indeed have an intrinsic value. Blockchain is an incredible useful technology. It solves the problem of having to trust a human institution to enforce rules. With blockchain, we now do not have to trust potentially corrupt humans. Instead we can trust a mathematical algorithm, which seems a lot more solid.

I actually totally agree with that. This is indeed extremely valuable. Blockchain technology will change the world. But there is a problem with this argument. It is not clear how this use will give a monetary value to a crypto currency.

For something to have a monetary value, it needs to not just be useful, but also scarce. Air is a good example. For humans, air is incredibly useful. In fact, it is one of the most useful things I can think of. It is so useful that it is the absolute last thing I would want to live without. That is because, cutting me off from a constant air supply will kill me more quickly than cutting me off from anything else. And yet, despite this extreme usefulness, it is free of charge. In everyday life, it has no monetary value, because it is not scarce.

At this point, crypto advocates will say, but Nico, crypto currencies actually are scarce. With mathematical certainty, the number of Bitcoins is limited to 21 million. So there you have it. It is useful, and it is scarce. It therefore clearly needs to have a monetary value.

I don’t find this convincing. It is true, the number of Bitcoins is limited to 21 million. But this overlooks that Bitcoin is not the blockchain. It is merely an application of the blockchain. And there are many others. That means that one does not own the useful blockchain by owning a crypto currency.

The individual crypto currency unit in itself is useless. Pictures of Bitcoins tend to portray shiny gold coins with a big B on it. But in reality, a Bitcoin is just a bit of digital code. It has no other use than being a piece of information. So we are not dealing with something that is scarce and useful. Instead, we are dealing with something that is scarce, but useless. This combination tends to result in a monetary value of zero.

The useful blockchain technology, on the other hand, is not scarce. Luckily, it is open source, and in the public domain. Everyone can, and many people are using it in thousands of applications. There are even multiple Bitcoin applications at this point.

Crypto investors have one good defense to this objection. They argue that there is a network, and prime mover, effect which makes Bitcoin unique among crypto currencies. Bitcoin was the first crypto currency, and it currently is the most highly valued in dollar terms. This gives Bitcoin an edge over other blockchain currencies. So again, there you have it, now it is useful and scarce.

This is not a bad argument, but it ultimately fails to convince me. First of all, even if there is a network effect, it is not clear to me, why the prime mover will be the one that wins this competition. There are often problems with new technologies. Therefore, it is the second or x generation which makes the race. Only in later generations all the bugs from the beginning have been fixed. Google, for example, was not the first search engine, and Apple by far not the first computer company.

Basing hopes of owning the future crypto reserve currency on a network effect, is a risky gamble. Even if cryptos ultimately were to succeed, no one yet knows which one will eventually make the race. And as I write this, the technology of the Bitcoin application in particular does seem to have some problems. It is too slow for transactions, and the mining network uses too much electricity. That is why we have already seen multiple forks. Bitcoin, therefore, might turn out to be a terrible investment, independent of whether cryptos succeed or not.

The real problem with the network argument, however, is that it confuses cause and effect. In order for a crypto currency to profit from a network effect, it first needs to be used as a currency. But how can it be used as a currency first, if all that gives it value is the network effect?

Bitcoin believers will counter this by arguing that we are simply past that point. Yes, this might have been the problem when the currency started in 2009. But, for whatever reason, Bitcoin now undeniably has a monetary value. It therefore can now profit from the network effect. Superficially, this seems correct. Bitcoins clearly sell for lots of dollars. But if we look closer, the argument becomes rather unconvincing. To explain why, we need to look at the second argument made against the lack of intrinsic value criticism.

Cryptos Do Not Need An Intrinsic Value

Many people argue that cryptos do not need an intrinsic value to have a monetary value. That is because nothing really has an intrinsic value. The theory of intrinsic value died with the marginal revolution, and the insight that value is not objective. Each person decides for himself, how to value something. In other words, if someone is willing to pay 1 million dollars for a Bitcoin than that is its monetary value.

Intrinsic value, however, is not objective value. The objective value theory, which was falsified in the marginal revolution, was the idea that everything can be objectively valued according to the amount of labour that was needed to produce it. This theory is indeed completely false.

But intrinsic value refers to something else. Something has an intrinsic value if there are multiple uses for it. It can therefore be traded on different markets. That means it can still be sold, if its demand drops on one of the markets.

For example, a business usually has an intrinsic value in the from of all its assets. Let us say a computer store goes bankrupt. That means that all the computer equipment of that store has no further use for the business, as it is discontinued. But there are other people who will still have some use for all the assets of the shop. The amount, a potential liquidator could sell all these assets for, is the intrinsic value of the business.

This intrinsic value is not objective. It is not the same for everyone. Many people will have no use for these computers. Intrinsic value is merely the market value for which you would likely be able to find a buyer, assuming a big enough market. As such, the intrinsic value is not even a precise number, but varies within a range.

Accordingly, when it comes to currencies, intrinsic value means that if something fails to function as a currency, the owner can still sell it on a different market, or use it himself. This gives the potential currency trust, as it would need to loose its usefulness on all potential markets to become completely valueless.

And trust is really the key when it comes to the value of a currency. Prices are indeed subjective. If people do not consider a currency to be valuable, then it won’t be. On the other hand, if enough people do trust a currency, they will accept it for business. Therefore, there will be a constant demand for it, and the currency stays valuable.

Crypto currency advocates correctly object to gold bug critics that most of the monetary value of gold does currently not come from its intrinsic value. Yes, gold is an incredibly useful metal, but at current prices, it does not seem to be used for much in the industry. Most of the monetary value seems to come from its use as a store of value.

I completely agree that once trust has been established for a currency, the intrinsic value does not matter anymore. An established currency does not need to have a secondary market as a commodity. State currencies, like the dollar, are a good example. Once the currency enjoys trust, all it needs to do is to not blow it. That is why a lot of people around the world accept US dollars, even though the US government does not force them to do so. And they will continue to do that, as long as the US government does not do anything stupid to undermine the trust of the dollar. Historically, the way currencies have blown trust is through a too rapid increase of the currency units.

This is where crypto currencies get it exactly right. By limiting the units of the currency, they are designed to not blow the trust once they have established it. If they ever get that far, they will not need an intrinsic value anymore. But the problem is, how will they get there?

The only way I could see them getting there is by force. If a government declared a crypto currency as legal tender, and forced everyone to pay their taxes in it, then that would create an artificial high demand for the currency. This demand would quickly stabilize prices and would make people build trust in it. In other words, the government would have created a big, artificial network effect. In that case, even if the government were to withdraw its force, people would likely continue to trust the crypto currency.

But the problem is, how can a potential currency build trust on a free market? The only real solution for it seems to be, by having an intrinsic value. That is how Gold became a currency. Only with an intrinsic value can holders of a currency be secure that if the underlying commodity does not work as a currency they can always use it for something else. This puts a floor into the price.

I do not see crypto falsifying that theory. They are currently not being used as a currency. The volatility is way too high. People who buy crypto currencies perceive them to rapidly go up in value. And since Gresham’s law tells us that bad money drives out good, crypto currencies are not being spend. In addition to that, because of the volatility, and the fact that cryptos cannot be used to pay taxes, businesses do not account in them either.

People are not buying Bitcoins, because they are longing for a reliable payment system. There are a number of very well and cheap payment systems out there, which currently work better than crypto currencies. They also don’t really buy them because they mistrust government money. No, if we are honest, the reason why the vast majority of people currently flock into Bitcoin is pretty much exclusively, because they are hoping to be able to sell that same Bitcoin, in the relatively near future, for a significantly higher price to someone else. Any other conclusion seems delusional in my view.

And this is a big problem. It is an unhealthy economic phenomenon called greater fool investing. Ponzi scheme is another word for it. As long as cryptos get their monetary value from being a speculative asset, they cannot function as a currency. In order to gain trust as a currency, cryptos would need to be as stable as possible in price, ideally only going up with the increased productivity of the economy. But they cannot stabilize their monetary value as long as they are not a currency.

In other words, cryptos, currently, get their monetary value from the projected higher future prices. They get it from the perception that, in the future, there will be a greater fool who is going to buy Bitcoins for an even higher price. But if that is the only reason why crypto currencies have a monetary value, than they will lose this same value, once it becomes clear that the market has run out of greater fools. Once that happens, far from stabilizing prices on a high plateau, subjective value starts to work against the price. The very reason, why Bitcoin had a monetary value in the first place disappears. Everyone runs to the exits to cash in their profits. But there won’t be any buyers waiting for them at those exits. At that point the currencies will fall back to their intrinsic value.

This is the outcome of every greater fool investing scheme in history, and there are many. It is not clear how crypto currencies will be able to go from being a speculative asset to being an actual currency. This would be unprecedented. Greater fool investing schemes always, always! end in a collapse, in which the underlying asset goes back to its intrinsic value. I don’t know of any exceptions. As I explained in detail in my previous article, they always have to end this way, because there is a natural scarcity of greater fools. Someone will have to be the greatest fool.

The crypto mania very much reminds me of the dot com bubble at the end of the 90th. Back then the same two arguments were made, to justify the high valuations of internet companies. The first one was the argument that the internet was this great new technology which would completely change the world. Therefore, everyone wanted to own a piece of it.

This assessment was undoubtably correct. The internet has indeed changed the world, and it has done so far beyond what was even imaginable back then. But that did not stop the stocks of many dot com companies from going to zero. What investors did not realize was that, by owning an internet address, they did not own a part of the internet. They merely owned a few, often useless, information on the internet. The same mistake is now being made with the blockchain technology. Bitcoin owners simply do not own this technology. No one owns it. What crypto investors own is a piece of one application of the blockchain. One of a potentially unlimited amount.

The second argument in the 90th was, that since the internet was so new, old economic insights did not apply anymore. Trying to understand the ‘new economy’, as it was called, with old economics would fail. Old School investors like Warren Buffet were seen as dinosaur, who should better retire. Dot com companies did not have to have any intrinsic value. In the new economy, people were clearly valuing things differently.

This turned out to be an epic miscalculation, and dinosaurs like Warren Buffet had the last laugh. All the dot com stocks eventually fell back to their intrinsic value. That meant that a lot of them went to zero, as they only were useless internet addresses. The only reason why they had a monetary value in the first place was, because people thought that prices would continue to go up. The ones that survived had real businesses with real values behind them. In other words, they had an intrinsic value.

The same argument is now being made for cryptos. Apparently, the fact that they lack intrinsic value does not matter. Old economics does not apply. It is all so new and so great. But I am not convinced. Now does not look very different from back in the 90th. I see no reason why well tested economic theories are supposed to be falsified by crypto currencies. That is why, I predict that the monetary value of crypto currencies, like all other assets, will eventually go back to their intrinsic value, which is zero. It simply seems to be the only reasonable conclusion to draw. Nevertheless, given that I like the idea of an anarchic currency, I hope I will be proven wrong. But I won’t invest my money in pure hope against reason.

Bitcoin – A Textbook Example of Investing Psychology

Bitcoin seems unstoppable. Since I last wrote about it in June, the price has doubled again. And with every new high, the bitcoin community gets more emboldened in their view that bitcoin is changing the world.

I however, remain unconvinced. The blockchain certainly will change the world, but cryptocurrencies not so much. Nothing has changed, bitcoin is still a speculative bubble. The price, in my view, will eventually go to zero. But of course, on its way there, it might first go to more ridiculous highs. A higher price does not mean that it is not a bubble. It just means that the bubble is getting bigger.

It is very amusing to watch this, as it is a textbook example in investing psychology. Having been critical about bitcoin for a while now, I get often asked whether I regret not buying any. The answer is, no I don’t. I don’t regret it in the same way I don’t regret buying that winning lottery ticket last week. Sure, now I know which numbers won the jackpot, but last week I did not. In hindsight, everything looks easy.

It was, and it still is, unpredictable where the price of bitcoin is going to top out. Is it $5000, $10 000, or $100 000, who knows. For all I know, there is an equal chance that tomorrow I might loose half, or even more, of my money. That is not a good bet to take. The first rule of investing is, to protect your downside risk. You always want to invest in things, which have high upside, and predictable low downside. An asset, in which you might double, triple, x-tuple your money, but in which you have an equal risk of loosing everything, is an asset to stay away from, if you are not a gambler. It is not worth the risk.

Most crypto investors, however, don’t seem to realize that there is a risk in bitcoin at all. They are making the classic mistake of confusing a bull market with brains. I know, I know, it feels good being invested in a bull market. This is particularly true for bubbles. You wake up in the morning, only to discover how much money you made in your sleep. What a great way to start your day. The longer the bull market progresses, the more you become convinced that you are indeed an investment genius, and you are already starting to plan for your early retirement.

All of this is classic investment psychology. People are chasing assets that have gone up in the past. Humans cannot help it. Inductive reasoning is deeply rooted in our thinking. We see a trend in the immediate past and project it into the future. That way, investors consistently invest in things that have already gone up by a lot. The fact that something has gone up in the recent past, makes us feel secure that there is little risk in investing in it. After all, the trend looks solid.

But, thinking about it rationally, the dumbest reason to invest into anything is, because it has gone up in the past. I think everyone will agree that the goal of investing is to buy low and sell high. So why buy high? The reason, of course, is that people expect to buy high, and sell even higher. What they overlook is that this is every suckers strategy in a bull market. But eventually, all potential buyers are invested in the asset. Once there are no buyers left, prices have to inevitable come done. This is the start of a bear market.

By its very nature, this turning point comes right at the top of the euphoria, when hardly anyone expects the bullish trend to reverse. This has to be the case, since the trend reverses when there are no buyers left, in other words when everyone is invested. But everyone is only invested, if they are positive about the market. At that point, prices have to come down to attract further buyers. These buyers will most likely be people who are already invested in the asset, and think they have a nice opportunity, to buy a bargain, before the bull market continues. After all, every time prices retreated in the past, the bull market eventually continued to new highs.

Unfortunately for them, that time, the bull market will have topped out and won’t continue. The longer there is a lack of new highs, the more people start to think that now is probably a good time to cash in their profits. But they are trying to sell into a market that has already run out of buyers. This makes prices fall even further. The more prices fall, the more people start to get nervous and will try to cash in. The downtrend in motion is going to feed on itself. Eventually, people are going to panic, and prices crash. At that point there will be virtually no buyers left.

Well, that is not quite true. Usually, investments have some intrinsic value. A company, for example, has real assets with real values. Once prices go below the intrinsic value of the underlying assets, smart investors, who are not driven by primitive investment psychology, come in as new buyers. They know they are buying a bargain. This is the reason, why every assets class goes through cycles of bull and bear markets. The trick is, to buy at the bottom of the bear market, and not at the top of the bull. That, however, is very difficult, for it is at the bottom of a bear market that everyone will warn you to invest, and it is at the top of the bull market that everyone thinks nothing can go wrong.

There is, however, a big problem with bitcoin. It does not have an intrinsic value. There are no real assets behind it. The reason why most people invest in it is, because they think the price only knows one direction, which is up. But because it lacks an intrinsic value, there will be no one stopping it from going to zero in a real bear market. And bear markets always follow bull markets, with almost absolute certainty, because there is never an unlimited amount of buyers. That means that there will be no smart money buying into bitcoin once it crashes. That is the nature of Ponzi schemes.

With mathematical certainty, in crypto currencies, for every investor making a profit, there will have to be others who loose that exact same amount of money. It is a zero sum game. So if you hear about someone having made a lot of money in bitcoin, you know there is some poor sucker who has lost that same amount. That poor sucker might not yet know it though, because he things he can cash in his coins at any time for the price advertised on the internet. Eventually, however, there will be a lot of suckers, who will not only have to cancel their plans of an early retirement, but will instead have to start saving again at a lower level then they started. In numbers, those will be more people than the numbers of winners, as most people come to the party at the late stage of a bull market.

None of what I write here, will likely affect a lot of the readers, who are currently invested in crypto currencies.. They will say, Nico, your investment psychology theory is all good and well, but you don’t understand bitcoin. Bitcoin is different. Bitcoin is not just a Ponzi scheme. It is going to replace the global monetary system. That is the reason why prices are going up. You just don’t understand what is going on.

Again, this is classic investment psychology. People always convince themselves that the bull market they are invested in is different from previous ones. Confirmation bias is one of the strongest psychological biases we have. We always like to confirm our theories about the world. This is particularly true if we have a lot of money invested in these theories. So, I am fully aware that most people reading this, will shrug it off as another idiot not understanding the revolution.

I know how strong this psychology is from my own experience. I have been invested in bull markets in the past, in which I too dismissed anyone criticizing the idea that the upwards trend is unsustainable. So, I have been there, done that, and no, bitcoin is not different. It is not going to replace the global monetary system. Right now, I don’t know of any honest business that does its accounting in bitcoin, or any other crypto currency. In addition to that, all the articles I read about bitcoin, and there are many, even in major newspapers, are all about, how much higher will the price go, how much money can you make in crypto. And that is why people are invested in it, not because of some idealistic reason to fight the government.

So, for what it is worth, be warned. If you have investments in crypto currencies, you are invested in a Ponzi scheme. At the end of this, for every winner, there will have to be the same amount of losers. The only way to not end up on the loosing side is, to sell before everyone else does. I am not saying you should not gamble in this game. That is up to you. Just be aware that it is a risky game, at the end of which there will be a lot of suckers. And you might be one of them, if you play for too long.

The EU is insular; we need to build a global marketplace

The Remain campaign is based almost entirely on the benefits of the Single Market. As I have previously pointed out, remaining in the Single Market is likely to be central to Brexit transition management. So the only argument remainers have for sacrificing democracy is that we need to “have a say” on the rules. This is short sighted and unambitious.

Trade is increasingly being organised at a global level between international organisations ranging from private sector rulemaking bodies such as the ISO, to quasi-governmental institutions under the wing of the United Nations and the WTO. Together they form a rapidly evolving global rules based trading system in which the EU’s rules are subordinate. With a global regulatory regime emerging to harmonise standards, facilitate trade and thereby increase and spread prosperity, we are witnessing the construction of a global single market.

An independent Britain can develop links with emerging economies and pioneer the elimination of technical barriers to trade (TBT). It is TBT’s, not tariffs, which are hindering free trade.  When we leave the EU we can play an active part in kick starting the global trading system and reinvigorating global trade.

Remainers have repeatedly asserted that the global system has stalled but there are encouraging signs of progress. The 2013 WTO Bali trade facilitation agreement is of huge significance but it is little discussed in Britain because our Eurocentrism encourages a parochial outlook. Its potential for facilitating trade and increasing prosperity goes beyond any single trade agreement.

It aims to reduce red-tape and streamline customs procedures on a worldwide scale. The World Bank has stated that if all countries reduced supply chain barriers halfway to best practice, global GDP could increase by 4.7% or $2.6 trillion, potentially worth about $60 billion a year to the UK. World trade overall could increase by 14.5%, or $1.6 trillion, far outweighing the benefits from the elimination of import tariffs.

The global economy will be enhanced not through bilateralism but multilateral trade agreements and  the harmonisation of standards. For example, an agreement on a global tyre specification for passenger vehicles could save $40 billion a year. Standardising nomenclature for existing pharmaceutical products could save $20 billion. Adopting electronic documentation for the air cargo industry could yield $12 billion in annual savings and prevent 70-80% of paperwork-related delays.

This will not happen spontaneously. It will take a great deal of work, cooperation and leadership. It is in leadership of this global model that the EU fails. While the WTO agreement is a celebration of multilateralism in world trade, the EU obsession with regional trade agreements and advancing its political agenda is diverting attention away from an initiative of immense importance.

By forging ad hoc alliances and building a coalition of the willing the UK can help put the global interest back on the agenda. By breaking away from exclusionary and restrictive regional trade agreements we can instead give priority to multilateral trade facilitation which will have a galvanising effect on world trade.

This is the positive Brexit agenda. In a world that is increasingly global we  are surrendering our voice, veto and right of initiative on the world stage. With vast potential economic gains at stake from improved global trading we need to look out to the world and all the fantastic opportunities that a globalist outlook offers us. We need to take back control of our trade policy.

Britain can be a champion of free trade, intergovernmental cooperation and reform. We will gradually break away from the protectionist EU model and look beyond the limited bilateral model of trade and towards a multilateral strategy.

Ben is a political writer and Brexit campaigner with the Leave Alliance.  He blogs at The Sceptic Isle. Follow him on Twitter: @TheScepticIsle

Railway privatisation in America

The history of railways in Britain follows a similar pattern that found throughout Europe and much of the world. The railways were built by private companies, which later merged and combined and were ultimately nationalised into a single, state-run operator. Britain is of course unusual in having since privatised its rail network again, notionally at least, with trains now run by a mixture of private companies on rails owned by a single publically owned body, Network Rail. Elsewhere in Europe, publically owned rails are increasingly opened to private rail operators under the European Union’s Directive 91/440/EC.
However, in North America, the opposite situation exists. The United States is one of the few countries that never truly nationalised its railways. However the government did indirectly take charge of passenger services by forming Amtrak in 1971. This has led to a situation where a national passenger operator, supported by state subsidy, operates a network over lines owned and maintained by numerous private freight railroads.
The formation of Amtrak in 1971 came at the end of a long story of decline for America’s passenger rail services. Trains were seen as an outmoded form of travel, supplanted by the automobile and the passenger airliner. Both road and air travel were receiving massive state assistance through the building of the Interstate network and new airports and air traffic control infrastructure. Meanwhile passenger railroads were struggling to compete, held back by overbearing taxation and political conflict over the proper way to assist the industry, should it be assisted at all.

With railroads continuing to fail, public pressure mounted to save passenger services. However the Democrats were unwilling to subsidise the for-profit private railroad companies, and the Republicans were opposed to nationalisation. This situation led to the decision to create a publically supported body that would take over passenger services from the private operators. While some private services lingered on into the 1980s, the majority chose to shed their services to the new operator.

Fast forward thirty five years and today’s Amtrak network is a mere shadow of the services it inherited in 1971. The ongoing drive to bring it closer to financial independence has left a dwindling system of slow, infrequent services appealing largely to leisure travellers. Two of the contiguous states are completely without service, and away from the key North East Corridor and Californian Coast routes, trains are not seen as a viable way of travelling compared to the extensive Interstate and airline networks.

Freight railroads, however, continue to be a lucrative industry, and a series of mergers has led to a few titans like BNSF, Union Pacific, Kansas City Southern and CSX controlling vast networks that span the country. On these lines speeds are slow, the networks being designed for America’s distinctive multi-mile long lumbering freight trains. While efforts to create new high-speed lines have been underway in several states, none have so far come to fruition, and no high speed trains operate (by the European definition of 200km/h) outside of the Boston-Washington DC North East Corridor, the only substantial area where Amtrak has control of its own rails.

The benefits of vertical integration here are as obvious as they are in the British system. Having operator and infrastructure be the same organisation avoids conflicting priorities and makes sure infrastructure operators are responsible for the punctuality of the trains using their rails. Whether it’s Amtrak running on Union Pacific metals in the US, or London Midland running on Network Rail ones in the UK, the hybrid of public and private ownership seems to create more problems than it solves.

It’s easy to assume that the solution to this is a single nationalised network, but this removes all opportunity for competition and shifts accountability from the passenger to the taxpayer. Instead, the proper solution in 1971 would have been to level the playing field between railroads, airlines and road transport, allowing private operators to continue operating their own services without government driving investment into competing modes.

Fortunately, there is now a glimmer of hope on the horizon. In Florida, the first of a new breed of private passenger railroad is emerging. The curiously named ‘Go Brightline’ is a private sector project to link Orlando, Fort Lauderdale and Miami with fast, modern services positioned to compete with road and air travel. For the first time in nearly four decades, privately operated passenger trains will link American cities along tracks owned by the same operator.
Despite the radically different geography, America, like Britain, provides a clear case study of how separating operation and infrastructure produces the wrong outcomes for the passenger. All too often this is ascribed to the failure of privatisation, but neither passenger system is truly in private operation. One place where railways are truly privatised is Japan, a country which enjoys a thriving passenger rail network that easily ranks as one of the best in the world.

It will be interesting to watch the progress of the Go Brightline project as it begins operating over the next few years. Hopefully it will demonstrate how true private operation can present a viable alternative, both to the inadequate Amtrak network and to proposed multi-billion dollar public sector projects that are rightly so off-putting to the American electorate.

Let’s imagine an alternative to the NHS in this best of all possible worlds

The NHS is on strike today with 4000 operations cancelled in a dispute over pay and conditions. The government’s contract negotiations with junior doctors became more bitter recently with the publication of emails between the Department of Health (DOH) and Sir Bruce Keogh, the medical director of the independent body NHS England. The emails document how the DOH suggested, and made, revisions to Sir Keogh’s widely publicised letter to the BMA that was sent in the week after the November 2015 Paris terrorist attacks. The letter included a request for assurances about how junior doctors would respond if there was a terrorist attack. The changes were made in order to be more ‘hard-edged’ about the terrorism risk and the DOH planned that this point would be ‘pressed quite hard in the media once the strike is formally announced’.

It is not surprising that the DOH, as a government department, is trying to use fear and spin to win its political cause. It is saddening that a senior clinician, Sir Keogh, who has championed patient safety and the use of data to improve outcomes in heart surgery, has allowed himself to be manipulated this way, but perhaps it is also unsurprising, given the pressures on those in power. The concern raised by Sir Keogh is utterly invalid and we sadly have history to demonstrate this – has he forgotten that only 10 years ago in the 7th July bombings the actions of the off duty doctors at BMA house in Tavistock Square? Has he forgotten the doctors who rushed to work to staff the A/E and surgical departments? Given the 1st strike was meant to be a ‘Christmas Day Rota’ why has he not raised hysterical terrorism concerns each December 25th for the past few years? Even the most amateur of psychologists could understand that accusing professionals of a disregard for terrorism can only lead to a hardening of the resolve in those you are trying to negotiate with.

Much has been written about the junior doctor contract. To summarise: ‘junior’ doctors includes all doctors who are not consultants, from early 20s to late 30s and above; the banding payments are not optional overtime, rather they are a supplement based on the intensity and timing of the rota with an intentionally punitive supplement to reduce unsafe working; junior doctors have little choice of employer as there is an NHS monopoly on training; the market has shown the pay and conditions are too low, with dangerously understaffed rotas, rising emigration and increasing locum rates. The government’s proposals would reduce staff pay for an equivalent rota over time, thus hoping to delay the inevitable financial collapse of the NHS on their watch.

This industrial dispute, and the way it has been handled, however represents more than just a clash of two narrow interest groups. It is a symptom of the sickness in the NHS. This solely tax funded system, with no safety valve of patient contributions, can only tend towards one set of end points: a cheap yet inefficient system with unavoidable political input, top down bureaucracy, low patient autonomy, poor staffing practices and a public discourse dominated by emotion and clouded thinking to a near religious degree.

I am not saying that the NHS is all bad. In such a large system there are areas of excellence as well as areas that need improving. If we set our sights low enough the NHS today is much better than what came before it. We are not in 1948 however. All todays healthcare systems do much more that in 1948. We are in 2016 and live in a relatively wealthy country where people have discretionary spending and luxury way above that needed for food, water, clothing and shelter. And 2016 is a world with fast capital flows, increased movement of people, rapidly evolving technology and an increasingly ageing population. A centrally planned and funded system has no chance of keeping up in such an environment and a new solution is necessary.


For the junior doctors the problem of regulation and central contracting leads necessarily to collective bargaining and industrial action. Thus a first step would be to remove central contracting from junior doctors and allow hospitals, or chambers of specialist doctors, to offer their own services, including training, with their own T&Cs. At the same time accrediting specialist medical training should be opened up to the market. Thus training accreditation bodies and hospitals or healthcare providers would have to offer a package with training that had a reputation for being high quality, with good enough T&Cs to attract the best candidates.

With regards to low value healthcare, such as GP appointments, day case procedures or specialist clinics, a mixture of self-pay and concierge models would lead to multiple choices for patients with varying mixtures of convenience, price, access and continuity. There would still be a market for the lowest price options, but insurance based schemes could offer the ability to top up or pay an excess as needed at the time of use. Paying with one’s own money as much as possible should always be preferable to alternatives. The waste and the clash of incentives that arise when others, government or private, spend money on our behalf is responsible for many poor outcomes.

High cost healthcare is more challenging. How does one know in advance how much to pay in insurance for a rare yet potentially severe event, such as many cancers, that could cost £100,000 at the median yet could cost £150,000 in a service with higher safety, more convenience, greater autonomy? The market is so opaque the only answer for many is to pay what they can afford in insurance and hope it’s enough when they need it. More confusingly an insurance provider might take funds and use it to build a pool of money by investing in various investments which may or may not have provided enough money at the time the money is needed.

When one buys a healthcare insurance the main concern of many is that the healthcare insurance will provide enough cover when needed. This explains why historically supporting a system such as the NHS was logical for many people, as MPs will always have to vote for a certain amount of tax to be used on the service and will always vote to keep the local hospital open. There is no guarantee, however, that the UK government will remains solvent to the extent needed to fund an NHS in future, in the same way that elderly people relying on only a state pension and state nursing care already find themselves in circumstances much reduced compared to their expectations during their working life.

I would like to propose a system whereby providers of healthcare issue vouchers for their services. This could be digital voucher via a blockchain, most effectively brought into existence by ‘proof of burn’. The current market value of, for example, a prostatectomy is purchased by a cryptocurrency such as Bitcoin then destroyed in an open manner whilst creating the equivalent digital voucher for prostatectomies. Brokers could create these vouchers. Underlying this is a series of options which are tied to individuals and expire on use, or on death of the holder. This is sold as a healthcare package funded by a mortgage like product. The role of the brokers, or insurers, is to ensure they balance the number of options vs tokens so that they remain solvent. Blockchain technology would be able to ensure the reserve held by different insurers is public and comparable, whilst the rate of use of tokens remains transparent. The capital for insurers would be via investors who would buy a bond in the fund that bought the tokens.

If I get prostate cancer, and an operation is the appropriate option I can redeem my option and spend a voucher worth 1.0 the cost of a prostatectomy. But what if 1.0 x cost is not enough for provider I wish to use? What if the provider charges 1.2x a prostatectomy? In that case I could buy an extra eligible option on the open market from someone who is happier with the 0.8x service. If no one wants the 0.8x service the market response will be for the marginal price of 1.0 x service to rise. The aim of the system is for it to be self-balancing as the change in price for the 1.0x service cannot be hidden from new joiners to the scheme, as the insurance companies must buy enough tokens with the capital raised when a new person joins. The system therefore stays ‘honest’ and consumers are paying for what they want – the right to appropriate quality medical care if they need it in future. Of course one could buy 1.2 x options as standard, in the same way that someone buys the full featured medical insurances, and there could be options where there are 2 alternative yet different priced treatments, with a rebate if one chooses the cheaper, perhaps more inconvenient, treatment option.

This sounds complex but the principle is that the individual must have some stake in the money being spent, or saved, when accessing healthcare, and that the more transparent and open this market is, and the more incentives can be aligned, the great the chance of maximising value. The core idea is to envisage a system where consumers trust they will receive healthcare when needed yet do not have to appeal to regulators, whilst still incentivising insurers and health care providers to continue to provide a choice of high quality, convenient and affordable treatments.

The idea for this system is a work in evolution, and as such needs developing, but if you are an interested actuary, trader, cryptographer, insurer, mathematician or an imaginative thinker who might want to help progress this to a white paper, feel free to contact me on @MrZachCope.

How can I do in 2016 what I did not do in 2015?

There are plenty of roundups up the year and previews of next year floating around at the moment. Any brand which desires your long-term engagement (and they all do) is making sure to tell you what they did for you in 2015 and to make promises for 2016. I am not big on promises, but we have spent much of 2015 thinking about and sharing ideas about the kind of thing we would like to do – the kind of strategy we think would work. Now is a good time to reflect on that material and if we feel we can achieve some small part of this vision in 2016 then let it serve as a reminder to reach out and find the help you need to achieve it.

I am delighted to include two brand new videos of our events from earlier in the year. This year’s recording are a treasure trove and I am really looking forward to sharing more of that in 2016.

syed kamall two chairmen featured

Poverty Solutions without Politics

Syed Kamall started his talk by saying that he knew quite a few of the people in the audience. This was not to ingratiate himself with us. His point was that although he is familiar with and agrees with our ideas and has mingled quite a bit with us in the past, he is not now inclined to spend much of his time merely reading and talking about these ideas. His concern is to do something about them.

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Martin Keegan on the Evolution of Private Cooperation

It would be a mistake to underestimate the importance of a subject like this one, merely because the guy doing the talking is keeping the emotional temperature strictly at lukewarm. The Trust is the means by which Civil Society, the society of what Edmund Burke called the “little platoons”, becomes a reality. All manner of cooperative enterprises are able to get started and to thrive, for decades and even for centuries.

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Making Change Within Your Lifetime

Brian Micklethwait, Charlotte Bowyer and Guy Herbert joined myself for a wide-ranging chat about how they do and have done libertarian activism. All the participants looked at their efforts as incremental, not revolutionary, and that they all agreed it was difficult. Things will get worse before they get better. This rather noisy recording is from the Fine Line – the dinner and drinks venue for the Liberty League Freedom Forum 2015.

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WE will build the roads! Implementing a stateless society

We all accept that we want to reduce or remove the state, so how do we get to that libertarian nirvana; or at least closer to it? There is no simple answer but instead of travelling along that road to serfdom we should start building the road to liberty. Our liberty.

Who will build that road?

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© Outme

Opportunities in purity

Some dismiss natural rights libertarianism because they believe it requires revolutionary change. It does not – it requires a more creative and more incremental approach. Libertarians need to find the changes that are beneficial and that lie within a complex set of constraints. This is a very different, and much superior, approach to simply ignoring natural rights.

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© Helen Cobain

© Helen Cobain

Decentralising welfare

I thought it might be helpful to summarise my tactical ideas on welfare provision. Note that the focus of these ideas is on long-term joblessness, although various other problems could be solved the same way. Enabled by Nudge we achieve a transition back to voluntary Friendly Societies as the main service provider, and a “big bang” that opens up the market to all sorts of innovate players.

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Who is we?

The biggest news of 2015 is that “we” now means something, and is a word we can use more. Rob, Leon, Devika, Brian, Miss P,  and others have begun to make significant and regular contributions; we have been plugged in to a team workspace (Slack), installed apps on our phones, and now when something happens here there is more than one person whose phone beeps, more than one person thinking about how Libertarian Home relates to today’s news agenda, and taking to social media on behalf of the brand. This is a huge step forward and I am really grateful for those of you who have taken the plunge and committed to Libertarian Home as a vehicle for regular activism.

There is space for more of you to get plugged in. We have made progress somewhat at random. If you are a regular contributor, or would like to be again, then come and talk to me about taking up your place in the team. There is no need to commit to doing anything more than you already do. If you just want to blog, that is fine, but blogging as part of a team connected in real-time is a different and more valuable experience for all.

The Inevitable 2015 Top 10

This content, selected from the top 20 most well-read articles of 2015, is the content that deserves to be read again in 2016. Enjoy.

Our Long Term Economic Madness, by Ben Kelly

In May the Conservative Party portrayed the election as a choice between Tory competence and Labour chaos. Labour’s spending and borrowing compared to the Conservative “long term economic plan”. The electorate made their choice and the current government received a mandate to cut the budget deficit and fix the economy.

Britain is now purportedly on the path to economic sanity, but you can be forgiven for having some moments of doubt

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Ending Fake Charities, an interview with Sara Scarlett

A well known libertarian and a former Lib Dem started a petition calling on the Government to cease all funding of the charitable sector.  “A “charity” which receives taxpayer funding is simply not a charity.”

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Dear Mehdi Hasan, I Am A Free Speech Fundamentalist, by Rob Waller

I read your recent article on ‘Free Speech Hypocrites’ and the Charlie Hebdo attack with great interest. However I found it to be poorly thought out and flawed

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12 libertarian policy statements

I find myself thinking, once again, in terms of leaflets…. here are 12 policy statements. Are they in the right order? What would you include?

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How I will be voting, by Simon

Let’s be clear about what a UKIP vote was at the EU election: it was a vote against the existence of a political institution that we do not need and do not want, so I voted UKIP.

The test for this Westminster election is very different.

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The virtuosity of individualism, by Ben Kelly

Conventional wisdom dictates that individualism is a destructive force which has enraptured and degraded our society. According to leftist orthodoxy it manifested itself in our culture with Thatcherism and rampant consumerism and has infected the “selfish” millennial generation, the only explanation for their worrying right-wing tendencies.

Conventional wisdom is, as is so often the case, quite wrong.

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Things you can’t say about culture that are true, Ben Kelly

For them “multiculturalism” is an attempt to create tolerance and harmony amongst multi-ethnic groups and do away with the supposedly chauvinistic concept of a dominant culture

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Let’s sea if we can bung some politicians and make a fortune

It is not that a bribe was offered to politicians on national TV, but that changing laws to make your product compulsory was discussed as an attractive business strategy with no discussion at all of whether a such a move was ethically appropriate.

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Ignorant Andy Burnham just insulted 700 NHS staff, by ExxCee

I was part of the team which led the shut-down of the service. I personally stuffed envelopes with redundancy notices for our staff. I tried to answer the questions of confused nurses and call handlers who were unsure about the TUPE transfer process. I was even able to help them with information about their future roles

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Soviet Migration Chaos, by Nico Metten

Europe seems to be in crises at the moment. Economic problems of some EU states, most importantly Greece have been constantly in the news over the past few years and no end is in side. The people in charge to manage the crises are our completely clueless politicians. They have identified all kinds of causes, except the real one, which is of course themselves.

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At the very start of 2015 we faced up to a tragedy in our community. She was not a regular attendee of our Meetup but was well-known and well liked by everyone there. The mood at our February event was raw. I am sure Christina Annesley will be warmly remembered in 2016.