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Therefore, a more advanced currency with greater speed and capabilities would greatly reduce the value of all other inferior digital "money"; just as each new digital currency created greatly reduces the value of those already in existence. Retrieved 31 October Archived from the original on 7 February Despite IQs that look like professional bowling scores, no one in the trio could actually operate a company. Kim in a warmer, more sympathetic light, though this story, too, shows a relationship that was ill fitting at best. The requirement of a signature makes this hard to forge by a malicious naysayer.
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The raw block data that each miner is trying to solve contains a generation transaction. That transaction is where their coins are sent if they solve that block. Because miners competing against each other want their coins to be sent to different addresses, and those addresses are hashed together with their nonce, it does not matter if everyone starts their nonce from zero.
The added randomness from differing generation transaction addresses prevents each miner from working in the same space as others.
I had wondered about the same question as the author. Your explanation clears it up for me. Moreover the nonces need not be enumerable. If randomly picked from a large enough pool it is unlikely that the same nonce gets picked twice.
Only one thing to add on another post: Bitcoin has 3 methods for finding peers: Did I miss it? Does it have anything to do with quantum computing? Oops — actually, I had an extended discussion of this question, but deleted it just before I posted. The reason I deleted it is that the discussion was inconclusive. The separation seems to be a fairly arbitrary design decision — there are some minor space and security advantages, but not enough in my opinion to justify making the Bitcoin address the hash rather than the public key.
That reduces the window during which the private key could be derived and used in a double-spend to about 10 minutes. This has significant ramifications for the safe transition to quantum-proof cryptography, if nothing else. To me, both seem like relatively small points. On the first point, many people reuse addresses, so in practice public keys are often widely known. So it does seem a bit arbitrary. This might make a nice example for my post on Bitcoin scripting.
I have read that there is no known algorithm that would allow public keys to be derived from public addresses within a practicable timescale, even with quantum computing. However, the same is not true for deriving private keys from public keys. Thus addresses that have not been used to spend, have benefits in terms of being more QC proof. I recall Vitalik Buterin writing on this topic. It looks like the protocol version is inside the JSON. What would be the incentive for non-miners to answer your question?
Why would you trust the answers or lack thereof? After all, if I understand correctly, when there is no transaction fee set aside, the miners could very well choose to omit transactions from their blocks?
On trusting the answers: The requirement of a signature makes this hard to forge by a malicious naysayer. On your last point, yes, this is a very interesting question. At present this all seems to be working okay, but over the long run I suspect will limit the use of Bitcoin for small transactions.
On the last point: I could see the transaction fee being indirectly related to the time required to confirm a transfer. If you want your transfer confirmed quicker, then you have to pay. Also could someone with very large resources overwhelm the network with bad data? Eg, if china wanted to use some super computers or a bot net to stop bitcoin from operating by adding all sorts of bad data to the block chains? Denial of service type attacks are a real problem.
On the first question, the answer is, I think: Android had a bug in their random number api that was successfully exploited. Or maybe someone dies but the next of kin doesnt know the details? Lost bitcoins are just that — gone from the money supply for good, unless someone manages to either a recover the keypair; or b breaks the underlying crypto.
That brings up an interesting scenario, on a long time scale there will have to be some allowance made for replacement of the lost coins, or sub-division of the satoshi. With Bitcoin; losing the private key for good is more like accidentally dropping your coins out of an airplane over the pacific ocean.
Looks like we both independently arrived at similar methods of explanation: Thank you so much!!!! I had wanted an understandable primer on Bitcoin since ages and this was a fabulous read! It looks likely to cause floating point approximation errors. Just wanted to say thanks for a really great essay — the explanation was really clear, and totally fascinating.
Can quantum computers mine bitcoin faster? Does this boil down to how quickly a quantum computer can find a string that has a specified property for SHA? For which we have a quadratic speedup, but probably no more? Thanks for this, while I understood the majority of it, the coding element was very useful — especially highlighting where the script goes in conjunction with the transaction.
While a lot of people know abot bitcoin, there is such a shortage of good quality technical info. Why is bitcoin built to be inherently deflationary? This seems to be the go-to argument against why it will ever gain widespread adoption as a currency. Why does the reward for mining bitcoin halve every , blocks? Could there be a point in the future where this is reversed? I certainly suspect as do you that these may ultimately turn out to be design flaws.
Bitcoin is NOT deflationary. It is inflationary with a known and decreasing rate up until around at which point it will stop being inflationary. The only deflation in Bitcoin may happen through coin loss. The same, by the way, is true for Fiat. The difference is that Fiat can be arbitrarily inflated and with Bitcoin it is not arbitrary. Why is it inflationary at all as in, why not start with a predetermined amount of bitcoins that never change.
Bitcoin designers wanted a way to spread bitcoins around without starting with a central authority that has them all and gives them out like, say, ripple. The bitcoin generating part of mining does exactly that. Bitcoin is only not deflationary if you assume that real wealth production will gradually slow, and eventually stabilize around at the same pace as the drop in Bitcoin production.
The more that needs to be paid out in each transaction to cover the fees, the lower prices and actual payments will have to fall to make room for that overhead. Lower revenue translates to lower ability to afford a given price level, and so on. What actually needs to be demonstrated is that there is any value in allowing any static, nonproductive account to maintain its nominal value, as opposed to using the inherent decline in the value of such accounts provide the baseline motivation to use more productive investments to store anything beyond cash sufficient to meet immediate needs for liquidity.
Trying to store value in money rather than in future production potential is the ultimate perverse incentive, rewarding fraud and financial manipulation far out of proportion to development of real assets. There are excellent reasons for wanting to store value. One obvious one is the desire to save for retirement. JPE V66 6 Dec. Actually bitcoin is inherently deflationary if you believe that the size of the bitcoin economy will grow faster than the money supply.
Although not quite intuitive, it does make sense upon reflection that the money supply reflects the value of the economy it represents. If the money supply is growing faster than the underlying economy then you get inflation.
If the money supply is growing slower than the economy you get deflation. I think all but a few of us expect the bitcoin economy to grow faster than the supply of bitcoins — hence we have a deflationary currency. The wisdom of that choice is another mater, of course. One could imagine many different scenarios for the amount and timing and conditions of new currency entering the system.
Does everyone have their own version of it or do they sync to a master? Does every block chain get updated when validation is completed? But the way the protocol is designed at present there is a sizeable number of people keeping a full copy of the block chain.
This is currently quite a manageable size about 12 gig. If Bitcoin grows rapidly enough this may eventually become a problem. The conclusion there, which seems to me believable, is that there are many options for scaling Bitcoin at least up to the level at which credit cards are used today, and perhaps further. Just about the total amount of bitcoins, if I understand well, new bitcoins are generated each time a transaction is processed?
It means the more exchange we have, the more bitcoins in the market there is? How were created the first bitcoins? Is there another way of creating bitcoins that checking transactions?
Not per transaction but per block of transactions. Exchanges are a bad example. The transactions within the exchange happen outside the network. There are so many trades going on within an exchange, it happens internally. And since trades need to happen fast, the network is not suited for that.
Thanks for the great Bitcoin writeup. What I think is more interesting than the cryptography aspect is the social-motivational aspect of Bitcoin and why it seems to be succeeding. Scaling this system to support a billion users transacting multiple times per day seems…. Anyway, all very interesting to watch.
As usual, I got in late and out early with Bitcoin bought around 5, sold around , seemed like an awesome profit margin at the time… that aspect of Bitcoin is a lot like any other speculative investment, and is certainly fueling interest at this stage.
On scalability, check out https: Like you, though, I wonder about the long-run economics and impact of mining. Thanks for writing this great explanation of Bitcoin. I noticed in the first Bitcoin transaction example, you mention 0. Thanks for the excellent writeup. I have a question about one item, hopefully you can explain it. It appears the money you send someone is merely chunks of one or more previous transactions.
Those previous transactions are the inputs for my transaction to you. How does the transaction message for the 2 bitcoin transaction prove that I was the recipient of those previous transactions when the addresses are all different? The proof is in the digital signature. That signature is generated using a public key which must match when hashed the address from the output to the earlier transaction. But if I understand correctly the need for every transaction to be publicly verified means that you are tied to all your transactions.
Anyone with a copy of the block chain can notice that the flow of money goes from various drug users, to Stringer, to Russell. If you really want to enable money laundering, first create a bank. Such a bank would have more uses than just money laundering. You will use a trusted middleman that does several transactions each day, some with good-guys and some with bad-guys. The middle-man then transfers out the necessary amounts to intermediate addresses yyy0 … yyyM that he has set up specifically for this transaction period.
Because all the incoming money has gone into the xxx address there is no way to separate out subsequently which money went to which reciever. If ALL the yyyy addresses belong to bad guys then you would be guilty by association. Many bitcoin services perform such mixing by default, based on what I have read. The legal ramifications for the mixing service provider are unclear to me. But such a bank would have to keep its own records — both as a practical necessity and as a legal requirement — and those could be obtained by the authorities.
Whereas cash can be laundered tracelessly, through a cash business like a casino or restaurant, which can perfectly innocently be expected to have lots of cash coming in and no way of knowing where it comes from.
Interestingly this is exactly what was done with silk road. It basically was a bitcoin bank moving bitcoins around in such a way the buyer and seller could not be connected. Nonce starting at zero is not a vulnerability.
The nonce is simply 32 bits out of the whole bit coinbase that you are hashing and there is no way to design a target solution to be distributed anywhere within the nonce range of those 32 bits. Of course this creates an obvious incentive for all participants to try to guess nonces in a different order than everyone else. So it seems reasonable that most client software would use a random sequence of nonce guesses rather than guessing sequentially from 0.
But still, if one were to find a vulnerability in the random number generator of a popular client, then it might be possible to design a competing client which would, in practice, almost always find the correct nonce before the targeted client, by virtue of guessing the same sequence a few steps ahead. That would allow the attacker to successfully validate a share of blocks greater than their actual portion of the collective computational power, at the cost of everyone using the vulnerable client and finding the nonce less often than they should on average.
Alex has explained my concern well. As people make transactions, the public ledger grows. Will it not grow to an unmanageable size at some time? If the block chain forks, do the miners on both sides of the fork keep their rewards?
I am puzzled by transactions in blocks. Is it not possible for two miners to be working on different blocks which contain mostly, although not all, the same transactions? Does the second miner restart by taking his unverified transactions and putting them in a new block?
However, over time only one of the forks will become the accepted consensus for confirmed transactions.
And so only the miners from one fork will be able to redeem their transactions. What will happen when an owner loses his wallet restores a backup from a few weeks back.
He may have spent some coins, and he may have received some. Those transactions are no longer in his block chain. How would the block chain get back in sync? On your question-to-yourself about using two phase commit, I think the major issue would be vulnerability to denial-of-service attack. A malicious user could set up a swarm of identities to act as nay-sayers and therewith deny some or all others from performing transactions.
In my experience using the bitcoin client, you are not allowed to do anything on the bitcoin network until your block chain is in sync with the latest transactions. It somehow recognizes how far behind your block chain is and starts downloading blocks and tells you how old your block chain is and how much left you have to update as it downloads more.
BTW, I un-installed the bitcoin client because over the 1 year span that I had it installed, the block chain went from about 2 GB to about 25 GB, and the novelty of having my own copy of the block chain wore off in comparison to its cost.
On the naysayer DDoS attack on two-phase commit: Here is a very entertaining rational explanation http: If we were to decide that the rewards should be different remaining at 25 indefinitely, for example , what exactly would have to change? Is it the bitcoin mining clients that are hardwired to only validate transactions that award 25 coins to other miners when they validate their blocks, and the date of the validated block indicates that the award should be 25 BTC?
Every , blocks the rate halves. No need to keep track of the date, simply count blocks. As the chain is just validated list of transactions, how there can be any cap on transactions? What does hardcoded mean practically? You only own that much of bitcoins as others agree you own. So, hardcoded here means it is the original protocol suggested and supposed to be honored by all the users.
Would it be, in principle, possible for all miners to agree on not lowering the reward at all? For example to continue to reward 25 per block for all eternity. I was thinking about how the blockchain is managed as more transactions are processed, thanks for the link https: In a way, Bitcoin is replicating a history of money evolution in an accelerated manner.
I wonder what will take place in the protocol to allow the peer-to-peer nature to continue while scaling the project to allow the transaction capacity necessary for a true currency. Yeah, that is very interesting. And you do already see a lot of signs of centralization with the big mining pools:.
This makes the concept difficult to grasp. Thanks for such a generous and informative post. There is so much babble on Bitcoin that it often seems to operate socially as more of a rorschach test on currency than an actual means of exchange.
The devil, and the delight, are in the details. Bitcoin has fascinated me recently. I admit to not being able to fully wrap my head around it, but I took what I could and wrote a little here: How does the block chain know that the address sending the coins is correct?
The sender sends their sig to go with it, I assume paired up with the hash of the address allows the various nodes to validate right? They would need to in order to validate. So can a sig only be used once, and if so how is it generated and what prevents it from being faked?
Public key cryptography is a remarkable and beautiful thing. Each client using Bitcoin has keypairs — one key in each pair is public, the other private. The nature of asymmetric cryptographic digital signatures is that I can sign any piece of data using my private key, and anyone else with only my public key can verify that the person who signed that data holds the private key. In order to benefit they would have to be converted or be re-introduced later on.
The situation is complicated further by the possibility of laundering. If you quickly spend some stolen bitcoins on, then it becomes very different to later recover those bitcoins, since now they may be in possession of honest parties. Indeed, this is a critical question. The apparent lack of unambiguous protocol documentation makes me think that alternative implementations are difficult to achieve. I have one question or doubt: What is done with all these hashes?
Did you do this video or is this video inspired by this post!! Many people have asked about scalability, so let me just leave this here: I have a question: Could miners run a modified version of the software to choose not to publish a transaction in the blockchain?
I mean, like a small group of powerful miners controlling the entire network? If you control half or more of the total mining power in the network, you can keep a transaction out of the blockchain by solving blocks faster on average than the miners who are trying to include that transaction.
If you control less than half, you can delay the transaction, but sooner or later the rest of the miners will get ahead of you and your version of the blockchain will lose out.
There was a time in this country when you can go to the bank and trade in your 20 dollar bill for an oz of gold. But a medium of exchange is just that, something used to facilitate trade, an accounting device. It should have scarcity value and be resistant to counterfeiting. Fiat currencies have scarcity value to the extent that they are usually printed in finite amounts.
Gold is generally scarce. And bitcoin is scarce as well. Gold has been used as a medium of exchange for centuries. If people are willing to pay for something that is rare or unique, it has a value.
The demand for it defines the price. Excellent write-up, and I look forward to further installments — which leads me to ask: I just checked both RSS feeds, and they seem to be fine. One year on from peak price, what does the future hold? Gizmodo Australia Allure Media. From Stellar to Suck". Where is the next human-based digital currency? Your dream of a Bitcoin paradise is officially dead and gone".
Salon Salon Media Group Inc. When the bubble bursts". Is the crypto-currency doomed? Federal Reserve Bank of Chicago. The Possibilities and Pitfalls of Virtual Currencies". Dialogue with the Fed. Federal Reserve Bank of St. In fact, I think that the threat that they pose as alternate currency can serve as a useful check on a central bank. Bitcoin is good, NFC is bad". Technology International Business Times. Dollar in Response to Senator's Bitcoin ban request".
Christina Wang September The Verge Vox Media. Draghi has recently expressed more confidence in the Eurozone economy. The expectation of ECB tapering has put downward pressure on our dollar. This is why the lynchpin for the global economy now rests on the shoulders of Mario Draghi and Janet Yellen—both of whom foolishly believe that their massive counterfeiting sprees have put the global economy in a viable and stable condition.
I intentionally left out Haruhiko Kuroda of the BOJ; even though he is the worst of the money printing bunch, at least he knows—along with everyone else--that he will never be able to stop counterfeiting yen.
And, of course, the Fed has made it clear that it will begin reverse QE around the end of this year. The memories of central bankers are extremely limited. That is how high yields were before ECB purchases began. However, these intractable yields were extant before the gargantuan increase in nominal aggregate debt levels incurred since the global financial crisis, which was abetted by the central bank's offering of negative borrowing rates.
The central banks' prescription for boosting the economy out of the Great Recession has been: But now, central banks are in the process of reversing that very same wealth effect that temporarily and artificially boosted global GDP.
Therefore, by the middle of next year--at the very latest—we should experience unprecedented currency, equity and bond market chaos, which will be a trenchant change from today's era of absent volatility.
The vast majority of investors have fully embraced the passive buy and hold strategy due to confidence in governments and central banks. That misplaced confidence is the biggest bubble of all. Cryptocurrencies make good currencies, but fail miserably when trying to achieve the status of money. Cryptocurrencies are both created and held electronically inside a virtual wallet.
These digital currencies use encryption techniques to regulate the generation of new units and to verify the transfer of funds. Cryptocurrencies operate independently of governments and are decentralized. The most popular cryptocurrency now is Bitcoin. Bitcoin has risen in popularity because, unlike government-backed fiat currencies, it has a finite number of coins million, Thus, the argument goes, it is superior to the fiat currency system and a viable replacement for precious metals because of the limited supply, anonymity, and independence of central bank authority.
Cryptocurrencies are driven by a technology called Blockchain that allows for the transfer of stocks, bonds, property rights and digital currencies; directly, in real time, and with lower fees, because there is no middleman. The Blockchain technology itself is revolutionary and will make transactions more trusted, transparent and immutable.
While the technology driving cryptocurrencies is very interesting, the "coins" themselves are not equivalent with the Blockchain technology. Cryptocurrencies are simply piggybacking on the blockchain as they masquerade as real money. To explain, we must first consider what the properties of genuine money are. First and foremost, money is a store of wealth. For centuries PM's have been the premiere storage of wealth — they have no challengers in this criterion. In order to be a store of wealth, money must have intrinsic value.
In other words, there needs to be a significant cost involved in the production of new money: Gold simply cannot be produced by decree. Most importantly, money must also be virtually indestructible and extremely rare. Gold and platinum are extremely rare and do not corrode or oxidize. Essentially, they last forever. However, unlike PM's, fiat cryptocurrencies lose their utility during a simple power failure or whenever the internet goes down.
People who put their faith in cryptocurrencies have to ask themselves how confident they are that there will never be a victim of an Electromagnetic Pulse bomb or a nuclear war that disables all forms of electronic communication. Try bartering for a can of beans with a fried PC. A more likely scenario is that governments or hackers shut down Bitcoin exchanges. In fact, back in , there was the infamous Mt. Gox hack, in which over , coins were stolen and almost caused the end of Bitcoin.
The owners of cryptocurrencies must hope that governments never shut down the exchanges or websites that enable these electronic transactions. Governments can try to ban gold ownership, but that must be done on a door-to-door basis and is extremely difficult to accomplish. But to place confidence in cryptocurrencies is to put faith that governments cannot control the internet. Gold and platinum are very rare within the earth's crust, and the mine supply of these elements increase marginally each year.
And the number of elements that are rare and indestructible are known, fixed and miniscule. If scientists routinely discovered new elements by the hundreds that are virtually indestructible and extremely rare, the value of all existing PM's would become greatly diluted. That dynamic is exactly what is happing with cryptocurrencies.
Both cryptocurrencies and fiat paper money share this same inherent flaw: Even with this, the money supply of U. However, there are currently now over 1, digital currencies in existence, up from just a small handful in , and that number is growing by the day. These currencies are mostly homogeneous and therefore tend to act like a single commodity.
Of course, there are some small differences. Ethereum, the second most popular cryptocurrency, offers self-executing agreements coded into the blockchain itself. But the core of the technology—decentralized digital money—is the same throughout the cryptocurrency world.
Therefore, a more advanced currency with greater speed and capabilities would greatly reduce the value of all other inferior digital "money"; just as each new digital currency created greatly reduces the value of those already in existence.
The advocates of Bitcoin believe they have the upper hand to gold because it is limited to 21 million units. But what the holders of Bitcoins don't yet understand is that even though this one cryptocurrency is limited in supply, the universe of commodity-like cryptocurrencies is unlimited. Because cryptocurrencies are driven by quickly changing technology, you have no idea when your cryptocurrency will become obsolete.
Therefore, you can go to sleep believing your wealth is stored in the equivalent of an iPhone and wake up realizing your life savings is parked in an eight-track cassette. Cryptocurrencies are an inferior form of money to PM's.
After all, one has to question the durability and soundness of owning electrons inside a digital wallet. It is also a currency that has attracted a number of terrorists, black mailers, and child pornographers--giving governments a great motivation to regulate it. Precious Metals, such as gold and platinum, are the most perfect form of money known to humans. This has been proven correct for thousands of years.
Indeed, history clearly proves that all currencies backed by nothing eventual display that very same valuation--nothing.
However well intentioned, in the end, the creators of cryptocurrencies are really just modern day alchemists; and what they ended creating is nothing more than fool's gold. But as we have seen back on this side of the hemisphere, the public's interest in these political scandals can be easily overlooked if the underlying economic conditions are favorable. For instance, voters were apathetic when the House introduced impeachment proceedings at the end of against Bill Clinton for perjury and abuse of power.
And Clinton's perjury scandal was indefensible upon discovery of that infamous Blue Dress. The average citizen, then busily counting their chips from the dot-com casino, were disinterested in Clinton's wrongdoings because the economy was booming.
Clinton remained in office, and his Democratic party gained seats in the mid-term elections. Therefore, Abe's scandal is more likely a referendum on the public's frustration with the failure of Abenomics.
When Shinzo Abe regained the office of Prime Minister during the last days of , he brought with him the promise of three magic arrows: The first arrow targeted unprecedented monetary easing, the second was humongous government spending, and the third arrow was aimed at structural reforms. The Prime Minister assured the Japanese that his "three-arrow" strategy would rescue the economy from decades of stagnation. Unfortunately, these three arrows have done nothing to improve the life of the average Japanese person.
Instead, they have only succeeded in blowing up the debt, wrecking the value of the yen and exploding the Bank of Japan's BOJ balance sheet. For years Japanese savers have not only seen their yen denominated deposits garner a zero percent interest rate in the bank; but even worse, have lost purchasing power against foreign currencies.
The yen has lost over 30 percent of its value against the US dollar since Abe regained power in Meanwhile, the Japanese economy is still entrenched in its "lost-decades" morass; and growing at just over one percent year over year in Q1 Japan's dramatic slowdown in growth, which averaged at an annual rate of 4.
In addition to this, higher health care costs from an aging population have driven government health care spending to move from 4. Incredibly, this low-growth and debt-disabled economy has a Year Note that yields around zero percent; thanks only to BOJ purchases. Prime Minister Abe's plan to address this recent scandal-driven plummet in the polls is to increase government spending even more and have the BOJ simply step up the printing press. In other words, he is going to double down on the first two arrows that have already failed!
However, the Japanese people appear as though they have now had enough. And the nation would never be able to service this debt if the BOJ didn't own most of it. The sad truth is that the only viable alternative for Japanese Government Bonds JGBs is an explicit or implicit default. Japan is a paragon to prove that no nation can print, borrow and spend its way to prosperity. Abenomics delivered on all the deficit spending that Keynesians such as Paul Krugman espouse.
But where is the growth? Japanese citizens are getting tired of Abenomics and there are some early indications that they may vote people in power that will force the BOJ into joining the rest of the developed world in the direction of normalizing monetary policy.
The reckless policies of global central banks have left investors starving for yield and forcing them out along the risk curve. But interest rates are set to rise as central banks remove the massive and unprecedented bid on sovereign debt—perhaps even in Japan.
A chaotic interest rate shock wave is about to hit the global bond market, which will reverberate across equity markets around the world. Is your portfolio ready? This powerful and protracted bull market has made Cassandras look foolish for a long time.
Those who went on record predicting that massive central bank manipulation of markets would not engender viable economic growth have been proven correct. However, these same individuals failed to fully anticipate the willingness of momentum-trading algorithms to take asset prices very far above the underlying level of economic growth. Nevertheless, there are five reasons to believe that this fall will finally bring stock market valuations down to earth, and vindicate those who have displayed caution amidst all the frenzy.
Congress needed to shave two weeks off its August recess in an effort to make headway on raising the debt ceiling, which will hit the absolute limit by mid-October, and how to fund the government past September 30th of this year. Tea-Party Republicans, as well as Office of Management and Budget Director Mick Mulvaney, would like to add spending reform riders to the debt limit bill.
Treasury Secretary Steven Mnuchin is looking to pass a "clean" bill. If Mnuchin gets his clean debt ceiling bill passed, the show-down will then move to the appropriations bills used to fund the upcoming fiscal year. For the past few years, Congress has been pushing through last minute continuing resolutions, rather than passing a budget, to provide funding at a rate of the previous year's funding.
Not being able to make progress on either of these measures will lead to a government shutdown that could leave markets and Trump's tax reform agenda in a tail spin. The Donald may find it very convenient to "Wag the Dog" before the year closes out.
What is needed is a "fantastic" distraction from his failure to reach an agreement to repeal and replace Obamacare and to push through with a tax reform package.
Also, an assault on Kim Jong-un's nuclear facilities would go a long way in reducing the media's obsession with Russiagate. Trump promised that a nuclear strike against the U. Trump also urged China to, "put a heavy move on North Korea" and to "end this nonsense once and for all. On June 7th the spread between China's 10 and 1 year Sovereign bond yields became negative. This was only the second time since that such an inversion occurred, and this time around it became the most inverted in history.
An inverted yield curve, no matter what country it occurs in, is a sign of severe distress in the banking system and almost always presages a recession. A recession, or even just a sharp decline in China's GDP growth, would send shock waves throughout emerging markets and the global economy.
Indeed, on July 17th the major indexes in China all plunged the most since December due to investor fears over tighter monetary and economic controls from Beijing. If the yield curve remains inverted into the fall, look for exacerbated moves to the downside in global markets. The head of the ECB, Mario Draghi, stated in late June that deflationary forces have been replaced by reflationary forces. This simple statement sent bond yields soaring across the globe in anticipation of his inevitable official taper announcement that could be made as soon as September 7th.
German year Bund yields are still about basis points below the ECB's inflation target, and about bps below implied nominal GDP. This means when Mr. Draghi actually starts removing his massive bid from the European bond markets yields should spike suddenly and in dramatic fashion—regardless of the pervasive weak economy. Rapidly rising borrowing costs on Europe's over-leveraged economy would cause investors to worry about future growth prospects and send high-frequency front-runners scrambling for the narrow exit door at once.
Now, after QE has been wound down to zero and four rate hikes have taken place, the Fed will likely announce the actual start date for the selling of its balance sheet at its September FOMC meeting. The problem is that global central banks are tightening monetary policy as the economy weakens. This would exacerbate the move higher in bond yields caused by the ECB's Tapering.
That could be enough to send the passive ETF investing sheeple jumping off a cliff en masse. The end of central bank monetary accommodations, which is coming to a head this fall, is the primary reason to believe the odds for a significant stock market correction could be just a couple of months away.
Adding to this perilous situation is the record amount of NYSE margin debt outstanding, along with the fact that institutional investors have just 2. In other words, investors are levered up and all-in. Since the election of Donald Trump, the Dow Jones Industrial Average has reached a record high one out of every four trading days.
The average days without such a decline is and respectively. This market is overvalued, overextended and extremely dangerous! Therefore, it is very likely this long-overdue market correction could be worse than the ordinary 20 percent decline. The upcoming stock market toboggan ride is not only starting from the second highest valuation in history, but also with the balance sheets of the Fed and Treasury already severely impaired.
In other words, there just isn't a lot of room left to lower interest rates or to run up huge deficits in an attempt to quickly pull the economy out of its downward spiral. It is time to put a wealth preservation strategy in place before the fall arrives. Illinois officials have been frantically working on a massive 5-billion-dollar tax increase to stop the major rating agencies from downgrading their debt to junk.
Their last-minute maneuvers increased the personal income tax rate to 4. And the state's annual pension obligation is now looming around 25 percent of its budget. But Illinois is not alone in its fiscal woes. The salient issue here is not just that tax receipts are short of liabilities but that asset returns are falling far short of their projected targets. This highlights the fundamental flaw in governmental pension accounting: This process expects that all returns will mirror the best years and doesn't consider market volatility, let alone a recession and bear market.
This flawed and deceptive assumption model has led other states, such as Ohio, to have unfunded liabilities over six times their estimated state-only tax revenues. Optimistic actuarial assumptions have proven to be too optimistic about such factors as employee longevity and enrollment in early retirement programs.
Pension fund managers have been underweight U. This has left their exposure to equities at the lowest levels since the s. Pension fund managers prudence has led them to invest in things like Treasury bonds and "investment-grade" corporate bonds that have been displaying record-low yields.
Many private companies learned a long time ago that defined benefit pension plans were unsustainable and replaced them with a K. Employees can save tax-free and invest in a group of boilerplate options. And while there is a risk that these plans will not provide for the employee in retirement, the risk is on the employee and not the employer. Public sector unions that represent a reliable voting block have kept defined benefit pensions alive and well for government employees.
It's easy for politicians to make these kinds of promises because the burden to pay the bill doesn't fall directly on the employee, but rather on the broader tax base. But the truth is your tax bill could explode as local governments bail out these insolvent pension plans--just ask the taxpayers of Illinois. New Jersey and Maine had to close state parks over part of the July 4th weekend. Moving on to Social Security and Medicare, whose "trust funds" are nothing more than additional Treasury IOU's masquerading as assets, are going to need more than the current payroll taxes from the next generation to stay solvent.
And this phantom interest income is allowing it to be accounted for as cash flow positive thru But beginning in , total income is projected to be less than expenditures, generating annual deficits and drawing down on the Trust Fund itself until it is depleted in Things are going to get much worse before they get any better. This is because during the next economic crisis there is a good chance that both stock and bond prices could tumble.
Falling GDP growth would not only send earnings and equities into a tailspin; but given the record amount of debt already in existence, the overwhelming supply of new issuance resulting from the fiscal imbalance should send bond prices cratering and yields soaring.
This would occur just in time to hit employees' k plans. Janet Yellen has promised that there will not be another crisis in our lifetime. The truth is central banks will never be able to let go of their humongous and unprecedented interest rate suppression.
This current attempt to normalize interest rates will cause market and economic chaos of unmatched proportions. Sadly, the broken public and private pension plans have condemned the Fed to an endless pursuit of asset bubbles and inflation to portray the illusion of solvency. Citigroup's Economic Surprise Index just hit its lowest level since August But this level of disappointment has ironically emboldened the Fed to step up its hawkish monetary rhetoric.
The truth is that the hard economic data is grossly missing analyst estimates to the downside as the economy inexorably grinds towards recession. This anemic growth and inflation data should have been sufficient to stay the Fed's hand for the rest of this year and cause it to forgo the unwinding of its balance sheet.
But that's not what's happening. But why is the Fed suddenly in such a rush to normalize interest rates and its balance sheet? Perhaps it is because Ms. Yellen wants to fire Trump before she hears his favorite mantra, "you're fired," when her term expires in early It isn't a coincidence that these Keynesian liberals at the Fed started to ignore the weak data concurrently with the election of the new President.
A Q1 GDP print of just 1. And a lack of evidence for a Q2 rebound in the data hasn't done so either. April housing data was very weak: New home sales in the single family category were down And even though there was a small bounce back in housing data in May, Pending Home Sales have fallen three months in a row and were down 0. Retail sales dropped, 0. It's not just economic growth indicators that are disappointing, but also evidence of disinflation abound everywhere.
Commodity prices are also illustrating signs of deflation. Further evidence of deflation is seen in the fact that the spread between long and short-term Treasury Yields are contracting. The Household Survey is a leading indicator for the Establishment Survey and the overall employment condition. Wall Street's currently favorite narrative is one of strong earnings growth. But according to FactSet, nearly half of Q2's projected 6.
Excluding this sector, EPS growth is projected to be just 3. The economy should continue to move further away from the Fed's growth, and inflation targets as its previous monetary tightening starts to bite.
The odds are very high that such a weak print on jobs will occur before the next hiking opportunity on Sept. From there it will turn to panic as the economy and stock market meltdown.
And, most importantly, the coming market crash and recession will occur with the balance sheets of the Treasury and Fed already extremely stretched. Hence, an extrication from this recession will not happen quickly or easily. All of the above makes this the most dangerous market ever. This crash and ensuing economic downturn, which given history, logic and the data should happen soon; will alter the Fed's current stance on monetary policy.
But it will happen too late to preclude a very steep decline in GDP. Trump cannot push through his tax cutting agenda rather quickly it may be both Ms. Yellen and the Republicans that find themselves moving out of D.
That's the direction some high-profile economist and former members on the FOMC want to go. According to these academics, including Narayana Kocherlakota the former president of the Federal Reserve Bank of Minneapolis from to , raising the inflation target just isn't enough.
They want to put a time horizon on it as well. Their rational for doing both actions is to reduce the level of real interest rates, which they somehow believe is the progenitor for viable GDP growth. You see, once the Fed has taken the nominal Fed Funds Rate to zero, there isn't much more room to the downside unless these money manipulators assent to negative nominal interest rates. But charging banks to hold excess reserves is fraught with danger, and so far this idea has been eschewed in this country and has been proven ineffectual in Europe.
The next recession could be just around the corner and the Fed is thinking about ways to stimulate the economy given the fact that the amount of ammunition--the number of rate cuts until the F. With very little leeway available to reduce borrowing costs, these mainstream academics want to facilitate more negative real interest rates by ensuring inflation is higher right from the start.
The math is simple: But as to why these Keynesian academics are so convinced a lower real interest rate is better for economic growth is never clearly explained. Probably because it is a nonsensical tenet and the biggest fallacy in all of central bank group think.
Their spurious logic dictates that a lower unemployment rate is the primary cause of rising rates of inflation and that a higher rate of inflation is supportive for lowering the unemployment rate. Exactly how this simple model arrives at that conclusion is never cogently explained; other than the mistaken belief that inflation and growth are synonymous terms.
But history and genuine economics clearly illustrate that inflation does not bring about growth, nor does it necessarily lower the unemployment rate. In fact, a rising rate of inflation often leads to higher rates of unemployment. This is the exact opposite of the Phillips Curve dogma held at the Fed, which dictates that a falling unemployment rate is the totality of inflation. The reality is that the humongous amount of new credit pumped into the system by global central banks has primarily landed in financial assets, not consumer price inflation.
Central banks will purchase assets directly from the public or the Treasury instead of through the banking system. In other words, getting new money into the public's hands causing an increase in broad-based money supply and inflation.
The next stock market plunge and concomitant GDP collapse is approaching quickly. The Fed is preparing investors for its ultimate response; which will be to guarantee a higher inflation rate and to put a timestamp on it as well.
But those efforts will only vastly exacerbate the stagflation condition suffered by the middle class. Those that possess a keen insight to the direction of markets are aware of this phenomenon and are moving into precious metals now; while they are still able to afford them.
The economic ruse that is run by Communist China is growing bigger by the day. The formula behind what has been the Great Red Engine of global growth is really very simple: Print new money and funnel it through the state-owned banking system in order to entice businesses and individuals to incur a debilitating amount of non-productive debt.
Historically speaking, countries that have utilized this ersatz form of economics have suffered a currency and bond market crisis. But the command and control government of China always seems to be one step ahead of the laws of economics; and has been able to defer the inevitable day of reckoning due to its large currency reserves.
However, those reserves have dwindled as the nation was forced into selling its dollar-based assets and defend the value of the yuan.
To aid in propping up the yuan, China has deployed a unique cocktail of regulations and market trickery. In addition to outright currency manipulation, trading bands and strict capital controls, China has now resorted to simply making up prices for its currency.
The China Foreign Exchange Trade System, which is managed by the PBOC, changed the way it values the country's currency each morning and the way it is allowed to fluctuate through the day. The government currently sets a benchmark value for the yuan against a basket of currencies for which the yuan is then allowed to fluctuate in value by 2 percent during the day. You would assume the opening benchmark level would be based on the currency's closing value the day before.
But the Chinese government contends that the market just isn't getting it right. Therefore, they are introducing a "countercyclical variable". The omniscient Chinese government will now determine the opening benchmark value of the currency. Because after all, the government of China is great at pretending it has a better view of supply and demand than millions of individuals voting with their wallets each day.
But the currency manipulation doesn't end there. The Chinese government still has the less regulated offshore yuan to contend with. Investors that believe the yuan will fall in value will go short the currency outside of China. This involves borrowing yuan in Hong Kong, swapping it for dollars and then repatriating it back at a more favorable rate. There are risks associated with borrowing the yuan. When these risks rise it can force investors to close out this trade, which has the effect of pushing the yuan higher.
Therefore, in order to crush the Yuan bears, China followed up its countercyclical variable by sending margin costs for borrowing the offshore yuan through the roof and forcing a short squeeze. The overnight CNH Hibor rate, spiked from 5. And with this it appears China's currency will live to die another day.
We are living in a world where market manipulation has reached unprecedented proportions and any vestiges of the free market are extremely hard to find. This is especially true throughout the developed world. China sets a GDP target and then fudges with the number to ensure its accuracy. It fabricates economic numbers and is the world leader in the production of alternate facts.
Spinning a fairy tale as it pretends to move towards a more market-based system. But to imagine China can repel these economic forces forever would be to defy centuries of data that says otherwise. The offshore Yuan speculators represent the incipient dissolution of confidence in the government and its currency. The Chinese government can only manipulate the message from the market for so long.
But by the early 's money printing caused the government to abandon the dollar's gold backing, and stagflation soon followed. Heck, even the Roman Empire couldn't hold back the forces of inflation forever. This destruction of confidence in governments and their fiat currencies do not happen overnight.
But history is clear that markets always win and governments always lose…reality triumphs over fiction. China's fairy tale will come to an end.
A pernicious end that will be shared by the Euro and the Dollar as well. Those seeking a much better ending will need to park their wealth in gold.
The bounce in Treasury yields witnessed after the election of Donald Trump is now decaying in the D. If the Fed continues to ignore this slow growth and deflationary signal from the bond market and continues along its current rate hiking path, the yield curve will invert by the end of this year and an equity market plunge and a recession is sure to follow.
An inverted yield curve, which has correctly predicted the last seven recessions going back to the late 's, occurs when short-term interest rates yield more than longer-term rates.
Why is an inverted yield curve so crucial in determining the direction of markets and the economy? Because when bank assets longer-duration loans generate less income than bank liabilities short-term deposits , the incentive to make new loans dries up along with the money supply.
And when asset bubbles are starved of that monetary fuel they burst. The severity of the recession depends on the intensity of the asset bubbles in existence prior to the inversion. The Federal Reserve has traditionally controlled overnight lending rates between banks. Nevertheless, outside of these QE programs, the long end of the yield curve is primarily influenced by the inflationary expectations of investors. The yield curve inverts when central banks believe inflation is headed higher; but bond investors are convinced of the opposite.
The last two times the yield curve inverted was in the years and This next inversion will occur in the context of record high equity, real estate and bond market valuations that will require another government bailout.
However, this time around the recession will commence with the balance sheets of the Fed and Treasury extremely overleveraged right from the start. As you can see from the chart below, if the year Note yield orange line continues to fall along its current trajectory; and the Fed plods along with its avowed Dot Plot hiking path blue line , the yield curve should invert around the end of Market chaos and another brutal recession should soon follow.