The libertarian fantasies of cryptocurrencies

Digital money needs tough regulation rather than bleating in favour of ‘innovation’

Martin Wolf

“Move fast and break things” was the famous motto of Mark Zuckerberg, Facebook’s founder. Among those broken things have been norms of trustworthiness essential to democracy. An activity as dependent on trust as democratic politics is money and finance. This is why developments here cannot be left to the greed and fanaticism we see in the world of cryptocurrencies. Careful assessment needs to be made of this world and its relationship to the broader one of digital money. Change is indeed on the way. But it cannot be left to happen.

The cryptocurrency movement would reject that, because its roots lie in anarchistic libertarianism, as Nouriel Roubini of New York University argues. This ideology also beats in the hearts of many Silicon Valley entrepreneurs. They are not altogether wrong: the state can be a dangerous monster. But it is also essential: it is humanity’s ultimate insurance mechanism.

The world of anarchy is one of competing bandits. It is far better to have just one, as the late Mancur Olson argued in Power and Prosperity. Moreover, he added, liberal democracy helps tame that bandit. States exist to provide essential public goods. Money is a public good par excellence. That is why dispensing with the role of governments in money is a fantasy. The history of the so-called cryptocurrencies demonstrates this.

Money is a store of value, a unit of account and a medium of exchange. To be a really good currency, it needs to be durable, portable, divisible, uniform, limited in supply and acceptable.

How do cryptocurrencies measure up against these requirements? They are clearly neither a store of value nor a good unit of account, as their vast swings in price show. They are not a good medium of exchange, because law-abiding people and businesses do not want to own assets that are, by virtue of their anonymity, ideal for criminals, terrorists and money launderers. While an individual cryptocurrency can be limited in supply, the aggregate supply is infinite; according to the International Monetary Fund: “As of April 2018, there were more than 1,500 cryptocurrencies.” There could just as easily be 1.5m.

The best way to view cryptocurrencies is as speculative tokens of no intrinsic value. One could have value if it became the currency of choice of a jurisdiction. Yet there is a compelling reason why, in normal circumstances, people use the currency of their own government: they need to pay taxes. To do that, they need to render money the government accepts — principally, deposits denominated in national currency at banks with accounts at the central bank. This, in turn, is the government’s bank. The state can enforce this: that is why it is the state. You may have an online existence. But you also have a physical body, which the government can put in prison if you don’t pay your taxes. This is why the state can enforce its domestic monetary monopoly. Only those operating in the shadows would seek to operate outside this framework — and even they will find it very dangerous.

As the Financial Times’ Izabella Kaminska and Martin Walker of the Center for Evidence-Based Management argued in evidence for the House of Commons Treasury committee, so far the cryptocurrency craze has made online criminality easier, created bubbles, fleeced naive investors, imposed grotesque waste in so-called “mining”, offered funding for malfeasance and facilitated tax evasion. What is the social value in any of this? There is no good case for new anonymous currencies. Cryptocurrencies are not yet important. But they need tough regulation. It is no longer enough to bleat in favour of “innovation” or “freedom”.

Whatever the dangers of cryptocurrencies may be, “distributed ledger technology” including “blockchain” might prove valuable in making activities dependent on safe record-keeping, notably finance, more efficient and secure. A huge number of experiments is under way. A recent Geneva Report on the Impact of Blockchain Technology on Finance, argues that such technology can “mitigate the ‘cost of trust’” and so “lower overall costs, reduce economic rents and create a more secure and fairer financial system”. That would be welcome, if true. Let us experiment. But all the important public policy requirements of transparency and financial stability must continue to apply.

One of the most important potential innovations in the broad area of digital money is potentially the opposite of cryptocurrency: central bank digital money, perhaps as a substitute for cash and possibly as something more radical than that. Analysis at the IMF and the Bank of England demonstrates that we need to be clear about what central bank digital money is to achieve, how it relates to cash or bank deposits, and whether it could be a substitute for central bank reserves, which at present can only be owned by commercial banks.

Replacing cash with digital tokens of some kind would be relatively simple. It would mainly raise questions about the degree of anonymity of such replacements. Far more potentially revolutionary and destabilising possibilities would arise if the public at large were able to switch from deposits at commercial banks to absolutely safe accounts at the central bank. This radical idea has obvious attractions since it would remove the privileged access of one class of businesses, banks, to the monetary services of the state’s bank. But it would also transform (and surely destabilise) today’s monetary system, in which the state seeks to guarantee and regulate a money supply largely created by private banks and backed by private debts. Yet the revolutionary fact is that it would now be easy for everybody to hold an account at the central bank. Technology is eliminating the historic difficulties over such access.

As everywhere else, innovation is transforming monetary possibilities. But not all changes are for the better. Some seem clearly for the worse. The right way forward is to reject libertarian fantasy, but not change itself: our monetary system is far too defective for that. We should adapt. But, history reminds us, we must do so carefully.

How Venezuela Aligned the Western Hemisphere

The U.S. finds itself aligned with the region. Can it capitalize on the opportunity?

By Allison Fedirka  


In the Western Hemisphere, it’s Venezuela versus just about everybody. The fallout from the country’s crisis has evolved beyond a confrontation with the United States over sanctions to a hemispheric – even global – melee. The most notable result has been the emerging political and diplomatic alignment against Caracas among states throughout the Americas, including the U.S. Washington has historically strong-armed its policies into practice across the region, fostering resentment toward the U.S. throughout Latin America. But in Venezuela’s demise, the U.S. and other American countries have found common ground, and it has resulted in a remarkable shift in how the U.S. relates to Latin America, at least for the time being. Alignment on Venezuela may open the door for further U.S. alignment with the region – as long as Washington can avoid alienating itself once again.

The administration of U.S. President Donald Trump recognized opposition leader Juan Guaido as Venezuela’s acting president within hours of Guaido’s announcement that he had assumed the role. On this front, the U.S. is in lockstep with much of the region. Within the Lima Group, a coalition of states in the Western Hemisphere, there’s been overwhelming support for democratic political transition in Venezuela. Like the U.S., the majority of members recognize Guaido. Beyond the Lima Group, the list of countries recognizing Guaido has grown by the day and now includes former backers of President Nicolas Maduro such as Ecuador. Others, like Uruguay and Mexico, have taken a more neutral stance, favoring dialogue over new elections and choosing not to recognize Guaido. Maduro still has some allies, of course, including Bolivia, Cuba and Nicaragua.

Two factors have shaped the convergence of regional interests over Venezuela. First, the decline of the “pink tide” – a wave of populist governments elected in several Latin American countries – brought to power governments that were ideologically opposed to the Maduro regime’s socialist policies. While the U.S. has been a longtime critic of the governments of Maduro and his predecessor, Hugo Chavez, it was not until populist governments throughout the region started losing at the ballot box that the U.S. found allies in this fight. Second, the spillover from the Venezuelan crisis – particularly the immigration issue – thrust a sizable financial and social burden on its neighbors, which were ill-equipped to handle the fallout. Venezuela’s quick stabilization and immediate access to aid are the keys to stemming the migration. The U.S., too, needs a stable Venezuela – both for regional security and to satisfy business interests in the oil sector. This consensus may seem perfectly sensible. But to fully appreciate just how remarkable the alignment of the U.S. and over a dozen regional states truly is, it’s important to understand the history of the United States’ relations with Latin America.
An Interventionist History
Throughout the 19th and 20th centuries, U.S. interventionism largely defined Washington’s relationship with the rest of the Western Hemisphere. In fact, from 1898 to 1994, the U.S. government was behind 41 changes of government in the region. From the onset of the Spanish-American War to the start of World War I, in particular, the U.S. intervened to forcibly install and control friendly governments in the region. U.S. forces occupied independent Cuba, its Marines held the Port of Veracruz in Mexico, and U.S. troops were on the ground to help Panama gain independence from Colombia.

World Wars I and II provided a reprieve. The U.S. was focused on the Northern Hemisphere’s conflicts, and the Southern Hemisphere took a back seat. But with the onset of the Cold War, its interventionism came back with a vengeance, propelled by the United States’ imperative to keep Soviet influence out of the Western Hemisphere. The strategy, known as “hemispheric defense,” was focused on preventing Soviet-aligned states from encircling the U.S.; Washington needed to avoid a situation where it would have to make good on its threats to launch a nuclear response. So, the United States launched massive covert campaigns to overthrow governments seen as too friendly toward Moscow, eradicate Soviet sympathizers and bolster dissident militants. The notorious Operation Condor in the Southern Cone epitomized these efforts, but they played out across the región.

With this track record, it’s unsurprising that the U.S. has had a strained relationship with its neighbors in the Western Hemisphere. Many of the anti-communist regimes that the U.S. helped install and prop up brutally repressed their constituents, and Washington’s economic development plans for the region in the 1980s and 1990s fell flat. Many blamed the U.S. – not mistakenly – for the political violence and economic hardships that plagued the region. This resentment laid the foundation for the rise of leaders like Chavez, who garnered public support by vilifying the United States and promising to chart a course free from U.S. “tyranny and imperialism.”

The United States managed to maintain relatively good ties, built on economic and security cooperation, with countries like Peru and Colombia through the 1990s and into the 21st century. But even in these friendlier countries, the governments had to recognize domestic concerns over capitulating to and aligning too closely with the U.S. But as the Soviet threat receded, the United States’ need to employ force in the region decreased. As its use of force waned, so too did populist, anti-imperialist sentiment. Populist regimes faded away with the emergence of a struggling global economy, and ties between the U.S. and the rest of the hemisphere became less antagonistic.
Playing a New Role
Washington now finds itself in a novel situation – aligned with governments and popular opinion across the Americas – and it must tread carefully if it hopes to maintain these newfound ties. The Lima Group has come out against military intervention in Venezuela, so any use of force there would be damaging to relations across the region. If it reverts to its old tactics, the U.S. will be perceived as blatantly disregarding other countries’ positions on regional affairs, and it will lose the credibility it has gained through its handling of the situation in Venezuela thus far. This could cause Latin American countries to turn toward other potential partners like China or Russia – players the U.S. is actively trying to keep out of its neighborhood.

To navigate this veritable minefield, the U.S. devised a twofold approach. First, it took steps behind the scenes to bolster political opposition and encourage a political transition. Then, it rolled out an international campaign to garner support for regime change and reform. It’s necessary to show the world that the international community – and not just the United States – is driving this effort. This strategy also gives regional actors like Colombia and Brazil an opportunity to shape the process and emphasizes that Venezuelans themselves are pushing for change, which helps legitimize any future government. Conveniently, this all helps keep the U.S. in good standing in the region while laying the groundwork for a pro-U.S. leader to take over in Venezuela and accept U.S. investment in reconstruction efforts.

This two-pronged approach has played out through soft power maneuvers designed to cripple the regime and build an anti-Maduro coalition within the international community. The U.S. government has placed sanctions and visa restrictions on Venezuelan officials; U.S. companies have reinforced official policies (Bank of America, for example, blocked Venezuelans’ use of credit and debit cards); and the U.S. has given Guaido and his interim government access to U.S.-based Venezuelan government bank accounts. The U.S. strategy was also crafted to put Maduro in impossible situations. When the U.S. sent aid to Venezuela, Maduro had to decide whether or not to accept it; taking aid from an adversary would undermine his regime but rejecting it would deny food and medicine to hungry, sick Venezuelans. (Notably, the U.S. delivered this aid to neighboring Colombia to avoid trespassing on Venezuelan territory.) One of the most controversial U.S. moves was reaching out to members of the Venezuelan military. It’s not clear exactly which groups the U.S. is engaging with, but this outreach complements the opposition’s courtship of junior and enlisted military members. Only the military has the firepower and capacity to oust Maduro – something the U.S. doesn’t want to do itself.

The United States is in uncharted territory. Its interests are suddenly in sync with those of many Latin American states. If the U.S. is able to capitalize on this moment and work with its regional partners to help Venezuela through a political transition, it could usher in a new era in American relations. Whether this alignment extends to only a single issue or represents a more permanent shift is yet to be seen.

The Myths and Legends of Japan’s 20 Years With Zero Interest Rates

Japan’s two decades of zero interest rates just haven’t stimulated enough

By Mike Bird

A time traveler from 1999 would find some familiar comforts in 2019: overalls have made a comeback, Pokémon is wildly popular and interest rates in Japan are still stuck around zero.

The apparent continuity—in economic policy as well as fashion—isn’t all it seems. The simple narrative that Japan has pursued over two decades of uninterrupted stimulus hides several changes in monetary policy. More worryingly for investors, the tendency of Japan’s fiscal guardians to run policy too tight shows little sign of fading.

The Bank of Japan’s stop-start approach is most obvious in the fact that it has actually raised interest rates three times since 1999: in 2000, 2006 and 2007. It was slower than its global peers to unleash the monetary bazooka following the financial crisis, with its balance sheet remaining roughly flat between 2005 and 2012. Even the idea that it has since been on an asset-buying spree needs more nuance. The BOJ has slowed its pace of government bond purchases to less than 30 trillion yen ($270.95 billion) a year, still hefty but far below its official target of 80 trillion yen.

If Japanese monetary policy has been less loose than assumed, the Ministry of Finance should shoulder more blame for the lack of a sustained recovery. Its consistent push for austere policies might seem sensible, with a government debt pile climbing toward 250% of GDP. But the government’s net interest payments peaked as a proportion of its revenue in the 1980s, and currently run at a fraction of 1% of Japanese economic output—a burden the nation can easily bear.

In trying to avoid a debt disaster that has never come, Japan’s fiscal authorities have fueled the slow-burning crisis of the last 20 years: persistently low demand, stagnant wages and rock-bottom inflation expectations. Corporate goods prices rose by just 0.6% in the year to January, according to data released Wednesday, the slowest increase in two years.

The past is present: a Pikachu Carnival Parade in Yokohama, Japan, in 2017.
The past is present: a Pikachu Carnival Parade in Yokohama, Japan, in 2017. Photo: Akio Kon/Bloomberg News

There is some good news. Basic wage growth is now at its highest since the late 1990s. Women have entered the workforce in droves and the number of job vacancies per applicant has reached multidecade highs. Corporate governance reforms offer some hope for Japanese stocks, currently trading at their cheapest in six years.

Investors may remain reticent about Japan until policy makers show they are willing to change.

The current plan to raise the country’s consumption tax in October—a move that’s likely to crimp demand—isn’t encouraging. Unless Japan’s bureaucrats start working in closer harmony, its experiment with zero interest rates could stretch well into a third decade.

Why a bomb like the one that blew up markets in 2008 may be ticking right now


It’s been a banner year for stocks already. In fact, if we could just shut the whole thing down for the next 10 months, we’d be looking at double-digits returns on the S&P 500 SPX, +0.39% for 2019.

No complaints with that kind of annual performance.

Alas, it doesn’t work that way, and, needless to say, there are plenty of things that could go sideways before the bell rings in 2020. One of the risks could come from a familiar source: leveraged loans.

Read: Leveraged loans are in uncharted territory and that’s a big risk, Moody’s says

In our call of the day, Satyajit Das, a former banker who was once hailed as one of the world’s 50 most influential financial figures, says we could be facing a bomb similar to the one that exploded in the market a decade a year ago.

“Financial markets have short memories,” Das wrote in an opinion piece for Bloomberg over the weekend. “Of late, they’ve convinced themselves that collateralized loan obligations (CLOs) are much safer instruments than the collateralized debt obligations, or CDOs, on which they’re based and which helped precipitate the 2008 crisis. They’re wrong — and dangerously so.”

CLOs are similar to CDOs, in that each pools multiple loans to create synthetic, bond-like investments. It’s wonky stuff, but, basically, CLOs are set up to be a safer way to increase the leverage on a portfolio of debt. Instead of mortgages, subprime and otherwise, in CDOs, CLOs repackage corporate loans, and consumer credit, such as car loans.

“Nevertheless, many risks remain,” Das warned. “How safe or not CLOs are is contingent on several factors: the credit quality of the underlying loans — as judged by the risk of default and the extent of loss if there is a default — as well as the correlation between default and losses within the portfolio.”

There’s currently $700 billion in outstanding CLOs around the world right now, with annual new issues of more than $100 billion, similar to what we saw in the infamous subprime CDOs in 2008.

Das said many aspects of the risks aren’t fully understood. For instance, the credit quality of loans packaged in most CLOs is below investment grade and the borrowers are highly leveraged, which increase the risk of higher losses.

“Investors assume that the portfolios are safer because they’re diversified,” he wrote. “Yet, relative to mortgages, corporate-loan portfolios typically are made up of fewer and larger loans, which increases concentration risk. Leveraged loans are highly sensitive to economic conditions and defaults may be correlated, with many loans experiencing problems simultaneously.”

As we’ve seen before, the nasty unwind can spiral out of control quickly in the face of a downturn.

“The risk is that CLOs will create adverse feedback loops,” Das said. “Falling prices, rising spreads and tightening credit availability will cause credit markets to seize up. Tighter credit will feed into the real economy, setting off losses, selling and price declines.” That’s when the fear contagion kicks in, he continued, as the financial position of banks is questioned and depositors refuse to fund banks.

“There are too many parallels to 2008 for comfort. Investors, many with uncertain expertise and weak holding power, have increased their exposure in the search for higher returns,” Das warned. “Built into this speculative episode, like its predecessors, is a euphoric flight from reality and a blindness to risks that continue to rise.”

Looks like that “blindness to risks” is about to spill over into Monday’s session, as stocks are setting up for a nice start to the week.