Bitcoin Has No Value; Neither Does Ethereum, XRP, Etc.

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PRICE VS VALUE

Most investors do not understand the difference between price and value. If they did, the prices they are willing to pay to invest in certain things would either be higher or lower, depending on the fundamentals. Usually, though, an investor is more likely to overpay; either out of ignorance or as the result of wishful thinking. Case in point: Bitcoin.

BITCOIN AND OTHER CRYPTOCURRENCIES

As an investor, I need to be able to analyze and assess real fundamentals in order to arrive at realistic valuations for prospective investments. Only after the valuation process can a price be applied which is a reasonable estimate of value.

The typical Bitcoin investor doesn’t have a clue as to what the value of his investment is. What he does know, is that its price has gone up – a lot. The price action is what attracts the typical investor; not the fundamentals.

As a result, the price of Bitcoin bears practically no relationship to its fundamental value.

So, what is the value of Bitcoin? First, it is important to note that the value of Bitcoin is not a function of the token itself, or the limited number of tokens. This is also true of other cryptocurrencies. The value of Bitcoin and other cryptocurrencies is that they can be exchanged between individual parties PRIVATELY on a decentralized blockchain. That is a hugely positive characteristic which is the primary basis for realistic valuation of most cryptocurrencies.

However, we live in a highly regulated society. Our financial system is the epitome of stringent regulation and control. That control is evident in the process involving financial transactions and the transfer of money, including taxation.

Financial transactions on the blockchain are unregulated and can go unreported. As the dollar volume of transactions increases, so does the potential loss of tax revenue.

It is naive and short-sighted to think that any government which claims to have regulatory authority, either directly or through one of its agencies, would not take steps to intervene in areas where financial activity is perceived as a threat to its  own control and power. (see Janet Yellen Re: Cryptocurrencies And Terrorists)

A QUESTION FOR INVESTORS 

If the value of Bitcoin lies in the private transfer of ‘money’ between investors, and that value is the same basic fundamental that applies to other cryptocurrencies, then why is the Bitcoin price at or near $100,000 while the price of XRP is only $2? Is Bitcoin wildly overpriced; or are other cryptocurrencies underpriced?

There are unique characteristics for various cryptocurrencies and there are differences that make certain ones more attractive than others depending on useful value to individuals. These include fees, transaction speed, conversion costs, stable value tokens, etc. Nevertheless, the decentralized private transfer between individuals remains the common attraction and basis for value in most cryptocurrencies.

IS BITCOIN MONEY?

Bitcoin has been described and characterized as a form of money. But, is it?

Money has three distinct characteristics: medium of exchange, measure of value, store of value. Bitcoin and other cryptocurrencies are, to a limited extent, mediums of exchange. But, they are not measures of value.

Money is used to value other items – by price. Under our current monetary system, we place a relative value on various goods and services by attaching prices to them. The goods and services we buy and sell, our own labor, education, etc. – all have value. The value of various items is determined and a price is affixed using a commonly accepted medium of exchange. Currently, that medium of exchange is the US dollar. For Bitcoin to be considered money, it would need to function as a measure of value. In other words, how many Bitcoins will it take to purchase your next vehicle? or dress? or steak dinner at your favorite restaurant?

We don’t know because there is no reasonably reliable application of value for Bitcoin. In other words, how much is Bitcoin worth? At least with US dollars – for now, anyway – they serve as a medium of exchange and a measure of value.

There is no possibility for Bitcoin to be considered a store of value. Being a store of value requires a retention of purchasing power over long and indefinite periods of time. It is impossible to determine Bitcoin’s value because there is no history of sufficient length to provide evidence that it serves as a store of value. Sufficient evidence would require centuries.

How do you determine a value for nothing, i.e., Bitcoin? A house has value. Companies that produce and provide goods and services have value. Real money (i.e. gold) has value.  The much-maligned US dollar, a paper substitute for real money, has  a commonly accepted, implied value, even though it continues to lose purchasing power.

Bitcoin is a digital creation which has no value in and of itself. As such, it can never be used as a measure of value for anything else. Think of it this way: How many Bitcoins is your house worth? How many Bitcoins will your next car cost? If you can answer those questions without any calculations, you will know that Bitcoin has become “a generally accepted form of money”. (see Is Bitcoin Money – Does It Have Value?)

CONCLUSION 

What is the value of a tulip bulb? (see Tulip Mania: About The Dutch Tulip Bulb Market Bubble)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Trump’s Tariffs – National Security?

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A long-time friend of mine, a staunch free-market and free-trade advocate, emailed me shortly after I posted the article Trump’s Tariffs – Just More Bad News. An excerpt from his commentary follows:

“…while I still believe in free trade as a basic tool for maximum prosperity, especially in a perfect world, I have changed my view, and now I believe that under many circumstances, tariffs and even subsidies are crucial to our national security. Free trade is fine when talking about sweaters, stuffed animals, plastic bowls, and maybe even automobiles. But do we want to depend on China , or even Japan, for our steel, ammunition and pharmaceuticals? I think not.”  

I agree in principal that there may be occasions where selective use of tariffs and “even subsidies” might serve a protective purpose in our national interests.

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Trump’s Tariffs – Just More Bad News

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TRUMP’S TARIFFS 

President Trump has now followed through on his earlier threats to impose tariffs on trade partners and neighbor countries, Canada and Mexico. In so doing, he has accomplished nothing that will result in anything positive or worthwhile.

Tariffs are never justified and never produce the presumed results. They are self-inflicted open wounds that continue to fester. The action immediately raises the prices of certain imported goods which Americans buy from those countries. That forces negative financial decisions by consumers that will result in harmful economic consequences.

In addition, the danger of retaliation is heightened in this case because Trump’s actions are in blatant disregard for the existing USMCA treaty ratified by Congress during his first term in office. Actions and reactions by the countries involved escalate into trade wars that affect not just the specific countries but the entire global supply chain. There are many variables, including which particular goods are taxed, how long the tariffs are in place, etc., but the effects are always negative.

CONCLUSION

After passage of the Smoot-Hawley Tariff in 1930, America’s trade partners responded with their own tariffs. The results were historically horrible. Global trade fell by 65% and the Great Depression worsened. Some say it contributed to the beginning of World War II.

Hopefully, things will not get that bad. Just remember that nothing good will come of Trump’s tariffs. (also see Trade Tariffs – The Worst Is Yet To Come and The Danger of Trade Tariffs)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Federal Reserve Is A Private Institution – Powell Is Not A Public Servant

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At his press conference earlier this week, Fed Chair Jerome Powell said the following… “The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals, and, really, keeping our heads down and doing our work,” he added. “That is how we best serve the public.” 

Powell’s repeated use of the personal pronoun “our” rates special attention. I don’t think he means it in the collective sense. In this case, “our” means them – not us. Admittedly, his appending claim “…how we best serve the public” is meant to allay fears and present himself and the Fed in a more positive light. Nevertheless, investors and others need to know and understand some things about the Federal Reserve’s origin and purpose.

From The Creature From Jekyll Island (G. Edward Griffin)…

“Back in 1910, Jekyll Island was completely privately owned by a small group of millionaires from New York. We’re talking about people such as J. P. Morgan, William Rockefeller and their associates. This was a social club and it was called “The Jekyll Island Club.” That was three years before the Federal Reserve Act was finally passed into law. It was November of that year when Senator Nelson Aldrich sent his private railroad car to the railroad station in New Jersey and there it was in readiness for the arrival of himself and six other men who were told to come under conditions of great secrecy. For quite a few years thereafter these men denied that any such meeting took place. It wasn’t until after the Federal Reserve System was firmly established that they then began to talk openly about their journey and what they accomplished. Several of them wrote books on the topic, one of them wrote a magazine article and they gave interviews to newspaper reporters so now it’s possible to go into the public record and document quite clearly and in detail what happened there.” 

PURPOSE OF THE FED 

The purpose of the Federal Reserve is to provide a structured system whereby its member banks can create and lend money in perpetuity. The Fed accomplishes this by continually expanding the supply of money and credit.

The Federal Reserve exists for the benefit of the banks and bankers.  Its purpose and motivation is not aligned with ours. The Fed’s objective is to facilitate the ongoing creation of money and loans which generate interest income. (see The Federal Reserve – Purpose And Motivation)

Our financial problems are the result of intentional inflation created by the Fed. Cheap and easy credit has exacerbated the fragility of the entire banking system.

Why in the world would the United States Congress approve a bill which authorized the inception of a private institution whose purpose and goals had nothing at all to do with serving the public? Besides, the government (President Andrew Jackson) had promised there would never be another National Bank. Here is why the Federal Reserve exists today…

COLLUSION AND SECRECY 

In order to allay the fears of the American public, and convince Congress that it was in the best interests of the country to authorize by law the existence of this ‘private’ institution, it was necessary to effect a campaign at two specific levels: grass roots, i.e., the American public; and, behind closed doors, i.e., politicians and the U.S. government.

The message delivered was that the mission of the Federal Reserve was to actively manage the stages of the economic cycle – recession, depression, recovery, prosperity – and, thus, avoid the extremities of panics and crashes that had plagued the banking industry and put depositors at continual risk. (This has morphed into a two-pronged goal of focusing on 1) maximum employment and 2) stable prices.)

The statement of intention to manage the stages of the economic cycle was born out of necessity. Members of Congress would not vote in favor of any bill authorizing existence of a central bank without their constituents approval. If the American public thought there were benefits that could outweigh their fears, and if enough members of Congress felt similarly, and perceived that public support was sufficient, then possibly the bill would pass.

Support of business and the general public notwithstanding, approval was not assured. In exchange for support by the government (Wilson administration including Treasury officials and others), another secret meeting was held at which an agreement was made that if the Federal Reserve was granted a legitimate birthright, all future government funding was assured.

In other words, the Federal Reserve underwrites and guarantees that the US Treasury/Government will get whatever funds it needs; a promise made over one hundred years ago. (see U.S. Government Is Beholden To The Fed & Vice-Versa)

PRIVATE INTERESTS VS PUBLIC POLICY 

So, what did the bankers get out of this? The answer is found in one word. Money.

More specifically, they got control over the money. They were now legally authorized to be everyone’s sugar daddy, and, ostensibly, they had the support of the United States government and its citizens.

Banks lend money to individuals, companies, and governments. They also lend money to countries, revolutionaries, and global conglomerates.

The Fed is not particularly interested in the profitability or welfare of  smaller, individual banks, though. It was intended originally that the Federal Reserve could better supervise and contain damages spawned by errant actions of independent banks, but the primary goal was to create an environment that would allows the banks, especially big, power center banks, to operate and function without interruption, and on a hugely, profitable scale.

With the inception of the Fed, the bankers could protect the interests of their elite hierarchy and retain control over the money supply, lending activities, funding their own special interest activities, and make tons of money doing it.

JEROME POWELL VS DONALD TRUMP

President Trump is now demanding (again) that the Fed lower interest rates. This is what Powell had to say about it…

“I am not going to have any response or comment whatsoever on what the President said,” Powell replied. “It is not appropriate for me to do so.”

Fed policy (and purpose) is not designed to support off the wall “demands” by politicians (or investors, for that matter). A similar “demand” was made during Trump’s first term. It went nowhere. Two years into his successor’s term in office, the Fed began raising rates; much to the chagrin of a majority of outspoken enthusiasts from both political parties.

The current difference of opinion between Mr. Powell and President Trump could be entertaining, though.

CONCLUSION

Regardless of claims to the contrary, the Federal Reserve does not exist to serve the public interest. The Federal Reserve is a banker’s bank which exists for the purpose of 1) creating and lending money and 2) collecting interest in perpetuity.

As valid as are the calls to end the Fed, it likely won’t happen. The United States government would lose its pipeline to unlimited funding. The result would be financial and economic pandemonium.

The road ahead, though, will bring financial and economic devastation anyway. Right now, the Fed has everything it can do to handle the unintended consequences of its own errant policies over the past century. Fighting the negative effects of more than one hundred years of intentional inflation is a full-time job. (see Federal Reserve – Conspiracy Or Not?)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Liquidity Problems Could Overwhelm Inflation’s Effects

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LIQUIDITY PROBLEMS – 1929 

In 1928 and 1929, the Fed raised interest rates for the purpose of curbing rampant speculation in stocks. At that time, investors could borrow as much as 90% of the stock price for their proposed investment. The banks were just as aggressive as investors and were happy to oblige.

Raising rates did not slow stock speculation by investors or banks, however.

What it did do was cause a slowdown in economic activity. Thus, as economic activity declined, the stock market continued its rise, unabated.

As the decline in economic activity continued, both businesses and consumers were affected negatively. The money was available for investors to buy more stocks, albeit at a higher cost; but, businesses and consumers struggled with liquidity problems.

STOCK BUBBLE BURSTS 

The crash in the stock market brought illiquidity issues to light. Layoffs in the financial industry were numerous and swift. The ranks of the unemployed ballooned.

If you were an investor who had purchased stock with 10% down, it would take only a 20% decline for you to have lost twice as much as your original investment.

Now, imagine the plight of the banks who had lent money to investors using stocks as collateral. The collateral was worth as much as 30% less after one day of trading. Bank failures became almost commonplace during the Great Depression that followed.

FED RESPONSE

As might be expected, the Fed did purchase government securities in the open market and lowered the discount rate. It also assured commercial banks that it would supply needed reserves.

Unfortunately, “too little; too late” became the common descriptive phrase used when referring to Federal Reserve response to the crisis which it had caused. That is because the economic devastation was overwhelming.

Unemployment soared to as much as 25% and prices declined (deflation) by more than one-third. The aggressive, free-spending social programs of the 1930s government could not stop the slide and contributed to the length and breadth of the depression. At the depths of the Great Depression in 1932, the stock market had declined by 90%.

The stock market crash was not the cause of the Great Depression, though. The Great Depression was caused by a Fed policy of higher interest rates. Whatever the intention or merits of the action (the higher rates were imposed for the purpose of curbing rampant stock speculation), it led to a reduction in economic activity which was well underway before stocks crashed.

INFLATION, DEFLATION, AND THE FED 

The Federal Reserve officially implemented an interest rate policy of “higher for longer” almost three years ago. Rates moved up rapidly and bond prices have lost one-third to one-half of their value since then, depending on length of maturity. (see “And So Rates Will Be Higher” – Jerome Powell)

It matters not what the intention was or whether it was correct. What matters at this point are the circumstances in which the Fed finds itself now.

Most, or all, of our serious financial and economic problems are the result of a century of intentional inflation. The effects of that inflation lead to a loss of purchasing power in the currency (U.S. dollar). When the Fed intervenes in the markets either directly (by purchasing or selling securities) or indirectly (manipulating interest rates), it creates distortions which have ripple effects and are amplified.

In addition, those effects are unknown with regards to extent, duration, and timing. Remember being surprised at the higher increases in consumer prices post-Covid and economic shutdown. Those increases are attributable to government (and central banks) actions in response to the ‘pandemic’.

The economic shutdown was forced upon society by government – rightly or wrongly. As a result, the decline in economic activity led to huge financial and economic problems for society, including supply chain issues. These problems were met with phenomenally huge financial largesse (inflation) by governments and central banks, which, in turn, led to higher consumer prices (effects of inflation).

After more than one hundred years of trial and error, it is apparent that…

  1. The Federal Reserve causes the problems and crises with which it continues to grapple.
  2. The Fed is doomed to a role of reacting to crises of varying intensity (worse) and frequency (more often).
  3. Serious deflation and economic depression would overwhelm efforts by government to reverse the effects or contain the damage.

CONCLUSION 

There is no path to financial stability from the current point that does not involve a cleansing of huge magnitude. The cleansing will be accompanied by serious financial and economic pain. The Fed is continually dancing with its own devils amid music which is horribly out of tune. The only option left is to wait until the music stops. (also see If The Markets Turn Quickly, How Bad Can Things Get? )

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Backtalk From The Bond Market

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BACKTALK FROM THE BOND MARKET

Investors keep looking to the Fed for supposed “forward guidance”. They are looking in the wrong place. Since mid-December, bond prices have declined another 5% and are currently at new 52-week lows. Here is an updated chart of U.S. Treasury Bond ETF (TLT)…

U.S. Treasury bond prices have now declined 16% since the Fed announced a reversal in its interest rate policy and the first rate cut last September. The latest weakness comes in the face of a second rate cut, so it begs a repeat of the question I posed last October…
“Why are bond rates rising at the very time the Fed is trying to move interest rates lower?” (Fed Cuts Rates But Bond Rates Are RISING)
Subsequently, the Fed announced a second rate cut, but the announcement lacked the conviction that inflation is under control and that multiple rate cuts could be expected for 2025.
I don’t so much think the Fed has suddenly had a change of heart. The situation is precarious and the cumulative effects of more than full century of money creation (inflation), mis-management, and manipulation have evolved into a game of playing catch with a ticking time bomb.
Former Fed presidents Greenspan, Bernanke, and Yellen all know this and have kicked the can down the road. Jerome Powell was likely aware of the ongoing threat of a catastrophe from which there is no return. The opportunity to be “numero uno” for a season, however, must have displaced any fear of presiding over a credit collapse and economic depression.
THE FED’S DILEMMA

The Federal Reserve doesn’t know what to do; but it probably doesn’t make much difference anymore.

A dilemma is “a situation in which a difficult choice has to be made between two or more alternatives, especially equally undesirable ones.” (New Oxford American Dictionary)

We are hooked on low interest rates and the drug of cheap and easy credit. Maintaining low interest rates furthers that dependency and heightens the risk of overdose. The result would be a swift and renewed weakening of the U.S. dollar accompanied by the increasing effects of inflation.

On the other hand, raising interest rates more could trigger another credit implosion which could lead to deflation and a full-scale depression.

Doing nothing is an option. The problem is that the Fed is holding that “ticking time bomb” and doesn’t know how long it will be until its world blows apart.

WHAT TO EXPECT NEXT

Don’t trouble yourself worrying about who the next Fed chair will be. It doesn’t matter. It is too late in the game for a change to have any meaningful impact. This includes speculation that Judy Shelton might get nominated again. Yes, she is an excellent choice; and, for all of the right reasons.

Unfortunately, that would expose the game of chess being played by the Federal Reserve and its owners. (see Federal Reserve – Conspiracy Or Not? and Federal Reserve vs. Judy Shelton)

The worst possibilities come after something big happens. The Federal Reserve and the U.S. government will work together to stave off any possibility of loss of control. That means that everyone – investors,  traders, citizens, communities – will be subject to a host of new economic and monetary regulations, restrictions, executive orders, etc.

It will be like nothing we have seen in the past and beyond anything we can currently comprehend. (also see Bond Investors To The Fed – “Not This Time”)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

 

5 Investments To Avoid In 2025

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INVESTMENTS TO AVOID IN 2025

While most other analysts usually tell you where to invest, I prefer to tell you where NOT to do so; at least at this particular time. The backdrop of a deteriorating world economy, recurring financial catastrophes and the volatility which accompanies them, plus exacerbation of existing problems by governments and regulatory agencies, make it difficult to recommend investments on a fundamental basis.

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Still No New Highs For Gold Since 1980

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ALL-TIME HIGHS FOR GOLD 

The intra-day high for spot gold in 2024 is $2785 oz. That is an increase of 34% over its closing price of $2062 oz at the end of 2023. Indeed, gold holders are happy campers and their confidence and trust is emboldened and confirmed.

As the gold price continued to climb throughout the year, the financial media, particularly in the gold space, has treated us to a barrage of headlines regarding “new, all-time highs” for the yellow metal.

In truth, the all-time high for the gold price was set in 1980; and, it has never exceeded that price point since 1980. 

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Bond Investors To The Fed – “Not This Time”

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RE: FED POLICY…

“I think instinctively – I can’t prove this, we’re going to learn about this empirically – but it seems to me that the neutral rate is probably higher than it was during the intra-crisis period. And so, rates will be higher.”  (Jerome Powell, July 2024)

Powell’s comments were from an interview conducted two months prior to the announcement that the Fed Funds target rate was lowered after more than two years of higher interest rates.

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Fed Balance Sheet Continues To Decline

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FED BALANCE SHEET 

Below is a chart posted and updated regularly by the Federal Reserve Bank of St. Louis…

As can be seen in the above chart, total assets of the Federal Reserve Bank have declined by 22 percent since peaking in March 2022. The aforementioned peak was nearly simultaneous with the announcement by the Fed in March 2022 of a change in Fed interest rate policy.

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