Sunday, October 08, 2017

“You’re broke even if you have money,”

A “Generation One” family member recently asked if I had insight about the linked article here citing a situation recently experienced by a Puerto Rican citizen who said “You’re broke even if you have money,”  due to the island-wide power blackout and non-functioning ATMs.

The blog goes on to say, “Big Government is thrilled to see so many banks go cashless. But as the folks in Puerto Rico are learning the hard way, a cashless society isn’t all it’s cracked up to be...”

Well, the simple insight in this situation is that  without electricity, ATMs don’t work. “Duuuuh!”  Then the writer goes on to use that instance to build a naive and biased discussion of the reasons behind banks’ promotion of a cashless society. Despite his naiveté, that specific circumstance inevitably leads to the larger topic of digital money.

It’s inherent in their DNA that banks will promote cashless financial transactions. They rightly argue it will reduce fraud, tax evasion, and money laundering. Unstated, however, is the real reason:  cashless transactions provide banks and government authorities with more control of money and taxing power.

But there are much larger issues at play behind the desire for a cashless society which are only beginning to integrate into the system of money and its transfer. This, along with the broader implications of digital currency, have been discussed by economists, politicians, and banks for some time. It’s simply another manifestation of the huge transformations wrought by the development of digital technology.

Technological changes are increasing at an  exponential  rate, not in a straight  line. That’s because technology uses information already developed to upon which to build new systems, thus  driving  advances  in information flows, analyses and exploitation more rapidly than ever  before.  A math professor of mine once said, paraphrasing, “The greatest weakness of modern man is  his  inability to understand the exponential function.”  No doubt.

We are currently living through changes which are more widespread, epochal, and impactful to economies, governments and societies than mankind has experienced in over 2000 years---or more accurately since the dawn of human history---due to pervasive advances in digital technology.  None of those developments, including cashless societies and digital money, will be stopped. And that’s why Elon Musk, in particular, along with other visionary technologists, warn about the potential danger of robots taking over mankind.

I will get into the deeper, invisible changes surrounding the technology of money later, but to the practical matter of providing for our immediate, foreseeable needs during a weather emergency, others advise we should keep a sufficient amount of hard cash in a home safe which allows us to live for 3-6 months if the economy should collapse or power fails due to a storm or war. As in Puerto Rico, a storm in this country has knocked out power for weeks in some parts of the country, but it’s extremely unlikely the entire grid would go down.

As I’m sure readers are aware, the so-called “prepper” movement takes this potential disaster to the extreme and advises that you should be totally self-sufficient to provide for yourself and family in case of economic collapse or if the power grid goes down. Neither of those events will happen…ever.

Puerto Rico will return to normalcy supported by money from the U.S and other countries.  As just one example, Elon Musk has offered to provide solar power and batteries to Puerto Rico which use the same technology powering the electric cars he developed.  He claims he can power entire cities using his batteries in a stacked array. He can probably do it.  He already has in development the same type of lithium-ion battery to power homes and buildings as well as his cars. This is just another example of technology development visible around us.

But, as you might expect, there’s more to Puerto Rico’s power grid failure that is not discussed. The Puerto Rican electric system is a government entity supported with citizen’s money, namely taxes.  Puerto Rico Electric Power Authority   is itself bankrupt and unable to pay its bills, propped up by the government which continually injects funds into PREPA.  More important, PREPA is rife with corruption.  The fact that the Puerto Rican financial system had already fallen into insolvency and on the verge of bankruptcy---before the hurricane struck---is largely due to graft and waste in PREPA, which, by the way, is responsible for some 70% of the country’s debt. As a result of the inefficiencies so often found in government run entities, the system is an antiquated mish-mash of vulnerable components:  generators, transformers, powerlines, and cable that fail to work in the best of times.

With regard to the U.S. power grid specifically, much of what you hear, mostly from doomsayers, is that there is a risk of the entire U.S. power grid going down. That won’t ever happen, either, for a couple of reasons. The entire system, while it is, in fact,  interconnected not only domestically but also with Canada and Mexico, is made up of so many independent legacy generating, transmission, and computer control systems developed over the last 120 years, that each individual grid can, for the most part, isolate and support itself with the power generating capacity within its own system. No doubt, there would be brownouts and blackouts, but it’s impossible for the entire system to go down all at once or even in a short period of time.

But I digress. The use of pieces of paper and metal as money, or more accurately, fiat money, (which is a book’s worth of information in itself), will inevitably disappear. As a result, paper money and coins will be kept as relics of an earlier time.

Beyond that, there is another technology already in development which will take us to the next level of systems of financial exchange and do away with the need for any kind of money, be it paper, silver, gold or otherwise.  This truly disruptive technology will eliminate the need for banks and will preclude governments---least of all politicians---from interfering in the personal exchange of money between individuals and institutions.

This potential but real threat of Bitcoin and the blockchain to the established financial order and to powerful financial elites recently caused Jamie Dimon, CEO of J.P. Morgan, one of the world’s largest banks, to state that  “…Bitcoin…is a  fraud.”

But the man speaketh with forked tongue. It’s a known fact that every bank in the world is frantically analyzing the blockchain upon which Bitcoin and over 1500 cryptocurrencies are based because it will---and is already---changing the fundamental workings of the global financial system.  This new technology threatens the wellbeing and very existence of every financial powerhouse and its beneficiaries because it brings a truly distributed, democratic process to the functioning of money as a system for the exchange of value.

Dimon speaks from his position at the very top of the established financial and political order.  He speaks not to the point that Bitcoin is a fraud, but rather from outright fear of the ability of this new technology to literally destroy that system he represents. Without a doubt, he fully comprehends Bitcoin’s and the blockchain’s threat to the banking system. Banks will become like horse drawn carriages and buggy whips---a symbol of an antiquated system. Fifty to a hundred years from now, his statement will be seen as akin to those made during the advent of the automobile.
You may have heard of Bitcoin, or more generally, “cryptocurrency,” which itself is a technology based on the “blockchain”.  cryptocurrency   is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Bitcoin was the first, and is now only one example, of more than 1500 such currencies recently developed. 

Digital currencies are able to function only because of the underlying technology known as the blockchain.  The blockchain can best be described as a universally distributed and remote (“in the cloud”) accounting ledger digitally connected to all other transactions registered in the blockchain (visualize a DNA strand) in a peer-to-peer network.  The blockchain tracks each financial transaction independent of any other while each transaction depends on the previous one to build the infinite chain of entries in the ledger.

The first distributed blockchain was invented by an anonymous person or group known as Satoshi Nakamoto in 2008 and implemented the following year as a component of his digital currency – bitcoin – where it serves as the public ledger for all transactions

With currently known technology, fraud, theft and hacking can’t occur due to the extremely lengthy and complex  algorithms used in the blockchain and which are currently impossible to decode.  However, my personal opinion is “Never say never!”  Blockchain has potential applications beyond money exchange. For example, it can be used to track medical records, identity management, any type of transaction process, and even food traceability.

So this brings us full circle to earlier comments about governments’ desire to transition to a cashless society. With the implementation of the blockchain, that technology will prove to be the ultimate demise of those very governments and banks that seek to control money and their citizens. Can a one-world government or no government at all be far behind?

Len Ruggiero
CEO, LaMarch Capital, LLC.


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