The Bitcoin Bonanza and Bernanke’s Head

The Australian dollar is back below US91 cents. The RBA might lower rates and the Fed might print less money come December. Put together you’ve got a bearish case for the Australian dollar.

Wait. Aren’t trade flows and the real economy supposed to set exchange rates? Isn’t it about trade balances, prices and productivity?

Of course not! What is this, the 90s? We live in a world of speculation and government control now. Reality, tangible stuff and the free market are suspended.

Not that the Pope knows it. He’s come out criticising the ‘new tyranny’ of the free market in an 85 page apostolic exhortation. That’s what you get for putting an Argentine in charge.

The new Pope is also asking the same people who hacked his mobile phone to guarantee all citizens of the world ‘dignified work, education and healthcare’. Turning to politicians seems very impious. We remember the days when the Catholic Church did those things itself instead of asking politicians to do it. But the new pope is supposedly all about austerity…everywhere except in government apparently.

Strangely enough, the church is more concerned with the rich than the poor these days. Apparently, inequality is not a problem that can be solved by reducing the lot of the wealthy, instead of improving the lot of the poor.

We stopped reading the pope’s pontifications abruptly at this phrase: ‘I beg the Lord to grant us more politicians…‘ To be fair, we don’t know how the sentence ended.

Meanwhile, Member of the European Parliament Godfrey Bloom is also busy criticising the rich. But at least he’s picked the right rich in his epic tirade in parliament:

‘I’m minded to quote the great American philosopher Murray Rothbard here that ‘the state is an institution of theft writ large.’ Tax is just a system where politicians and bureaucrats steal money from their citizens to squander in the most disgraceful manner. This place [the EU] is no exception.

‘Fascinatingly, I really don’t know how you manage to keep a straight face when you are talking about tax evasion. The whole [European] commission and commission bureaucracy avoid their taxes. You don’t pay taxes like citizens pay taxes. You have all sorts of special deals. Composite tax rates, high tax thresholds, non-contributive pension schemes. You are the biggest tax avoiders in Europe, and here you sit pontificating.

‘Well, the message is getting home to the people of the European Union. You’re going to find that Eurosceptics are coming back in June in ever greater numbers. And I can tell you worse. As the people get your number, it won’t be long before they storm this chamber and they’ll hang you and they’ll be right.’

Huzzah! Now that’s the kind of Pope the world needs. Bring back the Inquisition.

Cyberspace is backing MEP Bloom with online gambling markets. You can make a bet on the ‘unexpected’ death of certain politicians and if you ‘happen’ to get it right, the payout is yours. It’s straight out of Agatha Christie’s Miss Marple. The assassin isn’t an assassin, he’s just a gambler.

Here’s the list of bids so far:

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You might notice a few things about the list. First of all, it uses Bitcoin. At B124, a successful bet on the death one Ben Bernanke would net you around US$124,000, four times the payout on Obama’s coincidental death. Using Bitcoin is particularly clever, as Bernanke’s efforts to lower the price on his head via inflation are thwarted by Bitcoin’s appreciation.

But probably not for long argues Mebane Faber. The blog compared Bitcoin to the shares in the South Sea Company, a famous bubble from the 1700s.

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Shares in the South Sea Company collapsed shortly after a parabolic move. And Bitcoin topped US$1000 overnight.

Meanwhile, gold is having a miserable time. About once a month a mystery seller dumps enormous amounts of the yellow metal onto the market. The plunge in price is so severe it triggers a 20 second trading halt called a ‘stop logic’. The idea being that traders need time to get back into the market to make the price stable again.

It’s paper gold being dumped, of course, not the physical stuff. But the effect is to make buying gold a risky business. If you put in a stop loss, it’s likely to be hit each time the metal’s price is attacked. That leaves you with a loss.

The media is also all over the gold market’s manipulation in another sense. It turns out the way gold is priced at 10:30am London time each weekday hasn’t changed much in the last 100 years. Although it’s done over the phone these days, it’s just as dodgy.

The way it works is that five banks bid amongst each other until their supply and demand between them hits equilibrium. Then they publish the price for the rest of us mortals. Heck the process is even called ‘fixing’. You couldn’t make it any clearer if you tried. The five banks even own the London Gold Market Fixing company which does all this, but has no permanent employees. Hmm.

The problem is, with derivatives dominating the gold market, the five banks can make a whopping profit by adjusting their bids or leaking information to traders. It was the same with LIBOR, which turned out to be an enormous rort for corrupt traders.

Back in political Europe, nothing is fixed. Nobody is actually implementing austerity, as my friend Chris Leithner will be talking about at the Mises Seminar, Greece remains in a disastrous budget position, and there’s a spat between the Germans and Spanish over bank stress tests. Does all that sound familiar?

The banks stress tests are a typical example of how politics is suspending economics and reality, as we mentioned above. You see, Spanish banks hold a bundle of Spanish sovereign debt. German banks hold a bundle of Spanish mortgage securities. Both want to show the market their banking systems are sound, which they aren’t.

So they create a stress test for the banks. The Spanish want the stress tests to be tough to show that the German banking system is actually just as in trouble as the Spanish. The Germans want a slack test, to avoid embarrassment, but if the Spanish are going to be difficult, they want Spanish bonds to be subject to valuation as well. Right now, government debt is considered ‘risk free’. Changing that would put the Spanish back at a disadvantage.

In the midst of the spat, any reference to actual risk is lost. It’s entirely about appearances.

But appearances can be very insightful sometimes. Take this hilarious statement from ECB President Mario Draghi from a few weeks ago talking about the bank stress tests: ‘Banks do need to fail to prove the credibility of the exercise.’ That’s practically an admission that the European banking system would be in deep trouble if another financial crisis hit. And this time, who can afford to do the bailing out? The pope?


Nick Hubble+
for Markets and Money

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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