16.10.2023 – 11:34

The book "Broken Money"

Recently, Lyn Alden, a former Wall Street analyst, published her new book, Broken Money. She revisits the current U.S. fiscal debt and deficit system in light of the ongoing problems in the U.S. bond market. Long-duration bonds have endured their worst drawdown in history. Lyn is asking a question about the elephant in the room.

Why Our Financial System is Failing Us and How We Can Make It Better Money, according to Lyn Alden, is the possibility to credit and move the fulfilment of needs through time. In this way of thinking, money is credit. In another school of thought, money is a super commodity and has the function of string value, allowing transactions, and being a unit of central banking. We are living in a centralised ledger system of accounts. So finally, there is a ledger that people use to trade with each other. With the central bank being the final ledger, we are living in a centralised ledger system.

Broken Money explores the history of money through the lens of technology. Politics can affect things temporarily and locally, but technology is what drives things forward globally and permanently. Her mission is to give guidance. The bond market is currently melting down, and yield curve control might be necessary. Institutions are trying to maintain their credibility. The endgame may be yield curve control, a strategy that the Bank of Japan is already executing. Will something break, or will yield curve control introduce a regime that will stabilise the system while inflation may still go on? We should look around for trouble spots: the real estate market, banks, and the public equity market. Up to now, they have not been disrupted by the meltdown in the bond markets.

Let's listen to Lyn Alden's own words:When we analyse the long-term potential of digital assets like bitcoin today, either from a bullish h bearish angle, history can indeed be one of our strongest teachers. Although technology is inherently futuristic in nature, the problems that technology can solve (or fail to solve) come from the past. Therefore, understanding monetary history helps us understand how to approach the potential market size of these new technologies. From papyrus-based bills of exchange to double-entry booking and paper banknotes, the main purpose of banking was to enable transactions to move more quickly and frequently than the transportation and verification of physical gold would allow. Banking also allowed for the usage of more extensive credit systems by allowing a third party (a money changer or a bank) to serve as a trusted intermediary between two non-trusting entities (buyers and sellers, or creditors and debtors). In other words, banking allowed for transactions (commerce) and settlements (money) to be separated."

Telecom helped enormously to increase the transaction speed. People could transact across the world by updating each other’s bank ledgers over telecommunication systems nearly at the speed of light. This was increasing the abstraction and efficiency of global commerce, as claims for payment could cancel out against other claims between banks and therefore render gold settlements rare and almost irrelevant. However, the system became much more centralised with the emergence of central banks. In various fields of engineering, such as control engineering or mechanical structural design, the concept of stability is very important, and it means something quite specific. An unstable system has an unbounded output when given a bounded input.

The oscillations will keep getting bigger, like how if you push a child on a swing at the perfect time while she is already starting to travel in the direction of the prior push, then you can apply a pattern of pushes that keeps her going higher and higher each time even though your push strength doesn’t change. The inputs are cumulative, resulting in a larger and larger output oscillation. This is how a singer can shatter a wine glass with her voice if applied at the glass’s mechanical resonance frequency, or how soldiers marching over a bridge can collapse the bridge if their unified footsteps match the bridge’s mechanical resonance frequency. When thinking about the financial system of a developed country like the United States, our mental model generally views them as marginal systems: a series of oscillations that stay within the same overall bounds. Sometimes debt levels go up, and sometimes we need to tighten our belts so that debt levels go down.

Sometimes the central bank tightens monetary policy, and sometimes it loosens it. The financial system, in other words, is thought of as being similar to how it was 20 or 40 years ago. But in reality, most financial systems are unstable. They have an unbounded output in the sense that sovereign debt as a percentage of GDP keeps growing over time. Fortunately, the frequency of these systems is very long, so it takes decades for problematic levels of instability to build up to the point where the output gets out of control. When it does get out of control, the system needs to be reset, recapitalized, or restructured in some way. In other words, sovereign bondholders lose purchasing power through nominal default or, more commonly, through inflation.

To use the control system analogy, the oscillations get out of control, the electromagnet drops the ball, and it has to be picked back up and put back in with some fixes. Sovereign debt levels relative to GDP keep increasing. in most countries around the world. We are coming out of a phase of falling and finally negative interest rates that have lasted for more than a decade. However, when interest rates bounce off zero and start going sideways, while deficits and debts keep growing, that’s a problem. The instability of the system begins to reveal itself. The United States now pays more money on its interest expenses than it does on its entire military. This is creating vicious cycles, and this is the tipping point when the global monetary system begins to get broke.

We have a completely centralised system on a global scale, but In a recent interview with CNBC, billionaire investor Paul Tudor Jones described the U.S. fiscal situation as follows: You get in this vicious circle, where higher interest rates cause higher funding costs, cause higher debt issuance, which causes further bond liquidation, which causes higher rates, which puts us in an untenable fiscal position. Money printing in such a situation is diluting income and savings, and therefore you end up in an indebted world with more working poor and a central ledger where money gets soft or hard, depending on how the central ledger wants to have it.

So your central banks can debase your currency with a move of the pen. Inflation leads to disorganisation, and disorganisation leads to inflation. If you live in a well-developed country, there are two things you do not want to disrupt: money and energy security. In times of financial stability, longevity, innovation, and wealth historically increased.

So how can technology help solve the problem? Energy trumps money. Energy is the biggest single-base variable. Money tends to get dividends out of technology development. Currencies could be tied to energy resources. Listen to Lyn Alden on YouTube here: The Global Monetary Order Is Broken, Says Lyn Alden, YouTube or buy her book here.

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