D.卡尔顿 罗西
D. Carlton Rossi

Negative Interest Rates



                                              



                   Blockchains and Cryptocurrencies

Your attention may have been diverted in anticipation of the Brexit vote whereby Britain would decide if it would remain in the European Union of 38 states. At the same time, a meeting of 90 central banks was hosted around June 6, 2016 for three days by the World Bank, IMF and Federal Reserve with regard to blockchain technology.

This technology was derived from the Bitcoin platform. For those who are unfamiliar with Bitcoin it is difficult to find a comparison except to say that it resembles a personal barter system in terms of services. It is popular among the underworld and those who wish to remain under the radar. Understandably, the technology underlying Bitcoin may be held suspect because no one knows the identity of the designer whose pseudonym is Satoshi Nakamoto. It is conceivable that a system could be designed so that it could be easily hacked by the designer.  

It is not surprising that the Federal Reserve is interested in blockchain technology. The Federal Reserve may be best known for low interest rates through quantitative easing. However, it deals extensively with bank settlements. As the central bank of the United States and private company it acts as a clearing house for financial settlements.

The Ethereum blockchain technology is a public blockchain platform with programmable transaction functionality which allows peer-to-peer contracts. It can be used by cryptocurrencies or other applications. Also, Java-like script programs like the DAO can be programmed to executable byte code.

It appears that central banks are on the verge of adopting negative interest rates. One of the main problems to implement this strategy is the presence of cash. As has been pointed out earlier by the author there will be a tendency for individuals simply to horde cash in a negative rate environment in order to avoid what amounts to a tax. This is defined as the Zero Lower Bound (ZLB) problem by Haldane who is a member of the Bank of England’s Monetary Policy Committee.

By processing transactions through an open decentralized blockchain program there is the potential to eliminate cash. This technological tactic is intended to avoid the hoarding of money (capitalism without capital) and to promote spending--thus triggering inflation. However, what discourages hoarding of cryptocurrencies? It may have to be a tax (or its equivalent).

It seems one has to clarify the meaning of “decentralized” since “central” banks are experimenting with their own applications. It seems decentralized is used in the sense that the currency is virtual and can be anywhere or everywhere. 

One cannot avoid the conclusion that all is an experiment outside the realm of conventional monetary theory and practice. The elimination of gold and the attempt to eliminate paper currency is an experiment. The adoption of programs based on cryptocurrencies is an experiment. In fact, Buterin has admitted that the cryptocurrency application of the Ethereum is an experiment which may implode. The imposition of negative interest rates is an experiment. The impression of all this experimentation is that the mice (central bankers) are running people through the maze as was depicted in Hitchhikers Guide to the Galaxy. 

It may be appropriate to mention the “Ether” which is the basic unit of Ethereum. Originally, in Greek, it meant “pure air” or that breathed by the gods. It was difficult for scientists or philosophers to define it; although, it generally represented the fifth element. Issac Newton was perhaps the most famous scientist with a hidden agenda as an alchemist to consider the ether. Of course, one of the aims of alchemy was to turn lead into gold. He was unsuccessful in this daydream. His scientific endeavors had used the concept of “ether”, but advances were difficult, so his choice (loosely speaking) was either ether or logic. It seems he rejected ether and developed the laws of physics and calculus. 

Newton though is known for something else. He was Chancellor of the Exchequer. He used gold rather than ether to back the currency. As a result of a stable monetary system the British Empire thrived for 300 years.

The developer of the Ethereum platform is known. It was a nineteen year old Canadian by the name of Vitalik Buterin who had emigrated from Russia. Currently, he resides in Switzerland. He is learning Mandarin. Ming Chan is the Executive Director at the Ethereum foundation.

Basically, the program was crowdfunded—by the people, so to speak. It was the most successful crowdfunding program in history. But who really were these people? While the designer is known the people are not known—partially due to privacy issues. In addition, who purchased 25% of Buterin’s ETH (Ether) holding in April? Were the proceeds invested in Bitcoin? Furthermore, was the holding sold prior to June 17?

The symbol adopted by the Ethereum platform is a pyramid sitting on top of the base of another pyramid. While the poet hasn’t drawn this I’mage it is nevertheless familiar to him. The reason is that he was asked to correct a translation of a document. He needed clarification on the exact shape of the pyramid of Emperor Qin Shi Huang since the description baffled him. An expert was therefore consulted. It is an image similar to Ethereum’s. The original mound was 76 meters in height at Mt Li, Lintong. While excavations have not been made at the location it is believed by at least one expert that there is an inverse pyramid below it.    

Who is Qin Shi Huang? You know him because he ordered an army of terracotta warriors for the afterlife. He built the Great Wall with conscripted workers. He also buried alive 460 Confucian scholars and burned Confucian books—particularly the Book of Songs and Classics of History. His dynasty was overthrown in a peasant rebellion.

His name, Huangdi, was a derivation. It came from the Three Sovereigns and Five Emperors. However, he also appropriated it from the name of the Yellow Emperor who had united the tribes and whose cult was popular.

In terms of philosophy, he was a Legalist which justified strict central control. It meant Rule by Law rather than Rule of Law. He eliminated the Hundred Schools of Thought which incorporated Confucianism. No opposition was tolerated.

He may have followed Daoist astrology since he was interested in the five elements. Incidentally, Daoist temples seem to have been spared in terms of banning or burning of books. He was born under the sign of water. This may explain why he took mercury pills and why a river of mercury ran through the underground of the tomb. Mercury was intended to confer immortality; although, it also hastened his death at the age of 39. The Qin Dynasty was short-lived, too.

The Ethereum platform is a virtual machine that uses the DAO. In the Foundation's words “A blockchain program is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.” Confidence in the DAO may have been particularly inspired by its religious overtones, faith and fervour of its appish followers.  

However, confidence was misplaced when the DAO was hacked on June 17th. Surprise! Surprise! Why is it a surprise since it had been reported that Buterin collaborated with hackers to design the DAO. It has also been said that the security flaw may have been known before it was hacked. No one knows who hacked the system, but one can say with confidence that it was a hacker. The hack of the DAO might have proven embarrassing to the central banks except for the fact that it seems to have been mysteriously underreported.

The DAO blockchain was launched on July 30, 2015. On June 17, 2016 it crashed. Next generation smart contracts did not last a year let alone a generation—even in computer terms. The price of Ether dropped from $21.60 to $15.

Which hackers might have had financial motive to bring down DAO? Perhaps they were hackers of Ethereum’s rival or Bitcoin. The date of June 17 may not have been a coincidence.

The Bank of Canada announced on June 15, 2016 that it was developing its own version of the Canadian dollar based on blockchain technology. It is called CAD-coin. Other Canadian banks including a consortium called RC3EV were to participate. It would run on The Jasper Distributive Ledger Settlement Program. A scheduled speech by Bank of Canada senior deputy governor was set for June 17.


                                      




                                        
Negative Interest Rates



It might be expected for the author to make a few comments on the Brexit vote, so I’’ll put in my two cents worth—although they may now be rounded down to zero cents. Its probability was apparent. There is a wave of populism and nationalism sweeping the world. It may not be so evident in Canada which has been classified as the world’s first post nationalist state and where order takes precedence over individual rights. However, these two movements are swelling on a worldwide basis.

To the author, the result of the Brexit vote was the equivalent of the Boston Tea Party which was a reaction to taxation without representation. It sparked the American independence movement. The majority of British voters voted against control by a union controlled by bureaucrats in Brussels.

The short term impact on Canada of the Brexit vote is small. It is reported, however, by BNN (6/24/2016) that the Bank of Canada held over US $6 billion in British pounds in its foreign reserves last month. Theoretically, it may have lost over US 700 million on its foreign exchange reserves at the peak of the pound’s decline on the first day. Canadians don’t care about that in the long run. It won’t stir them.

However, if interest rates go into negative territory it will shock them. That is the red line. They may discover the relationship of the Bank of Canada and the Bank for International Settlements with its headquarters in Basel, Switzerland. They will ask why infrastructure loans are not made at zero interest by Canada’s public bank which was created by statute and accountable to the executive and legislative branches of the Government. They will not ask the question “Varus, where are my legions?’ in reaction to Roman defeat by Germanic barbarians, but will rather ask “Where are my barbaric relics of gold reserves that were held by the Bank of Canada?” These reserves which did not earn interest, in effect, backed infrastructure loans such as the St Lawrence Seaway.

A few central banks throughout the world have adopted negative interest rates (NIRP) while many more are contemplating them. For example, the Federal Reserve has undertaken a pilot project to better understand the implications of negative interest rates. However, the US still accounts for about 60% of positive yielding debt. As a whole, though, negative yielding sovereign debt of central banks has increased to 10 trillion.

Negative interest rates are coming to a bank near you. It is apparent from the Japanese experience with them that they might have to go much lower for a longer period of time to be effective. Anyway, it will probably be another failed experiment by a central bank. It is suggested by some economists that they must reach the level of negative 4.5% to produce positive results. To use negative rates to produce positive results—now that is illogical. If this circumstance were to happen in Canada it may mean that the ordinary Canadian has to work perhaps five years longer to make up for lost income.

The basic problem that the world faces is debt deflation fostered by quantitative easing. Central banks are trying to trigger inflation but without success. It is evident that the Federal Reserve Board will not increase the basic lending rate until at least December as a result of the Brexit vote and the forthcoming US election. While the prospect of a rate increase has decreased, the prospect of a rate decrease may have increased proportionately due to the rising strength of the US dollar and Brexit. There is no denying that uncertainty and lack of confidence are the dominant trends. If the reader is concerned on a personal basis about the potential prospect of negative interest rates then one must look at the precious metals.


On a larger scale, though, the author contends that a Gold Banknote  ©  (D. Carlton Rossi 2011-16) may help restore currency confidence and reduce uncertainty. It is designed by a non-economist. It was the economists who got us into this mess by turning a science into a séance. This banknote combines a paper currency and a real gold or silver strip. 


           






                                              
 

The wine industry in the Xushui region has a long history. It began 5000 years about the time of Xūnyù. However, today, the region is plagued by counterfeit products.

Sun Dawu speaks of one of those companies that sold fake wine. The fake wine was produced by a company that no longer exits.  It was not able to develop its brand. Its customers lost trust in it. It had no currency so to speak.

The wine cost 18 yuan a bottle. It was luxuriously packaged. Almost unbelievably, the packaging and bottle cost 15 yuan a bottle. That left two to three yuan in profits; whereas, the actual cost of the wine was only .05 yuan.

On one occasion, the author remembers a Fujian peasant who brought out his best wine to offer as a toast to D. Carlton Rossi  It too was elaborately packaged and pored from an expensive bottle. It was supposed to be from a famous wine growing region of France. While the author was no connoisseur of wine he did recognize that he was offered red vinegar instead of wine. The author was also able to read the English label on the bottle. It said “piss on peon”. He regretted having to tell the truth to his friend. One doesn’t lie to one’s friend nor withhold the truth.


                    

Sun Dawu began the liquor company of Dawu Group in 2009.  It is managed by his son. It was not established for profit. Rather, it was set-up to ensure that his workers and the local population would not be plagued by adulterated alcohol.

The roasting time of competitive brands of liquor vary. A poor quality liquor can be made in as little as 3 to 7 days. A medium quality liquor can last 40 to 60 days while a high quality liquor takes 80 to 90 days. These liquors vary in price, but are generally expensive. They are sold through expensive and extensive TV advertising.

In contrast, Sun Dawu took a different approach. He concluded that things can not deviate from their original purpose. He proposed that the liquor company use a slow flavor brewing method to produce a low price product of good quality in a mid-range package. The liquor ages two to three years depending on the brand. Basically, they are sold through word of mouth. They are then offered through the Group’s hotel, restaurant and spa.



                  

                               Copper Coin of the Tang Dynasty

The coin of the Tang Dynasty (618-907 A.D.) was made of gold, silver, copper and lead. It was called the Kai Yuan Tong Bao or Kai Tong Yuan Bao. The coin lasted throughout the Tang Dynasty without discontinuity when China was the commercial center of Asia through the Silk Road. Businessmen could cash them in at any time for a paper receipt in more than 40 offices throughout the kingdom. The dynasty reached its zenith during the reign of Emperor Xuanzong. During this period of 44 years the inflation rate was low.

The calligraphy of the Kai yuan was written by Ouyang Xun. He was the lead calligrapher of his age. Therefore, his style was praised by poets. Two of the most famous Chinese poets were Li Bai and Du Fu. The poem of D. Carlton Rossi called was inspired by the form of Du Fu’s poems; although, it was modified in a unique way.  

However, paper currency at the time of the Mongolian Empire undid it. Marco Polo writes how Chinese alchemists produced paper money with as much form and ceremony as if it were actually of pure gold and silver. Large quantities were printed. The system lasted only 100 years. In other words, barbarians introduced a counterfeit currency which bankrupted the dynasty. 

Today, China’s central bank is in a very different situation. It holds a large reserve of gold which might be used to establish the remnimbi as an international reserve currency. It is obvious that China did not purchase this vast store of gold so that it wouldn’t earn interest. One wonders how they will react with Japan’s introduction of an unconventional monetary program called “negative interest rates” after the failure of the Bank of Japan’s unconventional quantitative easing.

If China should back its currency with gold or for that matter include it within its trade-weighted basket of currencies then what might its implication be for countries which do not have a gold reserve and yet are part of the basket? Fortunately, the number of these countries is minuscule. The most negative consequences might be experienced by any of these countries which do not have a gold reserve and yet introduces negative interest rates. The result might be a flight to safety of gold. It is not gold that is a barbaric relic, but rather the neo-barbarism of fiat and virtual currency coupled with negative interest rates.