Perverse Incentives and the Rise of Crypto

Governments created cryptocurrencies.  Policy decisions from the most mundane regulations like pet licensure to the big ones like the bank bailouts after the fall of Lehman Bros. pushed the alliance of hard-money advocates and cryptography experts together to form Bitcoin.

From its earliest days, Bitcoin advocates understood why they were spending their time developing its infrastructure.  They wanted a way out of the system created by what I consider the superstructure of world capital movements.  Alex Jones calls it the “Globalists,” others the “Atlanticists” and the alt-right just calls it “The Jews.”

None of these are adequate descriptions of who/what this group of international power-brokers, financiers, old money, secret societies, et cetera are.  But their over-arching goal is what the modern Marxists rightly identify as the accumulation of nearly unlimited power.

Lacking any true moral center or humility, “The System” is nothing more than a giant capital vacuum constantly tugging at us to give up just a little bit more of ourselves to keep them from annoying us further.

Gimme Some of that ol’ Time Rent Control

In economics we call these types of people rent-seekers. Rent is defined as unearned wealth taken as a fee while giving lesser value or none in return. It is not a like-for-like exchange of value.  Taxation is the ultimate form of rent.  It’s also theft, but that’s just dispensing with childish euphemisms.

The problem with rent-seeking behavior is that it creates perverse incentives within an economy, which, in turn, waste capital.

The most obvious example of this is farm subsidies which prop up the price of one crop by paying farmers not to plant another crop.

In lobbying to protect the lives of certain constituents (the farmers/agribusiness corp.), politicians trade the lives of other constituents who have less political pull within the government, be that government representative or otherwise.  Everyone who profits along the way collects rent as either a direct consequence (the farmers and/or agribusiness) or a bribe (the politicians/bureaucrats).

And now everyone who gets paid in support of this policy has a vested interest in maintaining it.  From the secretary filing the paperwork and the farmer sitting on his ass to the CEO of Monsanto.  This is the essence of perverse incentives and it is a cancer that eats away at the fabric of an economy.

Perverse Incentives Create Perverts

But, the rot goes far deeper than that.  Prices are information.  They transmit our desires of the moment into tangible comparisons.  So, if you distort the prices of things, you distort not only the value of them but the incentives for entrepreneurs to schedule future production.

People respond to incentives the same way always.  They do more of that which satisfies their needs.  This is why all forms of poverty reduction policy results in more poverty.  It sets up the perverse incentive to not work to better yourself.

These interventions also consume more capital handing that capital out than it will ever produce in future returns on it.  You have to pay everyone up and down the line.  To them this is free money.  It simply is not as scarce as it should be relative to the effort they expended to acquire it.

They will tend to waste it knowing they don’t have to work hard to get more tomorrow. In the process, they bid up the prices for those frivolous things and under-value those things that create real value.

And that destroys not only their work ethic, but ultimately their self-worth while keeping capital-starved the engine of real growth which is the pool of real savings, which I’ve discussed in previous posts.

Those inflated prices are transmitted through the pricing system in an ever-degrading downward spiral of capital destruction.  The political class responds with more interventions, more monetary debasement to prop up prices for their partners-in-rent-seeking.  This exacerbates the natural business cycle, misprices the most important commodity in any economy, the money.

Money Shrugged

It is this mis-pricing of money through the artificial depression of interest rates that is the most pernicious.  And the whole modern financial system is based on managing these effects to extract the most rent but not collapse the system, ending the gravy train.

The problem is that the amount of capital needed to prop up prices grows exponentially and eventually the whole system collapses.  The debt grows to a point where servicing it consumes all the productive capital available and everything just stops.

On this point, and a few others, Ayn Rand was absolutely correct.  And it is why she is so thoroughly demonized by modern Progressives.  Atlas Shrugged, in spite of Rand’s other pathologies, correctly describes this process.

Those that see this coming and seek to protect themselves are outliers.  Those whose lives are being diminished by all the rent-seeking seek alternate solutions.  The productive portion of the economy is forced to run leaner, being under-capitalized.

The pressure for something better intensifies and eventually spawns something brilliant.

When that innovation is produced gets over-rewarded by an investment community starved of yield on their savings.  This is what drives bubbles in new technology.

From computers to the internet to cryptocurrencies there is a through-line of tech bubbles that exists alongside the history of this floating-exchange rate monetary system and its problems.

It is the biggest rent-seeking operation in the written history of the planet.

The Crypto-Boom

With each major innovation in communications and computational technology the powerful have co-opted those leaps to create new forms of control to keep the system from crashing.  And the technology itself drove efficiencies that pushed the seizure off for a few more years.

We’ve reached that moment of collapse in a generational sense.  It doesn’t have to happen today or next month or even this year.  But, it is happening.

Ludwig von Mises called it the “Crack-up Boom,” the final boom before the system crashes and cannot be re-inflated through money printing.

And, I’m certain that cryptocurrencies, not necessarily Bitcoin, are the means to break this system as we approach the next monetary crisis.  These other advances (computers, the internet) didn’t fix the underlying problem, the money. The perverse incentives created by a monetary system weren’t neutered.

In fact, they made it worse.

But, cryptocurrencies, properly deployed, cannot be subdued in the same way that gold was.  They’re trying (and succeeding) in doing this to Bitcoin now.  But, all this will do is further drive development in crypto-platforms towards privacy, security and ease of use.

Watching the powerful interests, “The System” strike back against decentralization the way they have in the past three months has been illuminating.  It proves me right again that these people are very smart but they aren’t very clever.

They know how to stop a political opponent using some variation on the “Nuts and Sluts” technique of public shaming.  It’s not working on Donald Trump, because Trump has no shame.

They know how to bind down competition through erecting legal barriers-to-entry, expanding rent-seeking and money printing.  And, it’s working on Bitcoin.  But, it won’t work on cryptocurrencies in general.

Bitcoin was produced for nearly nothing.  Litecoin cost even less.  Now so many of these crypto-businesses are capitalized at levels they expected five years from now.  So, even a 50% to 70% haircut from peak prices puts them in a good position to continue development.

So, when the next financial crisis hits and the real flood of money into the space occurs, they’ll be ready for the mass movement of capital into it.  And at that point we’ll have a real fight on our hands.

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