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Protect Your Savings: Central Banks, the Inflation Fallacy, and the Mountain of Debt

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Since the end of the financial crisis, or some would say that since we entered the eye of the storm, central banks all over the world continued to pursue “extreme” measures to prop up the world’s economy and avoid a deflationary spiral. So far, we can say that the experiment worked, although the underlying problem, debt, didn’t go anywhere, and growth is far from being stellar.

 

The Balance sheets and interest rates of the major central banks (source: resilience.org)

Stock markets had an eight year bull-run, and they are sitting near their all-time highs as we speak, boosted by the free money that is looking to squeeze all the returns out of every asset class. Still if we look at what the trillions of liquidity achieved, the picture is not pretty, wealth inequality skyrocketed, wages stagnated, and corporate profits surged to historic highs compared to the size of the economy.

Income and wealth inequality in the US in 2016 (source: Marketwatch)

Is Deflation the Real Enemy?

Central banks are still fighting the deflation demon with their policies, as in a deflationary crisis the current global debt levels would cause a massive wave of defaults and probably would force the restructuring of the financial system as we know it. But is deflation as bad, as the “powers” want to world to believe.

First things first, there is “good” deflation and “bad” deflation, although at the end its very had to differentiate between them in practice. Good deflation is the product of technological progress, basically the improvement in productivity, which, by definition, causes prices to fall as less and less work and resources are needed to produce the same product.

Bad deflation happens when the economy contracts, demand falls that causes a decline in prices too, which in turn causes a decline in output… and the vicious circle begins. Couple that with a high nominal level of debt, and you have the recipe for a deflationary credit crisis and a depression.

The Benefits of Deflation

Having said that, it is important to note that deflation also has a more positive role in the economic cycle. In a crisis, those companies that are weaker, have inferior products go out of business, lousy lenders go bankrupt, and the field will be perfect for the more productive and able businesses to shine. If this “cleaning” effect is delayed or interrupted by cheap credit, growth rates will be lower after the end of the crisis, debt levels will remain high, and there will be less “fuel” for the next cycle to expand.

Also, cheap credit that is the direct consequence of low interest rates, discourages saving, and with that, it destroys the very fundament of the free market, while also creating asset bubbles all over the economy. Why? Because, with no real yield in bonds, capital will naturally look for alternatives and, boosted by the forces of momentum and mass psychology, real estate, stocks, and other yielding assets are all suspect to the development of speculative bubbles.

If we look at the recovery since the Great Recession, we see slow growth globally, a very slow labor market recovery in the US, and a stock market that’s being led by record stock-buybacks by the giant companies, not exactly the signs of a healthy productivity cycle.

Inflation Targeting and Price Stability

In theory, the economy needs a certain amount of money to function properly and, to put it simply; if the economy grows it will need more to keep prices stable. Now, in today’s world, price stability in some weird way is, according to central bankers, 2% inflation per year. It is hard to justify this inflation targeting as, and it’s kind of funny to call an exponential function stable (with 2% inflation in 15 years your money will lose more than one-third of its value, get that you stupid savers).

Dollar lost 97% of its purchasing power since 1913, the creation of the Federal Reserve

Also, there is a huge problem with the standard calculation of inflation, as it is based on consumption basket, and it doesn’t take other prices in the economy into account. Why is that a problem? Because to measure the “general” price stability, you should probably count housing and stock prices as well, as they represent a large part of the assets held by the population, and their prices have the same kind of effect as the prices of the goods that are in the inflation basket.

The reason that inflation should include other asset classes is that the economic growth is in part the function of those assets, and that means we are in a phase the measured inflation is slower than the real one, while debt levels are still growing, meaning that the problems that led to the crisis are actually being reproduced rather than healed through the blowing of the bubbles and structurally inefficient spending and production patterns.

Bubbling up the economy

So what’s the problem with the bubbles? The main trouble is that the wealth bubbles create is imaginary, and it will disappear as soon as the bubble bursts. As an example, imagine a stock bubble where your holdings go up 10 times. So investors are happy and they calculate that their wealth went from say 100 to 1000. The huge problem is that the market-price only reflects the latest transaction, and not the price that all investors could cash in by any means. And in a bubble below the last price there might be huge “air-pockets” with no new buyers—this is how crashes occur.

And if the economy is propped up by spending based on bogus wealth, imagine what will happen when (not if) those bubbles pop, deflation will be back in earnest, and the central banks will be forced to start the printing presses again.

Long-term consequences and the Strategies to Follow

So will a deflationary crunch happen or not? It will depend on how the central banks will react to the next crisis, and how far the bubbles grow until then. A good example is the case of Japan where they are still trying to re-flate the economy for more than two and a half decades now without much success. To be fair, the world as a whole doesn’t suffer from the same demographic headwind that Japan, but still not letting the system to clean itself might be a huge drag on future growth, even if technological advance will likely pull the global economy out of the “mud” of deflation.

Until then it will be a hard feat to achieve significant returns. A selective investment strategy to the most promising segments will likely perform well, but the currently popular passive strategies will likely disappoint investors. Also, gold and cryptocurrencies should perform well during credit and currency troubles, while diversifying into international markets with relatively better growth prospects, and buying hard (but not overvalued) assets globally will likely be a good way to go.

All in all, the job of an individual investor will be harder, but more rewarding compared to the majority of passive investors and managed funds based on those. So investing in your knowledge about selective investing and entrepreneurship will likely be the one with the highest ROI in the coming decade.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 413 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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  1. embersburnbrightly

    June 26, 2017 at 4:33 am

    Wonderful and timely article; although a bit scary to see the true facts as they are consolidated together here. I suspect the lion’s share of so many of our ongoing financial troubles relates directly back to this statement:

    “Dollar lost 97% of its purchasing power since 1913, the creation of the Federal Reserve.”

    In short — in times of financial crisis, we continue to rely on the mechanism that caused the problem in the first place.

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“The Core of Any Blockchain Project is Decentralization” – Jack Zhang, Lightning Bitcoin

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Lightning Bitcoin is a fork of the ‘first-crypto-currency’ Bitcoin about which we decided to take the opportunity recently to speak to advisor Jack Zhang (AKA DianfuDatou / 点付大头 – known best as a Founder of Chainfunder and DAF).

Discussion topics include: what makes this project unique, as well as how you shouldn’t get it confused is not to be confused with the Lightning Network upgrade which is being applied to the original ‘Bitcoin’.

Who is Jack Zhang

Jack Zhang (AKA DianfuDatou / 点付大头) is a Chinese investor, business leader, and entrepreneur whose “portfolio includes XRP, XEM, IOTA, NEO, EOS, TEZOS, VEN”.

Zhang proudly describes himself as “one of the leading advocators of Ripple in China” having “translated Ripple into Chinese as ‘ruibobi’” – as well as the co-founder of NEO. Please note that most sources ascribe this latter achievement regarding NEO to an ‘Erik Zhang’ and so this claim requires further confirmation – however this writer sees no reason for him to lie in this respect.

He claims that his first experience with cryptocurrency was in 2011, when he entered the industry himself having previously worked as an investment banker at companies such as Zhejiang investment bank.

“I bought more than 10 thousand bitcoins at the price of 5 dollars and sold all of them out at the price of 7 dollars. At that time, I remember how I was reading posts on Bitcointalk about blockchain for several months and got fascinated by the genius design of the technology.”

Zhang says that the Lightning Bitcoin team members “come from a diverse cultural background, including China, the United States, Canada, the UK, Russia, Germany, and India.” And that:

“Currently Lightning Bitcoin has four core developers (listed on the website) with a team of 6 specialists. Eason Zhao is a CTO and H.H.Wang is a leading developer.

“Lightning Bitcoin also has an operational team of 8 outstanding and hardworking people managed by Wasley together with a community manager James Vuitton… We have independent leaders for each directions of the business;”

What is Lightning Bitcoin?

According to Zhang, Lightning Bitcoin is “a coin that takes the best from existing blockchain titans and adds advanced consensus mechanism.”

“Lightning Bitcoin forked from Bitcoin blockchain at block height 499,999… Lightning Bitcoin (LBTC) is a fully decentralized Internet-of-value protocol for global payments.

“The specific applications include peer-to-peer transactions and exchange platforms. Any users that operate on the LBTC protocol can enjoy instant, secure and nearly free global financial transactions of any size.”

Lightning Bitcoin is far from the first (nor will it be the last) fork from Bitcoin. A number of observers have claimed that the correlation between new forks and over inflation of Bitcoin. Jack Zhang however sees it as follows…

“Back in 2017, Bitcoin blockchain started to face network congestions, and a lot of other problems, that is one of the reasons why there were so many hard forks popping up. However, all of them changed either size or difficulty adjustment, what in my opinion did not improve the situation. That is a consensus that makes the difference. Pow and PoS are easily centralized, while DPoS represents true decentralization. Moreover, DPoS has the benefit of high efficiency, with little resource consumption.”

This mechanism utilises the relatively young Distributed Proof of Stake (DPoS) protocol which this writer has written about in a recent article, despite its basis upon the Proof of Work (PoW)-based ‘Bitcoin’.

Zhang states that Distributed Proof of Stake “allows separation of the voting power and block production, with no risks of a hard fork.” In fact, the aftermath of the announcement of DPoS adoption coincided with the company taking on another of its advisors “Stan Larimer a founding partner of Bitshares… we found mutual interests, as a result Stan joined Lightning Bitcoin advisory board.”

“Lightning Bitcoin uses DPoS, with the forging interval of 3 seconds, and the block size of 2M. We have achieved the TPS of thousands of transactions.

“Anyone can use LBTC, without censorship. The transaction fees are charged only for preventing network security issues, like DDoS attacks. It is not an off-chain solution on top of the Bitcoin blockchain as Lightning Network. I personally believe that Lightning Network will face the problem of centralization eventually.”

Furthermore,

“Lightning Bitcoin’s on-chain governance system enables LBTC holders to vote for the blockchain improvement proposals and the delegates who maintain the network as Lightning Nodes. It solves the problems of centralization of bitcoin by incorporating all participants in the Lightning Bitcoin ecosystem into the decision-making process.”

Lightning Bitcoin vs Lightning Network

Due to the similarities in naming, it seems natural that there may be a little confusion on behalf of the public and crypto-investment community with regards to the differences between ‘Lightning Bitcoin’ and ‘Lightning Network’.

“There is some confusion, you are correct.

When Lightning Bitcoin forked in December 2017, for Lightning Network it was still unclear when it is going to be launched, since it was still at the internal testing stage; only after four months later, in March 2018 when Lightning Network released its beta, both projects started to be confused by users in some countries.”

This, according to Zhang, is actually a problem more specific / limited to region,

“In other countries, like China, lightning network is not that well-known, as well as it has different Chinese name, that gives us more room for the development in Asia.”

Present and Future of LBTC

“Currently, Lightning Bitcoin network is stable, we constantly improving its functions and adding more products.

“The next big step for LBTC that we are working on right now is the development of on-chain governance, that will allow the network to self-improve and self-upgrade.

“In the future, stable upgrades of Lightning Bitcoin network in combination with chain governance, and decentralized transactions will allow cross-chain flashovers and smart contracts… the exploration of the on-chain governance model will become one of the most important tasks in the current stage of LBTC.”

Zhang continues to discuss the future for the coin in-detail as well, including that:

“In short, after complete integration of on-chain governance, next milestone is the development of new decentralized exchange. It will be an important component of the LBTC payment function.

“This exchange will have both basic functionality such as flashovers function of the gateway, as well as a system to guarantee the ease of cross-chain operations. Additionally, it will have the function of early crowdfunding of project under the necessary supervision.”

Finally,

“After implementing and perfecting the decentralized exchange, the development of intelligent contracts based on the UTXO model will be carried out, and a high-concurrence-based public chain ecosystem will be established to guide the flow of DAPP traffic.”

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Trans-Fee Mining: Investigating FCOIN and The Future

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Trans-fee mining’ is a concept utilised by a growing number of projects and exchanges which has not received much in the way of critical attention recently from either mainstream financial or specialist cryptocurrency publications.

The Fall of F-Coin?

Thanks to a company called FCOIN, most of the news which has appeared has been negative. Statistical information regarding the exchange can be found at popular aggregate ranking website CoinMarketCap.

Despite positive coverage earlier this year from the likes of Forbes’ Andrew Rossow, David Hundeyin of our sister site CCN.com wrote more recently that the exchange had been “Accused of Crippling Ethereum Network for Cheap Publicity” with a supposed aim of gaining publicity.

These pundits are joined by community members such as Reddit poster u/ltcisking (along with a large amount of other concurring, Google-topping results), who recently wrote a post aimed at proving such allegations, entitled ‘One of the biggest scams to ever hit Crypto’.

Twitter has also seen its fair share of investor complaints as well, including the following…

As well as the replies to this post,

What is Trans-Fee Mining?

Due to the unusual circumstances in which the ‘trans-fee mining’ sits (being supported by a number of independent projects despite the reputation of FCOIN): it is a difficult methodology to describe.

It builds upon the concept of the ‘exchange token’: which is most often associated with coins such as BNB (Binance Coin), which can be used for staking towards a particular crypto in the exchanges ‘community coin of the month’ program.

The original FCOIN implementation appeared to build upon this vision at first. The token’s value is derived from the fact that it has a stable value, and that it can be used on-platform (like BNB) as a means of purchasing other tokens whilst offering regular returns on investment for long-term holders of the token.

What is FCOIN Doing Now?

FCOIN has issued various statements which appear to support the sentiment behind the claims which they have faced. These include a recent August 14th post, with the telling title ‘FCoin community referendum end and recent plan publicity’.

Highlights of the piece include new objectives such as

“1.Complete and publicize the destruction of the remaining unissued FT.
“2. Complete the delivery of all FT warrants and withdraw the FT warrants from the market…
“4. As of the end of the referendum, the previous trans-fee refund will remain unchanged (based on the price of the FT related trading pairs before the suspension), and then, all the trans-fee refund will be stopped (including all return plans based on FT issuance).
“5. We plan to establish an FCoin mechanism and an announcement cleanup team. The team untied and improved the current FCoin mechanisms and standardized the release of various mechanisms in the future, and made a unified interpretation.”

At best, this may be an admission of fault, and at worst: an ambiguous and uninformative piece of messaging which fails to outline the situation with a strong brand or executive voice.

This comes in addition to a couple of announcements regarding ‘compensation planning’ with regards to investors who had “participated” in the fundraising of the ‘GU’ and ‘QOS’ tokens through their service.

The latter included the assurance that this process “compensation plan is an initiative taken by the platform to protect the interests of community user” concluded with the damning statement that:

“The FCoin platform has informed the QOS project parties and urged them to conduct self-examination of market price fluctuations and recent media reports as soon as possible. It is not excluded to take delisting and other related measures. The specific plan will be subject to the subsequent announcement. During this period, QOS will be temporarily suspended.”

Torch-bearers of Trans-Fee Mining?

Various claims of discrepancy against FCOIN’s actions as a company however, have not discouraged many projects which are attempting to build their own version of trans-fee mining. Whether or not they have been inspired by the short-lived success of FCOIN’s implementation is yet to be confirmed!

One of the most recent organisations which has decided to foray into this difficult and all-but-controversial territory is BitMart, an exchange founded by current CEO Sheldon Xia. Their approach is branded ‘Mission X’, and utilises their proprietary ‘BMX’ token.

“All transaction fees from the BMX market will go directly to the users who supported the project. In addition, successful projects will enter BitMart’s main trading markets.

“This program gives users the ability to decide which projects they want to be listed on the exchange, creating a self-regulated market.”

The platform piqued this writer’s attention upon noticing a disparity between public consensus and professional news coverage. Whilst the latter has published next to nothing with regards to the platform, a quick search of social media and communities such as forums seem to illustrate a positive and transparent image.

CoinEx was recently reported to have achieved unprecedented growth following the release of their token – however, like FCOIN have been called out for discrepancies. This time regarding the faking of volume metrics.

Final Thoughts

It appears that trans-fee mining as a concept is a long-way from earning this writer’s confidence, however it must be noted that there are many promising aspects. Time will tell whether talent will shine through or if trans-fee mining will fade out at the hands of opportunists.

What is important to note is that it is not the technology or idea, but the hands that are operating the machine incorporating it.

This writer cannot directly recommend the concept in its current state, but believes that the original idea is solid and if implemented in a viable way: would thoroughly warrant the full attention of any potential investor.

Until then, watch the community and keep an eye on the media – as well as word-of-mouth as this flawed-yet-promising idea is if nothing else, highly interesting!

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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My CFD Journey: 72,000 USD Up Today

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Wow the indexes are falling globally now. Dax is down with 1% today – same as Dow Jones. I would love to do a short call on these indexes, but that have seriously hurt my financial standings previously since we still are in a “bull” market with earnings reports beating forecasts and macroeconomic numbers excelling analysts viewpoints. I only want to trade by using trend following, so even if the markets are down, I love to do short buy calls as they most likely will rebound to new ATH (all time highs). The reason for just doing short buy calls is that we might be on the tipping point to a bearish market, but that’s something I would like confirmation on from e.g. macro numbers, earning reports and such. Until then, I’m quick in and out.

Here is my results

Order Entry Price Take Profit Stop Loss USD Bank Roll USD % Change
Start 258 064,52
Day 1 25.01.2018 Dax Buy 13268 13274 13262 6 472,52 264 537,03 2,51
Day 2 26.01.2018 Dax Sell 13342 13318 13392 7 642,84 272 179,87 5,47
Day 3 29.01.2018 Dax Buy 13331 13336 13313 12 508,39 284 688,26 10,32
Day 4 30.01.2018 Dax Buy 13226 13233 13176 6 625,94 291 314,19 12,88
Day 5 31.01.2018 Dax Buy 13217 13230 13187 26 474,06 317 788,26 23,14
Day 5 01.02.2018 Dax Sell 13291 13265 13327 10 834,58 328 622,84 27,34
Day 6 02.02.2018 Dax Buy 12797 12825 12772 72 314,97 400 937,81 55,36

Using ProRealTime

As I wrote yesterday, I’m using IG.com to trade CFDs. They got a tool called ProRealTime that I started to use yesterday. It’s a great tool with many more indicators and tools, and best of all, you get a good look at your stats. Here is my stats so far on ProRealTime in NOK (1 USD = 7.65 NOK – click on the images to get a larger view):

As you can see from the image above, I got 8 winning trades and 1 losing trade. I tried to buy the dip on Dax but managed to enter a bit too early. The Dax index fell quite rapidly after I initiated this trade and I wanted to keep it open as long as possible as I knew a rebound would happen. But I was not comfortable enough to sit it through so I closed it. Still feeling certain that the price would rebound I entered a buy position yet again at what I thought would be the lowest low. And thankfully, that worked and it rebounded above my initial entry point for the first trade. To ensure that I got the profits I wanted, I did a third trade buying Dax when RSI showed a trend reversal (rose above 50). I closed the trades once I was happy with the profits and because I became nervous that the price would turn back down. Then I initiated the last trade of the day going long on Dax yet again.

Here is the total overview of my trades today:

I would again like to highlight that trading CFD is very risky, and I’m still significantly down in total these last 3 years.

My trading rules

  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.
  9. Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.
  10. Always write down your trades and elaborate what went right or wrong.

What is the meaning of this?

Why I’m I writing all these posts? My main goal is to find a working strategy trading CFDs and be able to mentor Hacked.com members and do live sessions together. However, I would like to keep going for at least one month until I feel comfortable that the strategy I have, actually works. I would rather lose my own money, than lose any of yours.

I wish you all a great weekend. We are going to visit our family this weekend and have a nice time.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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