Popularism, Patriotism, Nationalism, Protectionism... The Globalization Aiding Cryptocurrency
Games Without Frontiers
A perfect storm. The stage is set for the introduction of new technology. It’s called Distributed Ledger. You know it by its other name.
Facebook, Arab Spring, popularism and trade wars. The rise of social media, mass migration of people fleeing war-torn countries, extreme politics, tariffs on trade, and the rise of Bitcoin. Not connected? Think again.
Beware the Crowd
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” — Warren Buffet
Hidden in plain sight, this quote from the world’s greatest investor hides one of the most powerful techniques and skills you can master.
It’s another way of saying “When the only way is up, the only way is down.”
Like it or not, we are tribal by nature, and hard-wired into our psyche is the need to have the consensus of the tribe. The Herd.
Human nature is what makes trading and investing so difficult. Most people wait for the signal that it’s safe to make a move and in doing this consign themselves to averageness.
It’s why the majority find themselves in negative equity when housing markets cool down and facing loses when stock markets crash.
It’s a hard lesson to learn because, for most, the lesson comes after the test. Ask yourself how many times did you instinctively have the urge to make a decision and yet held back and in the end didn’t do it?
Shoulda, Woulda, Coulda.
Why is crowd behaviour so important?
Economics is not a science. It’s the study of scarcity. It’s the study of how people use resources and how they react to imbalances in supply and demand. People are the crowd.
Hidden inside Buffet’s quote is the importance of understanding consensus. In general, when everyone agrees, the trend is very close to completing.
It’s not just about money.
You can apply the Buffet quote to other situations too.
Rise of Popularism
In 1912 people living in Europe had never had it so good. The British Empire was at its peak, and people even took holidays in the sun. The only way was up. And we know what happened next. A generation wiped out.
The catalyst? The assassination of Archduke Ferdinand of Austria on the 28th June 1914 in Sarajevo, by a Serbian Nationalist. Austria declared war on Serbia. Alliances reacted, and by the 28th July, the First World War had begun.
In 2011, the West had never had it so good. We were coming out of a financial crisis. Things were good — if you’d won the citizenship lottery.
But what about if you hadn’t?
What if you lived in Syria, Libya or Yemen?
The catalyst? In 2010 Mohamed Bouazizi a Tunisian street vendor self-immolated himself in reaction to having his fruit and vegetable stall ransacked by police. It went viral.
Mohamed Bouazizi’s treatment caused outrage and riots.
Facebook’s success allowed others, not so lucky in where they were born, to be able to contrast their lives with the rest of world.
An unintended consequence of Facebook’s global reach is it gave people in the Middle East a tool to focus their voice as one. Using social media allowed them to coordinate their dissatisfaction.
Coordinated dissatisfaction sparked the Arab Spring revolt in 2010. The region destabilised and the mass movement of people desperately trying to get out and into the West began.
Patriotism vs. Nationalism
As people flooded into Europe through Greece, Italy, and Spain, feelings of nationalism began to take hold. Europe already split in two, because the 4 wealthy northern countries needed to raise funds to pay for the bailouts of the less prosperous south, faced another big problem. Mass migration.
Patriotism is where you are proud of your country for what it does. Nationalism is where you are proud of your country no matter what it does. There are more displaced people now that at any time since World War II.
The financial crisis, the European debt crisis, the Arab Spring revolt and the mass migration of people trying to make a better life for themselves and their families.
This leads to walls going up. This leads to nationalism, and nationalism gives rise to extreme political parties.
Extreme nationalism and political parties promote xenophobia and distrust of other nations. Distrust of other nation states brings trade wars and trade wars lead to armed conflict.
It’s the same pattern throughout history. Not verbatim, but definitely a rhyme.
In Facebook We Trust
We’re all familiar with the story of Facebook and how it gives us a way to share our lives. Its genius lies in the fact that as humans we all crave to be respected and heard.
But all this warm and fuzziness comes with a price. Facebook is an advertising company. And it provides a way for you to share what you love and don’t love in exchange for the collection of your data on an industrial scale, sometimes without your consent.
In March 2018 Facebook was hit with a scandal.
Channel 4 News, in the UK, broke the story of a massive data heist, allegedly involving a British company — Cambridge Analytica and Facebook.
The gist of the story is the company obtained a dataset, (including data covertly acquired via apps from Facebook) and used this dataset as the seed to create a much larger information pool.
This pool was then allegedly used to manipulate voters in the UK Brexit referendum and US Presidential election
The Big Takeaway
This was seen and presented by Channel 4 as a threat to western democracy.
No matter what expert was wheeled in to explain what Cambridge Analytica had allegedly been doing, the key is this — once the larger information pool had been created, from the original seed dataset, it is virtually impossible to tie this back to the original data.
There is no way to stop this from happening again unless the technology is put in place to change the way data is stored and accessed.
The solution to the Cambridge Analytica and Facebook data heist story is to use a blockchain.
The world economic forum provides us with a tool that allows us to peak into the global chess game and the confusion.
It provides a mechanism to ask big questions. Questions whose answers are the drivers behind global market trends. Trends that last decades.
Weapon of Choice
The Impossible Trinity; aka the Trilemma.
This is the international relations trilemma from the world economic forum website.
Capital Movement : Democracy : International Order
Think of a trilemma as a thought experiment. It works like this — at any one time (epoch) you can have any two of the three possible choices but not all three. The third choice has to be a continuously monitored compromise.
In the last few decades, we have enjoyed the effects of capital movement or globalism. Travel to Australia from the UK in 1985, and you felt far away from home.
Cars were different; music was different, haircuts were different.
It was before globalisation changed everything— before the Internet, before email, before Facebook, before Instagram and Twitter. It was a time before we all binged on the same TV shows on Netflix or Amazon Prime.
There’s been an increase in democratic values too over this period. And during this time it’s international order that’s required constant tweaking.
The International Order Game
Countries must balance their needs with the needs of other countries and meet regularly to agree on how to achieve this.
Free-floating fiat currency exchange rates are tied to interest rates. Interest rates are the currency of risk and countries balance out the risk of capital movement with their relationships with other countries. Think of the increase in the number of meetings and global economic forums in the last 30 years.
The G8, then the G7 (they kicked Russia out), morphed into the G20. The G20, (Group of 20 countries) meet annually to discuss international relations and global trade.
“Political” forums have become “Leaders” forums.
But times are changing.
Environment of Distrust
Since 2010 there has been a gradual swing towards each country attempting to outmanoeuvre each other and gain an advantage. There were small changes at first, but since 2016 these changes have become more noticeable.
Remember the trilemma? You can have only two of the three choices. Countries are moving towards international order by self-determination, and this means sacrificing either capital movement or democracy.
Since 2009 the United States has been printing money on an unprecedented scale. One reason for doing this was to attempt to make the US economy more competitive. The rise of China as a global superpower has been aided by the Chinese running an uncompetitive peg to the US dollar.
And as a result, cheap Chinese goods pour into the market. This causes other countries, including the United States to be less competitive.
In reaction to this, the US flooded the market with US dollars. Those dollars find their way into China through trade surpluses and because of the fixed peg to the US dollar the Chinese are forced to print more of their currency to maintain the peg.
The US gambled that the slack in the United States economy would be able to absorb the newly printed dollars without causing inflation. They also calculated QE would have the opposite effect inside the Chinese economy because the Chinese economy was running at close to full capacity. QE was designed to force inflation on China, who has been accused by the US and other countries of maintaining an uncompetitive exchange rate.
QE was a sneaky way of tweaking international order, and the general population was not even aware it was happening.
Recently though, things have become a little less subtle.
The United States has a problem. It has 21 Trillion dollars of debt on its books. It needs to find a way to keep America competitive and to have American goods exported worldwide, and at the same time find a way to pay down its national debt.
Subtle didn’t work.
Time to bring in the sledgehammer.
In 2018 US President Donald Trump imposed trade tariffs on steel at 25%, and aluminium at 10%.
The EU, is on hold, thinking about the appropriate response.
Trade wars are notoriously difficult to win because of their reciprocal nature. The US imposes steel tariffs on its trading partners, and in response, they impose tariffs on the US. And round it goes.
There’s another name for this type of policy.
In the short-term protectionism provides domestic jobs, but this advantage is lost once other countries react and impose restrictions on your goods.
The global economy and the well being of all relies on an interconnected web of global supply chains. Think of this as a massive oil tanker at sea. Once it’s running, it takes time to change direction or stop.
Using likelihood, the corner of the international relations trilemma most likely to be affected will be democracies. It has to be so because all countries rely on these global supply chains and cannot quickly be weaned off them.
What has all this got to do with cryptocurrencies?
When you understand the importance of consensus and the behaviour of crowds, you’ll have an understanding of when changes to the status quo are more likely to occur.
Trilemmas are tools to allow you to expose big picture trends, trends that can last for decades. Crowd consensus and tools like trilemmas give you a 10 way to see the drivers of global economies that will most likely dominate over the next decade.
What does protectionism, extreme politics, xenophobia and social media have in common? They all intertwine to create a social contract. And the contract will require a mechanism of trust in an increasingly distrustful world.
The rise of nationalism means an environment of less trust in the future.
The need for a secure way to store and access data, so manipulation of the democratic process is not possible.
The recent tendency of nations to move away from consensus agreement and towards self-determination of economic policy. This is the perfect incubator for the introduction of distributed ledger blockchain technology.
I Trust You, But—
The disadvantage with distributed ledgers is they also give individuals a mechanism to move capital across borders.
And this is a problem.
Countries with Debt to GDP ratios greater than 100%, such as the United States, need to be able to fund budget deficit spending and tightly control their competitiveness against other nations.
If a country decides to take a protectionist route, and impose tariffs on trade to make their state more competitive then controlling the capital movement across its borders is of critical importance.
When Bitcoin launched in 2009, no one cared. By 2017 it was another matter.
Next, we’ll discuss why governments took evasive action to control the flow of fiat currency into cryptocurrencies.