Financial Myopia is Inherent to the Human Condition
History has shown that regardless of how regulators beg and beseech, persecute and prosecute, boards of directors will continue to engage in financial chicanery. The C-suite will always invent some new obscure financial instrument the regulators haven’t thought of yet. A game of cat and mouse where private enterprise is always one step ahead. The bankers went to better schools, had private tutors, and have better connections. They make millions while the beaurecrats survive on a pittance.
Because of this they will continue to find ways to hide the atomic bomb-like CDS obligations off balance sheet in a Cayman Island holding company. They will continue to value their abandoned Nigerian oil refineries at $200 million. If you pay an accountant enough they will turn shit into gold. An adequately compensated accountant will put George R.R. Martin to shame.
Financial history is replete with tales of the never ending struggle by corporate management to mislead the investing public with misleading balance sheet tactics. No matter what the regulators do, no matter what obscure future potential scenarios they anticipate, it is the board members and executive committee that must be trusted to act in good faith.
Enron hid liabilities off balance sheet and congress passed SOX to prevent another debacle. But this didn’t stop Lehman. They innovated a new fraud an order of magnitude larger which made Enron’s look like petty larceny. Enron was a 64 billion dollar bankruptcy while Lehman was 660 billion. One would assume the incentives of management and investors are aligned. But due to primarily short-term expirations on stock option based compensation for the c-suite, this is no longer the case.
Your average investor has to take financial statements at face value. They don’t have the time or ability to ascertain the facts for themselves. In a world full of global corporations a global perspective is required to understand their operations. You can pay a financial advisor or active manager to look at these companies in depth for you. But you will just be paying more to underperform the market on average.
Not everyone is an investor and vulnerable to the above. But everyone has a bank account. By virtue of their makeup, all modern banks lie to their customers. Any simpleton who reads the fine print would instantly know that the bank doesn’t actually have their money. They instead have about 5% of their depositors’ money at any given time. This is the current median required reserve ratio for banks of all sizes as required by the federal reserve. This means that only 5% of people can withdraw their money at any time.
I am a rabid Austrian economist who rails against fractional reserve banking. Yet, when I pull up my banking app to look at my checking account balance I feel at ease. There is my money safe and sound. The bankers, or at least their software developers, are keeping a watchful eye out for me at all hours. Even those of us who know better easily fall into this stupor of security.
This happens because the concept of fractional reserving is so heterodox to human intuition. An item can not be in two places at once in the physical world. Something is either there or it is not. My phone screen says my money is there, just as it does for all of Chase’s customers. But deep down we are lying to ourselves.
Bitcoin is the opposite, fully reserved with no obfuscation. The supply is fully audited every time a block is found. All bitcoin the world over, no matter who owns them, and no matter if they have been moved in 10 minutes or in 10 months are tracked at the same regular interval. Bitcoin is the only asset with a completely auditable supply. The state of which can be ascertained by anyone, anywhere, anytime with $100 of hardware. There is no overcompensated c-suite or panel of central bankers pulling the strings.
No matter how sophisticated humans get we cannot remove the central point of weakness from finance: ourselves. In a time of crisis when liquidity dries up would you rather store your wealth in a 20x leveraged bank or in a 100% reserve asset. Only one grants a mathematical certainty that your assets will be available and the other is a confidence game. Bitcoin’s purchasing power may vary with the times. But the bitcoin will at least be there, waiting to be transferred at a moments notice.
Maybe you only keep a nominal cash position to meet your short term obligations and think you can just sell your stocks, bonds, and real estate in a crisis. You can try, but these can only be liquidated at your brokerage or with your real estate broker, and only with significant delay be sent onto your bank with either a wire or an ACH transfer. Both of which are entirely dependent on the banks not freezing up in a crisis, something which 20x leveraged institutions tend to do. Banks always freeze up in a crisis. It is how regulators prevent the banks from going from a state of temporary illiquidity to one of permanent insolvency.
A bank holiday, to arrest the next crisis, is perhaps only days away. They can shutter the banks and remove access to your cash at a moments notice. They may also take half of the value of your checking account. Ask any Cypriot citizen how 2012 went.
Bitcoin keeps your optionality open at all times and in all market conditions. No one can tell you what to do with your bitcoin. There are tens of billions of dollars worth of mining hardware running incessantly. Financially incentivized to get your transactions confirmed as soon as economically feasible.
One would assume we had solved all accounting shenanigans over the 500 years that double entry book keeping has existed. Every additional financial crisis is proof we have not. There will be yet another crisis which originates from where the regulators least expect. At the height of a cycle, when the street’s expectations are highest, you can be sure that every CEO is massaging their numbers to keep up with the analysts expectations.
The myopia of humans is uncorrectable. This short-term vision for humanity can only be remedied by something autonomous. Mathematics codified in perpetuity with clear consensus rules and run by unbiased machines. The human element must be removed from the most innate human need: the storage and preservation of value.
