Crypto's Belief System May Have a Trust Problem

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Trust Me, I’m an Economist

Thanks to all those who sent in questions for our live blog discussion with Vassar College’s Benjamin Ho about his book Why Trust Matters. The transcript should be posted on the web soon, but for now I will offer you some of the more interesting insights.

On the Federal Reserve, with the decision on a nomination for the next chair expected any day, he addressed the friction between demand for accountability and discretion to act in a hurry. Central banks need this flexibility, but few people feel they are accountable enough, and many see political pressure behind them. Ho said:

One of my favorite papers, on The Politician and the Judge by economists Maskin and Tirole, discusses this dilemma that we need our government officials to be accountable (like the Politician) but we also need to give them discretion (like the Judge).

The Federal Reserve chair is a great example of the latter. We need to give them space to make the right choice even if it is unpopular, and hence the institution is designed with features like 10-year terms, and a history of apolitical appointments, where presidents regularly reappointed the chair from their predecessors.

That norm is currently being challenged. I actually have no problem per se with that development; I think there is good reason for more democratic accountability. But I do think it should be done with care and awareness of its consequences re: the trust in the Federal Reserve system.

There is also much to discuss on crypto, which exists as a method to do away with the need to trust in institutions altogether, and instead rely on an algorithm. It might be better to find a way to improve trust in the institutions we have, or create new ones, rather than come up with a system that does an end run around our need to trust each other altogether. Ho is clear that money developed as a means of establishing trust:

You can get dizzy trying to pin down just what money is, and a popular misconception about how money arose is that money was a way to improve the barter system.

In fact, a better way to think about money is that money was a way to keep track of trust. In hunter-gatherer societies, a lot of economic life was governed by gift exchange. I shared my hunt as a gift, in the hope that you will share your hunt next time. As societies grew, it became more and more difficult to keep track of who owes who a favor. People began using markers to keep track of favors. The earliest markers became the earliest form of writing. Other markers developed into money.

Ho also suggests, rather controversially these days, that we still behave as though we have a lot of trust in our financial institutions. Think about how readily people spend money online, and read their credit card numbers into a phone or type them into a browser, and you get the point. He also suggests that interest rates still function as the best measure of strong trust in a system is a low interest rate. “We can back out mathematically, based on the interest rate that is charged, the probability that the parties involved think they will be repaid. For now interest rates remain low, and I think that does tell us something.” 

(Stacy-Marie Ishmael, Bloomberg’s managing editor in charge of crypto, commented: “Funnily enough, one of the “attractions” touted by various players in crypto who offer lending products is high interest rates!”)

One final point is that Ho, an economist who has devoted years to this issue, believes trust has grown over time (it’s essential to economic development) and despite the increasingly bitter partisan atmosphere in the U.S. and elsewhere, trust in institutions remains strong:

The distrust we see is mostly an increase in partisanship, which comes from greater ideological sorting. We don’t trust Congress but we trust our Congressperson. We don’t trust “the media” but we avidly consume the media we trust. We don’t trust medicine, but we still trust our doctor. Similarly, when it comes to the financial system, markets have been remarkably steady through many crises. It’s the partisanship I worry most about.

I still fear that he’s wrong about this, but I hope he’s right. And he does make a great case. 

Next Book Club: Shutdown

The last book club selection of the year is Shutdown by Adam Tooze. Note that it’s called “shutdown” rather than the more loaded word “lockdown,” which appears to have found its way into the vocabulary of several languages other than English. We don’t need yet another rehash of the issues that have given us Covid fatigue, like masks, vaccines and lockdowns. Rather, Tooze’s book is about the undeniable fact that the world economy had an unprecedented peacetime shutdown last year. How and why did it happen, how did the various economic actors manage the situation, and what will be the consequences?

It’s well written, and even though it covers ground most of us know only too well already, it manages to shed a lot of light. For one example, take this passage on central banks: 

‘If the financial markets had suffered a heart attack in March 2020, most of the world would have suffered, but the benefits of the recovery were distributed unequally. In the years since the dot-com bust of 2000-2001, central bankers had moved from being ringmasters to ever more frantic jugglers of liquidity…

“It was a disorienting scene, because while the central banks remained the key actor in the drama, they were doing precisely those things the prohibition of which was central to founding central bank independence in the 1970s and 1980s. In the era of the market revolution, the mandate of the central banks had been to fight inflation. In that struggle, it was taken as axiomatic that central bankers must refuse to monetize government deficits… The shift from a world in which central bank independence was founded on not buying government debt to one in which central banks around the world warehoused trillions of dollars in debt was bewildering.”

It’s extremely thought-provoking, and I hope it will provoke a great discussion when we hold a live blog with Adam Tooze, some time in the last few days before Christmas. Now, please get reading.

Things That Make You Go Hmmmm…

Here come three charts that have me thinking. 

Industrial commodities are turning

If we’d like inflation to calm down, it would be good to see commodity prices ease back. And if we look at the price of iron ore, whether in the U.S. or China, the shift in price over the last 12 months has been extraordinary:

This is in part a sign that the Chinese authorities are reining in speculation. It also owes something to a possible slowdown for Chinese manufacturing, which is dealing with huge producer price inflation. But it’s exactly what we might hope to see if the laws of supply and demand were to deal with inflation without intervention from central banks.

Share buybacks: It’s all a question of timing

Buybacks get a bad press. This isn’t wholly fair. If a company has nothing great to do with its cash, it is far better to pay it to investors rather than sit on it and destroy value. However, one fact about buybacks is unavoidable. Companies, like all the rest of us, get a better deal if they buy shares when they’re cheap. And that is absolutely not what they are doing. This chart is from T. Rowe Price’s year-ahead survey for investors, which uses data from Strategas Research Partners:

Stock purchases should be contracyclical, bought to give shareholders a bargain. The exact opposite is the case. The bulk of buybacks in recent years have, indeed, been pretty bad for investors.

Labor shortages are real, at least in the U.K.

The most startling chart I’ve seen recently is this one, from Absolute Strategy Research Ltd., using data from the Confederation of British Industry, the U.K.’s main employer organization. Labor shortages are almost as serious as in the darkest days of the 1970s:

Much of this will be driven by the loss of new EU migrant workers thanks to Brexit; it isn’t just a pandemic effect. But the overall effect is mind-blowing. I’ve been trying to avoid comparisons to the 1970s during the inflation debate, because I want to avoid hyperbole. British industrial relations in that decade broke down in a way that hasn’t been seen since in the developed world. But these numbers are stunning and suggest that the risk of elevated inflation next year in the U.K. is real indeed. The Bank of England is widely expected to raise rates next month, after employment and inflation numbers for October that supported such a move; on this evidence they would be wise to do so. 

What’s in a Name?

I doubt anyone will be able to spot the top in crypto, whenever it happens. But it’s tempting to see a top in the news that the Staples Center in Los Angeles, home to the legendary Los Angeles Lakers, is to change its name to the Crypto.com Arena. The Singapore-based cryptocurrency exchange has big ambitions, and its slogan is “fortune favors the brave.” Its CEO told Bloomberg that the naming deal was in line with its hopes to be “a top brand in the coming years, next to Nike and Apple.”

This sounds a little like hubris. And if you want to be as big a brand as Nike or Apple, be warned that neither of those companies has its name on a stadium, although both have come close — Apple was  in contention for the naming rights to the San Francisco 49ers’ new home, while Tottenham Hotspur’s ground in London, still without a sponsor, nearly became the Nike Stadium.

That may have been just as well for them. As Aaron Elstein points out in Crain’s New York, the record of companies bidding top dollar to attach their names to stadia is long and undistinguished. Most notoriously, the Houston Astros’ current home started life as Enron Field. It changed its name to MinuteMaid not long after. The New England Patriots’ Gillette Stadium was originally going to be CMGI Field (after a bubble-era dot-com that bought other dot-coms). And so on.

Across the Atlantic, shirt-naming rights in U.K. soccer have also been a mixed blessing. From 2006 to 2010, the great Manchester United team of Cristiano Ronaldo and Wayne Rooney, which won the Champions League and three English Premier League titles in a row, wore AIG on their chests. You can probably work out why that sponsorship deal wasn’t renewed.

Tacking your name to a beloved stadium might not be good for business. When the 49ers’ Candlestick Park changed its name to 3Com Park in 1995, irritated fans suggested it would be easier for 3Com (now part of Hewlett Packard) to change its name to Candlestick. These days,  I gather Chicago White Sox fans aren’t wild about going to see their team at “Guaranteed Rate Field.”  

None of this proves that crypto is about to peak. And as we learned from  1999 and 2000, mad speculative excess can coexist with a genuinely transformational technology. But if LeBron James is playing in a building called the CRYPTO.COM Arena, that’s a symptom.

One bright side: I suppose this is good news for Staples. These days the office supplies retailer belongs to a private equity group. 

Survival Tips

Sometimes it feels like there’s no justice in the world. I learned today of the death from cancer of my high school classmate Belinda Sykes. She was already a brilliant musician when she was 14, and she went on to have a great and eclectic career in music. She was also very open about her diagnosis, and the effects it had on her ability to sing and play wind instruments. 

I suspect that she would prefer to rest in music rather than rest in peace, so let me offer some samples of the mature Belinda in action.  This is Nuns & Roses (great name), an album of subversive medieval music by Joglaresa, the group she founded. Here’s their Christmas offering, and here she is singing Nani Nani with Ensemble Wytars.

Hers was an example we should all follow. My thoughts and prayers are with her family and friends. 

To contact the author of this story:

John Authers at [email protected]

To contact the editor responsible for this story:

Matthew Brooker at [email protected]