In Episode 54 of Hidden Forces, Demetri Kofinas speaks with economic historian Barry Eichengreen about his experience studying currency pegs and exchange rate mechanisms, as the two explore how the legacy of globalization, trade liberalization, and the great moderation laid the foundation for the challenges facing the modern economy.
Barry Eichengreen has made a career of studying the history of money and the role that currency has played in the international order. Currency regimes are not fixed in stone. Our current system of floating exchange rates backed by the petrodollar has only been with for the last forty years. Before it, the Western world existed on the gold exchange rate mechanism of Bretton Woods, which lasted for less than thirty years, and whose dissolution lead to a period of high inflation and unemployment that challenged the economic models of the time and put the American economy and political establishment through a decade of frustration, uncertainty, and unrest.
However, In the years after the stagflation of the 1970’s and the deregulation of the 1980’s, a period of moderation swept across the Western World. The cost of capital declined, as inflation steadied and markets rose. Developing economies hitched their wagons to the industrialized West, pegging their currencies to the US Dollar, which was seen as the coinage of a New World Order. The Euro project, once a gradual process of integration, was fast-tracked under Maastricht and the reunification of the German Reich. Communist China, humbled by the fall of the Soviet Union and motivated by the riots in Tiananmen Square, set itself down the path towards becoming the growth engine of a new sort of global economy. At the time, many adopted Francis Fukuyama’s phrase, “the End of History,” to describe this period of optimism in the establishment of a neoliberal world order that they hoped would last for the rest of time.
Alas, the grand ambitions and lofty ideals of the Washington consensus proved premature. The rush of capital from Western countries into Eastern ones precipitated a series of financial crises beginning in Asia, and ending on the balance sheets of America’s legendary financial institutions, leading to a government-engineered bailout of the country’s investment banks. Eventually, the high-flying stock market of the late 90’s popped in spectacular fashion, and thus began a series of monetary countermeasures, rate cuts, and wealth effects that would lead, inexorably, towards the Great Financial Crisis, a watershed moment in the history of markets whose consequences we have yet to fully reckon with to this very day.
Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou
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In Episode 53 of Hidden Forces, Demetri Kofinas speaks with Gillian Tett, Managing Editor of the Financial Times US about her experience at the paper and how her background in anthropology has helped her identify financial bubbles in technology and the economy.
“It's tough to make predictions, especially about the future,” said the famous Yankee captain, Yogi Berra, and yet, this hasn’t stopped us from trying. Attempting to predict the future is a sport as old as civilization itself. Oracles and wishing wells litter the landscape of humanity’s past. Yet, in a world whose outcomes are no longer determined by the forces of nature, ordaining the future has become a matter of market introspection. Learning how to cultivate a sense of objectivity, empathy, and cultural awareness can be the difference between staying ahead of the curve or falling far behind it.
Gillian Tett has managed well by this measure. The Managing Editor of the Financial Times US is trained as a cultural anthropologist who applies her knowledge of human cultural practices, values, and norms towards trying to identify key trends in finance and the economy. In this almost hour-long conversation with Demetri Kofinas, Gillian shares stories about how her experience covering financial markets, as well as her background as a cultural anthropologist, has helped her to spot financial bubbles in technology and the economy.
Prior to the crisis, Gillian Tett and her team of capital markets reporters were some of the only financial journalists to cover the arcane world of credit derivatives. Since 2008, she has been one of the most important journalistic voices in all of economics and finance, moderating panels and conducting interviews at the most prestigious conferences and private gatherings around the world.
Our conversation begins in Tajikistan, where Gillian studied local wedding rituals as part of her doctorate in cultural anthropology. She would later draw a useful comparison between Tajik wedding rituals and what she was seeing in the space of credit derivatives (specifically, the innovations happening at JP Morgan). The conversation quickly shifts to the 2008 financial crisis, and what the now managing editor of the Financial Times learned from her experience covering the panic of ’08-’09. This was a period in which central banks engaged in extraordinary measures aimed at shoring up the global financial system for fear that if they did not, a banking collapse would ensue. Fortunately, the system survived, but not without leaving some lasting scars…
The rest of Demetri’s conversation with Gillian Tett is an exploration of the current financial landscape. Where have the risks accumulated post-2008? Much of today’s investment capital has accumulated in technology stocks and in technology-related companies. Private placements have boomed, and pre-IPO valuations have skyrocketed. Unicorns like Uber, Theranos, and a litany of cryptocurrency ICO’s have shot straight to the moon. The growth of wealth and income inequality since 2008 can be seen in these sky-high valuations.
Sovereign balance sheets have also exploded as a legacy of the crisis, but little has been discussed about the growth in corporate debt over the last six to eight years. Not only is the amount of corporate debt important, but the form that debt has taken is telling. Hampered by new regulations, as well as the memory of the last crisis, banks have curbed back their lending only to see bond make up the difference, buying up new offerings across the risk curve. Emerging markets have been a big beneficiary, not only of the appetite for high-yield debt but also, of loose monetary policy. The dollar carry-trade has become a powerful funding mechanism for emerging market economies and companies, which are now at risk of a dangerous snap back as the Fed continues to tighten, raising interest rates and shrinking the size of its balance sheet. Volatility remains low, but with prices having made all-time highs across various asset classes, geopolitical tensions between the United States, Russia, and China may prove the straw that breaks the market’s back. Additionally, the developing trade war with China, as well as the protections measures taken against Canada and Europe may finally create the type of consumer price inflation that the Fed has been begging for. You know what they say? Be careful what you wish for…
Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou
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In Episode 52 of Hidden Forces, Demetri Kofinas speaks with Simon Winchester about the value of precision (and imperfection) in the modern age.
Few things are as responsible for the making of the modern world as precision engineering; yet, it is largely invisible to us. We live our lives in a customizable fashion, expecting the world to conform to our expectations, wants, and desires. And yet, below this surface layer of personalization and complexity exists a world of exactness so precise that it evades our capacity to notice it. It is this world of increasing perfection, uniformity, and repetition that Simon Winchester writes so eloquently about.
This conversation is neither a salute to precision nor a rebuke of perfection. It is a commentary on both the genius brought to bear by humanity in reshaping the world, as well as an homage to the craftsmanship and personal touch that has given it meaning.
Our endless striving for that which is flawless is most human. Yet, try as we might, we cannot rid the world of all its imperfections. Humanity, after all, is by its very nature hopelessly, beautifully, fatally flawed. "To err is human," said Alexander Pope. Forgiveness is divine.
In chronicling the history of precision engineering, Simon Winchester, has not only found something forgivable in humanity's shortcomings but indeed, something worthy of honor and celebration.
In his book, “The Perfectionists: How Precision Engineers Created the Modern World” Winchester asks whether a wish for perfection is actually essential to modern health and happiness, whether it is “a necessary component of our very being?” He answers with a resounding, “no.”
Yet, the problem, as Winchester articulates it, is not simply an existential one. It is a technical one as well.
For proof, we’ve only to look to our jet engines, where microscopic errors can quickly cause cascading problems that lead to catastrophic loss of life. In fact, this is exactly what happened in 1989 on a United Airlines flight, when a microscopic metallurgical defect in the titanium disk caused the engine to fail. 112 people died as a result. Unfortunately, such tales aren’t relegated to the annals of history. Many similar events have occurred in the decades since. If the past is any guide, then as our technologies continue to multiply (we made 13 trillion transistors each second of 2015) and shrink in size, we can expect the threats associated with them to become larger and more pronounced.
In today’s episode, Simon Winchester joins host Demetri Kofinas for a conversation that is equally a discussion of the significance of exponential technologies, an investigation into the kind of world we want to build, and an exploration of what it means to have a life well lived.
Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou
Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod
In Episode 51 of Hidden Forces, Demetri Kofinas speaks with Patrick Grim, a world-renowned philosopher, and bestselling author, about the roots of human consciousness.
Recent advances in science and technology have allowed us to reveal — and in some cases even alter — the innermost workings of the human body. With electron microscopes, we can see our DNA, the source code of life itself. With nanobots, we can send cameras throughout our bodies and deliver drugs directly into the areas where they are most needed. We are even using artificially intelligent robots to perform surgeries on ourselves with unprecedented precision and accuracy
But despite all the advances that we’ve made, there’s one part of our biology that remains largely in the shadows: the human brain.
We know that the brain is a material object. It is composed of gray matter, neurons, and trillions of synapses. What we don’t understand, and what philosophers and neuroscientists have been trying to figure out for quite some time, is how our consciousness (our thoughts, emotions, experiences, and everything that makes us who we are) can be explained by these few pounds of matter.
Ultimately, it is a problem that’s centered on the relationship between mind and body. Formally, it is known as “the mind-body problem.” Put succinctly, it’s the problem of trying to explain the relationship between the mental realm and the physical realm - between the material and immaterial. It is also known more commonly by David Chalmer’s phraseology “the hard problem of consciousness.”
Although Rene Descartes is often credited as being the first thinker to worry about the connection between mind and body (or mind and matter), the question is actually a far older one. In fact, it extends at least as far back as Plato and Socrates, and it is characterized by three primary schools of thought.
Materialism says that the cosmos, and all that is contains, is an objective physical reality. As a result, philosophers who subscribe to this school of thought assert that consciousness, and all that it entails, arises from material interactions. As such, the material world (our flesh, neurons, synapse, etc.) is what creates consciousness.
Idealism says that the universe is entirely subjective and that reality is something that is mentally constructed. In other words, consciousness is something that is immaterial and cannot be observed or measured empirically. Since consciousness is what creates the material world, according to this school of thought, it is unclear if we can ever truly know anything that is mind-independent and beyond our subjective experience.
Dualism essentially holds that mental phenomena are, in some respects, non-physical in nature. In this respect, the mind and the body exist, but they are distinct and separable.
Although most modern philosophers subscribe to the materialist view, determining, and ultimately understanding, the nature of human consciousness using an empirical methodology is a remarkably difficult task. The primary issue with accomplishing the aforementioned is that empirical science requires things to be measured objectively. And when it comes to consciousness, everything is subjective.
So, what can science say about human consciousness? Can it say anything at all?
In this week’s episode, Patrick Grim joins host Demetri Kofinas for an exploration of the roots of human consciousness and an examination of what the world's greatest philosophers think about the relationship between the mind and body.
Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou
Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod
In Episode 50 of Hidden Forces, Demetri Kofinas speaks with Nevin Freeman, the founder of a new stable-value cryptocurrency project, about the hard problem of currency.
2018 is the year of the stablecoin, or so says Nevin Freeman, the founder of a new stable-value cryptocurrency project based in the San Francisco Bay area. In order to understand what stablecoins and how they work, we first need to understand money.
In order for something to qualify as money, it has traditionally needed to function as both a store of value, and as a medium of exchange for goods and services. The medium of exchange component of money allows it to function as a vital coordination mechanism for society, allowing humans and international governments and organizations to collaborate on a massive scale. Money is thus an intrinsic part of our capitalist infrastructure and, without currency, many of our most important institutions and organizational structures would collapse.
Yet, our system of money and credit is not without its share of problems. Middlemen, financial intermediaries, and other central organizations often charge exorbitant fees for their services. These same intermediaries often function as “gatekeepers,” permitting or preventing access to financial counterparities at their discretion. The mismanagement of our financial system by such institutions has become a major source of systemic risk, the brunt of which is disproportionately carried by those at the bottom of the economic pyramid.
Cryptocurrencies offer a possible solution to many of the most prominent problems associated with fiat currency systems. However, there are significant roadblocks on the path to widespread adoption. As we mentioned, in order to qualify as money, a currency needs to both the medium of exchange and store of value functions. This becomes difficult to do when currency volatility can wipe out 50% of your net worth in a single day or double the cost of your company’s inputs overnight.
It is no secret that crypto markets are remarkably volatile. Even the most prominent cryptocurrencies - Bitcoin and Ether - fluctuate wildly. Unfortunately, it’s impossible for a decentralized currency to function as an effective store of value if its price varies by as much as 15% on any given day and in any given direction. Even if the cryptocurrency in question were rarely to drop in price, upside volatility can create a speculative feed-back loop that discourages anyone from actually using it as a medium of exchange. Why would you pay someone’s salary in bitcoin if you expected the currency to be worth more after you sold it? In this sense, even a highly volatile asset with little downside risk that serves as a great store of value can still be a poor medium of exchange.
Until cryptocurrencies are able to function as both a store of value and as a medium of exchange, they are unlikely to become truly mainstream or see real-world adoption. Yet, as previously mentioned in the case of bitcoin, a cryptocurrency’s capacity to store value directly undermines it’s use as a medium of exchange. How do we resolve this paradox?
This is where stablecoins come in. They aim to solve the problems of our volatile crypto markets by establishing price-stable cryptocurrencies that are pegged to some other stable asset, for example, the US dollar. Notably, these pegs are not determined by supply and demand. Instead, stablecoins effectively “price themselves” by making a standing promise to fulfill any buy or sell order at a set price, regardless of changes in demand for the currency by market participants. In traditional currency pegs and exchange rate mechanisms, currency boards manage the value of the peg by overseeing the promise to buy or sell at a preset conversion price. So, how does a currency peg work in the case of stablecoins?
Here is an overview of how the most prominent stablecoin projects on the market promise to do this today:
Traditional asset-backed stablecoins: In short, under this system, each unit of the particular stablecoin is backed by a corresponding unit of fiat currency. Let’s use the US dollar as an example. According to this system, a third-party issuer sells tokens for one dollar each. The issuer then keeps all the dollars taken in from these sales in an account. If an individual holding a unit of the stablecoin wishes to cash out, the third party gives a US Dollar to the holder and removes a unit of the stablecoin.
The problems with this method loom large. First, there’s the obvious fact that, at any moment, the organization or individual issuing the stablecoin can abscond with all the money that’s supposed to be in the bank account. Second, a government or other centralized organization could freeze the aforementioned account of the issuer, which would grind the project to an abrupt halt. In short, there’s a lot of risk and a lot of trust needed for this method to function properly.
Collateralized Debt Stablecoins: Under this system, instead of attempting to back units of a stablecoin one-to-one with a fiat currency, the stablecoins hold a ratio greater than one-to-one of a crypto asset (or more commonly, various kinds of crypto assets). The way this works is rather simple. An individual who holds a crypto asset can deposit this asset into a smart contract, which creates a stablecoin for them.
The peg (the value of the stablecoin) is primarily maintained by the promise of future redemption for collateral if the stablecoin price diverges from the target for too long or the value of the collateral begins to drop. In either of these cases, all of the stablecoin holders can trade their coins for $1 worth of the collateralized crypto assets. In theory, speculators will step in to buy stablecoins below the target price based on this promise of future redemption and that will keep the price stable all of the time. The primary problem with this system is that that the underlying collateral is, by its very nature, volatile. As a result, in order to ensure itself against significant price drops, the system needs to hold a significant amount of collateral (often two-to-one, or even more). This is also a much more complex system, making it difficult to implement in a way that is efficient.
Future Growth-Backed Stablecoins: According to this system, the value is maintained by neither fiat or cryptocurrency holdings. Instead, a central account is created that uses algorithms to maintain the stability and manage the supply of the cryptocurrency in the face of fluctuating demand. It accomplishes this by increasing the number of stablecoins when the price goes up and decreasing the number when the price goes down. The increase in stablecoin supply is meant to reduce the market price of the coin to its target level. Conversely, when the price of the stablecoin drops below its target price, the system will reduce the supply of stablecoins and increase the price of the coin so that it returns to its target level. The primary issue with this method is tied to speculators. If they happen to lose interest in purchasing or actively begin to short the stablecoin, then the peg eventually breaks because the entire mechanism becomes worthless.
At the moment, it remains unclear which system, if any, will work. History has not been kind to currency boards, and the challenges of implementing a purely digital version of a currency peg has never before been tried until now.
In order to better understand the nature of stablecoins, and the promise that they have, Nevin Freeman joins us for a conversation about money and the fundamental properties of currency.
Ultimately, this is an exploration of how we can make cryptocurrencies a true store of value, while at the same time enabling these decentralized currencies to function as real and viable mediums of exchange.
Producer & Host: Demetri Kofinas
Editor & Engineer: Stylianos Nicolaou
Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod