Editorial Graveyard- Part IV: Opinion Piece- Gold-Backed Stablecoins Solution to Bitcoin’s Instability

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Rejected by FEE

In mid-June, the value of Bitcoin sunk below $20,000.00, reaching a two-year low. After a slight rebound on June 20th, Bitcoin had still lost 55% of its value; for the year and 35% within June. However, Bitcoin was not the only digital currency to suffer turmoil amid this downturn in the market; several other commonly traded cryptocurrencies also experienced a decline in value. As with any speculative assets, there are multiple factors; commentators cited as causing the recent meltdown in the crypto markets. Some commentators suggest that macroeconomic factors such as high inflation and interest rate hikes are potentially to blame. Others claim slumps in trading volume and the failure of several major crypto projects (collapse of Terra-Luna and Celsius) have agitated the market. The recent trouble in the crypto space most likely cannot be attributed to one sole factor but will not be persuading any crypto-skeptics to get on the bandwagon anytime soon. 

There is a digital currency alternative that is not only less volatile; but still possesses the benefits of blockchain technology, that is commodity-backed stablecoins. More specifically, stable coins collateralized by gold reserves and gold-pegged money seemed politically impossible since President Nixon closed the gold window back in 1971. It is possible to have gold-backed private money, that blends the advantages of cryptocurrency with the value stability and historical salability of gold. Effectively, the best of both worlds, adopting the best attributes of both monetary assets.

What are Stablecoins?

The term stablecoin is thrown around, but what is it? It is a digital currency with value tied to an asset or supply controlled by an algorithm (known as an algorithmic cryptocurrency). This category of digital assets created a cryptocurrency with a stable value. Cryptocurrencies have become popular alternatives to traditional inflation hedges as such money assets are highly volatile, meaning that Bitcoin may not be the best store of value if compared to other monetary assets. In 2014, the first stablecoin, Tether, was established and was backed by the US Dollar and related assets  (US bonds). But wasn’t the creation of cryptocurrency an attempt to veer away from the authority and meddling of central banks? There must be a better asset to collateralize private digital money than monetized debate.

Fortunately, there is gold, precious metal that has demonstrated its value retention and salability throughout human history. In an age of digital transactions, even using gold-pressed coins or promissory notes to redeem specie may be cumbersome in an era of debit cards. The idea of a gold-pegged stablecoin seems like a natural fit, combining the benefits of gold’s superior value proposition with the perks of blockchain technology. The market for the digital token has answered with popular stablecoin such as Pax GoldTether Gold, and Perth Mint Gold Token.

Gold stablecoins are valued at a specific amount of gold per token, stored in a secure vault. Per the Pax Gold white paper, each coin is collateralized by one troy ounce of gold. In the example of Pax Gold, any owner of Pax tokens can redeem them for physical gold “… at partner organizations..”. The reserve ratio requirements for gold to token backing and specifics of redemption requirements may vary by currency, most gold-backed stable coins utilize Ethereum-based smart contracts.

Gold-Pegged Stablecoins Offer a Superior Value Proposition 

The most notable difference between Bitcoin and a stablecoin like Tether Gold is the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and fluid cross-border payments conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Gold-Backed Stablecoins Are More Stable Than Unbacked Cryptocurrencies:

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence.

The Convenience of Gold Collateralized Stablecoins:

When compared to physical gold and ETF gold funds, gold-backed stablecoins have a greater degree of convenience. Gold-backed stablecoins are frequently compared to ETF Gold Finds, but “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..” While redemption in fiat currency was maybe more convenient from the standpoint of liquidity, most users are opting to obtain a currency with no instinct value (prior use). Even though those that opt to invest in gold stablecoins, there are inherent counterparty risks.

In comparison to physical gold and ETFs the ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. Plus, the unencumbered cross-border transactions make it an excellent universal medium of exchange. 

Many people may still hold a healthy amount of skepticism regarding stablecoins tied to reserves of gold. After all, there requires a high degree of institutional trust for such an arrangement to transpire. However, this may be the last shot we have at establishing a gold standard. The political interest to maintain current easy money policies is too tempting for the Federal Reserve and politicians to maintain. Beyond the macroeconomic goals of full employment and price stability, Fiscal QE can be used to fund government projects ranging from wars to universal basic income, making irresponsible monetary policy a tempting lever for political gain. In the post-Bretton Wood era, the only way to avoid the bargaining chip of an elastic money base is privacy money with fixed commodities controlling the overall monetary supply. The political interests are so strong even if we had Ron Paul in the Whitehouse, easy money types would get their way on fiscal and monetary issues. The only way to ever obtain a gold standard will be from a private monetary regime.

Editorial Graveyard- Part III: The Bootlegger and Baptists of Woke Capitalism

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Op-Ed submission was rejected by the Foundation For Economic Education for being too “abstract” and “academic”. The corresponding paper proposal for George Mason was also rejected. I am currently working on another proposal for GMU focused on intellectual property.

Introduction:

Bruce Yandle’s Bootlegger and Baptist (1983)  theory of regulation presents a practical explanation for why such unorthodox coalitions are effective vehicles for camouflaging rent-seeking behavior by a firm. In brief, armed with the public appeal of the moral arguments posited by the Baptists, the Bootleggers can quietly lurk in the shadows, funding initiatives that will advance their self-interest. In other words, the ethical advocates create a smokescreen that provides cover for the business interests, superficially obscuring the stigma of corporate advocacy, since few examples of political action invoke the ire of the average citizen than policy campaigns that line the pockets of big business.

           The trend of “woke capitalism”, however, is bringing the Bootleggers out of shadows and into plain sight. CEOs are now openly standing in unison with political activists, speaking out against topics ranging from police brutality to environmental issues. The Bootleggers can work openly with the Baptists to promote a positive image while still silently providing monetary support in the background. Moreover, the social justice messaging of “Woke Capitalism” extends beyond corporate activism and is observable in the product market and advertising. Some companies, for example, adopt marketing that emphasizes social consciousness to secure the business of Gen-Z. A clear example is Gillette’s 2019 advertising campaign addressing “toxic masculinity”. Typically, companies use this tactic to target younger consumers with higher preferences for ethical products and brand authenticity, requiring companies to go beyond philanthropy and mandating community services hours for their employees; their woke ethics are thereby conveyed in their branding.

The Four Main Categories of Woke Capitalistic Coalitions:

           The most recent alliances forged between business interests and political activists take the form of four main taxonomical categories. Some of the various types of Bootlegger and Baptist coalitions feature collaboration between firms and activists. Other coalition types  form within the technocratic structure of the corporation or emerge between different departments within the organization. Woke coalitions thus have several notable classifications of “woke” corporate alliances. Two further subcategories include proactive and reactive forms of rent-seeking.

Reactive Coalition Models:

           The reactive models for “woke” coalitions include two subtypes of collective action organization, the interaction between external actors and collaboration between internal employees. The first variety of reactive coalitions are rent-seeking alliances formed to restore the company from a sullied reputation caused by criticism, the objective being to mitigate the loss of sales and reputation amid public controversy. Some firms thus attempt to distance themselves from the controversy through their activistic partnerships. By way of example, Bank of America in the past was accused of engaging in “discriminatory” lending practices. To counteract this negative publicity, last year BOA pledged to donate $1 Billion over the next four years to community programs to address economic and racial inequality. Such an act of philanthropy can easily make the general public forget about the firm’s past indiscretions.

The second type of reactive “woke” coalitions are the intracompany factions designed to divert attention from potentially costly internal controversies. In instances of hostile work environment ligation, the legal team, the human resources department, and executive management band together to deescalate the publicity nightmare. Human Resources and management work together to legally distance the company from a harassment incident and shield executive management from more scrutiny and accountability. Legal navigates the statutory and tort concerns and works internally to establish an anti-harassment campaign intracompany. A prime example of an internal diversionary coalition was Vice media’s response to sexual harassment claims. After settling several cases, the company decided to form an advisory board to educate employees on diversity and proper workplace deportment. Even if such an initiative on the part of the human resources department failed to soften the bad publicity, at least it may decrease the probability of another incident.

Reactive Coalition Models:

Finally, the last two variants of “woke” coalitions aligning business interests with moral advocates to facilitate proactive forms of rent-seeking. Similarly, these proactive coalitions can be delineated into examples of internal and external collaboration models. Proactive partnerships form to capture potential gains and avert the costs of prospective controversies. The most salient example of such external cooperation would be firms standing behind a woke cause, anticipating that such an alliance will obscure the firm attempting to shape current regulation (regulatory capture).  A notable example was detailed in the Fall 2021 issue of Regulation magazine, which showed how providers of cloud computing services IBM and Oracle joined forces in 2017 to advocate for the passage of  the Stop Enabling Sex Traffickers Act (SESTA) and the Fight Online Sex Trafficking Act (FOSTA); effectively becoming bedfellows with various factions of human rights activists. Both laws intended to attribute liability to digit platforms for any user content that promotes sex trafficking. The article’s author Thomas A. Lambert speculates that IBM and Oracle could have done this with the hopes crafting potential exceptions to the platform liability portions of SESTA and FOSTA.

Additionally, we cannot forget the proactive inter-department coalitions that are emerging within corporations. For example, several companies are hiring diversity and inclusion “coaches” as a peripheral subset of human resources. The demand for this job role has become so prevalent that a number of colleges offer programs to become a certified “diversity practitioner”. The human resources department defends the existence of these staff members by emphasizing the need to educate employees to avoid instances of harassment and discrimination. The diversity coaches preach the virtues of cultural sensitivity and other tenants of the “woke” philosophy, thus producing a self-reinforcing spiral justifying further diversity initiatives.

Conclusion:

 Superficially, these alliances between big business and “woke” activists seem relatively benign, but in reality, these coalitions have profound consequences for the integrity of capitalism and the rule of law. The four types of woke B&B coalitions described above undermine capitalism and the rule of law because woke capitalism has made it easier than ever for business interests to create the façade of morality but are unjustly bending the rules-of-the game in their favor. Wokeism provides the veil obscuring corporate America’s hand in the legislative till. Generating more anti-competitive laws that undermine both the rule of law and free trade. 

The emphasis on firms getting involved with “woke” causes not only disguises crony capitalism and rent-seeking behavior, but also distracts companies from their primary custodial duty to their shareholders. As Nobel laureate Milton Friedman expresses in his own Friedman Doctrine , a firm has a duty to maximize its profits for its shareholders. After all, these individuals have invested in the company expecting a higher return. Without this financial support the firm could not achieve its current level of success. Diverting funds that could be used for investment in capital to increase productive efficiency for political activism is tantamount to theft.

Editorial Graveyard- Part II: Credential Debasement.- Published December 2021.

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Update: This essay was published as of December 2021.

Submitted to the Foundation for Economic Education

What is Inflation?

The concept of inflation (the depreciation of purchasing power of a specific currency) applies to other goods besides money. Inflation is related to the Law of Supply and Demand. As the supply of a commodity increases, the value decreases. Conversely, as the good becomes more scarce, the value of the commodity increases. This same concept is also applicable to tangible items such as vintage baseball cards and rare art. These are rare commodities that cannot be authentically replicated and command a high value on the market. On the other hand, mass-produced rookie cards and replications of Monet’s work are plentiful. Yield little value on the market.

Inflation and the opposite principle of deflation can also apply to intangible goods. When looking at the job market, this becomes quite evident. Jobs that require skills that are rare or exceptional tend to pay higher wages. There is a notable caveat to this observation, which is compensating differentials. Such a form of compensation accounts for the risky or unattractive nature of undesirable jobs. The higher wages are due to a lack of workers willing to accept the position rather than possessing skills that are in demand.

The Signaling Function of College Degrees.

Over the past couple of decades, credentialing of intangible employment value has become more prevalent. Credentials can range from college degrees to professional certifications. One of the most common forms of credentialing has become a 4-year college degree. This category of human capital documentation has evolved to take on an alternate function. Outside of a few notable exceptions, a bachelor’s degree serves a signaling function. George Mason economics professor, Bryan Caplan, argues that this function of a college degree is a signal to potential employers that a job applicant has desirable characteristics. Earning a college degree is more of a validation process than skill-building. Employers desire workers that are not only intelligent but also compliant and punctual. The premise of the signaling model is valid because many graduates are not using their degrees. In 2013, that only 27 % of graduates had a job related to their major.

Due to the signaling function of a bachelor’s degree over the year, there have substantial increases in the number of job seekers possessing a 4-year degree. Retention rates for 4-year institutions reached an all-time high of 81 percent in 2017. In 1900 only 27,410 students earned a bachelor’s degree. This number ballooned to 4.2 million by 1940. That number has increased to 99.5 million. These numbers demonstrate the sharp increase in the number of Americans earning college degrees. Today, nearly 40 % of all Americans hold a 4-year degree. Considering the vast increase in college attendance and completion, it fair to question if a college degree retains its “purchasing power” on the job market? Much of the evidence seems to suggest that it has not.

What is Credential Inflation?

The signaling function of college degrees may have distorted by the phenomenon known as credential inflation. Credential inflation is nothing more than “… an increase in the education credentials required for a job..”. Many jobs that previously required no more than a high school diploma now are only accepting applicants with bachelor’s degrees. This shift in credential preferences among employers has now made the 4-year degree the unofficial minimum standard for educational requirements. This fact is embodied in gov the high rates of underemployment among college graduates. Approximately 41% of all recent graduates are working jobs that do not require a college degree. It is shocking when you consider that 17 % of hotel clerks and 23.5 % of amusement park attendants hold 4-year degrees. None of these jobs have traditionally required a college degree. Due to a competitive job market where most applicants have degrees, many recent graduates have no means of distinguishing themselves from other potential employees. Many recent graduates have no other option but to accept low-paying jobs. 

The Two-Pronged Debasement.

The value of the college degree has decreased in value in two ways. First, its value has depreciated due to the vast increase in workers possessing degrees. This form of debasement mimics the effect of printing more money. Following the Law of Supply and Demand, the greater the quantity of a commodity, the lesser the value. The hordes of guidance counselors and parents urging kids to attend college certainly have helped this matter. However, public policy has served to amplify this issue. Various kinds of loan programsgovernment scholarships, and other programs incentivized more students to pursue college degrees. These policies that make college more accessible are what are devaluing college degrees. The current proposal for “free college” would be more expansive than our current policies. More people attending college makes degrees even more common and further depreciated.

The second form of credential debasement is a qualitative form of depreciation. Proving that the quality of a college education has decreased over the years is difficult to validate. Similar to how the Ancient Romans debased their currency by diluting the silver content of their coins, we have done the same to the college curriculum. College students are rarely studying but are attaining higher GPAs than previous generations. The average full-time student spends less than 30 hours a week focusing on coursework. Amounting to approximately 900 hours a year (average full-time worker devotes 1,800-2,000 annual to their job). Yet, the average GPA has climbed from 2.5 in 1940 to 3.1. A potential sign that college is not as academically rigorous as it once was.

Conclusion.

It is not to say that brilliant students with aspirations of a career in STEM fields should avoid college. For the average student, it may be a malinvestment in their future. Incurring large amounts of debt to work for minimum wage is not a wise decision. When faced with policies and social pressure that have made college the norm, the signaling function of a degree becomes distorted. If students focused more on obtaining skills than credentials, they might find a way to stand out in a job market flooded with degrees.

Editorial Graveyard -Part I: Caniglia V. Strom: A Victory For The Fourth Amendment

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Over the past couple of years, it seems as if the Fourth Amendment has been under attack. The headlines featuring stories of no-knock raids and other invasive search tactics used by the police. Despite the specter of an expansive police state looming above us, there is a silver lining. There have been some minor victories. One shining example was the Supreme Court ruling in Carpenter V. United States. Here the high court ruled that conducting warrantless seizures of phone records to be unconstitutional. A recent example of the court ruling in favor of the Fourth was Caniglia V. Strom.

In Caniglia, the court rejected the First Circuit expanding the Community Care Taking Doctrine to the home. Mr. Caniglia, who had been quarreling with his wife. He then brandishes a pistol and askes her to put him “out of his misery”. Mrs. Caniglia decided to spend the night in a hotel to allow her husband to calm down. After not hearing from him, she called Cranston police to conduct a welfare check on him. Responding officers reported that Mr. Caniglia seemed to be stable. He consented to be evaluated at a psychiatric hospital if the police did not confiscate his firearms. However, police later came by the home to remove the guns. Officers informed Mrs. Caniglia that he had consented to his guns being taken. After several failed attempts to recover his weapons, Caniglia sued under Section 1983. The First Circuit ruled that the actions of the officers were permissible under the Community Care Taking Doctrine. This decision was then subsequently overruled by the Supreme Court.

Community Care Taking Doctrine

Before reviewing the SCOTUS decision, there is still one question that remains. What is the Community Care Taking Doctrine? It is the legal doctrine that enables warrantless searches and entry for noncriminal policing functions. Originally formulated in the early 1970s as a result of the Cady V. Dombrowski decision. The petitioner, a Chicago police officer, had been involved in a drunk driving accident. His service revolver had been left in the vehicle. The court viewed this action on the part of the local police department to be legitimate. Recovering the weapon would protect the public from it “… falling into the wrong hands..”. 

SCOTUS Decision

The majority opinion summarizes the flaws of extending the Community Care Taking exception to Caniglia. The case has the rare distinction of being a unanimous court decision. In a nutshell, their concerns included the lack of justification in previous case law and the constitutional difference between the home and vehicles. The court viewing claims that the officers acted within the scope of the doctrine to be erroneous. 

Lack of Legal Justification

Justice Thomas directly states in his opinion that the First Circuit’s interpretation “… goes beyond anything this Court has recognized.”. The presumption being that generally, home searches require a warrant. Per Thomas, the lower court applied this doctrine merely because the nature of the search was noncriminal. The conditions of a search being permissible under this doctrine must be for purposes outside of a criminal investigation. The logic in Cady was specific to impounded vehicles already in police custody. It is reasonable to permit officers to assist motorists in trouble on the roadways. However, this privilege cannot be an “… open-ended license..”.

Thomas holding the Care Taking Function to the parameters of Cady establishes firm limits on the doctrine. Favoring the First Circuit decision would only further erode the Fourth Amendment. Why? The American legal system evolved from English Common Law. This influence makes case precedence the prime mover of future court decisions. History case justifying the invasive procedures by police upholding them. Only further eroding our Constitutionally held right to privacy and baseless searches.

The Constitutional Difference between the Cars and Homes

There is a clear difference in how the Fourth Amendment applies to the home versus automobiles. A point held by Justice Thomas in his SCOTUS opinion. The core of the Fourth Amendment was the ability to retreat to the home free of intrusion, citing Florida v. Jardine. A considerable caveat being the instance of exigent circumstances. A point of argument the First Circuit failed to establish. Considering if Mr. Caniglia was a threat himself, immediate action would be necessary. Not hours after the fact. Leading Justice Thomas to express “…First Circuit… goes beyond anything this Court has recognized..”. Because the officers lacked both a warrant and consent from the owner, effectively violating the sanctity of his home.

The Community Care Taking Doctrine has traditionally applied to vehicles. In the corpus of case law, there is a different expectation of privacy in the home. Carroll V. United States, one of the first SCOTUS cases to address automobile searches, found that the mobile nature of cars made warrantless searches crucial. However, a house is a stationary private property. Outside of the scope of extenuating circumstances or a warrant in hand, police entering the home is a civil rights violation. The officers who seized Mr. Caniglia’s guns were out-of-line.