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This is meant as a warning to TPN members about a financial “fad” that I view as a complete and utter scam, which you may be solicited to “take advantage” of.   From my own experience and that of a few friends, it seems that an unsolicited “info-mercial”-type email is being sent around the web to people whose email addresses are on lists indicating an interest in hard money, or fears about the dollar, or who are otherwise deemed targets for items of financial/investment interest.

 

The scam is about a new “currency” called BITCOINS, pitched as an  “e-currency” free of the problems which plague fiat paper money.    BEWARE.    It’s doomed to implode, probably in the not very distant future.   It’s a “Ponzi scheme,” its success to date being due entirely to the same factors that make a chain-letter successful (to the early birds) and a disaster (to the late-comers).

 

The perps have most recently resorted to invoking the prestige and reputation of the famous inventor Thomas Edison, likening their “invention” to the final, perfected version of a monetary idea Edison once had, but finally eliminating any slight flaws it might have had, by  virtue of the new technology of the world wide web, which was not available to Edison when he came up with his “brilliant” monetary “invention” almost a century ago.

 

RUN FROM THIS AS YOU WOULD FROM THE  PLAGUE.   

 

I’m writing this only because the scammers’ pitch is aimed at people who understand the perils of fiat paper money, and of gov’t induced depreciation of the currency.   Let the liberals get wiped out  by this.   But I’d hate to see my intellectual and political  allies be weakened in any aspect of their ability to carry on the same battle I want to see won.

 

The following is intended to arm you against the seductiveness of the info-mercial that’s currently scouring the web for new victims, buttressed by a slick, flawed, despicable reliance on Thomas Edison’s name, and whose message seems specifically designed to hit the hot buttons of conservatives and/or free market advocates:


Edison's idea was not new, though it had a few superficial bells and whistles which gave it some appearance of being "different" from very similar schemes which had preceded it.   If it had been implemented, it would have been a disaster.   Edison was a brilliant man, but he jumped to conclusions too quickly in attempting to translate his brilliance from inanimate objects of nature, to an arena where human nature, free will, choice, and the ability to completely reverse one’s behavior are inherent to the nature of the subject being examined.


Pieces of his scheme were actually adopted as part of the Gov't's crop loan program for a few decades (ie, some of the identical ideas embodied in Edison’s scheme were adopted, though they were not specifically taken from Edison).   The USDA operated on some of the same assumptions made by Edison and crucial to the success of his plan.   Edison’s plan was to use crop commodities in the creation of a new currency to be backed by them, which he erroneously thought would stabilize both the currency and the prices of the commodities, thereby assuring farmers of a reliable income and the rest of us of a reliable currency.    The USDA’s attempt to stabilize crop prices by a means similar at root to Edison’s, at a "fair" price to farmers, backfired, as anyone who really understands the longer term cause-and-effect relationships of the most basic laws of economics could have predicted (and did predict).   

 

What had been intended to provide a stable  "floor" price for farmers created in practice a "ceiling" instead.  The designers of that program overlooked at least one of the same things Edison's plan does:   that every economic "action" induces "feedback" forces in the OPPOSITE direction.    Attempts to enforce a given supply or demand or price or production rate, etc., rather than give a free hand to ALL the factual, real-world  causes-and-effects which these different factors have on each other, will ALWAYS fail, and MOST OFTEN produce an effect which is the precise opposite to the one intended.    

 

Enforced price ceilings end up establishing floors in practice, and the attempt to establish, by force of law, a floor to certain prices will instead create a ceiling they cannot rise above.

 

We saw this not only in the decades-long administration of the USDA's price-support or crop loan program, but in Nixon's brief attempt at price/wage ceilings, in India's attempt to place ceilings on prices, even in Caligula's ancient Rome where his regime's death penalty for violating its price ceilings were ineffective at making them do anything but exacerbate the very problem they were intended to alleviate.

 

There is a saying (two, if you include it’s flip side) in the  markets that “The best cure for  high prices is high prices.”    (And that the  best cure for low prices is low prices.)   Both are absolutely true.

When, at a certain price level, consumers want more of an item than producers are making, supplies start to dwindle, local shortages or delays in obtaining the item occur, and the price begins to rise.    The higher price forces some consumers to tighten their belts and reduce their consumption, while simultaneously SENDING A SIGNAL to producers of what’s going on out there, namely, that consumers WANT MORE PRODUCT.   The higher price offers producers a higher profit, they pull out all stops to produce more, and when that larger supply hits the market, they find they can’t sell THAT much quantity at the higher price, so they soon have to lower the price  right  back down again.  PROBLEM SOLVED, quickly, efficiently, and fairly, without the use of  coercion.    Meanwhile, new production lines have been set up, and future production will proceed at the NEW HIGHER LEVEL, without any significant increase in the price, except for that temporary period needed to send the right signal to producers.

 

When, at a certain price,  consumers are no longer buying as much of a good as producers are making, inventories of unsold amounts  start piling up.   The most efficient  manufacturers start lowering their prices to induce consumers to take the excess inventories off their hands.   The LEAST efficient producers cannot make a profit at the lower prices and must either become more efficient or go out of business.   Pretty soon consumers are gobbling up the good at its cheaper price, but production has been reduced, so inventories become smaller and smaller.    Prices rise again, but (without gov’t interference) they will in such a case usually NOT go all the way back up, but settle at a level LOWER than before – because the industry as a whole has become so much more efficient through having “pruned out” the “deadwood” of wasteful, inefficient producers.  PROBLEM SOLVED.    Production and consumption are back in line, prices are back to  where they started from OR LOWER, consumers are getting the product at the same or lower price, and efficient producers are now the ONLY ones in business, so they can make the same or even more profit from selling a smaller quantity of the same good.

 

Any  FORCEFUL attempt to interfere with prices will result in BLOCKING THE TEMPORARY SIGNAL THE MARKET NEEDS TO SEND OUT, IN ORDER TO CORRECT THIS NATURAL CHANGE FROM THE PREVIOUS STATE OF AFFAIRS, a change of the type that is always  happening in all aspects of our lives, not just in the economy.  Such benighted activity as  the belief that forced manipulation of prices, if done by a nice government with no financial interest in the outcome, will help the situation, are as helpful as stopping your child from crying by stuffing a gag down his throat.


There have been no exceptions to the operation of this inescapable logic (except temporarily once in a while, when fads or erroneous beliefs of  people in the marketplace are operating, until reality's response becomes too powerful for them to escape from  any longer, and the error they’re making then quickly erases itself, after having caused a little or a lot of harm).   When such a mistake is ENFORCED FOR  A LONG TIME by law, the accumulated damage can become enormous.  This occurred with the farm program, Nixon's price/wage ceilings, and every other such attempt in human history.  More recently the mortgage meltdown was the result of an attempt to enable purchases by those who could not afford the total price of a home purchase, by effectively lowering that price or cost via MANDATED lower interest rates.   By now almost everyone has suffered.   The originally intended beneficiaries of the policy are homeless again – and in debt.   Plus, millions of others have been forced into the same fate unnecessarily.  

 

This fallacy (that good can be accomplished by forcefully “managing” or manipulating prices with good intentions) was ONLY ONE  of several flaws in Edison's scheme.  The same flaw is exhibited by the Bitcoin scam, in spades.

When  you are tinkering in metallurgy the metal doesn't bite back at you. When you are tinkering with human nature, it almost always does.  (If you do that in the area of economics, then strike out the word "almost" in the previous sentence.  You will ALWAYS fail.)  Sometimes, the failure remains hard to see for a long time, but  eventually  the devil has his due.

[Historical side-comment:   SKIP THIS IF YOU LIKE.  IT'S LONG, AND IT'S JUST AN ILLUSTRATIVE EXAMPLE FROM THE DAYS OF NIXON'S PRICE CEILINGS.

Republicans USED to be the party of free markets.   Under Nixon, that characteristic had not yet been discarded as fully as it has been since.   Republicans  knew price controls don’t work.   So  they tried to “fool mother nature” by puttiing the ceilings on the permissible PROFIT rate in various industries rather than directly on the price.    But – as we all should know – “you can’t fool mother nature.”   (You can’t trick water into running uphill by using fun-house mirrors to trick the water into thinking up is down.)   Because there were no limits imposed DIRECTLY  on price itself, this left futures market prices free to go where the market dictated.   They rose steadily throughout the period of Nixon’s ceilings.   In fact, for reasons too long to detail here, profit controls had the effect of MAGNIFYING the awful consequences of simpler price controls. Futures thus were a kind of “escape valve” for  some of  the upward pressure on prices added artificially  by the government’s controls, serving the function a “black market” serves under direct price controls.  Prices for most commodities soared, but by much less than they would have if not for futures markets, because they offered a means for people in truly desperate need of a particular commodity to obtain at least some of it at that high price, whereas in the absence of futures, many people in such  a circumstance would have been unable to get it at all, and would have suffered far worse consequences than having to pay a high price.    I remember trading in the lumber and crude oil markets at that time.   It was amazing how much ignorance there was even amongst the supposedly sophisticated traders in futures markets, who make most stock market traders look like tyros.    When the Price Commission would see its policies failing, their response was to strengthen the policies, thereby compounding the problem instead  of removing it.    They would announce a new, more stringent control on, say, lumber prices.    The market would go “limit down.”   I and my co-worker would buy.  Before day’s end it would turn around and go limit up, then much higher in succeeding days.   It was like taking candy from a baby.   That’s  how  few people  understand basic  economics.  This was NOT rocket science, but  something quite simple and very straightforward.   Yet it would repeat itself time after time.   Shows you  how hard it can be for our species to learn or face up to an unpleasant or unwished-for lesson.   (Which is also a partial explanation for  why we have an Obama for a President.)     Well…. the grand finale to this was the time when Nixon’s whole policy was abandoned.   Same ignorance of economics prevailed.   The gov’t ended controls on lumber prices.   “What? NO LIMITS on how high it can go????”  Tons of people surged in to buy, the market opened higher that day, set a NEW RECORD HIGH price, then promptly went limit down, and repeated that for many days thereafter.   IE, when the government  FREED PRICES TO RISE,  that very same DAY the world saw the highest prices it would ever see again for MANY YEARS, as the price of lumber then went into a massive, persistent DECLINE begun at the moment the government gave them the OK to rise.      

 

The market partiipants in crude oil weren’t quite as astute.  When controls were lifted from crude oil and gasoline, they too opened higher, but they also closed higher.  It was only on the following day that THEIR massive decline began.  In other words, within 24 hours of REPEALING the attempt to keep prices down, they began to go down with a vengeance – after about a year of steadily rising while the government’s plan to lower them had been in effect.  It was an INCREDIBLY  dramatic proof that whenever the  FORCE OF GOVERNMENT is applied to an economic problem,  it will almost invariably  make that problem worse.

 

 

Let that be a lesson to anyone who trusts in the ability of the government to handle matters having to do with economics – or the modern day “economists” who advise governments from their academic chairs in that subject.   As a BTW, I testified at a price commission hearing back then.   I was 24 years old at the time, and faced 9 PhD price commissioners with my testimony that essentially told them that (in not exactly these words) their policies were insane. This was the experience which gave birth to my idea – still held today --  that it’s a reliable rule of thumb to assume that the greater a person’s formal education in economics, the more prestigious his degrees and accomplishments, and the more renowned he is his field, the LESS WELL he understands his subject.]

 

 

Back to BITCOINS:   They are a scheme to control the SUPPLY of a created-out-of-thin-air nothing, and thereby  manage its price.   They  are described as a new “currency,” but when  you cut through all the rationalizations, spin, misinformation, and outright lies of their adulating sponsors, they are nothing more than a game of musical chairs,  played with invisible chairs that everyone is required to believe will be supplied, somehow, before the music stops.   They are FAR LESS even than a fiat currency without its fiat.   They are ELECTRONIC NUMBERS in tiny magnetic bits on computers.  They don’t even have the approximately 1/20th of a penny’s value that the paper in a $100 bill possesses.    And . . . there is no government power to force others  to accept them from you, such  as the legal tender laws which serve to keep our dishonest monetary system on life support while it dies very slowly, via currency depreciation.    Thus, when BITCOINS die, it will be quick, devastating, and very vicious.   

 

 

This is a true Ponzi scheme, based entirely on the "greater fool theory."    IE, that even the foolishness of paying an exorbitant price for  something worthless is "wise" if you can find a greater fool than you are, to buy it from you  for a still higher  price.    THAT is the sole reason for the "success" of bitcoins -- to date.   You will be told that its price is determined  "by the market" and that its supply is strictly controlled.   Well, I have a rare, strictly controlled supply of used toothpicks for you, and I only add one toothpick a week to that supply.    Wanna pay me a fortune for 'em?  They're in VERY limited supply, you know, and I'm not a government but a PRIVATE SECTOR entrepreneur.  Limited supplies lead to higher prices in the free market.   NOW are you interested?

The signs that that Ponzi scheme is beginning  to unravel are already showing very visibly.    And so the current large holders of bitcoins, and the promoters of it who have "cashed in" on the scam,  are eager to keep it going as long as possible, so they can  make one last attempt to get the vast numbers of individual small investors to stampede into the scheme in order to dump their  own holdings on the public and leave the small investor holding the leaky bag that they now own -- before its entire artificially manufactured "market value" has leaked out.  

 

Remember the “beanie baby” (was that the name?)  craze, during which people paid $thousands for intentionally “low production” tiny stuffed animals because of their artificially created “shortage?”    That’s bitcoins, only when the bubble bursts, you won’t even have a cute little stuffed chipmunk to commiserate with – just a computer printout of a number that refers to absolutely NOTHING that exists anymore, because it never really existed in the first place.

 

Beware bitcoins.  They are every bit as unsound a scheme as the famous tulip bulb mania in Holland a few hundred years ago.    There is going to be news of a total bust of the bitcoin mania on the financial front pages, in the not too distant future.

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Tags: Bitcoin, Ponzi, scam

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Comment by Randall Woodman on February 11, 2014 at 8:46am

So this is an interesting development.

http://reason.com/archives/2014/02/10/its-time-to-grill-the-federal...

The most provocative way to phrase it would be something like, “Chairman Yellin, what effect would it have on the dollar and the world financial system if some large online retailer such as Amazon or Walmart.com or even the online Apple Store were to announce that it was going to give customers the choice of paying in Bitcoin instead of in dollars?”

Comment by Morry Markovitz on January 28, 2014 at 5:56am

To Gerald  V Todd:

Congratulations to your Mathematician grandson.   From what university did he graduate?   Would it be correct to assume he achieved a fairly high score on the quantitative section of his SAT?

Below are 2 simple math problems, each of which your grandson might enjoy either solving  or else explaining why they can't be solved (one's a high school level geometry problem, and the other's a high school algebra problem).   Each should be elementary for someone with a degree in math to solve with a few moments thought, but each solution has an interesting/amusing aspect which I'd be interested to know whether your grandson appreciates or enjoys:

1.   A man starts from a certain point on the earth's surface and makes a journey which has 3 legs.  First he goes one mile due south, then one mile due west, then one mile due north.   Having travelled these 3 segments of his journey, he finds himself right back at its starting point.     Can you find the starting (ie, the ending) point(s) on the planet where such a result is possible?

2.  A man leaves the dock in his rowboat and rows upstream (ie, against the current) at a steady pace (ie, a constant speed) in a river whose current also has a constant speed.     When the man reaches a point exactly a mile from the dock where he'd begun, his hat falls into the river and begins floating back downstream with  the current.   The man ignores this and continues his steady rowing upstream at the same pace for an additional 10 minutes, at which time he decides he really should retrieve his hat after all, so he  instantly reverses direction, now rowing downstream (with the current) at his same rowing pace.     He catches up to his hat precisely at the moment when both he and the hat have arrived at their starting point adjacent to the dock.    The question is:   what is the speed of the river's current?

Comment by Dan Q on January 15, 2014 at 2:57pm

Morry, you can say that gold and cash encourage criminal behavior as well. But as I've pointed out with the Slashdot interview, Bitcoin seems to have been developed by people with such a lack of understanding of macroeconomics, and that makes its agenda very clear.

Comment by Morry Markovitz on January 15, 2014 at 1:32pm

RANDALL:

Thanks.   I just read that earlier today, and have seen several others.

No one knows who, precisely, created the Bitcoin phenomenon,  but it's flawed for many reasons.   Some suspect the INTENT was to  serve the interests of criminal endeavors, because that's what it already known to have done, and to be doing.  Its anonymity feature is ideal for large drug dealers, prostitution, terrorists, etc to conceal identities and perform transactions or launder money via Bitcoin.    It will self-destruct somewhere along the line, for the reason given in the article your link is connected to, or for other economic reasons of basic economics.

Comment by Randall Woodman on January 15, 2014 at 1:01pm

Bitcoin is an interesting thing to watch.  Is it a scam?  I don't think it was ever intended to be so by its creators.  However, there is a technical flaw to be concerned about.  Those of you following the bitcoin phenomenon may find this article of interest.

http://www.wallstreetdaily.com/2014/01/15/bitcoin/

 

Comment by Morry Markovitz on January 11, 2014 at 12:22pm

Oh, I rememberr now, by kingpin you mean the vague memory I'd had from a web video or  maybe on cable, about some guy who had zillions of dollars and no one knew who or where he was, but he was in fact trading drugs I believe. that "silk road" rings a bell now.    I don't know anything more about it than what I saw on either TV or some web video many months ago.    And I think "silk road" rings a bell as the name of his global drug dealing ring.

Comment by Morry Markovitz on January 11, 2014 at 12:17pm

To Daniel Quintiliani,

Thank you Dan.   I don't know nearly as much as you seem to about these things, and what you say makes perfect sense.   I recall reading about the recent arrest of a long-time drug pusher and "high level" pimp who was arrested after a lengthy investigation.   If memory serves, he was using Bitcoin's anonymity aspect to remain a step ahead of the law for some time.

I  wonder if your first and second comments should be connected -- ie, that the anonymity provided by Bitcoin would also serve the interests of child pornographers, not to mention terrorist groups.

Comment by Dan Q on January 10, 2014 at 10:41pm
Comment by Dan Q on January 10, 2014 at 10:38pm

Morry, I'm confused.

I sent you information on the virus, then you mentioned a kingpin, I asked you if the Silk Road person was the kingpin you were talking about.

Comment by Dan Q on January 10, 2014 at 10:16pm

Morry, the owner/owners of Silk Road, not Wikipedia.

Was that the person you were talking about, the kingpin you mentioned?

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