Anthropic was the first major AI lab to deploy its technology on classified U.S. military networks. Claude was put to work analyzing intelligence, planning operations and conducting cyberwarfare for the Pentagon. In July 2025, Anthropic signed a $200 million contract with the Department of War. Sorry, yes, the Department of WAR.

Satisfied as a customer, the Pentagon asked for more. Specifically, an “all lawful purposes” policy, which could include the freedom to use Claude for autonomous weapons and mass surveillance. Anthropic said no. Amodei had red lines: no autonomous weapons, no mass surveillance of American citizens. The Pentagon did not take this well. But the real oppressed constituency in the whole story, that nobody thinks about, got doubly betrayed: the shareholders.

Prof. Theo Vermaelen at INSEAD has spent years developing an ethical framework of the firm as a contract theory. The core argument is simple: managers operate on delegated authority from shareholders. In practice, shareholders have very few explicit rights. They come last in the waterfall after customers, creditors, often even employees. The implicit contract the manager agrees to with a shareholder is that managers will responsibly look after their interests. When managers deviate to pursue their own moral preferences, they are instead spending shareholder’s money purely on their own moral consumption, and are therefore behaving unethically.

Vermaelen frames this as the tension between “Alpha on Earth” (financial returns) and “Alpha in Heaven” (moral and reputational benefits that accrue to managers but may not translate to shareholder value). When they conflict, honoring the ethical obligation means committing to Alpha on Earth, unless shareholders explicitly opt in to Alpha in Heaven (foregoing Alpha on Earth). You can’t always get what you want, you can’t pursue both.

Consider the two decisions Amodei made.

First, he signed the $200 million contract. Anthropic, a Public Benefit Corporation founded by safety-minded refugees from OpenAI, agreed to provide its most advanced AI system to the world’s most powerful military for use in intelligence, operations planning and cyberwarfare. Whatever scope limitations were negotiated, the relationship was established. The money was real. This was Amodei choosing Alpha on Earth.

Second, he refused to expand the engagement into autonomous weapons and surveillance. This was Alpha in Heaven. The principled stand, the red line, the thing that plays well in press releases and recruiting pitches to idealistic engineers ahead of an expected IPO.

The problem is that these two decisions are mutually exclusive under the implicit contract framework, as they disregard the preferences of the only relevant stakeholders, namely Anthropic’s shareholders.

If shareholders invested expecting financial returns, then signing the contract was correct but refusing to expand was a violation. You already took the Pentagon’s money. You already deployed Claude for cyberwarfare. You chose this client. Now you’re leaving revenue on the table and torpedoing the relationship with the world’s deepest-pocketed buyer because of a personal moral preference about the next incremental use case. The line between “cyberwarfare” and “autonomous weapons” is not a bright line. It is a gradient, and you stepped onto it voluntarily.

If shareholders invested expecting safety, then refusing the expansion was correct but signing the original contract was the betrayal. If investors gave eye-watering valuations because they believed in responsible AI development, then deploying Claude on classified military networks for cyberwarfare was the violation, not the refusal to go further. Amodei could have avoided all this by simply never taking the call.

Either way, the shareholders are the most betrayed group in this whole story, and have had their implicit contracts absolutely destroyed by a CEO torn between money and moral consumption.

Contrast this to Sam Altman’s approach. OpenAI publicly supported Anthropic’s stance on AI safety, then immediately submitted a bid to replace Anthropic’s contract. Not only is this not hypocrisy, this is perfectly ethical behavior from the CEO of OpenAI because his shareholders know what they are getting. The implicit contract is respected. In fact, the board of OpenAI has gone to considerable trouble and expense to clarify precisely this Heaven v Earth trade-off.

Dario, on the other hand, wants to mold the world in his own image. He sells Heaven to his employees and social entourage but sells Earth to his investors and finds he cannot deliver both. The manager who believes his moral judgment should override his shareholders’ capital allocation is not a steward. He is a priest spending the congregation’s tithes on his own preferred charity.

Nobody in this story is thinking about Anthropic’s shareholders. The debate is framed entirely as a contest between national security hawks and safety advocates. These are legitimate positions. But the people who actually put up billions of dollars to fund this company are invisible. If they invested expecting returns, Dario just destroyed a $200 million relationship and invited a government blacklist. If they invested expecting safety, Dario already betrayed them when he signed the contract.

The real test of AI safety is not whether Dario Amodei can draw red lines for the Pentagon. It’s whether anyone thought to ask his shareholders where those lines should be.

I, for one, believe we should give a voice to the voiceless (the brave capitalists risking their estates in the pursuit of self-interested returns).

To anyone who understands the difference between stocks and flows, this may come as a surprising conclusion since pitting batteries against oil is like declaring that water bottles have made wells obsolete. The author performs a sleight of hand when he obscures where the energy that is supposed to power these Chinese batteries actually comes from.

Between 2014 and 2024, China essentially added the entire EU electricity fleet to its generating capacity with fossil fuel plants alone, mostly coal2. It is currently building at least 40 nuclear reactors.

The strategic question is simple: Can you build enough cheap, reliable electricity to power an electrified economy, regardless of the source?

Both China and the US, now with the brilliant Energy Secretary Chris Wright, answer this question by pressing literally all the buttons at the same time. Sure, solar and wind, but mostly gas, coal, nuclear and hydro.

Cheap energy, in whatever form, is the single most important foundation for any form of prosperity, let alone industrial competitiveness. China’s EV industry is unviable without a massive increase in baseload capacity at the same time, whether it’s to power the cars or to power the factories that make them in the first place. Europe’s energy strategy, in contrast, guarantees power grid failures and a skyrocketing cost of energy, the two horsemen of deindustrialization and impoverishment.

The Heidi piece correctly notes that Chinese battery costs are plummeting. What it omits is that this cost curve depends entirely on cheap Chinese electricity for manufacturing, electricity that costs one fifth of Switzerland’s precisely because China pursued the all-sources energy strategy that the US now advocates, under Trump. Subsidies are a confounding factor but a structural reason why a car-maker like BYD can offer products at competitive prices is that those prices embed Chinese coal-fired electricity for industrial users. When CATL builds battery gigafactories across Europe, they are exporting the products of cheap energy to markets that have made cheap energy illegal.

In Europe, and unfortunately also in Switzerland, the Davos set pursue electric vehicles while rejecting nuclear and increasing baseload capacity. We attempt to charge batteries with moral superiority and streamwater alone. Even if all you wanted was more electric buses, you cannot even electrify transport without the electricity to charge it.

In the same decade, China added 250 times more annual CO2 production than Switzerland has saved. Incidentally, we should be celebrating this, as it is a signal that China is accelerating pulling people out of poverty. The European misery maximalism mental prison, net zero, accelerates pushing people into it instead.

Energy is driven by science and by hard, natural laws. Both Trump, and China, understand this. They are simply creating more energy at the lowest price. This strategy will guarantee the long term prosperity of their industries and citizens. The opposite strategy, that we blindly follow in Europe and Switzerland, is a path to guaranteed impoverishment.

Criticising Trump might be popular in fashionable circles, where luxury beliefs such as “batteries vs oil” have social benefits to one’s status. Notwithstanding what the art gallery crowd might think about it, the facts, science and natural laws of energy show that Trump is, if only on this issue, completely correct. And if Europeans actually cared about the prosperity of their continent, they wouldn't be advocating for anti-science policies like net zero.

China's industrial strategy works because they build power plants. Ours fails because we won't. You can't charge batteries with sanctimony.

Would you save 1000 strangers if it meant sacrificing your own child?

Notes on Thomas Sowell’s “A Conflict of Visons”.

Flip the question if you want. Would you save your own child if it meant sacrificing 1000 strangers? In “Conflict of Visions”, Thomas Sowell summarizes a simple difference in worldview, from which a complex chain of consequences on views on society emerge, including on whether your family or the strangers survive.

Despite necessary caveats, it remains an important and remarkable phenomenon that how human nature is conceived at the outset is highly correlated with the whole conception of knowledge, morality, power, time, rationality, war, freedom, and law which defines a social vision.

Coleman Hughes1 summarizes both worldviews, Sowell’s “constrained vision” of mankind and his “unconstrained vision”:

The constrained vision [...] maintains that humans are inherently more flawed than perfectible, more ignorant than knowledgeable, and more prone to selfishness than altruism. Good institutions take the tragic facts of human nature as given and create incentive structures that, without requiring men and women to be saints or geniuses, still lead to socially desirable outcomes

Fundamentally, if you take people “as they are” and you accept that the trade-off of changing them is costlier than simply providing the right incentives for them to behave correctly, you focus on the systems that are necessary to produce good outcomes for everyone. Adam Smith, a moral philospher before he became an economist, would frame it as the need to organize systems that would produce the best possible moral outcomes at the lowest possible psychological cost. The hallmark of people with a “constrained” view is that they focus on trade-offs rather than solutions, and systems over outcomes.

The unconstrained vision, if humans are flawed, selfish, and ignorant, is not due to the unchangeable facts of our nature but to the way that our society happens to be arranged. By reforming our economic system, our education system, our laws, and other institutions, it is possible to change the social world in fundamental ways—including those aspects of it purportedly fixed by human nature.

On the other hand, if you believe people are “perfectible” and can be improved with enough effort, you focus on designing the best possible solution and implementing it regardless of the cost. William Godwin viewed the pursuit of moral perfection as the highest form of virtue, a view which would hold strangers in equal regard as one’s own family as a general utility-maximizer. The hallmark of people with an “unconstrained” view is they focus on solutions rather than trade-offs, and outcomes over systems.

Each view has huge ramifications on how people judge different questions, such as the original “sacrifice your child or a stranger”. If you view utility-maximizing as an imperative, saving 1000 people maximizes utility to far more people than saving one child, even if your own. You might want to avoid situations like it in the future, so you would come up with a complex bureaucracy of state that decides these sorts of problems are “bad” and computes a way to preempt terrorists from putting 1001 people in harm’s way. If you take people as they are, you recognize that self-interested agents will always pick the child and not worry too much about the outcome. To prevent future situations, you might focus on whether you can aggregate a preference for ‘non-1001 people sacrificing’ into a collection of laws and traditions that shun or police such behavior.

While believers in the unconstrained vision seek the special causes of war, poverty, and crime, believers in the constrained vision seek the special causes of peace, wealth, or a law-abiding society.

The collection and transmission of knowledge is another key distinction between each worldview. The constrained view holds that people have hyperlocal, incredibly specialized knowledge in one domain and, being flawed, cannot hope to have a total picture of the whole. But complex societies emerge because the interaction of pockets of knowledge leads to systems and rules that aggregate this information. Knowledge is, therefore, experience collected over time into tradition, where better rules ‘outcompete’ worse ones towards an equilibrium. Treating a flaw in the system as inevitable is not the same as accepting the status quo forever. Many original philosophers with a “constrained” view held anti-slavery positions and advocated for the liberation of colonies for self-government.

Knowledge as conceived in the constrained vision is predominantly experience -transmitted socially in largely inarticulate forms, from prices which indicate costs, scarcities, and preferences, to traditions which evolve from the day-to-day experiences of millions in each generation, winnowing out in Darwinian competition what works from what does not work.

An unconstrained viewholder would conversely prioritize the acquired knowledge of an “educated class” and view anyone not in this class as flawed - though redeemable with enough education. They might produce the reasonable-sounding take that historical tradition doesn’t contain information relevant to organizing the world in the future. Knowledge is derived through reason and handed down from a field of people who have acquired this reason. A flaw in the system is necessarily an output of ‘flawed reasoning’ which can be corrected with enough effort.

Implicit in the unconstrained vision is a profound inequality between the conclusions of “persons of narrow views” and those with “cultivated” minds. From this it follows that progress involves raising the level of the former to that of the latter.

Hopefully some interesting categorizations have already started to occur to you, as they certainly would while reading Sowell’s book. The French Revolution versus the American Revolution, for one, are a contrast between an emphasis on rationality versus acquired tradition respectively. Common Law is the practice of precedents while Napoleonic Law the imposition of rules.

The dichotomy is a simplification and people can be at any point on the spectrum between constrained and unconstrained, just as they can change their minds or switch gears. With this in mind, it’s still one of the clearest frameworks for getting to the crux of a moral argument.

• Constrained

  • View on people: As they are

  • Progress towards truth: Trade-offs

• Unconstrained

  • View on people: Perfectible

  • Progress towards truth: One-shots

Daniel Neilson has a great simplified series1 on macroeconomics that builds up a simple model for the world economy, relating participants such as ‘households’, ‘businesses’, ‘government’ and ‘rest of world’ to each other through value flows illustrated in a T-account balance sheet.

‘Sources’ refers to an inflow of value and ‘Uses’ an outflow. For each sector, every inflow must have a matching outflow. Similarly, every source must have a corresponding use in another sector.

To be clear, the two rules are:

1. total uses equal total sources for each sector, and

2. each entry appears as a use and a source, in equal amounts.

US Dollar System

In the below example, Households generate Income as a Source (paid by Businesses as a Use) and spend it on Consumption and Taxes. In the case of the US, they also spend it on Net Imports from abroad, where the corresponding contra flow is Net Exports. For the picture to balance, the ‘ROW’ picture must have a financial Use, in this case US Treasuries.

This idealized T-account model sort of illustrates the mechanism for US exorbitant privilege today. The simplification the model makes is dusted with Keynesian idealism about investment in the private sector. The theory of fiscal deficit spending is that public investment in the private sector will return more growth through feedback into the domestic economy.

The reality is a lot of this excess government spending is inflationary but not actually productive. Instead of going to the most efficient use in the private economy, it is more likely than not to get malinvested or just used for more random government spending. By effectively ‘skipping’ the private sector this fiscal deficit effectively drags on the long-term potential of the economy and hollows out business sectors.

Something like this reasoning is probably part of what is behind Trump’s issue with the US trade deficit.

Ethereum

I wonder if you could make a similar macroeconomic flow model for Ethereum:

1. A user derives some amount of utility from an application built on Ethereum

2. There is an additional enabling amount of ‘security’ provided by the validator, in that it removes counterparty risk for transaction settlement by virtue of being verifiable in a decentralized and cryptographically secure way

3. The application in question could be anything, for this example we use ‘tokenized asset swap’ as a stand-in for purchasing BlackRock’s BUIDL but it could also be a collateralized overnight repo transaction on an Ethereum money market like Morpho

4. The application settles for a small fee or spread, that the user invests in by dint of its utility and security

5. The user also has to pay a base fee to validate the transaction on the Ethereum protocol

6. Part of the gas fee is also a priority tip that the user may choose to pay to increase the speed of transaction inclusion by a validator running the Ethereum protocol

7. An incentive balancing mechanism present in Ethereum burns a portion of the base fees to reduce the supply of outstanding Ether

8. Validators secure their activities and are discouraged from manipulating transactions by posting collateral that can be ‘slashed’ in the event of malicious behavior or being offline, collateral that is held ‘in escrow’ by the Ethereum protocol

9. Ethereum closes the loop by ‘spending’ on issuance, or new Ether, that is used to compensate validators for their activities

In the long-term, a structurally balanced flow of value would have a vibrant ecosystem of many validators capable of sustaining themselves from priority fees alone. Today, quadrillions of dollars2 flow through Large Value Payment Systems recorded by the Bank for International Settlements, alone. In contrast, stablecoin transfer volumes over the last twelve months on Ethereum were in the $10tn range3.

As long as Ethereum represents some small percentage of global capital flows (<0.5% today), there is always more room to grow. The remainder of that growth of economic activity has to come from new sources of application utility, which depend on increasing the amount of security utility capable of safely ‘hosting’ these applications.

In some regard, it could be said that Ethereum is running a deficit in some account (probably application utility) and using issuance rewards to subsidize the growth of security utility. Unlike in the case of US trade deficits, the accrual of excess security utility is actually maximally productive. Greater levels of security utility accrue to application builders who use it to secure ever more complex applications or apps that ‘host’ or calculate asset balances with higher value-at-stake.

Or maybe I am trying to fit a round peg in a square hole and the macroeconomic modeling doesn’t work at all but it is fun to think about all the same.

When great institutions fail, we rush to find systemic causes. In "Meltdown," Duncan Mavin explains Credit Suisse's collapse through a grand theory of cultural contradiction:

1. The bank was a hybrid of conservative Swiss values and American risk-taking, which led to a clash of ideologies within the organization

2. The bank's leadership attracted a series of intense, incongruous individuals who whiplashed the bank in different directions, leaving behind a legacy of betrayal and scandal

3. The Swiss market was not large enough to sustain both Credit Suisse and its rival, UBS, leading to a constant struggle for dominance

This elegant theory nevertheless masks a messier truth. Credit Suisse wasn't destroyed by abstract trends, but it was made and unmade by distinctive and incongruous individuals in what could almost be described as a multi-decade relay race to maximize value extraction and scandal, with each runner taking what they could before passing the baton.

The irony of Credit Suisse's implosion is all the starker when contrasted with the legacy of its creator.

From the outset, Alfred Escher was a misfit with a chip on his shoulder that would stand out among the staid and buttoned up elites in Zurich. His father traveled the world and rebuilt the family fortune during the heyday of republican revolution in France and the US, exposing Alfred to these new ideas. Escher would go on to create the precursor bank to Credit Suisse, Schweizerische Kreditanstalt. The ultimate intent was certainly profit, as a capitalist free enterprise, but fundamentally he needed it to exist in order to support and finance his effort to modernize his country through investments in railway infrastructure.

Mavin lightly traces Credit Suisse's later troubles to Escher's dual character - New World risk taker and conservative Swiss banker. But this misses a crucial distinction. Escher took risks to build something lasting: railways, universities and institutions that could serve Switzerland for generations. The bank managers who followed him would take risks of a very different kind, as the story of Ernst Kuhrmeier illustrates.

Ernst Kuhrmeier managed a quiet CS branch in Chiasso, a small Swiss village just across the border from Italy. Kuhrmeier is famous for running an aggressive deposit raising spree among Italians fleeing rapacious tax drives from a sequence of unstable governments. He funded high savings rates with bizarre investments, like stakes in Piedmontese winemakers or Milanese salami manufacturers. When the Italian government offered a tax amnesty in 1976, the run on the bank left Credit Suisse with an $800m mark-to-market hole, $3.5bn today. The schemes had continued for years without lifting any eyebrows, likely largely on account of the substantial fees Kuhrmeier generated.

If Kuhrmeier's scandal represented individual greed at a local level, Rainier Gut would show how the same impulses could reshape the entire institution. Gut was an outsider investment banker who climbed the career ladder all the way from a trainee role. In 1971, CS recruited him to expand their foray into the industry as the board tried to navigate a strategic shift away from the sleepier business of private banking and into the exciting, high-risk world of corporate and transaction banking. With Board blessing to take ever greater risk, Gut led the bank into a joint venture with the U.S. investment bank First Boston. They would bind closer together after a series of eyewatering leveraged buyout losses at First Boston led to Credit Suisse essentially bailing it out through an acquisition (and briefly owning a mattress company in the process).

“In truth, the bank had become a monster, a high-octane global investment bank strapped onto a relatively small, secretive Swiss firm. It was an uneasy amalgam of two potentially explosive banking cultures that, over the remainder of its existence, just kept on blowing up.”

Gut would continue empire building in Switzerland, buying up Bank Leu, which had blown up for facilitating an insider trading scheme, and Swiss Volksbank, a large domestic retail bank. In 1996, he proposed to merge with UBS in a bid to consolidate Swiss banking, but a clumsy approach threw the deal off and UBS would wind up acquiring another competitor instead.

A common thread throughout the book is the lapse in internal controls that allow bad decisions to persist - either the short-term headline maximizing moves or outright insane corruption. What the organization really seemed to consistently select for were leaders with individual priorities and few scruples. The leadership of the bank became a revolving door of personalities with eager ambitions who were quick to be dismissed when things turned rough. At a certain point, one can only conclude that the responsibility lies with the Board for creating such an organization.

“Over and over, when the time came, the bank ditched its executives unceremoniously, no matter who they were. It made for whiplash-inducing changes of leadership and strategy. It also meant too many top executives just wanted to make their bonus quickly and didn’t care about building for the long term. The individual came first, the firm a distant second.”

By the time Tidjane Thiam took the helm, Credit Suisse had become a Frankenstein's monster of accumulated bad decisions. It feels like the end of the book, as we have spent the better part of 20 chapters escalating from one ridiculous scandal to another even more ridiculous crisis. Tidjane himself has to start his tenure with a few buried landmines, including fallout over the 2008 crisis, the insane tuna-bond bribing scandal in Mozambique, links to 1MDB and more. Only we then realize there are 10 more chapters of even more grotesque and bone-headed catastrophes waiting to happen.

Even Tidjane’s attempts at reform were eventually swallowed by the bank's scandal-prone culture, ending in a bizarre spying scandal that seemed to confirm every suspicion about the bank's ethical compass.

What makes Credit Suisse's story particularly damning is that this wasn't some unregulated frontier of finance - this was one of the world's most prestigious banks, operating under intense regulatory scrutiny. Yet it repeatedly found itself the accidental owner of random illiquid businesses after a bank run or losing billions of dollars in breathtakingly irresponsible trades, a pattern that would be almost comedic if it weren't so devastating to the institution's integrity and to the customers affected.

“All of these men led the bank through decades of overexpansion, expensive acquisitions, scandal after scandal. Many of them considered a merger with UBS on equal terms or better – a more favourable outcome than the end result – before calling it off. None of them fixed the bank’s broken business model and its discreditable culture. Who is to blame for Credit Suisse’s demise? The bank’s failure was a group effort.”

Credit Suisse's demise offers a stark lesson about institutional failure. It wasn't destroyed by the clash of Swiss and American banking cultures, nor by the inevitable pressures of global finance. Instead, it fell victim to a succession of leaders who treated a 167-year-old institution as their personal vehicle for wealth extraction. Each generation of management weakened the bank's immune system against misconduct, until scandal became not just frequent but inevitable.

By the end, Credit Suisse's collapse wasn't just predictable - it was the only possible conclusion to decades of privileging personal ambition over institutional integrity with no governance check in sight. The bank didn't die from external forces; it was hollowed out from within. The purpose of a system is what it does.

Further links:

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Europe is a source of vitality for the world

For European capitalism enjoyers like myself, the last 25 years or so have been a rude awakening. Europeans are becoming poorer1. European social democracies aren't the panacea we were told they were. As living standards slide compared to Switzerland, Singapore, or the US, the truth unfolds: our model of social democracy and bureaucratic statism simply doesn't work, and perhaps never did. Yet Europe isn't doomed if it rediscovers the principles that cemented its place in history as the cradle of the modern world.

Americans love to rah-rah their own civilization's achievements, while Europeans find it distasteful. But allow me to indulge. Our continent's brightest invented most of the essential elements of the modern world. From Roman legal codes to recent medical and technological innovations, Europeans are invariably at the center. Europe produced entrepreneurship, joint stock corporations, universal suffrage, emancipation from slavery, property rights and civil rights. Americans may love freedom, but Europeans invented it. In fact, technically Europeans invented America too. What defined this vital pursuit of love and life in the past, and how can we unleash it again?

The paradox of European decline

Europe's economic dominance skyrocketed with the Industrial Revolution. The real power that unleashed it was decentralized innovation. Key to its spread was entrepreneurial spirit, lack of government interference, and competition between neighboring states.

Parliament contributed to the favorable business climate by providing a stable government and passing laws that protected private property. Moreover, Britain was remarkable for the freedom it provided for private enterprise. It placed fewer restrictions on private entrepreneurs than any other European state.2

Today, the European Union and its member states are crushed by central planning that has squeezed the dynamism out of the European economy. This development seems strange as the EU's track record for deregulation and pro-business trade facilitation is clear. The Single Market has taken decades to create and is largely complete. The OECD's Product Market Regulation (PMR3) indicator measures the degree to which government policies promote or prevent competition - a higher score means a more difficult regulatory framework. Of the 5 top countries in the ranking, 4 are EU members.

However, recent bureaucratic anxiety about the Single Market has led to a regulatory frenzy. GDPR makes it difficult to launch digital businesses or compete with non-EU ones. The much-ridiculed AI Act was notable for the complete lack of businesses to regulate. In the ideological zeal to achieve the unachievable More Perfect Union, the EU regulatory machine is on productive overdrive4.

It's easy to overstate the EU's impact and breeze past the damage of member state governments that have ratcheted in size with no off-switch. Tax burdens in most EU countries now reach confiscatory levels. In France, an employer facing a €100k cost to employ will hand over less than half to the employee after taxes and social security. The average tax burden map for Europe shows a desolate picture5, where the highest earners are robbed of more than half the fruit of their labor in some cases. How is it possible that 100 can melt to 47 with so little to show for it? What incentive is there to produce in an economy like this?

The hard reality is that the social model at the center of this wealth extraction system is crumbling. Pension expenditures in aging countries like France, Italy, or Spain threaten to consume 12-15% of all GDP6 by 2070, assuming there's any Domestic Product left by then.

Universal healthcare systems, long a source of pride for Europeans, are similarly strained. Though often cited as 'free', the reality is in fact much simpler, though less infantile. Nothing is free, and universal healthcare is paid for by everyone. Basic economic reasoning leads to the obvious conclusion that subsidizing a service's price in a context of limited supply will lead to that service running out or being heavily rationed. Switzerland, by contrast, combines private insurance mandates with targeted subsidies to achieve better healthcare outcomes than France for less cost7.

Energy policy serves as a glaring example of how disconnected European elites are from the basic requirements of a functioning economy. The obsession with 'decarbonization' and 'net zero', while well-intentioned, borders on delusion and cruelty. If we were sincere about carbon reduction, nuclear power – a near-limitless and completely carbon-free energy source – would be the obvious choice. Instead, we're dragged into a Malthusian nightmare of 'degrowth'.

Energy consumption fuels life itself. Relying solely on solar panels and reducing energy use translates to supporting fewer people – a grim Chudjackian equation = billions must die. Windmill marxism doesn't just risk lives through lack of air conditioning in scorching summers. It's a slow, painful grind into oblivion as opportunities vanish and food sources evaporate into an atmosphere heated by Chinese coal plants and American natural gas. The pursuit of a green utopia, ironically, paves the way for a dystopian future where economic vitality is sacrificed on the altar of misguided environmental idealism, a self-fulfilling prophecy of decline and scarcity.

In a post-war drive to provide for all citizens after decades of strife and trouble, the European social model has followed through to its logical conclusion. Lee Kwan Yew, the former Prime Minister of Singapore, noted this as early as his late 1940s study visits to the United Kingdom in his memoirs:

What struck me most was the fairness of the system. The government was creating a society that would get everybody rich or poor, high or low or middle class on to one broad band of decent living standards. And this although there were still shortages. The rationing of food and clothes, introduced during the war, would continue until the Conservatives abolished it in the mid-1950s. It still applied to items like tea, sugar, sweets, chocolate, butter, meat, bacon and eggs. Utility clothes at reason-able prices were available, but needed coupons.

I was too young, too idealistic to realise that the cost to the government would be heavy; worse, that under such an egalitarian system each individual would be more interested in what he could get out of the common pool than in striving to do better for himself, which had been the driving force for progress throughout human evolution. That realisation had to wait until the 1960s, when I was in charge of the government of a tiny Singapore much poorer than Britain, and was confronted with the need to generate revenue and create wealth before I could even think, let alone talk, of redistributing it8.

Mortgaging the future is a false solution

To mask these troubles, national governments have turned almost universally to deficit spending. Deficit spending mortgages future growth to pay for present consumption. Sometimes this reaches absurd Kafkian parody, such as Spain's socialist regime subsidizing 18-year-olds with €400 worth of videogames and books on their voting-age birthday.

Most often, it's simply to feed the ever-ratcheting pyramid scheme of increasing state liabilities to retiring citizens or provide healthcare in overburdened hospitals. It's unfair to its beneficiaries, who subscribed to a social contract where they traded work for retirement security, only to find that the checks bounce or the benefits buy fewer groceries than imagined. It's patently obvious that the confidence game can't continue indefinitely with an ever-shrinking, childless, overtaxed working population feeding a growing aging population and a gargantuan state administrative machine.

Recent announcements from the European Commission only seem to reinforce the direction towards greater state intervention in the economy, a fundamentally aimless pursuit. Fittingly, the EC's 2025 Competitiveness Compass of central planning has a compass pointing to every cardinal direction at once. Tellingly, no private sector representatives were present at the announcement word salad to 'decarbonize competitively'.

Pedro Sanchez, Spain's electoral runner-up Prime Minister at the head of a fragile minority government, took time out from being pursued by endless corruption scandals to address the World Economic Forum earlier this year [YT]. He gaslit attendees into thinking Spain's recent spate of deficit-fueled growth was a product of the State's performance, rather than a mortgage on the future of Spain's young workers. To the few people who had the patience to watch the drone show, the contrast with Javier Milei's fiery defense of individual liberty could not have been starker [YT].

The EU-wide omniparty of placid center-left or center-right, often in tenuous alliance with extremist left-wing political cells, only has one song on their playlist: We just need One More Omnibus Law to create a Capital Markets Union, a Banking Union, a Potato Union. Higher income taxes, new exit taxes, a Green New Deal for Competitive Green Energy that will Green accelerate poverty in the Green continent to unimaginable Green levels. A glitch in the LSD trip from Brussels to Strasbourg has made the record skip the same beat over and over again for different things, stuck in the manic paralysis of a machine whose only incentive is to keep doing more of the same.

I find it extremely unlikely that any of the current coterie of political leaders would all of a sudden U-turn and ratchet down the size of the government after decades benefiting from nice offices. Donald Tusk had a chance to do something about the regulation he decries during his decades of public service. Ursula von der Leyen, the European Commission head, didn't even have to be elected into the position she's held since 2019 and has been in some form of national European government since at least 2005.

It is not fit that you should sit here any longer. You have sat here too long for any good you have been doing lately … In the name of God go.
–Oliver Cromwell

These are not solutions nor do they come from people that are fit for Europe, no matter how often the same talking heads repeat it over and over again, in a frenzied sort of European Juche. Europe does not need more windmill marxism. They are false solutions that change nothing.

Radical Decentralization

It's easy to be an armchair policy maker but I am going to do it anyway, because typing is free and there do not seem to have been substantive efforts to tackle the really hard issues yet.

Unlike many anti-EU chuds who reply guy on every post from an EU politician, I don't believe in dismantling the EU. In a multipolar geopolitical context, European confederation strikes me as the only political structure that can offer safety and stability for European citizens. But there's more than one way to skin a cat.

Europe’s salvation lies not in rejecting federalism but reimagining it. A “loose federation” of autonomous states—competing on taxes, embracing nuclear energy, and sunsetting bureaucracy—can restore prosperity. The alternative is a spiral of decline, where well-meaning regulations suffocate the very innovation Europe once pioneered. As Switzerland proves: small government, not big bureaucracy, is the true social model.

To close out, I offer A Modest Proposal: for Preventing the Governments of Europe from Being a Burden to Their Citizens or Country, and for Making Them Beneficial to the Publick (in three parts)

1. End the welfare overhang and eliminate VAT / endless taxes

The most pressing urgency is to shrink the size of the state and free the Europeans. On average in the EU, government expenditures chew up around 50% of GDP, with some critical situations such as France edging around 60%. The social model is broken and needs hard choices. However, as Switzerland once again shows, low-tax regimes can still provide perfectly good public services. This conundrum is confounding to statist accelerationists who would have people pay over half their livelihood for potholed roads and 6mo hospital waiting lists.

2. Generate infinite energy

Never listen to Net Zero people again, consign decarbonization to the compost bin where it belongs and eliminate competitiveness-destroying carbon taxes9. Europe is absolutely riddled with shale reserves. There is a breakeven point for extracting all of it, we just choose to sabotage our own prosperity so that we can allow Chinese manufacturing to outcompete our hard industries. Build nuclear power plants in every city. We need to be energy maxxing.

3. Sunset every commercial law and regulation

National and EU laws need referendum kill-switches, and new regulations should have an automatic expiration date unless explicitly renewed. Most importantly, the stifling tall poppy syndrome of OECD tax rate harmonization and endless uniformization needs to stop. The way vitality can come pouring back into the Old World is if its people are allowed to thrive and compete, including at the policy level. Dynamic competition between EU member states but also between national regions as policy labs is a key ingredient to the decentralization that undergirded Europe's competitiveness during the Industrial Revolution.

The Road Ahead

If this seems like a dramatic sea change, it's because it is. The further complicated matter is that the EU is not one entity but 27 individual national polities, each with their own set of anxieties and concerns. The US may have 50 states to make things complicated, but now imagine 27 sovereign countries with at least 1 language each, if not more. Some of these languages are even Hungarian.

But the Argentine case is the beacon of light that should guide us. Argentina miraculously climbed out of the hole of socialism out of sheer desperation, as many socialist regimes wind up doing to their citizens. Unwinding the debt on the future will involve a sharp shock of short-term pain. But as the Argentine experiment also shows, it's always darkest before the dawn.

Europe led the world before. With the right priorities, unconventional ideas and new people to execute it, it can do it again.

VLLC

It's interesting to think about, but commodity trading firms are actually a tremendous and misunderstood force for good in the world.

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Short-termism in a corporate context is when managers of a company overvalue meeting short-term quarterly targets over creating long-term value. It's a form of 'present bias', in lay terms (or 'hyperbolic discounting' for insufferable economists).

In 2005, Graham et al1. found that 75% of a sample of 400 CFOs would trade off long-term value for "earnings management". We can take the lazy way out and believe that managers are terrible and that capitalism is poisonous for society, or, instead, look at the incentives and see what people are programmed to want to do.

Quarterly earnings reports are an obligation for U.S. public companies since the Securities Exchange Act of 1934. This was one of many command economy instincts that FDR succumbed to. Like many such distortions, it usually comes from good intentions (preventing another 1929 crash). For more, Martin Daunton’s chapters on the era are highly recommended:

When the state coerces a sampling frequency of 4x a year for disclosures, it becomes immediately clear that managers would solve for them as KPIs over making decisions that are better for the business long-term.

Fewer disclosures are worse for transparency but may allow well-aligned managers to make conscious long-term bets. It would have been interesting to run the experiment of whether the free market would, of its own volition, self-regulate over time towards lowering the risk premium on companies that run their P&L and balance sheets on Dune instead of PDFs. Alas, we are deprived of that possibility, in favor of giant investor relations departments and greater disincentives for private companies to make themselves available to the public as investment opportunities.

An instructive example of a contrast, a long-term thinker, is the co-founder of the once-upon a time private company Glencore, the artist formerly known as Marc Rich + Co. Daniel Amman, a Swiss business journalist, published in 2010 a tell-all memoir of Marc Rich's insane story in "The King of Oil"2.

It is a riveting book that follows an utterly unimaginable life. Rich was, by all accounts, a 'Live Player'. ’s framework of "Live Player / Dead Player"3 explains:

A live player is a person or well-coordinated group of people that can do things differently from how they were approached in the past. That’s pretty rare. Most individuals and institutions are “dead players.” They operate off social scripts handed down from previous generations of experts, superiors and exceptional performers.

Starting his career in the buttoned-up commodity trading firm Philipps Brothers, Rich would push the envelope chasing deals with ambition and a voracious appetite for taking risk. The global oil business used to be controlled by an oligopoly, the "Seven Sisters" (Chevron, Esso, Gulf, Mobil, Texaco, BP, and Shell) who cornered production from insouciant producing countries, often with 1 or 2 year forward agreements at low prices. In 1969, very little oil worldwide traded 'spot'.

Rich's intuition for macro trends helped him understand, early on, that the demand for oil was quickly going to change. He developed, over many years, a web of relationships that allowed him to broker deals outside of the staid and extractive market controlled by the oil majors. By breaking into smaller oil producing regions and connecting buyers with suppliers directly, Rich and his partner Pincus Green blew the doors open and virtually single-handedly created the spot market for crude oil, just as the Six Day War precipitated the 1970s energy crisis and the world's first oil embargo.

The emergence of the spot market would prove to be a transformational development for many countries, particularly in Africa, who had been unable to enter the trade for many years.

The development of freer markets was particularly advantageous for emerging African nations that possessed oil reserves but were unable to extract the oil and bring it to market themselves

Amman's book details many fascinating geopolitical quandaries that Marc Rich was able to successfully navigate, entirely apolitically. From selling Iranian crude oil to Israel, refined Israeli byproducts to Francoist Spain, Cuban crude to Ecuador and the US and back, Marc Rich sat at the intersection of ideologies and focused his company on being of value to his customers. He would prove to be so adept, he found himself navigating even changes of political regime to polar opposite ideologues.

Rich was a mediator who brought together business partners who officially wanted nothing to do with one another. Iran and Israel. Arab states and South Africa. Marxists and capitalists. [...] It is a paradoxical situation that helps illustrate the fact that many of the aspects of the commodities trade are not as they appear. While the Left decries Rich as an exploiter of the third world, it was actually his company that helped ensure the financial survival of the Nicaraguan Sandinistas, who were idealized as 'freedom fighters' by many of the same left-learning people

Rich consciously viewed his business as fundamentally one driven by relationships, which are underpinned by trust. Trust is an important social lubricant and a precondition for a nation's prosperity and competitiveness. Put simply, when people can bank on the idea that other people will follow the rules, transaction costs, search costs and other frictions decline. Productivity follows. With greater productivity, there are more opportunities, prosperity and the tide lifts all boats. To gauge intuitively whether you live in a low vs high trust society, you could run a thought experiment to follow what would happen if you left your wallet on the sidewalk. Now imagine you wanted to sell Angolan crude oil to the United States.

Marc Rich cultivated loyalty and trust to such a high degree that players of virtually any stripe could count on him for a lifeline, even at the height of maximum risk and uncertainty. Where a developing African nation might show a U.S. diplomat the door, Rich might just be at the table, offering valuable assistance and financial support instead. The least satisfying story of Rich is of the unscrupulous vulture. The forbidden question really is, why does diplomacy fail where Marc Rich succeeds?

The spring of 1979 saw the beginning of one of the twentieth century's most astounding business partnerships. Shortly after the revolution, the anti-Semitic, anticapitalist, and anti-American regime of the Ayatollah Khomeini decided to do business with none other than the Jewish American businessman Marc Rich. […] I had asked him how he had managed to gain the trust of the new Khomeini regime, even though he had worked closely with the Shah's government. His laconic answer helps to explain why traders such as Rich exist in the first place, and why they are in such great demand. "We performed a service for them," Rich explains. "We bought the oil, we handled the transport, and we sold it. They couldn't do it themselves, so we were able to do it."

Developing trust is a very long-term strategy that requires constant investment and has little room for straying. Frequently, March Rich + Co traders would forego short-term profits or squeezing clients during a supply crunch in order to maintain credibility for future business.

He did not want to ask for the highest possible price, as that would have contradicted his long-term strategy. "To sell a product at the highest possible price to a client in need is like taking candy from a baby," one of Rich's experienced traders explained the company's philosophy. "We just wanted to make something on top of it all. We knew the customers would be grateful and would someday make it up to us. We were investing in the future. The highest price was not the most important factor. What was important was to build up a stable position and a stable business relationship"

Daniel Amman writes an instructive note, remarking on the contrast between the short-termist incentive of regulated capitalism and the trustworthy commodity trader:

His company is in many ways the antithesis of the fallen business elite that does not seem capable of looking past the next quarter. An era in which oil prices reached new records saw the reemergence of the myth of the commodities trader as a man who could make millions of dollars in seconds with a single telephone call. The reality is something entirely different. The commodities trade is a hard, capital-intensive business with tight margins. [...] Successful traders have to look far ahead into the future. "The key to success - and to real wealth - is long-term thinking," Rich says. Six months in South Africa in order to negotiate the purchase of a mine? Six months in Cuba in order to ensure a loan is paid back? Advance financing of a smelter that will not be completed for years to come? Such actions are nearly unthinkable for listed companies obsessed with quarterly returns.

This upfront investment is risky in terms of opportunity cost and upfront capital investment, but materializes in longer-term higher profits, as the marginal costs decrease with time. From a macro perspective, these investments are beneficial to everyone, as the intermediary that incurs them helps reduce informational asymmetries (what price should I sell my crude oil stock at?), transaction costs (how do I ship my crude oil stock across the Atlantic?) and search costs (who do I sell my crude oil stock to?).

To return to the original assertion: How are commodity trading firms a tremendous and misunderstood force for good in the world?

Marc Rich + Co turned crude oil from oligopolistic inventory into a lever for growth for many developing countries around the world. He mediated between partners in conflict with one another to meet their needs and keep the wheels of civilization turning for the better.

More fundamentally, through investing consciously in long-term games and building trust with people around the world, he helped lower transaction costs for energy, transferred knowledge and technology to places like Jamaica or Angola, and greased the engine of global growth. This engine drives productivity and lifts people out of poverty better than any force we have been able to discover to date.

Excerpt from "The King of Oil" by Daniel Amman, reproduced under fair use for commentary, just because it’s so relevant and also insane:

There was a great sense of nervousness in the Jamaican department of Marc Rich + Co. in Zug on February 10, 1989. The charismatic politician Michael Manley had just been elected prime minister in Kingston. His socialist People’s National Party had won in a landslide, and Rich’s people were prepared for the worst. “We were waiting for Manley’s people to call and tell us to stay in Switzerland and not to come back to Jamaica,” said one of the traders who had feared for his future then. In those days Michael Manley was a hero of the European Left. The former union functionary cultivated an anti-imperialist rhetoric directed against the United States, and he openly admired Communist Cuba as a role model for his nation. One of the main themes of the election was the question of how Jamaica should handle its natural resources. The Caribbean island is one of the world’s largest producers of bauxite, the ore from which aluminum is won. Manley was highly critical of Jamaica’s cooperation with Marc Rich.

Rich owed his reputation to the oil trade, but as we have seen, his company traded commodities from aluminum to zinc. Bauxite, aluminum oxide, and aluminum made up about a fourth of its income. Rich had been represented there for some years by his company Clarendon, which dealt directly with the Jamaican government. Manley’s People’s National Party had promised to stop all business with Rich and to closely reevaluate all existing government contracts with his company. Placards with photomontages were displayed at the party’s rallies depicting Marc Rich with blood on his hands. He was denounced as an archetypical exploiter and “foreign parasite.”

Manley’s first appearance in the Jamaican parliament turned out to be a huge disappointment for Rich’s critics. He had made a mistake concerning “the Marc Rich matter,” Manley admitted during the budget debate of March 1989. His government would “of course” honor Jamaica’s contracts. Rich’s critics around the world—particularly activists in the antiapartheid movement, a movement with which Manley was closely associated—were crestfallen. They had hoped that Manley would promptly turn his back on Rich. Why, they asked themselves, did Manley make such a staggering 180-degree turn?

The simplest answer to this question was given to me by a banker who worked for Rich. “Marc Rich had saved Jamaica. He had bailed it out.” At that time, in spring 1989, officials from the International Monetary Fund (IMF) were in Kingston to inspect the government’s bookkeeping, and further IMF credit was dependent on the results of the inspection. The Caribbean island was as reliant on foreign loans as an addict is on his drug of choice. Jamaica was deep in debt, its balance of payments was heavily in the red, and the Jamaican dollar was steadily losing value. In the spring of 1989 it looked as if Jamaica would flunk the inspectors’ test. Most significant, the country maintained lower currency reserves than the amounts stipulated by the IMF, which were intended to help Jamaica meet interest payments and obtain further loans. The new government was lacking $45 million in hard currency, and it needed to find it fast; otherwise the IMF would stop the flow of credit into the country. Jamaica would then find itself unable to meet its payments—a development that would have devastating effects for the Jamaican economy and people.

In the end, even socialist beggars can’t be choosers. Shortly after assuming office, Prime Minister Manley entered into talks with Clarendon’s managers. They explored the idea of Rich helping Jamaica with a loan—and discovered they were preaching to the converted. The IMF forbade countries from borrowing money to cover their currency reserves, so a normal loan was out of the question. Rich’s people, however, believed the problem could be solved with a bit of “creative accounting.” They offered to give Jamaica the desperately needed $45 million, but not as a loan. Instead, the money was intended as an advance payment on future aluminum oxide deliveries. Jamaica was saved; IMF officials accepted the government’s accounts and approved the new credit.

Critics maintain that Rich was thus essentially able to buy Manley and effectively take Jamaica hostage. However, the reality of the situation was that no bank, no international organization, and certainly no other company would have been prepared at that time to lend Jamaica a single cent. The country was over $4 billion in debt and was not even remotely creditworthy. “In any other company it would have been considered crazy to give Jamaica money under such circumstances,” a Rich employee who played an important role in the Jamaican negotiations told me, “but we never let down the people who do business with us. We sometimes even took on losses.” Of course, Rich’s people were not helping Jamaica out of a sense of charity: “For us every situation was an opportunity. We weren’t looking for fast money. We were looking for an ongoing relationship.”

Rich’s companies were willing to accept the smallest of profit margins—and ready to take an occasional temporary loss—in order to break into a market or enlarge their market share. The trade in commodities—and this is particularly true of aluminum—is a cyclical business. A one-or two-year period of high prices can be followed by longer periods of low prices. Those traders who are prepared to operate against the cycle, hold out during dry spells, and even invest during hard times can reap good profits when the prices again begin to rise. There is no better example of this strategy than Rich’s Jamaican aluminum trades.

Rich had already helped Jamaica out of trouble four years prior to the island’s troubles with the IMF. In 1985 aluminum prices had hit a low of $1,080 per metric ton—the lowest price in years. At the same time, oil prices had skyrocketed, making the complicated and energy-intensive production of aluminum even more expensive. The American aluminum producer Alcoa, which mainly made money as a supplier of aluminum to the aircraft and automobile industry, wanted to shut down its Jamaican production facilities for converting bauxite into aluminum oxide due to increasing production costs. It had become cheaper for Alcoa to purchase aluminum oxide from a third party.

The closing of the Alcoa facility was a catastrophe for the country, which lived mainly from tourism and bauxite. It was a golden opportunity for Rich, and his people immediately approached the prime minister, Edward Seaga. “We knew exactly what we wanted. We had a plan that covered everything from A to Z,” Rich’s employee explained. “We told the minister of industry, Hugh Hart, he should suggest to Alcoa that they lease the facility to the government instead of shutting it down. We knew Alcoa would agree, as even a closed facility would have cost them a lot of money. We simultaneously guaranteed Jamaica that we would continue to purchase their yields at fixed prices for a period of ten years. We told the government that we would take care of everything; all they had to do was maintain production.” Clarendon, the Marc Rich company, even supplied Jamaica with cheap oil.

In early 1986 Seaga’s government signed a ten-year contract with Clarendon for the Alcoa facility’s entire annual yield of 750,000 metric tons of aluminum oxide. It was risky for the company to commit itself to a long-term contract while prefinancing the facility’s yield in the midst of a crisis. Metals experts assumed that prices would continue to fall. It was a risk that might pay off only to those who could wait. Marc Rich was someone who knew how to wait.

Two years after Clarendon had signed the ten-year contract at fixed prices, the demand for aluminum began to increase rapidly, and prices began to skyrocket. In 1988 the price for a metric ton of aluminum was at $2,430—more than twice the price at the time of the contract. Rich made a fortune as a result of the simple fact that he had had the patience and the money to wait out the slump in the aluminum market. Jamaica also profited from the rise in prices because the price agreed with Rich was a mix of fixed prices, London Metals Exchange–linked prices, and barter of oil for alumina. Between 1980 and 1990 Rich advanced Jamaica’s government almost $320 million in order to secure annual yields of aluminum oxide. Critics bemoaned the exploitation of the nation’s natural resources by “assorted private individuals.” Rich’s employee in Kingston in those days is of a wholly different opinion: “The Jamaicans are eternally grateful to us,” he told me. “We gave them back their pride, the Alcoa facility was once more able to turn a profit, jobs were saved, and we made a really good deal.” 

You give a value and you receive a value.

Summary

• An interesting story about the Bank of Amsterdam, a 17th century stablecoin

• A two-period model for a ponzi confidence game

• Spare no expense or life to stop people from dollarizing

An Interesting Story and More Central Banker Trickery

An interesting BIS paper that escaped me from last year, a few months prior to the liquidity crisis in the US banking sector, discusses the story of the Bank of Amsterdam (1609-1820).

The Bank was a public deposit institution that issued a functional 'fiat' currency and conducted open market operations to balance the value of its scrip relative to underlying circulating coins in use in the market.

I credit the authors with acknowledging that the Bank of Amsterdam was functionally a stablecoin on the Dutch guilder:

The early Bank of Amsterdam resembled what we now know as a “stablecoin” – where account-based money is backed by assets of stable value. Indeed, customers would physically deposit metal coins with the Bank and account balances were recorded in a central ledger. These deposit balances could be transferred to other account holders without cost, or withdrawn for a small fee.

The Bank started in 1609 with a mandate to

‘check all agio (of the current money) and confusion of coin, and to be of use to all persons who are in need of any kind of coin in business’

'Agio' referred to the premium or discount to par that coins circulated with in the market. In this regard, it played the role of a clearinghouse for coin and worked to stabilize the value of its scrip through operations to change the supply of its monetary base of Bank guilders.

By 1683, the Bank had suspended redeemability of its deposits into coin. It allowed depositors to 'encumber' high quality metal 'trade' coins in exchange for a small interest rate, while retaining redeemability on precious metals. The Bank observed the circulation of 'local' coins closely and targeted a nominal 4-5% premium of Bank guilders.

The Bank's main lending activity was to the Dutch East India Company (VOC), supplying merchant banking capital to trading activities in overseas markets that were a source of precious metals that helped keep the balance sheet of the Bank humming.

When the Netherlands engaged in wars against England, the Bank stretched its balance sheet to lend to the VOC. By the late 18th century, wars had collapsed trading activity of the VOC and defaults on loans cascaded through to the bank. Metal depositors began to withdraw, eroding the quality of the balance sheet. Opaqueness kept the Bank going through a state of terminal insolvency, though skepticism began to reverberate through the market, pushing the agio, or premium, down to 0% or lower. This dynamic would be exacerbated by counterproductive issuance that the Bank engaged in to support the agio with market operations.

For a brief period the agio went 'negative', or 'depegged' in crypto language. The Bank failed to recapitalize throughout this period and would go as far as distributing profits to government authorities - making the situation worse. It would take occupation by Revolutionary French forces in 1795 to blow the lid open on just how insolvent the bank was as a result of non-performing VOC loans, culminating in its closure.

The paper explores portfolio choice games that merchants face when determining what currency to use, simplified through a first period of imperfect information and a second period when information about the state of the economy is revealed. Through these models, the power of a scrip's network effects is made clear - network effects have value in the context of portfolio choice for a merchant. In the absence of negative perception, network effects make it easy for participants to continue using Bank guilders on the basis that other merchants also use Bank guilders.

Incredibly, the Bank ran at negative equity for a substantial portion of its existence, presumably the 'imperfect information period' that the authors later model.

Though, one must assume that there is some information leakage, given the apparent relationship between the agio (public information) and the depth of the Bank's insolvency (private information).

The ultimate catalyst for the Bank's collapse was the combination of

1. cratered collapse in network effects or market perception

2. availability of alternatives that merchants could pick from in their portfolio

3. reaching the limit of redeemability as all the liquid assets exit the balance sheet, leaving only illiquid (and, in this case, nonperforming) loans

The authors conclude that the lack of fiscal backstops to the solvency of a central bank (or quasi central bank in the case of the Bank of Amsterdam) undermine and exacerbate situations of economic distress. These put pressure on the agio, as a proxy for 'network effects', or desirability to hold Bank guilders.

Reassuringly, one of the conclusions of the authors is that to maintain regimes of 'high trust', central banks need to follow @growing_daniel's exhortations and "do something well".

In practice, there is great uncertainty around where exactly the break point for trust in fiat money would be. Yet given the stakes for the economy as a whole, central banks and governments would do well to stay far clear of this critical threshold.

Worryingly, the relationship to 'fiscal support' is highlighted as a key bastion of ultimate central bank solvency. It's an interesting inversion of the commonly accepted wisdom that central banks function best when they are independent. The original Party line, as I remember it, is that fiscal strength derives from central bank money robustness, rather than the other way around.

Have we always been at war with Oceania? Or is central banking just a Klein bottle, where you have to look at it in four dimensions to understand that central banks and governments fold into themselves indistinguishably?

Our global game model formalises the conditions under which trust in fiat money can evaporate. It shows that there is a unique break point for trust in fiat money, which is more likely to be reached in a severe shock when central bank equity turns deeply negative and fiscal support is lacking. When uncertainty declines, the move from one regime (high trust) to another (breakdown of trust) becomes a step function, and the downfall can be swift and precipitous.

In the paper, the authors thankfully stress that fiscal support needs to come from a government with sound finances, i.e. more tax revenues than expenses. In situations where these hypothetical fiscals have finances that are not sound (there must be some examples, surely), in the absence of reductions in expenses, only one solution presents itself. In these conditions, fiscal support that comes from skinning an already embattled citizenry can hardly be imagined as a source of stability for the financial system.

To some degree, the two-period model presented is a very demure way of describing a ponzi, or a confidence game. In one period, with imperfect information, people have 'confidence' in the game. In the second period, when information is revealed, people rush to the exits. In academic terms:

When uncertainty declines, the move from one regime (high trust) to another (breakdown of trust) becomes a step function, and the downfall can be swift and precipitous.

The authors show that balance sheet 'elasticity' (the confidence game) is supportive for trade expansion and economic growth, and asserts that alternatives must be inferior.

In our model, the agio is the relative price of fiat money versus its alternative, ie coins. The modern day equivalent of the relative price of fiat money differs across countries. For small open and emerging economies, it would often be the US dollar, while new alternatives may arise eg due to “cryptoisation” or the emergence of stablecoins. A shift from fiat money would be visible in quantities and relative prices – especially exchange rates – which become a barometer for trust in fiat money. In line with our model predictions, episodes of dollarisation in past decades show that when this happens, it happens fast. Such a rapid move could be very damaging to the overall economy.

Yet few consumers of dollarization, or even cryptoization, in emerging markets would believe that their economies are worse off as a result of the dollarization. On the contrary, when the confidence game is exhausted and Bank guilders are worthless (cf. Lebanese Pound), dollarization is a lifeline to the economy, rather than a hindrance.

Another, more recent paper, "Is Money Essential? An Experimental Approach" plays games with test subjects to show the presence of money in conditions of monetary equilibrium supports economic expansion. Of course, the paper is written by central bankers, so the phrase actually references 'fiat money'. The real insight is actually that 'any money with network effects and a reasonably stable value in conditions of monetary equilibrium supports economic expansion'. So to the Lebanese exporter, dollars and even bitcoins are preferable to the Lebanese Pound, and merchants that accept both will benefit and produce more.

The paper therefore conceals a statist subtext in a fascinating story about 17th century stablecoins:

• Balance sheet 'elasticity' (fiat money) is a confidence game that makes number go up

• Sometimes, number go down

• This makes fiat money technically insolvent

• Technical insolvency is ok as long as people believe in it

• If people stop believing in it they might start using bitcoin

• This Is Bad because bitcoin does not employ any central bankers

• Therefore, the confidence game needs to be kept going as long as possible by being competently run

• If it is not competently run, the government needs to backstop with fiscal surplus

(subtext) continues ↓

• If the government is not competently run, it will not reduce expenses to raise surplus, but raise taxes

• This means generations of citizens will be in a spiraling Road to Serfdom and guaranteed poverty to keep the confidence game going

• But this is Okay because at least they will not be using bitcoin

New paper from Bank for International Settlements:

Novel risks, mitigants and uncertainties with permissionless distributed ledger technologies

h/t @Discobanker

Permissionless blockchains as a settlement layer present numerous opportunities for any participant. This includes financial market participants, should they choose to experiment with permissionless blockchains for settlement between themselves. This irks some people at the BIS for some reason, for whom the alternative of a 'Finternet' is much preferred. This paper adds to the library of future papers that can be circular-cited to justify onerous regulations and legal architecture intended to prevent the benefits of permissionless blockchains from materializing.

Categories of risks

Governance risk

• decentralized governance poses a challenge for regulated entities (what challenge that is, is an exercise left to the reader)

• off-chain governance is time-consuming (ok?)

51% attack risk

• Acknowledged as not likely as it would be counter to the incentive of the attacker

Legal and compliance risk

• mishmash of non-specific AML concerns: "Permissionless blockchains pseudonymize participants [complicating KYC, AML, CFT]" sourced in a circle as per... FATF which simply states by diktat that "cryptoassets can be used for illicit purposes"

• settlement finality is probabilistic and long

• lack of privacy of transactions (despite this being a clear mitigant to the first concern in this list)

• MEV may run afoul of consumer protection regulations as it is, again circular sourcing per Auer, "front-running" (it is not, as front-running needs prior knowledge of the activity that is being front-run)

Additional risks

• Liquidity risk: for e.g. the higher frequency of market feedback in stablecoins means they are more susceptible to capital flight than a regular bank. With an open mind, we could also see this as a feature to be designed for, rather than a bug to be stamped out

Mitigants proposed

• Business Continuity Planning

• Smart-contract based permissioning (whitelists, blacklists, ZK KYC and centralized control)

• Permissioning node infrastructure

• KYC L2s

• Technology to guarantee settlement finality

Risks of the mitigants

The idea of a neutral settlement layer is that it is unopinionated by design. If someone wants to build a KYC Layer 2 for the Western world, that's fine and very much possible. It does have the effect of boxing in many of the productivity benefits of neutral settlement layers to favor incumbent payment networks. That said, there is likely something of a Faustian bargain to be made with any infrastructure that seeks to integrate with a heavily regulated, existing economy, such as global capital markets.

The biggest risk the paper poses to the roadmap of Ethereum as a neutral settlement layer is the idea that permissioned nodes can mitigate operational and market risks for regulated entities at the Layer 1 level.

To begin with, 'permissioning' a set of validators does not change the fact that they are operating as part of a broader mesh of validators that run the network as a whole. Legal and compliance risks are not actually mitigated by this. Any mining or staking activity that takes place within a permissionless blockchain is undifferentiated technically from another. By participating in the consensus algorithm at all, it necessarily supports the network in validating any transaction.

Next, attempting to eliminate MEV through regulation by only allowing 'permissioned nodes' is doubly an error. Firstly, in mislabeling MEV as a form of 'market manipulation' that can be stamped out through enforcement. Secondly, in mistakenly considering that a validator plays an 'active' role in a consensus algorithm.

The accurate way of building a 'permissioned network' as described is through a specialized L2 or 'enterprise blockchain' if you will. Many of the risks described still do not disappear and many new risks materialize, notably around counterparty exposure.

Finally, the description of the alternative to permissioned nodes as 'nodes operated by criminals or other sanctioned parties' is simply unhinged. Clearly, this is not the only alternative. It is extremely unlikely that the solo staker running a NUC in their cupboard is participating in L1 consensus in order to somehow evade sanctions (as they would not be able to). Furthermore, there is no guarantee either that a permissioned node would not support business by criminals or other sanctioned parties.

Conclusion

It is standard Praxis for elements in the BIS with an agenda to stamp out permissionless blockchain technology to highlight and exaggerate risks, while proposing solutions that essentially reduce to 'continue using centralized systems'. Citations are self-referential and often lack explanatory power or insight. The biggest risk in this new contribution to a growing library of North Korean harvest reports from Basel is that it suggests we surrender the idea of permissionless blockchains, so that regulated entities can continue benefiting from delegated exorbitant privilege over the financial system.

Retail CBDCs are a hammer in search for a nail. A product that exactly 0 people have asked for. For all intents and purposes they effectively nationalize the bank deposit industry. This understandably rustles the jimmies of an existing sector that extracted rent from bank deposits with regulatory blessing until now. 

So we are now thundering into the era of more government intervention to fix a problem government intervention created. The ECB has a North Korean harvest report paper recommending ways to neuter it enough for existing public-private partnerships to not face a threat to ongoing monopolist extraction. 

The conclusion is that:

1. Banks exert monopoly pricing power on deposits

2. CBDC's will reduce this rent extraction and increase welfare in the steady state

3. However the transition period will be volatile as people abandon banks

4. So CBDC's should be made shittier to dampen demand throughout the transition, for e.g. 3000 EUR per capita limits, restrictions on foreign holdings, etc. 

The model shows that these policy choices are successful in making the transition less 'volatile'. But, hold up. How did we end up in a place where we are having banal, technocratic discussions about the degrees to which you could fuck over consumers through government intervention? 

The ECB assumes that nationalizing bank deposits shifts more welfare to the economy. If the government had exorbitant privilege over breakfast cereals they'd come to the same conclusion for Rice Krispies. But nobody asked for this cursed coin in the first place, so why exactly are we 'transitioning' anywhere to begin with? Are there alternative places to 'transition' towards that aren't so horrifying? What are the welfare benefits of ‘transitioning’ to more private sector solutions rather than less? 

Forbidden questions. We will never find out. 

We don't explore these possibilities in sponsored academic research. This is because the premise starts from the central bank wanting to increase its exorbitant privilege at all costs and regardless of its mandate. Therefore everything else must follow. All the models must demonstrate welfare improvements to greater central bank intervention in the economy. All North Korean harvests have been record breaking.

The baseline is the existing state of affairs, where banks extract rent from deposits. The missing piece is that this monopolist extraction is only possible because of regulatory barriers to entry to new entrants, i.e. government interference in the economy.

The forbidden alternative is to:

• Do less government intervention in the economy

• Allow more competition from the private sector

• Lower barriers to entry into the banking sector

The ECB, on the other hand, assumes ex-ante the solution is to:

• Do more government intervention

• Suck all the oxygen out of the free market

• Threaten to obliterate the monopolist financial sector by becoming the ultimate monopolist, but ultimately cuck the product so it doesn't actually end up threatening financial sector cronies

Their baseline for welfare improvement is incorrectly the status quo: an overregulated monopolist private sector. But the actual baseline for policy-making should be the alternative: 

Less regulation and more free market competition.

We are deprived of these nuances through the terrifying, faceless technocracy of banal academia in the service of a higher, horrifying, outcome. One more citation to add to a policy recommendation. One more presumption that science marches in the direction of progress.

The economists producing these models are not at fault individually. They are well-meaning nerds, just making models - it's what they know how to do. There is, however, a ruthless and deeply disturbing Nuremberg quality to the debate over what policy recommendations to adopt to prevent CBDCs from competing too well. 

It's a bit like having a polite academic debate over what type of wood chipper to pulverize squirrels in. One model suggests diamond tipped blades are more performant. Another that regular shredders do the job just as well. Unfortunately, nobody is halting the discussion and saying: Hold up, why the fuck are we not discussing whether it is the right decision to pulverize animals to begin with?

Airline killed 440 squirrels in `giant shredder' | The Independent | The Independent

I schizopoast with depressing regularity about how you can reliably find government intervention at the root of virtually every economic problem. Consecrating the nationalization of money is the Big One. Don't let the North Korean harvest reports distract you from policy decisions that will inflict certain poverty. 

Serbia is a mad, landlocked, place in the Balkans that has faced a string of demographic and economic calamities over the past few decades. In a new, multipolar, world, it also finds itself at an interesting strategic juncture. It’s seemingly forever stuck in a halfway home between friendship with Russia and China and edging closer to integration with its geographic neighbor and main trading partner, the European Union and its member countries.

In trade terms, Serbia is also a minnow, running a persistent current account deficit despite being in a middle-income development stage, which suggests structural issues such as under-investment and relatively low productivity. 

When its highly-educated population, with deep groundswell educational capabilities in IT and engineering, meets the prospect of competing in an underinvested and structurally low productivity marketplace for work, the result is inevitably demographic catastrophe. Indeed, highly productive people have historically opted to leave the country to pursue better opportunities abroad, creating a brain-drain.

Current account deficits also put exogenous pressure on the local currency, particularly one with a fixed exchange rate policy such as Serbia. With an increase in government expenditure or in foreign direct investment in a fixed exchange rate regime, the central bank has to accumulate foreign reserves to maintain its commitment. 

This is only made possible by continuously high levels of foreign direct investment and the presumption that capital mobility is unrestrained, if we follow a simplistic Mundell-Fleming model for Serbia as a small, open economy with effectively fixed-exchange rates.

The inflow of FDI speaks to the government’s success in liberalizing capital controls over time and creating conditions to attract investment into the country. However, to the extent these are based on wage arbitrage (you could create an IT development shop in Belgrade at a fraction of the cost relative to one in Berlin, for equivalent levels of competence and English language skills), this effect is likely to be short-lived.

Specifically, as more capital flows in to seek technical talent, the economy will eventually face labor shortages in fast-growth areas of the economy and FDI flows may reverse, putting pressure first on central bank reserves, as it sells them down to support the exchange rate, followed by the exchange rate itself.

In fact, under fixed exchange rate conditions, the Serbian economy has no monetary policy degrees of freedom at all to begin with, as open market operations in domestic currency would merely shift the allocation of balance sheet assets as capital leaves the country. Releasing the peg would threaten to devalue the dinar. While making it more competitive for export industries, as long as they lag in factor productivity, the benefits are likely not going to overcome the downsides to higher cost of imports and skyrocketing inflation.

Recently, a post went viral in legal circles in Serbia, which suggests that an interpretation of the law means Serbian businesses would be prohibited from transacting in cryptocurrencies of any kind1. This interpretation would effectively introduce new capital controls on an otherwise liberalized economy. If it’s given wings and precedent, it would result in a disastrous, short-sighted and self-defeating outcome. Both the economy and the government that survives thanks to it would be dealt huge blows.

A better alternative is minimalism of the Swiss-DLT variety. Stop treating cryptocurrencies like alien technology and just recognize them pragmatically in existing categories where such categories exist. Where they don’t, create simple commodity-like categories to recognize reality post-fact: people use Bitcoin to escape volatility and capital destruction, people use Ether to build complex transactions with no intermediary.

There are few country/growth combinations as compelling as Serbia + blockchain industry. Serbian presence is overweighted in crypto already, relative to the size of its economy, driven by flagship projects such as DefiSaver or Tenderly. These, in turn, create knock-on positive externalities, as they train developers who can then go out and launch their own companies and create new business opportunities. 

It’s an industry that allows companies to raise FDI at much lower cost and much higher speed than, for instance, raw material extraction, and certainly creates much longer-lasting positive factor-movements. In other words, a crypto developer may end up later on working in a FinTech company or in other IT sectors with opportunity. 

For a country that has lagged in financial technology development for so long, crypto represents a leapfrog opportunity not unlike mobile payments in Sub-Saharan Africa. However, until recently, the amount of capital raised for blockchain startups has not reflected the full potential of the sector in attracting investment into Serbia.

Central banks in general have a tendency to view cryptocurrencies with suspicion. This is understandable, as the prospect of ‘free banking’ effectively curtails the central bank’s ability to enact decisions, even bad ones. However, I believe that central banks should open to the idea that people will choose their own currency and businesses will use the easiest / cheapest means of payment to transact and that this is largely ok. When the central bank is forced to compete in the market for money, the strength of a government’s sovereign currency can only stand to improve. 

Foreign direct investment starts with capital mobility. Therefore the Serbian government needs to let go of a perceived ability to control flows of cryptocurrencies in businesses, particularly if it aims to stabilize the exchange rate of the dinar in the long-term.

If the Serbian National Bank wants FDI to continue and if it values the robustness of the Serbian Dinar, it just needs to let Serbian entrepreneurs transact with the world as they please.

The Economic Government of the World (Martin Daunton, 2023)

tldr: This book is a doorstop but it’s very good and it turns out ‘neoliberal international rules-based order’ is actually statism all the way down

The propaganda bromide that describes a typical, Western, understanding of modern history is that we live in a liberal, rules-based international order. Governments around the world cooperate through internationally-ratified forums such as the WTO or the UN to settle disputes and regulate trade between each other. Benevolent institutions such as the IMF or the BIS take care of the world economy, assisting with development and intervening to help economies in moments of distress. Central banks are independent, technocratic, stewards, conscious of the heavy burden they manage on behalf of their citizenry. The growing realization one comes to, working through this excellent book, in its dense doorstop glory, is that there is far more to the story after all.

In Daunton’s framing, economic evolution starts from an established order of some kind. It then experiences a sudden change which leads to an interregnum. During this period of relearning and upheaval, leaders try and work out what new order is possible, and vie for control throughout it. Eventually, things click into place and a new order is established. The regime transitions that the book describes are organized in rough thirds, I) 1933-1946 and the ratification of the Bretton Woods agreement (Ch. 1-9), II) 1946-1973 and its abandonment (Ch. 10-18), III) 1973-2023 or the ‘floating world’ and the regime transition we find ourselves in at the moment (Ch. 19-27).

Unusually, it focuses almost entirely on the diplomats, technocrats and economists who would forge our modern model of economic cooperation. Typically, historical anthologies would focus on broad, sweeping changes or focus on key political leaders and their decisions. This one chooses to focus on the nerds and the economics wonks in a period of history which saw incredible turmoil and two World Wars. This provides us with a unique perspective into the motivations and machinations of the wonks and ideologues fueling economic regime change during this period.

Roughly speaking the trajectory of the book can be traced across Mundell-Fleming’s Impossible Trinity triangle. The theory states that economies are constrained to picking at most 2 of 3 conditions: stable exchange rates, free capital flows or monetary autonomy. When an economy features a stable exchange rate, for e.g. pegged to gold, it has to make a choice. If the government keeps control over interest rates, it must also introduce capital controls. If the government keeps capital flows open, it must relinquish control over interest rate policy. In either scenario, attempting to pursue all three would result in capital flows in or out of the economy to follow interest rates, either way placing enormous pressure on the stability of the exchange rate.

The period 1923-2023 traces the following moves across Mundell-Fleming triangle:

There is an insightful augmentation that’s possible with Dani Rodrik’s political economy triangle in How Far Will International Economic Integration Go? (Dani Rodrik, Journal of Economic Perspectives—Volume 14, Number 1—Winter 2000—Pages 177–186).

However, even in Rodrik's mind, the international order is composed of well-meaning technocrat mandarins constraining governments for the benefit of the free market.

“The institutions were indeed based in Washington, with a real risk that they would pursue the interests of the United States. [...], the new institutions have been portrayed by the political scientists John Ruggie as 'embedded liberalism' and by Dani Rodrik as 'shallow multilateralism'. Their argument is that the principles of open, multilateral markets were incorporated into formal institutions and rules to prevent a return to beggar-my-neighbour policies, while ensuring that the pursuit of international trade was combined with a concern for domestic welfare. This account is accurate as far as it goes. The multilateralism was unlike that of the 1930s, when economic nationalism was in the ascendant, and that of the later twentieth century when the pursuit of multilateralism went much further. It is also incomplete. A particular form of liberalism was being embedded. It did not follow the vision of the 'Genevan liberals' of the 1930s such as Hayek and Robbins, who wanted formal rules with federal or supranational bodies that limited the nation state and enabled the market. Instead, the new institutions were intergovernmental and gave more weight to the nation state and domestic welfare. The balance between internationalism and domestic welfare in the new multilateral institutions also prioritized the needs of the leading capitalist economies, and they came to define the 'West'.”

The big upset at the heart of the book is that the placid vision of a competent, rules-based international order is something of a mirage. Over the course of the past 100 years, our world economic order has rolled a lumbering policy triangle painfully along its sides. Each hard thud along the way was pushed by a new generation of technocrat hammers in search of a nail. Although many different economic regimes were tested in the last century, the common denominator among the winning sides have invariably actually been quite statist. This means that most of the push has been in the direction of increasing state control, rather than the creation of extra-national rules enforcers who could limit the power of the state.

This is actually in sharp contrast to the vision for the international order that Friedrich Hayek wanted to pursue, along with their liberal colleagues from the Mont Pelerin Society. It is one of the many ideological tensions that battle for supremacy in the forums of conferences and international agreements. This group of so-called “Geneva liberals” didn’t really end up having their way as much as people think. At the heart of every international rules-based order institution is in fact a statist apparatus at the mercy of one government or another.

There is a palpable difference between the common perception that capitalism is a free market, and the mundane self-serving drudgery of bureaucratic reality built between government wonks, one international summit at a time. The “Geneva liberal” vision would likely more closely align with the earlier state of affairs prior to the Great War, with a fixed exchange rate and capital mobility essentially constraining the scope of government intervention into monetary policy/ The ‘golden straitjacket’ as a feature (preventing malicious government interventions into the market for money), rather than a bug.

Franklin Delano Roosevelt is another example of this difference between perception and reality. The common image (at least in my educational experience) of the New Deal as the saving grace to the world economy stands in stark contrast to the fickle, authoritarian and often clueless statist portrayed through verbatim quotes and retellings by Daunton. FDR torpedoed international summits, made his cabinet members fight against each other and, crucially, unwound the gold standard back in 1933 with the swift sledgehammer of an authoritarian (though not before vacillating a number of times before committing).

“Roosevelt removed opponents of his monetary policy at the Treasury and the Federal Reserve and pressed ahead with an aggressive policy of devaluation. In August 1933, Warren reported to the Treasury that 'I believe there is only one way to end the depression, and that is an adequate devaluation of the dollar. Other things may help, but they cannot succeed without a reduction in the gold value of the dollar.' […] Roosevelt worried about an agrarian revolt if he did not increase prices. He decided to act.

On 29 August 1933, Executive Order 6261 authorized the Treasury to buy new minted gold for sale to foreigners at 'the best price obtainable in the free gold markets of the world'. The intention was to increase the price of gold and hence raise domestic prices but the limited amount of gold available for purchase within the United States would not affect the world price of gold, the exchange rate of the dollar, or the price of commodities. After a couple of months, it was clear that the plan was not working, and Roosevelt decided to take drastic action by setting the price of gold. In his 'fireside chat' of 22 October 1933, he announced his new gold policy:

‘Our dollar is now altogether too greatly influenced by the accidents of international trade, by the internal policies of other Nations and by political disturbance in other continents. Therefore the United States must take firmly in its own hands the control of the gold value of our dollar. This is necessary in order to prevent dollar disturbances from swinging us away from our ultimate goal, namely, the continued recovery of our commodity prices.’”

Roosevelt dealt with the implementation with capricious frivolity and had to circumvent laws and violate constitutional constraints. When exploring a legal challenge to a law that allowed commercial contracts to be honored in gold, FDR waited for the outcome with the petulant exasperation of a tyrant: “If the policy of the government,… is to be irrevocably fixed by decisions of the Supreme Court ... the people would have ceased to be their own rulers”.

Ultimately, however:

“In January 1934, the Gold Reserve Act gave Roosevelt the power to fix the dollar at between so and 60 per cent of the current value of $20.67 for an ounce of gold. He immediately set the new price of gold at $35, which was to be maintained by an Exchange Stabilization Fund on the British model. The dollar was devalued to 59.06 per cent of its pre-1933 value, and stayed at the same gold price until 1971”.

In “Two Treatises of Government”, John Locke describes that the natural state of man is a “state of perfect freedom to order their actions, and dispose of their possessions and persons, as they think fit, within the bounds of the law of nature, without asking leave, or depending upon the will of any other man”. This is to say that governments only emerge as a result of citizens, rather than the other way around. The defining feature of statism is the implicit assumption that the reverse is true.

Keynesian orthodoxy–the ideological victory of Keynes and the behavioral quirks of objectively a brilliant mind are also described in deep detail–is thus not only not a framework for an unregulated free market in the slightest, but is instead the coercive subservience of interventions into the business cycle to the political needs of the state. This is often misconstrued as the government acting to soften the blow of the market to serve the wellbeing of capitalist enterprise and its citizens. In reality, the picture throughout the 20th century has been one form of neighbor beggaring after another, with the victors gaining greater management rights over interventions in the world economy.

When they’re not busy dissolving into a vat of moral nihilism, Jacobin writers would have you believe that we are currently in an unregulated neoliberal-capitalist feeding frenzy of a system at the expense of national self-determination. But the cunning Marxist sleight of hand here is conflating ordinary, hard-working people with their agents, or rulers. Democracy is not, in fact, the same as a government's autonomy over the economy. Daunton's deeply researched autopsy of 100 years of economic government show the extent to which the international order has in fact deferred to select national interests. International order impinges on self-determination to the extent that one group of governments interferes with the narrow interests of another in an international forum. But at no point is the wellbeing of the individual citizen ever seriously taken as a barometer for measuring the merit of an idea. Often, ideological differences emerge as the battleground for one type of statism over another.

The conclusion ends on something of an optimistic note with nebulous belief that the emergence of a more multilateral system in the near future will prove to offer more stable equilibria than the past 100 years. Cryptocurrencies are disappointingly given a cursory glance and discarded, which feels like a missed opportunity as they could help reset the geopolitical order to precisely this aim. Omid Malekan, in “Rearchitecting Trust”, goes through a similar exploration of economic history but from the angle of trust assumptions. His conclusion is that the world will indeed drift towards greater situations of political tension between geopolitical blocks. But crucially, you can still trust your peers if you have a way to transact with them in a credibly neutral way.

P.S.: An incredible anecdote about the murky WWII history of the Bank for International Settlements:

“The future of the Bank for International Settlements was questioned at Bretton Woods. Although board meetings were suspended at the outbreak of war, the BIS continued to operate from Switzerland, where it claimed to follow a policy of neutrality under the presidency of the American banker Thomas McKittrick. The wartime activities of McKittrick and the BIS were, in fact, deeply contentious. McKittrick was friendly with Emil Puhl, the vice-president of the Reichsbank and a director of the BIS who visited Basel during the war. Puhl was closely involved with the BIS in recycling Nazi gold that was acquired from occupied countries and from the victims of the Holocaust to buy raw materials and to assist allies of the Third Reich. The Third Reich was granted the holdings of the occupied countries at the BIS, which gave the Axis powers 67.4 per cent of the bank's shares and about 80 per cent of the BIS's income came from interest on German investments, It is true that McKittrick did supply information gleaned from Puhl to the American intelligence service.

Equally, Per Jacobsson visited Puhl at the Reichsbank in 1942 and noted that 'the future of the BIS depends on Puhl's possibilities of holding the fort in Berlin'. Jacobsson returned to Berlin to discuss the Keynes and White plans in May 1943. The wartime record of the BIS was at the very least questionable. At Bretton Woods, the Norwegian delegation proposed that the BIS be abolished 'at the earliest possible moment'. The resolution was supported by Morgenthau and White in their campaign against international bankers, and White proposed that no country could join the IMF unless its central bank agreed to take steps to liquidate the BIS. Some delegates felt that the issue was not a matter for the conference, but the resolution passed as a compromise between immediate liquidation and continuation as Keynes saw, 'the earliest possible moment' might be some time off. Indeed, Wall Street bankers and the Federal Reserve Bank of New York doubted the wisdom of abolishing an institution that could support monetary and financial orthodoxy.

Similarly, European central bankers welcomed it as a forum for central bank co-operation in the difficult post-war period. Although Hugh Dalton, Chancellor of the Exchequer in the post-war Labour government, thought the BIS 'smells of the Schacht-Norman period' and should be liquidated, the British Treasury was aware of the technical complexities in winding it up and felt there were more pressing issues [...].

Pressure for liquidation subsided, and in November 1946 the new president of the BIS–the governor of the National Bank of Belgium–established a working arrangement with the IBRD. Jacobsson's annual report to the BIS explained the need for international financial organizations and claimed that the BIS was the only body to cover the whole of Europe. Attitudes at the US Treasury also shifted. The European central bankers resumed their regular monthly meetings in December 1946, and it became the agent for post-war schemes for European recovery.

Astonishingly, in 1947 a report by the Federal Reserve Bank of New York found no evidence of the BIS's conniving with Germany during the war. In 1960, the Federal Reserve rejoined the organization and the BIS played a leading role arguably more important than the IMF's in maintaining the international monetary system (see chapters 16, 18 and 21). Despite its morally reprehensible wartime record the BIS was too useful to abolish.”

Cocoa futures have been on an absolute tear this year, as inordinately rainy weather has punished cocoa crops and decimated harvests. The Bloomberg [Archive.ph] story provides a window into the pressures farmers face living under the resource curse, compounded by government intervention. In the case of Ghana and Ivory Coast, for example, farmers are not going to be benefiting from the increase in prices as forward agreements have been locked 12 months in advance by the government on their behalf. This mismatch of price and supply leaves most of the riches in the hands of intermediaries and commodity traders, with no real recourse for increasing the farmer take beyond reneging on commercial agreements.

The story of government intervention obscures the other, underlying, story of the resource curse in Ghana and how it is spreading unabated throughout the country. Ghana has the (mis)fortune of being blessed with many valuable natural resources beyond Cocoa Beans, including Gold and Rubber. Farmers are then incentivized to shift their production factors to the nearest available resource that does not face the constraints of the Cocoa Bean market, further exacerbating the supply crunch in Cocoa Bean deliveries. In this case, know-how and expertise in Cocoa Bean farming is lost to first-time Rubber plantations - a resource curse hurting an already cursed resource.

In “Escaping the Resource Curse and the Dutch Disease?”, Erling Røed Larsen (2006) explains that resource-rich countries can face one or both of two macroeconomic evolutions following the discovery or exploitation of a new vein of natural resources. 

The Resource Curse describes, more broadly, the phenomenon whereby resource-rich countries tend to grow more slowly. Dutch Disease is a more specific term to the phenomenon whereby non-resource sectors of the economy contract rapidly to shift into the resource sectors of the economy. These terms describe combinations of two drivers, the factor movement effect and the spending effect. 

The factor movement effect occurs when resource extraction and related industries experience attractive returns to capital, and therefore bring capital and labor to it at the expense of other sectors of the economy. Why would you mill grain or weave carpets when you could chop Cocoa Beans off a tree and earn more instead? The danger with factor movement is that intangible value in the shrinking sectors atrophy and may be lost forever. 

The spending effect relates more closely to the aggregate inflow of new revenues into the economy from the sale of commodities. This occurs when foreign currency inflows from selling resources are converted into domestic currency and spent in the economy, driving up domestic currencies, increasing prices and making exports uncompetitive. For a time, Luanda in Angola claimed the top spot of most expensive cities in the world in the 2010s for a similar reason, combined with decimated local production after a protracted Civil War, forcing most of the consumption to be through imports.

As an interesting counterexample of another African resource-rich economy, Botswana, has grown at an incredible clip, albeit in a completely different region and with slightly different export sectors (Diamonds in Botswana vs Gold and Cocoa Beans in Ghana). Botswana still seems to have some variety of Dutch Disease, in the sense that the overwhelming proportion of export revenues are generated through essentially diamond sales.

However, overall fiscal discipline and aggressive savings of resource revenues have prevented the typical increase in rent-seeking that many resource-rich countries fall prey to, and allowed broader economic expansion.

Another example of an economy that avoided this pitfall is Norway. In "Escaping the Resource Curse and the Dutch Disease?", Larsen explains the comparative success of Norway relative to its neighbors despite the siren temptation of oil revenues. It’s still clearly an oil-dominated country but its growth and prosperity outstripped its neighbors (without oil) despite starting from a less favorable position.

Perhaps one of the most important factors for why Norway’s economy has not fallen prey to the resource curse is centralized wage formation. Norway has a system of collective bargaining, similar to Switzerland, where industry unions and employer guilds or associations (essentially employer unions) bargain with each other on the desired level of wages for a given industry. These types of negotiations typically find ways to consider broader welfare objectives for all parties and are heavily consensus driven. Neither Norway nor Switzerland have any meaningful tradition of labor strikes or labor disruption. Crucially, the government is categorically not involved in wage formation processes and neither country has a government-regulated minimum wage1.

The other major factor is that the spending effect is mitigated by all of the oil revenues essentially being sucked up into a sponge. In Norway’s case, the oil industry is entirely nationalized, and all revenues accrue to the government. However, incredibly, these revenues are all directed to a sovereign wealth fund so there is no corresponding boom in aggregate demand from increased spending as a result. Whatever windfalls do accrue to the government are deployed in fiscally disciplined policies such as debt paydown and not into new increases in aggregate demand in domestic currency. Finally, the fund has a commitment device wherein the government is only allowed to spend the returns, not the principal, of the fund. 

There are other reasons why positive spillovers from oil extraction are higher in Norway than with other resource extraction industries in other countries. The process is technically advanced and requires substantial know-how in engineering and research to function at optimal and profitable levels, so a lot of positive spillover is created in the rest of the economy to offset the decline in spillover from smaller manufacturing sectors.

Despite the preponderance of the government in the spending factor, what is surprising is how little it actually ends up featuring. Interestingly, Norway escapes the resource curse because the government either does not get involved (collective bargaining) or when it does, it limits its involvement as much as possible (sovereign wealth fund).

Botswana appears to be mimicking many of the same choices, with its own sovereign wealth fund (Pula Fund) for diamond revenues. However, it also shows the contra example to governance relative to Norway’s fund, as the Pula Fund does not have clear restrictions on how the government could use it. So, reliably, the government ended up using it.

To come back to Ghana, some solutions present themselves from looking at Norway’s example. The difficulty is that Cocoa Bean processing and grinding does not have the same level of spillover effects as high-tech oil extraction. There is not much benefit to Ghana’s economy of adding higher-order resource processing capabilities when these capabilities are commodified activities. It is very unlikely they would be able to successfully compete on price with existing capacity in other countries. Conceivably, they could try and cartelize exports and force buyers to purchase only processed cacao nibs or chocolate mass but would likely push Cocoa Bean cultivation into other geographies instead. What is clear is that the living income differential (LDI) and government collective bargaining has not only not helped farmers, but in these market conditions actively hurt them. Promoting collective bargaining by farmer collectives rather than by single government mouthpieces would be a start.

The role of the government so far has been highly deleterious to Cocoa Bean farmers, as they have been consistently unable to maintain their promise of guaranteeing a living wage by centralizing bargaining with international buyers. Compounding the effect of inefficiency is the impact of crass corruption and weak institutions, which allows the conversion of export revenues into very specific domestic spending. Visibly, very little of this domestic spending is happening out of the farmer’s pockets.

As with most situations, it turns out that not involving the government at all leads to positive outcomes (centralized wage bargaining). And where it does get involved, the most positive outcome occurs when the government is involved the least (keep resource revenues abroad and commit an inability to touch the fund).

Stablecoins can be payment rails as well as stores of value–and more. However, emerging regulation is mostly focused on treating them like gift cards. Well-run stablecoins will continue to grow regardless, so we can only hope for the emergence of rational, data-driven regulation that focuses on user benefits rather than incumbent profits.

Unlike current bank products, stablecoins can be two things at once to benefit users

In their most elementary form, stablecoins are a type of eurodollar deposit. Someone, somewhere in the world needs to hold dollars and stablecoins offer a way to access those dollars. All stablecoins are a type of ‘narrow-bank’, a simple bank balance sheet structure that does only one thing – hold dollars in sight deposits or checking accounts.

Stablecoins can do better than typical sight deposits with respect to minimizing the risk of not having enough cash on hand for people to redeem their deposits. This is because the behavioral pattern of every stablecoin on a public blockchain can be tracked in real-time. This means the effective maturity of those deposits can be estimated with far more data than banks can, and can give more confidence to the degree of liquidity risk that a stablecoin balance sheet can take.

Given that stablecoins can invest in money market funds or, theoretically, central bank deposits, at low risk to the holders, there is no good reason that the users of a stablecoin couldn’t benefit from sharing in the rewards too. USDM from Mountain Protocol, for example, is a fiat-backed stablecoin fully regulated in Bermuda that offers its (non-US) holders close to the federal funds rate just by holding. Each token maintains its redemptive claim to $1 by rebasing the number of tokens a user holds, rather than its value.

By virtue of trading on a public blockchain, stablecoins can offer clear and instant settlement for transfers anywhere in the world, compared to the antiquated and byzantine ledger clearing exercise banks must regularly do to settle their wires (as in the original wire transfers that were executed over telegraph by Western Union in the 19th century).

To be clear, there are many improvements left to make in the space, but the path is clearly promising to enough people that stablecoins have become a +$100bn market cap category. In aggregate, stablecoins would be one of the world’s top 20 banks – on sight deposits alone! – and represent at least a significant single digit percentage of the US treasury market, even as incumbents whine to the government and push them out of legitimate funding markets.

Thus stablecoins, in combination with public blockchains, offer a distinctive and novel innovation in financial services. They offer services that reward users rather than extract solely for shareholders. Stablecoins are a new type of thing and should be treated as such.

However, regulation is focused on treating them as an old thing instead

Stablecoins are facing a difficult time being understood properly by regulators. This subsector of our industry is unfortunately overshadowed by the fraudulent Terra scheme, whose founder prevaricated on the risks of running an insolvent-by-design stablecoin and wiped out thousands of user deposits.

As ‘narrow-banks’ they do not have a favorable path ahead of them either. The Federal Reserve in the US has been averse to narrow-banks in the past for ‘being too safe’ and ‘threatening monetary policy transmission’. Both statements are obviously false, bewildering and proof that central bank independence is largely a myth (too big to fail → regulatory capture of the executive → lean on central banks to call the safest possible type of bank unsafe).

Most new attempts at legislative enshrinement of fiat-backed stablecoins treat them as payment rails, similar to a prepaid card. MiCA relies explicitly on e-money regulation which was originally devised for early internet payment methods and inherits its prohibition on granting interest to holders. This benefits some fiat-backed stablecoin issuers, such as Circle or Tether, who can reap the gargantuan rewards of risk-free investments for themselves, while artificially manipulating the competitive environment for new players who can otherwise compete by offering users more value. The UK looks like it is going in a similar direction, unless clearer heads prevail.

Rather than try and make a new shape for a peg, regulators the world over are insisting on finding ways to shove a round block into a square hole or exclude it altogether.

Well-run stablecoins will continue to grow so regulation should follow

The interesting thing about stablecoin mobility is that it isn’t really restricted to a specific jurisdiction. Regulators should be mindful of the efforts they put in to try and essentially impose soft capital controls on a system that can’t physically be fully controlled other than by attacking validators for public blockchains. Imagine trying to turn off the internet just so you can censor a tweet (or stop a stablecoin).

Suppose a fiat-backed stablecoin is enshrined in law as the 'Only Correct Choice’, paying no interest to users. They might have more facilities for integrating in a specific country, for e.g. offramps to bank accounts and similar facilities. But experience in dollarized economies such as Lebanon shows that people in conditions of deep institutional mistrust don’t actually hold their dollars in banks – out of a misapprehension about the local banks. They simply transact in US dollar cash with each other for goods and services, off the purview of the central bank and financial regulators in Lebanon. The same may well occur with fiat-backed competitors, who may shy away from greater transparency to prevent regulatory attacks. But if people choose to use them to transact amongst themselves, there is little that a regulator could feasibly do.

The pragmatic approach and the one that solves for the greatest amount of consumer welfare and positive prudential regulatory outcomes, is to recognize what stablecoins look like right now, and frame regulation around that instead. In fairness, lawmakers do seem to know how to get this right in some instances. For example, EU legislators recognize that crypto whitepapers play the role of prospectuses and MiCA recognizes them as such, adding new and arguably positive legal liability elements to explicit claims made in a whitepaper for example.

Decentralized or hybrid crypto/fiat stablecoins such as DAI have a role to play too, offering crypto-native guarantees to collateral backing and a native dollar currency to the burgeoning economy of crypto-native workers. Its inherent flexibility (in theory, DAI could be pegged to any asset, not necessarily USD) and its lack of a central issuer (each DAI is minted permissionlessly by users interacting with a smart contract) evades its classification as a fiat-backed e-money token. Of course, these systems can and must improve over time, but their roadmap to that improvement goes through greater resilience and transparent visibility into the backing.

Where decentralized stablecoins can self-regulate over time into becoming ‘the most transparent form of cash’, fiat-backed stablecoins need rational, data-driven regulation to enforce guarantees to users without wiping away all of the innovative benefits. Regulators opting to lean into old paradigms for regulating new things will find themselves enshrining incumbents at the expense of users, and may well still find themselves governing a small fiefdom as users choose otherwise around them.

Fortunately, some green shoots exist. As new, well-designed, fiat-backed stablecoins continue to emerge and grow, we can only hope that regulation will follow them conscientiously to allow their benefits to accrue to stablecoin users.

nb. Steakhouse Financial is a third-party signer to Mountain Protocol

• Ethereum is a neutral, decentralized world computer and Ether serves as a natural candidate for the base money in this digital economy

• Holding or using Ether incurs an opportunity cost, as it could be used for staking to secure the network, which yields a return in exchange for the risk of slashing.

• Lido's stETH democratizes access to the risks and benefits of validation without compromising liquidity or fungibility, and has other features that make it a suitable decentralized reserve currency in the internet of value

Ethereum is a neutral, decentralized world computer

There’s an intriguing idea that the fabled metaverse of the future (cursed meme) actually exists already. Millions of people live most of their waking hours as ‘avatars’ in some respect. Whether they are a name + surname combination on Outlook, a videogame athlete or a milady, digital existences already play an outsize role in the lives of many, and I expect the number of people in this condition to increase with time.

In this context, Ethereum is the ultimate world computer, allowing people to form partnerships, transact amongst each other, and intermediate complex financial relationships¹ in a peer-to-peer way without the need for government oversight to supposedly protect users. Today, while the digital economy remains a curiosity for most normal people, it has the potential to be tomorrow’s neutral mediator in a complicated and mistrustful multipolar world.

In a world of BRICs/NATO/NAM with no persuasive hegemon, Ethereum is a sort of future digital Switzerland. A neutral network that can credibly help maintain capital flows, trade and shitcoins all around the world regardless of the state of trust or geopolitics. This neutrality confers on it an innovative and important new variety of sovereign dominion. The more out of reach this base network is for any one government or organization, the more valuable it becomes for everyone, including governments.

This emergent, sovereign, internet economy needs a common vocabulary for exchange to minimize friction. Given Ether’s preponderance as an industrial commodity for the space, it is a natural candidate as the base money too. Ether itself already satisfies many traditional functions of money, such as medium of exchange (Sotheby's quotes in ETH), store of value (would you rather hold ETH or US government coins?), and unit of account (Etherscan is the ultimate auditor). However, it is also a commodity money because it can be used to pay for transactions and has value as fuel for gas.

Holding or using Ether incurs an opportunity cost

Because of this commodity characteristic, holding or using pure Ether incurs an opportunity cost. One of its most productive uses is as collateral for staking to secure the network, which yields a return in exchange for risk of slashing. Ether could be used to validate the network but is instead being held or used as gas. Would we still regard pure gold in the same way, if in order for gold to retain its ‘goldness’ you had to stake it and earn some amount of risk/return? It would obviously still be valuable to hold, but you might hesitate to mint it into coins.

Liquid staking tokens, like Lido's stETH, allow people to delegate validating the network. This democratizes access to the risks and benefits of validation, and does so without compromising liquidity or fungibility. Furthermore, stETH in particular has the features, decentralization and scale to become the standard reserve currency in this new ecosystem centered on the internet of value (let’s reclaim this useful term from the WEF bugmen).

Lido’s stETH is a compelling candidate as a decentralized reserve currency

stETH allocates entirely to Ether's most productive default use-case, network staking, without compromising on key characteristics of money. stETH returns 90% of the rewards to users just by holding it. Finally, the Staking Router (Lido’s marquee v2 feature), will establish stETH as the most decentralized guarantor of Ethereum network security by creating a dynamic market for stake allocation on behalf of holders.

stETH allocates its assets to the most productive default use-case for Ether

stETH represents a 1:1 pro-rata share on Ether staked using Lido. To keep the tracking value as close to 1:1 as possible, stETH rebases once a day, delivering a real-time risk-loaded interest rate to holders. This design choice sets stETH apart from many other liquid staking tokens. stETH also inherits the benefits of ERC-20 tokens, such as transferability and standardization, while layering in one of the most productive default use-cases for the underlying commodity.

We can extend SebVentures' cryptobanking diagrams for DeFi protocols to Lido by drawing stETH in circulation as liabilities and ETH staked in validators as the assets. Clean stablecoin-like simplicity, with a single focus.

stETH returns 90% of the rewards to stETH users just by holding it

As we wind the clock back to a world of >0% interest rates, yields on developed economy government securities have increased to as high as 5% depending on the maturity (and the government). However, savings accounts have failed to follow suit. The average deposit rates in the US show a disconcerting rent extraction on the part of American banks, whose last remaining value proposition at this point is to stand between between US government debt and depositors.

At time of writing, the range of rate differences across maturities between US dollar deposit accounts and US government treasury yields varied between 2.47% and 4.77%. Rather than going from government interest payments to US dollar holders, this is all getting stuck inside banks for ? reasons.

stETH fulfills the disintermediation promise of DeFi with minimal extraction as a stake aggregator, returning 90% of the underlying Ether staking rewards to stETH holders on a regular basis–an industry leader among staking services on this basis. It is fundamentally a thin protocol that aspires to become a neutral settlement layer backed by decentralized Ether staking.

Lido's Staking Router will establish stETH as the most decentralized guarantor of Ethereum network security

Today, Lido's stETH validator set is a diverse group of node operators with broad geographic and jurisdictional exposure. Lido’s early and user-friendly launch has been key to keeping Ethereum's validator set decentralized. The biggest risk to the growth of Ethereum is for centralized providers such as Liquid Collective, Coinbase, and so forth, to take a large or controlling share of network validators. Centralized validators have a role to play in overall security, but at length could compromise the network they are staking to ostensibly protect. Lido's early release of stETH preempted the formation of large centralized oligopolies and arguably created the conditions for the dynamic marketplace of liquid staking tokens that we know today.

Lido's Staking Router, set to launch in v2, will turn stETH into an aggregator by allocating Ether to groups or types of node operators, allowing for the emergence of a dynamic market in Ether allocation. This feature marks the start of solo staking as part of Lido's validator sets, offsetting their limited capacity for stake with the benefits of greater decentralization and network security. The Staking Router has the potential to create a validator agnostic platform for many different types and approaches to staking.

As the fight shapes up between centralized staking providers and decentralized protocols such as Lido, the Staking Router will provide the opportunity for decentralized validators to rally under the network effects of stETH and make a stand for Ethereum’s security against monolithic corporations.

stETH is one of the most interesting innovations in a newly sovereign supranational space, in its role as a standard-bearer currency for the internet of value, and a well-designed stablecoin in its own right.

¹: One of the major use-cases people have found for this network is dollar-denominated stablecoins. I'm a fan of Dai, for example, as the perfect vehicle for world dollarization and neutral access to a settlement layer of dollar-denominated value. The self-governing bodies in Maker governance, admittedly, look a bit unhinged when viewed with a traditional lens. But the discussions take place in public and decisions are voted on in full view of the blockchain, which is actually an improvement relative to having lizard people in boardrooms make decisions behind closed doors. When we say ‘systemically important’ we really mean ‘we have surrendered our society as hostages to them’.

Note: adcv is a Chef at Steakhouse Financial, which serves as the Finance Workstream for Lido Finance and MakerDAO

• github

• goerli deployment

villager

villager is a collection of smart contracts that aims to create a permissionless way for multiple parties to exchange tokens at a predetermined rate. This was a useful exercise to learn some Solidity and figure out things like interfacing for ERC20 tokens or using Foundry. The aim was to build a system for three tokens: food, wood and coin to be exchanged in a contract at a rate set by an owner as per the below

This is only ever likely useful in a very narrow set of scenarios, if ever:

Deep out of the money limit order
If the owner wants to create an effective 'limit order' for a token well in advance, or at a deep out of the money premium

Indirectly selling one token for another
If the owner wants to buy and sell tokens indirectly, i.e. issue wood without selling it directly for anything in particular but being open to receiving a minimum amount of food or coin

Buyer of last resort for a token at a fixed discount
If the owner wants to guarantee the exchange of, say, coin at a fixed discount from the market

There are probably a million reasons why this is the dumbest way to do either of these three things but I just wanted to practice.

Tooling and testing

I used Foundry, a Rust framework for developing Solidity smart contracts that's extremely convenient. Writing tests and developing are all done in Solidity so there is no need to jump back and forth between other languages and frameworks.

It also has a number of really useful features for testing that helped me a lot:

• assertEq(address(three.getFood()), address(food)); asserts and other testing  functions to double check functions are doing what you want them to do

• vm.prank(alice); pranking the simulated vm so you can simulate what happens if one user or another trigger a function

• deal(address(food), address(alice), 1_000 * WAD); dealing fake ERC20 tokens in testing so you can try out integration functions that use ERC20 tokens

• I struggled a bit to get this to work as there is more than one implementation of deal in the Foundry libraries

• The way that I managed to get it to work is by importing the Std-Utils library and instantiating three fake tokens in test:

import "forge-std/StdUtils.sol";
import {ERC20} from "openzeppelin-contracts/token/ERC20/ERC20.sol";
...
ERC20 food = new ERC20("Food", "FOOD");

Function development

I had mapped out how I imagined the contract would function, which is basically as a cross-rates table that allows the contract to exchange tokens at. The contract itself must have one of the tokens to begin with. The owner would presumably be in charge of 'seeding' it.

The owner would also be in charge of setting two of the 6 cross-rates and the others would be derived from it:

Units of A in terms of B: food wood coin food - 200.0000 1.0256 wood 0.0050 - 0.0051 coin 0.9750 195.0000 -

It was at this point that I realized what it meant in practice that Solidity does not do floating point numbers and can therefore only do integer division.

Integer division means that you can divide 10 by 10 and get 1 but if you divide 1 by 2 you get 0 and if you divide 7 by 5 you get 1, as per this example. The EVM stack only accepts integers, so if you want to get a rate like 0.0050 you need to express it as some very large integer, and then account for the zeros off-chain. Leading to my discovery of the utility of 18 decimal places. I did say this was a smolbrain learning journal.

I had to therefore figure out what to do in a few edge cases: what if you divide 5 by 7 but the cross-rate itself wouldn't necessarily mean that the value of tokens exchanged is zero?

The smolbrain solution is to double up on decimal places during any integer divisions, and just remember the zeros to unwind it or while multiplying it out. Given the amount of time I have spent reading MakerDAO contracts I set a constant for 10^18 called WAD. For example,

function farm(Resource name_, uint256 amount_) public {
	wood.transferFrom(msg.sender, address(this), amount_);
	food.transfer(msg.sender, (amount_ * WAD) / woodFood);
	emit Farm(msg.sender, (amount_ * WAD) / woodFood, Resource.WOOD);
}

Would be the way to get the cross-rate that divides by the woodFood rate. You receive a  10^18 amount_, you have a 10^18 woodFood rate, so to come back dimensionally to 10^18 for the output you multiply by WAD=10^18.

This still creates some weird edge cases. For example, in testing I found that setting the two base rates at 3 and 5 created a situation where exchanging 3 coin for the expected 5 wood actually gave me 2 wei less than I expected because of an integer division issue. I think? I forced the test to say a wrong thing to get it to pass. I am sure this is not amazing practice.

uint256 woodFood = 5 * WAD;
uint256 coinFood = 3 * WAD;

coin.approve(address(three), 3 * WAD);
three.chop(Three.Resource.COIN, 3 * WAD);
assertEq(wood.balanceOf(address(charlie)), 4_999_999_999_999_999_998);

The other edge case is for very small numbers, such as 10 wei. At such small scales, there is no point to decimal precision and you start to get really large rounding errors as a % of the value. The easiest thing is to force the functions not to work if it ever looks like they will exchange for 0 tokens.

Quitting and permissionless contracts

The cooler things about permissionless finance are designs that allow participants to interact with one another through the conduit of predetermined rules set by a smart contract. When someone opens a vault on MakerDAO, they are pushing buttons with very clear rules and very complex functions can be executed to transact without any intermediaries.

Permissionless contracts tend to have funny features, such as just sitting around and not doing anything until someone (anyone) triggers a function. The protocols might create incentive structures to incite people to actually trigger them with bots. Many of these functions are knock-on triggered by other function calls.

In order to prevent tokens from getting stuck on the contract, there has to be a way of sweeping the balance out somewhere. The design anticipates the existence of an owner address. This address has the right to set the rates and quit() the tokens. Whenever there is a >0 balance of either of the three tokens, if the owner calls quit(), it will receive the balance of each of the tokens.

Porque

I like understanding how things work. I am amazed at every turn at the minimalist elegance of systems that can execute such complex transfers of value with no intermediary. Mind you, many (most?) banks continue to run off COBOL datacenters and the population of engineers who can maintain these is literally dying of old age.

Writing Solidity is tricky but not as syntactically complicated as other languages I have experienced. Foundry helps a lot to make things a lot easier. But it is really hard to write things well and I constantly feel like there is a smarter way to do what I am trying to accomplish, without success. I am sure there are many patterns to do any number of the things I did better. If anyone has the time or disposition to help me figure out what those things are, I'd be highly appreciative of their feedback.

Thank you for coming to my TED Talk.

I'll die on the hill that governments should be expected to demonstrate that FATF Guidelines or KYC/AML requirements are both

1. Compliant with basic civil liberties enshrined in most Western countries

2. Effective

As it stands, neither claim can be supported with persuasive evidence. Without both of these conditions, these so-called 'requirements' should not be considered acceptable.

Counterarguments often reference North Korea and illicit financial flows, but I find it hard to believe that the handwringing about 'money laundering' or 'crimes' is genuine. This skepticism stems not only from the obvious characteristics of decentralized currencies that make them highly unsuitable for 'money laundering' or 'crimes', but also because it doesn't take much reading to realize that the core issue at stake is one of control:

"In line with the principle of proportionality, significant crypto-asset service providers should be subject to both stricter requirements and enhanced supervision"

"This assessment recommends strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations."

"A government-backed electronic transfer has something that backs it up, it has a government [...] but with Bitcoin, that's not the case"

A democracy can only endure if any claims to control can be countered with a safety valve, such as reelection triggers, no-confidence motions, opt-outs, public referenda, or other mechanisms that can curb the government's power. Without these, unopposed claims to control undermine democracy, pushing the technocratic state further into the private sphere. Increasing technocratic control becomes a self-perpetuating cycle, as it only serves to boost tax collection, which in turn sustains the cycle.

These claims to control also establish extractive oligopolies, often disguised as 'public safety' or 'compliance'. The true beneficiaries of regulatory capture are incumbents, who lack any civic motive to defend and are all too happy to comply. These market distortions can emerge out of seemingly benign intentions, as in the case of tobacco excise tax regulations.

Most countries impose an excise tax on tobacco consumption, supposedly to account for the externalities of tobacco smoking and raise the barrier to entry to the habit, all in the name of protecting public health. However, it also represents a significant portion of government revenues (anywhere between 2-7% for OECD countries).

In an ideal governance scenario, an opt-out mechanism would incentivize civil servants to employ these revenues diligently. However, in the absence of such opt-outs, these mechanisms harbor the potential for extractive forces to germinate around good intentions and metastasize into disastrous outcomes.

Tobacco consumption tends to display relative inelasticity to tax, meaning that a 10% increase in excise does not result in a 10% decrease in consumption. Consequently, raising excise almost always leads to higher government revenues.

There are numerous ways to impose excise tax on tobacco products. After years of exerting pressure on tobacco consumers, excise tax revenues have become highly optimized. As expected, the EU pioneers in complexity and refinement in this arena. Generally, there are three types of excise tax that can be applied to a pack of 20 cigarettes:

1. Specific tax: Charge a fixed amount for all packs, regardless of their value

2. Fully ad-valorem: Charge a consistent proportion of the pack's value

3. Mixed regime: Ad-valorem above a minimum threshold, creating an effective 'kick-in price' at which ad-valorem components kick in and a floor price for all packs

Major tobacco companies with high margins argue that a mixed regime excise tax is better for consumer health than ad-valorem, as the higher minimum price raises the barrier to entry for consumption.

However, this argument is dubious at best. The optimal outcome for public health would be for people to abstain from smoking altogether. Any form of excise tax increases the entry cost for new tobacco companies, protecting the margins of incumbent players. By setting a higher floor price for cigarettes, the market is driven to form at the lower end, closer to the price points at which large tobacco companies operate. This effectively forces low-end tobacco brands to compete in premium segments, where they're likely to lose.

In the end, we're faced with a situation where:

1. Government tax revenues increase

2. Large oligopoly profit margins and market dominance increase

3. Consumer health remains unchanged

To bring the discussion back to DeFi, Balancer LP pools have the potential to replace BlackRock's iShares business entirely. After all, there's no reason for an intermediary to charge fees and collect passport PDFs on a 60/40 ETF. But for its full disruptive power to benefit consumers, the infrastructure for the pools must remain neutral.

In this scenario, BlackRock would disintegrate as a controlling industry extractor, giving way to direct interactions between tokenizers and consumers. If necessary, some of these interactions can even go through KYC so that the passport PDF storage industry survives. But the infrastructure itself must remain agnostic to truly improve consumer welfare. Governments must be willing to forego imposing KYC checks on Balancer because it's absurd, ineffective at solving crime, and virtually impossible to implement.

KYC and AML 'requirements' are the excise tax of financial service industries. Consumers are inelastic to increased costs that wind their way up in higher fees, as people need financial services. Moreover, KYC/AML 'compliance' sets a floor for operating expenses that makes it difficult for new players to enter and disrupt incumbent market participants. Finally, KYC/AML provides a new source of control and information to government authorities, which ultimately proves extractive through the potential to enact and collect higher tax revenues.

This leads to a situation where:

1. Government controls over civil liberties increase (and therefore tax collection increases)

2. Large oligopoly profit margins and market dominance increase

3. Consumer financial protection remains unchanged (or worsened)

However, there is a crucial difference between Balancer LP pools and Camel cigarettes: the degree of control a government can effectively enforce. If you want to use DeFi, you can just go ahead and use it. This characteristic embodies its disruptive potential and poses a threat to government authority alluded to in the earlier quotes from government officials chirping about losing control.

In an alternate timeline, governments rally around a nascent industry to oust scammers and safeguard innovations, giving them a chance to test the market and thrive. In that reality, the EU Parliament runs Ethereum validators in Strasbourg and Brussels, allocating staking rewards to startup grants or educational programs.

I'd love to see that timeline come to fruition. However, the potential for change will persist regardless. Governments must choose which side of history they want to land on, and whether they want to cling to ineffective rule-making or contribute to improving consumer welfare and financial autonomy. The choice is theirs, but the disruptive power of decentralized finance will continue to grow, with or without their support.

• Mandatory identity verification for all crypto-asset handlers, including decentralized protocols

• A 1,000 EUR cap on unidentified crypto payments for goods and services, with the real value likely to decrease due to inflation

• New financial intelligence enforcement units in member states and Brussels

These rules come despite the fact that AML and KYC regulations patently do not work to stop what the UN Office on Drugs & Crime refers to as 'illicit financing flows'. In some developing economies, these flows could refer to up to 20% of the annual value of trade with advanced economies. Annual proceeds of crime amount to more than $2tn globally, in spite of innocent people being subjected to constant surveillance and suspicion of guilt. It may shock you to hear that sending PDF scans of passport photos to a bank does very little to prevent criminals from transacting.

Cryptocurrencies are often wrongly perceived as an ideal money laundering tool, despite their inherent transparency. The reason people know that North Korea's Lazarus group is in control of hundreds of thousands of ETH worth of stolen digital assets, is because we can plainly see it on chain. Conversely, it had to take a whistleblower to open the lid on some of the world's most notorious opaque money mixers (Credit Suisse AG), revealing over $100bn squirreled away in ratholes. Credit Suisse was (F to pay respects) ostensibly a very well-regulated bank with Lots Of Top AML Controls™️. It presumably stored a lot of PDFs of its customers in different places, and I'm sure held them for the regulatory-approved minimum holding time for financial data just to be safe.

Regular people have been dulled by KYC to the point of expecting financial cavity inspections for basic everyday transactions. In spite of this acquiescence, I believe the chimera of terrorist financing, criminal proceeds and illicit funding flows is not in fact about making new rules and concentrating more power in the European Commission. Rather, I believe it is about:

1. Competent public administration enforcing principles to minimize incentives to do crime at the source

2. Effective targeting of criminals without violating innocent citizens' civil liberties

Liberal democracies should be really hard to manage for administrators, given that they should be placing very strong guardrails on executive overreach to protect fundamental values that people won't or can't defend by themselves. However, modern Western democracies have lost their sense of narrative and its citizens lack an animating purpose, giving way to intense apathy and the ability for frankly mediocre administrators to blunder their way through the European Charter of Fundamental Rights without much consequence.

Whether it's a Cypriot bail-in robbing depositors by another name or confiscating private property from businesses by closing them down to prevent the spread of a virus, Western principles clearly do not do much to stop bureaucrats and administrators from doing quite mediocre jobs. In the former case, the eurozone was patently not better off as a result of the bail-in. In the latter case, millions of people died from the virus in spite of the number of fines issued to citizens for indulging in fundamental civil freedoms.

In the European instance, at a minimum, these new AML proposals would violate a litany of articles from the European Charter of Fundamental Rights  (art. 6 Right to liberty and security, art. 7 Respect for private and family life, art. 8 Protection of personal data, art. 17 Right to property, art. 41 Right to good administration, art. 48 Presumption of innocence and right of defense). To rub salt in the wound, they continue to pass the buck to ordinary, hardworking people, instead of holding accountable the gluttonous bureaucratic state that is paid to look after these issues.

To counter this worrying degradation in Western values, European leaders must reflect on the goals of European integration and envision the society they want to create. Should it be one that enshrines the sovereignty of individual citizens and encourages transactions across borders? Or do they want a vast, centralized surveillance state that views every citizen with suspicion? The vision for the latter is a sad society unmoored from any sense of narrative or purpose, destined to dwindle into a sort of demographic irrelevance as the world euphorically ascends around it.

I don't have the zest or the mental damage to want to contemplate any of these questions as a prospective elected official. I have a simple, smol, brain and in that frame, I honestly would rather people just let people transact.

The idealized academic microeconomic model for a simple market is one of perfect competition, where firms produce undifferentiated goods and on average earn no economic profits over the long-run. In this structure, many indistinguishable firms enter and exit markets without friction, a Sisyphean dystopia of Darwinian capitalism where no one firm prevails.

Conversely, Peter Thiel argues in Zero to One that competition is something undesirable and that firms should strive towards monopoly capitalism, in the vein of Google in the search engine market. His chief maxim is to seek contrarian truths and to pursue them to where they might lead.

1. It is better to risk boldness than triviality
2. A bad plan is better than no plan
3. Competitive markets destroy profits
4. Sales matters just as much as product

His observation is that conventional beliefs only ever come to appear arbitrary and wrong in retrospect. Before electricity, nobody would have thought twice about hunting whales to light street-lamps. He argues that, if you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth. Once you have your hands on a truth that nobody is not even wrong about, you can play for 100%.

This approach is suitable in new categories or in existing categories that are being redefined. For instance, Canada Goose and Moncler are both ‘Category Killers’ in the outdoor-wear market. They are just jackets, yes, but they found success at an unprecedented category price premium, each with its signature mini-category of one.

However, what this view misses is the realpolitik of competition that does eventually emerge. More importantly, it misses the analysis of how to leverage the presence of competitors to drive industry structure in a positive-sum direction.

For instance, when Uber faced new or existing competitors in ride-hailing apps, instead of approaching industry formation constructively, it often resorted to chasing 100% share at all costs. This superficially seemed to follow Thiel’s maxim of aspiring to monopoly capitalism. However, it also violated some important guardrails that reduced industry attractiveness through overly intense competition. Canada Goose succeeded by increasing the demand for outdoor jackets as a whole, not by fighting tooth and nail to take share from lower-quality jacket manufacturers.

Ethereum staking as an industry is reasonably unique in that it doesn’t have a pure profit objective. It plays an essential role in maintaining the security of the Ethereum network, by incentivizing the emergence of a decentralized set of validators who participate in the consensus of the blockchain. It still needs to be an attractive enough market to draw a broad base of profitable validators. But it primarily needs to perform the role of securing the network that everyone depends on. The incentives are reasonably well-designed, in the sense that if one central player did manage to capture a majority validator share, the network would cease to be useful and would therefore lose value.

Liquid staking allows users who have Ether, but not the technical know-how or time / resources, to deploy their validators. Decentralized liquid staking providers, such as Lido or Rocket Pool, serve as deposit brokers to a large network of validators and attract a large network of users holding Ether. Centralized liquid staking providers, such as Coinbase, concentrate validators in their exchange and offer their users one-step access to staking yields. The benefits for both sides are clear. On top of it, the deposit ‘receipt’, or token, is often tradable as a unit of account itself.

Players in this mini-industry need to understand and internalize how they are contributing to the overall public good objectives, so that each player can press their strengths for everyone’s benefit in a positive-sum way. This is preferable to an internecine hyper-competitive warfare for deposits, which would threaten the integrity of the system they’re trying to protect by making the industry less attractive for anyone to participate in.

Currently, liquid staking is quite a competitive market. Operating margins are thin, the stakes are high and the sector as a whole is hostage to the vagaries of total cryptocurrency market cap, which is not typically moored in any computational economic reality. At the time of writing it is declining, and whenever growth turns negative, players start to scramble for what’s left of a shrinking pie.

Despite the context, market participants fortunately haven’t relented in their vigilance to safeguard network security. Lido, for instance, has faced criticism as its market share approached the 30% mark, despite aggregating a highly decentralized node operator set. The intensity of these calls are a reflection of the importance of this market to all participants.

Michael Porter’s book, Competitive Advantage, contains useful frameworks and case studies that are relevant to understanding, for instance, how to navigate the presence of competitors. It sits squarely in the realpolitik world of experience, saddling the monopoly capitalism view on one side and atomized perfect competition on the other. It also might contain guidance that could help bolster the development of the burgeoning ecosystem building around decentralized finance, including liquid staking.

Industry structure can, in certain conditions, benefit from the presence of multiple competitors, who each play positive-sum distinct roles for each other in maintaining the welfare of the overall ecosystem. Porter outlines a few examples of how the presence of the right types of competitors can benefit individual players as well as the liquid staking market as a whole.

Good Competitors Increase Each Other’s Competitive Advantage

• Enhance the ability to differentiate: Lido stEth vs Coinbase cbEth is easier than comparing staking Eth at Coinbase vs staking ETH at Kraken, if consumers have difficulty distinguishing between various options

• Improve bargaining position with regulators: The presence of large institutional players helps educate regulators about the benefits of a healthy liquid staking industry, provided they don’t fall for the temptation to capture them and disfavor decentralized liquid staking

• Lower antitrust risk: The presence of liquid staking competitors reduces the risk of any one player gaining a controlling share of the network and reduces the intensity of PvP warfare among decentralized liquid staking providers

• Increase motivation: A viable competitor can be a powerful motivator for reducing cost and improving products

Positive-sum Competition Improves Liquid Staking Market Structure

• Increase industry demand: If the presence of cbETH on the Coinbase app is a gateway to educate consumers about the benefits of liquid staking, then the industry as a whole benefits

• Reinforce desirable elements of industry structure: As long as all competitors keep catering to a user demographic that values decentralization and network security, product feature development will tend in that direction for all players

Good Competitors Aid Market Development

• Share the costs of market development: Having more staking operators makes it more likely for market trial to be induced, and a lot of the costs of development can be shared through open-source contributions

• Reduce buyer’s risk: Users may be reluctant to enter liquid staked Eth if they see there are only one or two firms minting tokens

Bad Competitors Deterred From Entry

• Block easy entry avenues: Although attracting new players is a desirable outcome for Ethereum staking, it is important that these players share the same values of the ecosystem and are not willing to compromise for a quick scalp on newly referred Eth deposits—the presence of high-quality competitors makes it harder for lower quality offerings to succeed

We make references to a ‘good competitor’, inferring the existence of a ‘bad competitor’. Porter also describes what makes a good competitor, regarding the way in which they focus their resources to achieve their objectives.

A good staking or liquid staking competitor, rather than a bad one, is strategically focused and plays to grow the ecosystem

• Conscious of self-perceived weaknesses: Doesn’t try to be a one-stop shop for all Eth deposits

• Understands the rules: Conscious of the dual profit/good objective

• Operates under realistic assumptions: Never pressured into escalating wars for deposits

• Knows its own costs: Conscious of what margins are sustainable for staking operations or protocol viability

• Follows a strategy focused on improving industry structure: Aware of industry structure dynamics and consciously leaning on peers to play to their strengths

• Knows when to say no: Knows what market segments to ignore and which ones to focus on

• Burns the ships: In it to win it and for the public good, not just a spaceship that landed to farm tokens

Fortunately, the presence of a public good objective (network security) can help align market participants to solve for more than just the growth of their own staking operations–if they want to.

1. He was blinded by the gods for his ability to see the future, and revealing their plans to the mortals

2. He was blinded by Athena, after seeing her naked, as a punishment (though it’s not clear whether his witnessing was accidental or not)

3. He was blinded by Hera, after arguing, from what can only be surmised as first-hand experience, that women derived more pleasure from sex than men^[1]

In any of the above cases, the story of Tiresias is the story of a cabal of unscrupulous deities with a very mortal-like emotional intelligence, hazing the lights out of this modest son of a shepherd. With all the troubles he had been subjected to, he still managed to make an illustrious career for himself as a seer. In mythology, he occupied a place in many thresholds—god and mortal, man and woman, present and future.

In one myth, Liriope, a river nymph, bore a child called Narcissus and doted on him from a very early age. Her helicoptering obsession with making sure nothing bad would ever befall him led her to Tiresias, to consult about Narcissus’ future. He told her, prophetically, that he would be fine as long as he never “knew himself”.

“If he but fail to recognize himself,
a long life he may have, beneath the sun,”—

Ov. Met. 3.337

Ovid doesn’t go into a lot of detail around his upbringing. But you can imagine the obsessive Liriope, going out of her way to protect Narcissus from anything that might damage his self-image, or even just provide him with a reflection of himself. To know oneself, in the gnostic, psychological sense, is to understand not just the extent of the possibilities that lie within but also the extent of the impossibilities. The only real way to understand or learn about oneself is through challenge, and failure.

The Orthodox Christian tradition would define this as the commandment to take up a cross and bear it dispassionately, with dignity. This Stoic metaphysics of challenge, failure, and suffering is quite universal, and has perpetuated throughout Greco-Roman culture, as well as emerged independently in other centers of civilization around the world. Transcendence emerges after pushing past the mortal prison and accepting the challenge as an end in and of itself.

When a charming nymph with a beautiful voice, Echo, pursued Narcissus, he rejected her coldly, as she couldn’t live up to his pathological expectations. Echo was herself also a victim of her parent’s generation. She was cursed by the goddess Hera to only ever be able to repeat the words of others. This, for the simple crime of talking too much, to try to comfort Hera while she seethed with jealousy over her husband’s extramarital affairs.

Echo’s inability to be anything besides a reflection, and Narcissus’ inability to look in the mirror, destroyed each other. Echo withered away in a cave, and Narcissus took root in the ground by a pond until he wilted into a flower. A generation of beautiful, youthful, potential, hamstrung by the moral failures of overbearing, narcissistic parents who are incapable of handing over the reins.

Narcissus is a cautionary tale, not (just) because of his unbridled arrogance, but because of the sheltered upbringing that caused it. Having never learned to “know himself” from his overbearing parent, he never had the chance to experience failure, or even understand what it meant to desire something.

To pursue things that are new and difficult is a sure-fire way of looking in the mirror and confronting one’s limitations. Nobody is ever really prepared to raise a child. Nobody was ever really taught how to lead a squad of soldiers into battle. It’s far easier to grift and steal from other people’s ideas. Although the most rewarding challenges tend to have the potential to create a lot of good for others, if not for oneself, just trying to produce something of value will, in most instances, end in defeat and failure.

But you can’t build a reputation on what you are going to do. And you can’t truly know yourself if you never face a challenge. Lacking a suitable trial, at least try to make things, or learn how.

1. This weirdness is worth a longer footnote. While traveling through Mount Cyllene, Tiresias came across two snakes mating. For reasons known only to him, he disturbed the scene and wounded the copulating reptiles, for which he was instantly transformed from a man to a woman. She left the scene and lived as one for seven years, going as far as marrying and bearing children. She eventually returned to the scene, on a hunch it would change her back. Congruent with the logic of Greek myths, it did. He thus closed the cycle and became one of the few people in history to have mutated XY chromosomes to XX and back in a round trip over the course of his lifetime. ↩︎