The slippery road of National Debt

If you owe your bank $100, you have a problem. If you owe your bank $1 million, your bank has the problem. It mattered I guess when this quote was popularized by Keynes, but I’m having a hard time wrapping my head around the number 300 trillion, let alone managing it. Global debt is an all-inclusive number though, comprised of sovereign debt, corporate debt and household debt. And since its unmanageable even by the best homo sapiens, we’ll take a closer look at the national debt in today’s discussion and the current situation surrounding it.

National debt is the total amount of outstanding borrowed sums (pending to be paid), accumulated over a nation’s history. Nations make money from tax revenue and they spend them for social welfare, infrastructure and to promote growth. When they spend more than they make, they accumulate deficits which are paid by borrowing. Borrowing comes in the form of bonds, which is a security issued with a maturity date, that pays back the loan plus an interest. The collective accumulated amount borrowed plus the promised interest constitutes the national debt.

 

national debt

 

national debt

Where does borrowing come from?

 

Borrowing can come from anywhere. It’s split into debt held by the public and debt held by the government (intragovernmental). The debt held by the public is held by state/local governments, pension funds, mutual funds, corporations, individuals and foreign nominal/legal persons. The debt held by the government is the amount of debt that the government owes to itself. It is held mostly by government trust funds like social security trusts and insurance trusts. In approximate proportion of 75% for public debt and 25% for government debt, both form the overall national debt. Denmark and the US have a debt ceiling in place.

Debt ceiling? A debt limit that – by law – cannot be passed. If the country reaches this limit, it can no longer get money via borrowing, it can no longer use debt to pay for obligations, fund social programs and services. And like in all things financial, there’s an irony to this as well. Denmark never reached its debt ceiling – almost did with the 2007 crisis – but they increased the limit so high, they can never possibly reach it again. The US reached theirs – 78 times to be exact since 1960 – and increased it, reached it and increased it again and again, you see where I’m going with this. The current US debt ceiling is at $31.4 trillion. The current US national debt is at $30.93 trillion. What’s next? 

 

Debt to GDP ratio 

allfx consult

 

Largely related to the 2007 financial crisis as well as the COVID 19 pandemic, the debt was accumulated to avoid defaults (bankruptcies), protect lives and retain unemployment at manageable levels. According to the IMF, global debt rose to $226 trillion in 2020. Compared to the global GDP, you get a 256% global debt to GDP ratio.

Can these numbers be reduced? How fast and how? More borrowing to pay past borrowing? And if not, what are we to make of this masterpiece?

 

What do these numbers mean in a context that we can understand?

The World Bank conducted a study in July 2010 called “Finding the Tipping Point-When Sovereign Debt Turns Bad”, that placed lines not to be crossed by countries. If crossing the line is only for short term periods like small recessions, it shouldn’t have much of an effect on productivity. If crossed and extended for longer periods like decades, economic growth is likely to be hindered. Based on its samples of advanced and developing countries, between 64%-77% debt to GDP was found to be a proper estimate.

Talking of hindered economic growth is one thing. Entering the realm of country defaults is a different story. Another study conducted by Hirschmann Capital, with information taken since the 1800s, showed that 51 out of 52 countries that passed the 130% debt to GDP ratio, defaulted one way or another.

 


Table contents from Hirschmann Capital (Source: Reinhart & Rogoff, RIETI Japan, Bloomberg, HC Estimates)

So if countries today crossed the line by a longshot, why don’t we see them defaulting already?

To put things in perspective, a country will choose to default when the gains of not paying its debt exceed the cost of default. That is if the country has a choice. Here is a broad classification of defaults:

  • Disorderly default – “Violent”, with no time to prepare both for the banking sector or the citizens who are unable to react. Described by the collapse of all financial transactions, bankruptcy of banks and a steep increase in unemployment. Cyprus almost went through this back in 2013, if not for a bail-out program from the Eurogroup, the EU and the IMF of €10 billion, in exchange for impossible obligations (like tapping in people’s bank deposits).
  • Orderly default – Happens for the same reasons as the disorderly default, but this is a strategic choice of the country filing for it. There is a consensus reached between the lender and the borrower, with milder consequences to the economy and its people. It allows for a quicker comeback to the international markets. There is time to set things right unlike the disorderly default, and unemployment is much less severe.
  • Selective default – Partial default of payments and loans. Selecting to default on one or more obligations, but continue to pay some. In general, its characteristics are similar to the orderly bankruptcy.

Greece is an example of a country that defaulted as a result of the 2007 financial crisis, while other European countries facing similar numbers didn’t. Partial reasoning? the ability of a country to pay its debts relative to its ability to raise surpluses. Belgium and Italy as an example, were also hit by the crisis and had high debt ratios but were able to raise surpluses while Greece wasn’t. Another indication that economic output/production is imperative. A country consistently spending more than it earns, is on a downhill spiral. Passed the point of no return, odds are that a restructuring, devaluation, higher inflation or outright default is inevitable.

In the early 2000’s (which was also the beginning of the housing bubble), emerging markets were urged to take on credit from advanced countries to finance their operations. With very low interest rates to provide cheap money and attract borrowers, emerging markets jumped on the train to what they thought was the answer to their problems.

 

Taking Zambia as an example, the country is largely dependent on copper mining and rain-fed agricultural production. Zambia ranks 6th in the world in terms of Copper production (2nd in Africa after the Democratic Republic of Congo) and depends on weather to support its agriculture. Its external debt was so large relative to its output that it became unsustainable, and it became the first African country that defaulted on its payments during the pandemic.

Chinese creditors hold 1/3 of Zambia’s debt (or approximately $6 billion). The creditors include Industrial and Commercial Bank of China, Jiangxi Bank and China Minsheng Bank. Some say Zambia is a test case, with the world eyeballing how China handles debt restructuring as well as the precedent this case sets, for other countries in risk of default to follow.

 

IMF among others, point out the following “remedies”, relative to lowering debt: 

  1. Productivity and economic growth – produce more than you spend or better yet, spend so that you can produce.
  2. Surprise burst in inflation – which reduces the nominal value of the debt and increases tax revenue due to higher prices.
  3. Austerity measures – Cut spending, increase taxes, accept any tomatoes thrown your way
  4. Debt relief – Debt restructure and gold revaluation maybe?*
  5. Financial Repression a.k.a. macroprudential regulation – government policies that redirect funds intended to go somewhere else, to the government. Helped countries reduce debt after the end of WW2 and is coming back due to the large amounts of current debt. It includes tighter connection between banks and government, pension funds/domestic banks lending the government, regulation of cross border capital moves, higher reserve requirements, prohibition of gold purchases (Gold Reserve Act of 1933).
  6. Default

 

*Is gold revaluation an option?

 

The term “gold revaluation” over the years fell victim to speculations and conspiracy theories. The outcome is a biased approach (depending on who benefits from such action and who loses). Not to be confused with the gold revaluation account held by central banks (where they can realize profits from the rise of gold price relative to the cost of buying it). Although related because, if you use gold revaluation to register unrealized gains and write off debt in your balance sheet, you’re in the foothills of a gold standard system. And if that’s the case and you check the relationship between money in circulation relative to the gold held in reserves (which is what the gold standard is suppose to do), you will find that the backing percentage is very low.

The gold revaluation we’re referring to, is mostly Rothbardian (see Murray Rothbard’s gold revaluation ideas) who popularized the possibility. Imagine returning to a gold standard system and fixing (pegging) the gold price per ounce, based on the quantity of gold central banks have in reserves relative to circulating money. Similar to 1933 in the US, when the government confiscated gold at the current price ($20.67 per ounce) and then immediately revaluated it to $35 per ounce (gold Reserve Act). Should the same concept happen today, from $1,800 it could reach anywhere between $10,000 to $50,000/ounce. Why? As explained by Jim Rickards, author of “The New Case for Gold” if the global gold reserves are 34,564 tons (as far as we know, since central banks don’t disclose the full numbers), to reach a peg of 20-40% of M1, you would need to price gold astronomically high. 40%? M1?

M1 is a measure of money supply (measuring from M0-M3). M1 is also known as narrow money, all the currencies and assets that can be easily converted into cash. The further you go on the M scale, the broader the money it measures and the less liquid (easily convertible to cash) the assets are. Rickards explained that 20-40% of M1 is historically a workable percentage used, when money was pegged to gold in the past (see image). The law in the US from early 1900s to 1950s said that gold price multiplied by the amount of gold in reserves had to amount to 40% of total money supply (Federal Reserve Act of 1913). Due to the Vietnam war and the need for money, they had to curtail the law, but 40% worked just fine. He also said that the Bank of England in the 1800s managed a successful gold standard when Britain became dominant power after the fall of Napoleon and until WW1 with 20% gold backing the money supply.

At $1,850/ounce, gold reserves relative to money supply is extremely low. If we consider M1 in the US hypothetically at $10T (with 8,000 tons of gold reserves), the gold is backing approx. only 4.75% of M1. The value of gold to back 40% of M1 would need to be approx. $15,600. If you take Rothbard’s approach of 100% backing, the value of gold should be approx. $39,000/ounce. What?

 

Here’s how it works out*:

 

M1 (hypothetically is 10 Trillion) / Tons (8,000) = $1,250,000,000 (Price per ton)

$1,250,000,000 (Price per ton) / 32,000 (Ounces per ton) = ~$39,000 (Price per ounce)

$39,000 (Price per ounce) x 40% = ~15,600 (Price per ounce)

At $1,850 (Current price of gold per ounce), backing is 4.75% (39,000 x 4.75%)

*For accurate calculations you will need to replace the hypothetical numbers with current ones. The above is meant to explain gold revaluation, and does not reflect our opinion on whether it is a viable strategy or not.

According to the World Gold Council 

Worldwide Total Gold Reserves by Region = 31,422.57 tonnes = 34,564.827 US tons 

  • America =  8,133.46 (North America) + 614.68 (South America) = 8,748.14 
  • Europe = 11,776.29 (Western Europe) + 3,433.59 (Central & Eastern Europe) = 15,209.88 
  • Asia = 3,332.62 (East Asia) + 878.72 (South Asia) + 809.30 (Central Asia) + 731.28 (South-East Asia) = 5,751.92 
  • Middle East, North Africa, Sub-Saharan Africa = 1,460.46 (Middle East & North Africa) + 172.28 (Sub-Saharan Africa) = 1,632.74 
  • Oceania = 79.89 

 

Last but not least, there is a reason credit/debt is not taught the way it should to youngsters in schools. Keeping the majority financially illiterate is the way to maintain and distribute wealth how the minority sees fit. You can be the person that gets a loan to buy a house to live in and have constant cash outflows, or the person that gets a loan to buy a house, then rents it to someone else and has cash inflows.

In one of Kiyosaki’s appearances, he mentioned that during the financial crisis the banks gave him tax free money (credit), somewhere around $300 million to buy property because they knew he would turn them into cash inflows. So where everyone was defaulting on their payments and losing their homes, he was finding dirt cheap properties that are now worth whatever they are worth, producing cash flow and making him even more rich. That’s $300 million out of $700 billion injected into Wall Street through the TARP program. Story for another day but think of how much wealth was produced from the left over $699.7 billion.

Debt/credit may not be as bad a your grandparents said it is. As long as you put it to good use.

The information provided is strictly for informational use and is not meant in any way to be construed as investment advice. One should seek expert advice, as all investment strategies involve risk of loss.


 

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Connecting offshore: With our clients in Belize, Seychelles, the Caymans, Martial Islands and St. Vincent offering the most flexible IB and White Label solutions.

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Contact us for a private conversation to discuss your case through the contact form or one of our emails at info@allfx–consult.com, partners@allfx-consult.com.

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Building up to the Merge | Bite-sized piece

Building up to the Merge | Bite-sized piece

Keeping it simple – What, when, how, why 

 

What – The Merge is Ethereum’s transition from Proof of Work to Proof of Stake consensus protocol. The transition involves the launch of the Beacon Chain (went live in December 2020), the Merge (case in point) and the Shard Chains which will come in later to improve the network’s scalability.

Shards? Think of 12 people standing on top of each other. The one at the bottom can hold the rest, but the weight is causing some neck & back problems. Now split them up from 1 person holding 11, to 6 holding 2 or more people. Less pain, more gain.

In the case of Ethereum’s blockchain, it’s currently a single chain that holds all the network’s transactions in consecutive blocks. The sharding upgrade will break down the large database, into smaller, manageable pieces (64 to be exact). Combined with rollups (packaging many transactions in a single one and submitting it to the chain as one) reduces the data required for a transaction.

How does it improve scalability? If the network can handle thousands of transactions per second (TPS), it can serve a huge amount of users improving congestion and usage spikes.

When – EST. mid September, 2022

How – As mainnet (ETH 1.0) gets merged with the Beacon Chain the entire transactional history of Ethereum will be merged with it. The PoW model will be completely abandoned and the Beacon Chain’s PoS will be the only producer of new blocks.

gas fees

Why – To improve Ethereum’s sustainability as it currently requires vast amounts of energy for validation. It will reduce its requirements by 99.95%. It would be great if gas fees and transaction speeds got better as well, but this won’t be the case with the Merge.

Gas fees? The cost of a transaction on the Ethereum blockchain. After the London upgrade last year, the cost is derived from multiplying {the base fee (cost of gas) + optional tip} by the transaction cost.

Why do gas fees need improvement? Because as the network got more congested, these costs increased exponentially. Especially after the massive interest in NFTs. A user can’t always wait for low peak times to make a transaction (which kinda’ sorta’ fixes the problem), so improving the overall structure would be great.

Ethereum, PRE – MERGE

 

Ethereum (ETH) went live in 2015 to record transactions and facilitate smart contracts.

smart contract

What is a Smart Contract?  Contracts (programs) that exist (created and validated) in the blockchain’s network. After their addition to the blockchain, they are enforced by the network. No need for a third-party enforcement i.e. lawyer or bouncer.

The Ethereum platform has been extensively used for Initial Coin Offerings (ICO boom of 2017), where new tokens are launched using the ERC standard.

ERC – Ethereum Request for Comment is a standardized document with rules that Ethereum based tokens must comply with. Programmers use the ERC to write Smart Contracts on the Ethereum blockchain. The community then reviews and comments on it through the EIP.

EIP – Ethereum Improvement Proposal – the comments of the community. Once received, the developers revise and implement accordingly.

hard fork

Example of EIP 1559 during last year’s London hard fork. It split the transaction fee that used to be directed to the miners, to a base fee + tip. The base fee gets burned (removed from circulation by the network) while the tip goes to the miners. The base fee is algorithmically calculated based on network congestion. If many transactions are fighting to be included in a block, the base fee will be higher.

Note: The EIP 1559 (burning) combined with the PoS upgrade (the Merge), will reduce Ether supply by more than 80%. The event is known as triple-halving.

What is halving (as we know from Bitcoin)? When the reward for Bitcoin is halved or cut in half. So triple-halving for Ethereum, is like halving Bitcoin 3 times.

The issue of new Ether will drop significantly, the burning through the EIP1559 and the staking of Ethereum to be eligible to validate (which can’t be withdrawn for at least 6 months after the Merge) will see a huge Ethereum supply drop. Increased demand combined with decreased supply, has speculators targeting a $5,000 breach. Ethereum already came close to this target in 2021, when it climbed up to $4,800 after major updates (Berlin and Uniswap) and the sale of Beeble’s NFT for a staggering $69.3 million (Pak’s NFT “The Merge” sold for $91.8 million in December of 2021).

ERC standards in a nutshell

  • ERC20 – standard used to create fungible assets (resembling fiat currency). ERC20 tokens have a fixed supply, and they are transferrable. Some remained on the Ethereum blockchain while others jumped on their own blockchain (example of Binance and Tron).
  • ERC721 – standard used to create NFTs (non-fungible, each token is unique). Allows transfer only of individual NFTs, not in batches.
  • ERC1155 – standard (introduced in 2019) that allows mixed use of fungible and non-fungible tokens. Single smart contracts can support multiple functions i.e., user can send coins (fungible) and weapons, mascots, art (non-fungible) in one transaction.
  • ERC777 – standard used to create fungible assets like ERC20 but allows for more complex interactions when trading tokens. When tokens are sent to a contract, a function (called hook) is activated that allows sending tokens to a contract and notifying the contract in a single transaction (unlike ERC-20, which requires two transactions (approve / transferFrom).the merge

Birth of Ethereum Classic. ETC was born after the DAO hack in 2016 – set of smart contracts for a Decentralized Autonomous Organization. DAO was a venture fund (high risk/high reward investment pool). Its investors had voting rights on the assets that the fund would invest in. It raised millions of $ worth of ETH, a third of which was hacked and stolen.

The community proposed to hard fork ETH to restore stolen funds. Some refused. After a vote in 2016, Ethereum was hard forked to Ethereum Classic (ETC).

 

 

To place the size of these two in perspective, analyzing the numbers today (11/08/2022)

  • ETH trades at $1,853 with a market cap at $227.3 billion
  • ETC trades at $40 with a market cap at $5.5 billion

Transition phase – Ethereum transactions are currently validated through the PoW (Proof of Work) consensus protocol. Just like Bitcoin.

Quick facts about PoW: It requires advanced equipment and vast amount of electricity to solve complex equations. The better the equipment, the faster the complex equation can be solved – unfair match? Wasteful and vulnerable to attacks (51% attack – mining pools that control more than 50% of the mining hash rate). Mining pools defy the main purpose of why blockchain technology is a step forward for us all, which is decentralization.

What is hash rate? Total computational power used by the network to process blockchain transactions. In essence, how many calculations can be performed per second.

The next step in Ethereum’s evolution is the transition from PoW to Proof of Stake (PoS) consensus. PoS has a more random selection. Participants (nodes) stake their assets. Dishonest validations means losing one’s stake and reward. Some algorithmic activity finalizes the choice of validators as well (like coin age base selection where a forger’s coin age is reset to 0 after forging a new block, and a waiting time of 30 days is needed to be selected again).

Fast forward to December 2020, Ethereum 2.0 went live initiating (phase 0) of PoW to PoS transition. Ethereum 2.0 chain is called the Beacon Chain. ETH 1.0 and ETH 2.0 exist side by side until they Merge together.

One of Ethereum’s test networks called Goerli, ran a final test on August 11, 2022. It simulated the process that Ethereum will go through in September. The test validated the reduced energy requirements, and that the merger process works.

The world is now counting down the remaining time to the Merge.

Investors don’t need to do anything before or after the Merge. Ethereum.org warns against scams with the disclaimer “you should be on high alert for scams trying to take advantage of users during this transition. Do not send your ETH anywhere in an attempt to “upgrade to ETH2.” There is no “ETH2” token, and there is nothing more you need to do for your funds to remain safe”

Original article published on www.allfx-consult.com

#carbonfootprint #ethereum #themerge #eth #etc #sharding #capitalmarket #capitalmarkettraining #decentralized

The information provided is strictly for informational use and is not meant in any way to be construed as investment advice. One should seek expert advice, as all investment strategies involve risk of loss.

Belize Forex License | Definitions and Application Requirements

Currently considered one of the top offshore forex license options, the Belize forex license has established itself among one the best to have. With a higher capital requirement, the Belize option provides some insight into the level of capital available and seriousness of the Broker associated. Belize also offers a favourable Tax framework. Although there are reporting requirements, physical presence for board meetings is not required (with other solutions being acceptable). Belize maintains a good reputation in trader communities (compared to other offshore jurisdictions).

 

to answer the most frequently asked questions we receive on a Belize Forex License:

 

  • Local office with at least 1 employee is a requirement
  • The capital requirement is $500,000

 

How does someone start the process to obtaining a Belize Forex License?

 

As with most licenses, the first step is the formation / incorporation of a Belize company followed by the process of collecting/submitting the necessary documents and finally evaluation and approval/rejection of the license by the regulator. Further questions, documents might be requested throughout the process but with the final approval, the license fees are paid to the regulator and the steps for opening a corporate bank account to deposit the capital requirement can start.

If you have Institutional business as a network and operate through a forex IB or White Label program, jurisdictions like Belize may be considered a “pricier” option when considering to start your own brokerage, but it does give a strong impression regarding the seriousness of your business. Unlike working unregulated, Belize will provide comfort to your clients who need a regulated broker to support their trading needs.

 

Find out which brokers are registered in Belize today as well as the country’s latest economic data.

 

In this regard, some of the documents required (but not limited to) are:

  • An accurately completed application form, signed and notarized
  • Details and Data on directors and shareholders with documentary evidence of information provided
  • Copies of passports, proof of country residence and bank statements separately on each shareholder and director all of which must be notarized
  • A CV for each shareholder and director
  • A comprehensive business plan
  • Clean criminal record from each of the respective countries of origin for each of the directors / shareholders
  • Letters of reference from Banking Providers

All documents that are presented in the case for application and company formation should be complete, duly signed and notarized by a Belize notary. If the original documents are not in English, these should be translated and certified locally. For government issued documents, there may be a requirement for these to be apostilled.

 

Information on the corporate structure requirements of a Belize forex license

 

Shareholders and Directors are not required to reside in Belize, however they are required to have appropriate background and experience fitting their roles. They should have a clean criminal record. There must be a local director (Belize resident) on the board. In order for the process of the license to begin, a local entity must be established with all the relevant documents and information submitted. Belize is FATCA compliant, but still maintains the discreet handling of banking and transaction details.

A company that is looking to acquire a Belize license, will be required to have a capital adequacy of no less than $500,000 and will be required to pay a yearly fee of $25,000. The company will be required to keep up-to-date records and maintain regular reporting with the regulator at the prescribed periods (Reporting will include – but not limited to – capital, income, as well as the number, volumes and values of all executed trades. It is important to select the name of the company correctly and according to the guidelines of the Belize authorities.

In order to benefit from the various corporate incentives for operation of international business, it is important to note that no transactions should be conducted with local Belize entities or individuals and that the Belize Dollar should not be a currency offered for trade / transaction.

 

Looking for a Belize Forex License? Contact us today too look into the details

Time frames to get the Belize forex license:

It’s in the discretion of the national regulator to approve, ask questions or even reject any application depending on its complexity and structure. Process should be completed within 3-6 moths from submission of application. Our initial (internal) assessments are usually enough to identify problems (if any) in the early stages, thus maintaining excellent time frames.

 


 

How allFX-Consult can step into this picture:

allFX-Consult is a capital markets and forex consulting agency, catering to quality rather than quantity. For over a decade, our Directors have been connecting with some of the best individuals/professionals, service providers and brokers the industry has to offer so that we can meet any forex corporate challenge.

Because of this, allFX-Consult always has a counterpart/partner for any corporate structure. Before we make any recommendations, we thoroughly examine all possibilities. We’re chosen for being discreet, detail oriented and deadline driven.

Contact us for a private conversation to discuss your case through the contact form or one of our emails at info@allfx–consult.com, partners@allfx-consult.com.

#forexlicense #offshorelicense #belizeforexlicense #forexib #whitelabel

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