Tag Archives: economics

The International Relations of Blockchain

The soaring earnings and dramatic fall of Bitcoin late last to early this year has catapulted the very nascent technology of blockchain to the forefront of news media. It has been met with polarizing speculation from the public and various news outlets, but John Oliver’s Last Week Tonight — a comedy news show, articulated the topic quite well:

While the show did very lightly touch on Blockchain – the backbone technology of Bitcoin, a digital currency – it primarily the use of blockchain technology as a cryptocurrency. The reality is that blockchain technology has far reaching implications and is the key reason why companies across an array of industries are pouring into its research and development.

To dive a little deeper into blockchain, IBM’s Think Academy put together a three and a half minute video succinctly describing the technology’s main advantages:

  1. Transparent transactions
  2. Decentralized ledger
  3. Increased security

These three components, from a telecommunications/information technology standpoint, fundamentally harden the security of information systems in the following ways:

  1. Decentralized Ledger
    As the IBM video points out, blockchain relies on a network of computers across the globe that contribute (or mine) “blocks” of information and attach it together in a sequential chain. Think of it kind of like the game of “snake” on an old-school Nokia phone (I really hope that doesn’t date me…) and the snake itself is comprised of the very same blocks of information linked together. Each block has an “index number”, which puts the blocks in order and when a new block is produced, it is added to the front of the chain. This is why the technology is called what it is – “block-chain”  – or blockchain.

    What does this have to do with a ledger?

    Along with an index number, each block has other pieces of information in it. It can have information that includes, for example, the timestamp, sales amount, and item of a transaction that took place when a block was created. Such a block becomes the equivalent to a digital receipt or invoice that, chained together, evolves into a digital ledger.

    Why decentralize a ledger?

    Each computer on the blockchain network keeps a local copy of the blockchain. As each block gets added to the chain, the same block gets added to every single chain across all computers in the blockchain network. With each computer on the blockchain network updated in real time, the blockchain network effectively becomes a super redundant chain of information that is nearly impossible to manipulate.

    How so?

  2. Increased Security
    Blockchain has a series of quality control mechanisms that keep it from becoming manipulated. One feature is that every block has a full history of every block that came before it. If, for example, transaction information were included in previous blocks, that history is also written in the latest block that’s added to the chain. If someone were to try to game the system by trying to produce a block that has different or conflicting historical data (or a different historical blockchain), that block is rejected as the majority of devices with matching blockchains would override that fallacious block. This feature, in conjunction with a handful of other security mechanisms and designs, makes the ledger, in a sense, immutable: “unchanging over time or unable to be changed.” This immutability ensures accuracy and trust of data that’s included in the blockchain.

    What makes this significant?

  3. Transparent Transactions
    With an immutable and decentralized blockchain ledger, transactions, currency serial numbers, or any type of record the ledger contains can be considered trusted and accurate. Since anyone can confirm a blockchain history, the blockchain (if public, which most are) can be considered transparent. This transparency of the blockchain helps prevent censure, corruption, or fraud.

With these three features of blockchain, the IBM video concludes, “blockchain will do for business as the internet did for communication.” As catchy as the conclusion is, it falls considerably short on the potential of blockchain technology improving other industries and the public sector. A slew of use cases for blockchain technology have been proposed for the medical industry, census, and a whole slew of other sectors, but of interest is its potential for international relations and governance.

New Voting Systems
For the last decade and a half, attempts at introducing technology in the electoral process has been historically marred with skepticism and failure. With the magnum opus that is the Russia probe investigation, it is a tough sell to introduce new technology in the electoral process.

Blockchain’s capability as a decentralized ledger is not just limited to a sales or currency capacity. Ledgers can be kept for all kinds of things, including votes. For example, a block that is generated can include the unique index number of the block, the timestamp of its generation, the vote recording of a specific candidate, and an encrypted unique identifier of an eligible voter. With the immutability and decentralization of a blockchain voting ledger, the final result can be considered accurate and trusted with verification being able to occur in milliseconds.

A number of proposals and pilots have already been rolled out. In Sierra Leone, populous districts and cities have used a blockchain voting system to audit election results. The efficacy of blockchain’s use for transparent and fair elections is still pending study, but certainly the use case, application, and execution of a blockchain voting system is well under way.

International Agreements with Teeth
There is plenty of debate in the world of international relations on the efficacy of international agreements and/or sanctions, but one of its biggest criticisms is the lack of “teeth”. Whether it’s related to a climate accord or sanctions, there is a dearth in mechanisms that can actually impose the terms of an international agreement without the explicit and active participation of all governments in uniform agreement. However, an international banking (wire) mechanism that sits on a blockchain network might solve that problem.

Ethereum is a blockchain technology that is programmable. Unlike it’s cousin Bitcoin, Ethereum doesn’t keep a record of serial numbers, inventory information, or casual data. Ethereum’s blocks contain code known as “smart contracts” that execute a process if certain conditions are met. A bank wiring system on an Ethereum blockchain platform can provide the necessary components of a trusted international platform: decentralized, programmable to automate governance and enforcement, and transparent to prevent fraud at the digital layer.

For example, in the wake of the Russian ex-pat assassinations in London, the UK is flirting with a range of economic sanctions to leverage, but it is already agreed this is difficult to enforce. However, if Europe’s WMD agreements were to be codified into a hypothetical “Euro-zone blockchain banking network”, it could be possible that sanction conditions be programmed into the network and enforce its governance when requirements are met. In this case, the discovery of a nerve agent would automate the enforcement of economic sanctions on those determined to be involved in the assassination.

However, there should be no confusion that the blockchain is just a potential tool of enforcement. Its “teeth” are only as strong as what is coded into it.  That is determined at the treaty or bill negotiation table.

Bridge the Digital Gap of the Developing World
Rural areas in the developing world are notoriously “underbanked” where there are too few or no banking facilities. This missing basic necessity effectively shuts out these communities from participating in the world economy. Underbanking exacerbates poverty by time lost due to travel for trade/transactions or the high cost of urban-to-rural middlemen. 

Blockchain as a cryptocurrency, like Bitcoin, can provide direct-to-consumer interaction on the world stage. Mobile wallets – think of bank accounts attached to your smart phone – can provide a direct avenue of exchange to the most rural of communities with the use of a smart phone and a USB. Through cryptocurrency, rural communities can become more competitive in the world marketplace.

Cryptocurrencies have also been proven to be in high demand in developing countries with volatile market places and currency. Countries like Venezuela, Greece, and Turkey have all seen a dramatic rise in the demand of cryptocurrencies like Bitcoin. The reason for the demand is that it is used to mitigate risk if a currency is experiencing hyperinflation. While cryptocurrencies are also known for their volatile value, it can often be less volatile than the currency of a local country experiencing financial crisis and more readily available than more stable currencies — especially for those in the rural communities.

…Cool Your Jets…
There are numerous other possibilities that blockchain technology can help improve or revolutionize international relations, but it is important to remember that the technology is very, very new. It is safe to say that the technology is here to stay, but how to use it is a completely different matter. There are too few experts, proven use cases, and general products for the technology to be whole sale adopted just yet. It is also an open debate which version or maturation of the technology will become wildly adopted.

All that being said, the serious considerations being brought by industries and the public sectors alike should give the international relations/affairs enthusiasts to take serious notice.

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Why I Will Vote for Obama – A Capitalist Viewpoint

Conducting research is an interesting journey. It can even be an emotional rollercoaster at times. It is fun (at least for me) to see the hypotheses or worldviews I possess in regards to politics, society, etc. is supported by factual evidence. Although, sometimes doing research can completely discredit your beliefs as well. In the case of my last blog post, the journey of doing research uncovered an incorrectly held belief/opinion (once again).

What you saw in the last blog post still remains correct. Both Obama and Romney refuse to address or lower the exorbitant defense budget and they both do not address the giant subsidies the United States pays to special interests, which burns a hole in our national debt. However, my intention when I first wrote the blog was to add a third piece as well. I was going to write that both candidates have not put legislation (or proposed/supported legislation in the case of Romney) into place that addresses the economic fubar that got the entire country into the economic disaster we are currently in. Had I included that into the blog without doing the proper research, I would have been wrong.

The reality is that President Obama did address the horrific wall street practices that brought the United States economy to a near standstill (wiki of Dodd-Frank). In fact, he addressed it emphatically. And, if you’re a capitalist…excuse me…a smart capitalist, you will know how important the passing of this bill was and how important it was in stopping the bleeding of the American economy. If you don’t know, let me break it down:

  1. When Bill Clinton acquired the presidency, he wanted to prove that he was a pro-business Democrat. So his administration began unraveling various government regulation that oversees wall street in the name making it easier for business to do…well…business.
  2. The detrimental piece of legislation that allowed wall street to run wild was the Commodity Futures Modernization Act, which allowed all derivatives to be unregulated and expressly forbade the CFTC (Commodity Futures Trading Commission) from regulating it.
    1. What are derivatives? — Wiki here, but the way Lawrence Lessig explains it is easier to understand:
      “Derivatives are assets whose value is derived from something else, where ‘something’ could mean literally anything. I could have a derivative that pays me if the price of gold falls below $1,000 … A derivative is just a bet entered into by two or more parties. The terms of the bet are limited only by the imagination of the parties … Derivatives serve a valuable purpose. As with any contract, [the] aim is to shift risk within a market to someone better able to carry it.
  3. When derivatives became unregulated, there was no oversight to see if whether parties (bankers, investors, hedge funds, etc.) contracted/bound themselves to derivatives so risky that it became detrimental to the overall macroeconomic structure. This is precisely what happened with the mortgage bubble and collapse of 2008 (click the link!!), which subsequently caused financial firms to go under (Lehman Brothers) and caused General Motors to beg the government to bail them out because Wall St. would no longer let them borrow money for their bad business model.
  4. Alan Greenspan, Chairman of the Federal Reserve during the time financial deregulation was taking place, was flabbergasted that his life-long championing of deregulation and laissez-faire economics would cause such a detrimental financial collapse. In the end, he had to admit he was wrong at a congressional hearing and concede that regulation is a vital piece to an economy.
  5. Sources: Lawrence Lessig’s Republic, Lost (unless I hyperlinked otherwise)

As a result of all this, President Obama championed an overhaul of the deregulated financial sector of the United States and pushed Congress to pass a financial reform bill, which it did with Dodd-Frank. The most important piece to that bill is the Volcker Rule, which keeps banks (or an institution that owns a bank) from amassing too much risk and participating in hedges or derivatives that could be deemed too risky without having adequate insurance or capital to support those risks. It also prevents banks from engaging in investments that are not deemed to be in the interest of its clients (conflict of interest).

Therefore, if you like capitalism…excuse me, intelligent capitalism…you will like the spirit and direction in which President Obama has taken the American economy. This is not to say that Dodd-Frank is adequate. In fact, it’s still far from it, but it does tighten the glaring loophole and puts the economy in the right direction. Candidate Romney on the other hand has threatened to “repeal and replace” Dodd-Frank, which has garnered the attention of financial institutions on Wall Street to pour millions of dollars of into Romney’s campaign. Even the conservative newspaper, The Economist (read: no friend to the Democrats and strongly dislikes Dodd-Frank), find Romney’s economic policies unpallatable. While, I do not agree with certain aspects of the article (which I could delve into in another blog), they seem to come to a similar conclusion as I do to vote for President Obama for a second term:

“As a result, this election offers American voters an unedifying choice. Many of The Economist’s readers, especially those who run businesses in America, may well conclude that nothing could be worse than another four years of Mr Obama. We beg to differ. For all his businesslike intentions, Mr Romney has an economic plan that works only if you don’t believe most of what he says. That is not a convincing pitch for a chief executive. And for all his shortcomings, Mr Obama has dragged America’s economy back from the brink of disaster, and has made a decent fist of foreign policy. So this newspaper would stick with the devil it knows, and re-elect him.”

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Of Deficits and Hurricanes

There’s nothing like a natural disaster to remind us of our (in)famous institutions that snap into action in providing disaster relief–especially in an election year. The blogosphere and web-pundits stormed in (pun intended) on each candidate’s record and positions on disaster relief and found the Romney/Ryan ticket having proposed 80% cuts in disaster relief funding. As online pundits argue over the pros and cons of such cuts, it touches upon one of the centerpieces of the election debate: Excessive spending and what to do about it.

The United States is in a deep hole, $1.1 trillion federal deficit and $16 trillion dollar national debt to be exact, and both president and nominee have different approaches as to how they will close that gap–supposedly (I will get to that later). During the debates President Obama talked about raising taxes for high income households and allowing certain business and household tax cuts to expire in order to close the gap. Mitt Romney’s plan is to cut taxes even further, adding $456 billion hole to the already enormous debt, but has claimed he will make up the lost revenue with “economic growth” and spending cuts. Unfortunately, the numbers don’t quite add up for Romney’s plan. As Bill Gale, from the independent Tax Policy Center, critiques Romney’s debt solution:

“Even if all the available tax expenditures were closed in the most progressive manner possible, it would not raise enough revenue among high-income households to offset the tax cuts they would receive. This was true even when we adjusted the revenue estimates to allow for the impact of potential economic growth, and even when we gave the campaign a trillion-dollar mulligan by ignoring the cost of the corporate tax cuts.

As a result, we concluded that if Romney did not impose new taxes on savings and investments, the only way to finance his tax cut proposals and reach revenue neutrality was to raise taxes on households with income below $200,000.”

This difference excites left-leaning pundits. Some so much so they’re calling it a “New”, New Deal. However, it may be a bit premature, if not totally off-base, to give Obama’s plan such a title. The fact remains, both are unwilling to cut the enormous defense budget and discussion of the bad American subsidy burden policy is non-existent (if you are to click on any one of my links, this is the one you should click on for sure). These two (especially the latter) causes a considerable amount of fiscal waste and only large corporations benefit from the industries these policies support. In fact, according to Lawrence Lessig, author of Republic, Lost, “10% of the recipients of farm subsidies collect 73% of the subsidies.” As a result, small-scale farmers can’t compete with large agriculture corporations because their bottom-line is leveraged far more than a competing small-scale farm. And yet, nobody talks about this.

I am not arguing that subsidies are all bad. Subsidies are an important tool for governments to support a nascent industrial sector so that it can grow and compete in the global market. For example, subsidies for green energy are an important piece of legislation that can help jumpstart a viable green industry sector. The problem becomes when to take the training wheels off. Subsidies artificially lower prices (as already noted in a previous link) and inhibits the free market to push-pull industrial sectors into other areas when they become less viable in one location and more viable in another. As a result, this creates a bubble and wastes an enormous amount of tax payer dollars, which increases the debt/deficit. It’s simply common sense that the oil/fossil fuel industry doesn’t really need subsidies to support their business because it’s already a proven commodity. Yet, we still pump $1 trillion in subsidies globally to get cheap gas and eliminate green energy competition.

At this point, it might seem clear that subsidies have to go, but here lies the conflict. Unfortunately, neither president nor nominee can simply slash subsidies completely tomorrow. There are many businesses, small to large, that are tied up in government subsidies and not allowing them time to transition their business models to seek revenue away from subsidies would cause a whole lot of people to lose their jobs and prices on food and fuel to skyrocket. In essence, it would be like implementing Iranian policies on the United States–not very smart.

The solution would be a long-term plan that must be designed to withstand successive presidents. It would have to be strategic in addressing concerns of rising costs that could be associated with subsidy cuts, which is usually addressed by lowering tariffs for cheaper imports. The money saved by subsidies can be reinvested in burgeoning sectors such as green technologies, high-tech services, and education to create a workforce that can support the demand for such positions.

Such a policy creates jobs, creates the workforce to perform those jobs, and saves the government a lot of money on waste. Cutting subsidy expenditures also allows proposals for tax cuts to actually be feasible by offseting the lost revenue caused by said tax cuts.

Unfortunately, that’s perhaps political suicide for both candidates as their campaigns rely on the contributions of those who benefit from subsidies. In other words, our tax dollars go to companies that pay candidates money to never address this problem. This hits on another issue of campaign finance reform, but that might be addressed in a different blog or you can read Lessig’s book (highly recommended).

In the meantime, we’re left with two politicians that blow harder than Sandy ever could.

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