Economics and politics - comment and analysis
26. May 2022 I Heiner Flassbeck - Friederike Spiecker I Economic Policy, Economic Theory, Financial Markets

Terra and Luna – or how the moon destroyed the earth

Can there be a better business in this world? One claims to be a computer genius and to have understood that the currencies of this world issued by the states are unstable, inflation-prone and in general threatened with extinction because they are far too inflexible with their national limitations on the one hand and too centralistic on the other. Consequently, they would create a currency themselves that would be available to everyone and could be used globally at any time. Because something like this already exists in the form of Bitcoin, whose wild fluctuations do not exactly distinguish it as a “currency,” they claim to have created a cryptocurrency that has a fixed exchange rate to the U.S. dollar.

The algorithm for this new cryptocurrency was certainly written quickly, and already a surprising number of people began exchanging their hard-earned state currency for the electronic promise. The model quickly picked up steam – as is not unusual for a Ponzi scheme, as long as no participant realizes it is a Ponzi scheme.

The “hard” currency had to be called Terra, something smaller was not imaginable. To be kept stable against the US dollar, Terra needed its own cryptocurrency called Luna. That’s because Terra’s operators certainly didn’t think to put the money they received from investors into U.S. dollar-denominated securities to hedge Terra’s parity with the U.S. dollar. Instead – and this was the really ingenious trick – they set up the following system: Anyone who wanted to get the currency Terra with the 1:1 fix to the U.S. dollar first had to buy the currency Luna for it, whose value was based on supply and demand. At its highest point, in the second quarter of 2022, one unit of the artificial currency Luna was traded at over one hundred dollars. Thus, one could purchase one unit of Luna for one hundred U.S. dollars and exchange it for one unit of Terra, which in turn would be “backed” by exactly one U.S. dollar.

Profits from nothing

Which means nothing other than that the creators were getting incredible counter-values in real currency for their electronic nothing called Luna at times, while at the same time claiming that no one was gaining or losing anything because the value of Terra was, after all, guaranteed. One wonders how stupid a person must be not to see through this “business model”, or better: how greedy for money on the one hand and angry about the zero or low interest rate policy of western central banks on the other hand, that he gets involved in such gross mischief.

Usury is nothing comparable to this, it is simply sheer fraud, which the politicians of this world, however, follow in amazement, as if it were a force of nature between the earth and the moon, which humans had nothing to oppose. The Korean founder of Terra and Luna, Do Kwon, is meanwhile called the most hated man of Korea by many (for example by the Financial Times), but he is by no means behind bars.

In order to postpone the imminent crash of Terra and Luna and to be able to play the rip-off game a little longer, Terraform Labs (Kwon’s company) finally offered potential currency buyers an interest rate of 20 percent on every investment in Luna – apparently without any entrepreneurial concept, where the 20 percent interest rate should come from in a real world, in which one is already very happy about a two percent interest rate.

By then, at the latest, every investor would have known that things could not have been done properly here. At that point, at the latest, the authorities should have intervened. Twenty percent interest is clearly usury at a low inflation rate, but a general 20 percent interest promised by an institution that consists of nothing but a few algorithms is announced embezzlement, because it is only possible to stabilize the old Ponzi scheme with new Ponzi schemes.

It came as it had to come: Luna crashed hard to earth. From over 80 US dollars, it went to near zero within a few days. Terra fell in parallel below parity with the dollar and the snowball had landed. Anyone who guarantees a fixed exchange rate to a real currency must be able to procure the hard currency in prodigious quantities in a very short time precisely when things get choppy in the financial markets and – for whatever reason – people want to exchange the artificial currency they had previously acquired at some point back into U.S. dollars.

And exactly this cannot work in such a Ponzi scheme, because the fraudsters of course do not keep the collected money safely in some trust accounts or in some safes, in order to honestly answer for the entered obligations just in case, but because they squander it themselves and put it aside.

Politics is silent, …

But politics does not intervene. How could they? Which politician could explain to the public from his own understanding how our monetary system works, let alone contribute to the enlightenment of the absurd fantasies of the crypto community? Central banks are failing, too. Christine Lagarde (here) tells us her own son is involved in crypto, but fails to explain to the audience why she could not even make her son understand what mischief he is up to.

To put it bluntly: As long as an institution like the Deutsche Bundesbank, which no longer has any monetary policy responsibility at all, stores tons of gold in its cellars in order to somehow create the impression that the paper money system is “covered” with it, one can actually dispense with any attempt at enlightenment from the outset.

As long as the majority of academic economists follow monetarist patterns in their lectures and derive the significance of the money supply for inflation on the basis of the so-called quantity equation, which only provides any clue to the “money supply” if assumptions are made, that are never covered by reality, one need not be surprised that rich cranks and computer geeks can persuade the mass of people that the modern monetary system is on the verge of collapse and that one can only protect one’s money by entrusting it to the “swarm intelligence” of many “cryptocurrencies.”

Due to actual shortages in certain areas that are central to the real economy (example raw materials for energy and food), consumer prices have risen sharply and, due to a lack of cooperation between bargaining parties and central banks, there is a threat of persistent inflation at undesirable levels. The fact that cryptocurrencies, which entered the race precisely with the promise of protecting against the loss of value of established currencies, are plummeting in value at precisely this time, because the whole world wants to get rid of them as quickly as possible thanks to rising interest rates and a weakening global economy, is a staircase joke of history. After all, the crash of Luna and Terra has shaken up the entire crypto-casino, so much so that Bitcoin has also halved its value compared to November 2021.

… the “experts” are saying crazy stuff …

Simply outrageous, not to say indecent, however, is how these events in the financial industry are commented by so-called experts: One “emphasizes that there is still no sound data basis for a long-term view of Bitcoin.” – as if empirical evidence were needed to expose a clearly unproductive system based solely on speculation for what it is: a rip-off game in which big players and scammers line their pockets at the expense of either gambling addicts, naïve, money-hungry, often young people, or even frustrated workers who are paid inadequately for their hands’ work.

Another expert virtually mocks investors by saying “A lot of people are hurting right now, and there’s a rude awakening happening right now. The crypto market is like a roller coaster ride. You have to buckle up and enjoy the ride (sic!).” And the icing on the cake is provided by the “somewhat more daring crypto experts” who, in view of the drop in value, “advise that now is the time to make a new entry.” Which means nothing other than to usher in a new round of roulette and to court many stupid people who get involved in this madness.

The report quoted here comes after all from the Internet side of the public medium “Tagesschau”. The author of the report does not hesitate to write in the subheading of his article: “The price collapse of Bitcoin and other cryptocurrencies has destroyed hundreds of billions of dollars.” Aha, wiped out. And how, pray tell, did those hundreds of billions of dollars come about before? By blowing up a balloon called cryptocurrencies with hot air. Actually, the public media should help debunk dangerous fairy tales through sensible reporting and thus render them harmless from the start. But to do so, one would have to use one’s clear common sense and have the courage not to play along with the Emperor’s New Clothes game.

But how should that succeed in a world where a well-known and respected private university in Frankfurt advertises a “Certified Blockchain Expert” certificate program on its website with the following text:

“Blockchain is considered THE brilliant technology of our time. Founded in 2008 when Satoshi Nakamoto published the whitepaper on Bitcoin. Since then, numerous cryptocurrencies have been created, hundreds of startups and companies around the world have launched corresponding projects, and in the ecosystem of Ethereum – the second largest cryptocurrency – programmers are working on future applications day after day. All of this – the sums invested, the committed companies, the supporters – speaks to the fact that technologies are being created here that will change the financial system above all. The crypto world has long been far too big to go away.”

Yes exactly, these technologies are changing our financial system because the fairy tales they are used to convey are not being debunked as such. There is no table-covering for everyone in the real world, but only one in the financial world for a few cunning people. And they have meanwhile developed – not only thanks to the stupidity of the masses, but also thanks to the stupidity and cowardice of economists – a power that will indeed not disappear so quickly. The education at such brilliant universities as the Frankfurt School of Finance and Management already ensures that.

… and the central banks are failing

The world’s major central banks have failed on a very large scale. They, like the ECB, have buried monetarism in secret instead of doing so transparently, publicly and forcefully. The attack that this would have represented on the neoclassical-neoliberal doctrine of economics was then probably too unpleasant and unwanted in wide circles. Apparently, the responsible central bankers did not realize how deeply anchored in human prejudices is the idea that a “stable money supply” is needed to prevent the devaluation of money, or at least to keep it within narrow limits.

The phrase “too much money chasing too few goods”, used over and over again by monetarists, seems so immediately obvious that to this day hardly any economist has tried to expose it for what it is, namely the representation of a relationship between two quantities that can never be used for what one pretends to do with it: to fight inflation or even to predict it.

Indeed, one never knows in advance what “too much money” means, in spite of this so plausible theorem. Whether the existing money was “too much money” can only be said in retrospect, when inflation has already occurred. Then one knows that the central banks financed a process that was inflationary. Then one can indeed say that this process came about only because the central banks financed it.

But it does not follow from this exactly what the vast majority of economists claim. For central bank financing was only the necessary condition for inflation, which came about for quite different reasons. Only if central bank financing were the sufficient condition for the emergence of an inflationary process could one derive from the fact that a certain money supply has increased the prediction that inflation will occur.

Since this is not the case, the theorem of the “too large” money supply and the “too small” quantity of goods has no meaning. Nevertheless, it is an excellent way to create confusion, and that is exactly what the majority of economists do with it. The crisis-induced run-up in government deficits and the zero interest rate policy have done the rest, so that large parts of the population are skeptical about the monetary system and their own national currency and are looking for alternatives. The fact that Japan has already been pursuing a zero interest rate policy for thirty years and even now, in an environment of high price increases on some world markets, still has very low inflation rates, is simply not taken note of.

But it would be crucial for central banks and top politicians to explain these connections in order to prevent even further uncertainty among the masses. But how does ECB President Christine Lagarde criticize cryptocurrencies? “My very sober assessment is that cryptocurrencies are not worth anything, they are not based on anything, there is no underlying asset that acts as a security anchor.” And that’s just different with the euro, the average citizen is probably supposed to conclude from this, because behind that, after all, there is a large asset that stabilizes it. And under this “security anchor” Otto Normalverbraucher imagines the gold stocks in the vaults of the Bundesbank.

This kind of “enlightenment” fuels people’s uncertainty about our monetary system instead of putting the brakes on it. When the ECB chief then adds “The day we launch the central bank’s digital currency, a digital euro, I will guarantee that the central bank stands behind it, and I think it is very different from many of these things,” the reassurance strategy is likely to miss its target entirely. Ms. Lagarde should have said that behind the euro – whether in coin, paper or digital form makes no difference whatsoever – is a large association of economies with a large stock of physical capital, whose citizens are largely united in wanting to produce goods and services every day with this stock of capital, based on the division of labor. And it should have said that the stability of belief in the value of the currency is largely determined by whether productive labor is reasonably valued with that currency, or whether the currency can be abused by some people to enrich themselves without productive labor.