You may remember that economists are interested in the relationship between GNP and the nation’s money supply i.e., the Velocity of Capital.  Better, they say, that the nation’s capital is in motion and, inflation notwithstanding, the more motion the better.  Unfortunately and despite the quantitative easing that has taken place over the past decade, there seems to be a significant portion our money sitting on the sidelines, waiting for clear signals that risk and reward are once again in balance.  As we have seen in the news recently, much of this money is squirreled away in accounts several layers deep and, often, in off-shore banking centers.  Could it be that the real concern is over-taxation?  As a nation, could we be witnessing the odd relationship between politicians wanting to stimulate the economy by mobilizing capital and the controllers of that capital refusing to expose it to risk on one side, and taxation on the other?  Not only is this plausible, it describes a scenario that is very likely.  Have financial planners, accountancies and tax lawyers done such a remarkable job of managing wealth that their inescapable conclusion, and advice to their clients, is: “take your money off the domestic table and, preferably, well off the table”?  It appears so.  Such funds are often invested elsewhere, where the rates of return are higher and taxation is lower.  This capital and its advantaged winnings may eventually be repatriated, but, in the uncertain meantime, none of it is participating in the stimulation or growth of our economy…and that’s a problem.

Recent discussions here at Capital Dynamics have centered on two seemingly-unrelated items:

1. Traditional businesses with low risk and good velocity of capital (turns of capital) and,

2. Block-Chain and non-block-chain Distributed Ledger businesses where risk is higher and money changes hands at a blistering pace.

We like some mature lines of business, where margins are necessarily small but receivables cycles are measured in days, not months.  Easy to see how a seemingly uninspiring business can, and does, generate gross returns of 10% per month, and more.  The news of the day however, repeats that Bitcoin is up 1000% or down 30% and those who have not yet entered the crypto-coin fray are missing out on spectacular, if potentially illiquid, gains.  But what is a crypto-currency if not an alternative to the nation’s fractional currency and legal tender?  It is this discussion that has captivated us over the past few months.  We’re wondering whether such mundane small margin businesses can benefit from converting to the block-chain model re: decreased costs and even faster reconciliations?

Not lost on participants and onlookers alike is the idea that platforms like Ethereum, Bitcoin Cash and others are the digital equivalent of the gold rush hardware store -repeatedly taking a few dollars from each and every miner who chooses to go off-grid and prospect for outsized returns.   Are citizens losing confidence in our dollar and the politicians and tax collectors who stand behind it, or are they merely taking the opportunity to branch out and do what professional investors have been doing for some time i.e., getting clear of domestic controls in order to earn a good return?  There is no doubt that our economic system has become burdened with over-regulation and taxes (and taxes on taxes) but will it take mass migration to crypto-currencies before those who are most threatened by it admit that they have been poor stewards of our money supply?

The banking industry may be best placed to discuss the creation and movement of currency and, several high profile members of that community have expressed their views.   As much as we respect his opinion, we are not sure that we agree with industry titan Jamie Dimon of JP Morgan; who suggests that the bubble will pop and holdings in electronic tokens will be worthless.  It is not clear whether he means regulators will attempt to suppress activity in the block-chain arena (see: China) or that, eventually, all crypto-currency issues will be exposed as entirely speculative.  One thing is certain though: the democratization of transaction processing via the distributed ledger model has deeply unsettled the tax man, traditional banks, investment houses and other for-profit businesses which operate under government license and with high barriers to entry.