Fixing Capitalism: Nouriel Roubini

How Roubini’s attacks on bitcoin and crypto exposes his own ignorance

Nouriel Roubini, aka Dr Doom, thinks crypto is garbage and he’s been ranting again.

The distinguished professor of economics at New York University’s Stern School of Business is worth taking notice of, not so much because he is a professor of economics but because he is one of the few members of that profession to correctly predict the financial crisis of 2008.

Roubini is what you might call an anti-crypto maximalist.

Unlike some of his peers, such as Mohamed El Erian, chief economic adviser at financial giant Allianz, who says that cryptocurrencies will survive the bloodbath of the bear market, Roubini sees no value whatsoever in bitcoin or crypto. El Erian, in contrast, said back in June that “bitcoin is a buy below $5,000”.

Roubini remains stubbornly convinced (he would say vindicated) that crypto in all its forms is fundamentally worthless, devoid of intrinsic value – and he is not shy about shouting it from the rooftops, much to annoyance of many in cryptoland.

Tweets galore

Roubini is a prolific tweeter. In a flurry of tweets over the past 24 hours he has taken the crypto industry to task for being “THE most manipulated financial market in ALL human history & manipulation of ‘assets’ that are all shitcoins & worth ZERO”; it is also “the most criminal, corrupt” market, he explained for emphasis in another tweet.

Comparing the stock markets’ pain to crypto, he insists “a stocks bear market (-20%) looks like a minor scratch”.

In yet another tweet he references the lay-offs at ConsenSys describing its retrenchment, variously, as an “Apocalypse” and in another tweet says the 60% payroll cull will “soon be 99%”. For those losing their source of income this Christmas he is all heart. Roubini “has no sympathy for those fools who left real jobs 4 fake quick riches of shitcoins”. Nice!

Further up the feed he interprets the resignation of Blythe Masters from Digital Asset for “personal reasons” as indicative of hype turning to dust “like all the other flopping ‘enterprise DLT’ projects peddled by IBM, JPM/GS”.

It goes on, with Overstock’s plummeting share price getting the Dr Doom treatment. To repeat, this is all from the past day or so. The man has too much time on his hands. He also retweets a-plenty the musings of like-minded crypto detractors and attacks anyone that takes issue with his analysis, such as crypto news outlets.

Did he actually read the Bakkt story?

And at the top of the feed we find him referencing CoinDesk’s story that the Bakkt launch may be delayed, which he suggests, wrily, “would be better to be postponed for good as by the time it is launched 1000s of shitcoins will be dead & buried… already crypto zombies as down 95+% from peak”.

Before we get to the meat of the problem with Roubini’s economics let’s take a look at some of those tweets, leaving aside the ones that aren’t much more than childish abuse – although, to be fair, he has a lot of trolls to contend with.

For starters then, he clearly didn’t get past the headline of Marc Hochstein’s CoinDesk story on Bakkt, as it emphasises the launch was still happening but the US Commodity Futures Trading Commission moves slowly, so there may be a delay but it could be “just a matter of days”. To be fair the flood of institutional money coming into crypto is likely to be more of a trickle at first, as a recent JPMorgan client note suggests.

Blythe Masters resignation dig

Then there’s the goings on at Digital Asset, where Blythe Masters, one of the first Wall Street bankers to get into crypto, this week resigned her position as chief executive. Masters was formerly a high-flyer at JPMorgan, joining Digital Asset in 2015.

So, is Digital Asset really all washed up, as Roubini intimates? Not exactly. The company has partnerships in place with the likes of Google and is currently working on upgrading the Australian Securities Exchange’s clearance and settlement systems with distributed ledger technology.

That’s not to say there hasn’t been something of a coming off the boil regarding corporate blockchain development, as the hurdles to actual real-world adoption are more realistically appraised.

The highly reputable Barron’s points to a survey by Gartner showing that only 3.3% of chief information officers had deployed blockchain software.

Gartner’s Rajesh Kandaswamy told Barron’s: “This technology that’s supposed to be revolutionizing financial services, we don’t see it yet.”

However, the operative word, to remind Roubini, is “yet” – it’s not the same as saying it will never see adoption by financials. After all, email was invented in 1972 and the first consumer service didn’t appear until 1979.

Certainly, bitcoin and blockchain has been around for 10 years, which may seem like forever in digital years, but the notion that banks are going to kick out their legacy systems without extremely careful consideration of all the ramifications, with interoperability between different systems and the lack of industry-wide standards key considerations, was always the pipe dream of boosters.

And as for Masters, she hasn’t exactly turned her back on the industry. She is still on the board at Digital Asset and remains the chairwoman of the governing body of the Hyperledger blockchain consortium.

Roubini lumps in the good with the bad

The other substantive criticism, beyond the abuse and “told you so” self-aggrandisement, is of the markets and the many sub-par projects he dismisses (as do many crypto people) as shitcoins. He certainly has a point on both counts.

As was reported on EWN, pump and dump schemes are rampant in the space , as are the other forms of market manipulation such as wash trading. But such practices could be quickly squeezed out by regulation. The lack of such regulation and oversight is hardly the fault of the industry alone, although exchanges should not have to be instructed by others before they put proper market surveillance in place.

Crypto markets are still the Wild West that’s for sure, but the prevalence of scammers and criminals is sadly to be expected in an industry with few rules and money to be made from the gullible and poorly educated market participants unable to discern between the good the bad and the ugly.

For example, a good rule of thumb is to assume that all Telegram trading groups are a nest of scammers, and to confine trading to the largest most liquid exchanges such as Binance and Bitfinex, for example – both were recently said to be the only trading venues that don’t falsify their trading volumes.

No intrinsic value – really?

So, in fact there is plenty to agree with Roubini on when it comes to the current state of the crypto markets, but he is mistaken in seeing the endemic abuse as somehow a necessary and inevitable feature of the industry per se.

Indeed, a widely circulated rebuttal of Roubini’s anti-crypto stance by Jan-Willem Burgers of consultancy CapGemini writing in Bitcoin Magazine, makes the point of actually agreeing with him on the subject of altcoins, choosing to concentrate instead on a defence of bitcoin.

Roubini, in common with many others who would not claim to be economists and those who are, says that crypto has no intrinsic value because it supposedly lacks physical properties – and therefore any use or exchange value – beyond the entry of a number in a digital ledger.

Zombie crypto, zombie companies

It is this thinking that allows him to scoff at the collapse in the value of bitcoin, telling all who will listen that its price will eventually “go to zero”, in comparison to the sturdier world of stocks presumably.

Given that the Nasdaq has just fallen into a bear market, Roubini may not have to wait too long before the S&P enters correction territory and its very own bear market.

Take a look at the two charts below from professional trader Peter Brandt, who predicted this year’s 80% drop for bitcoin. It shows the parabolic rise of bitcoin and the S&P 500. Notice any similarities?

How Roubini's attacks on bitcoin and crypto exposes his own ignorance 10

Brandt explains: “Parabolas, once violated, often result in 80% decline. Violated $BTC parabola lead to sub-$4,000 — violated $DJIA parabola should lead to sub 19,500. Could get there by end of year.”

So, stocks, from that perspective and with Roubini’s thinking in mind, might be said to have been in a bubble these past few years. Does that mean that the equity asset class is a fiction, a mirage? Hardly. Likewise bitcoin.

As is his wont, he throws around the word zombie in reference to the multitude of dead coins – and there will be many more to die – as if this were yet more incontrovertible proof of the failings of crypto.

I wonder if he’s ever heard of the term zombie companies? I’m sure he has.

A zombie firm is generally agreed by economists to be one that is at least 10 years old and unable to cover its debt servicing costs out of profits.

There are some very large corporations that fit that definition: Netflix, Tesla… we could go on.

Schizoid Roubini?

As Roubini would no doubt agree, rising borrowing costs will increase the number of zombie companies, but he seems unable to connect the dots. Perhaps all those years working for the IMF and the World Bank has formed cataracts over his eyes in that regard?

In an interview with the Financial Times’s Gillian Tett, at the time of the publication of his book (with co-author Stephen Mihm) Crisis Economics: a Crash Course in the Future of Finance in 2010, Roubini said: “There is this big debate between the Keynesian school and the Austrian school. But I am pragmatic and eclectic. It is all about timing.”

His prescription to cure the world’s financial ills is that in bad economic times governments should spend money to maintain demand, as Keynes advocated. However, in the good times government should get out of the way and let the free market do its thing, as Carl Menger and the Austrian School he gave birth to would have it.

Ultimately, Roubini’s solution for the periodic crises the economic system expresses itself as a mixture of pie-in-the-sky reformism, where the world’s financial regulators and governments work together for the common good; and where policy is not constrained by “politics” so that public expenditure and debt can be cut as required.

He probably won’t be feeling the pain from the cuts he advocates, as there are still plenty of folks happy to pay handsomely for the services of Roubini Macro Associates (New York) and Rosa and Roubini Associates (London).

Now if he was really of the Austrian School he would be fixated (wrongly in my opinion) on fractional reserve banking and the lack of commodity backing to fiat that allows central bankers to inflate away the value of money, but he is not.

And if he was really true to John Maynard Keynes he would, for example, be in favour of fixed exchange rates (but not the outdated gold standard version as we see below), not the floating ones we have today.

Keynes wasn’t just an economics prof – he ran money for Cambridge University very successfully. On the other hand,  Roubini admits in the FT interview he had never directly bought any asset class, at least up until 2010, preferring passive funds.

Roubini doesn’t understand the origins and essence of money

Roubini tweets about gold and quotes Keynes approvingly, but in so doing only reveals his own ignorance, which for someone on the Time magazine’s list of top 100 most influential people and who is a respected economics professor, is disturbing.

Here’s the tweet:

Gold is useless; a barbaric relic as Keynes put it. Really?

Keynes actually said, in 1924, the “gold standard is already a barbarous relic” – that might seem like nit-picking but “gold” and the “gold standard” are two different things. The key thing is he didn’t say gold was useless – far from it.

And here we come to the crux of the matter, as far as Roubini’s understanding of money goes, honed as it has been over decades in academia.

Keynes didn’t think gold was useless. If he did he would not have said in 1943, when he was laying out his ideas for a post war economic order, which became the Bretton Woods system, the following: “We do not take any action injurious to the position of gold.”

He went on: “The world being what it is, it is likely the confidence gold gives can still play a useful part.”

Keynes, unlike Roubini, understood that the essence of money was not derived from its physical form as such, but rather its acceptance by various human societies at different times and levels of development, as a reliable store of value.

Abstract transferable value

For the Ancient Greek city states, each with its own distinct coinage, or Manu Masa, the king of the 13th-14th century west African Mali empire, acclaimed to be the richest man in the world because of the size of his gold hoard, what they all had in common with the holders of crypto today – or at any rate bitcoin, is their common understanding of the concept of abstract transferable value.

And of course many other commodities before gold were used as mediums of exchange, such as the cowrie shell or the stone money (rai or fei) of Yap island.

The latter, Keynes and the high priest of monetarism Milton Friedman, were both familiar with.

In Friedman’s case he thought the rai system was comparable to the gold standard. He produced a paper about the monetary implications of the island’s form of abstract wealth, in which he noted:

“The Yap Islanders regarded stones quarried and shaped on a distant island and brought to their own as the concrete manifestation of wealth. For a century and more, the “civilized” world regarded as a concrete manifestation of its wealth metal dug from deep in the ground, refined at great labor, and transported great distances to be buried again in elaborate vaults deep in the ground. Is the one practice really more rational than the other?”

The concrete manifestation becomes abstract in exchange as the universal equivalent, obliterating barter.

The rai were “mined” through a proof-of-work (sailing to a far-away island) because the limestone didn’t exist locally. Sound familiar?

“Ownership of a disk could be transferred, for instance, as a wedding gift, to secure political allies or in exchange for food from residents of nearby islands after a severe storm. These deals also occurred in front of the whole community. No matter who acquired a rai, it stayed in its original location.”

Archaeologist Scott Fitzpatrick of the University of Oregon puts it this way: “Stone money transactions on Yap were the precursor to Bitcoin and blockchain technologies.”

The people of the Micronesian island of Yap invented a monetary system far too advanced for Roubini to grasp. Guess that explains his crypto blind spot.

Last word(s) to Lloyd Blankfein, the recently retired chief executive of Goldman Sachs who, although not a “believer” in bitcoin, takes a less “ideological” and dogmatic position than Roubini: “If it works, I say to myself, ‘Hmmm, maybe that was a natural progression from hard [commodity] money to fiat money to consensus money.’ So who’s to say.”