Arithmetic for Austrians

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Arithmetic for Austrians

This piece grew from a number of conversations with people of Austrian economic persuasion, mostly Bitcoiners and goldbugs (which these days seem mysteriously to have converged). I thought of calling this “Monetarism for goldbugs”, but decided to preserve the mathematical slant of the previous pieces in this series. But it’s monetary arithmetic, of course. And as Austrians tend to obsess about “sound money”, it is specifically sound monetary arithmetic.

(Note: Someone has pointed out on Twitter that the arithmetic in this piece is considerably more advanced than the equations themselves suggest. If you are bit rusty on the mathematics of change, I suggest reading the first piece in this series, Calculus for Journalists). 

Inflation is complicated

As “sound money” seems to mean “no inflation”, let’s start by defining what we mean by inflation.

In mainstream economics, “inflation” usually means a general increase in the level of prices. But it can also be defined as an increase in the supply of money. More money in circulation relative to the supply of goods and services means each unit of money has less purchasing power, which is equivalent to a general rise in the price level.

These competing definitions cause endless confusion. Some very bright people seem unable to decide which definition is right. For example, here is the great economist Henry Hazlitt:

Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit.

These statements are contradictory. Inflation is either caused by an increase in the money supply, or it is an increase. It can’t be both.

Hazlitt knows this perfectly well, so he appeals to the dictionary to decide which of these definitions applies:

If you turn to the American College Dictionary, for example, you will find the first definition of inflation given as follows: “Undue expansion or increase of the currency of a country, especially by the issuing of paper money not redeemable in specie.” 

But he then discovers that there are two dictionary definitions:

In recent years, however, the term has come to be used in a radically different sense. This is recognized in the second definition given by the American College Dictionary: “A substantial rise of prices caused by an undue expansion in paper money or bank credit.”

He has to make a choice, so he arbitrarily decides that the first definition should apply:

The word “inflation” originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean “a rise in prices” is to deflect attention away from the real cause of inflation and the real cure for it.

Hang on. In that last sentence, hasn’t he used the second definition? Do make up your mind, Henry. Either inflation is caused by an increase in the money supply, or it is an increase in the money supply. It can’t be both.

This doesn’t have anything to do with the “cure” for inflation. Under either definition, curing inflation may mean putting the brakes on money creation. But which definition applies does matter. If inflation is caused by money creation, then the purpose would be to end the social evil of inflation, not to restrict money creation for its own sake. But if inflation is money creation, then the purpose of restricting money creation would be purely to restrict money creation, regardless of the social effects.

This might sound like a specious distinction, but in Austrian economics it is crucial. For Austrians, it is money creation itself that is the social evil. Here’s Ludwig van Mises, for example:

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”

For Mises, “inflation” is an increase in the money supply, and rising prices are the inevitable consequence of that inflation.

Mises and the quantity theory of money

Now for the arithmetic. Mises’ definition appears to imply that there is a linear relationship between money supply and prices:

P = M

where M is the money supply and P is the general level of prices. Note that in Mises’ thinking this is not an identity. A rise in M causes P to rise, but not the other way round. So if M is fixed, P cannot rise. P is therefore a dependent variable.

This is a refreshingly simple equation which understandably appeals to those who like simple solutions to complex problems. Sadly, it is far too simple. Compare Hazlitt’s explanation of inflation with Mises’ definition above (my emphasis):

When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase — or does not increase as much as the supply of money — then the prices of goods will go up. Each individual dollar becomes less valuable because there are more dollars. Therefore more of them will be offered against, say, a pair of shoes or a hundred bushels of wheat than before. A “price” is an exchange ratio between a dollar and a unit of goods. When people have more dollars, they value each dollar less. Goods then rise in price, not because goods are scarcer than before, but because dollars are more abundant.

We could call Mises’ assertion that an increase in the money supply necessarily flows through into higher prices the “lump of output fallacy”.*

Mathematically, we can express it like this. P is the general level of prices across all goods and services. But the quantity of goods and services produced is not fixed. So we need a “quantity” term, Q, in our equation:


Unlike the first equation, this one is symmetrical. If production of goods & services falls, either M must fall too or P will rise. Conversely, if the quantity of goods & services produced increases, then either the quantity of money, M, must rise in line with the increase, or the price level P will fall.

An alternative way of expressing this is to say that when there is a fixed money supply in a growing economy, the purchasing power of money will increase. Bitcoiners, who see the primary purpose of money as being to make the holders of money richer, love this. “Wowee, look at Bitcoin’s market cap!” they say.

But this is also too simple. Units of M aren’t spent once then destroyed. They are re-used. So there isn’t a straight-line relationship between the quantity of goods & services in circulation, Q, and the quantity of money, M, used to buy and sell them. The more frequently each unit of M is re-used, the more goods & services can be bought and sold for the same quantity of M. Or, alternatively, the more frequently each unit of M is re-used, the higher the prices of goods & services can rise. The frequency at which units of M are re-used is known as the “velocity” of money, V.

So the final form of our equation is this:


This is known as the “equation of exchange”. It is widely used, and equally widely misunderstood.

The first area of misunderstanding concerns causation. This is an accounting identity. It means exactly the same in all of these forms:

MV=PQ (this is the most commonly used form)

You can’t use this equation to deduce what is causing prices to rise. It could be any combination of falling output, rising money supply and/or rising velocity. You can’t assume that rising prices necessarily means the production of M is out of control. This equation doesn’t tell you anything at all about what causes what.

Nor can you assume that rising M necessarily means the central bank is printing money. It depends what you mean by M.

Matrioshka money

Central banks record several different measures of M. They are rather like a Russian doll: each measure fits inside the next one. The exception to this is M0, most of which is excluded from other measures of M, as we shall see.

M0 is “base money” or the “monetary base”, sometimes known as “outside money”. It is the money created by central banks, or – in days gone by – governments. M0 is divided into two parts: physical currency in circulation, and bank reserves.

All notes and coins produced by a government are base money, regardless of their composition. Thus, gold and silver coins produced by city-states in the 12th century were “base money”, just as much as dollar bills are today. Before the era of electronic banking, bank reserves were also physical notes and coins. But these days, bank reserves are mostly electronic, though banks do have supplies of physical notes and coins so they can fill their ATMs. So M0 is divided into physical and electronic money, of which electronic money is by far the larger proportion.

Bank reserves have been vastly increased by quantitative easing. Banks now have far more reserves than they need to settle customer deposit withdrawals, which is the sole purpose of reserves. Since 2008, the Federal Reserve has paid interest on these excess reserves: other central banks have done so for even longer, though before QE banks didn’t tend to have much in the way of excess reserves. Most base money, M0, is therefore now interest-bearing. Only physical notes & coins remain interest free.

M1 is what most people regard as money, namely the money in their current (checking) accounts and in their wallets. It does not include bank reserves, because bank reserves are not “in circulation”.

M2 is M1 plus short-term saving accounts and overnight money market funds.

M3 is M2 plus long-term savings accounts and money market funds with a maturity longer than 24 hours.

M4 is M3 plus other deposits.

M1-M4 are collectively known as “broad money” or “inside money”. All broad money except legal tender notes & coins is created by commercial banks: in Scotland and Northern Ireland, some banknotes are also created by commercial banks, though these are not legal tender. Bank reserves are not part of broad money.

Central banks don’t necessarily report all the categories of broad money. The Federal Reserve, for example, currently reports M0, M1 and M2: it used to report M3, but stopped doing this in 2006, saying that M3 didn’t appear to add much in the way of useful information and it wasn’t worth the time and cost of producing the figures. The ECB currently reports M0, M1, M2 and M3, and the Bank of England reports M0, M1, M2, M3 and M4.

Confused? Yes, you might well be. Faced with such a multiplicity of Ms, it is hard to know which one should be used in the equation of exchange, or for that matter, which one contributes most to inflation. And it does matter which one is used. Statements like “central banks have vastly increased the money supply since 2008” are correct if your definition of “money supply” is M0, but incorrect if your definition is M2:

Arithmetic for Austrians

But whichever definition you use, a statement like that tells us absolutely nothing about price rises. Nor does this chart. Increasing the money supply, whether M0 or any other M, does not automatically mean that prices rise. That depends on the behaviour of the other two variables in the equation of exchange, Q and V.

No, please don’t rely on GDP

Output, Q, is notoriously complicated. For nations, it approximates to real GDP (RGDP), which is the estimated monetary value of goods & services produced in a specific period, adjusted for inflation. RGDP is notable for revisions, inconsistencies, omissions and opinions. The contribution of services to RGDP is particularly ephemeral. Measured RGDP can also be significantly – and sometimes hilariously – affected by changes in the law. In 2014, Italy emerged from recession when prostitution and drug-dealing were included in its RGDP. And Ireland’s RGDP rose by 26% when, under pressure from the EU, the Irish authorities changed Apple’s domicile for tax purposes from a cloud somewhere above the Caribbean to Ireland. I am increasingly worried by the extent to which both fiscal and monetary decision-making is driven by a measure as volatile and error-prone as this.

I would also hate to think that anyone would use RGDP forecasts to determine the money supply. The equation of exchange is an identity. Thus, output is as likely to be determined by money supply as money supply is to be determined by output; and both affect, and are affected by, the price level. These variables are inextricably linked; the relationship is complex and the direction indeterminate. If you adjust M in response to expected changes in Q, both Q and P can end up changing in unpredictable ways. Messing around with the money supply in response to RGDP forecasts is a mug’s game.

To be fair, the Austrian school aren’t in favour of messing around with the money supply in response to RGDP or anything else. They are quite happy if prices fall because Q is increasing while both M and V remain fixed: this is the “benign deflation” that they think happened during the classical gold standard of the late 19th century. Falling prices can be good news for consumers, though not if falling prices flow through into falling wages and unemployment, which is what actually happened in the late 19th century. The “Long Depression” was miserable for a lot of people.

It’s not difficult to see that falling prices could result in falling wages, particularly if workers lack bargaining power. It’s also not difficult to see that falling prices might result in rising unemployment. Businesses want to make profits, and falling prices squeeze profits: if businesses can’t make sales at the price necessarily to maintain nominal wages and profits, they are likely to cut wages and lay off staff to maintain the nominal value of profits as far as possible. The fact that money buys more when its price increases is lost on most people (this is known as “money illusion”). And anyone who has debt is in deep trouble when the value of money is rising, because the value of the debt rises too. Austrian economists are keen on businesses being able to borrow for productive investment, but then when prices fall, the economy goes into a slump and those businesses can’t repay their debts, they claim the borrowing was “malinvestment”, the goods and services produced were “over-production”, and the businesses deserve to be liquidated and their employees to lose their jobs. Irving Fisher, who was no monetary dove, had some pretty harsh words for this:

But, in practice, general over-production, as popularly imagined, has never, so far as I can discover, been a chief cause of great dis-equilibrium. The reason, or a reason, for the common notion of over-production is mistaking too little money for too much goods.

Fisher shows us that when there is too little money in circulation for the amount of goods & services produced, and no more M can be produced, the result is economic depression. I do have some sympathy for those who say “just fix M, and let P and Q sort themselves out”. But there is another, better, way – and that is to allow M to respond to the demand for money.

Velocity matters

We can regard velocity, V, as an expression of the demand for money. The higher the velocity of money, the lower the demand for it. When demand for money falls towards zero, people dump money in favour of goods & services as fast as they possibly can. We call this hyperinflation, though “hypervelocity” might be a better name for it. Hyperinflation causes immense economic damage and leaves deep scars. It is rightly feared.

At the other extreme, when people hoard money and refuse to spend or to invest in other assets, prices of goods & services collapse, output collapses because businesses are unable to sell their goods & services, and the economy enters a depression with high unemployment and widespread defaults on fixed obligations such as debt. This phenomenon goes under many names. Keynes called it the “liquidity trap”, because people’s preference is to hold money rather than riskier assets. Irving Fisher termed it “debt deflation”, although its principal characteristic is price collapse. We might call it “hyperdeflation”. The most famous example is the Great Depression in the US in the 1930s. It is rightly feared.

But these are extremes, and they are rare. Most of the time, the velocity of money is a benign indicator of activity in the economy. If Q rises more than M, it’s entirely possible for V to increase rather than P falling. Alternatively, falling V can mean fewer binary options platform transactions, which is a sign that the economy is slowing down. If prices have been rising, then falling V could signal a welcome slowdown. But if they have not, then falling V could mean a recession.

Unfortunately V is difficult to measure, and is often only deducible from the behaviour of the other three variables. For that reason, it is treated as a residual – though the St. Louis Federal Reserve statistics database does record it:

Arithmetic for Austrians

(I’ve explained here why it is the velocity of broad money, not the monetary base, that matters for prices.)

In fact this chart shows that V has collapsed since the Fed started targeting inflation in the early 1990s. It’s hardly surprising that commercial banks were able to expand credit in the 2000s without price inflation taking off, and that since the 2008 financial crisis the Fed has been forced to replace commercial banks’ money creation with public money creation on an unprecedented scale. Money simply isn’t circulating at the speed that it did when inflation was higher. It remains to be seen whether V will pick up as the Fed shrinks its balance sheet (there is some evidence that QE depresses the velocity of money). If it doesn’t, then unless there is a return to the excessive credit creation of the 2000s, the equation of exchange suggests a gloomy outlook for the US economy.

Clearly, particularly since the mid-1990s, V has been anything but fixed. However, many economists treat it as fixed. This has an unfortunate effect. Treating V as fixed results in overstatement of the contribution of M to inflation. “Inflation is always and everywhere a monetary phenomenon”, yes, but that does not mean that the quantity of money in circulation is the only important variable. The velocity of money matters too.

Money must have velocity, or it cannot function as a medium of exchange. When money is so scarce and illiquid that its velocity falls towards zero, people create new forms of money for transactions. This is what is currently happening in the cryptocurrency world. As bitcoin copy trading becomes more illiquid and less usable as a medium of exchange, people are turning to other cryptocurrencies. In fact they are creating them. Lots of them.

Cryptocurrency hyperinflation

One of the unintended consequences of the complete lack of regulation in the cryptocurrency ecosystem is that there is unlimited money creation. Anyone can create a cryptocurrency, and far too many of them are accepted, mainly in my view because of an implied link to the US dollar which effectively gives them value that they don’t deserve. In 1896, William Jennings Bryan had to use the political system to try to get an alternative coin issued for use by poor American farmers for whom gold coins were too scarce and expensive. Despite his fiery speech, he failed to get political agreement for silver coinage to be issued. But all a cryptocurrency user has to do is produce a bit of code and a white paper, and hey presto there is a new coin. Even if individual coins have issuance limits, the fact that new cryptocurrencies can be created without restriction means there is effectively no limit to the money supply in the ecosystem as a whole. This is in stark contrast to the fiat currency system, where central banks at least try to limit the creation of money by commercial banks, though not always successfully. In the cryptocurrency world, no-one even tries to control M.

Of course, Bitcoin maximalists like to pretend that nothing except Bitcoin constitutes money. This is understandable, but not consistent with the Austrian economics they claim to espouse. Both Mises and Hazlitt said that M is the sum total of the money created by all money creators in the economy. By analogy, therefore, for the cryptocurrency ecosystem, M is the sum total of all coins, not just Bitcoin. And by Austrian standards, the cryptocurrency ecosystem’s production of M is frighteningly out of control. Bitcoin itself is inflating more slowly than it did two years ago, because the block reward has halved, but the cryptocurrency ecosystem as a whole is hyperinflating. Unsurprisingly, so are its prices.

Some think that “stablecoins” will be able to bring cryptocurrency prices under control. But the fact that money needs velocity, and that velocity varies with demand, undermines the mechanical supply adjustment processes that the creators of non-collateralised stablecoins are building. Adjusting the supply of money only stabilises its price if the demand for it remains unchanged. But adjusting the supply itself affects demand, particularly when people are sensitive about inflation. As Hazlitt points out in the essay cited above, if people expect the supply of money to rise and as a result its value to fall, they might dump their holdings. So stablecoins whose supply is automatically adjusted by an algorithm might turn out to be anything but stable.**

Other stablecoins are pegged to strong cryptocurrencies such as Bitcoin or Ethereum, or even to the US dollar. The problem, as with all currency pegs, is holding the peg. Do these coins really have the reserves to guarantee exchange at the pegged rate?

But in fact, there is a far more powerful “stablecoin” underpinning the cryptocurrency ecosystem. This is why cryptocurrency prices herd together, and why the price trend is ever upwards despite intermittent crashes. Ever wondered why cryptocurrencies are valued in dollars? Why cryptocurrency HODLers rejoice at the “market cap” of their coin in dollars? Exuberant coin creation is made possible by a wholly irrational belief that there will be enough US dollars to enable everyone who has bought into this hyperinflationary ecosystem to cash out at its vastly inflated prices. Whatever Bitcoin maximalists may claim, the cryptocurrency ecosystem’s anchor is not Bitcoin, it’s the US dollar. And it is not Bitcoin’s “sound money” that enables cryptocurrency prices to rise to dizzy heights, but the assumed backing of the Federal Reserve for the faux dollar liabilities being created. But the US taxpayer has not agreed to support this system, and is highly unlikely to do so. At some point, there will be a reckoning.

What conclusions can we draw from this?

Firstly, inflation is complicated because money is complicated. Defining inflation as “increase in the money supply” doesn’t eliminate the complication.

Secondly, setting a hard limit on the supply of money does not prevent inflation, if people can respond to the restricted supply by creating alternative moneys. Note that I am using the Austrian definition of “inflation” here. If you evade a hard limit on one kind of money by creating another kind of money, you have increased the money supply.

Thirdly, even if you choose to define inflation as an increase in the supply of money, inflation is evidenced not by the absolute quantity of money in circulation but by the behaviour of prices. This is what the arithmetic in this post tells us. Targeting an absolute quantity of money ignores the influence of output and money velocity on prices. It is surely better to allow M to adjust so that prices remain stable, than to keep M fixed and allow prices to swing wildly – which is what generally happened when the UK was on a gold standard:

Finally, influencing the demand for money is a pretty good way of managing inflation. After all, if you can dampen demand for money, people will be less likely to create alternative moneys to evade a hard limit. Even for Austrian economists, price stability is the real concern. Mises wanted to restrict money creation because he thought it was the only way of ensuring price stability. But if there were a better way of controlling price rises than restricting the money supply, he would surely choose it.

But how to do this? In the Bitcoin world, interest rates wouldn’t be the right tool, and I’ve already discussed the limitations of stablecoins. Perhaps exchange rates could be a limiting factor. Or perhaps the Federal Reserve should flex its muscles. If cryptocurrency investors knew that the coins they have bought have no guaranteed dollar exchange value, prices would come down remarkably quickly.

Rather than pretending that the only “true” money is Bitcoin and ignoring the growing evidence of out-of-control inflation in the cryptocurrency ecosystem, perhaps Bitcoiners could give some thought as to how the demand for coins can realistically be managed so as to prevent a disastrous crash when US dollar support for their ecosystem is withdrawn.

Related reading:

Previous pieces in this series:
Calculus for journalists
Probability for geeks

Other pieces:
Keynes and the Quantity Theory of Money
The Bitcoin Standard – a critical review
Velocity Matters

* Mises’ thinking is more nuanced than this quote implies. Sadly, however, that of some of his followers is not. If I had a bitcoin for every time I have heard a Bitcoiner or goldbug say “when the Fed increase the money supply, prices rise”, I would now be very rich.

** To be fair, it is not just the producers of stablecoins who think they can control the price of money solely by adjusting the supply. “Sovereign money” proponents tend to think so too. So do some monetarists.

Image from Pixabay, with permission. 

The Bitcoin Standard – a critical review

Forex stock trading

For over a century now, the world has lacked a genuinely international means of payment. This is partly due to decisions made at the Bretton Woods conference in 1944, when the US dollar was adopted as the principal international settlement currency, rather than John Maynard Keynes’s suggestion of an independent global currency that he called “bancor”. Although the Bretton Woods gold-backed structure ended in 1971, the US dollar became ever more dominant.

In 2008, the dollar’s global reach enabled an American financial crisis to spread to the entire world, causing a deep recession and long-lasting malaise. Ever since, there has been a deep longing for a more stable international financial system, one which didn’t depend on debt, wasn’t dominated by the US and was immune to political whims. Some have called for a new Bretton Woods, or even for the return of the classical gold standard.

Bitcoin emerged from the financial crisis as a fledgling international digital currency. Satoshi Nakamoto’s white paper presented it as a peer-to-peer electronic cash system, but from the start, its gold-like properties were evident: it was traded like a commodity, it had a restricted supply and it operated seamlessly across borders. Some, including me, thought it could potentially replace gold as the anchor for a new international monetary system similar to Bretton Woods.

Recently, Bitcoin appears to have turned away from its original purpose and become primarily a new class of asset. Other cryptocurrencies are gradually replacing it as international media of exchange. But some argue that this is merely a transitional phase and Bitcoin will nevertheless eventually become the world’s premier international currency. Those who see Bitcoin in this way are known as “Bitcoin maximalists”.

One of their number, Pierre Rochard, asked me to do a thoughtful review of a new book by Saifedean Ammous, a Lebanese professor of economics who describes himself on Twitter as a “Bitcoin economist and carnivore grill-master”. I was immediately attracted by the name of the book – “The Bitcoin Standard”. So I asked for a review copy.

I hoped to find a rigorous assessment of the economic costs and benefits of adopting Bitcoin as an international monetary standard. But right from the start, it was clear that the author had another agenda. “The table of contents reads like an Austrian goldbug tome”, said one of my friends. It certainly does. Of ten chapters, seven are about money and its history, including an entire chapter on Monetary Metals, and only three about Bitcoin. Quite why Saifedean thought it was necessary to document the entire history of money in order to discuss Bitcoin is not entirely clear. But document it he does, at some length. And not only money, as we shall see. Saifedean has opinions on all sorts of things – education, music, the arts, work, marriage, children, Keynes. And in this book, he freely expresses them.

By far the best part of the book is the last three chapters. On Bitcoin itself, Saifedean clearly knows his subject, and his arguments are generally balanced and nuanced. He sidesteps the “everyone will use Bitcoin” trap, recognising not only that Bitcoin’s illiquidity means that most transactions will inevitably be off chain, but also that there will inevitably be competing applications. He also acknowledges that blockchain cannot solve every business problem.

Personally I think he is too quick to dismiss the threat to Bitcoin’s supremacy from other cryptocurrencies. He seems to think that everyone will value Bitcoin’s deflationary nature and expensive proof-of-work verification as much as he does, but the reality is that people have choices, and they don’t always choose the gold-plated solution. The history of computing shows us that often it is the solution with the best marketing that wins the day, not the one that is technically best. Anyone remember CP/M, which lost out to MS-DOS despite being a far better operating system?

I also think he is unwise to downplay the considerable energy cost of Bitcoin mining. He devotes an entire chapter to explaining why natural resources (except for gold) are unlimited, so presumably thinks that the enormous electricity drain can simply be accommodated, since electricity is derived from natural resources. Perhaps in the future there will be abundant cheap electricity from solar and other renewables. But I was concerned by his lack of interest in the environmental costs. Since there is growing international concern about climate change, Bitcoin’s environmental issues may put people off using it. Also, Bitcoin miners’ energy demand makes Bitcoin vulnerable to censorship. Public grids are already starting to deny access to Bitcoin miners, and state authorities are refusing permission to set up mining rigs. Bitcoin miners may try to develop their own energy sources, but all forms of energy require access to land, and all land is under the control of governments, one way or another. Bitcoin’s need for energy may prove to be its Achilles heel.

But apart from these concerns, the chapters on Bitcoin are pretty good. The problem is the rest of the book. Saifedean has framed the narrative as a gold standard apologetic, leading towards Bitcoin replacing gold in a new digital version of the classical gold standard. So you have to wade through seven chapters of Austrian economics and hard-money fetishism before getting to the meat of the book. It’s like having to cross a swamp to reach the barbecue.

Saifedean obsesses about “sound money”, which for him means either Bitcoin or gold. But he is distinctly cavalier about the soundness of his facts. There are some absolute howlers. This, for example:

There is no better evidence for this than the fact that the rarest metal in the crust of the earth, gold, has been mined for thousands of years and continues to be mined in increasing quantities as technology advances over time, as shown in Chapter 3. If annual production of the rarest metal in the earth’s crust goes up every year, then it makes no sense to talk of any natural element as being limited in its quantity in any practical sense. 

 Gold is not the rarest metal in the crust of the earth. It’s rare, yes. But other metals, such as platinum and iridium, are rarer.

Even more problematic are the logical inconsistencies. Here, for example, he says that increasing gold production would make no difference to its price, because gold hoarding would increase to absorb the increase:

For gold, a price spike that causes a doubling of annual production will be insignificant, increasing stockpiles by 3% rather than 1.5%. If the new increased pace of production is maintained, the stockpiles grow faster, making new increases less significant. It remains practically impossible for goldminers to mine quantities of gold large enough to depress the price significantly.

But the same apparently does not apply to other metals. On Twitter, I asked him about this, pointing out that sharp rises in gold inflows under a gold standard are known to be inflationary. He argued that because stockpiles of gold are so large, it would be impossible for miners to increase production sufficiently to affect prices. And anyway, he said, gold production has been rising at about 2% per year for decades.

Facepalm. Just because something has been rising at a low stable rate for decades doesn’t mean it will continue to do so. Just ask the American construction industry. A sudden large rise in gold production – which could happen if, for example, the present expensive, dangerous and environmentally damaging cyanide extraction process were replaced with cheaper and friendlier starch extraction, or if asteroid mining took off in a big way – would unquestionably depress its price. Even more importantly, so would a sudden inflow of gold on to the world markets if central banks dumped gold in favour of Bitcoin, as he suggests in Chapter 9. Gold isn’t so special that the laws of supply & demand don’t apply to it.

For me, the most difficult sections of the book are those on monetary history. They are littered with errors, and very poorly referenced. And they are biased. Saifedean’s aim seems to be not to give an accurate description of the development of money in all its forms, but to support his hard-money ideology. So we have the obligatory discussion of Yap stones, shells and beads, but no mention of the use of IOUs as money, a practice going back at least 3,000 years. In fact credit-as-money never features in the entire book. For Saifedean, credit simply cannot ever be money. For the rest of us, of course, it is, as the economist Stephen Williamson quipped: 

Fortunately, ignoring credit-as-money is not particularly serious in the chapter on Primitive Moneys. The discussion of the debasement of the Roman currency, ending with the shift of the imperial centre to Byzantium and the gradual decline of Rome, is interesting. However, I am unconvinced that the debasement of the currency was the cause of the fall of Rome. Rather, I would suggest, the debasement of the currency was a symptom of its decline. In my view, Saifedean has causation the wrong way round. It is not the presence of a monetary metal in the coinage that preserves its value. It is the robustness of social institutions that makes using a monetary metal possible. The lesson from Rome is that gold standards don’t survive economic and social collapse.

I am also amused by Saifedean’s assertion that today’s Islamic dinar, which is derived from the Byzantine bezant, holds its value because it is made of gold. I suspect that the more significant reason is the reverence in which it is held because it is seen as divinely mandated. Religions are far better at preserving institutions over the long term than any other form of social organisation.

Saifedean’s problem with causation continues after the fall of Rome:

New generations of Europeans came to the world with no accumulated wealth passed on from their elders, and the absence of a widely accepted sound monetary standard severely restricted the scope for trade, closing societies off from one another and enhancing parochialism as once-prosperous and civilized trading societies fell into the Dark Ages of serfdom, diseases, closed-mindedness, and religious persecution.

Umm, can all of this really be blamed on the absence of a “widely accepted sound monetary standard”? Or did social and political fragmentation make a monetary standard impossible?

More importantly, it’s not true. Nor is Saifedean’s assertion that feudalism followed on from the fall of Rome. Historians are divided on exactly when feudal structures started to emerge, but the earliest estimate seems to be about 800 AD. That is more than three hundred years after the fall of Rome. True, Saxon social organisation did resemble the later Norman French feudal system in important respects. But Viking social organisation did not, and that was at least as important in Europe as Saxon or French.

The untruths continue in the next chapter, where Saifedean describes the rise of the city-states Florence and Venice. According to Saifedean, merchants physically carried the silver and gold coins minted by the city-states. These were accepted all over Europe because of their metal value. “By the end of the fourteenth century,” says Saifedean, “more than 150 European cities and states had minted coins of the same specifications as the florin, allowing their citizens the dignity and freedom to accumulate wealth and trade with a sound money that was highly salable across time and space, and divided into small coins, allowing for easy divisibility.”

No, just no. European cities minted their own coins, yes, but merchants did not carry them from city to city. It was far too dangerous. Trade developed at that time not because of the florin and the ducat, but because of letters of credit and bills of exchange. Saifedean does not even mention the Florentine banks that played such a crucial role in international trade at that time. This is a catastrophic omission.

Saifedean then does even more violence to historical accuracy. He skips straight from the 13th century to the 19th, thereby implying that throughout this time all trade was conducted in gold and silver coinage. Goldsmith receipts, certificates of deposit, the banknotes that were issued first by private banks and later by central banks, the first travellers’ cheques, even France’s disastrous attempt at a paper currency after the French Revolution – they are all airbrushed out of history. Then he comes up with this absolute gem:

Two particular technological advancements would move Europe and the world away from physical coins and in turn help bring about the demise of silver’s monetary role: the telegraph, first deployed commercially in 1837, and the growing network of trains, allowing transportation across Europe. With these two innovations, it became increasingly feasible for banks to communicate with each other, sending payments efficiently across space when needed and debiting accounts instead of having to send physical payments. This led to the increased use of bills, checks, and paper receipts as monetary media instead of physical gold and silver coins.

This is just wrong. Bills, cheques (I prefer the British spelling) and paper receipts long pre-dated trains and wires. In fact the introduction of the telegraph marked the start of the move away from paper and coin as monetary media towards digital money, since it meant payment instructions could be sent by wire between banks, enabling them simply to make the necessary ledger entries without any paper being presented. Even now, international payments are often known as “wire transfers”.

Ordinary people, of course, used physical cash for payments, and at that time most of that physical cash was silver and copper coinage. But banknotes were widely used for large transactions. In the 18th and 19th centuries the British guinea (later the gold sovereign) was recognised as the primary unit of account for international trade, just as the US dollar is today. But trade itself mostly involved paper, as it had for centuries. Letters of credit were as ubiquitous in the 19th century as they were in the 14th.

Some of Saifedean’s points about the latter half of the 19th century are fair. For example, the demonetisation of silver possibly was at least partly responsible for the decline of India and China. But there are other reasons too. For example, Bengal’s cotton weaving industry collapsed during colonial rule because of competition from cheaper British cottons brought in by the East India Company. And the Opium Wars left China scarred and impoverished.

It’s also fair to say that the near-universal adoption of a gold standard based on the British pound facilitated international trade to a then unprecedented degree. However, this was the most centralised monetary system in history. European central banks, led by the Bank of England, cooperated to manage the gold price and international money flows. The US, which did not have a central bank at that time, relied on monetary support from the Bank of England to smooth out seasonal fluctuations in its agrarian economy. It is not clear that a decentralised and autonomous form of such a system, with no central banks actively managing specie flows and prices, would necessarily work in the same way – or be as effective at facilitating trade.

The international trade boom facilitated by the gold standard was even more remarkable when you consider that trade in the latter half of the 19th century was anything but free. True, the British Empire was at its height then, covering a third of the globe, and countries that were part of the Empire had what amounted to “free trade” with Britain. And Britain itself famously adopted unilateral free trade in 1846 when it repealed the Corn Laws. But the US’s import tariffs in the second half of the 19th century averaged 40-50%:

And although tariffs in the rest of the world were significantly lower, they rose gradually during the last two decades of the 19th Century in response to the US’s very high tariffs and its growing dominance of global agriculture:

(chart courtesy of @Pseudoerasmus, who is excellent on all this historical trade stuff)

Saifedean’s assertion that the classical gold standard period was a time of “global free trade” is yet another gross error. In fact the world is much closer to global free trade now, under the “unsound money” system that Saifedean hates, than it was under the classical gold standard. The last three decades have seen globalisation on an unprecedented scale, and an equally unprecedented fall in global poverty. We should think very hard before throwing that away in pursuit of a golden chimera.

After this, Saifedean’s narrative goes horribly wrong. His discussion of the twentieth century opens with this howler:

The twentieth century began with governments bringing their citizens’ gold under their control through the invention of the modern central bank on the gold standard.

The only central bank that was invented at the beginning of the twentieth century was the Federal Reserve, which was created in 1913. All the European central banks had existed for at least the previous century, and many for much longer – the Bank of England, for example, was founded in 1694, and Sweden’s Riksbank in 1668.

He continues:

As World War I started, the centralization of these reserves allowed these governments to expand the money supply beyond their gold reserves, reducing the value of their currency. Yet central banks continued to confiscate and accumulate more gold until the 1960s, where the move toward a U.S. dollar global standard began to shape up,

I genuinely don’t know where to start with this. He seems to be talking about all central banks as if they were the Fed. The Fed did indeed accumulate gold from World War I onwards (though so did the Bank of France), but it did so at the expense of other central banks, not ordinary citizens.

But there is worse to come. Saifedean thinks he knows why World War I lasted as long as it did:

In retrospect, the major difference between World War I and the previous limited wars was neither geopolitical nor strategic, but rather, it was monetary.

So nothing to do with the fact that four great European Empires were fighting for supremacy? Nor that because of their colonial possessions, they were able to bring in fighters from all over the world? Nor that the British were eventually able to call on their historic alliance with the USA? Seriously, none of that matters?


Had European nations remained on the gold standard, or had the people of Europe held their own gold in their own hands, forcing government to resort to taxation instead of inflation, history might have been different. It is likely that World War I would have been settled militarily within a few months of conflict, as one of the allied factions started running out of financing and faced difficulties in extracting wealth from a population that was not willing to part with its wealth to defend their regime’s survival. But with the suspension of the gold standard, running out of financing was not enough to end the war; a sovereign had to run out of its people’s accumulated wealth expropriated through inflation.

Good lord. The European powers did run out of money. They borrowed heavily from the USA. That’s how the Fed acquired all that gold. That’s why they had to abandon the gold standard. If Saifedean paid any attention to debt dynamics, he would see this. But because he totally ignores the role of debt in the monetary system, his causation problem has gone into overload.

World War I eventually ended in 1918. Unsurprisingly, the currencies of the losing team (Germany and Austria) devalued far more than those of the winners. Saifedean does not connect that devaluation with the Treaty of Versailles, in which Germany was forced to relinquish much of its productive capacity to France and Poland, and was additionally saddled with enormous reparation bills. This is what Saifedean thinks was the effect of World War I:

The geographic changes brought about by the war were hardly worth the carnage, as most nations gained or lost marginal lands and no victor could claim to have captured large territories worth the sacrifice. The Austro-Hungarian Empire was broken up into smaller nations, but these remained ruled by their own people, and not the winners of the war. The major adjustment of the war was the removal of many European monarchies and their replacement with republican regimes. 

The Treaty of Versailles set up both the Weimar hyperinflation and the rise of Hitler. It was one of the most disastrous decisions ever made. And it doesn’t even warrant a mention?

It does get a brief mention a little later, in a paragraph discussing return to the gold standard:

Germany suffered from hyperinflation after the Treaty of Versailles had imposed large reparations on it and it sought to repay them using inflation.

Eh, what??? The reparations had to be paid in gold or in kind. Germany couldn’t “use inflation to pay them”. Inflation actually made paying them impossible.

Drawing a veil over this unfortunate episode, we move swiftly on to the Wall Street Crash and the Depression. Dismissing Liaquat Ahamed’s book Lords of Finance on the grounds that it is “Keynesian”, Saifedean accepts without question Murray Rothbard’s partisan analysis. Rothbard blames the credit bubble that burst so disastrously in 1929 on the UK, which returned to the gold standard at too high a parity in 1925 then leant on the US to loosen monetary policy to ease its gold shortage. Well, I agree that the UK’s tight money policy was foolish. So did Keynes, who warned about it at the time. But really, Saifedean – don’t American banks bear any responsibility for their excessive lending?

Saifedean then goes on to criticise US economic policy in the Depression. Again, there are things I agree with: the US could simply have devalued the dollar versus gold, rather than leaving the gold standard completely, and attempting to maintain producer prices and wages in a debt deflationary depression was crazy. So too was running fiscal surpluses, as Hoover did. But who does Saifedean blame for the mismanagement of the US economy? Not Hoover, or Mellon, or Roosevelt. No, he blames John Maynard Keynes:

Having never studied economics or researched it professionally, Keynes captured the zeitgeist of omnipotent government to come up with the definitive track that gave governments what they wanted to hear. Gone were all the foundations of economic knowledge acquired over centuries of scholarship around the world, to be replaced with the new faith with the ever-so-convenient conclusions that suited high time-preference politicians and totalitarian governments: the state of the economy is determined by the lever of aggregate spending, and any rise in unemployment or slowdown in production had no underlying causes in the structure of production or in the distortion of markets by central planners; rather it was all a shortage of spending, and the remedy is the debauching of the currency and the increase of government spending. Saving reduces spending and because spending is all that matters, government must do all it can to deter its citizens from saving. Imports drive workers out of work, so spending increases must go on domestic goods.

This is the first of several attacks on Keynes in this book. Anyone who has actually read the General Theory, or anything else by Keynes for that matter, will know that this is a gross distortion of his ideas. But Saifedean is not writing for an informed audience. His book is polemical, not scholarly. Hence the historical distortions, the lack of credible academic citations, the presentation of opinions as facts, and the demonization of people he doesn’t agree with, particularly (but not exclusively) Keynes.

Saifedean then launches a diatribe against economic education, alleging that it has become a vehicle for enforcing government management of the economy, and blaming what he calls the “Keynesian deluge” for, among other things, murder of “classical liberal” economists in Russia, Italy, Germany and Austria. How on earth Keynes is responsible for the treatment of academics by Hitler, Mussolini and Stalin is beyond me, but that is the clear implication. I suppose if you want to demonize someone, finding a way of linking them with this trio is a sure-fire way of achieving it.

He goes on to dismiss all research into the role of the gold standard in the Great Depression on the grounds that it relies on “Keynesian animal spirits” – another gross distortion, this time of the work of Friedman, Bernanke, Eichengreen, Delong and many others. According to Saifedean, leaving the gold standard didn’t result in recovery:

if the problem was indeed the gold standard, then its suspension should have caused the beginning of recovery. Instead, it took more than a decade after its suspension for growth to resume…”

This is empirically untrue. Not only in the US, but internationally:

(Chart from Will O’Neill via Wikimedia Commons) 

Having blithely dismissed the evidence that leaving the gold standard kickstarted recovery from the Depression, he then comes out with this extraordinary statement:

The nations that had prospered together 40 years earlier, trading under one universal gold standard, now had large monetary and trade barriers between them, loud populist leaders who blamed all their failures on other nations, and a rising tide of hateful nationalism that was soon to fulfill Otto Mallery’s prophecy: “If soldiers are not to cross international boundaries, goods must do so. Unless the Shackles can be dropped from trade, bombs will be dropped from the sky.”

So the ending of the gold standard not only didn’t restore growth, it caused the rise to power of Hitler and Mussolini. You couldn’t make it up.

You couldn’t make this up, either:

From the sky the bombs did drop, along with countless heretofore unimaginable forms of murder and horror. The war machines that the government-directed economies built were far more advanced than any the world had ever seen, thanks to the popularity of the most dangerous and absurd of all Keynesian fallacies, the notion that government spending on military effort would aid economic recovery.

Apparently the Western powers were so desperate for economic growth that they started the most devastating war in history. I thought for a moment I was imagining this, but there is no doubt what he means:

As an increasing number of people went hungry during the depression, all major governments spent generously on arming themselves, and the result was a return to the senseless destruction of three decades earlier.

I have never before encountered such outrageous historical revisionism. The only European government that seriously tried to kickstart growth through rearmament was Germany’s. And even there, economic growth was far from the main objective. Hitler’s primary aim was conquest. Outside Europe, the only country that undertook significant rearmament during the 1930s was Japan, but again that had nothing to do with economic growth. The US did not start rearming until 1939.

The fact that European countries had not rearmed was in large measure the reason for Hitler’s early successes. They did not have the firepower to counter the Anschluss or the invasion of Czechoslovakia, so they opted for appeasement. Only when Poland was invaded did the British act, even though they lacked the forces to mount a credible opposition to Hitler’s war machine. And the rest of the Europe was unable to resist Hitler’s advance. Even the mighty Soviet Union struggled, before the US intervention in 1941.

Saifedean’s allegation is poisonous nonsense. And terrifying. We must not forget what the real causes of World War II were – the asset-stripping of Germany and Austria after World War I, the racism and anti-Semitism of the Nazis, the doctrine of “lebensraum” that underpinned Hitler’s imperialist ambitions. Neither must we forget that eugenics, which the Nazis used to justify systematic murder of millions of “inferior” human beings, had widespread support in other Western countries too. Leaving the gold standard and restoring economic growth had nothing to do with World War II. And although I find Keynes’s support of eugenics repellent, I don’t think his economic ideas had any influence on World War II. Mein Kampf was written in 1924, twelve years before the General Theory. And Hitler was using scrip currency to reflate the German economy and pay for arms long before the General Theory was translated into German.

After the war, the world established a new monetary system, in which the US dollar was pegged to gold at $35 per ounce, and other currencies were pegged to the US dollar. Saifedean claims that to support this, other central banks provided gold to the US. I think this is a misunderstanding of the role of gold reserves at other central banks, but it may also reflect the fact that heavy borrowing by European powers from the US drained their gold reserves not only during the war, but for some time afterwards. Once again, ignoring the role of debt leads Saifedean to unfortunate conclusions.

The fixed gold price was maintained, with extreme difficulty, until 1968 when the London Gold Pool was forced to close. Pegging currencies to gold does not prevent inflation; rather, when inflation takes off, the peg becomes impossible to hold. The US unpegged the dollar from gold in 1971. However, it did not completely abandon its anchor: in 1974, the US entered into an agreement with OPEC to price oil in dollars. Although the price was not fixed, the importance of oil in the international economy, and OPEC’s recycling of petrodollars into US investments, helped to ensure the global dominance of the US dollar and dollar-denominated assets. Saifedean doesn’t mention any of this. Nor does he mention the repeated attempts to manage the dollar exchange rate during the 1970s and 80s. He mentions the high inflation of that time, but simply says “things got better after 1990”. Well I never. Just about the time that central banks gave up trying to manage exchange rates and started targeting inflation instead. The period between 1992 and the 2008 financial crisis is known as the Great Moderation, because inflation remained low and stable in all Western countries. It also happens to be the period of the greatest expansion in global trade in history. You don’t need a gold standard to have both expanding trade and low inflation.

There now follow two chapters extolling the virtues of the gold standard and the awfulness of the present monetary system. Apparently all of the ills of society are due to the lack of “sound money”, while all the beneficial inventions that have ever been made happened under the classical gold standard. I agree that monetary instability is socially damaging: I lived through the 1970s and 1980s, and I remember the unemployment and social misery caused by both inflation and the high interest rates used to bring inflation under control. But inequality is also socially damaging, and a deflationary currency such as a strict gold standard tends to increase inequality, because its rising price makes it increasingly inaccessible to late adopters while encouraging hoarding among those who bought in early. Subdividing the currency may make it more usable for transactions, but it doesn’t stop people hoarding. Anyway, gold standards don’t prevent monetary instability (see Rome), and fiat currency can be extremely stable (see Japan). Once again, Saifedean has causation the wrong way round. A stable, prosperous society with strong institutions is likely to have sound money, whether it is a fiat currency or a gold standard.

There are also repeated attacks on Keynes. Not only his ideas, but also his personal lifestyle are severely criticised. This, for example:

It is no coincidence that the breakdown of the family has come about through the implementation of the economic teachings of a man who never had any interest in the long term. A son of a rich family that had accumulated significant capital over generations, Keynes was a libertine hedonist who wasted most his adult life engaging in sexual relationships with children, including traveling around the Mediterranean to visit children’s brothels.

Keynes was undoubtedly a flawed man, but he was married, and he and his wife grieved over the loss of their child.

More importantly, though, this is more historical revisionism. The heyday of Keynesian ideas was the post-World War II period. This was also the period of the biggest baby boom in history. Birth rates only started to fall when abortion and contraception became widely available in the late 1960s. Marriage rates have also fallen significantly since then, and divorce rates have risen. Is this all because of Keynes’ lifestyle? Hardly. It is more likely due to women becoming economically active and therefore no longer dependent on men. It might also have something to do with the decline of religion and the fading of social norms derived from religion. And it might also have something to do with divorce becoming much easier and marriage much more expensive. And yes, it might also have something to do with social safety nets (which Saifedean appears to hate).  

Having blamed Keynes for family breakdown, and attributed the invention of hot and cold running water to the gold standard (nothing to do with cholera, then?), Saifedean then launches into an extraordinary diatribe against modern music and art. He claims, for example, that modern musicians and artists do not work at their art. He calls them talentless and lazy. His attack on artists, in particular, is so virulent that I wonder if he was rejected from an art college. “A stroll through a modern art gallery shows artistic works whose production requires no more effort or talent than can be mustered by a bored 6-year-old,” he proclaims. My art student daughter gently pointed out on Twitter that art projects can take years to complete. “Stick to your lane, grill-master”, she said.

Saifedean blames what he regards as the degeneracy of music and art on the absence of a gold standard and the interference of government in the economy:

As government money has replaced sound money, patrons with low time preference and refined tastes have been replaced by government bureaucrats with political agendas as crude as their artistic taste. Naturally, then, neither beauty nor longevity matters anymore, replaced with political prattling and the ability to impress bureaucrats who control the major funding sources to the large galleries and museums, which have become a government-protected monopoly on artistic taste and standards for artistic education. Free competition between artists and donors is now replaced with central planning by unaccountable bureaucrats, with predictably disastrous results. In free markets, the winners are always the ones who provide the goods deemed best by the public. When government is in charge of deciding winners and losers, the sort of people who have nothing better to do with their life than work as government bureaucrats are the arbiters of taste and beauty.

Ok, so the X factor is a better arbiter of taste and beauty than the Arts Council?

Ah, no. It’s all about being the right kind of people:

Instead of art’s success being determined by the people who have succeeded in attaining wealth through several generations of intelligence and low time preference, it is instead determined by the people with the opportunism to rise in the political and bureaucratic system best. A passing familiarity with this kind of people is enough to explain to anyone how we can end up with the monstrosities of today’s art.

So people who have inherited wealth are the best arbiters of taste and beauty. Paris Hilton is a better judge of music than someone from a poor background who studied at the Royal College of Music. I am stunned.

Saifedean is also embarrassingly ignorant of how the creative arts have historically been funded. Patronage has always been the prerogative of government. Handel, for example, wrote numerous commissions for British kings, including the Music for the Royal Fireworks, the Coronation Odes and the Water Music. Purcell wrote Queen Mary’s funeral music. The composers Lully, Rameau and later Gluck worked at the court of the French King. Bach wrote the Brandenburg Concertos in the hope of getting a job at the court of the Margrave of Brandenburg. And by far the greatest age of government musical and artistic patronage was the period of the classical gold standard.

I found Saifedean’s attack on musicians and artists chilling. “Degenerate art” has a bad history. Saifedean lambasts Russia, Italy, Germany and Austria for murdering and exiling his favourite economists, but conveniently forgets about the musicians and artists who were murdered and exiled for producing the wrong sort of art, or for being the wrong kind of people.

But I’m not going to waste any more time on this lunacy, worrying though it is. The big question for me is what I asked at the start of this post. Could Bitcoin be the anchor for a global system of currencies in the digital age?

Sadly, if this book is anything to go by, there is little chance of this. The Bitcoin community is in thrall to Austrian economic cranks and historical revisionists. “Sound money” has become something of a religion, and hoarding a religious duty. Saifedean talks about a “pool of loanable funds” (yes, I know, this is wrong, loans create deposits etc.). But this implies that there must be people willing to lend their money, rather than simply HODLing it. In Bitcoin, saving means hoarding, not investing. It means building up a hoard of something akin to gold, then sitting on it waiting for the price to rise – as it inevitably will, if enough people do this. Investment? I don’t see any.

That said, there is investment in the cryptocurrency ecosystem. Lots of it. There is also money creation. Lots of it. That’s what ICOs are about. Creating money and investing it. But the connection between saving and investment is broken: HODLers sit on their hoards, while ICOs create ever more “money”. Loanable funds? I don’t see any.

Until the Bitcoin community ditches the cranks and adopts a sensible monetary policy that properly recognises both the need for savings to be intermediated into productive investment and the need for money to flow, Bitcoin cannot possibly operate as the anchor of the cryptocurrency ecosystem. And in part because of Bitcoin’s failure, the ecosystem itself is hyperinflating. Sound money? I don’t see much of that.

Saifedean spent some time in his book discussing hyperinflation in fiat currencies. He should have a good look at what is going on in the crypto world, right now. That would be a much better use of his economic skills than writing this silly book. Stick to your lane, “Bitcoin economist”.

Update: David Gerard is less positive than me about the Bitcoin part of the book. His review is here.

Related reading:

The Bitcoin Standard: A Decentralized Alternative to Central Banking – Saifedean Ammous
Currency Wars – James Rickards
Lords of Finance: the Bankers who Broke the World – Liaquat Ahamed
Currency Wars and the Fall of Empires – Pieria
Economic Consequences of the Peace – JM Keynes
Essays in Persuasion – JM Keynes
When Money Dies – Adam Fergusson
The Course of Rearmament before the Second World War – Snell
The Rise and Fall of the Third Reich – Shirer
The necessary arrogance of elites
Mein Kampf – Adolf Hitler

Dragon image from Paul Demaret via Wikipedia. 

The EU is not a bastion of protectionism

Forex stock trading

Jamie Powell at FT Alphaville has debunked the USA’s claim to be the least protectionist trade area in the world. With the help of a couple of useful charts, he shows that it comes in a modest ninth on the list in trade-weighted terms. Go Jamie. The “victim America” narrative really needs to be stamped on, hard. America’s trade deficit is not caused by mercantilist trade policies in other countries, it is an inevitable consequence of the dominance of the dollar – and is thus a measure of America’s post-war success.

But in the course of debunking the USA, Jamie also incidentally debunked the Ultra Brexiters.

The Ultras insist that the EU is a bastion of protectionism, with extremely high tariff barriers to third countries. Indeed it does have very high tariffs for some products, mostly agricultural. But in the trade world, fallacies of composition abound. It is not safe to allege that a country or a trade bloc is extremely protectionist simply because it has high tariffs on a few products.

Jamie’s charts show that the Ultras are very wrong. The EU’s average tariff is low by international standards on both bound and trade-weighted measures. In fact it is lower than the average tariff of some of the countries that the Legatum Institute, mouthpiece of the Ultras, says could be part of their post-Brexit free trade paradise. You couldn’t make it up.

Jamie didn’t write about this, though – it is just evident from the charts. So I’ve borrowed the charts.

Here’s the first. It actually comes from Eurizon, who used it to justify their claim that the US is “by far the least protectionist nation in the world”. Never mind the US, just look at the EU28:

EU28 average bound tariff is among the lowest in the world. It is substantially below the bound tariffs of Australia, New Zealand and even Singapore, which the Ultras regard as a shining global example of unilateral free trade.

Of course, as Jamie points out, the bound tariff is a limit, not a target. The actual tariffs operating in practice are usually much lower. But it is interesting that the maximum average tariff that a “bastion of protectionism” will apply is only about half that of a “beacon of free trade” like Singapore, wouldn’t you say?

But what about the actual tariffs? Surely the EU28 is far more protectionist in reality?

Here is Jamie’s second chart. It shows the trade-weighted average tariffs in operation across the thirty countries and trade areas from the Eurizon chart, calculated from WTO data using applied tariffs (yes, the ones that operate in practice, not the bound tariffs) and trade volumes:

The EU28 has an average tariff of just over 3%, about the same as Canada and not far above the US’s 2.5%. Protectionist? Not much.

Admittedly, this chart does show that Singapore’s tariff barriers are in practice very low. The Ultras are right about that. But Australia’s are significantly higher than the EU’s, at 4%. And New Zealand’s are not a lot lower than the EU’s, at 2.5%.

The Ultras’ dream of “like-minded countries” combining to create a free trade paradise appears to be a pipe dream. With the possible exception of Singapore – which is a city-state, not a country – nowhere on earth has genuinely free trade. The UK is not going to find trade any freer outside the EU than it does within it. Indeed, Jamie’s charts show that most of the world is significantly more protectionist than the EU. This isn’t a paradise, it’s a shark pool.

Of course, as the image at the head of this post shows, tariffs are only one dimension of protectionism. Non-tariff barriers matter too, especially for a services-driven economy like the UK. The EU does have significant non-tariff barriers. But then so does every country. They arise from distinctive national characteristics such as law, language, educational qualifications, culture. In fact it is probably impossible to eliminate non-tariff barriers without seriously compromising national identity and self-determination. The Ultras need to decide what is really important to them – completely free trade, or sovereignty. They can’t have both.

Related reading:

Game theory in Brexitland
The Mystery of Jacob Rees-Mogg’s Recklessness – Forbes
Brexit and the Globalization Trilemma – Dani Rodrik

Charts from the Financial Times, obviously. Image from TES. 

The Risks and Rewards of Trading Small Timeframes

The Risks and Rewards of Trading Small Timeframes

I have recently been engaged in conversations with traders that have obtained good results over some timespan by trading sub-hourly timeframes. While it is possible to utilize micro timeframes for more accurate entries and stop placement, I have a strong bias against intraday trading and focusing on the micro timeframes.

In trading, it is possible to utilize a risky trading strategy (for example a Martingale position sizing model, or short-term scalping on volatile instruments) and obtain good results for a certain amount of time. This is what happened to a former coaching student of mine (you can view his story and path to consistency here). But reality kicks in sooner or later and the true risk of these strategies is revealed. If you are still a firm believer in day trading or scalping, read on – it may save your account and trading career.

Short-Term Rewards, Long-Term Risks

Volatile instruments and short-term focus usually go hand-in-hand. After all, it’s not exciting to tackle AUDUSD (which has an ATR of about 60 pips) when you can tackle the Dax (which has a 200 tick range currently). The apparent simplicity with which profits can be made by scalping volatile movers like the Dax is a mirage, and it leads to overtrading because your mind is lured towards the profit potential and away from the process.

Now consider this definition of overtrading:

a near obsession in trading any/all news-based dislocations or momentum boosts during the normal course of business, typically through chart gazing (i.e. staring at charts long enough to “find an entry”). Traders will likely utilize news catalysts or favorite chart setups as “excuses” to justify action.

Unlike many jobs where “working more and working hard” might be desirable, trading is about working “smart” and making good decisions time and time again. In this context, more activity does not translate into higher profitability. Instead, it usually means more losses. Your goal is account growth over a medium to long time period. Consistency (sticking to your trading plan and ignoring anything that’s sub-par) and longevity (surviving year after year, compounding your account) are the key.


Source: Pinterest

Are You Seeking Activity or Following a Plan?

To find out whether you are an overtrader, answer these questions:

  • Do i find it difficult to not be in a trade? –> This is a clear sign of addiction, just like other people are addicted to gambling. Beware.
  • Do i find that i’m unable to remove myself from my computer after entering a trade, or that it is very difficult to do so? –> This is a sign of uncertainty concerning your actions. It’s likely you either do not have a solid trading plan, or you don’t trust the one you are using, or you implicitly know it’s not robust. In the worst case, you are just “looking to snatch some ticks and bail” which has nothing to do with trading.
  • Do I exceed my daily drawdown limit (do I even have one?) –-> if you’re trading more than once a day, you need to have drawdown limits in place to make sure that you are, in some fashion, thinking in terms of probabilities and with some kind of safety net.
  • Can my account survive a likely losing streak? –> Short-term traders are all focused on win rates and frequently display negative-skew return profiles: lots of small winners and very few (but very large) losses that wipe out 5-8 winners at a time. If your trading hinges on your win rate, something needs to change.
  • The minute my trade goes into profit, do I want to move my stop to breakeven? –-> This is a classic syndrome of people that trade thier equity instead of the market. The market doesn’t know or care where you got in. So you cannot evaluate a trade based on how far into profit you are.
  • Can I look back and justify the trade I just took? –> This is a simple check, to make sure you are following a plan consistently.
  • Am I long and short on the same day? –> If you find yourself flipping from long to short (or vice versa) during the same day, something is probably wrong with your filtering.

If you have answered yes to any of the above questions, you may want to remove yourself from live trading before it’s too late, read through/meditate on  the following suggestions:

  • Do not sit down looking for trades. Your brain is hardwired to find solutions so if you ask yourself “where’s a trade?” then you will find one…but it’ll be a loss more often than not. If you’re wondering about the impact that spreads can have on short-term trading, read this.
  • Be ruthless with your trade selection. This also means that you need to possess a plan. You need to know what you’re looking for, where you’re looking for it and when you’re looking for it.
  • Compartimentation: increase time doing stuff you like (gym, cooking, playing golf, etc.) and be mindfull about it. Do NOT think about trading when you’re away from the screen. You mind needs the break.
  • Reward yourself once in a while, for being able to stand back and separate yourself from the markets. Good habits need encouragement. We don’t just need encouragement when we do something perfectly.

Ideas for Stacking the Odds

If you want to use the micro-timeframes with some purpose, at least try some of the following:

  • Select your instrument based some form of relative strength
  • Seek to identify the narrative guiding prices
  • Look for longs only on instruments trending up, and shorts only on instruments trending down
  • Use the microtimeframes to pinoint your entries within the broader picture, with tighter stop losses.

For example, here is a trade idea we issued this week on Nasdaq:

The Risks and Rewards of Trading Small Timeframes

Source: TradingView

Nasdaq was the strongest index at the day of inception, in a clear uptrend:

The Risks and Rewards of Trading Small Timeframes

Sentiment was favourable for longs, as the tensions between the US and China regarding tariffs had (temporarily) dissipated. After conducting the background check (and ONLY after this first crucial step), it becomes possible to deploy shorter term entry tactics to pinpoint good risk:reward opportunities.

This was a decent example, which was successful because of the background structure utilized and NOT because of the entry tactics or some particular technical setup on the micro-timeframes. Of course, even with the best structure, there will still be inevitable losses (which are the cost of doing business and cannot be avoided).

Over to You

Before you take these ideas and go searching for opportunities on the 1min charts, please be honest with yourself and make sure you are not just using this structure as a justification for your actions. Understand that short-term trading carries the highest risk of all strategies, and is possibly the least efficient strategy to adopt.

As retail traders we should all seek to miminize the time we dedicate to the markets, and maximize the efficiency of what we do. Short-term trading does just the opposite.

You’ve been warned!

About the Author

Justin is a Forex trader and Coach. He is co-owner of, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

The post The Risks and Rewards of Trading Small Timeframes appeared first on FX Renew.

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Video: Forex Trading Opportunities for the Week Ahead 25 Jun 18

Here is the video version of our Forex trading opportunities for the week ahead.

Please go here for the written summary: Forex Trading Opportunities for the week ahead

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.

The post Video: Forex Trading Opportunities for the Week Ahead 25 Jun 18 appeared first on FX Renew.

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Forex Trading Opportunities for the Week Ahead 25 Jun 18

I plan my trading for the week ahead each weekend. Here are the Forex trading opportunities I will be stalking this week.

Note that this is my current view, but if market conditions change my view can change too. Generally I will trade in alignment with what I have noted here, though I will wait for a set-up before I enter. I base my view on technical and fundamental information. This is my beliefs and you are welcome to have opposite ones. Having a plan is more important than the actual direction for me. 

  • Wait DXY.  – MT is sideways normal. We have a technical double top in place after a busted breakout of the prior high on 29th of May. There is no major fundamental change that is driving this move so I suspect that we are in for a period of consolidation rather than a longer-term reversal. Fundamentally, there are concerns around the escalation of trade wars between the US v. China and Europe in particular. I would suggest this is all part of President Trumps negotiation tactics and if he gets deals he considers fair then not a lot will eventuate. In the meantime it does cause market participants some concerns. The divergence trade is also alive and well with continued divergence in both economic performance and monetary policy between the US and it’s major counterparts. Again, this leads me to thing the recent sell-off in the USD is consolation rather than reversal. Watch out for US inflation numbers this week.
  • Wait GBP/USD. – MT is sideways normal. We remain in the sideways MT after a hawkish BOE meeting on Thursdays which saw the chance of a hike at the BOE meeting in August increase. No firm bottom is in place and Brexit issues are still at the forefront
  • Wait USD/JPY. – MT is sideways normal. USDJPY is caught between risk-off concerns around trade and monetary policy divergence. Wait for clear direction, though I favor the upside.
  • Wait AUD/USD. –  MT is bear normal. A small double bottom has formed ahead of the key 0.7330 level and the pair bounced strongly on Friday. Fundamentally, the AUD has been struggling on the back of trade concerns, China worries and monetary policy divergence. The picture is a bit tricky with the key level at 0.7330 ideally being taken before a reversal is considered as high probability so best to wait for now.
  • Wait EUR/USD. –  MT is sideways normal. A double bottom is in place and we look to be in for a period of consolidation. Monetary policy and politics along with trade concerns have all been weighing on the EUR and I suggest they will continue to, despite the technical bounce. Trump announced plans for Tariffs on European cars on Friday unless he gets a better deal from Europe (these tariffs are subject to a review). Along with this, Euroskeptics have been appointed in the new Italian government which is raising some concerns.
  • Wait NZD/USD.  –  MT is sideways normal. A double bottom is also in place on the Kiwi. Data has not been great out of NZ and the RBA remains dovish. Expect a bounce but not a longer-term reversal.
  • Wait USD/CHF.  – MT sideways normal. The pressure remains on USDCHF after the key 1.00 level was taken out in early May. With some risk-off sentiment in play particularity around trade, there may well be some further CHF strength.
  • Buy USD/CAD. Trend – MT is bull normal. A key reversal day after a strong run suggests some downside ahead. Now is a good time to take some profits if you are long. CAD has been struggling on the back of ongoing NAFTA concerns and divergent monetary policy. The price of oil has also been key. Oil had weakened ahead of Friday’s OPEC meeting with production increases on the horizon. But OPEC’s 1 million barrel per day increase was seen as a let down by market participants and oil was up 5% on the day. This coincided with the reversal day for USDCAD. Continue to buy, but wait for a sign the trend has resumed.
  • Wait EUR/GBP.  – MT is sideways quiet. We are stuck mid-range of the weekly sideways quiet MT. Wait for now.


  • Sell EUR/CHF. Trend – MT is bear normal. Continue to sell.
  • Buy AUD/JPY.  Reversal – MT is sideways volatile. Busted breakout off the bottom of the range provides a buying opportunity.
  • Wait NZD/JPY. – MT is sideways volatile. Wait.
  • Wait GBP/JPY. – MT is sideways normal. Wait.
  • Wait EUR/JPY. – MT is sideways volatile. Wait.
  • Sell CAD/JPY.  Trend  – MT is bear normal. Look to sell.
  • Wait CHF/JPY.  – MT is sideways normal. Wait.
  • Wait GBP/NZD. – MT is sideways normal. Wait.
  • Buy EUR/NZD. Trend – MT is bull normal. Look to buy.
  • Sell AUD/NZD. Breakout – MT is bear normal. Continue to sell.
  • Buy EUR/AUD. Trend – MT is bull normal. Look to buy.
  • Wait GBP/AUD. – MT is bull normal. Minor double top in place.
  • Buy AUD/CAD. Trend – MT is bull normal. Continue to buy.
  • Wait GBP/CAD. –  MT is bull normal. Careful as bearish hammer in play.
  • Wait EUR/CAD. – MT is bull normal. Careful as bearish hammer in play.
  • Wait NZD/CAD. – MT is sideways normal. Wait.
  • Sell GBP/CHF. Trend – MT is bear normal. Continue to sell.
  • Sell CAD/CHF. Trend – MT is bear normal. Continue to sell.
  • Wait NZD/CHF.  – MT is sideways normal. Wait.
  • Wait AUD/CHF.  – MT is bear normal. Minor double bottom in place.

Other Markets

  • Buy USDSGD.  Trend – MT is bull normal. Look to buy.
  • Buy USDCNH. Trend – MT is bull normal. Continue to buy.
  • Sell Gold. Trend – MT is sideways quiet. Wait.
  • Buy Oil. Breakout – MT is bull normal. Look to buy.
  • Wait S&P 500. – MT is sideways normal. Wait.
  • Sell DAX. Breakout – MT is bear normal. Look to sell.
  • Wait Nikkei. – MT is sideways normal. Wait
  • Wait T-Notes.  – MT is sideways normal. Wait.

View bank reports and fundamental analysis in the chatroom (members only)

View the chatroom 

Economic calendar for the week ahead:

View economic calendar

(MT = Market Type: Click for more information on market types.)

Trend: Market is trending in the direction I have listed and I expect it to continue. 

Reversal: I am looking for a reversal against the current trend.

Breakout: The currency pair is breaking out of a range. 

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.

The post Forex Trading Opportunities for the Week Ahead 25 Jun 18 appeared first on FX Renew.

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Markets Take the Stairs Going UP and Take the Elevator Going Down

Markets Take the Stairs Going U

“Stocks Take the Stairs Up and Elevator Down” – Old investing quote

The recent “tit-for-tat” tariff game being played between the US and China has brought some nervousness to the markets. In this article we’re not going to analyze the current situation, but rather use the market’s reaction as an excuse to shed some light on the differences between trading when market sentiment is benign, and trading when sentiment is skewed to the downside and the markets get nervous for whatever reason.

The old adage goes “the markets use the stairs to go up, but they come down with the elevator”. Trading bull & bear markets does have some differences, some of which we  will cover in today’s article.

Markets Take the Stairs Going U

The chart above illustrates the point: the markets can fall violently, but take much more time to recover.

Following Market Sentiment

In the markets, it really does not matter what the underlying truth might be. It’s a fact that markets move based upon anticipation and typically reverse with the news. Markets are never efficient for they will respond to what people believe even if that belief is clearly not true. This has given rise to the maxim  “sell the rumor, then buy the fact”.

The day to day and week to week oscillations really have nothing to do with facts or instrinsic copy trading binary options platform value. The value of an asset changes over longer periods of time. So, what are we really trading, if we have a short or medium term objective?


Participants are very aware of local drivers, headline events, risk-factors…and when market participants get surprized – or caught with their pants down – big moves can happen even if we are far away from “value”.

Markets Take the Stairs Going U

My belief is that being a pure technical trader is like fighting with one arm tied behind your back.  By only following the technicals, you’re never going to know what hit you. You’ll just know that you got hit. A better approach is to stay in touch with global developments, via newswraps or a live squawk service. The reason for paying attention to local drivers and influences is to know what is happening, and what price is being driven by.

Remember that one thing that hasn’t changed in all these years: people love fast markets. Many retail traders are attracted to trading because of the thrill that fast markets can give them. Unfortunately this means that they show up to do business at the worst of times (during Non-Farm Payrolls, during Central Bank announcements, etc) and are usually chopped up. Most fast markets happen to the downside and can be traded if you have a disciplined method for doing so. Otherwise, it’s like playing the lottery.

The Smell of Fear

“All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.” – Jesse Livermore

Markets Take the Stairs Going U

The first thing that happens, when a shift in sentiment is hitting the market, is a sudden “relatively large” move against the day’s natural evolution. If the day was positive, suddenly it turns negative with a volatility expansion.

The first thing to do, when you notice this behaviour, is to check what kind of tape-bomb hit the wires and is causing this type of an emotional response. Only with this kind of confirmation can you possibly plan a logical trade.  In the chart above, it was in fact dovish commentary during an ECB rate decision.

Dovish commentary doesn’t always generate this kind of a move. However, in the week before the announcement, some ECB speakers had turned hawkish and offered some forward guidance, speaking about copy trading binary options platform tapering QE (reducing stimulus) earlier than expected. The Euro was trading with a positive tone into the meeting thanks to this. So the dovish nature of the event forced a broad re-shuffling of positions and the ensuing violent drop.

The second thing to do is use mini consolidations or pullbacks to get in. When the markets are moving fast, it makes sense to dial into the faster timeframes because – especially with temporary drivers or tape-bombs – the move can exhaust itself before you get a chance to trade it.

Over to You

“If you fail to prepare, then prepare to fail.” –  Benjamin Franklin

We have already talked about market sentiment and how to stay in touch with it. It really adds confidence when you can understand what is driving a certain move, because you can evaluate the probability of followthrough on the move – i.e. whether it can be dealt with aggressively or not.

But in general, the market does tend to rise slowly and fall very quickly. Commodities (and cryptocurrencies) are a bit of an exception as they have explosive volatility on each side. Once again, this volatility can be beneficial if you are following the drivers and attempt to stay on the right side of the move.

Good Luck!

About the Author

Forex trader and Coach. He is co-owner of, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

The post Markets Take the Stairs Going UP and Take the Elevator Going Down appeared first on FX Renew.

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Are You Only As Good As Your Last Trade?

An old saying goes “you’re only as good as your last trade”. There have been other variations on the theme, for example:

  • you’re only as good as your latest success
  • you’re only as good as your latest picture
  • etc.

Unfortunately this kind of ruthless reasoning  can seriously impact your mindset and your trading. It’s no different than recency bias, where your focus is centered on your  most recent trading decisions, disregarding your longer term track record and the fact that you still have N-trades to make, over your lifetime.

You are not just as good as your last trade. You can be better…or you can be worse. It all depends on the decision-making process that you follow, and if you followed it in your most recent trade.

What Represents Bad Trading

To be fair, there is a way to evaluate your last trade…but it is the same way you can evaluate any trade, anywhere, any time:

  • did you follow your time-tested plan?

This is the only relevant question, and there can be shades of grey in the answer:

  • no, I did not follow the plan because I don’t have a plan;
  • no, I did not follow the plan because I was influenced by something;
  • no, I did not follow the plan completely because there was a logical reason for the slight variation which made sense based on my experience;
  • yes, I followed the plan because it was a bread & butter setup.

Being able to offer the correct reply has much to do with self-reflection, being honest with yourself, and being disciplined. At the most basic level, a bad trade happens when you don’t follow the rules. The outcome of the trade doesn’t matter. What matters is that for some reason you did not follow your rules.

Most people would try to evaluate a trade based on it’s outcome – but in reality that’s using hindsight to justify your actions. In an uncertain environment, with many unknown unknowns, you can only have faith in a time-tested process. Your last trade is either a reflection of this, or it’s not.

So, if you made a mistake and broke your rules, then yes your last trade should teach you something. You should look at it and say “what made me behave poorly?”.

The Negative Effects Of Recency Bias

Recency bias is all around us. Just look at the newspaper headlines during each serious market downturn:

Source: SummitStrategiesGroup

And we all know what happend next:

This is an extreme example to make a point. In your own trading, you are influenced by recency bias whenever:

  • you get overconfident due to a string of winners. I actually get more cautious the longer the winning streak, which is the opposite of what most retail traders do (augment their risk per trade, think they have a fail-safe system, overtrade, etc.);
  • you get discouraged by a string of losses. The only thing that matters  when I take a loss is whether I followed the plan or not.

So here are some suggestions on how to detach yourself from the outcome of any given trade:

  • Remember that each trade is, in reality, a random event. Your trading edge will reveal itself over a large number of trades.
  • Let your long-term track record speak. It’s more difficult to have confidence in your trading model if you have just started out of course – but then again you should be on a demo account and in the forex system development workshop or in a coaching session in order to create a consistent trading model.
  • Stick to your guns. Follow the plan. If you have a ranking method that offers you “A-quality” and “B-quality” trades, perhaps only stick to the A-quality.
  • Take a break from trading. If all else fails, remove yourself from the market and make sure you have other aspects of your life which are rewarding. You absolutely cannot let your trading results condition your mood.

Over to You

Even experienced traders are not immune to bad trades and recency bias. I made a bad news trade recently, where I simply did not follow my own rules. It was a dumb, emotional mistake. Does it matter, in the grand scheme of things? Nope:

  • Fortunately it was the only mistake of this kind that I have made in the past 12 months or so.
  • I am comforted by my longer term track record.
  • I know exactly what happened and why I made the mistake.

So when you realize you made a mistake, follow my lead. We all make mistakes sooner or later, but trading is about consistency and longevity. It’s a marathon and not a sprint.

In the Book of Psalms it is written “weeping may endure for a night, but joy cometh in the morning“. Losses are never pleasurable but we need to remember that it’s just one single negative event. It cannot stop you from achieving success in your trading.

Don’t just be “as good” as your last trade – be better than you last trade!

About the Author

Justin is a Forex trader and Coach. He is co-owner of, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

The post Are You Only As Good As Your Last Trade? appeared first on FX Renew.

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[Webinar Recording] ECB: Taper or Temporize?


About the Author

Justin is a Forex trader and Coach. He is co-owner of, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

The post [Webinar Recording] ECB: Taper or Temporize? appeared first on FX Renew.

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How to Follow the Market’s Rhythm

“If most traders would learn to sit on their hands 50 percent of the time, they would make a lot more money.” – Bill Lipschutz, Market Wizard

Most traders overtrade, for one reason or another. Overtrading is perhaps one of the quickest ways to decimate your account and especially as a retail trader with limited risk capital, the best thing is to only trade when the market is active and offering A+ trades. Efficiency is possible by working smarter, not harder.

The question becomes: how can you identify those instances when it’s worth pulling up a chair? When will the market be ripe for participation and when is it better to sit on your hands?

The Market’s Rhythm

Some weeks the market is very active, and some weeks (like this week in particular) the market is simply chopping around. There is a rhythm to the market, which is important to understand. All traders probably know by now the usual behavioural traits of the three main money centers in Foreign Exchange:

  • London is usually the trend-setter;
  • New York is the deepest liquidity pool and frequently challenges the London move;
  • Asia is usually the consolidation session.

But sometimes the market is awake and sometimes it seems like it’s sleeping. How can you logically forecast when to sit in front of your screens and when to something else with your time?

Let’s take this week as an example. This week we’ve had 3 relatively big pieces of data thus far:

  • UK employment data
  • UK CPI
  • US CPI

You would think that the markets would be pushed around by such items (which usually generate viable NewsFlow Trades) but instead all has gone silent this week. The markets are evidently waiting for something. Bill Lipschutz, founder of Hathersage Capital and Market Wizard, put it this way:

“What is important is to assess what the market is focusing on at the given moment”.

Source: ScotiaFX

Source: Commonwealth Bank of Australia

By paying attention to any bank sheet or market wrap, it becomes immediately evident what the drivers are for the day or week ahead. This goes one step further than just watching an economic calendar because amongst all the pieces of data, you know which ones will be the main focal points.

In particular, this week the FOMC rates decision and the ECB rates decision take center stage. The markets frequently remain rangebound ahead of such influential decisions and for good reason: if something unexpected comes out of either meeting, it could potentially force a decisive shuffling of positions – meaning large moves. This would make any pre-event risk taking fruitless.

Mindful Inactivity

The key to remaining in touch with the market’s rhythm resides in a few important practices:

  • check your macro calendar at the beginning of each day (as a reminder);
  • read up on a few bank sheets over the weekend in order to get a feeling for what will be in focus during the week ahead;
  • read session wraps in order to stay in touch with the day-to-day happenings (ForexLive produces free market wraps here);
  • take into consideration bank holidays, regular holiday times (August/December).

Mindful inactivity means that you’re acting like an eagle and not like a pigeon. Eagles do not waste energy. They wait for thermal columns and glide seamlessly upwards, carried by the hot rising wind. Thermals appear during morning or early afternoon hours after the sun rises and warms the earth. When a surface grows hot enough, a thermal column rises into the atmosphere. So that’s when it’s more likely to see eagles flying. They don’t appear out of thin air…you know that they are creatures of habit and are attracted by a certain dynamic.

Mindful traders are tuned into the rhythm of the market and listen, read and prepare. If a trend is starting on the back of a meaningful story/development/news item, a significant price change may follow. Hence, waiting for the market to be inspired by something enhances the risk-reward ratio of your trades, and can also positively impact your win rate.

Mindful Trading in the 21st Century

Understanding the matters that matter and sitting on hands the rest of the time has become much more difficult nowadays. With social media (Twitter especially), social trading platforms and tons of analysis being spewed out each day, the noise-to-signal ratio is blasted out of proportion.

We need to apply the 80/20 principle: 20% of the efforts will return 80% of the benefits. Don’t get too close to the market. Only focus on market wraps, important news events and read up on the rest during the weekend. Do not get carried away with analysis whilst in a trade – let your trade management do it’s job.

Over to You

Remaining in touch with the market’s rhythm will give you peace of mind when sitting on your hands. You won’t be lured into action. You won’t be looking for trades. You will let things come to you. But this is nothing new: profitable trading habits were born centuries ago and endure to this day. Jesse Livermore had already written:

  • “Analyze in your own mind the effect, marketwise, that a certain piece of news may have”;
  • “Try to anticipate the psychological effect of this particular item on the market”;
  • “Don’t back your judgement until the action of the market itself confirms your opinion”.

And I would simply add:

  • when things aren’t clear, or when your edge isn’t present, sit on your hands. 

It’s ok to let some trades slip past you, so because the ones you do take will have a much higher probability of working out.

About the Author

Justin is a Forex trader and Coach. He is co-owner of, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

The post How to Follow the Market’s Rhythm appeared first on FX Renew.

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