Is Blockchain Ushering in a New Era of Deal-Making?


In the ever-expanding modern global economy, international deal-making is an integral part of trading, investments, and exchanging value across national borders. Dealings on a domestic platform are easier to conduct, where contract-driven activities can be verified in person and more reliably, without leaving much room for fraudulent activity or valuable information to be compromised.


For international economic ventures to proceed, contracts must be signed and managed remotely. This may prove to be a dubious notion when operating with the help of today’s array of unstandardized and haphazard online circuits, which can often prove inauthentic and put either or both parties at risk. Signatures can be superimposed illegally, data can be stolen, and the overall sanctity and confidentiality of the contract violated, not to mention the harried process of maintaining these relationships. For these issues and more, blockchain is increasingly considered a fitting solution.


The Status Quo is Stuck

One will encounter several counterintuitive digital infrastructures online when attempting to locate desirable personnel and contractors. These include posting advertisements in local forums or websites like Craigslist. There are often delays in delivery with little accountability, and few records to prove the reliability of applicants.


Foreign exchange regulations often hinder the flow of broader online dealings as well, and can put significant roadblocks in the timely completion of a contract. Often the wait for a payment to be processed lasts for days, and the banks involved on either side may unduly halt payment processing, owing to rigid governmental mandates. Platforms like Upwork, Freelancer, and PayPal impose draconian rules on contractors and vendors, requiring minimum deposits and taking absurd fees. Dispute settlements on these platforms can lead to sizable monetary losses for either party involved and are often drawn out, crippling smaller businesses who suffer from greater exposure to cash flow volatility.


Start-ups and other smaller businesses also use content management systems and other traditional platforms like email to maintain contracts with their clients and employees, make economic transactions, and guide personnel. These carry the risk of hacking, levy fees, and insist upon a level of maintenance that adds to overhead. Keeping these hindrances in mind, it is evident that one needs a more autonomous solution for smoother dealings across the world: a medium that will help overcome the hiccups and larger shortcomings and guarantee security for all involved.


How Blockchain Can Help

Blockchain is a distributed ledger that decentralizes deals in a way that encourages transparency and autonomy, without the threat of hacks or hefty fees. Professionals and businesses across numerous fields of work will soon be able to transact via platforms like Confideal, which put a familiar interface on the once-complicated process of creating smart contracts. These blockchain-based agreements allow two parties to exchange value based on a set of conditions, and blockchain can automate their operation without oversight because of its data irrefutability.


There is no longer an advantage in hiring an intermediary to enforce proper conduct in business relationships. A Confideal blogpost explains that prior to the mass adoption of smart contracts, their legal status needs to be assessed in order to choose the appropriate smart contract model suitable for a particular jurisdiction. “To put it simply, code is not law, but smart contracts created on a platform enabling the execution of said contracts and dispute resolution may be one.”


There is greater transparency in conducting dealings through blockchain technology. The permanent ledgers in a blockchain environment require transactions to be permanently recorded, and the cryptographic standards in use make it impossible for third parties to hack or compromise deals. Data tampering is impossible because of the strict node consensus rules required to alter blockchain entries, and every transaction is easily trackable, complete with validated digital signatures that keep everyone accountable.


As blockchain is a decentralized solution, it naturally eliminates the role of middlemen in helping recruit service-providers and removes the risk of costly mediation. It also drastically reduces the time spent in looking for potential clients and employees. Dealings can be done directly between participants, creating a truly free market exempt of mediating parties. Forex regulations are also irrelevant, and stringent government oversight of economic deals can be bypassed, which helps boost smaller businesses.


Concerning contract arbitration, an unfortunate necessity in some cases, the two parties involved must rope in an external third-party arbitrator one who is objectively unaware of the terms of the smart contract and its details. Smart contract platforms can provide a rating system for arbitrators so that clients can effectively choose arbitrators of superior quality. Platforms such as Confideal give parties equal footing when negotiating and arbitrating, removing asymmetric dynamics and ensuring the most optimal outcome in any situation for both signees.


The New Deal

What will the future of online dealings look like? An e-commerce store will be able to easily set up smart contracts with its vendors to automatically withdraw cryptocurrency, fulfill inventory, or onboard new products. Arbitrators with experience can specify their skills and services (including language preferences, experience, and other personal markers) so that the store can find them if necessary. Even finding outlier skills will be simple, like hiring a Korean-speaking arbitrator with knowledge of real estate laws in Florida, USA.


By helping contracting parties to save considerable time and money, and avail of higher efficiency in such transactions, blockchain will further empower individuals and businesses (small and large alike) to gain greater control over the exchange of products and services, with the ease and security of negotiating face to face.

                                                    

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Don’t Fight the Fed

 

Alexander Hamilton, George Washington’s Treasury Secretary, in his first “Report on the Public Credit” in 1790, put forth the concepts of “assumption” and “redemption.”

He argued that the federal government should assume the Revolutionary War debt of the states and pay those debts at “face value” in full to the bearers of such debt on demand.

In order to redeem the $75 million of bonds, Hamilton promoted creation of a “sinking fund” that would pay off five percent of the bonds annually.

Revenue to pay off the principle and interest should come from tariffs on imported goods and an excise tax on whiskey. Bondholders would be due 4% annual interest payments.

Today, the total value of US Treasury Bills, Notes, and Bonds is above $20 trillion and rising. US Treasuries are the global standard of debt, as is the US Dollar the standard for currency.

A bond investor today would enthusiastically buy 4% US Treasuries, if he could buy them at “par value” or $1000 per bond. Today’s 10 Year Treasury Note Yield is 2.309%.

In today’s bond market, a 4% bond is worth $1150, according to the Hewlett-Packard 12C calculator, a $150 “premium.”

However, if a bond investor believes that market interest rates will rise over time, the price of that 4% bond should fall until the market rate, now 2.309% matched or rose above the bond’s “coupon rate” of 4%.

The decision to buy, sell, or hold US Treasuries takes into account the “interest rate risk” just described.

US Treasuries today carry the lowest “default risk” among global government bonds, so investors need only consider interest rate risk.

Bond prices determine not only what a bond investor will receive twice per year in interest payments, but also what a borrower pays monthly to finance a home purchase or start a business.

That is where the rubber meets the road for the Fed’s influence on economic expansion or contraction.

The driver of the vehicle to which those wheels are attached is the Federal Open Market Committee (FOMC). It directs the market operations of the Federal Reserve System (The Fed).  

Fed action affects the price, and thus the yield, of US Treasuries by buying and selling in the open market.

When the Fed buys, it decreases the supply, increases prices, and lowers the yield. Selling increases supply, decreases prices, and raises the yield.

The Fed also sets the Fed Funds Rate, the interest rate at which banks may lend money to each other on an overnight basis.

The rate at which banks can borrow also influences the rate at which they will lend to their customers via home mortgage and business loans.

The higher the Fed Funds Rate, the higher the interest rates on loans.

Most often, the effective Federal Funds Rate is lower than the yield on US Treasuries, but not always.

If the Fed wants to slow the economy, it will raise the Fed Funds Rate and make it more expensive for banks to borrow.

Paul Volker’s Fed, in June of 1981, raised the Fed Funds Rate to a peak of 20% in order to squelch the rampant inflation of the 1970’s.

He succeeded. His Fed’s action was accompanied by the 1980-82 recession and its 10+% unemployment rate.

If the Fed wants to encourage lending by banks, it can lower the Fed Funds rate.If banks can borrow at a lower rate,

their loans to homebuyers become more profitable, and they will tend to lend more, but not always.

During the 1990-91 recession, which followed the Savings and Loan Crisis of the late 1980’s and the invasion of Kuwait by Iraq,

Alan Greenspan’s Fed dropped the Fed Funds Rate from 9.75% in December of 1988 to 3.0% in September of 1992.

Greenspan stated his frustration with the stubborn 7+% unemployment rate and banks’ unwillingness to lend by saying, “You can’t push on a string.”

Paul Volker’s Fed proved that rising interest rates will eventually slow the economy and stem inflation,

but his successors—Alan Greenspan, Ben Bernanke and Janet Yellen—did not meet with equivalent success by lowering rates to stimulate the economy and reduce unemployment.

It turns out that bankers will not lend unless they see a potential for profit. Loans to poor credit risks can end up as losses on the balance sheet and unemployment for loan officers.

Bankers want to make money, but they also want to keep their jobs.

Confronted with what would later be known as “The Great Recession,” Ben Bernanke’s Fed dropped the Fed Funds rate from 5.25% in June of 2006 to 0.25% in December of 2008.

Even though banks were able to borrow at an effective 0% interest rate, unemployment continued to rise.

The unemployment rate was 10.0% in October of 2009 and did not drop below 9% until October of 2011.

The Organization for Economic Co-operation and Development considers full employment to be an unemployment rate of between 4% and 6.4%.

 

For Ben Bernanke, author of Essays on The Great Depression, the worst economic event in US history was not the inflation of the 1970’s,

but the deflation of the 1930’s. When, in 2008, a zero-percent Fed Funds rate had little effect on the unemployment rate,

Bernanke’s Fed began buying bank debt, mortgage-backed securities, and treasury notes.

The intent of this “quantitative easing” was to flood the banks with liquidity in order to bring down long-term interest rates.

By the end of his second term, the Federal Reserve had transferred $4.5 trillion to the US Treasury from bank balance sheets.

When Bernanke’s second term as Fed Chair ended in 2014, unemployment was still at an unacceptable rate 6.7%.


Janet Yellen, the first female Chair of the Federal Reserve, defended quantitative easing, but vowed to revert to traditional monetary policy

when economic growth and unemployment returned an acceptable level. Her Fed targets a 2% growth rate for Gross Domestic Product (GDP) and is now close to achieving that goal.

The US economy expanded at an annualized rate of 3.1% in the second fiscal quarter of 2017.

Yellen’s Fed has increased the Fed Funds rate four times and projects continued gradual rate increases.

On Tuesday, September 27th, Ms. Yellen told the National Association for Business Economics, “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.”

But she also admitted that the Fed’s understanding of inflation is “imperfect” and that the apparent lack of inflation in the current full-employment economy is “a mystery.”

She said, “We recognize that something more persistent may be responsible for the current undershooting.”

 


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