How the Network State Pardons Prisoners of Centralization

Prisoners of Centralization

In the book prisoners of geography, author Tim Marshall describes how geopolitical conflicts including hot wars are predicted by geography.

· What if geography also can predict future economic recessions?

Although timing the impact factors causing market drawdowns from an investors perspective remains difficult, I believe that current supply chain, inflation and geopolitical instability are predictably impacted by geography meaning that economic recessions are not purely a function of human behavior, but instead, like Tim states in prisoners of geography, also a derivative of how geographic location corresponds with climate and abundance of natural resources within the physical borders of nation states.

I believe most governments understand theoretically how current market instability is partly an exogenous function of geography, but that political leaders in both democracies and autocracies are practically incentivized to treat economic issues as an endogenous disease cured by conducting radical fiscal and monetary policy to remain in power like heroin addicts looking for smack instead of solving problems by weaning of the stimulus addiction.

In our current centralized system, poor geographic location leads to suboptimal economic policy decisions by sovereign nations and therefore predictably increases the likelihood of a more severe economic crash.

Below text outlines how leveraging blockchain technology to create network states is a path forward to partially solve economic and geopolitical issues caused by geography.

The Importance of Price Discovery

“Conflicts and recessions are currently being ineffectively treated with painkillers rather than cures; knowingly or unknowingly doesn’t matter.”

The fact is that economic policy is not a tool that widens rivers, reshapes mountains, decreases temperatures and eliminates desserts to improve harvests and supply chains necessary for both efficient price discovery in stocks and commodities, which are needed to achieve basic standards of living.

“Without price discovery, bad ideas never die and good ideas never thrive.”

Just like a snake sheds its skin to remove harmful parasites, the economy needs bankruptcies to remove harmful companies. By allowing bad companies to fail during recessions, more capital reaches good companies in periods during economic growth so that humanity can invent itself out of geographic and climate dependencies.

To create sustainable economies, society should therefore leverage decentralized blockchain technology to compete with the current centralized system Just like socialism competes with capitalism to maximize prosperity.

Decentralized capital lets democracy decide how to decrease the dependency on polluting sources of energy and poor geography through community cooperation in a cross border fashion to hopefully increase life quality for the poorest humans.

Virtual Competition From The Network State

“Conflicts and economic recessions are ineffectively treated with painkillers rather than cures; if that is happening knowingly or unknowingly doesn’t matter, as the end-result remains…”

Improving technology requires investment which in turn needs price discovery, but markets never experience price discovery if central banks continue printing money to prop up dying assets.

· In addition to inhibiting investments made based on accurate information, poorly executed monetary and fiscal policy may lead to re-allocation of resources perceived to disproportionately impact certain parts of a population negatively, which can spark revolutions, election of populist leaders or even hot wars.

However, what if technology can be used to de-escalate conflicts by expanding cooperation across borders through decentralized communities?

· In the book the Network state, entrepreneur and blockchain philosopher, Balaji Srinivasan, defines in one sentence the network state and how an internet community may form through decentralized blockchain technology;

“A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population, income, and real-estate footprint to attain a measure of diplomatic recognition.”

· Without technological competition, which may allow communities to form across borders based on self-identified attributes as described by Balaji above, lack of beneficial geographic location creates sovereign competition that may escalate to hot wars meaning that geography is currently perhaps the most important factor for a nation’s economic success.

However, by adding digital/virtual realms that potentially achieve diplomatic recognition by cross border community formation, real land like desserts, oceans and mountains for strategic security and protection, lengthy rivers without waterfalls for superior trade routes and natural resources like precious metals and abundant energies for monetary power and industrial production, become marginally less important, which decreases the probability of hot wars and increases the likelihood of cooperation between nations to create more sustainable economies.

Risk of Current Economics

If we return to Prisoners of Geography, Tim Marshall demonstrates how the geographic lottery explains why a US that includes warm water port access to the Pacific and Atlantic oceans and friendly neighbors like Canada and Mexico remains as the dominant world power since around World War 1.

Tim also outlines how China, due to the abundance of natural resources and geographical luck, has positioned itself as a potential threat to US domination from a game theory perspective by teaming up with other world powers like Russia to both limit the US and expand their own progress.

Note, economic policy never creates nations, but short-sighted economic policy destroys them. Every single world power in history spanning silver mining Spaniards in the 1500s to a great British empire of the 19th century lost world dominance due to rampant inflation, which is directly correlated with an economic policy to print money.

With a potential recession on the horizon after a global pandemic in combination with record inflation and expanding interest rates, Americans are now being challenged by the Chinese similar to how the Americans surpassed the British as the number one world power around the start of World War One.

With 6 trillion in economic stimulus spanning 2020-2022, the US has printed more money for economic recovery in response to Covid-19 than the combined GDP of Canada and Japan in 2021. China has also printed money, but given their centralized state model, they have a greater control over how printed money is spent. China could for example tell companies making perhaps too great of a profit to return that money to the state coffers, while in the US windfall taxes from excessive profits require approval from a democratically elected congress.

Unlike Chinese economic policies where poor companies may be shut down by the government, the FED’s action to print money in response to economic crisis periods like 1971, 1992, 2001, 2008 and 2020 has therefore prevented true price discovery of financial assets and commodities over an extremely long time period, which in a capitalistic market has allowed poorly run companies to stay alive despite delivering inferior products and services.

“The potential dollar devaluation resulting from continuous FED and Treasury stimulus is similar to the currency devaluations that collapsed UK and Spain when they respectively were the dominant world power.”

China is now salivating at the possibility of overtaking the US position as number one and is using a blend between economic policy and foreign soft-power to increase influence in South America and Africa through investments like building a giant canal in Nicaragua and a super dam in Ethiopia with the hope of establishing political influence. These two areas are potential hot zones for future conflicts because the US does not like the fact China is pursuing influence in the west.

Capitalism and Geography

Legendary investor Howard Marks often states when he is interviewed on podcasts and financial tv that capitalism without bankruptcy is like Catholicism without hell.

Howard believes that economic recessions are necessary in capitalism as a method to flush out viruses from the system similar to antiviral medication. His argument is that great companies survive tough times, while poorly managed companies with poor business models collapse. According to Howard, economic hardship therefore allows market participants like himself to buy companies with bad management, but with a good business model, and install good management teams instead to create profit.

· Although the US is considered capitalist and China socialist, China has benefited immensely relative to the US and other western countries from free trade. In return for shipping deflation to the western world by producing goods and services for pennies on the dollar, China has created import dependency. Western consumers now demand cheap products similar to a drug addict looking for heroin and with supply chain problems China determines the price.

In addition to being the largest exporter in the world of intermediary goods like computers, China contains vast natural resource wealth, natural borders, warm water ports and great trade routes.

· Western import addiction yields China an enormous power because what happens to the west if China becomes isolationist. From a game theory perspective, China will most likely handle trade embargos much better than most western countries other than the US due to the abundance of natural resources, which ensure survival from global financial hardship that a trade embargo may create. China’s technology sector has vastly improved and no longer relies on western software to run native computer networks.

Through exporting deflation and becoming both technology and natural resource independent, China is now setting up a push to challenge the US dollar and become the world’s reserve currency.

Inflation makes previously cheap goods expensive. In an isolationist world, goods are marginally produced within borders rather than relying on trade of goods produced through comparative advantage. For example, outsourcing production to China has dampened prices in the US to benefit the consumer, while the Chinese have expanded life quality for workers, but with China in power, they will set the price, not US.

Location

Geography plays a huge part determining a nation’s export and import of goods and services, as countries with abundant natural resources tend to be developing nations that export unfinished goods necessary to produce finished goods refined by developed nations like microchips and batteries to create powerful and expensive computers and electric cars.

Moving goods requires beneficial geography, as difficult trade routes require higher consumption of energy and greater levels of cooperation. Despite accelerating advances, technology, up until recently, only allowed for centralized advances controlled by companies and governments thereby yielding immense to governments and companies in developed nations.

Even sea export, which is the most energy efficient method to move goods, benefits immensely from canals and straits that shrinks the distance between two trading partners like the Strait of Hormuz and Malacca as well as the Panama and Suez Canal may. However, often the location of these straits and canals are monitored by third party nations that are not global world powers like Egypt and Panama.

For example, the Strait of Malacca is a preferred route for China to import oil from Russia, which means a blockade of oil in the Strait of Malacca could easily therefore escalate into hot conflict. In a centralized world, the spark to a conflict with China could be just one man deciding to invade Malaysia and stop all ships from passing.

However, if we decentralize communities into states that span virtual and real borders, humanity spreads power and information to a larger group of people that together can de-escalate potential conflicts that may arise from blockades by sharing information and preventing propaganda.

Conclusion

When Tim Marshall wrote the Prisoners of Geography, he hinted at the possibility of using technology to overcome economic challenges caused by geography. Perhaps blockchain was the technology that Tim subconsciously was describing, but the advances of cryptography and the internet has made it possible for software developers to create virtual trustless economies.

As described by Balaji in the Network State. The blockchain through the creation of virtual realms may create cross border communities to shake up a world where physical geography historically determined the economic faith of sovereigns, states, cities and towns.

Decentralized communities spanning cross borders will increase empathy for people living on the other side of the world because people in different countries will share things that were not obvious previously. Two Liverpool fans are less likely to fight irrespective of location if they feel a sense of community thanks to the blockchain all else equal.

That idea of coming together as a group across borders to create diplomatic states recognized by sovereigns is the future and will expand cooperation in our world!