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Saifedean Ammous

Feb 27, 202577 min read

Principles of Economics

Part I. Fundamentals

Chapter 2: Value

“Value does not exist outside the consciousness of men.” – Carl Menger

Utility and Value

“Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being.” – Carl Menger

  • Oil in the year 2020 is no different chemically and physically from oil in the year 1620, and yet its value has changed from negative to positive. (p. 42)
    • I.e., via knowledge.develop
      • Value cannot be a constant property of objects; it is a conscious phenomenon in our minds. (pp. 42-43)

Valuation: Ordinal and Cardinal

“A judgment of value does not measure, it arranges in a scale of degrees, it grades. It is expressive of an order of preference and sequence, but not expressive of measure and weight. Only the ordinal numbers can be applied to it, but not the cardinal numbers.” – Ludwig von Mises

  • It is impossible for the person to express these preferences in quantitative and cardinal terms. (p. 44)
    • Because it’s subjective.
      • And it’s an ever-changing list

Value and Price

  • The value of economic goods is distinct from, and not to be confused with, their price. (p. 45)
  • The price at which a sale is conducted illustrates only that the seller values the good less than the price, while the buyer values it more. (p. 46)
    • It is not possible to determine an individual’s precise valuation from their transaction, only its upper or lower bounds.

Free Exchange

Determinants of Value

Marginalism

Marginal Utility

  • Menger illustrated that value is dependent on the needs the goods satisfy, which are, in turn, dependent on the abundance and scarcity of the goods, and only to the person making the valuation. (p. 51)
  • Economic decisions pertain only to individual units of goods, and individuals are at any point in time primarily making decisions about the next unit of a good they want to consume, not their lifetime supply of it, nor the good in the abstract.
    • Viz., there is no such thing as economic decisions in the abstract.develop

Law of Diminishing Marginal Utility

Valuation by the Least Valuable Use

  • Valuation occurs at the margin.develop
    • There is no valuation in the abstract.develop
  • Why is water relatively cheap even though it is essential?
    • Because its essential nature ensures humans are usually in possession of large quantities of it and make their marginal purchasing decisions based on the marginal units going to less pressing needs. (p. 53)

Water-Diamond Paradox

  • Since drinking water is usually available in large quantities wherever humans are settled, it, therefore, follows that the most pressing needs of water are already met, and that market choices are being made over units meeting far less pressing needs. (p. 55)
  • The water-diamond paradox illustrates the importance of individual circumstances to the assessment of subjective value. (p. 56)

Chapter 3: Time

The Ultimate Resource

  • This chapter builds on the work of economist Julian Simon to argue that human time is the ultimate resource and that economic scarcity is a consequence of the scarcity of human time. (p. 57)
  • There are no binding physical constraints on the production of economic goods, and with the dedication of more human time and effort, the output of any good can be increased indefinitely. (p. 58)
  • In contrast to the relative and constantly decreasing scarcity of material objects, human time’s absolute scarcity increases with time. This is intuitively true individually, as growing and aging make man realize that his time on Earth only gets scarcer, giving it more value. (p. 58)
    • The individual may have low time preference such that he provisions for his future generations.develop
      • See The Fiat Standard Ch. 7, primarily Fiat Family section.revisit
    • But, as Mises and Menger would argue, the valuation is subjective—meaning whether he cares for his future generations or not, it is always the individual whose time on the Earth is finite (unless he is God) that does the valuation.develop
      • Upon further reflection, I argue that the finiteness of his time doesn’t matter—he would manifest his preferences based on his knowledge unless he is all-knowing being.develop
  • In reality, resources need to be produced before they are consumed, and their production is limited not by their physical abundance on our enormous planet, but by the amount of time humans dedicate to producing them, and their opportunity costs in terms of other goods. (pp. 58-59)
  • Whereas economists had generally posited the scarcity of material goods as the starting point of economic analysis, it would be more accurate to understand scarcity as a function of the finite nature of human time. (p. 59)
    • What makes them scarce for us is the time that is required to produce them, since that is limited and constrained in a very vivid sense to us. (p. 59)

Opportunity Cost

  • The fact that our time is scarce means we cannot engage in all activities at all times. (p. 59)
  • Since human time is scarce, it is valuable to humans. (p. 60)
    • Ammous is here falling to [Scarcity Fallacy] (e.g., see Eric Voskuil’s [Scarcity Fallacy]).develop

Material AbundanceTODO

Simon’s Bet

  • Simon understood that as the human population increased and demand for these metals increased, these metals would have more resources directed toward their production, their quantities would increase, and their prices would decrease. (p. 72)
  • Simon, as an economist, understood the dynamics driving the production of these metals, even though he had little familiarity with the geological realities. (p. 72)
  • Simon knew that the scarcity of these metals depended ultimately on the amount of time humans dedicated to them, and that was, in turn, dependent on the incentive humans had to produce these resources, not on geological limitations. (p. 72)
    • More specifically, human ability to create knowledge has to be taken into consideration (as well as how to encourage them).develop

Time Preference

  • Human time being finite and uncertain means that no person knows with certainty how long they will live, or when they might die. This creates in man a time preference, a universal preference for earlier over later satisfaction. (p. 73)

Economizing Time

  • As discussed above, economic scarcity is ultimately the scarcity of human time. (p. 73)
    • We can then also understand the entirety of human economizing as centering around economizing time. (p. 73)
      • That is, we seek to increase the amount and subjective value of our time on Earth. (p. 73)
  • Ultimately, the economic question is how we trade off present utility against longer survival and future utility. The most important trade an individual conducts is their trade with their future self. (pp. 74-75)
  • Work, and the accumulation of capital, lead to increases in productivity, increasing the value of an individual’s time. (p. 75)

Economizing Action

  • The following nine chapters of the book will each focus on important tools we humans have developed, consciously and spontaneously, to increase the quantity and value of our time. (p. 76)

Part II. Economy

Chapter 5: Property

Chapter 7: Technology

Chapter 8: Energy and Power

Energy in Human History

Energy Abundance

  • The amount of solar energy that falls on Earth in one hour is more energy than the entire human race consumes in one year. (p. 163)
  • What constitutes the practical and realistic limit to the quantity of any resource is always the amount of human time that is directed toward producing it, as this is the only real scarce resource. (p. 164)
    • To be more precise, time dedicated is not a sufficient condition, but necessary one for new knowledge to be created.develop
      • As discussed in Chapter 3.
  • The price of virtually all resources is lower today than it was at past points in history because our technological advancement allows us to produce them at a lower cost in terms of our time. (p. 164)
    • To be specific, due to the knowledge (i.e., technology) created.develop
  • As consumption increases with time, more oil reserves are invariably found. (p. 165)
    • People produce goods where there is demand—this is why your money should be hard.develop
  • With every economic good other than bitcoin, there is no natural limit to its production; the only limit lies in how much time humans dedicate to producing it, which in turn is determined through the price mechanism sending signals to producers. (p. 165)
    • Viz., the price mechanism (i.e., market) dictates where the knowledge will be created. This is why government interference is detrimental to the whole society.develop
    • The power of self-constraint in the bitcoin supply architecture.develop
  • The scarcity of energy, like all types of pre-bitcoin scarcity, is relative scarcity, whose cause lies in its opportunity cost in terms of other resources. (p. 165)
    • The non-scarce nature of energy implies that it cannot be an economic good (as discussed in Chapter 2).
  • Only when directed to the satisfaction of our needs can energy sources be considered goods, and only when directed to the satisfaction of our needs does energy indeed become scarce, and thus, an economic good. (p. 166)
    • Again, value (ordinal rather than cardinal) exists because the scarcity of each individual’s time necessitates economization of available resources.develop
  • Energy, then, is not an economic good, but power is.
    • Applying the framework of subjective valuation at the margin (discussed in Chapter 2) to understand energy is a powerful explanatory tool that illuminates the nature of energy markets.

Power Scarcity

Power of Hydrocarbon Alternatives

  • In The Fiat Standard, I argue the hostility of modern government-funded science to hydrocarbon fuels has its roots in inflationary monetary policy, which at once raises the prices of these essential fuels and allows the government to finance and dictate science. The government would like to promote fuel-free alternatives because they are less sensitive to monetary inflation than high-power fuels mass-produced on a global market. (p. 180)
    • See Chapter 10 and 16 of The Fiat Standard.
    • The government employs the same schematic with its fiat food program (see Chapter 8 of The Fiat Standard).
  • Hydrocarbon power sources are easily transportable and storable, allowing them to be present in large quantities when and where they are to be needed. (p. 181)
    • I.e., it easily satisfies our needs when needed.
  • For high-productivity machinery to function, it does not just require a low marginal cost of energy; it requires a low marginal cost of energy at all times. (p. 181)
  • To make solar and wind power suitable for modern life would require using battery technology, which has an abysmally low energy per weight, in the range of 0.5 MJ/kg, which is roughly 1% of the energy density of oil or natural gas. (p. 182)
    • What would Elon Musk say about this?develop

Energy and Freedom

  • Slavery as an institution was more common in a world of primitive energy sources. (p. 183)
  • As machines and energy raised the productivity of labor, they increased the likelihood of workers being hired voluntarily rather than coercively. (p. 183)
  • In the modern context of energy abundance, where an individual in a rich, industrialized, developed country uses the energy of 100 humans every day, adding an extra human as a slave contributes very little power at the margin. (pp. 183-184)
    • The intelligence and integrity of workers in managing and maintaining machines became far more valuable than their brute force.
      • It is no coincidence that the abolition of slavery spread across the world with the spread of industrialization.
  • The economics of machinery make slavery far less workable economically.
  • High-powered machines are also an underappreciated driver of the liberation of women. (p. 184)
    • It was also a consequence of fiat money and inflationary policies that necessitated double-income for many households.
      • See Chapter 7 of The Fiat Standard
  • In a modern, energy-rich economy, the most productive and highly rewarded jobs no longer require physical strength. (p. 185)

Part III. The Market Order

Chapter 10: Money

The Problem Money Solves

Salability

Salability across Time

Why One Money?

  • The more common the medium of exchange, the more salable it is and the larger the potential market its holder can sell to. (p. 230)
  • As time goes by, primitive and unsuitable monetary media are discarded and ignored as their users lose their wealth, and in the long run, the most important metric in determining monetary status becomes the metric of hardness, or stock-to-flow ratio. (p. 230)

Money and the State

  • As humans seek to satisfy their desires through indirect exchange, some goods begin to play a monetary role better than others, and those who employ these media of exchange benefit from using them. Others copy them, and the successful solutions become more widespread.
    • If they do not copy the successful solutions, they lose wealth to those who do. The better solutions impose themselves as economic reality always does, by rewarding those who adopt them and punishing those who do not. (pp. 231-232)
  • Mises’ regression theorem
    • A normal market good can develop into a monetary good when it acquires monetary demand through the price mechanism of market—raising its value and increasing its salability.develop
      • Money, like all goods, emerges on the market because it offers a utility that makes individuals give value to it. (p. 232)
        • Gold’s global monetary role was not conferred by some government authority.
        • Government coins became money because they were minted from gold.
  • As with gold, silver, and all forms of money, statist recognition follows economic reality; it does not predate or dictate it. (p. 234)
    • Think about the implication for bitcoin.develop

Value of Money

  1. Increase the division of labor
  2. Allow for economic calculation
  3. Lower time preference
    • Money is technology, and technology affects time-preference.develop
    • As its salability allows for increasing provision for the future, the uncertainty of the future decreases, and individuals’ discounting of the future decreases. (p. 236)
      • Viz., time-preference is tech-driven.develop
    • It allows saving while preserving salability—the “saving” via forced “investment” under the fiat system has more risk because its salability is lower than the saving under the gold (or bitcoin) standard.develop
      • See Chapter 13.
    • Money can thus be understood as an important technology for the lowering of human time preference, as it is an extremely powerful tool for providing for the future, reducing the uncertainty around it, and allowing its holder to plan for it. (p. 236)
    • Money, at least in a free market, is the good with the most salability and least risk; it is the good that can always be converted to other goods with the smallest loss of its economic value. (pp. 236-237)
      • Money may not have a yield, but it is still held because it has the least uncertainty of all assets.
        • See “The Yield from Money Held” Reconsidered by Hoppe.revisit
    • Uncertainty is a major contributor to the discounting of the future. (p. 237)
      • And harder the money, the less uncertainty with regard to its purchasing power in the future.develop
    • Access to money, and in particular good and hard money, is a way to mitigate this uncertainty. (p. 237)
    • And the more humans can plan for their future and thrive in the long run, the more money will cause time preference to decline and civilization to thrive. (p. 237)
      • Viz., hard money begets saving begets capital to be deployed into the future (rather than being consumed in the present).developrevisit

Money’s Uniqueness

  • The utility of money is derived from the utility of the goods it can be exchanged for. (p. 237)
    • Viz., money does not necessarily have to possess industrial component like gold.develop
  • Money, like all goods, will have a diminishing marginal utility, but its marginal utility declines less than the marginal utility of all other goods, since each successive unit of money can be used to buy a unit from the next most valuable unit of any good and not just the next most valuable unit of the same good. (pp. 237-238)
  • Being liquid and easily exchangeable for other goods makes money a more useful thing to hold than other goods because it can easily be exchanged for whichever good the individual happens to value most at any time. (p. 238)
    • Money versus illiquid asset (e.g., money-substitutes such as real estate and stocks) is similar to hydrocarbon power sources versus inefficient alternatives (see Chapter 8)—money and hydrocarbon resource is portable and storable.
      • More specifically, fiat money is portable and storable spatially, but not sequentially (i.e., in time).
        • See The Fiat Standard on how salability across time is what defines hard money.revisit
  • The high salability gives money the utility of whatever good happens to be most valuable to the holder of money at any time. (p. 238)

How Much Money Should There Be?

“Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power.” – Ludwig von Mises

“The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.” – Ludwig von Mises

  • Any supply of money is enough for any economy, as long as it is divisible. (p. 238)
  • The economic value of money lies in its ability to be exchanged for other goods, and so the value of money comes from its purchasing power, not from its quantity. (p. 238)
    • This is a prerequisite to understand the following: material well-being can be achieved within deflationary economy.develop
  • It is only by reducing consumption and increasing saving that the deployment of capital is possible (as discussed in Chapter 6). (p. 241)
    • The decline in consumption of resources frees them from being used as consumer goods, and allows them to be utilized as capital goods.
  • Saving money corresponds to saving economic resources from consumption, thus creating more opportunities for work to be directed at the earlier stages of economic production. (p. 241)
    • I.e., the roundabout production.develop
  • A society which constantly defers consumption will actually end up being a society that consumes more in the long run than a low-savings society, since the low-time-preference society invests more, thus producing more income for its members. (p. 241)
    • Because when the money supply is increased, the capital will be consumed—resulting in the overall decrease of total income in the long-run.
      • Put differently, Keynesians are myopic (or arithmetic) as they focus in the short-run, while the Austrians think of the future-self as important as present-self (or geometric).Spitznagel
        • Tellingly, Keynes’ famous quote is “we are dead in the long-run.”
        • While the Austrians distinguish the present goods (money) with future obligations (credit), Keynesians blurs that distinction (see Chapter 6 of The Fiat Standard).
          • As such, the fiat money doesn’t care about salability in time.develop

Part IV. Monetary Economics

Chapter 13: Time Preference

Time Preference and Money

  • By saving money, the most liquid good and the generalized medium of exchange, the saver is able to exchange it in the future for the most valuable goods available, and to do so at the time of their choosing. (p. 300)
  • Money, particularly hard one, supercharges our ability to save.
  • Money is a technology—it improves and becomes more efficient at carrying out its task as a medium of exchange, both in the present between individuals, and between a present individual and his future self.
    • Better ideas and technologies win out and drive out the inferior ones.
      • The productivity of the technology pertains to how well it performs its function as a medium of exchange, or its salability (as discussed in Chapter 10). (pp. 300-301)
  • The majority of the wealth will accrue to the hardest money. (p. 301)
    • Gold made plenty of savings available for capital investment, increased labor productivity, incentivized investment in technological innovations, and increased prosperity.
  • As humanity progresses toward using monetary media that are harder to produce, our ability to provide for our future increases. (pp. 301-302)
    • The efficiency of transacting with our future selves increases, and the uncertainty of the future declines.FutureSelf
      • The security of money as a medium of saving has allowed countless people to escape the ravages of war and disaster with wealth they can easily transport worldwide.
  • For any society and at all times, the hardness of monetary technologies available to people is inextricably connected to time preference, for good or for ill. (p. 302)

Time Preference and Saving

  • For the Keynesian, saving and investment are levers that government policy dictates, completely separate from any notion of opportunity cost. (p. 302)
  • If man lives in a world in which everything is certain and perfectly predictable, he has no reason to hold any cash. (p. 303)
  • When man needs to liquidate his investment to spend it, he risks being unable to find someone willing to pay the price he wants at the time he wants. (p. 303)
    • In times of systemic crises, when everyone wants to liquidate investments for cash, the reduction in the market price from what the owner expected would be large.
      • In contrast, money’s value rises in times of crisis as individuals reduce expenses and liquidate investments for cash.develop
  • Should he come across a good business opportunity, if he is holding cash, he can allocate to it quickly. If he has his money tied up in other investments, he may not be able to. (p. 303)
  • Money is acquired for one property only: Its marketability or salability, the ease with which it can be sold without a significant loss in its value. (p. 304)
    • Specifically with the gold money or bitcoin—not with fiat.develop
      • Fiat is not really money because it confuses the present goods with future obligations (i.e., credit).develop
  • Cash savings are held not to chase a return on investment, but for their liquidity and low risk of reduction in their value. (p. 304)
    • Cash-substitutes (e.g., a house, a car, a stake in a business, or a fine painting), on the other hand, have far lower salability.
      • See Chapter 18 of The Fiat Standard.revisit
  • There is no investment without risk, as there is always the risk of partial or complete loss of capital. (p. 305)
    • With investment, what matters is the price at which you exit—not the prices you see in between. Ignoring the cost of liquidity (inherent with any investment), which tends to be the norm given inflationary environment sustained by perpetual credit expansion, amounts to economic miscalculation and thus results in capital consumption.develop
      • I.e., shifting your asset into (hard) money is saving, whereas shifting your asset into non-money is investment.develop
        • This is why nothing competes with bitcoin—the hardest money known to man.develop
      • I.e., credit expansion <> money printing.develop
        • The term credit expansion better captures what most central banks do—because credit in the digital form is more ubiquitous than actual paper money.develop
          • See Chapter 4 of The Fiat Standard.revisit
  • Conceptually and chronologically, saving can only be understood as the precursor and prerequisite of investment. (p. 305)
  • The lowering of time preference is what drives individuals to accumulate cash balances and to invest. (p. 306)
  • When money is expected to appreciate, people are more likely to defer consumption to save in hard money. (p. 307)
  • The Keynesian model posits the baseless claim that savings need to be equal to investments at equilibrium (as discussed in Chapter 6). (p. 307)
    • From that perspective, a surplus of savings over investment results in unemployment and recession.
      • But in reality, investments follow savings (i.e., individually, one has to save first before investment), and tend to rise as savings rise.
        • The latter part of the statement is not necessarily the case, both individually (i.e., some individuals might only save but not invest) and in the aggregate (e.g., bitcoin performance beats most other “investment” alternatives under the fiat regime). develop
  • The more time preference declines, the more likely individuals are to defer consumption, and the more cash they have on hand, the more they are willing to invest and lend. (p. 307)
    • The abundance of loanable funds allows for the financing of an increasing number of productive enterprises, at progressively lower interest rates.
      • As more capital is available, productivity of labor increases, and with it income and living standards. The increase in income, in turn, allows for more capital accumulation, in a virtuous cycle of improving material well-being.
        • The income does not necessarily have to increase in terms of absolute numbers, for improved material well-being—it’s achieved via increase in its purchasing power. Goods will be cheaper when the capital is deployed productively and when the money supply is fixed.develop

Time Preference and Civilization

Time Preference and Bitcoin

  • Hans-Hermann Hoppe believed that the short-term incentives embedded in democratic processes lead to policies that favor immediate gains over long-term benefits.revisit
  • Before bitcoin, many people simply had no conception of saving and delayed gratification. (p. 316)
  • The notion of saving passively while earning money from a job was very rare. After bitcoin, it became increasingly common. (p. 317)
  • Bitcoin could be the free market’s solution to the problem of rising time preference. It is the technological solution that allows anyone to rejoin the process of lowering time preference, saving, capital accumulation, and civilization. It requires no political permission, it obviates politics and monetary policy, it is unstoppable, and it is hugely rewarding for everyone who adopts it. (p. 317)

Chapter 15: Monetary Expansion

Part V. Civilization

Chapter 18: Civilization

The Fiat Standard

I. Fiat Money

1. Introduction

  • Fiat increasingly divorces economic reward from economic productivity, and instead bases it on political allegiance. (p. 27)
  • Bitcoin effectively combines gold’s salability across time with fiat’s salability across space in one apolitical, immutable, open-source package. (p. 28)

3. Fiat Technology

  • The fundamental engineering feature of the fiat system is that it treats future promises of payment of money as if they were as good as present money, so long as they are issued by the government, or an entity guaranteed a lending license by the government. (p. 51)
    • To assume something that doesn’t exist yet as good as something that exists.
  • With fiat, government credit allows nonexistent tokens from the future to be brought to life to settle transactions in the present when a loan is made, allowing the borrower and lender to have a larger amount of fiat tokens between them than when they started, thus devaluing the rest of the network’s tokens.
    • This is why we have the fractional reserve banking system, where banks lend more money than they actually hold in reserves, creating new money through the process of lending—because the money doesn’t exist as actual physical currency until it is borrowed.
  • Any lending organization also has the capacity to increase the money supply through lending. (p. 52)
    • The shadow banking system (as discussed in Ch. 6) turns this logic on its head—that is, they take risks because they assume that the government will bail them out.
  • Blurring the line between money and credit makes measuring the money supply practically impossible. (p. 52)
  • E.g., a client takes out a $1 million loan to buy a house
    • The present good of the house is handed to the borrower without them having to offer a present good in exchange (p. 52)
      • With the gold or bitcoin standard, the lender will have skin in the game—just like when you lend fiat money without the intermediary of banking system (e.g., between family members and friends).

Network Topography

  • Fiat incentives ultimately rest on coercion and violence
  • While fiat enthusiasts portray the network as having a variety of tokens, each belonging to a different country or region, the reality is that every currency but the U.S. dollar is merely a second-layer token, a derivative of the dollar. (p. 55)
  • The closer the borrower is to the Federal Reserve System, the lower the interest rate they can secure and the more likely they are to benefit from inflation of the money supply. (p. 56)
    • E.g., financing a housing loan on “social credit”

The Underlying Technology

  • The inevitable credit contractions that follow the banking system’s credit-fueled booms are remedied by central banks using their reserves to support illiquid financial institutions (p. 61)
    • The tricky part is because of the USD’s reserve currency status (partly due to the Breton Woods), USD can appreciate vs other currencies even when the Fed bailouts the US companies.

4. Fiat Mining

Lending as Mining

  • New money is not created when currency bills are printed, but rather whenever new debt is issued. (p. 66)
    • The credit expansion was made easier with the digitization of fiat money. Just like how individuals tend to spend more with credit cards, the lending entities can lend more with digitized credit.
      • However, this also contributes to the quickness with which market crash, insolvency issues, and credit contraction spread among the financial system—because the numbers on your bank account can disappear faster than the physical paper money.
  • Anyone who finds a way to get other people into debt profits not only from a positive interest rate return, but also by bringing new money into existence. (p. 66)
    • Because for the lender, the loan is an asset on their balance sheet.
    • The lender can structure a note via securitization of such loans and technically sell the default risk of the borrower to whoever buys such structured products.
  • Capital consists of economic goods that can be used to produce other economic goods. Money can be traded for capital goods, but it cannot substitute for or supplement them. The stock of capital that exists in any society at any point in time can only be increased by deferring the consumption of existing resources. It cannot be increased by producing more claims on it. (p. 67)
  • There is little incentive for people to save, and there is no longer any real capital scarcity for those who are politically well connected. There is also no capital for those who are not well connected. (p. 67)
    • Crony “capitalism” consumes capital
  • That everyone is forced to use the same inflationary monetary asset leaves everyone vulnerable to its failure and makes the financial system as strong as its weakest link. (p. 68)
  • Even perfectly solvent and profitable businesses would no longer be able to operate in a banking collapse because their financial counterparties would be compromised by liquidity crises. (p. 68)
    • The fiat system discourages longer-term entrepreneurial project.
    • Otherwise the project has to be outstandingly good.
      • E.g., Elon Musk

Deflation Phobia

CPI and Unitless Measurement

Inflation as a Vector

  • The cost of hiring highly skilled labor increases much faster than the quoted CPI rates. (p. 79)
  • Whereas industrial goods can easily respond to increased demand with increased supply, scarce goods, luxury goods, and status goods cannot increase in supply and end up continuously rising in price. (p. 79)
    • Another reason why you don’t want to play status games (see Naval Ravikant).
  • Saylor’s most brilliant insight on this issue is to pinpoint that inflation shows up in the cost of purchasing financial assets that yield income for the future. Returns on bonds have declined along with interest rates, reducing the ability of individuals to afford retirement. The market is effectively heavily discounting today’s money in terms of tomorrow’s real purchasing power as yields disappear. As the future becomes more uncertain, it is no wonder we witness a palpable rise in time preference. (pp. 79-80)
    • Viz., people are forced to “invest” but with a thirst for immediate gratification.develop

5. Fiat Balances: Universal Debt Slavery

Unquantifiable

  • There is no clear-cut answer on which measure actually constitutes money, as the nature of fiat is to conflate future fiat with present fiat. (p. 82)

Irreconcilable

  • Mining by issuing new debt is done by fiat and can rehypothecate the same collateral several times. (p. 83)
    • Viz., the practice of rehypothecation (re-using of the collateral in multiple financial deals) is unlikely under the bitcoin (or gold) standard.develop
  • There is no hard limit on how much lending takes place and no easy way of keeping track of all issuance taking place across all financial institutions in real time. (p. 83)

Tentative and Revocable

Negative

Fiat Savings

  • Hard money reduces uncertainty over the future and allows individuals to orient their actions toward the long term. (p. 86)
    • That is, you can sleep well with the bitcoin standard.
  • Success consists of being able to secure ever-growing quantities of debt as you pass through the stages of life: a big college loan that allows you to get into the best paying job, whose salary will allow you a larger loan for a large house and another loan for a car. (p. 87)
  • In sum, success in fiat means accumulating larger negative cash balances, and people live their entire lives stacking debt obligations upon themselves. (p. 88)
  • Savers need to study financial assets in order to maintain the value they earned and protect it from inflation. This makes it harder to have a stable cash balance and limits the ability of savers to plan for their future. (p. 91)
    • You effectively need to earn your money twice with fiat, once when you work for it, and once when you invest it to beat inflation. (p. 92)
      • This arrangement has been a big boon for the investment management industry.
      • Furthermore, the risk (e.g., concentrated long positions in equity indices) is shared on societal scale.
      • Forced “investment”—a symptom of adopting the fiat standard and inflationary policies—is simply a waste.

Fiat Debt

  • The fiat system thus taxes savers and subsidizes borrowers. The fiat standard encourages everyone to live fragile lives and take substantial financial risks. The alternative is a slow, continuous bleeding of wealth. (p. 93)
  • The most profitable route, however, comes from being able to issue fiat and get others into debt. (p. 94)
    • Which explains why so many businesses in so many fields offer credit products to their customers. (p. 94)
The Narrow Bank
  • The Fed’s policy to encourage more investment leads to people engaging in riskier investment than their risk profiles would otherwise indicate, leading to financial bubbles and crises. (p. 97)

6. What Is Fiat Good For?

Salability Across Space

Gold Spatial Salability

Fiat Spatial Salability

Bank Profitability

  • This system is spectacularly profitable for banks since it allows them to keep their money in one place while lending in another location, the fiat version of a bitcoin double-spend transaction. (p. 113)
    • The former refers to the reserve, and the latter refers to the credit that is not backed by the reserve.
Is Fractional Reserve Banking Necessary for a Growing Economy?
Can Fractional Reserve Banking Survive in a Free Market?
  • A “liquidity problem” is viewed as distinct from a solvency problem because the bank does have enough assets to meet all its depositors’ withdrawal demands, but it does not have them on hand. (pp. 117-118)
    • That is, a liquidity problem becomes not synonymous with a solvency problem, when the future obligation is treated as good as present good.
  • Full reserve banks then become unprofitable in comparison, as they bear the burden of responsible risk management, limiting their upside relative to their fractional reserve counterparts. (p. 118)
  • The emergence of modern central banking cannot be understood separately from the problems caused by fractional reserve banking. (p. 118)
Shadow Fractional Reserve Banking
  • A giant shadow banking system was now responsible for creating far more of the U.S. dollar money supply than the government or the formally regulated retail banking system. (p. 123)
    • Viz., the banking sector took advantage of the fiat mining architecture.
  • All of this means that today, inflationary money creation and business cycles are not mainly generated in the traditional or retail banking system, as was the case during the eras of most Austrian economists. (p. 123)
  • The layers and degrees to which maturity mismatching and fractional reserve banking can exist in the shadow financial system are not easy to survey. (p. 123)
  • The 2008 financial crisis was merely the collapse of this fractional reserve shadow banking system, sparked by an acute crisis in housing and mortgage markets. By bailing out most financial institutions directly, and by letting them borrow at lower rates, central banks played the role of lenders of last resort, allowing these banks to profit from mismatched maturity lending in the financial markets. (p. 124)

II. Fiat Life

III. The Fiat Liquidator

13. Why Bitcoin Fixes This

Salability Across Space

Separation of Money and Debt

  • As gold banks became indispensable for gold performing its monetary role, their gold was only as good as their credit, making their credit as good as gold. (p. 282)
    • A party that has monopoly control of the payment system will inevitably end up using this control to further its interests.
  • The conflation of money and credit has become so entrenched that most modern fiat academics insist that the two things are the same, ignoring the very real differences between the two. (p. 282)
  • The monopoly command over the international transfer of wealth protects central banks’ fiduciary media from facing the kind of market test possible with bitcoin-based institutions. (p. 283)
    • Banking returns to being a normal business offering services to customers, rather than a monopoly money-printing operation. (pp. 283-284)
  • Bitcoin monetizes a hard asset and offers everyone a chance to hold an asset as a store of value that does not have liabilities attached to it. You no longer need others to be indebted for you to have savings. (p. 284)
    • It does not require future production and repayment from the borrower to have market value.

Antifiat Technology

Neutral Global Currency

  • The World Bank’s central planning destroys the division of labor. The IMF’s monetary stipulations destroy the chance of having sound and hard money and thus accumulated capital. Finally, the WTO prevents technological advancement of poor countries through patents and trade restriction masquerading as free trade agreements. (p. 287)
    • There was no World Bank, IMF, United Nations, or WTO under the gold standard.
  • Will there be corrupt governments under hard money?
    • Of course, but they will face the consequences of their corruption far faster, as they run out of money and can no longer afford to pay the henchmen that prop them up. (pp. 287-288)
  • Bitcoin cannot end poverty and it cannot save those who cannot save themselves. (p. 288)
    • There can be no global lender of last resort in that world.

15. Bitcoin Banking

  • The two essential functions of banking:
    • Custody solutions—a specialized service that ensure better security for deposits
    • The allocation of capital into investments
      • With the gold money or BTC, there will be more skin in the game when compared to fiat world
  • The problem with banking is not the nature of banking itself but government policies that create monopolies. In a free market, banking would continue to exist but would be subject to consumers’ choice and satisfaction. (pp. 309-310)
  • The following argues seven ways in which we can expect bitcoin’s monetary properties to influence a bitcoin-based banking system:

Savings Technology

  • Investors had to shift to buying government bonds (p. 312)
    • Until the expectation for future inflation outdid the nominal interest rate with which the investors were comfortable lending—this happens because the overbidding results in lower interest rate (both from supply-demand and also because the government can interfere with the loan market if they deem the demand strong). When this happens, the demand shifts to the equity market.develop
      • Viz., the government can issue bonds as long as the expectation of future inflation was less than the interest offered—that is, as long as there are buyers.
        • One way they achieve this is by manipulating the “inflation” measure—e.g., CPI
        • The existence of hypothecation (and repo market) means anyone who purchase such bonds can collateralize them and can get present goods (with the future obligation of central banks).develop
          • Hence the demand for such bonds doesn’t disappear—even when the interest is in the negative territories.develop
    • The height of nominal interest rates does not matter—as long as there is credit expansion, the originary interest rate is bound to be higher than the nominal interest rate, resulting in malinvestment. It was the historical coincidence of 2010s wherein the nominal interest rates of multiple central banks hit zero that made equity market more attractive than debt instruments.develop
      - Zero interest rate triggered money inflow to equity market.
  • The stock index fund appeared as the saving vehicle of choice in the 2010s as bond yields continued to plummet and enter negative territory. (p. 312)
    • Forced “saving” via forced “investment”—or put differently, forced homogeneous risk.develop
    • “An expensive balancing act that impedes individuals’ ability to plan” (p. 312)

High Cash Reserves

  • By having no yield, bitcoin’s appreciation does not make it less attractive as it grows. (p. 313)
  • As bitcoin is also starting from a small market capitalization, similar capital inflows will cause a much higher rate of price appreciation in bitcoin than gold. This makes it a more attractive proposition as a store of value for the future, since it is likely to increase the value, not just preserve value. (p. 313)
  • Bitcoin can offer many millions, and maybe billions, an affordable credible threat of withdrawing their balances and taking full possession of their coins in a matter of minutes. (p. 314)

Demonetizing the World

  • Bonds and stocks can no longer offer yields that beat money supply inflation (p. 316)
    • The credit expansion artificially lowers the gross market rate, at times to zero—turning bonds into unattractive products.develop
    • This results in overbidding of equity, lowering its yield.
    • After all, there will be no “risk-free” interest rate under the gold or bitcoin standard
  • Excess demand for bonds rewards undeserving borrowers, most notably governments, misallocating capital and causing periodic default crises. (pp. 316-317)
  • “If bitcoin’s liquidity grows significantly, it would offer an increasingly compelling and efficient alternative to these technologies. Demand for these assets would become purely industrial and commercial rather than monetary. Housing would return to being thought of as a consumer good rather than a savings account or capital good. House prices would reflect demand for houses only as places to live, not as savings accounts. Commodities’ prices would reflect demand for the commodity itself. Equity would reflect the underlying fundamental values of the company rather than being a gauge for monetary policy as it is now. Artists might need to return to learning skills and putting effort into their work to sell it and not just rely on people’s search for anything scarce to buy their products.” (p. 317)

Unbonding the World

  • The continued growth of bitcoin would likely result in a reduction of demand for debt instruments as a method of saving. (pp. 317-318)
  • The enormous incentive to borrow in the fiat standard is ultimately driven by the monetization of debt, which creates a huge incentive for lenders to create more loans, as discussed extensively in Part I. (p. 318)
    • Does “lender” here refers to the commercial banks who are technically backed by the central bank?develop
      • Yes, because the money is created when the loans are issued.develop
  • The devaluation of the currency itself is what creates the demand for the bonds, which in turn allows for the devaluation of the currency, in the eternal perverse cycle of fiat monetary damnation of the last century. (p. 318)
  • The total market value of bonds = $140 trillion
    • Bitcoin = $2 trillion (as of 2025 January)
  • The homogeneity of bitcoin and its lack of a yield give it a natural advantage over bonds in playing the role of money. (p. 319)
  • The role of money optimizes liquidity at the expense of risk and return, while equity optimizes for return at the expense of liquidity. (p. 319-320)
    • I think how equity optimizes for returns at the expense of liquidity becomes clear during the market crash. Unfortunately, its risk-return profile tends to be distorted with the government interference, in that it looks more profitable than it actually is (as discussed in the next section).develop

Robustness

  • A financial system built on a hard monetary asset at its base would be far more robust than one built on debt obligations at its base. It would also cause far fewer financial and liquidity crises. (p. 320)
  • When funding conditions become unfavorable, most, or all, debt obligations are valued at a discount by the market, which places financial institutions using them as their financial assets in a precarious position. (p. 320)
    • I.e., systemic fragility
  • A financial system built on full cash reserves would not experience such liquidity crises. Financial institutions would keep on-hand cash instruments equal to the face value of all their liabilities that are redeemable on demand. (p. 320)

Full Reserve Banking

  • The gold standard itself was sacrificed to keep fractional reserve banking alive. (p. 322)

Equity Finance

  • Bitcoin-based financing will probably cause a shift toward more equity investment rather than credit instruments and interest-based lending. (p. 323)
  • Without a lender of last resort, offering a fixed-interest loan with a guaranteed return becomes exceedingly difficult for a bank, as there can never be a guarantee that the bank or its borrowers will not face insolvency. The risk of complete ruin is ever-present in any business enterprise, and any bank that backs its demand deposits with loans issued to businesses is taking on a large risk. (p. 324)
    • Again, the “risk-free” interest only exists in the fiat world.
  • It is doubtful that the extra returns banks can generate from lending demand deposits, as they do in a fractional reserve banking system, are even possible in a hard money economy where no lender of last resort exists to protect the banks and their clients from the downside risk. (p. 324)
    • The fiat world is not exactly Old Maid (ババ抜き)—because not only the cards are infinite, but every card is a Joker.develop
  • With the clarity brought about by the fixed supply, and the efficiency brought about by the high spatial salability, banking likely bifurcates into its two essential and demarcated functions: deposit banking and equity investment. (p. 324)
    • The gray area of investing in credit and fixed-interest rate lending is a function of the limitations of spatial salability and supply vagueness of fiat money. (pp. 324-325)
      • Viz., there will be no credit and fixed-interest rate lending, as well as their derivatives, with the bitcoin standard.develop
  • Investors who would like to earn a positive nominal return on their bitcoin would need to accept the high degrees of risk. With the downside unlimited, there is little reason to agree to an investment with a fixed upside, as is the case with fixed-interest loans. (p. 325)
    • Investment will be left to the professionals with skin in the game—as it should.develop
  • As human civilization progresses, and money improves as a technology, humans accumulate more cash balances, and that leads to lower interest rates on the price of capital. (p. 325)

    ”This is why the rate of interest mirrors the cultural level of a nation; for the higher this level, the larger will be the available stock of consumers’ goods, the longer will be the period of production, the smaller will be, according to the law of roundaboutness, the surplus return which further extension of the period of production would yield, and thus the lower will be the rate of interest.” – Joseph Schumpeter

    • Viz., the nominal interest rate will reach zero in the civilized society (in accordance with the most religions).develop
    • But knowledge is creation ex nihilo.
      • What would be the implication? Specifically, what is the cause-and-effect relationship of progress and the gross market rate of interest rate?develop
  • The move to fiat and the ensuing world wars reversed this trend in the twentieth century (p. 326)
    • But it is hard to escape the conclusion that rates would head to zero. Lending would be done at a nominal rate of return of zero, but a positive real return, which is the result of both the appreciation of the monetary asset, as well as the lender saving on their storage cost and risk of loss or theft. (pp. 326-327)
      • What is the incentive to run banking business then—especially given how the opportunity will be only in equity, whose downside is unlimited just like their upside?develop
        • Rather than seek a fixed yield for lending, lenders would seek an equity stake and a share of the business’s revenues. (p. 327)
          • I.e., the companies will assume the role of banking.develop
  • Interest-based lending would cease to exist. (p. 327)
    • What would be the implication here, especially with regard to how equity market boomed with zero interest rate regime?develop
      • I think it means that the equity market will reflect the fundamentals more.develop
  • The more attractive model for savers will be one in which they make a real return from the businesses in which the bank invests their money, sharing in the profit and loss. (p. 328)
    • Viz., either the companies, or the hedge funds, will assume the role of banking.develop
  • The role of the bank will be in matching maturities and risk profiles between borrowers and lenders and identifying the correct projects in which to invest. (p. 328)

16. Bitcoin and Energy Markets

17. Bitcoin Cost-Benefit Analysis

Is Bitcoin Worth It?

  • The millions of people who have chosen to hold more than $800 billion of economic value in the bitcoin network are clearly making a similar judgment to these users of modern energy-intensive technology. (p. 363)
    • Electrification has massively improved countless human products, and bitcoin is just another electric product humans are adopting rapidly.

18. Can Bitcoin Fix This

  • Investment in assets that offer a yield always involves risk. (p. 365)
    • Because of the “entrepreneurial component” (see Ludwig von Mises).develop
      • What is the nature of yield? What is the implication for ETH staking?develop
  • Cash substitutes (e.g., fiat credit, bonds, stocks, real estate, art, commodities)—their roles as monetary media are inherently limited. Rises in their prices will inevitably cause oversupply and big crashes. Bitcoin’s scarcity means that its price crashes to continually and significantly higher levels than past prices. (pp. 365-366)
    • Doesn’t this partially apply to these cash substitutes?develop
    • Essentially, they are simply not the best technology to become money.develop
  • The world has around 90 trillion of sovereign bonds, 10 trillion of gold. (p. 368)
    • Total: $230 trillion (3.7 京)
    • Cash substitutes: stocks 280 trillion
    • Bitcoin: $1.8 trillion (as of 2025 January)
  • As more and more investors in search of a store of value discover bitcoin’s superior intertemporal salability, it will continue to acquire an increasing share of global cash balances. (p. 368)

Government Attacks

Software Bugs

The Gold Standard

  • Bitcoin, however, is a hard monetary system that can gain adoption whether or not the entrenched easy-money interests approve of it. (p. 382)

Central Bank Adoption

  • As a dollarized economy, El Salvador had no seigniorage revenue to lose by adopting bitcoin. (p. 383)
  • The IMF has long banned its members from tying their currency to gold. (p. 385)
  • The U.S. still has the world’s strongest military and the strongest currency, and any global financial crisis that happens, while having its root causes in the dollar, is likely to only make the dollar stronger, not weaker, as happened in 2008. For all its flaws, the dollar is still the most liquid of all national currencies, and the one bearing the lowest default risk. All other central banks have liabilities in the dollar. (p. 385)
    • Merely a historical fact due to Bretton Woods arrangementdevelop
    • This why even when the Fed bails out corporations in the US, the currency that strengthens the most is USD.

Monetary Upgrade and Debt Jubilee

  • Hyperinflation can only happen as a result of governments and central banks increasing the money supply. (p. 387)
    • But the fact that they can—shouldn’t that be enough to cause hyperinflation?develop
      • “The only way to understand the bolivar’s collapse in value is as a result of the rapid increase in supply; any reduction in demand was rather an effect, not a cause, of that currency’s value dropping.” (p. 387)
  • Should fiat money continue to function as discussed in Part 1, with lending as the equivalent of mining, the likelihood of hyperinflation is reduced by two forces. (p. 388)
    • First, it is not easy to quickly expand credit to a hyperinflationary degree
      • This argument hinges on the assumption that the hyperinflation can be only caused by excessive money printing. But isn’t what constitutes “excessive” is quite arbitrary in his argument here?develop
    • Second, credit expansion is self-correcting because it brings about financial bubbles that liquidate large amounts of the money supply.
      • His argument somewhat holds because although the central banks have been printing money, they usually did so whenever after market crash happens.develop
      • But he also argues how CBDCs can interfere with the phenomenon of market crash (see the final section of this chapter).develop
        • “If hyperinflation were to happen, as it is happening in Venezuela and Lebanon today, it would be the result of governments overriding the credit creation process and resorting to increases in the base money, most likely through physical money printing, or its modern digital equivalent, through central bank digital currencies.” (p. 388)
  • If the credit nature of fiat money is preserved, it could avoid hyperinflationary collapse even if bitcoin continues to consume more of its share of money demand. (p. 388)
    • Viz., the Austrian Business Cycle theory
  • If more individuals and companies start to hold bitcoin instead of debt instruments on their balance sheets, that would reduce the demand for credit creation, reducing fiat money creation, making hyperinflation less likely. (pp. 388-389)
    • The next section discusses the strategy of borrowing USD to buy BTC (e.g., MicroStrategy).develop
  • Hyperinflation happens when the entire monetary system of a society collapses. (p. 389)
    • But we already have BTC.develop
      • “Bitcoin offers a refuge from hyperinflation rather than being the cause of it.” (p. 390)
    • In the case of the dollarization of Ecuador, hyperinflation ends, and economic production, growth, and normalcy resume on a harder money. (p. 390)
  • Rather than an attack on the fiat system, bitcoin might allow the fiat economy an exit from its spiral into ever-more debt slavery, as it devalues the fiat debt that saddles everyone in the fiat system. (p. 391)
    • And anyone who benefits from such debt creation—the governments, the central banks, and any entities associated with them.develop
    • But as with any entrepreneurial ventures, the benefits don’t get “distributed” evenly and equally—money is not neutral after all.develop
  • The sooner one upgrades to the bitcoin economy, the sooner their fiat debts become insignificant. (p. 391)
    • Bitcoin is money, and money is not neutral.develop
  • More interestingly, perhaps, would be the shift in business financing, as more people become wealthy enough to finance their own businesses with their own savings rather than from bank credit. (p. 391)
    • The incentives are also different when you work for yourself, compared to when you have to work to pay back your debt.develop
  • Under sound money regimes, a free market in capital emerges in place of central monetary planning. Productive individuals are able to accumulate capital and watch it appreciate in value, and so they can finance themselves and their businesses. Productivity is rewarded with compounding growth in value over time, giving the holders of capital more of it, and thus placing increasingly more capital in the hands of the productive. (pp. 391-392)
    • True meritocracy over crony “capitalism” and networkism.develop
  • Eventually, the only part of the economy that would remain wedded to government money would be government itself, and the parts of the economy dependent on government money, both of whose contribution to valuable economic production is approximately zero. (p. 393)
    • The end of crony capitalism.
      • And the beginning of infinity, as it were.

Speculative Attacks

  • Can you call this a carry trade?develop
  • As bitcoin investment becomes more accessible to institutional investors, many of these lenders will choose to just purchase bitcoin instead of lending to financial firms that purchase bitcoin, limiting the credit available for launching speculative attacks. (p. 394)

Central Bank Digital Currencies

  • With all balances held at the central bank, and credit increasingly politicized and centralized, the fiat system would take a very decisive turn toward an authoritarian and socialist society. (pp. 395-396)
  • As the corrective mechanism of fiat credit bubbles collapsing is sidestepped by the move toward fiat noncredit CBDCs, the brakes on fiat inflation would be severed. (p. 396)
    • Doesn’t this challenge the claims made in Monetary Upgrade and Debt Jubilee section (specifically, the second force that reduces the likelihood of hyperinflation)?develop
  • Since the 2008 financial crisis and the increased intervention of fiat central banks into financial, credit, housing, and many other markets, fiat central banks have been overriding the correcting mechanism of money supply collapse. (p. 396)
    • The author implies how there were more market forces in the pre-GFC era (e.g., in financial, credit, and housing markets).
  • An increasing share of the world’s bond and stock markets is now held by central banks, and their valuation is increasingly determined by central bank fiat, with the normal workings of the credit cycle overruled through infinite quantitative easing. (p. 396)
  • The push to promote fiat foods and fuels will likely take a far more coercive turn with the implementation of CBDCs. (pp. 397-398)
  • Bitcoin makes payment clearance a mathematical and mechanical process that cannot be controlled by intermediaries, whereas CBDCs make every transaction subject to approval and reversal by the central bank. (p. 400)

The Bitcoin Standard

3. Monetary Metals

Why Gold?

  • For anything to function as a good store of value, it has to beat this trap: it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down. (p. 21)

Roman Golden Age and Decline

Byzantium and the Bezant

The Renaissance

  • It was in the city-states that humans could live with the freedom to work, produce, trade, and flourish, and that was to a large extent the result of these city-states adopting a sound monetary standard. (p. 30)
    • It all began in Florence in 1252, when the city minted the florin, the first major European sound coinage since Julius Caesar’s aureus.
    • Venice was the first to follow Florence’s example with its minting of the ducat, of the same specifications as the florin, in 1270, and by the end of the fourteenth century more than 150 European cities and states had minted coins of the same specifications as the florin.
  • 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. (p. 31)
    • Eventually, the telegraph also outdid gold.
      • Bitcoin is both hard and fast.develop
  • The death knell for silver’s monetary role was the end of the Franco-Prussian war, when Germany extracted an indemnity of £200 million in gold from France and used it to switch to a gold standard. (p. 32)
  • It is the author’s opinion that the history of China and India, and their failure to catch up to the West during the twentieth century, is inextricably linked to this massive destruction of wealth and capital brought about by the demonetization of the monetary metal these countries utilized. (p. 33)
    • The demonetization of silver in effect left the Chinese and Indians in a situation similar to west Africans holding aggri beads as Europeans arrived: domestic hard money was easy money for foreigners, and was being driven out by foreign hard money, which allowed foreigners to control and own increasing quantities of the capital and resources of China and India during the period.
  • We can thus understand why nineteenth-century sound money economists like Menger focused their understanding of money’s soundness on its salability as a market good, whereas twentieth-century sound money economists, like Mises, Hayek, Rothbard, and Salerno, focused their analysis of money’s soundness on its resistance to control by a sovereign. (p. 34)
    • Because credit money was ubiquitous during twentieth-century.
  • The money invented in the twenty-first century, bitcoin, was designed primarily to avoid centralized control.

La Belle Epoque—the beautiful era

  • Under the gold standard, people held as much money as they pleased and spent as much as they desired on local or foreign production, and the actual money supply was not even easily measurable. (p. 35)
  • In the United States this era was called the Gilded Age. (p. 36)
    • It was only interrupted by one episode of monetary insanity, which was effectively the last dying pang of silver as money (discussed in Ch. 6).revisit
  • While the gold standard of the nineteenth century was arguably the closest thing that the world had ever seen to an ideal sound money, it nonetheless had its flaws. (p. 37)
    • First, governments and banks were always creating media of exchange beyond the quantity of gold in their reserves.
    • Second, many countries used not just gold in their reserves, but also currencies of other countries.
  • With growing international trade relying on settlement of large quantities of money across the world, the Bank of England’s banknotes became, in the minds of many at the time, “as good as gold.” (p. 37)
    • Britain, as the global superpower at that time, had benefited from having its money used as a reserve currency all around the world, resulting in its reserves of gold being a tiny fraction of its outstanding money supply.
  • The network of settlement became valuable enough that its owners’ credit was effectively monetized. As the ability to run a bank started to imply money creation, governments naturally gravitated to taking over the banking sector through central banking. (p. 38)
    • Viz., the banking sector was de-privatized.
  • With every passing generation displaying the intellectual complacence that tends to accompany wealth, the siren song of con artists and court-jester economists would prove increasingly irresistible for more of the population, leaving only a minority of knowledgeable economists and historians fighting an uphill battle to convince people that wealth can’t be generated by tampering with the money supply, that allowing a sovereign the control of the money can only lead to them increasing their control of everyone’s life, and that civilized human living itself rests on the integrity of money providing a solid foundation for trade and capital accumulation. (p. 38)
  • Interestingly, 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. Although gold was supposedly demonetized fully in 1971, central banks continued to hold significant gold reserves. Even as central banks repeatedly declared the end of gold’s monetary role, their actions in maintaining their gold reserves ring truer. (p. 39)
  • From a monetary competition perspective, keeping gold reserves is a perfectly rational decision. Keeping reserves in foreign governments’ easy money (e.g., USD) only will cause the value of the country’s currency (e.g., JPY) to devalue along with the reserve currencies, while the seigniorage accrues to the issuer of the reserve currency (e.g., the Fed), not the nation’s central bank (e.g., BoJ). (p. 39)
    • Viz., countries holding USD as their reserve do not gain from the seigniorage; instead, they risk the value of their reserves declining due to inflation or currency depreciation in the country that issues the reserve currency.develop
  • Even in a world of government money, governments have not been able to decree gold’s monetary role away, as their actions speak louder than their words. (p. 40)

4. Government Money

  • World War I saw the end of the era of monetary media being the choice decided by the free market, and the beginning of the era of government money. (p. 41)
  • The common name for government money is fiat money, from the Latin word for decree, order, or authorization. (p. 41)
  • It was not government that decreed gold as money; rather, it is only by holding gold that governments could get their money to be accepted at all. (p. 42)

Monetary Nationalism and the End of the Free World

  • In retrospect, the major difference between World War I and the previous limited wars was neither geopolitical nor strategic, but rather, it was monetary. (p. 43)
    • The ease with which a government could issue more paper currency was too tempting in the heat of the conflict, and far easier than demanding taxation from the citizens. (p. 43)
    • With the simple suspension of gold redeemability, governments’ war efforts were no longer limited to the money that they had in their own treasuries. (p. 44)
  • With redemption of gold from central banks, and movement of gold internationally suspended or severely restricted in the major economies, governments could maintain the façade of the currency’s value remaining at its prewar peg to gold, even as prices were rising. (p. 46)
    • The suspension of gold convertibility during wartime allowed governments to maintain the illusion of monetary stability while financing deficits through inflation. The US deployed the same tactic under the Bretton Woods system and until its collapse in 1971.develop
  • A return to the old rates of exchange would cause citizens to demand holding gold rather than the ubiquitous paper receipts, and lead to the flight of gold outside the country to where it was fairly valued. (p. 47)
    • I.e., Gresham’s law—because citizens will likely buy the gold and sell it elsewhere.
  • The introduction of bitcoin, as a currency native to the Internet superseding national borders and outside the realm of governmental control, offers an intriguing possibility for the emergence of a new international monetary system. (p. 47)

“A truly International Monetary System would be one where the whole world possessed a homogeneous currency such as obtains within separate countries and where its flow between regions was left to be determined by the results of the action of all individuals.” – Hayek

The Interwar Era

  • Under monetary nationalism the money supply of each country, and the exchange rate between them, was to be determined in international agreements and meetings. (p .48)
  • Britain had major problems with the flow of gold from its shores to France and the United States as it attempted to maintain a gold standard but with a rate that overvalued the British pound and undervalued gold (i.e., Gresham’s law again). (p. 48)
    • The 1922 Treaty of Genoa.
      • The U.K. had hoped to alleviate its problems with the overvalued sterling by having other countries purchase large quantities of it to place in their reserves.
      • The insanity of this arrangement was that these governments wanted to inflate while also maintaining the price of their currency stable in terms of gold at prewar levels.
      • But this did not and could not work and gold continued to flow out of Britain to the United States and France.
  • Had they admitted to their people the magnitude of the devaluation that took place to fight the war, and re-pegged their currencies to gold at new rates, there would have probably been a recessionary crash, after which the economy would have recovered on a sound monetary basis. (p. 48)
  • As Britain’s gold reserves were leaving its shores to places where they were better valued, the chief of the Bank of England, Sir Montagu Norman, leaned heavily on his French, German, and American counterparts to increase the money supply in their countries, devaluing their paper currencies in the hope that it would stem the flow of gold away from England. (p. 49)
    • While the French and German bankers were not cooperative, Benjamin Strong, chairman of the New York Federal Reserve, was, and he engaged in inflationary monetary policy throughout the 1920s.
      • The U.S. Fed’s inflationary policy ended by the end of 1928, at which point the U.S. economy was ripe for the inevitable collapse that follows from the suspension of inflationism.
  • The Hoover Presidency (1929 March ~ 1933 March)
    • The problems faced by the American economy in the 1930s were inextricably linked to the fixing of wages and prices.
    • After the bubble burst, market prices sought readjustment via a drop in the value of the dollar compared to gold, and a drop in real wages and prices. (p. 50)
      • By the early 1930s, the economic turmoil led to the suspension of the right for U.S. citizens to exchange USD for gold (i.e., Executive Order 6102).develop
      • Viz., even though the gold flew into the US from UK after WWI, that didn’t catch up with the amount of money the Fed was printing.develop
  • The Roosevelt Presidency (1933 March ~ 1945 April)
    • In order to remove the golden fetters to inflationism, President Roosevelt issued an executive order (Executive Order 6102 on April 5, 1933) banning the private ownership of gold, forcing Americans to sell their gold to the U.S. Treasury at a rate of 20.67 per ounce to $35 per ounce, a 41% devaluation of the dollar in real terms (gold). This was the inevitable reality of years of inflationism which started in 1914 with the creation of the Federal Reserve and the financing of America’s entry into World War II. (p. 51)
      • Viz., they took gold away from people at 35 per ounce.
  • Academic economics stopped being an intellectual discipline focused on understanding human choices under scarcity to improve their conditions. (p. 52)
  • The classical liberal tradition that viewed economic freedom as the foundation of economic prosperity was quietly brushed aside as government propagandists masquerading as economists presented the Great Depression, caused and exacerbated by government controls, as the refutation of free markets. (p. 52)
  • With no standard of value to allow an international price mechanism to exist, and with governments increasingly captured by statist and isolationist impulses, currency manipulation emerged as a tool of trade policy, with countries seeking to devalue their currencies in order to give their exporters an advantage. (p. 53)
    • E.g., the Plaza Accord on 1985.develop
    • Also the end of Bretton Woods in 1971 to stop the outflow of gold—the gold was underpriced vs the dollar at the end of Bretton Woods system (largely to fund deficits from the Vietnam War), and abandoning the system helped the US trade balances.develop
      • The dollar’s devaluation also helped reduce the “real” burden of U.S. debts (e.g., funding for the Vietnam War). Countries holding dollar reserves saw the value of their holdings decline, effectively benefiting the U.S. at their expense.develop
        • Wars indirectly benefit the US because they allowed the US to take advantage of the unique position of the dollar as the global reserve currency.develop
      • Inflation surged in the 1970s, but this also worked to erode the real value of debt and made U.S. goods more competitive.develop
    • Related: 5-2a2 What gets measured gets managed.
      • The government interference happens because it prioritize its citizens over the others.develop

World War II and Bretton Woods

  • All spending is spending, in the naive economics of Keynesians, and so it matters not if that spending comes from individuals feeding their families or governments murdering foreigners: it all counts in aggregate demand and it all reduces unemployment. (p. 54)
  • The death of the populist and powerful FDR and his replacement by the meeker and less iconic Truman, coming up against a Congress controlled by Republicans, created political deadlock that prevented the renewal of the statutes of the New Deal. (p. 55)
    • The end of World War II and the dismantling of the New Deal meant the U.S. government cut its spending by an astonishing 75% between 1944 and 1948, and it also removed most price controls for good measure. And yet, the U.S. economy witnessed an extraordinary boom during these years.
      • The situation was far from perfect, though, as the world remained off the gold standard.
  • The Bretton Woods Conference (1944)
    • The United States was to be the center of the global monetary system, with its dollars being used as a global reserve currency by other central banks, whose currencies would be convertible to dollars at fixed exchange rates, while the dollar itself would be convertible to gold at a fixed exchange rate.
      • To facilitate this system, the United States would take gold from other countries’ central banks.
        • The same tactic FDR employed against its citizens right after the Great Depression.develop
    • In essence, Bretton Woods attempted to achieve through central planning what the international gold standard of the nineteenth century had achieved spontaneously. (p. 57)
      • Whatever amount of money or goods moved across borders did so at the discretion of its owners under the gold standard, and no macroeconomic problems could emerge.
      • In the Bretton Woods system, governments were dominated by Keynesian economists who viewed activist fiscal and monetary policy as a natural and important part of government policy.
  • The constant monetary and fiscal management would naturally lead to the fluctuation of the value of national currencies, resulting in imbalances in trade and capital flows. (pp. 57-58)
    • When a country’s currency is devalued, its products become cheaper to foreigners, leading to more goods leaving the country, while holders of the currency seek to purchase foreign currencies to protect themselves from devaluation.
    • As devaluation is usually accompanied by artificially low interest rates, capital seeks exit from the country to go where it can be better rewarded, exacerbating the devaluation of the currency.
    • On the other hand, countries which maintained their currency better than others would thus witness an influx of capital whenever their neighbors devalued, leading to their currency appreciating further.
      • The currency that appreciated from the Bretton Woods was USD by design.
    • Devaluation would sow the seeds of more devaluation, whereas currency appreciation would lead to more appreciation, creating a problematic dynamic for the two governments.
    • No such problems could exist with the gold standard, where the value of the currency in both countries was constant, because it was gold, and movements of goods and capital would not affect the value of the currency.
      • In other words, the value of the currency does not affect the movements of goods and capital under the gold standard.develop
  • Without a stable unit of account for the global economy, the Bretton Woods system was as hopeless as attempting to build a house with an elastic measuring tape whose own length varied every time it was used. (p. 58)
    • Again, because of money’s non-neutrality.develop
  • In essence, the system was akin to the entire world economy being run as one country on a gold standard, with the U.S. Federal Reserve acting as the world’s central bank and all the world’s central banks as regional banks, the main difference being that the monetary discipline of the gold standard was almost entirely lost in this world where there were no effective controls on all central banks in expanding the money supply, because no citizens could redeem their government money for gold. (p. 59)
  • French economist Jacques Reuff coined the phrase “deficit without tears” to describe the new economic reality that the United States inhabited, where it could purchase whatever it wanted from the world and finance it through debt monetized by inflating the currency that the entire world used. (p. 59)
  • The military industry that prospered during World War II grew into what President Eisenhower called the Military–Industrial Complex—an enormous conglomerate of industries that was powerful enough to demand ever more funding from the government, and drive U.S. foreign policy toward an endless series of expensive conflicts with no rational end goal or clear objective. (p. 59)
    • Because USD is ultimately backed by raw power and its exhibition: war (see The Fiat Standard, Ch. 16).develop
      • Whereas bitcoin is backed by Proof of Work.develop
  • Fiat money allowed the American electorate to ignore the laws of economics and believe that a free lunch, or at least a perpetually discounted one, was somehow possible. (p. 60)
  • In the absence of gold convertibility and with the ability to disperse the costs of inflation on the rest of the world, the only winning political formula consisted of increasing government spending financed by inflation, and every single presidential term in the postwar era witnessed a growth in government expenditure and the national debt and a loss of the purchasing power of the dollar.
    • Viz., money was forced into one—because the Bretton Woods had secured USD as the global reserve currency. But this was not achieved through market force—hence not beneficial for the whole of humanity.develop

Government Money’s Track Record

  • In effect, the United States had defaulted on its commitment to redeem its dollars in gold in 1971. (p. 61)
  • Freely fluctuating exchange rates is “a system of partial barter.” (p. 61)
    • The seller does not want the currency held by the buyer, and so the buyer must purchase another currency first, and incur conversion costs.
    • The market for foreign exchange, at $5 trillion of daily volume, exists purely as a result of this inefficiency of the absence of a single global homogeneous international currency.
      • The foreign exchange market is not a spontaneous market phenomenon.develop
  • The total U.S. M2 measure of the money supply in 1971 was around 12 trillion, growing at an average annual rate of 6.7%. Correspondingly, in 1971, 1 ounce of gold was worth 1,200. (p. 62)
    • M2 money supply: 20x
    • The price of gold: 35x
      • The price of bitcoin: ?x
  • Hyperinflation is a form of economic disaster unique to government money. (p. 66)
    • There was never an example of hyperinflation with economies that operated a gold or silver standard, and even when artifact money like seashells and beads lost its monetary role over time, it usually lost it slowly, with replacements taking over more and more of the purchasing power of the outgoing money.
      • The modern equivalent: the dollarization of Ecuador.develop
  • The constantly increasing supply means a continuous devaluation of the currency, expropriating the wealth of the holders to benefit those who print the currency, and those who receive it earliest. (p. 67)
  • History has shown that governments will inevitably succumb to the temptation of inflating the money supply. (p. 67)
    • This is no different from copper producers mining more copper in response to monetary demand for copper; it rewards the producers of the monetary good, but punishes those who choose to put their savings in copper.
      • Only the hardest money at that point in time can perform the role of sound money.develop
  • Government can confiscate money from the banking monopolies it controls, inflate the currency to devalue holders’ wealth and reward it to the most loyal of its subjects, impose draconian taxes and punish those who avoid them, and even confiscate bills. (p. 70)
    • Viz., what we have is crony capitalism.
  • Sound money is the money that is chosen by the market freely and the money completely under the control of the person who earned it legitimately on the free market and not any other third party. (p. 70)
  • As one of the deans of the Austrian tradition in economics, Mises well understood that value does not exist outside of human consciousness, and that metals and substances had nothing inherent to them that could assign to them a monetary role. (p. 70)
    • Because we create knowledge and meaning.develop
  • In its infancy, bitcoin already appears to satisfy all the requirements of Menger, Mises, and Hayek: it is a highly salable free-market option that is resistant to government meddling. (p. 72)

9. What is Bitcoin Good For?

Store of Value

Individual Sovereignty

International and Online Settlement

Global Unit of Account

  • Foreign exchange market is almost mimicking barter. (p. 212)
  • However, bitcoin constitutes less than 1% of the global money supply.
    • 450 trillion global M2 money supply.develop
  • One fundamental difference between gold and bitcoin is that gold has large and highly elastic demand for use in a multitude of industrial and ornamental applications. (p. 214)
    • The central banks are unlikely to dispose their gold reserves, because doing so would only gain a fiat currency which it can print itself as they please, at the expense of letting go of an asset which will likely gain value over its own currency. (p. 215)
  • Unlike industrial demand for gold, which is completely independent of its monetary demand, demand for bitcoin to operate the network is inextricably linked to demand for it as a store of value. (p. 215)
  • The persistence of volatility in bitcoin’s value will prevent it from playing the role of a unit of account, at least until it has grown to many multiples of its current value and in the percentage of people worldwide who hold and accept it. (p. 215)
  • National currencies fluctuate in value based on each nation’s and government’s conditions, and their widespread adoption as a global reserve currency results in an “exorbitant privilege” to the issuing nation. (p. 216)
    • Viz., the fact that USD is functioning as a measurement of price globally itself violates the definition of price—because USD, given its world reserve currency status, does not respect the Misesian dictum: price is one but many. The whole world is forced to the price in USD, whose value is always contingent upon the actions of the Fed and the US government.develop

Takeaways from Podcast interviews:

  • Saifedean Ammous:
    • loan is mining, you devalue everyone’s fiat with new loan;
    • credit creation is self-corrected by the boom and bust (the Austrian business cycle theory);
    • inflation expectation encourages consumption (higher time preference, that is, preferring today over tomorrow);
      • hard money encourages saving (future-oriented);
        • think of Robinson Crusoe;
    • fiat average YoY increase ~14% (vs gold ~1.5%);
    • bad philosophy and fiatdevelop
    • debt slaves;
    • history (WW1-2) and fiat;
    • BTC is gold in the abstract;
    • deflationary worldview vs inflationary worldview;
    • BTC network transactions will be cheaper in the future;
    • higher BTC relative to fiat can happen when fiat is under hyperinflation;
    • in the fiat world, your fiat are meant to lose its value over time (but to the extent that the bust doesn’t hit you, it’s a short volatility trade of societal scale), and debt in fiat will be encouraged (that is, short fiat)develop
      • miss payments, you might lose all your assets (insecurity from short volatility position)develop
    • concept of opportunity cost gets warped with fiat because you don’t save and because the government can give you the money without cost (the cost of bullshit individually is near zero because the burden falls on the whole of society);
      • very high cost for not publishing;
    • socialism is a calculation (not an incentive) problem;
    • UK externalized its inflation problem to the US and France, and that led to 1920s boom and the Great Depression;
    • if you rate the US bonds they will be rated as junk;
      • bond market makes sense only with sustaining inflation expectation (‘evil through and through);
    • monetizing debt via fiat vs monetizing hard asset via BTC;
    • technological upgrade of fiat is BTC;
    • the economy will become less dependent on debt
  • Ammous:
    • everything is in bubble because fiat can be created out of thin air;
    • ‘a continuous devaluation of debt by people moving their asset into something that appreciate is the way out’;
  • Saifedean Ammous:
    • only human action can be the driver (of any relation);
    • Progressive Era (Rothbard);
  • Ammous with Lex;
    • capitalism is what happens when humans are left to their own devices;
    • money allows you to not worry about the problem of coincidence of wants;
    • money is the best technology to transfer value into future (what we want is sound money and not rising market per se);
    • money is whatever that is hardest to make;
    • gold allowed fiat;
    • money is not social contract (belief);
      • money is technology (physical);
      • lowest supply growth rate fiat tends to be the reserve currency historically;
    • gold ban made diamond rings;
    • we don’t need further motivation to consume;
    • economy is about the problem of scarcity (because want is easier than make);
    • prediction with humility;
    • fiat is coercion;
      • guns to the head;
    • wars were fought until all the gold were found, or until all the money were printed;
      • wars are often used as scapegoats;
    • John Osborn;
    • Newton was the ward of mint;
    • meritocracy and networkism;
    • Ammous is onto fiat, and not just onto quantitative easing (e.g., Mark Spitznagel);
    • gold can’t keep up with the inflation;
    • saving is liquid and has little uncertainty and is for the future (BTC), investment means risk (ETH);
      • saving and investment is not the same;
        • investment is a job in itself (most of Wall Street can’t beat inflation);
          • because market feedback mechanism doesn’t function properly in fiat
            • fiat world isn’t about meritocracy
        • saving should be easy;
          • saving is about certainty (there is little to no certainty in hyperinflation economy);
    • money is one (multiple currencies are barter);
    • fiat and populism;
    • money needs salability;
    • (we are seeing less and less inventions, and thus pro-status-quo is the status-quo);
    • Block Size Wars;
    • every non-BTC currencies can hard-fork;
    • energy consumption itself is considered evil, which is stupid;
      • you can mine from anywhere;
    • bonds replaced gold, BTC can replace bonds;
    • people are saving in equity indices;
    • most alt coins are fiat in disguise;

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