Unit 3 Lecture Notes

For people under the age of 60 today, life in debt is what normal life looks like. As soon as a person needs to do anything more expensive than survive childhood, they need to get into debt. You need to borrow to own a car, own a house, go to college, survive emergencies, or even just to get your consumer electronics. The world is full of blowhards railing against debt and how much of a problem it is, but very few people seem aware of the underlying cause of this debt epidemic. How can everybody get to borrow so much? Who's lending them the money and how can this lender never run out? And why is it that only in the twentieth century did this consumerist orgy start.

Readers of The Bitcoin Standard will know that my answer to all these questions comes in two words: easy money. The more that a money is likely to depreciate, the more that its holder will seek to spend it quickly, and the less they will consider saving it. In a free market, people will continue to spend the easy forms of money whenever they can, and only hold on to the hardest forms of money, which will, in the long-run, lead to only the hardest forms of money maintaining their role as a monetary medium. This would in turn lead to the collapse of easy money and start providing people with a strong incentive to save again. But if government enforces the use of the easy money, then it can survive for a while, and its negative effects on saving and borrowing can persist and metastasize as is the case today.

Another way of understanding this dynamic, which is the monetary flipside of the money supply explanation, is through the price of money, or the interest rate. When central banks manipulate interest rates downward, they are financing investments and borrowing through the devaluation of all existing money, and not through the saving of capital by people lowering their time preference. The effect is that savers now face a low return on their savings, while borrowers face a low cost for their borrowing. The incentive to save is thus weakened, as people get lower rewards for delaying gratification, and savings are no longer necessary to provide capital, for government can simply finance loans from devaluing existing money supply. The incentive to borrow is enhanced, as people are given a subsidy for indulging themselves and seeking immediate enjoyment rather than long term rewards.

There is nothing normal about all governments and the vast majority of individuals being in debt. Contrary to what the high-time-preference economics textbooks teach, this is not a normal state of affairs because "we owe it to ourselves," a linguistic sleight-of-hand that hides away the fact that "ourselves" is made up of different generations, the present of which consume at the expense of future generations. Societies and individuals that engage in this kind of short-sighted behavior will quickly be weeded out of the gene pool and its survival in the current world is a historical aberration unlikely to continue for long. The widespread availability of a hard money makes the prospects for debt-based economies bleak, as individuals and families that accumulate savings end up continuously improving their quality of life while those who accumulate debt worsen it.

Whereas in the past everyone had no reliable low-volatility store of value, everyone had to store their value in other kinds of assets which offer return, but carry risk. The problem with these assets is that no matter how profitable they might be, it is relatively easy to make more of them, which brings the price down, making the search for a reliable store of value a never-ending guessing game reliant on outsmarting the guesses of others with regards to their choice of store of value, a speculative activity with no productive value for society, and distinct from speculating on the returns to various assets, since their prices become more of a reflection of store of value demand than their underlying financial fundamentals. With bitcoin available, everyone in the world has access to a store of value whose supply cannot be inflated in response to increasing demand, and given its very small scale of penetration into the global money market and its strictly scarce supply, the potential upside is almost unlimited, making it even more attractive as a store of value in its early phases.

While most people tend to think of Bitcoin's rise in terms of its impact on the demand for government money, I have never come across a discussion of its impact on the supply of money. I believe this causal channel runs through Bitcoin's impact on demand for loans. Here is how I can imagine this scenario unfolding: imagine a basic modern wage earner who is in debt for something in the range of a years' income. Imagine he decides to put 1% of his income in Bitcoin every month, and imagine, for the sake of this thought experiment, that bitcoin appreciates on average around 50% per year from now. If this man holds on to his bitcoin and does not touch them, they would appreciate it to match the value of all of his debt in less than ten years. If Bitcoin's value rises by 100% a year, it would only take him 7 years to have enough bitcoin to pay off his debt.

I would expect that this scenario will become more and more common, provided bitcoin continues to survive, as evidenced by my personal interactions with bitcoiners, who have used their gains over the years to get out of debt and buy the peace of mind you get from not having to be dragged out of bed every morning to work to pay off someone, rather than working for yourself. In such a world where the possibility of saving is available again, you would expect a growing portion of the population to be free of debt and to have enough savings to finance their expenses, as well as to finance their businesses. Fewer people will get into debt for buying cars, houses, or consumer goods, because they can save up for them in hard money. More interestingly, perhaps, will 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.

The return to this form of mass capitalism, where capital is widely distributed, rather than centrally-controlled, is one of the themes I discussed in chapter 8 of The Bitcoin Standard. Under sound money regimes, a free market in capital emerges. Individuals who are productive are able to accumulate capital and watch it appreciate in value, and so can finance themselves and their businesses. Productivity is rewarded with compounding growth in value over time, allowing the holder more capital, and thus placing more and more capital in the hands of the productive. In large centrally-planned credit markets, such as those that exist under government money, capital is centrally allocated by government bureaucracies that determine who gets new capital, while also devaluing the capital accumulated by the productive members of society. In such a world, being productive is punished over time, and credit financing is more likely to go to those who can afford bracing the bureaucratic hoops of government credit boards. Capital is centrally allocated and the individual has less agency in deciding where to invest it. Capital and firms grow larger to afford lawyers and PR firms to communicate stability to bankers, and smaller businesses become less viable. This is why under the gold standard firms tended to be smaller, and there were far more smaller businesses thriving. It is said that when Britain was the prime industrial force of the world, its average factory had 20 workers. This is what a free market in capital would look like. The centralization of credit issuance rewards bureaucratic and sclerotic growth. It is no wonder that the golden era of innovation in the nineteenth century, la belle epoque, was a world running on a hard money, because that hard money is what allowed all these many inventors and tinkerers the capital and freedom to experiment with outlandish ideas.

Bitcoin allows everyone to erase their debts by moving to it.

The way this would work, functionally, is to understand that money in the current monetary system is made up of debt. This is taken as normal by most people, and after more than a century of Marx, Keynes, and other cranks spreading the gospel of government credit money as normal, many people believe this is normal. But it is not normal, and is only a consequence of the artificial government manipulation of money causing it to depreciate. A market solution that provides people with the possibility of appreciating money, money whose supply is not responsive to increases in value brought about by high demand - would bring about a decline in the demand for debt. Individuals first, then businesses, and then large corporations would slowly climb their way out of debt and into holding wealth in the form of bitcoin, using that wealth to pay off their debt. You would expect municipal governments to get into these kind of arrangements particularly in more decentralized governmental structures where local authorities have more sovereignty. As more and more of the money supply shrinks, the damage caused by the fiat economy shrinks, and the number of people under debt slavery is reduced. Eventually, the only part of the economy that remains wedded to government money would be government itself, and the parts of the economy dependent on government money.

As monetary central planning goes, it is possible to underestimate just how effective it can be at manufacturing its own justifications. Just like the Soviet Unions continued to produce very impressive numbers for economic growth into the late 1980s as Russians were going hungry thanks to shortages, the modern government-run central banks can also keep a macroeconomic charade going for a while. Paul Samuelson and William Nordhaus, two of the most important postwar economists in the US, both of whom have won the Bank of Sweden Prize (commonly misidentified as a Nobel Prize), the latter just two weeks ago, wrote in their 1989 Economics textbook, which is standard issue for most undergraduate students around the world: "The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive". Modern macroeconomics is no different than Soviet macroeconomics in its blind faith in the ability of high priests with PhDs to divine the working of the economy through models, metrics, and statistical analysis.

Here it is worth remembering that the best way in which inflation has been fought in the United States has been to massively centrally plan the food industry to direct people toward consuming cheaper foods, and to direct industrial processes toward increasing the volume of this food to appear more impressive. This is a topic which I plan on discussing in detail in a future edition of The Bitcoin Standard research bulletin, but for now, those interested in reading more might want to research a man named Earl Butz and read about his farm program, and how it relates the inflation of the 1970s to the devastating reduction of health widely witnessed in the United States since. Nixon hired Butz wanted to make food cheaper, and Butz did that by centrally-planning farming into a mega-in dustrial operation, telling small farmers to "go big or go home". He focused on promoting corn as a cheap food which would help bring down the cost of food. Dietary guidelines at the time also strongly discouraged consumption of expensive meat, and encouraged the heavy consumption of grains, which are very low on nutrients, very high on toxins, but very cheap. The shifting dietary in take from meat and a wide variety of plants to a heavy dependence on heavily processed and mass produced grains has been at the root of the obesity and diabetes crises. More can be read about this in The Big Fat Surprise by Nina Teicholz.

The fiat credit money system disguises its inflation from its subjects by destroying the quality of the food they consume and telling them that prices are stable. Whereas $2 could have bought you a ribeye in 1968, they could buy you a hamburger in 1988, and half a soyburger in 2008. If you ignore the differences between all these lunches, inflation hasn't been bad, the price of your lunch has gone up by 100% over 40 years, which is not a terrible fate. But this of course ignores that the lunch going from ribeye to a soyburger is not a like to like comparison. The ribeye is a heavily nutritious food, the soyburger is toxic industrial sludge. The real inflation, if measured in terms of nutrition, would be far higher.

The point from this digression is that you can expect the monetary system to persist for a while in creating an image of success by continuing to present to its subjects improved statistics and manipulating their experience of the world to better tolerate the reality. This become less and less tenable with time as governments are less able to finance themselves through inflation through the threat of bitcoin, and so you would expect these sclerotic economies surrounding governments to begin a slow terminal decline into irrelevance. Ultimately, the structures for these shambles of organizations can remain, but they will just become less attractive to people who see the migration to the new economy as more beneficial. While government connected firms may continue, they will lose relevance and value.

What we would likely see in this kind of scenario is a growing size of the bitcoin-based hard money economy, in which holders of money witness their value appreciate, while the government-based economy shrinks in size and in relative wealth as its lack of productivity becomes more punishing as more of the productive member of society flee to other sectors. The fiat economy will continue to provide people with lucrative careers with alluringly large numbers of monetary units being paid their way. But as the people who actually produce economically valuable goods move away to a harder monetary standard, these monetary units will buy less valuable fruits of others' labor, and will continue to maintain a semblance of value only when being used to purchase mass-produced large-scale economic goods whose production government can manipulate to appear cheap.

You can imagine two new global economies emerging across the world: the easy money centrally-planned economy of which government, media, and academia insist you must be part, with comfortable jobs secured from competition and controlled prices to ensure everyone gets their government-recommended soy and high fructose corn syrup rations. On the other hand, a growing, innovative, and apolitical economy which draws in the most ambitious, creative, and productive people in the world to work hard on providing goods of value to others.

It is true that in the long-run this is not sustainable, but the long-run might take a long time to arrive, because contrary to popular belief Bitcoin is unlikely to cause a collapse in the value of fiat money, by undermining the money creation process, and thus limiting the possibility of hyperinflationary collapse.

The only way to peacefully end credit money is to pay it all off, which looks like yet another nif ty killer app for a digital apolitical harder form of money that appreciates and encourages saving, capital accumulation, and long-term orientation.