An Open Letter to Ray Dalio re: Bitcoin – Robert Breedlove
Ray, your ability to penetrate the opaque realm of economics and share its secrets in an easy to understand language is one of your greatest gifts to humanity. With your videos, openly published research, and authorship, you have opened the eyes of many to a topic most consider too difficult to comprehend. The world needs more pioneers like yourself writing easy-to-read maps for the nearly incomprehensible territory of economics. Macroeconomists, Academics and Central Bankers rely heavily on deceptive language and universal public ignorance to perpetrate their schemes; your work in converting this esoteric domain into a more exoteric form is therefore commendable.
Let me begin by saying that, like you Ray, I consider myself a “dumb shit” who is more focused on dealing with what I don’t know rather than relying on what I do know to navigate life and work — a mindset well accorded with ancient wisdom:
“All I know is that I know nothing.” — Socrates
Epistemic reach is finite, as knowledge cannot explain everything in the world and, often, it clouds the truth. So let us explore the territory of economics with a beginner’s mind, free of the accumulated clutter commonly called “conventional wisdom”. It is from this frame of mind that I present to you this open letter regarding your perspective on Bitcoin through the lens of your stated principles on life and work (in this letter, I sometimes direct my comments at Ray, and sometimes at the audience, so please bear with these shifting perspectives).
We begin with an evaluation of Ray set in the idea-meritocratic style practiced at Ray’s firm, Bridgewater. The purpose of these assessments is to grade your peers candidly, being brutally honest and holding no punches, to ensure that the best ideas rise to the surface — unimpeded by policy, politics, or hierarchy — so that they may be scrutinized and, if useful, acted upon. In Bridgewater’s culture, communication is both top-down and bottom-up, so that people feel empowered to share their honest perspectives. For Ray, it’s all about getting to the truth by any means necessary, and I appreciate his stylistic approach. We will explore all of this more deeply below — so let’s dive in.
Subject: Ray’s Assessment of Bitcoin
From: Robert Breedlove
To: Ray Dalio
Attachments: Ray’s assessment of Bitcoin available here —
You deserve an “F” for your assessment of Bitcoin’s significance and future prospects. Although there are very few of us, everyone who has the requisite depth of understanding in the fields of computer science, monetary history, game theory, economics, and mathematics, and has spent the time intensely studying Bitcoin (it takes a lot), agrees with this harsh evaluation of your short-sighted assessment of this momentous monetary innovation. As one of your biggest fans, I truly believe that if you take another look (a long, hard, thoughtful look), you will see the light. Specifically, your assessment fails for the following three reasons:
1. You claim that you are sold “blockchain technology”, despite the only proven use case for “blockchain technology” is as a component of Bitcoin. Contrary to “conventional wisdom”, the real breakthrough is Bitcoin, not blockchain.
2. You state that Bitcoin could be disrupted by another “cryptocurrency”, however this extremely unlikely: Bitcoin is a path-dependent, one-time invention; its critical breakthrough is the discovery of absolute scarcity — a monetary property never before achieved by mankind. The emergence of Bitcoin cannot be reproduced because absolute irreproducibility is the discovery! The iPhone disrupting Blackberry analogy you cite is irrelevant; Bitcoin is a protocol, not a consumer product.
3. You state that price-stable, central bank issued currencies will be issued, which will likely be attempted, but such currencies would be antithetical to free markets. Further, price stability is an illusion: all economic goods move against one another in ratios of exchange, money is simply the most marketable good, hence the reason money-denominated prices tend to be more stable, but are still subject to supply and demand interaction. Since Bitcoin is absolutely scarce and cannot be stopped, it is likely to continue outcompeting all other monetary technologies on the free market — thus disrupting central bank monopolies as we know them. As an economic good monetizing in real time, the exchange ratio between Bitcoin and fiat currencies is likely to remain volatile for some time, but this volatility will continue to subside as Bitcoin’s market capitalization grows, thus making its use as a medium of exchange more practical (similar to the evolutionary phases gold underwent during its monetization process).
Your assessment is especially disappointing for three reasons: 1) You have consistently exhibited a knack for comprehending, distilling, and communicating highly complex economic concepts in a manner palatable for general audiences, 2) The depth of knowledge you possess in history, economics, and free market dynamics presents you with a privileged position to best understand the emergence of and demand for this asset, and 3) Your virtually unparalleled reach and reputation as a macroeconomic thought leader, organizational engineer, and cultural innovator is an invaluable platform from which to trumpet to the dire circumstances faced by the prevailing economic order and how Bitcoin has the potential to alleviate them.
In the following open letter, I will show that the fundamental tenants of your worldview, as stated in your book Principles and other writings, are fully consistent with Bitcoin — even though you may not yet realize it. I’ll begin with two primer sections: one on the nature of money and its history, and one on Bitcoin’s general functionality and economic properties — either or both may be skipped by the reader who has “already fallen down the Bitcoin rabbit hole”, so to speak. After these primers, I will walk through many of Ray’s most important Principles, one by one, and break them down to better understand their relationship to markets and Bitcoin. Let’s begin.
Money is a tool for moving value across time and space (or spacetime, as Einstein explained, these are actually one in the same). Money is an emergent property of barter (or direct exchange) that purports to solve the three dimensions of its non-coincidence of wants problem; it evolves naturally in the free market as the most exchangeable good in an economy. Although he is silent as to its origins, Ray understands the technological functions of money, as stated in his video assessment of Bitcoin (see open letter attachment above) that the primary functions* of money are:
2. A medium of exchange: in regard to moving value across space (the second function and evolutionary phase of money)
*We will ignore for now the third function and evolutionary phase of money, unit of account, as it isn’t pertinent to our discussion here.
Although the purpose of money always remains the same, to move value across spacetime, the technology fulfilling this purpose is constantly being subjected to market-driven evolutionary pressures. The greater a monetary technology’s resistance to value dilution across time — whether by counterfeiting, supply inflation, or deterioration — the more effective it is as a store of value. Once a store of value accrues enough value, people begin to use it for trading purposes. The more widely accepted a form of money is, the higher its value as a medium of exchange, which makes this aspect of its value proportional to the number of its monetary network participants (aka users). When a specific monetary technology, in the form of an economic good, becomes widely accepted in interpersonal exchange (aka trade) it is called “money”. Monetary technologies compete to become more widely adopted based on the following traits:
1. Scarcity: resistance to money supply manipulations and, thus, dilutions to its monetary unit value (difficult to produce)
2. Divisibility: ease of accounting and transacting at various scales (separable and combinable units)
3. Portability: ease of moving value across space (high value-to-weight ratio)
4. Durability: ease of moving value across time (resilient to deterioration)
5. Recognizability: ease of identifying and verifying the monetary value by other parties in a transaction (universally identifiable and verifiable)
Due to the relative advantages competing monetary technologies offer, the particular economic good being used as money can, and does, change over time. Throughout history, mankind has employed seashells, salt, cattle, precious metals, and government paper as money, to name a few. Similar to the price discovery process in a free market — where the collective actions of buyers and sellers are continuously compressed into a single actionable variable called the market price — competing monetary technologies undergo a market-driven discovery process. We can gain a better understanding of this dynamic through an analogy: monetary evolution is (roughly) comparable to the evolutionary process we see in communications technologies.
No matter what specific means is used to fulfill it, the purpose of communications technology remains the same: to move information across spacetime. Similar to the market for money, competition is at all times alive among different communications technologies, in which they are all subjected to a market-driven discovery process. As newer technologies are invented they are market-tested through competition; each survives or dies in terms of its relative speed, message fidelity, reliability, traceability, and mobility. Since these technologies have a singular purpose, people tend to adopt a common technology, a coalescent process that is propelled by network effects.
Network effects, defined as the incremental benefit attained by adding a new member to a network for all of its existing participants, drive people to adopt a primary form of communications technology. As more people migrate to the latest and greatest technology, it encourages others to do the same, as more network participation exponentially increases the number of possible connections. A simple example of this is the telephone: with two phones in existence, only 1 connection is possible; with five phones in the network, the number of connections jumps to 10; and with twelve networked phones, the number of connections increases exponentially again to 66, and so on. (see Metcalfe’s Law for a directional explanation of this network effect dynamic):
Since the purpose of communications technology remains singular (moving information across spacetime) despite technological advances, whichever technology is best at fulfilling this purpose has a tendency to become dominant in the marketplace. This tendency, reinforced by network effects, has driven communications technology evolution from carrier pigeons to telegraphs, to the internet today. This is an expression of the winner-take-all (or, winner-take-most) dynamic inherent to many networks, including those of the communications and monetary technology varieties.
Similar to the purpose of communications technology, the purpose of monetary technology is singular: to move value across spacetime. The various monetary technologies used to fulfill this purpose, however, undergo market-driven discovery and, thus, evolve over time based on their respective monetary traits. In respect to the traits of money, the one that takes primacy in determining a specific monetary technology’s likelihood of success in the free market is its hardness (also called the scarcity or soundness of money). This trait is of primary importance because it determines a money’s usefulness as a store of value, and a money that cannot adequately store value across time necessarily cannot transmit value effectively across space. The relative hardness, or scarcity, of a competing monetary technology is quantified by its stock-to-flow ratio, a valuation metric also common in precious metals markets such as gold:
· Stock is the existing unit supply of monetary units (for example: ounces of gold, quantity of US Dollars, or quantity of Bitcoin)
· Flow is the newly created supply over a specific time span, usually one year
· The stock-to-flow ratio is calculated by dividing the stock of monetary units by its newly created supply flow (can be thought of as the inverse of inflation)
· The higher the stock-to-flow ratio, the greater the hardness (also called soundness or scarcity) of the monetary technology
We can think of monetary hardness as the difficulty (or cost) necessary to produce an incremental unit of a monetary technology. For instance, the capital and operational expenditure necessary to extract an ounce of gold from the ground is the basis of its monetary hardness. As producers of gold will always seek to extract it until their incremental cost per ounce is equal to their incremental revenue per ounce (in other words, until marginal cost equals marginal revenue), there is a perpetual financial incentive for producers to maximize new supply flows up to the point of economic breakeven. In comparison to communications technologies, money exhibits much stronger centripetal, winner-take-all network effects that drive users to adopt a single store of value. Those who fail to adopt the hardest money available to them face a debasement of their stored value by those who can produce it at an incremental profit (where MC<MR). Hard money, then, is simply the monetary technology freely selected in an unobstructed marketplace as the most sound store of value available. Historically, gold prevailed as hard money precisely because of its superior stock-to-flow ratio relative to other monetary metals:
On the free market, people naturally and rationally choose to store the value created by their work in the monetary technology that is hardest to produce, since producing new units dilutes the value of existing units for all holders of said money. Since gold exhibits superior monetary hardness, it has outcompeted silver and other monetary metals several times throughout history. Gold outcompetes due to the game-theoretic aspects of an evolving store of value:
Since gold is virtually indestructible, nearly every ounce mined throughout human history remains part of its extant supply; and since gold is relatively rare in the Earth’s crust, its new supply flows are a small percentage of its existing stock each year. Taken together, these properties give gold the highest stock-to-flow ratio of any monetary technology in the world (before Bitcoin), meaning that its supply inflates at a relatively low and predictable rate. Superior hardness is precisely why gold became the dominant monetary technology on the free market.
Game theory tells us, and market history proves, that anyone who can, for instance, profit from silver production by selling it at a higher price than it cost to produce, has a direct financial incentive (the protection of value across time) to store any profits generated in the hardest form of money available to them. As all market participants are subjected to this harsh economic reality, this persistent incentive triggers investment flows from silver (or any other softer monetary technology) to gold (or the hardest form of money available). In this way, free market competition causes people to converge on a single store of value and, therefore, perpetually promulgates hard money. This is not surprising, as free markets tend to zero in on the best possible technological solutions to problems, discarding the rest. And conceptually, in the same way that money is an emergent property of a direct exchange (barter) economy, hard money is an emergent property of an indirect exchange (monied) economy.
The physicality of gold gives it both advantages and disadvantages. Being a precious metal that achieved its monetary value on the free market, gold is a self-sovereign monetary technology, meaning that its value, trust factors, and transactional permissibility as money are not subject to any counterparty risk whatsoever. In other words, gold is equity-based money or a bearer asset. If someone flips you a gold coin and you stick it in your pocket and walk away, then you have just participated in an irreversible transaction. The value of this coin is set by the market and whosoever is in physical possession of it is assumed to be its rightful owner. No bank or payment intermediary can censor or reverse this free market transaction. You have no need trust anyone else, whether you choose to hold or spend your gold. Self-sovereignty is a quality uniquely intrinsic to bearer assets such as gold, silver, or diamonds.
Contrarily, if someone hands you a US Dollar, you assume the counterparty risk of the US Government, who can dilute its value via supply inflation (as we see with all fiat currencies throughout history) or deauthorize its value altogether (as we saw when India deauthorized its 500 rupee bank note). Further, if you received this US Dollar through a payment intermediary, like Paypal or Venmo, you are also exposed to the risk of this payment being censored, reversed, or surveilled. Even when physically hoarding fiat currency, it is still vulnerable to supply inflation as its central bank backer can simply print more, stealing the value stored therein. By transacting in anything other than a bearer asset, which is valued solely based on free market dynamics, you forfeit your personal financial sovereignty to the currency issuer and/or other financial intermediaries.
Although gold’s physicality gives it the property of self-sovereignty, it also comes with inherent disadvantages. Its primary drawback is its suboptimal divisibility. Since gold has such high value to weight, it is impractical to pay for coffee using gold coins, for instance. This drawback of gold is what gave silver some utility as a medium of exchange throughout history, as its value to weight was much lower making it more practical to use for everyday purchases (due to its higher divisibility and portability), whereas gold was typically reserved for settling large transactions.
Eventually, gold’s divisibility problem was “solved” when central banks which began issuing paper currencies which were fully redeemable for gold. This provided users with a hybrid monetary technology that exhibited the hardness of gold, while offering an ease of transactability (high divisibility and portability) even greater than that of silver. With its marginal utility disrupted by paper currencies (and later, electronic abstractions of paper currencies), silver became completely demonetized and eventually the entire world market for money evolved to a paper-currency-enabled gold standard.
With transactions being executed in gold-backed paper currencies, the global gold standard led to the centralization of gold within bank vaults. These gold hoards became too tempting for governments and their central banks to resist expropriation of, thus catalyzing the fractional-reserve banking practices now ubiquitous in the modern world economy. As governments created more currency units than they could support with their gold reserves, they started revoking currency redeemability for gold, which culminated in the 1971 unilateral decision by US President Nixon to permanently sever the peg to gold (deceivingly, it was declared to be a temporary measure):
Since all other currencies in the world were pegged to the US Dollar, this final act of financial sovereignty usurpation officially abolished the gold standard worldwide. This death-stroke to monetary integrity brought us into the age of the “political debt-based money backed by the future cash flows of taxing authorities” we all are legally coerced into using today — fiat currency. With fiat currencies came the limitless inflation suffered episodically all over the world. Inflation comes to us from the Latin verb inflare meaning “to blow up”. This is an apt description since once it sets in, fiat currency inflation has only one possible outcome — dilution into worthlessness:
Since breaking its peg to gold, the US dollar has lost over 97% of its relative value. The fiat currency printing press has proven to be the weapon of choice for political leaders to further their agendas and enrich themselves; it has also become the primary means for funding perpetual warfare. During the past century of central banking — which cunningly imposed its dominion over a large swath of the world’s gold supply through coercion and confiscation — there has been unprecedented per capita death in warfare, an ever-widening wealth disparity, and an incessant sequence of economic boom and busts fueled by the continual marginalization of paper currencies and, ultimately, the instantiation of fiat currencies. Today, all semblance of monetary integrity and sanity has been destroyed with citizens left optionless, forced to transact in softest form of money in history.
In the wake of the latest (and arguably the greatest) fiat-currency-fueled economic bust, the 2008 Great Recession, when central banks all over the world were busy printing more fiat currencies to recapitalize their financial institutions via the shadow tax of inflation, Satoshi Nakamoto released an open-source software project into the world. He, she, or they called it Bitcoin.
Bitcoin can be thought of as the first incarnation of self-sovereign money in digital form. Its transactions are irreversible, uncensorable, and unstoppable. In other words, Bitcoin is the world’s first digital bearer asset. Possession of Bitcoin is achieved by holding its private key, which is an alphanumeric data string that can be stored in analog, computer, or ever human memory. Its absolutely scarce money supply is anchored to the most fundamental commodity in the universe — energy.
Bitcoin’s stock-to-flow ratio, the measure of its monetary hardness, increases (inevitably) every 4 years and will be about twice that of gold after its 2024 downward inflation rate adjustment (the halving); at this point, Bitcoin will definitively be the hardest form of money that has ever existed. Bitcoin’s uncompromising, apolitical monetary policy is enforced by unbreakable cryptography, hence this inevitability (as sure as 1+1=2). Its unrivaled hardness is made possible by an ever-rising production difficulty that requires expenditure of real world energy in a process called proof-of-work. This anchor to economic reality is also called mining — in an ode to the difficulty of gold production — and is the source of Bitcoin’s monetary integrity.
Bitcoin is also the world’s first asset with perfect supply inelasticity, as changes in its price have absolutely no impact on its supply flow. This means changes in demand for Bitcoin can only be expressed in its market price. If the price of gold increases, its new supply flow will increase as new miners enter the market and new methods of gold mining becoming economically feasible (since the gold miners can sell their product at a higher price), thereby applying downward pressure to its stock-to-flow ratio. With Bitcoin, no matter how much its price increases, it is absolutely impossible to create any new supply flow beyond its mathematically enforced and universally transparent issuance schedule. Also, a higher market price means a more secure Bitcoin network, as the resources allocated to mining are used to secure it. Like a vault whose walls thicken as more value is stored within it, Bitcoin adapts to become a more secure monetary network as its market capitalization grows. Absolute obstinance of the algorithmically enforced Bitcoin monetary policy drives a virtuous cycle that perpetuates the expansion of its network:
Bitcoin’s money supply is absolutely scarce, meaning its monetary policy (or money supply) is fixed — only 21M units will ever exist. Before Bitcoin, only time itself exhibited the property of absolute scarcity. This means that its stock-to-flow ratio will continue to increase and eventually become infinite when the last Bitcoin is produced sometime in the middle of the 22nd century. Bitcoin’s monetary policy is becoming the most trusted in the world as it is fully transparent and unchangeable.
Bitcoin runs countervailing to government monetary policy which is uncertain, opaque, and subject to change based on the whim of bureaucrats. Essentially, we each must decide if we are to trust the whimsical nature of self- interested bureaucrats or the inviolable nature of mathematics to manage our money supply. Shockingly, whether we decide or not, the harsh economic reality of Bitcoin’s superior hardness is likely to be imposed upon us all, as history teaches us the economic consequences of hard money cannot be ignored. As we saw earlier, the free market for money is winner-take-all. Critically, Bitcoin is open-source, like a spoken language, and it is transcendent of regulations and the legal insulations that preserve the monetary monopolies of central banks.
So we have Bitcoin, the hardest form of money in history, competing directly with government money, the softest form of money in history. So long as Bitcoin continues to exist, it will likely continue to outcompete gold and fiat currency in the free market, and its market capitalization will grow. Eventually, each and every holder of any softer form of money (whether its gold or fiat currency) will be faced with the grim reality of a gradually, then suddenly, depreciating asset relative to Bitcoin’s ever-constricting new supply flow. Imposition of this harsh economic reality will be applied persistently and each of us will be faced with the same mathematical and market-driven dynamic that has catalyzed the evolution of money throughout history.
Hard money, as selected on the free market, reigned for the first 4,900 out of 5,000 years of human commercial history and all signs indicate we are witnessing its reemergence in the rise of Bitcoin. Before government intervention, money supply was not a matter of policy, but instead was governed by game-theoretic principles, a “policy” rooted in natural law. Since governments have imposed monetary monopolies in the form of central banks, trust has steadily been eroded in their ability to prudently maintain money supplies. Said differently, Bitcoin is the most credible monetary policy in human history disrupting the most untrustworthy monetary policies in human history. A bet on Bitcoin is that the competitive dynamics inherent to the market for money will continue to play out in the same way they have throughout all of history, thus making money supply a matter to be determined once again by the free market instead of central planners.
Armed with these primers on money and Bitcoin, we will now dive deeper into the various principles that comprise Ray’s worldview. Through this exploration, we will gain a more fundamental understanding of history, markets, and Bitcoin. We begin with Ray’s most renowned cultural creation — the idea meritocracy.
(p.540) “Idea-meritocratic decision making is better than traditional autocratic or democratic decision making in almost all cases.”
At the pinnacle of Ray’s worldview is the cultural paradigm he originated at Bridgewater — the idea meritocracy. As a distinct organizational style, it’s intended to eliminate all barriers to the free flow of information between people — including ego, hierarchy, and personal agendas. An idea meritocracy seeks to align itself with reason and become impervious to politics. As Ray puts it, (p.306) “Power should lie in the reasoning, not the position, of the individual. The best ideas win no matter who they come from.” Essentially, an idea meritocracy is a free market for ideas — a way of filtering ideas via a (simulated) form of natural selection. Instead of charging ranked positions with the authority of decision-making, an idea meritocracy attempts to foster an environment in which the ideas compete freely based on their own merits:
The idea meritocracy: an open environment for the proliferation and combination of the most meritorious ideas, free from manmade impediments such as ego, policy, and hierarchy.
As a free market capitalist, it is unsurprising that Ray developed this approach to organizational culture, as it has proven to be the most effective system for the most people. It was (repeatedly) well established in the 20th century that free markets (capitalism) function better than centrally planned markets (socialism). At the heart of any economic system is the problem of properly adapting resource allocations to the circumstances faced by people at any particular point in spacetime. In other words, the core economic problem is how to best distribute current knowledge of relative value and scarcity. Knowledge is intrinsically superfluid: it resides within many minds and is constantly changing in accordance with the ceaseless interpersonal interactions among individuals and their assessments (and reassessments) of market realities. The challenge of an economic system is to enable quick, continuous, and effective assimilation and dissemination of this knowledge to properly guide entrepreneurial actions.
Naturally, individual entrepreneurs are always most familiar with the prevailing economic circumstances specific to their time, place, and industry. As they see, hear, and touch the productive factors and influences most pertinent to their domains on an almost daily basis, entrepreneurs gain and maintain an intimate understanding of the ever-changing conditions relevant to their chosen occupation. Said differently, knowledge has a localized dimension to it: it surfaces continuously at all points in spacetime where entrepreneurial actions (involving decisions and trade-offs) and economic realities (involving value and scarcity) interface. Therefore knowledge, by its very nature, is inherently distributed among the minds of many. And free markets, comprised of entrepreneurial actions guided by accurate price signals (more on these shortly) are the best assimilators and disseminators of these localized pools of knowledge within an economy. Simply, the free market is a nexus in which many minds effectively become one.
Capitalism is an economic system that deals with the distributed nature of knowledge in a true-to-life, bottom-up way. In a free market, each entrepreneur is unobstructed to operate in his own best interest in pursuit of profits. Contending with the ever-present realities of value and scarcity, the actions of entrepreneurs, like the actions of a pilot guiding his aircraft via his navigational instruments, are guided by the market prices relevant to his profession. This is free market capitalism: a seemingly chaotic bricolage of entrepreneurial decisions, price reconfigurations, and capital flows coming together in a unified orchestration that harmonizes individual and collective self-interests.
For instance, let’s consider the case of Larry the lemon farmer. Being a farmer, Larry is primarily conscious of the cost of fertilizer, soil, and water; and keenly aware of his total cost structure relative to the expected market value of his lemon crop, as maintaining total revenues above total costs is necessary for entrepreneurial survival. Should a drought strike and drive up the scarcity of water, Larry will become aware of this economic reality through the increased price of water which will, in turn, cause him to increase the selling price of his lemons or cut costs elsewhere to maintain his profit margin. Critically, Larry can respond effectively to this drought based purely on the increased price of water without any direct knowledge of the drought itself or its causes. As entrepreneurs choose to buy and sell the various productive factors related to their occupations, the knowledge in their minds becomes encapsulated in and distributed by the prices of these factors to everyone else in the world who interacts with them in the marketplace.
As new experiences provide feedback that change the state of knowledge, entrepreneurs must be left free to rationalize their own economic affairs, take risks in accordance with their rationalities, and operate in an environment free of coercion or violence that would otherwise disrupt their business dealings. Government in intended to be this protective force, which uses its monopoly on violence to prevent violence within society, thus preserving the rule of law and people’s rights to private property. Unhampered, free market competition among entrepreneurs ensures that only those adding value to society can survive and thrive. This principle of non-interference and mutual respect form the essence of true free market capitalism. An excerpt from the masterful essay I, Pencil poetically explains the magic of free markets:
“I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles that manifest themselves in nature an even-more-extraordinary miracle has been added: the configuration of creative human energies — millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree…The above is what I meant when writing, “If you can become aware of the miraculousness that I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand — that is, in the absence of governmental or any other coercive masterminding — then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith…The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.”
Standing in stark contrast to the economic system of free market capitalism is central planning (socialism). Central planning, as the name implies, means directing an entire economy in accordance with a single unified plan in a top-down, authoritarian, and unnatural way. In a socialistic economic system, a central entity owns and operates all the productive factors (capital, land, and, ultimately, its people) within a society. As such, this centralized body (usually old, stale, and pale white guys) is arrogantly assumed to possess all the knowledge and feedback loops necessary to form a completely (and continuously) accurate representation of the ever-changing economic realities navigated by its society. Whereas the free market is a form of ideological competition (akin to the idea meritocracy) intended to guide entrepreneurial actions consistent with economic reality, central planning is more akin to the ideological totalitarianism (akin to bureaucratism) associated with a traditional organizational hierarchy, where the merits of ideas are given short shrift and underlings unquestionably carry out the orders of their “superiors”.
Being completely misaligned with reality, socialism failed because it is a poor information system: with all productive factors singularly owned and controlled, the price signals necessary for adapting to changing market realities are inhibited from developing. This inevitably leads to the shortages, mass starvation, and societal disintegration commonly associated with socialism. For an acute visualization of the differences in societal vibrancy between capitalism and socialism, take a look at this shot:
If we learned nothing else in the 20th century, it is that free markets are better than centrally planned ones in across almost every conceivable dimension. Left to function freely in their natural state, markets consistently generate innovation that increase productivity, lower costs, and improve quality of life for everyone in society. Just consider for a moment how much innovations such as the automobile, smart phone, and internet services have increased our personal freedoms and enriched our lives. Now consider how un-innovative and un-adaptive government-run functions like the DMV, Post Office, and central banks are. So the elephant in the room, then, is why, in light of overwhelming evidence favoring a free market economic system, do we still tolerate central planning of the largest market of all — the market for money. Again, money is simply a technology for moving value across spacetime. Although it is an ancient (and somewhat, thanks largely to propagandists, enigmatic) social technology, it is hardly different than any of the other things we produce and distribute via free market mechanisms all over the world today.
Coming back to the congruence between the free market and the idea meritocracy, we arrive at two useful formulas. First, the idea meritocracy is comprised of three key elements: In Ray’s words, (p.309):
“Idea Meritocracy = Radical Truth + Radical Transparency + Believability-Weighted Decision Making”
Now, let’s translate this equation into its comparable free market format:
Free Markets = Truthful Price Signals + Transparent and Reliable Rule of Law, Private Property Rights, and Hard Money + “Skin in the Game”-Weighted Decision Making
With these equations in mind, let’s now dive into each of their elements to gain a clear understanding of Ray’s idea meritocracy and its relationship to free markets. Once we fully unpack these concepts, we will go deeper into the other principles underpinning Ray’s approach to life and work, using them as filters to more fully observe the potential impact of Bitcoin on all aspects of life.
We begin our journey from the greatest force of freedom in the universe — the truth.
(p.135) “Truth — or, more precisely, an accurate understanding of reality — is the essential foundation for any good outcome.”
The first element of Ray’s idea meritocracy is Radical Truth, the idea that gaining a clear perception of reality is paramount to facing it head on and dealing with it. In markets, its commonly said that “price is truth”; meaning that all known market realities are expressed in, and evaluated by, any particular asset’s price at any given moment. You may remember from Economics 101 that the market price is the intersection of supply (an objective quality) and demand (an intersubjective or opinion-based quality). Put another way, prices are data packets that convey information about scarcity (which is objective) and value (which is intersubjective). Each entrepreneur’s decision to buy or sell is influenced by prevailing prices and, in turn, communicates back into the market the state of economic conditions relevant to him which, in turn, influences the same decision-making of all other entrepreneurs within his market; this is intersubjective value. These decisions are based on actual availability of time, resources, and know-how; this is objective scarcity. This feedback loop is the means by which free markets dynamically adapt to express prices that accurately portray economic realities:
Let’s return to Larry the lemon farmer: say a storm wipes out a large crop of lemons in California; reduced supply levels of lemons intersecting with an unchanged level of consumer demand necessarily means an increase in lemon prices. Increased prices incentivize lemon growers like Larry to produce more as they now fetch higher prices in the marketplace. On the other side of the lemon market, higher prices disincentivize consumers from buying as many of the sour yellow citrus fruit. As people respond to these ever-shifting incentives, which are a reflection of the endlessly shifting economic realities of supply and demand, free markets adapt to maximize output and minimize costs. In this way, price signals serve as a dynamic incentive system for equalizing supply and demand discrepancies in free markets. However, to maintain their truthfulness, these price signals must be freely expressed in a money that is undistorted by government interventionism.
A price signal converts countless economic complexities into simplicity; it compresses myriad market realities down into a single, actionable variable — the market price.
Accurate price signals only prevail if the market is freely competitive and not subject to government interventions such as price fixing, trade restriction, or legal monopoly insulation. In true free market capitalism, most markets are relatively unobstructed by such artifices and the price signals are, accordingly, mostly reliable conveyors of truth. Lemon prices, for instance, tend to reflect the actual underlying supply and demand (or scarcity and value) realities at any given point in time. The market for money, however, is quite different in the modern economy, and its differences have cascading effects across all other markets.
Money is economic water; in the same way water intermixes and intersperses organic chemicals throughout the circle of life, money mediates the interchange of goods, services, and knowledge within markets.
Money, as one half of virtually every economic exchange, is the largest market in the world. This market is monopolized by central banks in every major economy worldwide; meaning that all forms of money competitive to fiat currency are prohibited (see eGold). As Ray aptly points out, (p.533) “Fiefdoms are counterproductive and contrary to the values of an idea meritocracy.” Yet, for some reason, the economic fiefdoms called nation-states, which are antithetical to the free market paradigm (and, therefore, the idea-meritocratic paradigm), are commonplace. Even in the US, where we pride ourselves on being free market capitalists, we maintain this socialistic market structure for money. In this market, the following elements impact price expression of money:
· Supply — the amount of money available to be loaned out (aka loanable funds)
· Demand — the amount of loanable funds desired for borrowing
· Interest Rate — the price paid for funds borrowed
Central banks “manage” the market for money by controlling the supply of loanable funds and setting the interest rate (the price) at which these funds can be lent out. These central bank privileges are preserved by state-enforced monopoly rights, which insulate their mass-produced fiat currencies from competition and eliminate their “skin in the game”. Skin in the game, a crucial Talebian concept, is a property based on symmetry, a balance of incentives and disincentives: in addition to upside exposure, people must also be penalized if something for which they are responsible for goes wrong or hurts others. Skin in the game is a central pillar for properly functioning systems, of both the organic and inorganic variety, and is at the heart of hard money. For gold, its mining costs and risks form the disincentives which are balanced against the incentives of its market price. Central banks, through various schemes and machinations, eventually coopted the market for gold and developed an economic system that could create money without skin in the game; allowing them to privatize seigniorage profits and socialize any losses they incurred through inflation. Unless consequential decisions are made by people who are exposed to the results of their decisions, the system is vulnerable to total collapse; the frequent faltering of fiat currencies attests to the unfavorable asymmetry of this model for citizens.
Most commonly, as they have a direct financial incentive to do so, and with no downside to consider, central banks increase the supply of loanable funds and decrease the interest rate below its natural levels, thereby inducing an expansion of the money supply. Importantly, money supply expansion does not create any new wealth, as ‘printing money’ does not infuse an economy with any new productive factors such as tools, factories, equipment, or human time. Instead, expansionary monetary policy only redistributes claims on productive assets from their rightful owners to those who receive the newly printed money first — usually bankers, politicians, and the other politically-favored-few closest to the spigot of liquidity (due to the Cantillon Effect). As Charles Holt Carroll said:
“Inflation is the surest way to fertilize the rich man’s field with the sweat of the poor man’s brow.”
Inflation of the money supply is a violation of private property rights, as it reallocates wealth away from its original owners (the many) into the hands of those closest to the governors of the monetary system (the few). But confiscation of wealth, via the shadow tax of inflation, is not the only collateral damage inflicted by money supply expansion. Entrepreneurs operating in these soft money economies are easily misled by the distorted price signals that centrally planned fiat currency markets inevitably cause.
To understand this, let’s look at the world through the lens of Larry the lemon farmer: emboldened by the “cheap” loans proffered by his local banker, Larry decides to borrow money to expand his lemon farm. He figures that borrowing enough money at 3% will allow him to expand and increase output of his farm by 2.5X, while only increasing his cost structure (including the 3% loan interest payable to his banker each year) by 2.3X. This economy of scale (the positive 0.2X margin between revenue growth of 2.5X and cost increase of 2.3X), Larry calculates, will drop straight to his bottom-line profit. So, Larry visits his local banker to sign the loan documents and sets out to expand his operation. At first, everything seems to be going smoothly as Larry gradually begins buying the additional land, fertilizer, and equipment necessary to grow and sell more lemons. However, things get sideways when other lemon farmers, lured by similar prospects of economic gain, also borrow from their local bank to expand their farms. As more lemon producers borrow and bid for the same lemon-farming assets, inflation sets in and prices begin to rise, thus increasing the cost structure of lemon production. Shortly after investing all his loan capital into his farm expansion, Larry finds that his cost structure has actually increased 2.8X due to more dollars chasing the same amount of productive factors for lemon farming. Gradually, then suddenly, the money Larry borrowed to expand his profit margin begins to work against him, as his increased capacity has eaten up his original profits and is now generating a loss (the negative 0.3X margin between revenue growth of 2.5X and cost increase of 2.8X, net of any prior profit margin). At this point, Larry has no choice except to increase his prices, cut costs, refinance, sell the farm, or declare bankruptcy. Under the same circumstances, other projects in other industries, misled into overborrowing by artificially cheap money, begin suffering losses as well.
An economy-wide simultaneous failure of overleveraged projects like Larry’s is called a recession. The boom and bust business cycle we have all grown accustomed to in the modern economy is an inevitable consequence of this centrally planned manipulation in the market for money. It is substantively no different than the shortages that would result if the price of bread was fixed at an artificially low level (which caused the starvation of millions in Soviet Russia). Artificially low interest rates don’t provide any benefit to the real economy, rather they simply disseminate distorted price signals that encourage entrepreneurs to embark on projects that cannot be profitably executed due to the (hard to foresee) impact of inflation on their cost structures. As with all well-functioning markets, the price of money must emerge through, and constantly reorient itself against, the natural interactions of supply and demand. Attempts to centrally plan this market only distort truth (price signals) and trigger overborrowing, recessions, and cause (or, at least, exacerbate) the boom-and-bust business cycle.
As money supplies become more opaque, so too do the critical price signals it carries back and forth between the minds of entrepreneurs.
The more opaque the present and future supplies of money, the more entrepreneurs suffer from this myopia, and the more stifled the economization of human action becomes. Price signal distortions like those faced by Larry result entirely from the opacity of central bank “managed” (read: manipulated) money supplies. Central banks are only able to perpetrate this scheme due to the legal monopolies (artificial barriers against free market competition) which shield their inferior monetary technologies (fiat currencies) from facing off with superior technologies (like gold) in the marketplace. Legal monopoly protections inhibit price discovery in the market for money (the natural interest rate). There is also ample evidence that central banks actively suppress the price of gold to preserve fiat currencies (see Gata.org). Further, if monetary technologies were freely selected and priced in the marketplace, as was the case when gold ascended to dominance, then everyone could more reliably use money as a store of value instead of being forced further out along the risk curve into stocks, real estate, and other scarce assets to protect their wealth from the ravages of inflation, which further distorts prices; the increasingly crowded unicorn club reflects just how distorted prices have become:
Simply put, price is truth; distorted money supplies distort the truthfulness of price signals and throw entrepreneurial action into disarray. At the heart of the cyclic booms and busts in the economy, then, is this distortion of the fundamental signaling which, in its current distorted state, misguides entrepreneurial action. Under these conditions of monetary socialism, trying to build a business is like trying to build a house in a jurisdiction that constantly changes the spatial values of its metric system; as Taleb puts it:
According to Wittgenstein’s ruler: Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler. The less you trust the ruler’s reliability, the more information you are getting about the ruler and the less about the table.
With an absolutely fixed supply, Bitcoin will restore the clarity of these economic nerve signals that are so critical to proper capital allocation, risk assessment, and entrepreneurial planning. Universal units of measurement are critical in economics and industry — the seconds, meters, kilograms, and other units of measurement we use throughout the world are all immutable in value. Upon these foundations of standardized measurement, the machinery of global commerce is constructed: builders of skyscrapers, electronics, and myriad other goods rely on the constancy of these measurement units when sourcing components and materials from around the globe. Money, too, is most communicative when its supply is immutable. As a purely objective monetary medium, once it accretes enough value to incentivize its users to spend it, Bitcoin denominated price signals will carry more truth than any other money in history.
Bitcoin is a monetary channel free from the noise of unexpected supply fluctuations, which necessarily means it carries the clearest signals. In this way, Bitcoin is the perfect conveyor of the data packets on value and scarcity known as price signals.
In terms of the idea meritocracy equation, we see that fiat currency is antithetical to radical truth and, its free market corollary, truthful price signals. On the other hand, Bitcoin is the most honest money imaginable, as every component of it, including its money supply, is viewable by everyone. In a world filled with fake news, click bait, and data breaches — Bitcoin is one of the rare instances of honesty in modernity. Central banking is the reverse; it is shrouded in complexities intended to hide its truth. Bitcoin is both radically truthful and transparent.
If money is economic water, then fiat currency is inscrutably murky, and Bitcoin is crystal clear.
Bitcoin’s transparency has already shed much light on the umbral industry of central banking and its shadowy tactics by sparking a renewed interest in Austrian economics and making an entire generation ask the question: “What is Money?”. We stand to gain even more clarity around Bitcoin’s impact on the world by diving into the second element of Ray’s idea meritocracy — radical transparency.
(p.308)“By radical transparency, I mean giving most everyone the ability to see most everything.”
Originally, capitalism was founded on the cornerstones of reliably consistent rule of law, private property rights, and hard money. Respectively, these cornerstones provided people non-violent dispute resolution, confiscation resistant assets, and a sound medium of exchange. With strong and reliable rules, entrepreneurs are then free to “play the game”, accumulating capital for themselves and diffusing any innovations gleaned in the process into the whole of society. For entrepreneurs to execute effectively, they must know the rules of the game, and must be able to trust that they are not subject to change. Imagine a poker player sitting at a table where the hand-rankings changed at the whims of the casino every few hands; without sound rules on which build a strategy, no player would remain engaged for long, and would quickly exit the game. Stability in these areas is among the primary reasons why the United States is such an attractive environment for investing; for the most part, its courts function well and contract law is enforced without bias. The exception, of course, is the violation of private property rights which results from centrally manipulated money supplies — in other words, the softness of the US dollar.
According to you Ray, “The most painful lesson that was repeatedly hammered home is that you can never be sure of anything: There are always risks out there that can hurt you badly, even in the seemingly safest bets, so it’s always best to assume you’re missing something”. Considered by many to be among the safest bets in the world today is the US Dollar — it is issued by the largest economy in the world, is “backed” by the world’s most militant taxing authority, and is accepted almost everywhere as a medium of exchange. Further, by unilateral decree (and a veiled threat of force), the US Dollar exclusively denominates the lifeblood commodity of the modern industrial economy, oil. The problem with the perceived safety of the US Dollar is the opacity of the rules which govern its existence: How many are there in existence? How many will be issued in years to come? Who gets to decide? Who stands to profit from its production? Even though the US Dollar today is just an SQL database maintained by The Fed that could choose to open its records to audit, it refuses.
Instead, The Fed sets monetary policy in closed door meetings and (only vaguely) communicates its intentions using ambivalent speech. To counterbalance this opacity, an army of macroeconomists, analyst, and market commentators pour over every detail of the statements issued by central bankers including not only their words, but their tone, delivery, and even wardrobes.
Imagine a semi-governmental agency being put in charge of setting the price of, say, automobiles based on undisclosed criteria and decided in closed-door meetings. Ask any “free market capitalist” if this seems like a good idea and he will spew vitriol at you for even suggesting such a socialistic method of managing the production automobiles. Then ask him whether it’s a good idea for this same agency to control the price of communications technologies like laptops and smart phones. You’ll be met with the same answer and (perhaps) a loud American battle cry in support of free market capitalism. Finally, very smoothly point out to him that The Fed sets the pricing of the US Dollar (the interest rate), which is the United States’ most valuable export market, and does so based on undisclosed criteria and closed-door discussions. Although Keynesians have done a great job convincing many of the enigmatic nature of money, it is quite simply just a tool for moving value across spacetime, and as such should be priced and technologically selected on the free market (just like everything else in a truly capitalist society).
Sunlight is the best disinfectant; when everyone can see the criteria and process behind a decision they are more likely to deem in trustworthy. With Bitcoin, the algorithm which sets its monetary policy is totally transparent, meaning people can universally agree that the system is fair and unbiased. As an open-source monetary protocol, Bitcoin is essentially the principle of radical transparency in perpetual action. Similar to some of the management tools you’ve created Ray — such as the baseball cards, Dot Collector, Pain Button, etc. — Bitcoin can be thought of as a global monetary policy management tool. As a machine componentized by open-source software and entrepreneurial self-interest, it does the work facilitated by central banks today — maintaining monetary policy, reaching consensus as to account balances, and facilitating international value flows — without relying on the whims of bureaucrats who control state-backed monopolies on money. Bitcoin is the purely transparent alternative to the opacity of central banking; it is a beacon of light outcompeting an industry purposefully shrouded in darkness. Once properly understood, Bitcoin’s superior visibility inescapably enhances its believability. And once you see it, it cannot be unseen.
Bitcoin’s monetary policy (its new supply flow schedule) is becoming the most trusted in the world as it is fully transparent and unchangeable. Bitcoin runs countervailing to government monetary policy which is uncertain, opaque, and subject to change based on bureaucratic whim.
In terms of the idea meritocracy equation, Bitcoin restores the confiscation-resistance of money, which provides its users stronger property rights when compared to fiat currency. Importantly, Bitcoin also reestablishes the sorely lacking 3rd cornerstone of capitalism in an otherwise free world — hard money. As an economic good undergoing monetization on the free market, with a supply inelasticity destined to surpass that of gold, Bitcoin is resurrecting the free market capitalist triad. As it bears repeating: Bitcoin is both radically truthful and transparent.
As you’ve said Ray: (p.327) “Having nothing to hide relieves stress and builds trust.” Transparency and reliability is the essence of Bitcoin’s monetary policy. It is truly unique in that its supply is absolutely predictable and absolutely scarce. Bitcoin is the most credible monetary policy in history outcompeting the least trustworthy monetary policies in history; it is rapidly gaining a track-record superior to central banks across all dimensions — reliability, predictability, auditability, cost-effectiveness, and resistance to censorship or manipulation — thereby further eroding the believability of central bankers, which is in shorter supply with every dollar printed.
(p.284) “When you’re responsible for a decision, compare the believability-weighted decision making of the crowd to what you believe.”
When it comes to money, track records matter. People’s trust tends to coalesce slowly around the most stable from an exchange ratio perspective — in other words, what best maintains or gains purchasing power across time. In this respect, gold is undoubtedly the king, as it sports a more than 5,000 year history of remaining reliably scarce and, therefore, valuable. An ounce of gold has roughly equaled the price of a fine man’s suit for the past century, whereas the same suit’s price in dollars has skyrocketed. The best performing central bank fiat currency in history in the British pound, which has only lost 99.5% of its value in its 317 year existence. When it comes to value storage, gold has a believable track record, whereas fiat currencies could only barely be less believable. The hardness or soundness of money, as one of the three cornerstones of free market capitalism, has been almost completely compromised as a result of state-enforced monopolization.
For free markets to function optimally, its three cornerstones — rule of law, private property rights, and hard money — must be consistently applied across all market participants. While the rule of law and property rights are (mostly) sound in western society, centrally planned money supplies are quite the opposite. Without any reliable insight into the primary governance aspects of money (see Radical Transparency above), entrepreneurs are forced to rely on other means of protecting their wealth from theft or debasement. Simply, the implementation of fiat currency offers limited to no assurances to its users that their wealth will be protected from confiscation, censorship, inflation, or counterfeit.
Fiat currencies, when stored in banks, are subject to confiscation or payment censorship by authorities. When stored physically (say, under your mattress), fiat currencies are still subject to value dilution via inflation (the legalized version of counterfeiting). Although fiat currencies offer some physical security measures against counterfeiting (the criminalized version of inflation), this has proven to be a cat and mouse game in which counterfeiters and authorities are constantly trying to outsmart one another in the domain of currency verification technologies.
Bitcoin, on the other hand, is a purely sound money and offers robust assurances to its users. It is resistant to confiscation, as only the possessor of a private key (an alphanumeric string of data) can produce the digital signature necessary to spend it. Bitcoin transactions cannot be censored due to the peer-to-peer and open-source nature of its software architecture. Complete immunity to unforeseen changes in its money supply is guaranteed by unbreakable cryptography and the economic self-interest of miners which secure its network. Finally, since the rules which govern Bitcoin can be verified by anyone, anywhere, and at any time — it is completely counterfeit resistant. Indeed, it is its radically transparent nature that makes Bitcoin the most believable monetary technology in history. Monetary opacity always leads to moral hazard on the part of policymakers.
With decades of experience seeing these hazards explode up close, Ray has said, (p.107) “The job of a policymaker is challenging under the best of circumstances, and it’s almost impossible during a crisis. The politics are horrendous and distortions and outright misinformation from the media make things worse.” So this begs the question: why should we permit policymakers to dictate monetary policy? As “free market capitalists”, we make no such concessions in any other market in the world. We don’t trust a board of governors to tell us how many automobiles to manufacture or at what price to sell laptops each year, so why should we trust central banks to set price and production targets the largest market in the world? As with all production decisions, the free market — representing the collective interests, intelligence, and wisdom of all economic actors — is always the best generator of (low) believable prices, new innovations, and consumer satisfaction.
Controlling monetary policy is like being crowned as the king of the world. As a fat-cat banker once said:
For this reason, most of the world’s wars have been waged in an attempt gain control over this contentious crown. And to control monetary policy, it is necessary to dominate the original monetary sovereignty layer of planet Earth — gold. For instance, during World War II, North America became a geographically-strategic safe haven for European gold hoards to protect them from Nazi plundering. At the conclusion of World War II, into which the United States ultimately intervened to destroy its war-wearied opponents and declare itself victorious, the Brettonwoods Conference was convened in which the rules of the global economic were rewritten by the newly self-proclaimed king — the United States. This conference cemented The Fed as the effective central bank of the world and the US dollar as the world reserve currency.
Even if you are a believer in monetary socialism, you would be hard pressed to defend the believability of central bankers. As you said Ray, “Think about people’s believability, which is a function of their capabilities and their willingness to say what they think. Keep their track records in mind.” In terms of capabilities, central banks have arrogated themselves virtually unlimited latitude to manipulate the supply and price of fiat currency. However, they have exercised these privileges based on (largely) undisclosed criteria and are notorious for their veiled communication styles. In other words, central bankers seem quite unwilling to say what they think (which violates the first thing necessary for an idea meritocracy) and their decision-making criteria is shrouded in falsehood. As Michel de Montaigne once wrote:
“If falsehood had, like truth, but one face only, we should be upon better terms; for we should then take for certain the contrary to what the liar says: but the reverse of truth has a hundred thousand forms, and a field indefinite, without bound or limit.”
In regards to track records, central bankers likely hold the world record for the most abysmal performance history. Since reputation cannot be printed, and must be earned through a lifetime of honesty, it is unsurprising that central banks have struggled in this respect. Historically, every fiat currency has trended towards worthlessness, which has only dragged the believability of this monetary model ever-downward. Mandated with price stabilization and employment maximization, The Fed has failed miserably at both, especially since severing the peg to gold in 1971; here, we show the US dollar’s loss of purchasing power since:
Central banker opinion-driven money supplies are proportionately reliable to the value storage functionalities of the ever-softening fiat currencies they mass produce. Bitcoin’s fact-driven money supply is as reliable as the mathematics and thermodynamics which sanctify its inviolable ledger. Opinions are like soft money, in that they can easily be diluted and distorted. Facts are like hard money, in that they are rooted in scientific realities. Said simply: do we believe the largest market in the world is best governed by opinion or fact? Buying Bitcoin is buying a put option on central banker malfeasance. As Travis Kling says:
More fundamentally: how can we possibly believe that central bankers will perform well when they completely lack skin in the game? As Taleb puts it:
“Systems don’t learn because people learn individually –that’s the myth of modernity. Systems learn at the collective level by the mechanism of selection: by eliminating those elements that reduce the fitness of the whole, provided these have skin in the game. Food in New York improves from bankruptcy to bankruptcy, rather than the chefs individual learning curves –compare the food quality in mortal restaurants to that in an immortal governmental cafeteria. And in the absence of the filtering of skin in the game, the mechanisms of evolution fail: if someone else dies in your stead, the build up of asymmetric risks and misfitness will cause the system to eventually blow-up.”
Totally disconnected from the consequences of their policy actions, which are instead born by citizens, central bankers are incentivized to maintain the status quo to preserve their jobs and “prestige”. Money, the largest and most critical market in the world, simply cannot evolve without practitioners who are subjected to real world results, in real time. Simply, if you lack skin in the game then you lack believability. This explains why ancient Roman architects were required by law to stand beneath their monolithic arches when the scaffolding was removed. This (deadly) disincentive to malperformance worked wonders, as some of the oldest arches constructed in this way are still standing at over 2,000 years of age. If only central bankers were subjected to the devastation they inflict on centrally planned economies should their decision-making not work out, then perhaps the world would still be on a gold standard and the dire need for Bitcoin would be lessened.
Parading themselves as the healers of economic crises, central bankers are actually the creators of these calamities. QE, TARP, NIRP, and other interventions inflict a heavy iatrogenic cost on society; and the harm done is further compounded by the agency problem (central bankers have no skin in the game, and therefore have conflicted interests when it comes to managing money supplies).
So, in terms of the idea meritocracy formula, it is clear that central banking fails to satisfy its third element of Believability-Weighted Decision Making, instead, the prevailing economic order seems to promote the least believable people into the driver’s seat of the world economy. Translated into the free market formula terms, this is an expectant result as these policymakers suffer from the agency problem and are rendered impotent without “Skin in the Game”-Weighted Decision Making. In this sense, Bitcoin is the reverse; its node operators and miners govern the system, all of whom have skin in the game and, therefore, possess more believable decision-making wherewithal — just like the ancient architects who stood beneath their newly un-scaffolded arches.
To put it all together in terms of our original equations; we began with:
“Idea Meritocracy = Radical Truth + Radical Transparency + Believability-Weighted Decision Making”
Which translates to this free market format:
Free Markets = Truthful Price Signals + Transparent and Reliable Rule of Law, Private Property Rights, and Hard Money + ‘Skin in the Game’-Weighted Decision Making
Based on what we’ve learned so far, we can translate these equations once again into central banking and Bitcoin versions:
Central Banking = Untruthful Price Signals + Transparent and Reliable Rule of Law, Marginalized Private Property Rights (due to violations via inflation), and Soft Money + “Agency Problem”-Weighted Decision Making
Bitcoin = (Absolutely) Truthful Price Signals + Transparent and Reliable Rule of Law, Private Property Rights, and (Absolutely) Hard Money + “Skin in the Game”-Weighted Decision Making
Clearly, only Bitcoin is 100% consistent with the equation for free markets; whereas fiat currency is almost entirely inconsistent. Since this free market equation is equivalent to the idea-meritocratic equation, we may deduce: Bitcoin is completely consistent with Ray’s formulation of the idea meritocracy, and fiat currency is not.
So, Ray, assuming your Principles are stated forthrightly, how can you possibly be a non-believer in Bitcoin? As you said Ray, (p.379) “When someone says ‘I believe X,’ ask them: What data are you looking at? What reasoning are you using to draw your conclusion?” So let me ask you Ray: after Bitcoin’s impeccable performance for over a decade (over 99.98% uptime, never been hacked, evolution into the most secure computing network in the world, roughly $200B in market capitalization, and over $1T of transactions cleared in total), what data and reasoning are you using to draw your conclusion about Bitcoin?
My guess is that like many smart people, you may have disregarded Bitcoin at the outset. In accordance with one of your favorite principles, I implore you to keep an open mind about Bitcoin and, perhaps, you will come to see it as an embodiment of open-mindedness itself. In that spirit, let’s dive deeper.
(p. 187) “If you can recognize that you have blind spots and open-mindedly consider the possibility that others might see something better than you — and that the threats and opportunities they are trying to point out really exist — you are more likely to make good decisions.”
Open-mindedness is a key aspect of both an idea meritocracy and evolution. It is a concept closely related with filtering and optionality: a form of non-cognitive intelligence intrinsic to natural systems in which exposure to multiple potentialities is employed, allowing the system to gain from what works and learn from discarding what doesn’t. An interesting paradox is discovered in that this openness is the source of Mother Nature’s opaque logic — as Taleb puts it:
“Evolution proceeds by undirected, convex bricolage or tinkering, inherently robust, i.e., with the achievement of potential stochastic gains thanks to continuous, repetitive, small, localized mistakes. What men have done with top-down, command-and-control science has been exactly the reverse: interventions with negative convexity effects, i.e., the achievement of small certain gains through exposure to massive potential mistakes…Simply, humans should not be given explosive toys (like atomic bombs, financial derivatives, or tools to create life)”
Close-mindedness, on the other hand, represents a rigid fixity on an existing knowledge framework that excludes the possibility of learning, innovation, and evolution. Without a culture of open-mindedness, organizations fail to learn and adapt well, and begin to suffer losses at the hands of more fit competitors. Sheltered from market discipline by their legally fortified monopoly positions, central bankers become feeble minded while, at the same time, their monetary technologies become brittle and maladapted to shifts in user demand.
Open-mindedness is an ever-present state of mind, a keen awareness of optionality and the freedom to filter; to change one’s mental or organizational model, to reform one’s prior assessment of conditions based on new information or a new vantage on old information (Bayesian inference).
Here, we see another perspective on the ineffectiveness of central planning — by moving in accordance with a single, rigid plan of action, the economy gets locked into a non-opportunistic course of action; it becomes blind to optionality and, thus, close-minded. For institutions, innovations, and individuals, close-mindedness is fatal. As legendary physicist Richard Feynman said, “we can never be sure we’re right, we can only be sure we’re wrong” — this is why open-mindedness matters across all spheres of human action.
Open-mindedness in the technological realm is manifest as open-source technologies; tools sporting schematics that anyone can inspect, modify, or enhance. Ray incorporates this principle into his culture at Bridgewater and in the “management tools” his team uses to make organizational and investment decisions. Bridgewater’s management tools are open-source by design so that they can consistently adapt to offer the highest utility to its workforce. As Ray says, (p.527) “Because the thinking behind the algorithms is available to everyone, anyone can assess the quality of the logic and its fairness, and have a hand in shaping it.” By applying the principle of radical transparency to his management toolset, Ray encourages a culture of open-mindedness by making their tools open to critique and change, in the same way ideas are assessed openly based on their merits alone within his cultural paradigm. This approach ensures that everyone maintains a perspective of “why are we doing it this way” and “is the tool helping us achieve our objectives as an organization”.
Essentially, by practicing open-mindedness, the team at Bridgewater supports their effort to operate as an idea meritocracy. In effect, Bridgewater has structured itself as an open-source organization in which its team learns and grows by, (p. 67) “Wrestling with the markets, thinking independently and creatively about how to make our bets, making mistakes, bringing those mistakes to the surface, diagnosing them to get at their root causes, designing new and better ways of doing things, systematically implementing the changes, making new mistakes, and so on.” Whether you realize it or not Ray, you have been cultivating a culture based on the ethos of open-source technology.
Open-source technology is readily inspectable and, therefore, trust-minimized. Openness lets it absorb feedback from many sources to adapt in response changing market conditions and user demand. These technologies are absolutely transparent and auditable, which minimizes the need for trust in their use. Trust-minimization is one of the primary benefits of that ancient open-source monetary technology — gold. Since trading partners couldn’t necessarily trust each other, they could instead rely on the natural laws restricting the supply of gold and use time-honored techniques for assaying its authenticity (until coinage fulfilled, then violated, this trust function), thus minimizing the need to trust counterparties to a transaction.
Closed-source technology is the reverse and thus requires users to trust in its purveyor; it is unauditable and, therefore, maladapted to market conditions and user demand. In the case of fiat currency, this purveyor is a monopolist and, as many of us learned in Economics 101, profit maximization for a monopolist comes at great expense to everyone else. Fiat currency is closed-source technology that is legally protected from audits and competing monetary technologies. Such opacity and market insulation not only slows the rate of monetary technology innovation, it also erodes the trustworthiness of fiat currency, and fattens its monopolists:
As you’ve said, “Adaptation through rapid trial and error is invaluable” — this is the ethos of open-source. Bitcoin, being open-source, is like a language, as its source code and transaction history are universally transparent and can even be printed onto paper (interestingly, this makes it protected under the First Amendment in the United States). Further, Bitcoin is supported by a global network of volunteer programmers. These programmers are self-interested in the sense that they are almost always Bitcoin owners as they are aligned with its purpose philosophically, and therefore stand to gain financially from its improved functionality and network growth. The work of these open-source programmers closely mirrors Ray’s approach to organization building, in which he creates systems that encourage others to (p.64) “Put honest thoughts on the table, have thoughtful disagreements in which people are willing to shift their opinions as they learn, and have agreed-upon ways of deciding if disagreements remains so that we can move beyond them without resentments”. Again Ray, your approach to culture and management style mirrors the philosophy of open-source technology.
Ray, is there any reason you believe Bridgewater should benefit from open-source tools while society should suffer under closed-source fiat currency? Shouldn’t citizens everywhere have access to the most open and highest quality feature-set for the most important technology in their lives — money?
Bitcoin’s openness is key to its competitive superiority as money. Over the past decade, its global army of volunteer programmers have greatly enhanced the utility of the Bitcoin network. However, and this is critical, these programmers are unable to change the rules of Bitcoin due to its ingenious social contract implementation. Further, since everyone (every node) is “in charge” of the Bitcoin network, it adheres well to Ray’s advice to, “Make sure that those in charge are open-minded about the questions and comments of others.” This constant scrutiny and feedback from users, each of whom has skin in the game and is “in charge”, ensures that Bitcoin is always functioning at or near its optimum. Contrarily, fiat currency has undergone essentially no innovation since its inception.
Due to its open-source nature, Bitcoin is sometimes referred to as “the internet of value”. In the same way the internet is a set of open-source protocols for exchanging data (called the internet protocol suite), Bitcoin is an open-source protocol for exchanging value. Such openness ensures that Bitcoin’s code cannot be manipulated to benefit anyone at the expense of anyone else. Fiat currency is the opposite; its central planners are, at their own discretion and at near-zero cost, able to siphon value from its monetary network by inflating its supply (such “technology backdoors” are only possible with fiat currency). In regards to how to kill Bitcoin, the ‘internet of value’ analogy also gives us the useful question: How would one turn off the entire internet worldwide, permanently? Governments have proven adept at eliminating centralized entities, however the decentralized nature of the internet and Bitcoin in many ways transcend the coercive and compulsory powers of governments (which is why America can’t regulate Bitcoin).
The openness of Bitcoin also makes it antifragile, meaning it becomes hardened by hostility. As you’ve said, “The key to success lies in knowing how to both strive for a lot and fail well.” Open-source, decentralized, digital tools like Bitcoin are uniquely capable of organizing human efforts without a central coordinator at unprecedented scales (strive for a lot) and also become enhanced in the face of technical failings (fail well). Stressors to Bitcoin may come in the form of an external attack on its network or an attempt to fork its blockchain. After 11 years of nearly flawless operation within a relentlessly adversarial environment, Bitcoin has earned its fair share of battle scars (Bitcoin cash, Segwit, etc). Each time Bitcoin withstands an attack, its reputation for network security, reliability, and immutability is strengthened.
Bitcoin is a technology that has accrued value on the free market based on its credibility as money. Unlike fiat currency which persists only because of a government-enforced refugium from competing technologies, Bitcoin persists based on its own merits. Indeed, Bitcoin is a free market for converting electricity into digital gold — it is outcompeting (literal) monopoly monies worldwide and, by doing so, making the market for money free once again (as we saw in the Gilded Age). Similar to the internet outcompeting intranets, Bitcoin is outcompeting fiat currencies because of its superior openness and monetary traits:
As you’ve said Ray, (p.189) “To be radically open-minded, you need to be so open to the possibility that you could be wrong that you encourage others to tell you so.” Unhampered competition incentivizes others to prove you wrong in the marketplace by discovering better or cheaper ways of producing or doing things — this is the very essence of free market capitalism. In truly free markets individuals are maximally sovereign and ruthlessly pursue satisfaction of their wants, which keeps entrepreneurs ever-vigilant in their quest to deliver high quality at a fair price. This unabated pursuit makes free markets generators of quality, innovation, and cost-effectiveness. The reverse is true is monopolized markets — which maximize profits for monopolists at the expense of customers in the form of lower quality (low innovation, soft money) and higher prices (market distortions and value confiscation via inflation).
As you’ve said in regards to open-source technology Ray, (p.528) “Though the system won’t be perfect, it is much less arbitrary — and can much more easily be examined for bias — than the much less specified and much less open decision making of individuals with authority.” Here you are describing the value of Bitcoin’s immutable monetary policy, which is totally free of arbitrariness, and its incentive-oriented design (people are incentivized to use Bitcoin, see feedback loop in Primer on Bitcoin) over central bank’s arbitrary monetary policy and disincentive-oriented design (people who attempt to compete with or refuse to use fiat currencies are punished). Further, the institutional web surrounding central bank interests is so complicated and holistically unfathomable, it is more prone to arbitrages by insiders, accumulation of systemic risks, and blow ups:
This messy, closed-source system is bureaucratic, inefficient, and fragile. The main point: open-mindedness is the key to the adaptivity and, thus, the longevity of natural systems. And money, a long time before government, arose as a natural market phenomenon.
(p.140): “Whenever I observe something in nature that I (or mankind) think is wrong, I assume that I’m wrong and try to figure out why what nature is doing makes sense.”
Ray’s introductory observation here is consistent with the wisdom of Taleb, who said, “what Mother Nature does is rigorous until proven otherwise; what human and science do is flawed until proven otherwise.” Clearly, this is a damning indictment of fiat currencies, which are unnatural monies born of unnatural laws. Gold and silver, on the other hand, rose to become natural monies precisely because of natural laws, which are beyond the reach of mankind’s prying hands, and which bestowed them with the traits of good money. Similar to the (mostly) uncompromising rules governing gold, the rules governing Bitcoin are founded in the (absolutely) uncompromising laws of mathematics — nature’s fundamental language:
As you’ve said Ray, (p.141) “nature optimizes for the whole, not for the individual, but most people judge good and bad based only on how it affects them.” This is what’s wrong with putting individuals in charge of money supplies — they are directly incentivized to produce ever-more money and use it to acquire hard assets (like land, gold, and businesses) and pass on the costs of production (monetary value dilution via supply inflation) to all other market participants, who are legally coerced into using increasingly value-compromised fiat currencies.
As a social technology so fundamental to human cooperation, like spoken language itself, money, to offer the highest utility to the most people, must be governed by rules that cannot be manipulated to benefit one person over another. Somewhat counterintuitively, for money to benefit the most people, governance over its supply must be beyond the reach of everyone. This is why gold ascended to become money on the free market and why it remains the sole instrument for final settlement among central banks today. As the hardest natural money in the world, gold remains the prime monetary sovereignty layer on Earth; it is equity-based, as physically possessing a gold asset is 100% equity and 0% liability, whereas fiat currency is debt-based, as it requires trust in the issuer, its taxing authority, and any payment intermediary associated with its use at any given time.
Simply, gold is the king of natural money; it arose to the role of money as a result of free market processes which, themselves, are operations of nature. Fiat currencies, on the other hand, are artificial; they can only exist in economies where people are coerced into using them via artifices like legal tender laws, capital controls, confiscatory actions, and other anticompetitive restrictions on the market for money. The impetus for fiat currencies existence arises from egoic desires of man like greed, control, and protectionism.
Whereas central banking converts human greed into a race to debase fiat currencies, which inevitably destabilizes economies over time, Bitcoin converts it into network resiliency and reliability. Bitcoin ingeniously combines the self-interestedness inherent to human nature with electricity and converts them into indisputable records and expansion of its monetary network. The Bitcoin network is itself an embodiment of a free market, where any entrepreneur with access to sufficiently cheap electricity and the necessary hardware can freely enter the market as a miner, that is disrupting the monopolization over the market for money worldwide.
In this sense, Bitcoin is a fractalized free market; its network of miners compete freely to forge an absolutely scarce money that exists outside the scope of monopoly-preserving artifice, thus impressing its free market characteristics onto the world market for money and giving people an alternative to monetary socialism.
Free markets represent a natural organizing principle for humanity that converts the pursuit of individual self-interests into improvement of its collective interests (in Talebian lingo: anti-iatrogenics). This spontaneous order generated by free markets has persisted, to a greater or lesser extent, ever since mankind started trading. Free markets, as an organizing principle, are among the most important in the world as they transmute greed into higher productivity, lower prices, and a stream of new, innovative ideas. What excuse is there, then, to tolerate an unfree market for money? As you’ve said Ray, (p.281) “Remember that most people will pretend to operate in your interest while operating in their own.” This is exactly what the private owners of central banks have been doing for over a century — operating in their own self-interest, under the aegis of government-enforced monopolies, at the expense of everyone else. In this sense, central banking could be the most successful con artistry at scale ever perpetrated (they can put this prize next to their poorest performance trophy).
In nature, energy expenditure is required prior to eating. Plants harvest sunlight into sugar, herbivores spend much of their lives standing and eating plants, and carnivores push themselves to full exertion episodically to hunt. As the 1st Law of Thermodynamics teaches, there is no free lunch in this universe. If there appears to be, you can be sure that hidden risks are accumulating as nature inevitably optimizes for the whole and will eventually restore balance — suddenly and violently if a state of sufficient disequilibrium is reached. Central banks, via the printing press, have spent over a century enjoying a perpetual “free lunch” where control over assets is continuously reallocated from the many to the few; Bitcoin is a (relatively) sudden monetary phenomenon and an economically violent force against banking cartels that is restoring equilibrium to the global economic order.
Bitcoin mining, although often demonized for being tremendously wasteful, may actually have a profoundly positive impact on the world environment. Although this has not been conclusively proven yet, there is research which supports this claim and deductive reasoning suggests it to be true. Consider the following excerpts from a report on this matter:
“Because bitcoin mining is highly mobile compared to overall power demand, it might actually be a boon for global stranded renewables…Whereas traditional industrial and residential power demand is largely geographically captive — be it by proximity to cities, resources, transport links or whatever other factors determine the location of such entities — bitcoin mining can be undertaken pretty much anywhere…This means that some of our most promising sources of renewable energy remain untapped due to their remote locations…Bitcoin mining is a relentless race to the lowest electricity costs and therefore — as explored by Dan Held and Nic Carter — acts as an electricity buyer of last resort…In this manner, bitcoin mining — which offers the possibility of immediate electricity monetization independent of grid connection — can play a vital part in the renewables development cycle.”
What is an energy buyer of last resort? Nic Carter gives us a useful visualization:
In this sense, Bitcoin mining is as natural as the free market processes of which it is composed. Instead of boiling the oceans, Bitcoin mining may actually help us to clean them up. Ray, as a thalassophile, I am sure this prospect must excite you, maybe you just haven’t looked deeply enough at the nature of this new money to understand its potential environmental impact yet? After all, Bitcoin mining is among the most efficient uses of energy in the world, and increasing mankind’s collective energy efficiency (aka productivity) is the entire purpose of the world economy in the first place:
In a profound sense, as Friar Hass says, Bitcoin is nature; a new form of life — a digital organism. Ralph Merkle, famous cryptographer and inventor of the Merkle tree data structure, has a remarkable way of describing Bitcoin:
“Bitcoin is the first example of a new form of life. It lives and breathes on the internet. It lives because it can pay people to keep it alive. It lives because it performs a useful service that people will pay it to perform. It lives because anyone, anywhere, can run a copy of its code. It lives because all the running copies are constantly talking to each other. It lives because if any one copy is corrupted it is discarded, quickly and without any fuss or muss. It lives because it is radically transparent: anyone can see its code and see exactly what it does.
It can’t be changed. It can’t be argued with. It can’t be tampered with. It can’t be corrupted. It can’t be stopped. It can’t even be interrupted.
If nuclear war destroyed half of our planet, it would continue to live, uncorrupted. It would continue to offer its services. It would continue to pay people to keep it alive.
The only way to shut it down is to kill every server that hosts it. Which is hard, because a lot of servers host it, in a lot of countries, and a lot of people want to use it.
Realistically, the only way to kill it is to make the service it offers so useless and obsolete that no one wants to use it. So obsolete that no one wants to pay for it, no one wants to host it. Then it will have no money to pay anyone. Then it will starve to death.
But as long as there are people who want to use it, it’s very hard to kill, or corrupt, or stop, or interrupt.”
Bitcoin is a technology, like the hammer or the wheel, that survives for the same reason any other technology survives: it provides benefits to those who use it. It can be understood as a spontaneously emergent protocol that serves as a new form of uninflatable money and an unstoppable payments channel. Structurally, the Bitcoin network reflects a quintessential manifestation commonly found in nature — the decentralized network archetype:
The decentralized network archetype found in nature is the antecedent to paradigm shifting innovations throughout history such as the railroad system, the telegraph, the telephone, the power distribution grid, the internet, social media and now Bitcoin.
Although fiat currency is commonly held as the “natural order of things” in modernity (a fallacious form of monetary uniformitarianism), it is precisely the opposite. As you’ve said Ray, (p.280) “to be great, one can’t compromise the uncompromisable.” What excuse was there to compromise the redeemability of dollars for natural money or to so heavily dilute the value of fiat currencies over time? These machinations were solely designed to enhance the expropriative abilities of bankers, bureaucrats, and politicians throughout history; letting them effectively default on their debts and pass on the real costs to citizenries. Far from being a natural form of money, fiat currency became dominant in the world at the end of a long chain of causality — a chain rooted in a flawed system that incentivizes people to operate with smaller time horizons and with a zero-sum mentality.
(p.127) “I believe that everything that happens comes about because of cause-effect relationships that repeat and evolve over time.”
Different institutional structures and incentive systems produce different human behaviors. Fiat currency is the most recent, and most extreme, act of money supply manipulation — a practice engaged in by all those who gained the ability to do so throughout history. Interestingly, it was a drawback of monetary metals, the difficulty of assaying their value and authenticity, which gave rise to coinage. The “public stamp” emblazed on the face of coins (usually with a smug emperor’s face) served as the veracity that entrepreneurs of old relied upon, thus converting the need to verify (or assay) money used in each transaction into the need to trust a state-stamped corroboration of monetary value. Almost every time coinage arose, it was not long before rulers engaged in the act of “coin clipping” in which they would periodically gather the coins from the citizenry, melt them down and mint them into newer versions with the same face value but less precious metal content, keeping the residual content to enrich themselves. People, of course, were outraged, as the expression of their preference for hard money was stifled; but this is an unsurprising effect of central planning.
When it comes to economic systems, free markets make customer preferences irrefutable; central planning causes them to become irrelevant.
Similar to modern day inflation, coin clipping was a way of surreptitiously taxing the population by debasing its currency. Nero, the infamous emperor of the Roman Republic, was the first to engage in this deceptive practice. In doing so, he set a malicious precedent that would be emulated by many successive emperors (and later, central bankers) across many different eras and empires. Each time the value-storage integrity of money was compromised by coin clipping or supply inflation, it was only a matter of time before the society which it bound together started to unravel. Centralizing control over a money supply always has, and always will, lead to expanded wealth disparity as those few (rulers, politicians, central bankers) who can extract value from the many (citizens) have always given in to this temptation. Eventually, this parasitism leads to social unrest and, ultimately, revolt.
Interestingly, as the problem of assaying monetary metals shifted the monetary trust function unto the state-backed coinage, this gave demagogues the means to violate the trust placed in their “public stamps” to enrich themselves. Had a monetary technology existed historically that was sufficiently counterfeit and confiscation resistant (like Bitcoin), government may have never grown to become such a significant institution in human affairs. Hard to believe perhaps, but true. Lack of trustworthy money caused the state to flourish; over time, the invention of perfectly credible money may, as a side effect, render the nation-state model anachronistic.
Money is the mechanism through which people market-price and exchange their time; it is the trust fabric through which people weigh opportunity costs and decide where to invest their finite energies and capital. When this cooperative mechanism is manipulated by rulers, the societies which run on the softening money begin to disintegrate as trust in the currency deteriorates, thus inhibiting trade and reversing the division of labor. This causes prices to rise and economic crisis to take hold. Unproperly channeled into a centrally planned economic system instead of a free market, greed becomes inherently self-annihilating.
Greed destroys fiat currencies, but greed secures the Bitcoin network.
Instead of learning these lessons of history, central banks pushed this monetary parasitism to unprecedented extremes. According to you Ray, “From 1950 until 1980, debt, inflation, and growth moved up and down together in steadily larger waves, with each bigger than the one before, especially after the dollar’s link to gold was broken in 1971.” The unitary motion of these economic forces was no coincidence. By breaking the peg to gold in 1971, Nixon set the world on an irreversible course that would be marked by successively larger recessions and (attempted) compensatory rounds of quantitative easing. This death-stroke to the gold standard moved the world into uncharted monetary territory, and became the cause of myriad economic and social problems. Here, we will highlight a few of them (for more on this, check out www.wtfhappenedin1971.com )
With the store of value functionality of money broken, people began using their homes as savings vehicles, which inflated a housing bubble that bursts in 2008 with disastrous consequences:
By breaking money’s anchor to reality, control over productive assets was steadily shifted into fewer hands with each economic recession and round of money printing (via the Cantillon effect). This caused an unprecedented decoupling of productivity and wage growth:
This divergence between productivity and compensation meant that more value was being captured by the most wealthy at the expense of the poorest:
Such distortions and wealth redistributions are the inescapable effects of monetary central planning. By manipulating the price of money (the interest rate) central banks spur over-borrowing, capital misallocation, and market distortions. By holding the interest rate below its naturally determined value (at the intersection of the supply and demand curves for loanable funds), central banks interrupt the natural chains of cause and effect which maintain dynamic market equilibria. This, in turn, causes market price movements to become more a function of monetary policy than of actual supply and demand curves. Ray observed this firsthand: “In 1978–80 (as in 1970–1971 and in 1974–75) different markets began to move in unison because they were more influenced by swings in money and credit growth than by changes in their individual supply-demand balances.” This causality still holds and becomes abundantly clear when seen from the right perspective:
These market distortions would not exist in a world with a free market for money. Free markets are ruthlessly efficient and trimming excesses and encouraging optimal allocation of resources; which is why they are so ruthlessly effective at promulgating hard money, because people will naturally select the most liquid asset that best holds its value across time as money first and foremost. Hard money eliminates market distortions because its supply remains rooted in economic reality and beyond the reach of self-interested central planners. Simply, by transitioning to a free market money like Bitcoin, we can eliminate the prime driver of wealth disparity — money supply inflation.
To better understand the root cause of wealth disparity, we use an approach advocated by you Ray: as you’ve said, (p.489) “Root causes are described in adjectives, not verbs, so keep asking ‘why’ to get at them.” Let’s begin our analysis:
Root cause discovery process:
A primary cause of social unrest and societal disintegration is wealth disparity. Alarmingly, this has been on the rise in advanced economies all over the world.
Why is wealth disparity growing?
Disparity in wealth holdings is rooted deep in the monarchical history of mankind. Although some economic inequality is natural, as people are born with unequal skills and predispositions, the (growing) levels seen in modernity are anomalous. Today, few people own most of the productive assets. Under a system of monetary central planning, these few have privileged access to newly printed fiat currency, which represents a redistribution of productive assets to those who receive the newly printed money first at the expense of those who receive it later (via the Cantillon effect).
Why do few people have privileged access to newly printed money?
Those with the most control over productive assets have leveraged their position to monopolize the market for money. These positions are reinforced via the lobbying mechanism, a system of institutionalized bribery, that heavily influences public policy in favor of its financiers’ private interests. Once a monopoly position is firmly established, they employ monetary policy as a means for implicitly taxing entire populations to further enrich themselves (again, via the Cantillon effect).
Why is there a legal monopoly on money?
Again, the few who own the most productive assets within a society are able to (heavily) influence the legal frameworks they operate under. Naturally, these few favor laws which benefit their interests. Primary among these interests is the ability to confiscate wealth via inflation. This privileged position is protected via the government monopoly on violence. Inflation allows early accessors of new liquidity to perpetually extract wealth from all the market participants coerced into using the fiat currency — those who resist face incarceration or violent retaliation.
Why is violence used to insulate the legal monopoly on money?
The root cause of violent coercion such as this is the fearfulness inherent to egoic human behavior. People naturally seek to secure themselves against the uncertainties inherent to the future. To this end money, a tool of pure optionality in the marketplace, is the ultimate hedge against the future. Using the government monopoly on violence, private interests gradually were able to monopolize the market for money, thus obstructing its natural course. Simply, central banks have acquired absolute power, which as we all know, corrupts absolutely. Fiat currency is the ultimate expression of unfree market dynamics.
Per this root cause analysis: the “why” of a growing wealth disparity is causally rooted in the adjective “unfree”. The root cause of a growing wealth disparity, then, is an unfree market for money. Fiat currency is a tool for restricting freedom and confiscating wealth. Bitcoin, like its predecessor gold, is a purely free market money — a tool for maximizing freedom and preserving wealth.
Monetary inflation, a property unique to centrally planned money, is purely a means of wealth confiscation — it does not offer a single equitable benefit to the people. Not one. The virtually limitless power control over the fiat currency printing press affords is the very cause for its existence and monopolization; it is both the means and the ends of monetary socialism. Fiat currency is a governmental tool for taxing, controlling, and manipulating people. As Thomas Jefferson once warned:
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…. I believe that banking institutions are more dangerous to our liberties than standing armies…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
By attempting to centrally plan money, mankind marginalizes his own potential. Although Bitcoin has demonstrated its disregard for the legal restrictions which insulate fiat currencies, it’s impossible to know what monetary technology the market would naturally select absent government interventionism. Monopolization increases costs and stifles innovation, the exact opposite of the effects generated by free markets. Devolution is the inevitable and disastrous effect of monopolization, whereas free markets cause the reverse — evolution.
(p.142) “Evolution is the single greatest force in the universe; it is the only thing that is permanent and it drives everything.”
Change is the only thing that never changes. And when something is finished changing, it is finished. As such, all things exist in either a state of evolution or devolution:
Whether improving or declining, all things exist in flux. As you’ve said Ray, (p.142) “As I thought about evolution, I realized that it exists in other forms than life and is carried out through other transmission mechanism than DNA. Technologies, languages, and everything else evolves.” Money, like a spoken language, is an informational protocol. Unlike language, money has evolved to inhabit many different forms. Seashells, salt, cattle, beads, stones, precious metals and government paper have all functioned as money at one or more points in history. Even today, forms of money still spontaneously emerge with things like prepaid mobile phone minutes in Africa or cigarettes in prisons being used as localized currencies. Different monetary technologies are in constant competition, like animals competing within an ecosystem. Although instead of competing for food and mates like animals, monetary goods compete for the belief and trust of people.
Historically, the hardest monetary technology to produce which exhibits otherwise comparable monetary traits (durability, divisibility, portability, recognizability) outcompetes more easily produced forms to become dominant on the free market — an asset that succeeds in this way is called hard money; a technology that is discovered through market-driven natural selection.
As we have learned, the rise of fiat currency was the result of governments coopting gold — which had risen to global dominance on the free market because of its superior scarcity relative to other monetary metals, which themselves exhibited superior monetary characteristics compared to other monetary technologies (like seashells, salt, cattle, etc.). By issuing paper money redeemable in gold, governments were able to resolve its one drawback — suboptimal divisibility. However, governments eventually eliminated redeemability of paper money for gold, thus ushering in the age of fiat currency. Lack of scarcity would have resulted in the extinction of fiat currency long ago if it weren’t for the anticompetitive efforts of governments in the gold markets (if you haven’t yet, check out Gata.org). In this sense, gold is the last freely chosen money in the marketplace and fiat currency is but an apparition of this multi-millennia-old monetary metal; a deception that has been haunting human progress since its inception in 1971. As Taleb describes it:
“…institutions block evolution with bailouts and statism. Note that, in the long term, social and economic evolution nastily takes place by surprises, discontinuities, and jumps.”
In free markets, competition generates the information that vitalizes innovation — the man-made type of evolution. Completely isolated from the discipline of the market by legal monopoly, central bank issued fiat currencies have softened tremendously, in both value and functionality. This is unsurprising: any complex system — whether it be a technology, an economy, or an organism — that is isolated from the shaping of competitive forces will naturally devolve over time. As you’ve observed Ray, (p. 147) “One of the great marvels of nature is how the whole system, which is full of individual organisms acting in their own self-interest and without understanding of guiding what’s going on, can create a beautifully operating and evolving whole. While I’m not an expert at this, it seems that it’s because evolution has produced a) incentives and interactions that lead to individuals pursuing their own interest and resulting in the advancement of the whole, b) the natural selection process, and c) rapid experimentation and adaptation.” This marvelous dynamic is at the heart of free market competition, open-source adaptation, and Bitcoin which, as we have seen, is both a free market in and unto itself and an open-source instance of digital hard money.
Bitcoin is an evolutionary leap forward for money: it combines the divisibility, durability, portability, and recognizability of pure information with the absolute scarcity of time to form the most impeccable monetary technology the world has ever known.
As you’ve said in regards to evolution, (p. 124) “I realized that passing on knowledge is like passing on DNA — it is more important that the individual, because it lives way beyond the individual’s life.” Ray, isn’t it time for humanity to transition to a form of money that exists beyond the schemes, machinations, and manipulations of those who are able to wrest control of its controlling mechanisms? By centering an evolved monetary social contract on an immutable ruleset, we can eliminate the incentives to fight over gold or international reserve currency status and therefore enhance mankind’s cooperative capacity, which in turn will accentuate the division of labor, enhance productivity, and increase aggregate wealth creation worldwide. It’s time for money to be governed by rules instead of rulers, and Bitcoin gives us the opportunity to make this transition once and for all. Imagine how much human ingenuity could be freed up worldwide if we eliminated the need for monetary policymakers, the army of analysts who watch them under a microscope, and the heavily distorted price signals caused by soft money.
Each of us are nodes of information — biological machines expressing our genetics, experiences, and ideas — that are collectively best served by successfully minimizing impediments to expression like policies, hierarchies, and illegitimate institutions. As Noam Chomsky said:
“Institutional structures are legitimate insofar as they enhance the opportunity to freely inquire and create, out of inner need; otherwise, they are not.”
Modes of organization which favor merit-based competition and rely on natural selection to determine which ideas flourish help us flourish. This is the free market (and idea meritocratic) paradigm: unobstructed exchange is always superior to that which is centrally intermediated, regulated, or manipulated. Global free markets, coordinated via truthful price signals, can be thought of as the human hive-mind; an organic, bottom-up system in which resources, risks, and human time are priced and allocated according to the prevailing economic realities faced by society. This collective mind is the macrocosm of our individual mind microcosms, which have naturally evolved in a bottom-up way. Existing as illegitimate, closed-source economic fiefdoms, central bank money monopolies inhibit the evolutionary potential of our global collective mind.
As you’ve observed Ray, (p.213) “This universal brain has evolved from the bottom up, meaning that its lower parts are evolutionarily the oldest and top parts are the newest.” Why should we expect the amalgamation of human economic actions to evolve any differently? Free markets enable price and technology discovery from the bottom up, as they completely lack any centralized governing body. Hard money has always evolved on the free market and is the norm of human history; only over the past century has it been so explicitly coopted by a few at the expense of everyone else. Using a Darwinian analogy: what natural selection is to gold, artificial selection is to fiat currency. In the same way mankind created designer dogs from wolves, or Monsanto self-terminating seeds from naturally-occurring seeds, so did he create fiat currency from gold. Bitcoin, as an unstoppable free market money being naturally selected for favorably in the marketplace, may in this sense be considered the reemergence of hard money in the modern world; a natural reversion to the free market foundations of money through an evolved (and evolving) monetary technology.
As a hard money that is monetizing in real time, Bitcoin outcompetes other forms of money in market-driven natural selection, whereas fiat currencies exist exclusively due to monopoly-driven artificial selection. As Bitcoin transcends the artifices that preserve the monopolistic position of fiat currencies, it forces these monetary technologies to compete based on their own (inferior) merits, and promises to push them into extinction.
One would be hard pressed to find a worse technology from both a functional and societal value-add standpoint. As you’ve said Ray, (p.272) “To be good, something must operate consistently with the laws of reality and contribute to the evolution of the whole; that is what is most rewarded.” In this sense, fiat currencies are bad — really bad. Not only do they give politicians a lever by which to control people, they also erode societal cohesion as their primary function — the storage of value across time — is repeatedly compromised in favor of multifarious political agendas all over the world. Viewed on a grander scale, Bitcoin seems to be a natural evolutionary step towards freer society:
· Gutenberg’s Printing Press gave us decentralized analog knowledge (which separated Church and State)
· Democracy gave us decentralized government
· The internet gave us decentralized digital knowledge
· Bitcoin gave us decentralized digital money (which may one day separate Money and State)
Indeed, it is amazing that a lone, anonymous programmer released an open-source protocol that is now a viable contender for the world reserve currency whereas Facebook, one of the most flush corporations in the world, has been unable to move forward with its currency project due to regulatory roadblocks. Digital technology reshapes reality, and decentralization enables us to create leaderless organizational structures based more so on rules than rulers. Bitcoin is the latest and greatest expression of this overarching trend away from centrality and towards a more natural ordering of things.
Like you Ray, I consider myself a shaper who experiences “the gap between what is and what could be as both a tragedy and a source of unending motivation.” I see a world in the shackled in financial slavery, with central bankers and their inner circles as the great parasites of wealth created by working people all over the world. Centrally planned money is straight out of the socialist playbook and, aside from a brief period in the late 19th century when the world was mostly on a gold standard, we have never seen a truly free market for money. An economy is like life itself; in life, we do not expect to understand events as they occur, at least with total causality and clarity in mind, but looking back on them we gain a better understanding. Bitcoin is alive; while it is impossible to say where it is heading with certainty, it is monetizing and evolving in real time, and its proponents all have skin in the game.
Evolution can only happen if the risk of extinction is present. Only systems with skin in the game are capable of evolution; absent this, devolution becomes inevitable. Systems learn and evolve through the death of their components; the biological manifestation of this via negativa process is called apoptosis. Any institution that cannot glean lessons from its undying components loses touch with reality as it grows until nature ultimately overrules its energetic imbalance in a mighty swing of the universal pendulum — whether by way of renaissance or revolution.
Therefore, we evolve best by sharpening our organizing principles against the palpable feedback gathered from falsifiable entrepreneurial experiments conducted at the front lines of our understanding, where each failure edifies the economic ensemble as to what does not work so that its next individual efforts will be emboldened by the greater experience gained. In this way, we are better served by the free market, with its bricolage of tactile sensory inputs from its entrepreneur-led, optionality-rich explorations of economic realities instead of the unwavering unidirectionality of a centralized plan. The choice of the technology we use as money is best arrived at in an uninhibited marketplace in the same way other technologies are invented, shaped by competitive forces, and tinkered with over time; in accordance with the timeless principle behind both innovation and evolution.
(p.121) “With time and experience, I came to see each encounter as “another one of those” that I could approach more calmly and analytically, like a biologist might approach an encounter with a threatening creature in the jungle: first identifying its species and then, drawing on his prior knowledge about its expected behaviors, reacting appropriately.”
History doesn’t repeat, but it does rhyme. Every moment and person are unique, but they tend to conform to some prior pattern or archetype. Personality types can be characterized and filtered by a variety of metrics including Meyers-Briggs and management tools like the Baseball Cards Bridgewater uses. Modern-day events are often foreshadowed by historical happenings. By thoughtfully studying these archetypal forms of characters and events, we are better equipped to deal with the uncertainties inherent to life and work. As the axiom says, “Those who do not learn history are doomed to repeat it.”
Bitcoin is often called digital gold for a good reason; the best analogy for its emergence is the monetization of gold. Money is a market pricing and coordination mechanism for human time; it reflects the present value of the (liquid) time savings generated by subdivided labor and denominates prices. The relative inelasticity of gold’s supply to other monetary metals is the reason it outcompeted other monetary metals to become dominant in the free market before central banking commandeered it (seriously, check out Gata.org). Its ascent as money is based on timeless economic principles from the Austrian school. Despite the justifications for schemes like fiat currency in 1971 (revoking dollar redeemability for gold was said to be a “temporary” measure) and MMT today, the minds of prominent historical figures agreed universally that only monetary metals were actual money:
– JP Morgan said in his 1912 testimony to congress: “Money is gold, and nothing else.”
– Thomas Jefferson is quoted as saying: “Paper is poverty, it is only the ghost of money, and not the money itself.”
Even you Ray once said: “If you don’t own gold, you know neither history nor economics.” In the free market, fiat currency has never existed. Only through state intervention has money come under the monopoly control; the state had no more of a hand in the development of language than it did money. So, to understand the ascent of Bitcoin from a quantitative perspective, we must first understand how gold came to dominate the market for money. In his masterful work The Bitcoin Standard, Saifedean Ammous sheds light on how Bitcoin can be perceived as “another one of those” in the sense that it is following a similar monetization path as that followed by gold. In short, throughout history societies have naturally coalesced around the monetary technology exhibiting the highest “stock-to-flow” ratio. When we look at the stock-to-flow quantitative model put together by PlanB, we see that the Bitcoin price has an extremely high correlation to this key valuation metric:
Said simply, the attribute of money that causes it to retain its value is its scarcity. As a former commodities trader Ray, I am sure you will understand the value of this model. In free market monetary competition, the scarcest money wins, as it is superior at protecting wealth across time. Bitcoin is on an inevitable path to become the highest stock-to-flow asset in human history, overtaking gold by a factor of two in the year 2024. Bitcoin’s ever-constricting new supply flow as a percentage of existing stock is encouraging its adoption first as a store of value before it begins fulfilling the other functions of money more adequately. This is consistent with the monetization path taken by gold — as the classical economist William Stanley Jevons remarked:
Historically speaking, gold seems to have served, firstly, as a commodity valuable for ornamental purposes; secondly, as stored wealth; thirdly, as a medium of exchange; and, lastly, as a measure of value.
So, in terms of monetization, Bitcoin is “another gold” following a similar evolutionary path — collectible, store of value, medium of exchange, and finally a unit of account. In an even deeper sense, Bitcoin can be considered “another one of those” as a part of the resurgence of ancient wisdom in the modern world. Yoga, meditation, Ayurvedic medicine, mindfulness, paleo diets, Ayahuasca, acupuncture — citizens of the digital age are rediscovering the deep roots of humanity. As the collective learnings of mankind are now accessible to everyone with an internet connection, this is likely a key driver of this worldwide phenomenon. Bitcoin, as a pure expression of Austrian economic thought, is yet another case of ancient wisdom’s resurgence into modernity. By releasing the economic juggernaut that is Bitcoin into a world dominated by monopoly money, Satoshi put Keynesian economics and its “highly mathematized” theories (central bank circumlocutory propaganda) to the test and, thus far, has succeeded wildly in disproving their validity.
Bitcoin is the best performing asset in human history, even when its sharp drawdowns are taken into account. It has offered the highest risk-adjusted rate of return of any asset class over the past decade (as quantified by the Sharpe ratio), and outperforms even further when only the negative volatility is taken into account (most of Bitcoin’s price volatility has been positive). Indeed, it has been difficult to invest in Bitcoin unsuccessfully:
As you’ve said Ray, “the greatest success you can have as the person in charge is to orchestrate others to do things well without you.” This is exactly what Bitcoin does for all current and future generations; it takes monetary policy out of the sphere of political influence and protects it with timeless, immutable, and mathematically-enforced rules beyond the machinations of mankind. These rules are fixed and fully transparent — resistance to confiscation, censorship, inflation, and counterfeiting — for all to see and rely upon across time. In this sense, Bitcoin is a timeless monetary system into which people can escape the walled-garden economies of a central bank dominated world; an man-made antidote to the poisoned society of man — as Henry Miller described it:
“Society had so complicated the relations between men, had so enmeshed the individual with laws and creeds, with totems and taboos, that man had become something unnatural, something apart from nature, a phenomenon which nature herself had created, but which she no longer controlled.”
By providing a more sound substrate for economic planning and coordination, Bitcoin promises to reduce the toxic bureaucracies that have festered around the central banking model. Outfitted with a sound store of value, people will no longer be forced out further along the risk curve to protect their wealth, making real estate more affordable and unicorn companies more rare. As state revenues naturally decline as a result, government-sponsored “zombie” companies and monolithic “too big to fail” institutions will gradually slip into irrelevance. Finally able to protect their wealth from confiscation via inflation, people will be better equipped to capitalize their own businesses and pursue their dreams. And a world in which people are doing what they love is better for everyone. The majority of most people’s lives is spent working to earn money, and Bitcoin stands to change the very nature of both work and money. In this sense, Bitcoin is bound to change mankind more than he will ever change Bitcoin.
(p.538) “We work with others to get three things: 1) Leverage to accomplish our chosen missions in bigger and better ways than we could alone 2) Quality relationships that together make for a great community 3) Money that allows us to buy what we need and want for ourselves and others… (p.216) man is perpetually suspended between the two extreme forces that create us: ‘Individual selection which prompted sin and group selection which promoted virtue.’”
Since time immemorial, man has been driven to take both selfish and selfless actions. The principles which guide people’s actions are a composite of family values, social experience, and natural predilection. Many of us inherit the political and religious leaning of our parents or family, which influence our value systems. However, our experience in the world also shapes (and continually reshapes) our values as well. These external influences are both, of course, undergirded by our natural inclinations and preferences. In short, we are all born unique, but are also products of our environments. Money, as the most interconnective social phenomenon in the world, is one of the most significant external forces shaping our thinking, planning, preferences, relationships, and actions. Think about it: how many times have you thought or talked about money in the past 24 hours? For most of us, many, many times. The nature of the money we use is a powerful determinant of whether we act viciously or virtuously.
In this respect, Bitcoin has an interesting impact on personal character. As Jimmy Song laid out (here, here, and here), Bitcoin (and hard money more generally) encourages people to develop virtues such as prudence, temperance, and justice. Since fiat currency suffers from perpetual dilutions of value, its users are incentivized to spend and borrow; in other words, to be less prudent with their money. Bitcoin is the reverse; its fixed supply and diminishing inflation rate ensures that it appreciates as global economic output grows and incentivizes people to save and invest. As more people adopt Bitcoin, their time preferences are shifted to become more future-oriented. In this way, Bitcoin encourages people to treat the future as something to be invested for instead of borrowed against.
Since its supply is unmanipulable, Bitcoin is gradually eroding the financial capability of governments to provide guarantees in the form of welfare or bailouts. It’s easy to see how this softens temperance: if you knew your job were guaranteed no matter your performance, how hard would you try? Similarly, a long history of tax-payer funded bailouts for failed banks without skin in the game have encouraged them to take on steadily more risk, as any gains realized from their efforts accrue to their shareholders whereas any catastrophic losses that are incurred are paid for by taxpayers (against their will). This contradicts the tradition in ancient Catalonia, in which failed bankers were beheaded in front of their banks (talk about skin in the game). By providing a means of privatizing gains and socializing losses, governments cause the market to misprice risk and erode the value of temperance: the skill of rightsizing one’s exposures in life on the risk and reward spectrum. With the risk of failure removed, beneficiaries of government guarantees no longer have skin in the game, and therefore take on risks intemperately. Repeated blow ups and taxpayer anger, as savings are eroded to bail out “too big to fail” institutions, fragilizes the delicate bonds that hold society together.
Justice is embodied in fair treatment; it encompasses integrity, honesty, and respect. When an action is taken that benefits one group disproportionally at the expense of another, we can say that it is unjust. Inflating money supplies is an unjust action, as it does not offer a single equitable benefit, and instead enriches the politically-favored few closest to the monetary spigot at the expense of the many farther away from it. Using inflation as a means of funding welfare and warfare, new government programs are continually implemented while old ones are kept functional despite their inefficiency or uselessness. As Milton Friedman once said, “Nothing is so permanent as a temporary government program”. Again, government intervention severs skin in the game and decouples the intention of these programs from their results. The impact of this is a swelling class of government dependents, workers, and contractors that function inefficiently and only exist because of the government’s ability to create new money. Interventionism of this kind distorts the information provided by market pricing and, therefore, makes fair dealings much more difficult. In a free market run on hard money, only industrious people who add value and deal fairly in an economy are rewarded. Paradoxically, as governments strive to ensure equality of outcomes, they incentivize unjust treatment. At the core of this rottenness is monetary inflation: a legally enforced injustice.
In an economy run on soft money, intermediary business models and professional roles designed to extract value from the money that originates at the center (the central bank) and flows outward into an economy (through successively lower tier banks and eventually to businesses and consumers) start popping up everywhere. These intermediary functions add little value to an economy yet capture a disproportionate share of the value of economic output; a dynamic commonly called “rent-seeking” that is unsurprisingly pervasive in industries that suffer from extensive government meddling like healthcare, education, and banking. After the last vestiges of hard money were abandoned in 1971, rent-seeking has exploded; consider the case of healthcare:
Meaningful work is being compromised by central banking. There has been a demographic shift from value-additive to value-subtractive positions — as evidenced by the training of more bankers than engineers, or the academic credentialing transition from medicine to finance. In a free market, compensation is reflective of a role’s usefulness to society. But with monetary socialism, there are greater financial incentives to work closer to the spigot of fiat currency in roles that are mostly non-productive and extractive. Hayek summed this up nicely:
“It is not merely that if we want people to give their best we must make it worthwhile for them. What is more important is that if we want to leave them the choice, if they are to be able to judge what they ought to do, they must be given some readily intelligible yardstick by which to measure the social importance of the different occupations. Even with the best will in the world it would be impossible for anyone intelligently to choose between various alternatives if the advantages they offered him stood in no relation to their usefulness to society.”
One more thing: most rent-seeking jobs suck! How many accountants, bankers, or administrators do you know that “love” their job? Many of these jobs are a direct result of the lacking social scalability inherent to monetary socialism. The more we can globally standardize onto a hard money, the more productivity we generate collectively, the lower the cost of living becomes, and the less we have to work individually.
Money is just a means to an end: as you’ve said Ray, (p. 417) “Remember that the only purpose of money is to get you what you want, so think hard about what you value and put it above money.” I think it’s safe to say that most people want to live a fun and productive life full of fulfilling relationships. To this end, the type of money society runs on is of paramount importance. The utility, supply, and value of fiat currency cannot be trusted; since money is the trust network through which all of our commercial relationships are carried out, this lack of trust in the money infects the trust relationships amongst its users. Again, to get what we want, we need reliable protocols for commercial interaction like private property rights, rule of law, and manipulation-proof money. As central banks confiscate and redistribute wealth created by the work of others, they cut these cornerstones of capitalism and weaken the foundations of civilization.
Money and speech are media of expression; any inhibition or censorship of these societal building tools, which together are responsible for nearly all human coordination and communication, contradicts the most basic liberties (1st Amendment in the US) intrinsic to Western Civilization. There is zero justification for a system that suppresses verbal or financial expression. By organizing ourselves within a truly free market capitalist system that incentivizes basic morality (don’t steal, don’t kill), we can advance our civilization to new levels and dramatically improve the quality of human relations.
(p.216) “The rewards of working together to make the pie bigger are greater than the rewards of self-interest, not only in terms of how much pie one gets but also in the psychic rewards wired into our brains that make us happier and healthier.”
The history of mankind has been marred by episodic violence — skirmishes between individuals, tribes, and, later, nation-states have been a consistent thread in the story of humanity. Like other animals, man seeks to maximize the odds his genes will be passed on to successive generations and will fight tooth and nail for his chance. Counterbalancing this self-seeking behavior are the benefits offered by a peaceful and cooperative society — the division of labor, rising standards of living, and more free time to spend as one sees fit. Between the 16th and 19th centuries, conflict-related deaths as a share of world population averaged less than 1%. In the 20th century, this figure more than quadrupled to over 4%:
This is no coincidence. Inflating fiat currency supplies gives governments a much cheaper and more surreptitious way to finance military operations as opposed to direct taxation or selling of war-time bonds. As Ron Paul said:
“It is no coincidence that the century of total war coincided with the century of central banking… If every American taxpayer had to submit an extra five or ten thousand dollars to the IRS this April to pay for the war, I’m quite certain it would end very quickly. The problem is that government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes. When the costs are obscured, the question of whether any war is worth it becomes distorted.”
As the enablers of inflation, this institutionalized system of time theft and financial subjugation, central banking is the mechanism through which government confiscates the resources necessary to fund its belligerent efforts. As Mises remarked in 1919:
“One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.”
Before the fiat currency experiment, it was a common refrain among warring nations that “the gold standard must be abandoned”. Clearly, it was in the best interest of these nations to severe the monetary anchor to time since debt-based money unlocked much more potential for borrowing against the future (via inflation) to finance current war efforts. Of the three ways governments can generate revenue — taxation, borrowing, and inflation — the latter is clearly more preferable for governments as its negative consequences are spread out over long periods of currency debasement and the shadowy, implicit tax imposed by inflation in the form of rising prices is less well understood by citizens (and rising asset prices helps paper over the perceived damage, although this is largely illusory).
Expansionary monetary policy was the key to financing the US military operations during the Vietnam War. Although the war-time economy seemed strong during the 1960s, US citizens would suffer economically in the echo of this economic intervention as the 1970s became mired in stagflation (low growth, high unemployment, and high inflation). Besides the death and destruction wrought during the war, there was economic devastation in the US and abroad. Between 1965 and 1984, the Dow index suffered a drawdown of 80% from its peak value on an inflation-adjusted basis in the wake of this soft-money-fueled-military-spending-spree. Unfortunately, this pattern of warfare funded through inflation would persist well into the new millennium.
After its great successes with its War on Poverty and War on Drugs, early in the 21st century, the US would launch its “War on Terror”. Over the course of the following 17 years, with the cumulative cost of the “war” (more accurately, an imperialistic military campaign) reaching over $2.1T in direct governmental expenses, we witnessed The Fed print money and purchase US government debt (US Treasuries or UST) almost exactly equal to the cost of the war:
Clearly, it is no exaggeration to say that the US central bank money machine and the US war machine are intimately connected. Central bank enabling of government war machines is a perpetual bane to humanity. Neither central banks nor military regimes are accountable to anything other than their own self-interests. In reckless pursuit of their own politicized ends, these institutions siphon away vast swathes of societal wealth to fund destructive military campaigns; this “twin demon” problem of wealth confiscation and capital destruction is the most anti-economic force in the world today. In the face of this diabolic menace, the world has but one hope: the separation of money and state.
As with all other critical commodities and industries, the free market is the best mechanism for allocating capital, promulgating innovation, and properly pricing risk. The singular purpose for the monopolization of the market for money by government is its unquenchable thirst for power; it imposes itself on citizens with hortatory messages from central banks and relies on the submissiveness of citizens. Fiat currency facilitates an exploitative relationship between governments and their citizens in which the former harvest the fruits of the latter’s labor in exchange for “protection”.
Wars do not protect the public, they tax it. Wars do not promote the public good, they destabilize it. Wars do not stimulate economies, they devastate them.
Throughout history, money has been both the means and ends of all war. People have always fought to control more resources or territory, and have wreaked havoc on each other in the process. Warfare is antithetical to meaningful relationships. If we want to build a world with more meaningful relationships, we must mitigate mankind’s ability to wage war against himself. An unmanipulable, uninflatable, and confiscation-resistant free market monetary alternative like Bitcoin is a good start: it holds within it the promise of starving the state of the virtually unlimited resources the fiat currency printing press feeds into it. When people have a choice to opt out of the inflationary economic order, governments lose the ability to tax them (both explicitly and implicitly through inflation) which mitigates state revenue and its ability to wage war.
Warfare, its attendant loss of life, and the degermation of capital it causes are mitigatable outcomes of money market monopolies. As with the other negative consequences of monopolization — like food shortages, unemployment, price signal distortion, and exacerbated business cycles — war can be curtailed by open and free markets, which create incentives for cooperation and long-term relationship building. As an unstoppably free market, Bitcoin is rendering irrelevant the artifices which preserve monetary monopolies and returning the market for money to its naturally free state. It accomplishes this by virtue of its intrinsic truthfulness and transparency which are, interestingly, two of the key ingredients to Ray’s free market for ideas — the idea meritocracy. As you said Ray, “In my case, I wanted meaningful work and meaningful relationships, and I believed that being radically truthful and radically transparent were required to get those”. A money that embodies these free market qualities is likely to influence its users to behave accordingly; this would create cultural effects diametrically opposed to those spawned by fiat currencies today. Simply, hard money like Bitcoin lowers societal time preferences; it encourages people to invest in themselves, seek meaningful work aligned with their skills, forge meaningful relationships, and to collaborate over longer time horizons. Critically, in a world run on Bitcoin, funding perpetual warfare via inflation would be a relic of mankind’s barbaric past — making Bitcoin the ultimate boon to the meaningfulness of relationships. But to get there, we must face reality head on and deal with it as it is, which brings to the here and now.
(p.138) “Man’s most distinctive quality is our singular ability to look down on reality from a higher perspective and synthesize an understanding of it.”
Since 2008, central banks across the world have injected an unprecedented flow of fiat currency liquidity into the economic system. Expectantly, this has furthered wealth disparity and sewn new seeds of systemic risks. Although we remain in a historically long economic bull run, these hidden risks appear to be rousing from their dormancy. No matter what form the next crisis takes, central banks have only three options to try and mitigate its consequences: 1) cutting entitlement benefits, 2) raising taxes, and 3) printing money. All three of these options will hit those living on fixed-income — retirees, pensioners, and the working poor — the hardest. Of the three, printing money is historically most favored by central bankers as it can be done (and is being done) with little political fuss or muss.
These systemic risks are compounded by negatively yielding government bonds, which most retirees, who typically have lower risk appetites because of their age, depend on for fixed-income in their twilight years. Since these many of these instruments now suffer from negative yields, this forces investors with low risk appetites, including retirees and pension funds, to keep their nest-eggs “at risk” in equities markets, lower quality bonds, or even riskier assets. This contradicts the standard American dream in which you spend your younger years earning and investing in higher risk assets, like equities, so that as you neared retirement you could gradually transition your exposure to lower risk investments that generate a relatively predictably, consistent return — like bonds. The intention of this approach gives you exposure to higher upside when you are young and reduce downside exposure as you age, so that your nest-egg doesn’t get crushed in a stock market crash.
Bitcoin can help those living on fixed-income protect themselves from the accumulation of hidden risks created by the optionality-theft central banks impose on citizens. A small allocation of less than 5% gives those vulnerable to economic contractions a kind of insurance policy — a put option on the idiocy inherent to a politically-charged, debt-based monetary system. Once again we find the wisdom of Taleb, as this is an expression of the barbell strategy: an approach to investing and other aspects of life in which assumes a large exposure to a low-risk, low-reward element and small exposure to a high-risk, high-reward element. In fact, a portfolio with 95% cash and 5% Bitcoin outperformed the S&P500 on risk and return every year over the past 6 years:
After decades of flooding the market with cheap money, central banks have distorted free market incentive systems and made economies dependent on this artificial liquidity to stay afloat. Even the indication of quantitative tightening sent markets tumbling in 2018, which was quickly reversed by The Fed’s now infamous “dovish pivot” back to a more accommodative monetary policy. As this soft money is continually injected into the economy, it is flowing to hard assets so that investors can protect their wealth against the inevitable inflation quantitative easing creates, thus further distorting soft-money-denominated prices and setting the stage for new bubbles in markets like real estate and equities. At the core of this perpetual monetary easing is the (perhaps well-intentioned but certainly misguided) attempts of central banks to “create price stability” and “smooth out the business cycle” — which, intentionality aside, is equivalent to an arsonist racing to extinguish the fire he started. To state the argument again succinctly: printing money does not create stability of any kind, it distorts price signals and exacerbates the severity of economic cycles.
Further, it is printing of money that has created the deeply negative bond rates we are seeing in Europe. As the European central bank (ECB) keeps printing money, it must buy bonds to inject this cash into the economy, which drives up the price of bonds and depresses their yields. So, we get into this (familiar) fiat currency trap in which the attempts to keep the economy healthy by injecting artificial liquidity hurt the most vulnerable among us, those living on fixed-income, the most. Bitcoin fixes this: by taking monetary policy out of the hands of people, who are incapable of “managing” a complex system like the economy as much as they are the weather, it eliminates the vector by which policymakers create these economic distortions that they then try to fight off using the same policy tools that created the problems in the first place. Since Bitcoin’s supply is absolutely scarce, whatever portion you own of the total supply, you can be 100% certain that you will always have at least that fraction; this is the crucial discovery of absolute scarcity that Bitcoin represents, a one-time event that can never be recreated.
Another way soft money is distorting markets is through “share buybacks”, in which corporations take out cheap loans and use the proceeds to buy back their own shares. This action is an expression of the belief that the company’s stock will outperform the cost of capital net of inflation over the loan term. Also, the agency problem rears its head again here, as the reduction of shares outstanding helps corporate executives hit their “earnings per share” targets on which their bonus packages are based. This “financialization” of the real economy is a product of the flaws incentives inherent to fiat currency. Unsurprisingly, in the wake of the past 10 years of reckless money printing, corporate share buybacks are now the dominant source of demand for equities:
A perverse configuration of dependencies arises as a result: low risk appetite investors have been driving out of “safe” investments like bonds because of their negative yields, thus pushing further out along the risk curve into equities or worse. However, due to the soft money fueled share buybacks outlined above, the dominant source of demand for these equities are the corporations themselves, which makes their share prices perversely dependent on the continued central bank provision of low interest rate loans. So now, in a twisted turn of fiat disease, entire retirement portfolios and pension funds have been forced into dependency on the continued accommodative monetary policy of central banks, which can only maintain their confiscation via inflation so long as the underlying society remains sufficiently productive and submissive under its authority.
Facing reality then, we see that the fiat currency experiment is in the endgame now. It interest rates aren’t held down or if central banks relent injecting liquidity in steadily larger doses, the economy will crash cataclysmically. Even if they do, it is only a matter of time before society begins to come unglued, as it always does when its trust fabric, money, is sufficiently debased. So, the time is now to accept our reality, lean on the lessons of history, and plan for a better future. Although it’s probably clear by now, fiat currency is not a viable monetary system. In any case, let’s “look down on the reality” of different monetary systems to glean some comparative insight as to their fundamental nature and what would best suit us from an organizing principle standpoint. In a sense, each particular kind of money represents an equity stake in its respective monetary system. Let’s compare:
Fiat Currency: Liquid equity in a central bank, a privately owned and operated monetary monopoly
– Only Class B Shares available, All Class A Shares owned by Central Bank Shareholders
– No voting rights
– Board observation rights limited to public central banker appearances
– Converts greed into monetary dilution, confiscation via inflation, and trade wars
– Liquid equity subject to unlimited dilution
– Liquid equity subject to deauthorization
– Liquid equity subject to censorship
– Liquid equity subject to confiscation
– Liquid equity has no claim on underlying assets of monetary network (gold)
Gold: Semi-liquid equity in the world’s original, physical, and free market money
– Class A Shares = Physical Gold, Class B Shares = Gold Certificates
– No voting
– Governed by nature, no board to observe (only for Class A)
– Converts greed into monetary value and unforgeable costliness
– Liquid equity subject to unlimited dilution, although historically this is low and predictable
– Liquid equity immune to deauthorization (only for Class A)
– Liquid equity immune to censorship (only for Class A)
– Liquid equity subject to confiscation
– Liquid equity is the underlying asset (gold, only for Class A)
Bitcoin: Liquid equity in the world’s only global, digital, final settlement monetary network
– Class A Shares = Private Key, Class B Shares = Bitcoin Exchange IOUs
– Pro-rata voting rights, option to fork network to new ruleset
– 100% transparent ruleset, no board to observe
– Converts greed into monetary value, unforgeable costliness, and network security
– Liquid equity immune to dilution
– Liquid equity immune to censorship (only for Class A)
– Liquid equity resistant to confiscation (only for Class A)
– Liquid equity is the underlying asset (Bitcoin, only for Class A)
Ultimately, none of our individual opinions matter about this; it is up to the free market to decide. Fortunately, Bitcoin exists as a free market alternative upon which society can stand and clean up this mess central banks and governments have created for the world. Only time will tell how this all plays out. Remember: the escalating stock-to-flow ratio of Bitcoin is relentless. At this point, it is fiduciarily irresponsible to ignore this asset completely, and the pain of having no exposure to it will likely only worsen with time.
With that, let me briefly summarize my arguments before closing:
Distorted price signals are the “nerve damage” inevitably suffered by an economic order based on central banking. As is true with all industrial monopolies, the profits for few are subsidized at the expense of many. Bitcoin fixes this by disintermediating the market for money and restoring its natural supply and demand dynamics. As Ray says, “An idea meritocracy requires people to do three things: 1) Put their honest thoughts on the table for everyone to see, 2) Have thoughtful disagreements where there are quality back-and-forths in which people evolve their thinking to come up with the best collective answers possible, and 3) Abide by idea-meritocratic ways of getting past the remaining disagreements.” These three requirements of the idea meritocracy, closely reflected in free markets, can be summarized as honesty, quality competition, and conflict-resolution. Bitcoin satisfies all three: it is completely transparent (honesty), secured by a free market for mining (quality competition), and governed by a community-determined ruleset that is algorithmically enforced (conflict-resolution protocol). Bitcoin embodies idea-meritocratic elements, and is one of the only sources of truth in modernity. As Einstein said: “The significant problems of our time cannot be solved by the same level of thinking that created them.” In the same way that we needed the breakthrough of double-entry bookkeeping to catalyze capitalism, as it enabled us to synchronize our economic efforts further across spacetime, we now need the triple-entry accounting system intrinsic to Bitcoin to break the central bank monopoly and more greatly amplify the synchrony of mankind’s economic efforts into futurity.
Bitcoin is an open-source protocol for exchanging value. Such openness ensures that Bitcoin’s code cannot be manipulated to benefit anyone at the expense of anyone else. The rules governing Bitcoin are founded in the (absolutely) uncompromising laws of mathematics — nature’s fundamental language. Bitcoin is the zero-marginal-cost-marketplace into which all available energy maybe sold; this means that every joule of energy which cannot find a more profitable employment flows into the “alchemization of digital gold” (the ultimate energy unemployment relief program, if you will). This realigns the race to the bottom associated with fiat currency, in which all monopolists are incentivized to devalue their currencies and secretly tax their people, to become a race to the bottom for the cheapest energy sources, thus spurring innovation in the realm of energy efficiency worldwide, forever. This perpetual bounty program for cheap energy becomes increasingly economically compelling as more monetary value accretes to Bitcoin, as more stranded joules become savable.
With central planning, any defectors from the single unitary plan become enemies of the state. This concentrates power in the hands of a progressively smaller few, which makes the intoxication of power more potent and attracts the most unscrupulous among us to seek its reigns. Bitcoin is the exit option, the plan B, for those enslaved by the prevailing monetary monopolies; it allows defectors a way out of the panopticon constructed by politicians and bankers by simply exercising their freedom of speech. It is a peaceful revolt against the institutionalized system of time-theft we call central banking. In the same way that Galileo’s new perspectives on the heavenly bodies shattered the political influence of the church over time, Bitcoin obliterates political control over money because it is the one-time discovery of absolute scarcity — a quintessential property of time that lives beyond the reach of mankind’s laws.
The idea meritocracy is the depoliticization of decision-making; Bitcoin is the depoliticization of money.
Bitcoin is an idea meritocracy and unstoppable free market for money, it is naturally outcompeting all monopoly-insulated monies by transcending the laws which protect them and forcing them into the competitive sphere in which only their merits matter. Bitcoin is a free-market-chosen-hard-money emancipating the monopoly-warrened economic fiefdoms all over the world. Bitcoin is an idea meritocracy consisting of: radical truth (true consensus, immutable records, carrier of truthful price signals) + radical transparency (open-source, inflation-immune, transparent and reliable money supply) + believability weighted decision making (one hash equals one vote, skin in the game governance). In this way, it is a free market money that is subsuming all economies facilitated with fiat currencies (centrally planned monies) into itself. Bitcoin is unregulatable, unstoppable, perfectly transparent implementation of energy-based, absolutely scarce, hard money devouring all softer forms and infusing the value stored therein into itself, once and for all. Bitcoin is hard money bending monetary history back towards its free market point of origin.
In the grand arc of human history, Bitcoin represents a reversion to a free-market-chosen hard money system. Ray, Bitcoin is the paradigm shift you’ve seen coming; once again, nature’s pendulum is changing directions:
As Alexander the Great once said:
“Through every generation of the human race there has been a constant war, a war with fear. Those who have the courage to conquer it are made free and those who are conquered by it are made to suffer until they have the courage to defeat it, or death takes them.”
Courage can only exist in the face of fear. If you listen closely, you may hear the devil whispering “You can’t withstand the storm.” And if you listen closely to your heart, to the warrior within, you will hear him respond, “I am the storm.”
The Coming Storm
In the 19th century essay by Georgi V. Plekhanov titled The Role of the Individual in History, a strong case is made for the inevitability of the path which charts itself as an expression of the unpredictably free action of people. As a process, human history expresses laws (principles) by which to orient its constituents. As an actualization, human history is made by those who set and solve the problems of progress in accordance with the conditions of their respective epoch, regardless of its laws. In this sense a great man is great because “he possess qualities which make him most capable of serving the great social needs of his time”.
Restoration of individual sovereignty is the chief aim of separating money and state. Free markets are idea meritocracies; minimized barriers to the interplay, recombination, and reproduction of knowledge are the defining characteristics of both. And knowledge growth is the key driver of innovation and economic growth. Bitcoin is both a free market money and a free market in and unto itself, with entrepreneurs freely entering and exiting its mining network. Consistent with Ray’s definition of an idea meritocracy, Bitcoin is radical truth and radical transparency in action, governed with skin in the game. As the central pillar of every economy, it is critical that the market for money remain free and unobstructed by monopolists, else we witness the continued cartelization of those industries closest to its economic influence.
Paradoxically, it is only when people are free to act on their own accord that they become conscious of economic necessity by virtue of having skin in the game. Those who are coerced by regulations or insulated from the consequences of their actions by government guarantees suffer from a disconnection with reality and atrophy over time. In this sense, freedom is the conscious awareness of necessity; acceptance of the opportunity costs to be incurred in action, awareness of the obstructions to be overcome, and understanding of natural laws. Value is the bridge between the conscious awareness of life’s necessities and the freedom to choose; it is expressed in price: the intersection of (objective) supply with (intersubjective) demand. Without an objective touchstone for the value of things (hard money), market signals are distorted and capital allocations are manipulated, causing societies to trend towards centralized power concentrations (bigger government), nationalization of assets (less free enterprise), and marginalization of citizenries (inflation, taxation, and conscription). Entrepreneurs are elemental to free markets and antithetical to state control. Leaving each person free to pursue profits by whatever (nonviolent) means necessary ensures that markets generate the lowest prices, highest satisfactions of wants, and continuous streams of innovations for all to enjoy.
Freedom allows people to self-actualize the actions they themselves deem necessary as they face the inherent scarcities of existence. Freedom, in a profound sense, is necessity transformed into action. A profound definition like this is fractal, in that it does not refute its superficial form, but is instead inclusive of it. Once an individual overcomes the restrictions imposed with both within and without, he is born again; his “free actions become the conscious and free expression of necessity.” By transcending the government coercion against money production, Bitcoin facilitates a reversion to man’s natural, sovereign state of being; an existence with more freedom of expression and less oppression. By incinerating the opacity of central banking with the light of pure transparency, drowning the lies inherent to fiat currency in a ceaseless flow of indisputable truth (a new block roughly every 10 minutes), and like the free people whose sovereignty it is reinvigorating, Bitcoin is swelling into a great social force that is:
“Bursting on cunning falsehood
Like a storm of wrath divine…”
Bitcoin is the first social institution in history with the potential to subvert the greatest man-made scourge humanity has ever faced — the infamous wealth-extracting, disparity-driving, and warfare-financing duopoly of monopolists: governments and central banks.