“Overcome by the giddiness that flying lent him, Icarus soared into the sky, but in the process, he came too close to the sun, which due to the heat melted the wax.”
Central banking, along with fractional reserve banking — two inseparable evils of monetary policies — have been distorting market price signals for the last 50 years.
In 1971, the Nixon Shock corrupted the global monetary system by fracturing the final linkage between gold and the U.S. dollar. Fiat currencies were unleashed, issued and managed by central banks. Over the years, delusional interventionism enabled by politicized narratives to serve a middle class convinced into believing central manipulation is in their best interest, has brought fiat currencies’ purchasing power to its knees.
Today, savers are penalized, while speculators and spenders are rewarded. This tendency to be punished by lowering one’s time preference feels alienating to many. It just doesn’t feel right. Yet, few are capable of putting a finger on why that is, including banking professionals and money managers whose salaries depend on not understanding it.
With a dysfunctional monetary system that doesn’t hold value over time, many artificial distortions arise in all markets. Like a cancer metastasizing in its host, fiat currencies are the initial viral load that contaminated all territories governed by the fiat dogma, spreading the pandemic of central and fractional reserve banking.
It is a well understood yet underappreciated fact that money accounts for 50 percent of the value of all transactions globally, and therefore a broken money can have severe repercussions, as it tricks every user into misleading economic calculus, ultimately leading to a distorted, apathetic and broken society. The logical construct behind the dissection of today’s evils is actually very simple: money is broken; fix the money, fix the world.
Time is an invariably forward passage common to all humans, agnostic of status, wealth, ethnicity or location. We only have so much of it. Money is an instrument to store time for later use, ready for trade with other specialized individuals. With money acting as a neutral good for trade, everyone is more productive with their special craft — the beauty of the specialization of labor! All voluntary and peaceful human action that emerges as part of a free society is enabled by money, a neutral good for exchange within a capitalistic society, a system built on the ability to accumulate capital for later productive use and to do good around oneself.
What happens if money decays faster than time, melting away the time people have accrued? How is the common man affected psychologically by a devaluing currency? How do assets behave when people store their savings using them to preserve their wealth? How are industries and markets structurally influenced when being close to money production is highly profitable? How will narratives around inflationary, “growth at all cost” compare to peaceful deflationary realities where individuals earn more by waiting patiently? What happens when sound money is finally restored to the people using free and open tools such as Bitcoin?
In this brief exploration, we will raise fundamental questions around national monetary manipulation with fiat currencies, their effects on life, business and psychology and how a global monetary melting led by Bitcoin will drastically shift the world toward sustained deflation — the ultimate step toward unrestrained prosperity and abundance. Hop on!
People save to plan for future uncertainty and enjoyment. A dad may want to save to feed his family tomorrow in case of an unplanned job loss, or to organize a family trip for the next holiday. A young person may want to save to build a business. Saving is the essence of all human life. It allows one to construct a well-balanced life. Without savings, a man is bound to get stuck on a never-ending hamster wheel, chasing his shadow.
Savings are the root of all capital accumulation, that serve as the base of life and investing, which leads to productivity improvements, if done well. Doing more with less is great, and that’s what life is all about, starting with biological evolution. A more productive dad can spend more time with his kids and wife. A more productive fungus has more room to grow and take over a larger territory. That’s all pretty basic, yet fundamental.
When money decays over time and fails to hold value, something odd happens.
People feel the need to spend it quickly, because they can get more with it immediately, compared to holding it for later use. Holding a devaluing money presents a penalty to a responsible saver. Better spend it and buy other goods and services, or invest it in yield-generating assets to preserve wealth over time (or to at least offset the inflation rate).
The root problem lies in the forceful decision of spending, instead of voluntary saving. With monetary inflation, people will tend to buy things they don’t need and invest in stuff they don’t understand. The resulting artificial demand for goods and services is unnatural and triggers many ills such as asset and consumer price inflation. Industries end up being built by producers responding to these artificially stimulated price signals, which cause systemic malinvestment, the scale of which we have yet to fathom.
Governments today measure economic development with a national metric called the GDP, which necessarily relies on consumption of goods as one of its primary drivers. Consumption means spending, which lowers savings, and, because saving is the basis of investing via gradual capital accumulation, it is easy to see how flawed a focus on GDP is.
Two great evils have emerged from fiat currencies and government-led measurements of economic progress: consumerism and short-sighted financial engineering.
Entire industries have been built on a delusional vision for mankind corrupted by debt-fuelled consumerism. Overzealous application of financial engineering is the atrocity pushing the boundaries of exuberance when it comes to enslaving our lives: buy things we don’t need (consume) with money we don’t have (debt).
If people were consuming less because money was holding value over time, would advertisers spend around $700 billion per year to promote goods and services? Would social media platforms be tracking their users and manipulating individual views as much as they are to serve advertising giants? Would the world’s best software engineers spend their precious time architecting machine-learning models to optimize online ad spend? Would the smartest pool of talent spend outrageous hours in financial services, losing the most precious hours of their youth with little societal benefit to show for it?
Global banking is estimated to be worth roughly $5.3 trillion. As one of the most well-paying industries, banking and financial services are attracting millions of workers, accounting for around 23 percent of the total global workforce, including talented software engineers and developers with the ability to horizontally move to other industries. Creating a massive industry, the growth of banking is a direct result of the corrupted fiat currency system, which incentivizes the construction of ever more complicated financial engineering schemes. All this to protect wealth from centrally induced inflation deemed necessary by those who benefit from its existence, which for everyone else ultimately only serves to increase systemic risk until an eventual rupture leads to socialized losses — bail outs.
Facebook, Google, YouTube and Amazon are advertising companies — under the semblance of speech-enhancing global social networks — receiving close to 40 percent of the global ad spend. Roughly $618.7 billion was spent by advertisers on these platforms last year alone, which incentivizes these companies to track their users as much as they possibly can to serve their paying customers: advertisers. Talented engineers are attracted to these companies, not to support free speech at a massive scale as social media could allow, but because the pays are indeed quite generous, with a median pay of a quarter million dollars at Google.
In a sense, banking and advertising are truly important industries, which most definitely can add value to the world but have been corrupted by the evil of fiat monetary inflation, to the point that benevolence is no longer possible. Advertising and banking are dominating global economic activity, while they ought to be supporting well-functioning free markets.
First and foremost, monetary inflation is an expansion of the money supply. Monetary inflation renders all previously existing circulating units less valuable by diluting their presence in the total supply.
Currency holders lose purchasing power due to inflation, which encourages them to get rid of it, as we just discussed, affecting many aspects of life such as time preference. Instant gratification feels good, and intrinsically, all biological organisms enjoy pleasure in the short term, knowing that long-term pain may occur as a result. Take a night out with friends drinking: sipping that extra glass of bourbon is undeniably enjoyable in the moment, but the next morning may not be so pleasant.
Rationally, if someone knows that saving money for later use will render this money more valuable, the incentive to not spend it right away is strikingly obvious. What happens then? Demand for unnecessary items may contract as people reduce their spending. People may start thinking twice about their willingness to spend the money they earned with hard work. “Do I really want to buy the latest pair of Nikes or the newest iPhone?” This simple shift of mindset seems inconsequential at first, but it leads to a rippling societal change — a complete reversal of current norms plagued by over-consumption of frivolities.
Allowing someone to reflect before making a decision to deny future wealth appreciation is a fundamental restructuring of the individual psyche. Delayed consumption lends space to think rationally, preventing superficial consumption. Instead of consuming life in the short term, one invests in their life for the long term. How does reliable and scarce money affect the human psyche? How does an individual change when exposed to delicate scarcity as opposed to extravagant abundance? What happens to a society protected by incorruptible assurances of sound money?
“A rolling stone gathers no moss.” Living a carefree life that is not built on solid foundations is unstable. Like a stone in the forest under the trees, the moss that accumulates is synonymous with a fresh and healthy environment, where time passes. A stone that tumbles in the river at the mercy of currents will not accumulate any moss — a torrential existence of misery.
Individuals are no different. Stability and prosperity come from a foundation built on a secure shelter, a decent nutrition, a healthy lifestyle, a loving family, caring friends, incorruptible values and generous savings for cold rainy days. Not having that unshakeable foundation can lead to a life of misery with no meaningful accomplishment.
All valuable things are scarce, and money is no different. Something abundantly available has little value. Water in an ocean doesn’t have much value, but in a deserted area, it can mean life or death. As individuals are exposed to truly scarce money, over-consumption stops.
Today, this phenomenon is observed in reverse, fuelled by massive consumer and corporate debt levels, the polar opposite of low time preference. People are spending their future in the present by neglecting the burden of debt, and borrowing large sums of money to pay for items they cannot afford.
Education in the U.S. is an obscene illustration of that for young adults, with 44 million students collectively owing $1.6 trillion of debt for their university degrees. American mortgage debt is nearing $10 trillion, which is propping up the real estate market in an unsustainable fashion. In total for the U.S. alone, consumer debt reached $14 trillion, while the corporate debt market hit $10.5 trillion earlier this year. Prior to the massive wave of stimulus led by governments all around the world, the sovereign debt market already hit an all-time high of $66 trillion, more than approximately 80 percent of global GDP. Overall, global debt-fuelled growth is a symptom of an illness in the money that we use globally, no different to the effect felt by individuals.
As mentioned earlier, a man with sound money lowers his time preference, facing the irrefutable scarcity of his storehold of wealth. As his savings appreciate in value over time, he can wonder about what he should be spending his time and money on next. He is now allowed to think before acting, instead of running on life’s proverbial treadmill. Getting rid of superfluous possessions is the number one priority. Leaving behind a life of frivolous spending hidden by the vicious ornament of “carpe diem,” this newly born man discovers the timeless prosperity of stoicism. Patience, devotion and loyalty suddenly emerge from the dust as strong values upon which he can build his reasoning.
Learning to appreciate the beauty of things around him, this man’s heart fills with love and empathy for others around him who are still on the treadmill. Few things truly matter, and chief among those that do are his family, his health and his life’s work to make things better around him. Sound money changed him. A fast life of abundance filled with comfort and certainty now feels shallow and miserable. Progress made through work, pain and love allows him to tackle uncertainty and find stability in the chaos of life. As he delays his own gratification to plan for his family or entrepreneurial venture, he reduces his consumption, accumulating liquid reserves. Savings allow him to be free, and because they are appreciating in purchasing power over time, the more patient he is, the more reward he inevitably reaps.
What happens if this effect on the individual spreads to society? As people demand less of products and services under a bitcoin standard, but also reduce their speculation in asset classes to preserve their wealth, a global deflation flourishes, allowing individuals and families to attain increasing purchasing power, further driving society toward prosperity.
When consumer behavior shifts, producers undoubtedly adapt their output to meet the new demand. If there is a demand shock, prices will plummet until buyers are found, such that producers can distribute their past production, and re-adjust their upcoming production cycle to meet lower demand levels. Producing less, entrepreneurs and organizations can focus on quality over volume, which should create more value for the buyers, perhaps willing to pay more for the products and services they are receiving, bringing prices back to an equilibrium.
In a society with sound money, where monetary production is locked away from the greedy minds of faillible humans, such as is the case with bitcoin, consumption slows down. As mentioned, faced with inalterable scarcity, individuals understand the cost of instant gratification. Suddenly, frivolous spending seizes to be common, because it ends up being so costly in the future. When cash reserves appreciate over time, products and services become more affordable, and individuals along with businesses end up spending later to enjoy a higher purchasing power.
Inflation may turn negative. Many investment strategies built on the mandate to preserve wealth and capital for the long term may turn obsolete as a result. Positive real returns today represent a key driver for long-term portfolio managers who are mandated to protect capital from inflation erosion over multiple decades. What happens when inflation turns negative? In such a scenario, cash doesn’t lose purchasing power. The well-known “cash is trash,” popularized by hedge fund superstar Ray Dalio, becomes a slogan of the past. Suddenly cash is restored with a fundamentally important property of sound money: a lasting storehold of wealth.
In a sound money society, cash is not only the most liquid saleable asset acting as a medium of exchange and measure of value, but it acts as a store of value. Anyone willing to solely preserve wealth over time and have access to liquidity to meet short- and medium-term obligations only has to hold cash. For trillions of dollars of capital parked in assets to preserve wealth over time, this represents a drastic shift. Bitcoin is the instrument which may turn the world upside down, reversing investment strategies for many asset managers across the world.
As Bitcoin maintains a steady cadence in its process of monetization, it will continue to absorb a material amount of wealth from the fiat legacy paradigm, plagued with inflation and currency debasement, until total collapse. Some would argue that such a particular view is extreme, while others would maintain that it is absurd and ignorant not to hold it. As this process proceeds and bitcoin attains unfathomable levels of market value, asset classes such as real estate, gold and equities will be repriced. Fundamental valuation models for the classes of assets exist today, and are well understood. Undeniably, today, most of these asset classes are deemed to be overpriced by multiple investment managers looking to find value in underpriced assets. Truth be told, most of these assets have accrued a monetary premium, which emanates from their respective utility as decent storeholds of wealth.
An asset that is understood by the market as a viable store of value is relatively scarce compared to the currency from which the saver is trying to find protection, while also being quite durable over time. Real estate is an asset class estimated to be worth $280 trillion and owes a material amount of this aggregate market valuation to the storehold of wealth use case. Indeed, many investors are parking capital in buildings of popular capital cities to preserve their wealth, often leaving their units vacant, as is the case in Vancouver. In other words, the utility of real estate, as a good for shelter, is not leveraged in this scenario, but only in the fact that urban properties are relatively scarce and durable in politically stable jurisdictions.
Equities behave according to the same principles. As a market of roughly $90 trillion today, they are mostly well understood with valuation models such as price-to-earnings ratios. Generally speaking, over a certain threshold, based on the industry and other factors, a company will be deemed overpriced or undervalued. Most equities today are used in diversified, 60/40 portfolio allocation strategies to preserve wealth against the erosion of fiat. Fixed income markets are another massive segment used for wealth preservation, especially T-Bills which are deemed “risk free” by some market participants.
What happens when investors withdraw from these asset classes to hold wealth-preserving cash? Most likely, a massive burst will follow. The monetary premium accrued over years of weak fiat currencies will be shifted back by a sound money standard, pushing investors outside of risk-on positions to preserve wealth. Investment will be made to derive a return on capital, not only to beat inflation from fiat currencies.
In its early phase of monetization, Bitcoin as the global monetary base may capture significant portions of the aggregated monetary premium accrued by different asset classes over the last decades of fiat currency experimentation. As these asset classes are repriced by markets, free of artificial fiat monetary inflation, purchasing power will be restored to the people.
One may wonder how long it may take for bitcoin to become the world’s dominant numeraire — the underlying unit of measurement of value that we collectively use to price assets and consumer goods. How much will markets such as real estate, stocks and gold shrink by, if Bitcoin absorbs their cumulative monetary premiums? How will consumption patterns change for individuals and businesses evolving under a deflationary Bitcoin standard? How will humans refocus their time and energy if massive industries such as advertising and financial services are reduced by 30 percent? What about 70 percent? Will humans get to Mars much quicker if the best talent can focus on rocket engineering instead of ads optimization?
All these are fascinating questions that we may attempt to answer another time.