back to indexSaifedean Ammous: Bitcoin, Anarchy, and Austrian Economics | Lex Fridman Podcast #284
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You can't have a permanent war without fiat.
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And I also think there's a case to be made
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that you can't really have fiat without war.
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The following is a conversation with Safety Namus,
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one of the central and most impactful economists,
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philosophers, and educators in the world of Bitcoin.
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He's an Austrian economist, an anarchist,
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and the author of The Bitcoin Standard
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and the new book, The Fiat Standard.
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Safety does not mince words in his criticism of economists
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and humans in general with whom he disagrees.
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For example, Paul Krugman,
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who is a neo Ecclidean economist
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and a previous guest at this podcast.
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Safety's opinions are strong and often controversial.
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I do push back in this conversation,
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playing devil's advocate or trying to steal man each side.
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But as always, I do so in the service of exploring
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the rich space of ideas that Safety has
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about human nature and human civilization.
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I trust the intelligence of you, the listener,
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to come to your own conclusions.
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That is the burden of being a free thinking human.
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It is on each of us individually
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to dive into this chaos of ideas.
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And from that chaos,
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discover long lasting universal wisdom to live by.
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This is the Lex Friedman podcast.
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To support it, please check out our sponsors
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in the description.
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And now, dear friends, here's Safety Amoose.
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Let's start with a big question.
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And what is the role of money
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in the history of human civilization?
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Money is a medium of exchange.
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The thing that defines money is that it is a good
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that you don't buy for its own sake
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because you wanna consume it itself
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or because you want to employ it
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in the production of other goods,
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which is what capital goods are.
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So we have consumption goods, we have capital goods.
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Money is distinct from those two
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because it is a good that is acquired
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purely to be exchanged later on for other goods.
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So it's not something that you acquire for its own sake,
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you acquire it so that you can then later on exchange it.
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And that's a market good.
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That's a market good like all other goods.
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You acquire food because you eat it,
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you acquire a car to move you around,
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you acquire money so that you can exchange it
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And that's something that many people
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have a hard time grasping,
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of the concept of money as a market good.
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But it is a market good, just like all others.
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And the importance of it is that it allows us to trade.
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It allows us to develop the division of labor,
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which would not be possible
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at any kind of sophisticated level without money.
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So if we live in a small society of 10 people,
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then think about all the things that we can make,
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all the things that we can produce.
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If we're only 10 people isolated from the world,
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there's only very few things that we can make.
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And therefore we can exchange those things directly
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But as, you know, if we get in contact with other societies
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that have more people,
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then the opportunities for specialization increase.
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You know, if there's 10 people,
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the only thing that you can make is the very basics
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you need for your survival.
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But if you're part of an economy of 10 million people,
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there's much more room for specialization.
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You can make a car, you can make a house,
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that's very sophisticated.
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And that relies on the division of labor.
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That relies on you specializing
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in doing one tiny little thing,
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which is not what you consume.
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You know, and you trade that thing
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for all the things that you consume.
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So as the economy becomes more sophisticated
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and involves more people,
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and currently we're all part of an economy
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of almost 8 billion people,
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each one of us produces one tiny little thing.
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And they exchange that thing
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for all the things that they want.
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And so, because we specialize,
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we become more productive
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in doing the thing that we're good at.
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So, you know, there's people out there who are engineers,
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who are designing windshields in cars.
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It's a very specialized thing.
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They sell windshield design to Mercedes Benz.
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And then from that, you know,
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that windshield design is added on
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to millions of cars around the world.
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And from that, they're able to get enough money
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to meet all of their needs.
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So the division of labor is enhanced enormously with money,
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because without money,
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it's very difficult to be able to exchange
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a large number of goods.
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It's very difficult to have a sophisticated economy
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with a large degree of specialization,
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because it's very difficult to find people
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who want the thing that you have
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and have the thing that you want.
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We call this the coincidence of wants.
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And that's really the problem that money solves.
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So you make apples and I make oranges.
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I'd like to have some of your apples,
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but you don't want my oranges.
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And that's, we have a problem of coincidence of wants.
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I need to find somebody who has bananas,
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give them my oranges, take their bananas,
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give you their bananas, and then I take the apples.
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In that case, bananas are a medium of exchange.
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So it's natural that a medium of exchange will evolve
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and will emerge in an economy
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as an economy becomes more sophisticated.
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As we move beyond 10 people and 10 goods,
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it's inevitable that we're going to come to a situation
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where we have the problem of coincidence of wants.
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And the way to solve that is to use a medium of exchange.
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And it can be anything.
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It can be a banana, it can be food stuff,
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it can be any kind of good.
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As long as I acquire the good
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with the purpose of passing it on to you,
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not for the purpose of me consuming it or using it,
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then that's a medium of exchange.
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So when we look at the entirety of human society
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of millions of billions of people,
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you think of them, just a bunch of individuals running around.
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I love the term coincidence of wants.
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So each one of them, it's like a stochastic system.
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They have desires, it's like a random collection of desires,
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somehow rooted in our evolutionary history,
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but mostly random in terms of preference
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of banana or apple, that kind of thing.
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And then they also have the capacity for competence
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and excellence in particular kind of labor.
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So like specialization, they're able to be like incredible
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at a particular set of tasks.
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So there's a bunch of ants running around
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with consciousness and intelligence,
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and they have desires and they have capabilities.
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And then there's a coincidence of both the wants they have
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and the capabilities they have,
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and you wanted to create a system
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that kind of exchanges those things.
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So when you imagine like what is a good, what is markets?
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When you imagine a market is like a hierarchical system,
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what do you imagine?
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A market is just the name
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for the naturally emergent phenomena
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of people voluntarily exchanging things.
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It's at any scale.
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At any scale, yeah.
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Individually, it could be a market of two people
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on an island on their own.
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It could be 8 billion people across the planet.
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Naturally emerging.
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Yes, this is the thing I think that is very hard
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for many people who don't have a good understanding
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of economics to grasp that capitalism and markets
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are not something that you need a central planner
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or a government officer to make happen.
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Capitalism is just what happens
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when people are left to their own devices.
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It's just our cognitive capacity allows us to develop tools
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that we can use for production.
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And that's what we do.
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That's what humans have been doing
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since they started making spears to hunt.
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That's the first capital good probably.
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So we're constantly accumulating capital.
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We're constantly trading with one another.
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We find an opportunity.
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You've got a lot of oranges.
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I've got a lot of apples.
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Then I'll take some of yours.
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You'll take some of mine.
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We're both better off.
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This is just a naturally emergent thing.
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And money is what makes it enormously powerful.
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Money is what allows it to scale really.
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Money is what allows it to go beyond small societies
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into just something that is global.
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Because with money, again, as I was saying earlier,
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all you need to do is specialize in doing one thing,
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the thing that you do best,
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and then you exchange that for money.
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And you don't have to worry
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about whether the other people involved in this
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want what you have and have what you want.
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You just sell it for money to whoever wants it.
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And you buy whatever you want from whoever has it.
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And that's an enormous reduction in the mental burden
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of how a market economy functions.
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So the first thing that I would say about money
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is that it allows for the division of labor
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and it allows for the market system to grow.
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And the second thing is that money is a mechanism
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for storing value into the future.
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So again, as humans, we develop the capacity
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to think for the future.
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We make a spear so that we can hunt,
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and then we see that it works.
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And then we take it out of the animal
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that we hunted it with,
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and we keep it for the next day's hunt.
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And then we start making a better spear,
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and we make a better fishing rod,
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and then we make a fishing net,
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and then we make a fishing boat.
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And that's our ability to think of the future.
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And as we start building durable goods,
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we start thinking more and more of the future.
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We start becoming more and more future oriented.
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And that's really the process of civilization,
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the process of denying our needs now
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in order to think for the future.
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So instead of spending all of our day on the beach,
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enjoying ourselves, we take time off from leisure
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on the beach and spend some time making a spear
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or making a fishing rod so that our productivity
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in hunting or fishing tomorrow is gonna be higher.
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And so that ability to think for the future
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is enhanced by our ability to provide for the future.
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And we do that with durable goods.
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But then money ends up being the best mechanism
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for providing for the future,
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because the future is uncertain.
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So you can save your apples and oranges.
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You can save the spears.
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You can save the animal that you hunted.
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But these things, first they rot.
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They're not very good at holding onto their value over time.
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But even if they were,
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even if you have objects that are durable,
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the problem with them is that you don't know
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if you need them tomorrow or next month or next year.
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You're not sure if you're going to be needing them.
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And you might end up not needing them.
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And you might end up not finding anybody who needs them
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or finding somebody who needs them,
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but doesn't value them much
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and won't give you much in exchange.
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Money allows you the optionality
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of saving the most liquid good, the most saleable good.
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So it's something that you can sell tomorrow
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with the least uncertainty.
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It has the most liquidity, the most ability
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to be sold without a loss in its value.
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So money is our most advanced technology
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and our best technology for moving value into the future.
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And so I think history really,
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I argue this in all my books,
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is that really history we see,
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we can think of it as a process of our money gets harder.
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And so our money gets better
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at holding onto its value for the future.
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And by harder, I mean harder to produce.
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We find things that are hard to produce
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that are better at holding onto their value.
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So they hold onto their value better for the future.
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And that allows us to plot and plan for the future.
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That makes the future less uncertain.
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And that makes us more future oriented.
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In other words, it lowers our time preference.
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And the harder the money is,
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the better it is at allowing us to think of the future.
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So people should know that you've written the book
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Bitcoin Standard from 2018, I believe.
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And then a new book called Fiat Standard.
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The Bitcoin Standard is considered kind of the Bible
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in the cryptocurrency space, in the Bitcoin space
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of just a very rigorous systematic explanation
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of why Bitcoin, what is it, why should it be,
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So you're describing in that book and in the new book,
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different implementations of the technology of money.
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In the new book, you talk about fiat money,
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which is another way to do money.
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So obviously, there's a lot of different ways to do money.
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And maybe you haven't discovered the best way to do money,
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yet our conversation today is how to do money better.
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Maybe we'll go back to bananas eventually, right?
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Very good reasons why we won't.
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Well, we can disagree.
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We can agree to disagree on this.
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I'm open minded to the bananas.
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One of the biggest source of joy to me
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when I first came to this country is eating bananas.
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And so maybe money, happiness, perishable happiness
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will eventually become the best medium of exchange.
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I don't know, open minded.
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Anyway, so you mentioned hard money and soft money.
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So there's different ways to do money.
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What is hard money?
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What is soft money?
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In the Bitcoin standard, I present the argument
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that money is always whatever is the hardest thing to make.
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Historically, I think we see many examples of that.
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So for instance, in prison, people use cigarettes as money
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because nobody can make cigarettes in prison.
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In societies, we have the example of Yap Island,
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for instance, it's an island that doesn't have any limestone
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but there's a nearby island that has a lot of limestone.
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And it's very expensive obviously with primitive technology
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to move limestone from Palau to Yap.
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So on Yap, limestones were money.
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Seashells, rare seashells that are not easy to find
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end up serving as money in places where they're rare.
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Glass beads were money in West Africa
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where there was no glass making technology
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because they were imported from abroad
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and they were very hard to make.
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And I think there's a conscious effort
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of some people might recognize the hardness
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and the scarcity and choose this as money.
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But I think what's more important
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is just a natural evolutionary process
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whereby people choose all kinds of random things as money,
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bananas maybe even.
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But then the people who end up making these bad choices
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don't end up with any wealth left.
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Whereas the people who store their wealth
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in the things that are hard to make
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end up maintaining their wealth
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and maybe even increasing it over time.
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And of course this culminated in the 19th century,
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in the end of the 19th century
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by basically the entire planet being on a gold standard.
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What is a gold standard?
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The gold standard is basically when money is gold
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or at least government currencies backed by gold.
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But the reason gold became money
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and not copper, not nickel, not bananas
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is that gold is the hardest metal in the world.
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And it is the hardest metal to increase the supply of.
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And the reason for that is based in chemistry.
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So gold is indestructible.
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You can't destroy gold in any meaningful sense.
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It's been accumulating stockpiles for thousands of years.
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The gold that was worn by Nefertiti back in ancient Egypt
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is today probably in somebody's necklace
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or in somebody's gold coin.
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So for thousands of years, humans have been digging for gold.
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They dig it out of the ground, they refine it
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and then they put it in a jewelry or a coin
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and then it just stays there.
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It gets melted down into new other forms.
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The jewelry gets turned into coins
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or coins get turned into bars.
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But it's just stockpiles that are accumulating.
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On the other hand, every year we get better
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at our technology of looking for gold.
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There's more people all over the world.
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The population increases, the technology improves.
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So we keep finding more and more gold
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and we keep making the stockpiles bigger.
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However, because we're constantly adding to a stockpile
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that is not being devalued,
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sorry, that is not being consumed
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because there's no way of consuming gold.
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You can't eat it, you can't burn it, it doesn't rust.
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Because of that, we're constantly adding
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to a constantly growing stockpile.
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So if you look at the numbers,
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you see over the last 100 years,
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we've got pretty reliable data on gold production worldwide.
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We see that pretty much gold stockpiles increase
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at around one and a half to 2% per year, every year.
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So yes, we're making more every year,
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but we're making more so we're adding to the stockpile.
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The stockpile grows more.
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So every year we're adding only around one and a half
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Compare that to the second highest,
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the second hardest metal historically was silver.
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And that increased historically at around maybe 5%
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Now it probably increases at something like closer to 30%
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because it's now getting used extensively
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in industrial uses.
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So when you use it in industry,
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when you put silver in a laptop or in a camera
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or in a machine, effectively,
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you are consuming the stockpile
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because it's not used as money.
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It's taken out of the monetary stockpile.
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So over the last 150 years, since 1870 in particular,
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and I discussed this in detail in the Bitcoin standard,
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what happened in 1870 was Germany won
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the Franco Prussian war and Germany was on a silver standard,
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but the value of silvers was declining.
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So Germany did something very smart,
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which is they took their indemnity from France
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in silver and gold and use that big chunk of gold
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to switch to going on a gold standard.
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And since then, silver has been collapsing in value
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So back then the price of an ounce of gold
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was around 15 ounces of silver.
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Today it's closer to 100.
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It's just been declining for the last 150 years.
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And so because of that, because of the fact
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that it's lost its monetary role
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as people shifted toward gold,
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the value of silver went down
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and so it became economical to use it
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in more and more industrial applications.
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So the stockpile declines and then as a result
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that weakens its monetary properties
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more and more and more.
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So that's why by the end of the 19th century,
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I mean at the beginning of the 19th century,
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gold and silver were money.
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By the end, it was basically only gold.
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And the countries that were still on a silver standard,
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China and India in particular suffered enormously from it
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because their money was devaluing very quickly
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next to gold and so Europeans who would come to China
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or India were able to buy things
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at practically a big discount.
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So I hope it's okay if I ask very simple,
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very basic questions.
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There's few people in this world that are good,
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as good as you are at answering very basic,
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almost ridiculously basic questions
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because I think exploring questions like what is money
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is a really great way to think from first principles,
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to really think deeply about this world.
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So I really appreciate you doing that.
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When you say standard, what does it mean?
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When you say silver standard, gold standard,
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again with a basic question.
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The term really I think was based out of gold.
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The first time this came out was the gold standard
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because so I said gold was money
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at the end of the 19th century,
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but it wasn't just that everybody was using gold coins
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and trading with gold coins
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because that's got a problem of divisibility.
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So a lot of things are worth less than one gold coin.
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So how do you buy that thing?
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And the answer was that you created the monetary instruments
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that were backed by gold and so currencies,
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national currencies under the gold standard
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were specific units of gold
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and that's how a gold standard functioned.
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Money was gold, but you had pieces of paper
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that were redeemable in gold.
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So you could go to the central bank,
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you'd give them the piece of paper,
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the $100 bill or the $10 bill
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and they'll give you gold in exchange
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and they give you a specific quantity of gold in exchange.
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Effectively, the paper was just a receipt for gold.
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So the paper exactly represented the amount of gold.
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Exactly, that was the plan.
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That was what it's supposed to do,
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but arguably we never had a pure gold standard
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because the nature of gold means
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that the people who are in charge of the gold,
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they have an enormous amount of power
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because the gold is concentrated with them
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and as long as not everybody shows up at the same time
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asking for their gold,
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then you can make more receipts than you have gold.
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So there's always shady stuff going on,
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but at least that's the state of gold
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is the receipts should exactly represent
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the amount of gold there.
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And also when you say standard,
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it means that governments sort of publicly stated
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that this is the approved,
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the main way of making transactions that are monetary.
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So this is the money, this is the official money
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that you should be using if you live in this country.
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Yes, although I would say it's more like
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the other way around.
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It's not that the governments established gold as money.
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It's more like gold gave the governments
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the credibility for their currencies.
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So governments were not the ones that made gold money.
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Gold has been money before states were invented.
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States, if you have a government
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and you'd like to have some legitimacy
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and you'd like to be able to deal with other governments
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on an equal footing, you had to go by the gold standard.
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You had to have a currency that was redeemable in gold
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so that you could trade with the rest of the world
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so that people could in your country use that currency.
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So it's not that governments were choosing gold.
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It's more like they were having to adapt
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their own currencies to gold
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in order to give their currencies credibility.
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So there's a dance there though,
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because if they had to,
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then why did they switch away from it after?
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So there is a dance where the governments,
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the people pressure.
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So first of all, the basic characteristics
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of the hard money pressures the governments
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and the people in terms of what should be used.
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Then the people, based on their community,
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the network effects, the narratives they tell each other,
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all that kind of stuff, they pressure the governments
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to take on a particular money.
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Then the governments, they like power,
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they like control, all those kinds of things.
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They pressure the people
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and tell different kinds of narratives.
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So there's a dance going on in this evolution
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of what technology to use for a monetary system.
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So the reason I don't know if governments had to,
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because they clearly didn't have to,
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because they eventually moved away from it.
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But there was pressure probably.
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Yeah, but even after they moved away from it,
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central banks, until today,
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they still hold a lot of gold reserves.
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In fact, if you look at 1914,
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when the world really went off the gold standard,
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the amount of gold reserves held by central banks
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was a tiny fraction of what it was.
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central banks accumulated more and more gold.
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What ended up happening is they prevented their citizens
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from using the gold, but they continued to use it.
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So gold continued to be money up until 1971
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because effectively the world was on a dollar standard
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and the dollars were backed by gold.
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But then after 1971, even then,
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central banks continued to accumulate gold
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because why would you as a central bank
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want to accumulate pieces of paper effectively
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or credit liabilities of another central bank
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that can produce them infinitely?
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And it's a lesson that's becoming more and more obvious
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to governments today,
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as we see US sanctions taking, say, Russian reserves
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or Afghanistan reserves.
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And this is why we see China and Russia
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have accumulated a lot of gold over the last 10, 20 years.
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So just to return to the question of definitions,
link |
so what is hard money versus soft money?
link |
Yes, so hard, I mean, it's a relative thing,
link |
but the hardness refers to the difficulty
link |
of producing more units of the money supply.
link |
So an easy money would be a money
link |
that is relatively easy to make.
link |
So you can increase the supply by 10, 20, 30, 40, 50%
link |
or something like that.
link |
So pretty much all commodities, all market commodities,
link |
other than gold and silver, they're easy money
link |
and they're not suitable as a monetary medium
link |
because they're being consumed.
link |
So if you look at, and in the Bitcoin standard,
link |
I mentioned this metric called the stock to flow ratio,
link |
which is the ratio of the annual production, the flow,
link |
to the stockpile, the existing stockpile.
link |
If you look at all the other metals,
link |
they're easy money because they're being consumed.
link |
So think about how much stockpiles of copper
link |
there are in the world today.
link |
So copper companies obviously have
link |
some stockpiles of copper.
link |
Major copper consumers will have stockpiles of copper,
link |
but the vast majority of copper
link |
is essentially on a conveyor belt of production
link |
from the mine straight to the consumer good
link |
that it's being used for.
link |
So the existing stockpiles are roughly
link |
in the range of one year's production.
link |
If you take all of the companies,
link |
I don't have exact statistics,
link |
hence it's very difficult to get these,
link |
but it's roughly in the same range.
link |
Like if copper production were to stop completely today,
link |
we'll have about a year's production
link |
stored in various places.
link |
So that makes copper terrible money
link |
because if you started using copper as money,
link |
and this is why a lot of people say,
link |
well, money is a collective illusion.
link |
Money is a social construct.
link |
If we all agree that something is money,
link |
then something is money.
link |
I think this is completely clueless,
link |
and it's usually Marxists who believe this,
link |
obviously no understanding of economics.
link |
It's completely clueless
link |
because even if everybody in society
link |
decided we wanted to make copper as money,
link |
even if we all decided to collectively
link |
take part in this hallucination or illusion,
link |
it would not make copper money.
link |
It would just make everybody who decides
link |
to take part in this hallucination poor, that's it.
link |
It would make copper miners rich.
link |
It would make all of the people
link |
who chose copper as money poor,
link |
and copper would not be money.
link |
It can't work because what happens is,
link |
because of the fact that the stockpiles are so small,
link |
if you buy, you know,
link |
even if you get the 1,000 richest people in the world,
link |
all of the world's billionaires,
link |
they get together,
link |
and they all dump all of the money that they have,
link |
all the stocks, all the bonds, all the gold,
link |
all of the Bitcoin, everything that they own,
link |
they dump it, and they buy copper with it.
link |
What's gonna happen?
link |
Price of copper is gonna go up a lot,
link |
but what's gonna stop copper miners
link |
from flooding the market with even more copper
link |
than what the billionaires bought?
link |
They're gonna dump all of that extra copper production.
link |
If the price of copper is gonna go up
link |
so there will be a lot more copper mining
link |
than all the other metals,
link |
a lot of nickel companies and gold miners
link |
are gonna switch to focusing on copper,
link |
and then we're gonna dump an enormous amount of copper
link |
The value of copper is gonna crash,
link |
and the people who chose copper as money
link |
are just gonna end up with large warehouses
link |
of very cheap rusting metal.
link |
So that's a brilliant description,
link |
and that kind of pushes towards gold
link |
where the stock to flow ratio,
link |
I guess you would say is 1.5 to 2%,
link |
like you mentioned earlier.
link |
That would be like the inverse of the stock to flow.
link |
That's the supply growth rate,
link |
so the stock to flow is the inverse.
link |
But let me push back on,
link |
as somebody who likes human psychology,
link |
let me push back on the collective hallucination
link |
So that's for copper, but what about paper money?
link |
That's not, you can't smoke it,
link |
It's just, it's supposed to represent,
link |
it's supposed to just be the medium of exchange,
link |
and in that sense, what role does collective hallucination
link |
play in the effectiveness of money?
link |
Exactly zero, because all of the paper money,
link |
first of all, there's never been an instance,
link |
and again, this flies in the face
link |
of a lot of what a lot of people like to think about money.
link |
There's never been an instance
link |
where a government came out and said,
link |
all right, we're printing out these pieces of paper,
link |
use them as money.
link |
This one is worth 10 apples or use it for buying things,
link |
and here's the piece of paper.
link |
This has never happened.
link |
They've always taken fiat money, paper money,
link |
all of these things were always born out of fraud.
link |
Initially, it was a receipt for gold,
link |
and then they told you, well, you know,
link |
you don't need the gold anyway, and you have to use this,
link |
and then if you don't use it, we throw you in jail.
link |
And then, so first of all, it doesn't,
link |
you can't enforce this thing,
link |
so it's never really just happened,
link |
and it's never been hallucinated into existence.
link |
People can hallucinate this kind of nonsense
link |
in writing textbooks and books and in academia,
link |
but in the real world, people don't hallucinate money.
link |
People are very careful about what they put their money in.
link |
For people listening,
link |
we're gonna have fun in this conversation,
link |
because you already said Marxist, fraud, hallucination,
link |
just because we use these words doesn't mean they're true,
link |
but they're fun to talk about.
link |
So you have a strong certainty about the way you talk,
link |
which I think is fun,
link |
but allow me in my dumb self to push back,
link |
to play devil's advocate,
link |
and I'll actually ask you sometimes
link |
to play devil's advocate if possible,
link |
because you're smarter than me on all this stuff,
link |
so we want the smartest devil's advocate possible,
link |
and I'm certainly not that, but anyway,
link |
but nevertheless, we are currently on a fiat standard,
link |
so money does have value, paper money,
link |
and the reason it has value
link |
is because we believe it has value.
link |
To what degree, if we put the hallucination word aside,
link |
the belief that something is worth value
link |
is actually value, and is the thing that helps money work,
link |
because you're saying it's fraud,
link |
and the belief is almost valueless,
link |
but how much value?
link |
Can we quantify the value of the belief,
link |
the collective belief?
link |
I should say, all economics is subjective.
link |
I consider myself an Austrian school economist,
link |
and the starting point of all Austrian economics
link |
is that all value is subjective,
link |
so obviously, value only exists
link |
because humans choose to make the valuation.
link |
However, the economic reality of the way that money works
link |
means that it's just a technology like all others,
link |
and so for me, when people say,
link |
well, if we hallucinate that this thing can be money,
link |
then it'll be money.
link |
If we can hallucinate bananas to be money,
link |
then it'll be money.
link |
For me, it's like saying, well, if we hallucinate
link |
that bananas can be spaceships, they'll be spaceships.
link |
I mean, you can call them spaceships if you want,
link |
but a banana's not gonna get you to the moon.
link |
Well, then nevertheless, that's true.
link |
So you're drawing a big distinction
link |
between physical reality and the space of belief,
link |
but it seems like so much power of human civilization,
link |
so much destruction, so much creativity, creation,
link |
happens in our minds.
link |
Absolutely, everything does happen in the mind.
link |
You're not gonna get to the moon,
link |
but you might still have a significant impact
link |
on human civilization if a lot of people believe a thing.
link |
True, but economic reality exists in a way
link |
in which your beliefs are rewarded
link |
when they match up with economic reality,
link |
and they're punished when they don't.
link |
So if you ride a banana and jump off a cliff
link |
thinking you're gonna get to the moon,
link |
that solves the problem of people thinking
link |
that bananas are spaceships by killing people
link |
who think that bananas are spaceships.
link |
And I think, to go back to your question
link |
in terms of paper monies, so yes,
link |
even though ignoring the original sin
link |
of the creation of fiat money,
link |
and ignoring everything that happened before 1971,
link |
all right, well, here we are, people are using,
link |
well, it's not really paper money.
link |
We should say fiat money is predominantly credit.
link |
So it's also a digital currency.
link |
So more than 90% of dollars are digital.
link |
Less than 10% of dollars are physical.
link |
So it is a digital currency,
link |
and all over the world, all these governments
link |
are using digital currencies effectively
link |
with some physical manifestations in paper.
link |
But yet, even within these currencies,
link |
it's still the same analysis,
link |
and I discussed this in chapter four,
link |
the Bitcoin standard.
link |
You look at government monies,
link |
you see that the currencies that have held onto their value,
link |
the ones that have the biggest value,
link |
the ones that play the biggest role in global trade,
link |
the ones that are used as currency reserves
link |
all over the world,
link |
are the ones that have the lowest supply growth rate.
link |
The ones that grow, whose central banks
link |
are the least inflationary.
link |
And on the other hand,
link |
the ones who supplies more inflationary,
link |
similar to copper, end up failing.
link |
You look at Lebanon, Venezuela, Zimbabwe,
link |
these are currencies whose supply increases very quickly,
link |
and therefore, their value collapses.
link |
Whereas the dollar, the Swiss franc, the Euro,
link |
the British pound, the Japanese yen,
link |
they increase at a much lower rate in general
link |
than these terrible currencies.
link |
And that's why all over the world,
link |
you see people are looking to get more dollars
link |
and more of these harder currencies than the easier ones.
link |
So I think this analysis of the hardness of the money
link |
and the ease of money is pretty well supported empirically.
link |
So like you said, you're at least in part,
link |
or in whole, consider yourself an Austrian economist.
link |
So you're perhaps a great person to ask about the basics.
link |
What is Austrian economics?
link |
What is Keynesian economics?
link |
How do you compare the two?
link |
What should people know?
link |
What are the interesting defining characteristics
link |
to you about these schools of thought?
link |
So Austrian economics, the way that I say it,
link |
Austrian economics is economics.
link |
It's, we call it Austrian economics
link |
because economics has been hijacked
link |
by a bunch of frauds, really.
link |
Or people who are wrong, okay.
link |
Well, it's much worse than wrong,
link |
by people who are just essentially propagandists
link |
It's like your opinion, man.
link |
Yeah, well, that's also like your opinion, man.
link |
Well, I also talked to Paul Krugman on this podcast.
link |
So he's, the O speaks enough,
link |
but he's one of the people
link |
that is perhaps most harshly criticized
link |
by folks in Austrian economics perspective
link |
and vice versa, which is a fascinating tension.
link |
Yeah, he's done a great job as an actor
link |
who plays an economist on TV and the internet.
link |
So anyway, now tell me what you really think.
link |
No, but, so the basics of what is Austrian economics?
link |
What is the, what perspective does it take on the world?
link |
Yeah, so I mean, Austrian economics really is
link |
the continuation of a tradition
link |
that it goes back to the ancient Greeks
link |
of studying economics.
link |
Historically, it's really just economics
link |
and that has evolved over time.
link |
And the establishment of the Austrian school per se
link |
came in 1871, 150 years ago,
link |
when Karl Menger, the father of the school,
link |
wrote a book called Principles of Economics
link |
and essentially invented marginal analysis,
link |
which is a big deal in economics.
link |
Marginal analysis is the idea that in economics,
link |
individuals carry out decisions at the margin,
link |
that it's, when you make choice, you're not making it.
link |
For instance, if you're making a choice
link |
between what should I spend my money on,
link |
you're not making a choice whether it is,
link |
this thing is object A or B,
link |
which one is more valuable for me in general,
link |
which one is more valuable for me for the rest of my life.
link |
You're choosing about the next unit right now
link |
at this point, at this stage.
link |
And if you analyze economic decision making at the margin,
link |
it makes a lot more sense and you can understand
link |
why people decide and make the decisions that they do.
link |
Whereas if you don't apply marginal analysis,
link |
things don't make sense.
link |
The key thing that marginal analysis helps us solve
link |
is what is called the water diamond paradox.
link |
So you will die without water.
link |
We all need water and yet water is dirt cheap.
link |
Whereas diamonds are extremely superfluous,
link |
nobody needs them.
link |
Nobody is gonna live or die because they have a diamond
link |
and yet they're extremely expensive.
link |
So why is it that as human beings,
link |
we pay maybe say a dollar a liter for water,
link |
whereas we pay thousands of dollars
link |
for a few grams of diamonds.
link |
Why is this the case?
link |
Do we value water less than diamond?
link |
The answer is no, but at the margin where we are right now,
link |
you live in a place where water is very abundant
link |
because cities are only built in places
link |
where water is abundant.
link |
And you're only making a choice
link |
about the next unit of water.
link |
And so water is extremely abundant
link |
and you're choosing about whether to spend
link |
the next unit of money on water.
link |
The valuation that you give to water,
link |
given that you have a lot of water at home
link |
and that you live in a place that has abundant water
link |
is pretty low to the marginal unit,
link |
but it's very high for water overall.
link |
So if I asked you,
link |
how much would you spend for water in general?
link |
How much would you pay for water for all of your life?
link |
It would be a lot higher than diamonds.
link |
If I told you, you can only have water or diamonds
link |
for the rest of your life.
link |
You choose water, obviously,
link |
but nobody's ever had to make that choice.
link |
You only make your choices at the margin.
link |
So at the margin where we are, modern civilization,
link |
we have an abundance of water.
link |
That's why we have civilization
link |
and diamonds are very rare and scarce.
link |
And people are only buying,
link |
you buy your first diamond when you're gonna get married,
link |
you give it to your wife
link |
and that's gonna be the first few grams of diamond
link |
that she's ever gonna own.
link |
Giving my wife water.
link |
You should definitely give her Bitcoin instead of diamonds.
link |
I tell my wife, I occasionally remind her
link |
of how many Bitcoin we could have had
link |
if I bought her Bitcoin with the price of the diamond ring.
link |
What's the downside of, by the way, diamonds
link |
from the analysis of like gold and so on?
link |
Ah, that's a great question.
link |
Arguably, diamonds are a scam.
link |
Because they became popular as a thing in marriage
link |
after gold was banned,
link |
after gold ownership was banned in the US in the 1930s
link |
and in many places around the world.
link |
So before that, you'd give gold.
link |
And the reason you'd give gold in a dowry, in a wedding
link |
is because it wasn't just that it's pretty and shiny,
link |
it's because it's money.
link |
And so if you die, your wife can take the gold
link |
and she can live off of it.
link |
It's a demonstration that you're giving her
link |
something valuable.
link |
And that's because nobody can make a lot more gold.
link |
It has the high stock to flow ratio.
link |
But then they banned gold ownership,
link |
or they allowed people to only own
link |
very tiny quantities of gold.
link |
And that's when the diamond industry stepped in
link |
and marketed diamonds as the thing that you need to give.
link |
But the problem with it is, of course,
link |
that the diamonds aren't like gold.
link |
They're not very hard to make more of.
link |
And the reason we have scarcity in diamonds
link |
is really artificial.
link |
There's effectively a monopoly of diamond producers.
link |
They restrict the supply.
link |
And it's a pretty dirty business.
link |
And the way that they do it is,
link |
all of the talk about blood diamonds
link |
is a way for them to ensure their monopoly.
link |
So if you're part of the monopoly of diamond producers,
link |
then it doesn't matter how many people get killed
link |
producing your diamonds.
link |
If you're out of the monopoly,
link |
then human rights organizations descend on you
link |
and call for shutting you down for selling blood diamonds.
link |
And they're also restricting
link |
the production of artificial diamonds.
link |
This is the other thing.
link |
You can make artificial diamond,
link |
you can't make artificial gold.
link |
So they restrict the production of artificial diamond
link |
and they try and insist that, you know,
link |
you shouldn't take artificial diamonds,
link |
but they're indistinguishable from real diamonds.
link |
So it's an artificial scarcity.
link |
And I think there's gonna come a point at some point
link |
that this monopoly is gonna break.
link |
And a lot of people are gonna be left with essentially
link |
highly devalued jewelry.
link |
I'm gonna take this segment of the podcast,
link |
when I'm getting married, when the sun's up,
link |
and then instead you're getting water or Bitcoin.
link |
Yes, water and Bitcoin is all you need.
link |
So marginal analysis, focusing on the margin
link |
is the thing that allows you
link |
to most accurately capture human nature,
link |
the actual day to day decisions that we humans make.
link |
Yeah, that's really revolutionized economics, so 1870.
link |
And that was Menger's work.
link |
And then he had a student, Eugen Bomberg,
link |
who developed capital theory.
link |
And then he had a student, Ludwig von Mises,
link |
who is arguably the most important economist ever.
link |
And he developed theory of money.
link |
And he wrote a book in 1912
link |
called The Theory of Money and Credit.
link |
And then in the 40s, he wrote Human Action,
link |
which is a big treatise on economics.
link |
And I think this is the correct tradition of economics.
link |
And before World War I, this was just known as economics.
link |
And then after what happened in World War I,
link |
and I discussed this in detail in the Fiat Standard,
link |
is that the Bank of England essentially went off gold
link |
and tried to pass off their own credit
link |
as being as good as gold in order to finance the war.
link |
And incidentally here,
link |
this is part of the history that is not discussed often.
link |
This is presented as an innovation.
link |
Later on, they needed essentially a propaganda school
link |
that would justify what they did.
link |
And later on, it's presented as,
link |
oh, hey, we realized that gold was not good.
link |
And now look, we've built this thing
link |
that is better than gold,
link |
where now the government can just print money
link |
whenever it wants.
link |
And now gold money is not an issue anymore,
link |
which is extremely idiotic
link |
because the whole point of money
link |
is that it's not easy to make.
link |
If it's easy to make, it's not money anymore.
link |
It's just destroying the entire function of money.
link |
And we've seen that happen extensively
link |
in the 20th century
link |
after countries went off the gold standard.
link |
So essentially Keynesian economics
link |
is just inflation apologia.
link |
It's just propaganda to justify inflationism.
link |
And it's profoundly nonsensical.
link |
It's built on the idea that if you just make more money,
link |
you can stimulate economic production.
link |
And of course, this is very self serving
link |
to the central banks and to the banks
link |
and to the governments who promote this nonsense.
link |
And this is also very pervasive.
link |
If you've had the misfortune of studying at a university
link |
over the last century,
link |
you were taught Keynesian garbage economics.
link |
You were taught that if there's a problem in the economy,
link |
the way to fix it is that the government prints money,
link |
the government lowers the interest rate,
link |
and then that leads to more economic production,
link |
which is completely nonsensical.
link |
So you're, again, for the listener,
link |
you're using strong words, you know, push back
link |
just to find, to please devil's advocate
link |
to hopefully one day arrive at the truth.
link |
So just because it's in the interest
link |
of the central banks and the government,
link |
the interests and the models of Keynesian economics
link |
and the government are aligned doesn't mean they're wrong.
link |
So let's give them a chance.
link |
So the conventional wisdom, perhaps economics wisdom,
link |
is that inflation is good in moderation
link |
as it encourages spending,
link |
but too much is bad because it completely devalues,
link |
destroys people's savings.
link |
So a little bit of inflation is good to stimulate spending.
link |
And I mean, I suppose this is one of the things
link |
that's supported by Keynesian economics.
link |
Why is that wrong?
link |
This is basically the whole point of Keynesian economics,
link |
is to try and find an endless array of explanations
link |
to explain why inflation is a good thing.
link |
Well, the chicken and the egg.
link |
So that's the cynical take.
link |
This is a propaganda machine
link |
to sell the government's narrative.
link |
The less cynical take is there's a bunch of economists
link |
who are telling, who...
link |
Who figured out this thing
link |
and it happens to be good for banks and governments.
link |
Just because it's good for them doesn't mean...
link |
And it justifies the existence of government
link |
and your basic, I don't think it's your basic assumption,
link |
but a foundational principle of your thought
link |
is that a lot of government is not a good thing.
link |
Your first gut instinct, government bad.
link |
Like I mentioned, I live next door to Michael Malice,
link |
who probably beats you on the intensity
link |
and how quickly he says government bad.
link |
So there's a potential argument for government good.
link |
Some government is good.
link |
Maybe a lot of government is good.
link |
Maybe we need a lot of centralized management
link |
for resource allocation and so on
link |
because we humans specialize, we're too busy and so on.
link |
So there's an argument for that that exists.
link |
You probably disagree with any possible argument
link |
on that side, but anyway,
link |
so why is that idea of Keynesian economics wrong?
link |
I'm gonna focus for this on the money idea,
link |
the idea that a little bit of inflation is good.
link |
The idea here, I mean, the criticism is that
link |
without inflation, people wouldn't spend
link |
and then the economy would come to a grinding halt.
link |
And that's nonsensical because people spend
link |
not because they wanna keep this magical monster
link |
called the economy going.
link |
People spend because they need to consume
link |
because that's how we live, that's how we survive.
link |
You need to eat, you need shelter,
link |
you need clothes to keep you warm.
link |
And as technology advances, the capabilities
link |
of the things that we can do with our time increases
link |
and so we wanna buy more things.
link |
So people buy things because people want to consume.
link |
There's a limitless desire to consume,
link |
that there's no shortage of reasons for people to consume,
link |
shortage of reasons for people to consume,
link |
whether it's food or Ferraris or private jets.
link |
People just always wanna buy more.
link |
Can I interrupt just really quick?
link |
What about the fear about the uncertainty of the future
link |
where they might want to buy things
link |
but they're really afraid because it seems like
link |
there's a lot like a pandemic going on or whatever it is.
link |
Yeah, that's good.
link |
So fear of uncertainty, can you have too much fear?
link |
Here's the thing, what I was saying is,
link |
I was making the point that we don't need
link |
to be motivated to consume.
link |
Like we have the insatiable desire to consume.
link |
Everybody would like to have more of all kinds of things.
link |
Everybody would like to have a bigger house.
link |
Well, not everybody, some people have a big enough house
link |
but everybody would like a house,
link |
everybody would like a car, jet, all kinds of things,
link |
electronics, machines.
link |
So we don't need a desire to consume.
link |
But of course the limit on how much we consume
link |
is opportunity cost.
link |
Why don't you buy a Ferrari?
link |
Well, because that's really expensive
link |
and it would mean that, well, maybe you do have a Ferrari
link |
but I mean, most people don't buy a Ferrari
link |
because it's too expensive, they can't afford it.
link |
They'd have to work too hard to get it.
link |
And if they do get it, it might mean that
link |
they can't afford their house anymore.
link |
So we have to economize, that's a good thing.
link |
And we have to also think of the future.
link |
And so humans consume,
link |
we don't need more motivation to consume.
link |
We have to deal with the economic reality
link |
of the things that limit us from consuming more.
link |
So what Keynesians present is that
link |
when there is a problem in the economy,
link |
like there was after World War I,
link |
the problem is always caused by the inflation.
link |
And what the Keynesian hucksters do
link |
is that they look at the inflation,
link |
at the consequences of inflation
link |
and blame it on people not spending enough.
link |
When people are doing the rational thing,
link |
the money is, so there was inflation,
link |
caused an unsustainable boom, it caused the recession.
link |
And now a lot of people lost their jobs
link |
and they don't have enough money
link |
to go out and spend frivolously.
link |
So they save for the future, the future is uncertain.
link |
That's a good thing, that's how you fix things.
link |
You begin the recovery by, well, you lost some wealth,
link |
so you spend less, like if your business goes bust,
link |
if you lose your job, it's natural and smart
link |
that you stop spending money
link |
on the frivolous thing that you used to spend
link |
and you save it for the future.
link |
You invest in something else, you get a new job.
link |
And then once you've recovered, you start spending more.
link |
This is very sane and very good
link |
and it's the way to recovery.
link |
But essentially the Keynesians have used this
link |
as a justification for more inflation
link |
because inflation is an addiction.
link |
Once the government gets down the path
link |
of spending money to solve its problems,
link |
then every problem looks like it can be solved
link |
by more inflation.
link |
And so this is where Keynesian economics comes in.
link |
And of course, the Keynesian economics
link |
is based on the work of Keynes, which came in the 1930s.
link |
And this is the key point,
link |
like it's portrayed in the textbook
link |
as if it's just the scientific breakthrough
link |
that somebody in the 1930s, this genius,
link |
came about and realized that,
link |
oh, we don't actually need gold.
link |
We don't need hard money.
link |
We can actually just print all the money.
link |
And in reality, of course, it was just the very thin,
link |
flimsy, idiotic justification
link |
for what governments were already doing for 20 years.
link |
They'd already gone off the gold standard
link |
and they'd gone through 20 years
link |
in which they were lying to their population,
link |
telling their population we're still on a gold standard,
link |
but there are problems caused by various random things.
link |
But don't worry, we're gonna be going back
link |
on the gold standard.
link |
20 years later, after they went off the gold standard,
link |
they come up with this justification for why,
link |
oh, actually the gold standard was bad.
link |
And this is a really pernicious thing about it is
link |
the problems that were caused by us
link |
going off the gold standard
link |
were caused by the gold standard.
link |
And we're going to fix them
link |
by going off the gold standard even more.
link |
Just because government is lying and it's shady
link |
and it does these kinds of things
link |
doesn't mean Keynesian economics is wrong.
link |
So just, because I wanted to separate a few things you said.
link |
It could very well be very wrong
link |
and they could indeed be hucksters.
link |
All of these, such colorful language.
link |
I love you deeply for this, this is fun.
link |
Yeah, but I mean, it's like somebody like Krugman
link |
doesn't use this kind of language when discussing Austrians.
link |
It's just that when actors like him use it,
link |
it's presented as if it is legitimate
link |
because he's part of the major shows.
link |
So the case they make and the criticism Keynesians make
link |
of Austrian economics and the case they make
link |
for Keynesian economics is it's based on empirical evidence.
link |
So Austrian economists are pie in the sky theorists
link |
about like how human nature works.
link |
And it's just all theory.
link |
And just like you said, Keynesian economics
link |
kind of sell it as a science, data driven science.
link |
And so where's the data, bro?
link |
So one way of saying it is how do you know
link |
if we get rid of inflation?
link |
How do you know if we get rid of central banks?
link |
If we push towards that direction,
link |
we will have a better world, a better functioning economy,
link |
better functioning markets, better functioning society.
link |
This is another inaccurate way in which they present.
link |
The economics, they present as if it's just theory
link |
and that the data doesn't matter, but that's not the case.
link |
What the Austrians say is that without guiding theory,
link |
data is mute, data is dumb, data can't say anything.
link |
So theory first, and then you have to have models
link |
to provide context for interpretation of the data.
link |
And it's a sign of just how little self awareness they have
link |
that they think that they're just being led by the data
link |
when they're being led by Keynes's moronic theories.
link |
And they use the data to justify those theories
link |
and to stick by them.
link |
And in fact, they are the ones whose theories
link |
cannot be refuted because it's just
link |
government mandated religion.
link |
So according to Keynes's nonsense,
link |
so the way that they justify the inflationism is this,
link |
and I'm just using this to give an example
link |
of what you're talking about in terms of theory,
link |
the way they justify the inflationism
link |
to tie it back to the original point,
link |
they justified it, all right, we need money to spend.
link |
And then the level of spending in the economy
link |
is what determines the state of the economy.
link |
And I've taught macro economics
link |
at university level for a while.
link |
So I know Keynesian nonsense better than most Keynesians
link |
know Austrians, if not all of them, I guarantee you.
link |
And so the way they see it is the level of spending
link |
in the economy is what determines the state of the economy.
link |
There's a level of output and there's a level of spending.
link |
So there's like the factories on the one side
link |
that are churning out goods,
link |
and those goods have a certain quantity and value,
link |
market value, and it's completely nonsensical of course,
link |
because how can the value of the goods produced
link |
be different from the value of the spending?
link |
But let's put that aside for a second.
link |
So the amount of spending that happens in the economy
link |
determines the state of the economy.
link |
If the value of the production, which they call Y
link |
is higher than the aggregate expenditures,
link |
so this is the production
link |
and then the aggregate expenditure is lower,
link |
then we don't have enough spending to buy all the goods.
link |
And then that causes a recession.
link |
The factories start laying off workers
link |
and then the laid off workers start spending less.
link |
And then that leads to aggregate expenditure
link |
dropping even further.
link |
And so it's a vicious cycle
link |
where the economy gets into recession.
link |
And the only way out is for Keynes's bankster buddies
link |
and government buddies to print a lot of money
link |
to give to themselves.
link |
And then that will...
link |
That's one interpretation.
link |
But to print more money to increase the expenditure
link |
that to match the supply.
link |
To match the level of output.
link |
Sounds pretty good to me, I'm sold.
link |
Even though you're saying huckster, so.
link |
I just, you know, the way, I love you very much,
link |
but like just for people who are listening,
link |
I think it's, I love the way you talk and it's great
link |
and keep doing it, but just for context,
link |
like I don't know anything that involves human nature
link |
deserves this level of certainty.
link |
I, at least my position is that we don't know
link |
what the hell we're doing on basically anything.
link |
Perhaps, but I mean.
link |
Like there's a lot, like certainty can get us in trouble
link |
I don't know much about economics.
link |
I don't even know, you know, financial systems,
link |
monetary systems, but I just seen us get in trouble
link |
with human psychology, certainty,
link |
certainty of ideologies in general.
link |
You mentioned Marxism and so on.
link |
I came from the Soviet Union.
link |
There's a lot of people that are very certain
link |
throughout the history of the 20th century
link |
that communism is the utopia that humanity should strive for.
link |
So I'm nervous around certainty.
link |
I could be wrong, but you know, you ask me for my opinion.
link |
Sorry, so it's that little bit of a caveat.
link |
So to go back to the idea, then on the other hand,
link |
you have the level of, if the other situation
link |
is when the level of spending is higher
link |
than the amount of aggregate output.
link |
In that situation, you have too much spending.
link |
So therefore what ends up happening is inflation.
link |
So according to the Keynesian worldview,
link |
this is really important because this is a way
link |
that I'm gonna get to your point about empirical data
link |
and to show you why they're not correct.
link |
Yeah, they're not correct about what they say
link |
about empirical data.
link |
So then what this means is that there's a level of output
link |
and there's a level of aggregate expenditure.
link |
The aggregate expenditure can either be higher
link |
or lower than the output or equal to it.
link |
If it's higher, we get inflation.
link |
If it's lower, we get recessions, okay?
link |
So is there any universe in this model?
link |
Is there any potential universe
link |
in which you can have both inflation and a recession?
link |
According to the Keynesian model, you can't, right?
link |
Because aggregate expenditure cannot be both higher
link |
and lower than output.
link |
So therefore, if you were truly being an empirical person,
link |
if you were looking at evidence and trying to analyze data,
link |
you'd look at this and say, one example,
link |
you just need one example of high inflation
link |
and high unemployment to refute this entire model, right?
link |
And of course, the world is full of examples
link |
of high inflation and high unemployment.
link |
And that's what happened in the 19, and of course,
link |
they ignored it when it happens in poor countries
link |
because poor countries don't really matter.
link |
But then in the 1970s, that happened in the US
link |
and in the Western economies
link |
and the most advanced industrial economies.
link |
So historically, before then,
link |
you had all these Keynesian central bankers
link |
talking about this model and saying,
link |
well, aggregate expenditure is too low now
link |
and that's why we have unemployment.
link |
So we need to print more money.
link |
And then they print more money, inflation goes up,
link |
but also unemployment goes up because this model is broken.
link |
That's not how the world works.
link |
The level of aggregate spending in the economy
link |
is not a lever with which you can control
link |
inflation and unemployment.
link |
So what would a scientist do?
link |
What would a non Huckster do in this case?
link |
Admit the theory is wrong
link |
and find another way to reformulate it.
link |
Have the Keynesians done that?
link |
No, still the same garbage in the textbook
link |
that is being taught until today.
link |
So is it possible to have a non Keynesian model
link |
where one that still supports
link |
moderate amount of inflation is good for the economy?
link |
I mean, since the 1970s, since this has happened,
link |
yeah, this is what basically most fiat economists,
link |
as I like to call them,
link |
essentially anybody at a university financed by governments,
link |
which is financed by central banks,
link |
which is financed by fiat.
link |
Oh, we'll talk about that.
link |
The effect of fiat money on our life,
link |
as you write about in your book,
link |
fiat standard, one of them is education.
link |
I'm sure we'll disagree there too.
link |
Not smart enough to disagree, but I'll disagree anyway.
link |
So yeah, so a whole bunch of other models came up,
link |
but basically it's such an example of motivated reasoning.
link |
Like anybody who's got a familiarity
link |
with the scientific method
link |
or who's got an engineering background
link |
who comes into economics immediately has a lot of red flags.
link |
And I remember when I used to teach macro economics,
link |
I used to teach introductory macro economics.
link |
And it's a course that would be taken by econ majors
link |
as well as engineers.
link |
A lot of engineers would take it as an elective.
link |
And every time I'd explain,
link |
and I would just teach the Keynesian basic stuff.
link |
And every time I'd explain it,
link |
there's always that smart engineering kid
link |
who just looks at me and says,
link |
sir, this doesn't make any sense
link |
because this and this and that.
link |
And I'm always like, you get it exactly.
link |
Because if you have any kind of shred of scientific thinking,
link |
you see that this is all motivated reasoning.
link |
Like the answer is government needs to print money.
link |
And here's a whole bunch of models brought up by people
link |
for why government printing money is good.
link |
And the reason they're coming up to this conclusion
link |
is that you only get funded
link |
if you come up with this conclusion.
link |
If you come up with a conclusion
link |
that we need to shut down the central bank,
link |
you don't get funded by the central bank.
link |
You don't get published in the journals.
link |
You don't get a job at the prestigious universities.
link |
You don't get quoted by a fiat publications
link |
like the New York Times and CNN.
link |
They don't invite you on as an expert.
link |
Well, that's a fundamental flaw
link |
with a lot of institutions we have today
link |
and throughout human history.
link |
Let me zoom off for just a second to the big question.
link |
What is economics in general?
link |
You said there's a bunch of models.
link |
Is any economist basically trying to throw a bunch of models
link |
about human behavior on the table
link |
and try to generalize it to the global scale?
link |
So both dance between micro and macro somehow
link |
in order to determine public policy
link |
and explain the past, predict the future,
link |
prescribe policies that can control the future,
link |
those kinds of things.
link |
This is the big basic ridiculous question
link |
of what is economics?
link |
Economics is the study,
link |
the way the Austrians define it is the study
link |
of how humans make choices under the condition of scarcity.
link |
We begin with the starting point of economics
link |
as the fact that scarcity exists.
link |
And why does scarcity exist?
link |
Well, because it's easier to want things
link |
than it is to make them.
link |
It's much easier to want a Ferrari than it is to make one.
link |
And so because we have wants
link |
and we have limited means to meet those wants,
link |
we need to economize.
link |
It's a permanent marker of the human condition.
link |
We are always economizing at all times.
link |
And so how people make those decisions
link |
under the conditions of scarcity
link |
is what economists study.
link |
So to go back to your point on empiricism
link |
in Austrian school,
link |
so it isn't that the Austrians don't believe in data.
link |
On the contrary, it's that theory has to inform data.
link |
And in fact, if you think about it
link |
as the example of the stagflation of the 1970 shows,
link |
if you have stagflation,
link |
that just completely refutes the Keynesian model.
link |
The Austrian way of thinking,
link |
which is think from first principles,
link |
understand how the world actually works,
link |
think about how humans act and understand
link |
that economics is really all about human action.
link |
So it's not about aggregates of goods.
link |
This is really the key distinction
link |
in terms of methodology.
link |
For the Keynesians, it's physics envy.
link |
They look at the market economy,
link |
they look at individuals in the market economy,
link |
and they think that they can understand the market economy
link |
by looking at aggregates.
link |
This is really the key point of what I think
link |
makes a certain branch of economics pseudoscientific
link |
is the introduction of aggregates.
link |
When you introduce those aggregates,
link |
how much production takes place,
link |
how many people are unemployed,
link |
the percentage of the inflation rate,
link |
and then you think that you can establish
link |
scientific relationship between those aggregates,
link |
it's purely physics envy.
link |
In physics, for instance, or in chemistry,
link |
you put, let's say, a container that contains a gas,
link |
and you have the ideal gas law, PV equals to nRT,
link |
calculate the pressure, calculate the volume,
link |
and then the temperature.
link |
If you have the pressure and the volume,
link |
you can calculate the temperature
link |
because you have the nR constants.
link |
So there's a clear relationship
link |
that has been demonstrated in a laboratory
link |
and that we can do it right now.
link |
We can measure it and we can see it
link |
and it continues to hold.
link |
And all it takes is one scientist
link |
to show that this relationship does not hold,
link |
to do an experiment that shows that this does not hold,
link |
and it stops being a law of chemistry and it's broken.
link |
Whereas in economics, what they've done
link |
is they've copied the superficial shape of this
link |
without any of the scientific rigor
link |
that was used to build it.
link |
There's no experiments.
link |
You can't experiment on economies.
link |
We don't have the ability to establish laws,
link |
and all the laws that we establish
link |
are just models that get people published
link |
and get them on the media to say,
link |
my model says we need to print more money,
link |
but it's never subject to actual scientific scrutiny.
link |
If it were, they would all be rejected in 15 minutes
link |
because the world is full of examples that contradict them.
link |
Was it possible to do scientific scrutiny
link |
when it's human nature when you can't,
link |
when there's a nearly infinite number of variables
link |
and you can't control them?
link |
Is it possible, so what's the best thing
link |
you could possibly do?
link |
You do thought experiments.
link |
But the problem with thought experiments,
link |
Freud thinks everybody wants to have sex with their mother.
link |
Is he right? That's the problem with Freud.
link |
I don't know, maybe he's right.
link |
Well, obviously I'm joking on that front, but the...
link |
Freud is probably under the canes.
link |
Well, no, I think there's power to the thought experiment.
link |
Just like Einstein, a lot of general relativity,
link |
special relativity, that's a thought experiment.
link |
It originates in a thought experiment.
link |
Nice thing about physics,
link |
you can't eventually have experimental validation.
link |
The downside of economics is you really can't have
link |
experimental, definitive experimental scientific rigor
link |
of validation of a theory.
link |
So a thought experiment is just a thought experiment.
link |
Using your intuition, it's the power of reasoning together
link |
about human nature.
link |
And that's why economics cannot make the claims
link |
that physics can make.
link |
So with physics, you can predict that if you get this gas
link |
at this pressure, at this volume,
link |
the temperature will be that much.
link |
And you can make that prediction and test it a million times
link |
and you'll always get the precisely correct answer.
link |
With economics, we can't make quantitative predictions.
link |
But still, on Twitter, and even today,
link |
you're very certain about the statements you're making.
link |
Yeah, but I don't make quantitatively certain statements.
link |
In economics, we don't make quantitative predictions.
link |
We cannot do that because we don't have experiments.
link |
But we can understand how the world actually works
link |
This is really the key difference
link |
that the Keynesians think they just wanna copy
link |
the methods of physics.
link |
And then that's just gonna give them the certainty
link |
of the results of physics, which is like me saying,
link |
I'm just gonna put a red blanket on my back
link |
and jump from the fourth floor because I'm Superman.
link |
Well, it's not the red blanket
link |
that's gonna make me Superman.
link |
There's a lot more to it.
link |
So humility manifests itself in economics
link |
as the belief in a free market.
link |
Meaning like, I can't centralize,
link |
I can't do centralized control on this thing.
link |
We're going to minimize the friction
link |
of the free exchange of goods.
link |
So Austrian economics puts priority in the market.
link |
Yes, and you could arrive at it through two paths.
link |
The more practical path, which most scientific minded
link |
I came from an engineering background.
link |
So I initially had this idea that what is lacking
link |
in economics is mathematicization.
link |
We need to have better math models.
link |
We need to get all of those tools from engineering,
link |
apply them to economics, and then we'll be able
link |
to plan the world economy and make it work better.
link |
And then you start actually trying to solve problems,
link |
trying to actually calculate them.
link |
And you realize nobody can have that ability
link |
because the difference ultimately comes down to the fact
link |
we can't have experiments.
link |
And the reason we can't have experiments is that
link |
you can experiment on particles of a gas.
link |
You can't experiment on human beings and entire economies.
link |
And because particles of a gas are just dumb matter.
link |
And so you kick matter in a certain way.
link |
You can calculate exactly how much is going to fly.
link |
Human beings are much more complex.
link |
They have a will inside them.
link |
And this is really, this is the humility to understand
link |
that you are a human being and other people
link |
are also human being just like you.
link |
And that every person wakes up every morning
link |
and they have a million things in their mind,
link |
a million things they care about,
link |
a million things they want to do.
link |
And you will never be able to make the decisions
link |
for somebody else, let alone for millions of other people.
link |
So this is one path by which you arrive at the conclusion
link |
that free markets are better because you realize
link |
that all of the people that think
link |
that they can centrally plan markets
link |
can't actually do that.
link |
And that there's really nothing scientific about them
link |
except essentially the rituals they ape
link |
of the scientific process.
link |
And the other path I think that makes you arrive
link |
at the Austrian perspective or the libertarian perspective
link |
I should say, is simply the notion of individuals
link |
as having their own inalienable right
link |
to decide what they want to do with themselves.
link |
If you, I mean, the only way that you can give yourself
link |
the idea that you get to be planner is ultimately
link |
you think you're better than other people.
link |
You think your choice, your judgment overrides mine.
link |
And I don't think that's a defensible position.
link |
I think I'm in no position to want to force anybody ever.
link |
I will never want to force anybody
link |
to do anything they don't want.
link |
The Keynesian perspective, the central planning perspective
link |
is unlike physics, which is let's force a bunch
link |
of particles to sit in the lab so that we can study them.
link |
In economics, you're forcing people to do things.
link |
Let's stop these people from doing this job
link |
because it's bad for the economy
link |
and let's get them to do that job.
link |
Let's force them to pay this price.
link |
Let's tax them this much.
link |
Let's prevent them from using gold as money
link |
and force them to use our credit as money.
link |
So it has to rely on coercion.
link |
There's no central planning without coercion.
link |
And coercion is a crime, in my opinion.
link |
There's no way that it is justifiable morally or ethically.
link |
So from a politics, from an ethical perspective,
link |
your view is the, I mean, perhaps the,
link |
broadly speaking, the libertarian view
link |
is coercion is unethical, freedom is essential.
link |
What is, what are the pros and cons
link |
of government intervention in the economy?
link |
So can you steal, can you provide pros?
link |
You just kind of provided arguments against.
link |
Is there any arguments to be made
link |
for government intervention,
link |
for the role of government in society?
link |
Speaking from a political or from an economics perspective,
link |
what is the positive role of government
link |
that you can imagine you can speak to?
link |
I can repeat many other cases,
link |
but I don't find any of them compelling
link |
for the reason that I mentioned,
link |
which is that ultimately they all rely on
link |
putting a gun to somebody's head
link |
and using the threat of force.
link |
So that's for me, it can never be justifiable.
link |
Whatever the ends are,
link |
if the means are violence and the threat of violence,
link |
then the ends aren't justified.
link |
Everything that's good,
link |
governments will use as an excuse to justify coercion.
link |
So, you know, what do you like?
link |
You like motherhood and apple pie?
link |
Well, government needs to ensure
link |
that motherhood works well,
link |
and we need the government central planning of birth.
link |
We need regulations on birth, for instance.
link |
We need regulations on how people give birth.
link |
We need to ban people from giving birth
link |
in traditional ways that have been tried
link |
for thousands of years.
link |
We need to force people to do things
link |
in the modern scientific way.
link |
Well, so what about things like that all of us use,
link |
so infrastructure, for example, or education,
link |
or, well, the economy too, right?
link |
Can you make a case for the role
link |
of some large scale centralized systems,
link |
whether it's government or not,
link |
that do this kind of management?
link |
I guess, perhaps you could say
link |
there's the economies of scale argument
link |
that some things must exist at a very large scale,
link |
and therefore you would want political accountability
link |
of the people who manage them.
link |
This is kind of the argument
link |
that's given for infrastructure monopolies.
link |
For instance, roads or electricity.
link |
Let's say we live in a country,
link |
we need one power plant.
link |
The bigger the power plant, the better off we will all be.
link |
And there's a natural monopoly in the power plant business.
link |
So we're gonna have to have one power plant.
link |
And since it's only one power plant,
link |
then we can't just let anybody own it
link |
because then they're gonna make it too expensive.
link |
So we need to have the government own it
link |
so it can make it too expensive.
link |
And you don't find that case compelling?
link |
I used to believe in it.
link |
I was pretty much a Keynesian
link |
when I first started my graduate studies at Columbia.
link |
No, I don't find that compelling at all
link |
because I think all these examples that they mention
link |
of natural monopolies or economies of scale
link |
that can only fit at a scale of government,
link |
government bans people from opening power plants.
link |
And then there's only one power plant
link |
and they need to be in charge of it.
link |
But in reality, no.
link |
In reality, power plants can exist at all kinds of manners
link |
of scales of operation.
link |
And yes, of course, there are benefits to centralization
link |
in power plants in particular
link |
because there's efficiency in generation.
link |
One big power plant is more efficient
link |
than 10 equivalent smaller power plants.
link |
But there's also inefficiencies in centralization
link |
because the more centralized and the bigger the plant is,
link |
the further away a lot of the population is going to be.
link |
So you're gonna be losing a lot of the electricity
link |
And you believe the free market is best in managing
link |
that dance, that balance of centralization.
link |
Exactly, and if we do end up in a situation
link |
where there's one power plant for an area,
link |
then if the markets ends up centralizing all of it
link |
into one power plant, I don't see that as a problem.
link |
There are places, there's a small town
link |
with only one barber shop.
link |
Is that a catastrophe?
link |
No, because they don't need two barber shops.
link |
Now, if that barber shop started to take advantage
link |
of people, started to charge higher price,
link |
well, then that's just an opportunity for others
link |
to step in and put them in their place.
link |
And that's the same thing with power plants.
link |
It's the same thing with everything.
link |
Ultimately, I think the key thing is this.
link |
From the central planning perspective,
link |
they'll present you the problem as it is,
link |
and they'll tell you, well, this is bad.
link |
So the fix, and what we can do is better.
link |
So let's stop what's bad and do what is better.
link |
Two problems here.
link |
Usually, the reason that the thing is bad
link |
in the first place is because it is a government monopoly.
link |
It's because of government intervention.
link |
But the second thing is that this notion
link |
that we could just pass a law and fix what's wrong
link |
and make it better, it ignores the fundamental
link |
underlying reality, which is that what you're doing
link |
is you're offering only one way for this problem
link |
to be solved and making all other solutions
link |
practically illegal.
link |
You're taking taxpayer money, you're putting guns
link |
to people's heads to take their money,
link |
to use it to build, say, this one solution
link |
for a power plant, but you're preventing
link |
the free market process from providing us
link |
with other alternatives.
link |
Well, so you phrased it sort of from that perspective,
link |
but in theory, there is a feedback accountability mechanism
link |
for the solution that you propose and enforce
link |
by, as you're saying, placing a gun to people's head.
link |
You're accountable for that choice,
link |
for the quality of that solution,
link |
by being voted out if the solution is actually bad.
link |
So it's just a different selection mechanism.
link |
And I think, I personally believe it is a selection mechanism
link |
that has worked in the past.
link |
It just often does not work nearly as well
link |
And the question is, are there domains
link |
in which the free market gets itself into trouble?
link |
So this theoretical view is that that's the point
link |
of a free market, is it doesn't, if there's trouble,
link |
that's a signal, and it will respond to that signal,
link |
and it will respond appropriately
link |
to try to maximize happiness.
link |
The question is, is there a local optima
link |
that free markets get stuck in and need governments
link |
to represent the broader scale of the people
link |
to get outside of that?
link |
I think the fundamental problem here is the idea
link |
that there is a feedback mechanism
link |
when there is coercion in one party,
link |
when one party can employ coercion and the other one cannot.
link |
So in other words, I'm gonna put a gun to your head,
link |
I'm gonna take your money, and I'm gonna use it
link |
to buy more guns for me to put against your head,
link |
but somehow you're gonna put a paper in a box
link |
and that's going to deactivate my guns.
link |
Well, love requires a push and pull,
link |
a little bit of tension, a little spice in a relationship,
link |
I think, a little gun to the head.
link |
Good luck to anybody who's gonna be dating you
link |
if you think putting a gun to people's head
link |
is comparable to a relationship.
link |
All jokes, but yes, I mean, the people don't often think
link |
of it as government and the military as gun to the head,
link |
but that is sort of a libertarian perspective
link |
because ultimately when you, you know,
link |
turtles all the way down and at the bottom there's guns.
link |
At the bottom if you don't want to pay,
link |
if you don't want to, you know,
link |
all right, I don't want to be part of your power plant,
link |
I want to get my own generator, I don't want to do it,
link |
and I don't want to pay for it, I'll go to jail.
link |
You can't not pay for it.
link |
That's really the asymmetry which the market doesn't have,
link |
which is why, in my opinion, it's not as if, you know,
link |
I'm being stubborn and stuck on the idea
link |
that I want a market and that the government can't work.
link |
It's presented as if, you know, we're choosing
link |
between two different machines.
link |
You know, should we use an Apple or a PC?
link |
And I'm just constantly choosing one of them
link |
and saying that the other one can't work.
link |
It's not equivalent, it's not two machines.
link |
We're comparing between a machine and a gun to the head.
link |
And we're comparing between a situation
link |
in which anybody anywhere is free to provide the service
link |
or the good, and anybody anywhere is free to buy it
link |
from them or reject to buy it from them.
link |
So anyone can build a power plant, anyone can succeed at it,
link |
anybody can fail at it, anybody can build it in a way
link |
that I can choose to take part in or not take part in.
link |
I can build my own.
link |
So we have a situation which 10 million people, let's say,
link |
they each can freely choose to provide the good
link |
or to buy the good.
link |
That cannot be considered an alternative on an equal footing
link |
to a situation where one person or one entity
link |
gets to decide for everybody and those people
link |
decide for everybody and those who disagree go to jail.
link |
So the problem is that the alternative to governments
link |
is other large successful entities that have humans in them
link |
and human nature is such that there's corruption,
link |
manipulation and so on.
link |
I think free market depends on the honest communication
link |
of information as widely as possible
link |
so that people can make great rational decisions
link |
but sort of my fear is, I'd like to propose
link |
is that in general there's manipulation
link |
whether it's government, whether it's companies.
link |
They're going to try to do propaganda.
link |
They're going to try to manipulate you, deceive you,
link |
shut down competition by playing games,
link |
human games of different kinds
link |
and sometimes even meaning well.
link |
It's not like everybody thinks they're doing good
link |
and they're actually doing evil.
link |
So how do we prevent the worst of human nature coming out
link |
in a free market as well?
link |
By not giving the worst of human nature
link |
a monopoly on violence in the institution of government.
link |
That little inkling of coercion,
link |
that little bit of asymmetry creates a gigantic
link |
like ripple effect of asymmetry in your view.
link |
Yes and it ends up just being the place
link |
where corporations, individuals, free markets,
link |
they can't coerce without the resort to government.
link |
So you think about all the examples
link |
of corrupt corporations doing bad things.
link |
It's always because they have certain privileges
link |
from governments because as it exists,
link |
Coca Cola, McDonald's, all of these giant corporations,
link |
they can't do anything to me without government.
link |
They can't take any of my money
link |
and they can't force me to buy their stuff
link |
and so it doesn't matter to me.
link |
So if Coca Cola is corrupted,
link |
that's a problem for Coca Cola customers,
link |
that's a problem for Coca Cola shareholders,
link |
that's a problem for anybody who deals with Coca Cola
link |
but as somebody who doesn't drink their stuff
link |
and isn't a shareholder,
link |
I have absolutely no interest in what happens.
link |
They could all go bust tomorrow and I don't care.
link |
I don't buy their product and I'm not a shareholder.
link |
So in this situation where you choose to voluntarily
link |
associate with people and you only give your money
link |
to people you want to voluntarily give the money to
link |
so you either buy their product
link |
or invest in their production,
link |
in that situation, the only way that a company
link |
can get my money is if they build a product that I value
link |
or if they convince me that they are going to use it
link |
in a way that's profitable and I may be wrong.
link |
I may invest in a company that fails
link |
or I may invest in a company that turns out to be fraudulent
link |
but that's my fault and it's my fault
link |
that I gave them my money
link |
and then it turned out to be scoundrels
link |
but it's a totally different problem
link |
when we make it mandatory.
link |
It's violence, it's a crime to put a gun to my head
link |
and force me to subsidize companies
link |
and force me to come at certain conclusions.
link |
Do you find an interesting distinction,
link |
Mr. Michael Malice, between anarchism and libertarianism?
link |
So this particular use of violence,
link |
this last resort, this policing force
link |
that libertarianism is okay with
link |
and anarchism is not okay with.
link |
So basically nation states that keep you safe
link |
from the worst of war.
link |
Yeah, I think to be more accurate,
link |
the distinction between anarchism and minarchism,
link |
I think libertarianism is kind of a vague term
link |
that can encompass both.
link |
Means a lot of things, okay.
link |
On the Karl Marx to Michael Malice spectrum,
link |
No, no, I'm full anarchist.
link |
You're a full anarchist.
link |
Yeah, full anarchist.
link |
I mean, I don't find any justification
link |
for the use of force and I think recently perhaps,
link |
maybe I'm getting old, maybe I'm getting senile,
link |
maybe I'm getting wise, who knows?
link |
But I'm beginning to become more sympathetic to monarchy.
link |
So I'm an anarchist, monarchy.
link |
Which, what is that?
link |
Kings, royal. Oh, monarchy.
link |
Wait, are you joking or not?
link |
No, I'm not joking.
link |
And I think, I mean, I think morally and intellectually,
link |
I'm an anarchist, but the reality is we find ourselves
link |
in a world in which a lot of people are not.
link |
And the question is, what is the thing
link |
that is going to provide you with more freedom?
link |
And I think, I'm recently coming around to the idea
link |
that monarchy might be the best way
link |
to provide people with the largest amount of freedom
link |
because to have a free society, you need a majority,
link |
perhaps, or a plurality of people
link |
to have a very strong understanding of libertarian ideas,
link |
to have a low time preference,
link |
to have a preference for the future.
link |
So you need a majority of the population
link |
to not decide to go and do something insane
link |
in order to continue to have a free society.
link |
You know, when a respiratory illness comes along,
link |
unfortunately, you know, the last couple of years
link |
showed that we, the vast majority of people
link |
are gonna freak out and lose their mind
link |
and support whatever their stupid TV tells them to support.
link |
And, you know, there's always a current thing
link |
and the media is always telling you
link |
that we need this current thing as an excuse
link |
for more and more government power
link |
and more and more government coercion.
link |
What's the role of kings and queens
link |
in that case of a monarchy?
link |
What's the role of a leader?
link |
I think there might be a case that,
link |
so as I was saying, you need a majority of the population
link |
to get together and decide, nope, whatever is the case,
link |
you know, the answer is voluntary.
link |
No matter how bad the disease is,
link |
it doesn't justify forcing people to stay home.
link |
You wanna stay home, stay home.
link |
You wanna wear a mask, take a vaccine,
link |
do whatever you want, but you can't force others to do that.
link |
So you need a majority of the people
link |
to strongly believe in this principle
link |
in order to get it in a democracy.
link |
Whereas in a monarchy,
link |
maybe you just need the king to get it.
link |
And I think the reason kings are more likely to get it
link |
is that kings have a low time preference
link |
where they think about things for many generations.
link |
Whereas in a democratic system,
link |
your president is likely only going to be there
link |
for four years or eight years or 10 years
link |
or five years or whatever it is.
link |
So the only way that, you know,
link |
all humans are self interested.
link |
So the only way that your president in a democracy
link |
can provide for themselves is to maximize
link |
the amount of exploitation that they can do
link |
of the population during their brief stint.
link |
And then when he's out, you get a new one,
link |
and then that one wants to start all over again.
link |
So every four years, you get a new robber.
link |
With monarchy, you sign up for a multi generation
link |
subscription to the same family.
link |
And when they have the security of knowing that,
link |
you know, his great grandson is going to be
link |
taking money from your great grandson,
link |
suddenly his interest in yours align
link |
because they both want your great grandson
link |
to be prosperous and have enough money
link |
for his great grandson to take.
link |
It's a monarchy with a tiny government.
link |
So anything required to really provide for a free market.
link |
So for maximizing individual freedom
link |
and the freedom of the economy.
link |
Yeah, and if I were a king, which is highly unlikely
link |
to ever happen, but I think, you know,
link |
if you look historically, the dynasties
link |
that have succeeded at lasting for a long time,
link |
the key thing that they managed to do
link |
is to basically be libertarian.
link |
The key to being a good king is to just leave people alone.
link |
Let them do whatever they want.
link |
Don't rob them too much or rob them as little as possible,
link |
or maybe even don't rob them.
link |
And, you know, as a king, use your power only
link |
to punish people who aggress against others.
link |
Don't use your power to enrich yourself
link |
and enrich your friends.
link |
And that's really, like, if you look at smart kings,
link |
this is what they do.
link |
This is what they teach their children.
link |
And the cycle of kingdoms is that, you know,
link |
the first king understands this,
link |
builds the empire and the first couple of generations,
link |
they get this and the society is free, the economy is free.
link |
And because of that, you know, there's peace and prosperity,
link |
but then over time, the next generation of kids
link |
become a lot more high time preference.
link |
They haven't worked hard.
link |
They don't understand the meaning of hard work.
link |
So they become more likely to engage
link |
in destructive behavior.
link |
So raise taxes, pass laws that require people to do things,
link |
even when they're not hurting anybody.
link |
And that ends up basically eventually destroying the kingdom.
link |
Of course, power corrupts.
link |
So you have to kind of create human institutions
link |
that prevent you as a king or any kind of leader
link |
from expand, so going back on the original promises
link |
and the purposes of your position.
link |
And then distracting, using tools of technology
link |
and communication to distract the populace
link |
while you expand the power.
link |
All right, you wrote the fiat standard.
link |
I think we danced around it quite a bit,
link |
but I don't know if we actually defined it.
link |
So what is fiat money?
link |
What is the history of how it came to be?
link |
The fascinating history of the birth
link |
of the fiat monetary system is something
link |
that really only got uncovered in 2017.
link |
This is extremely, extremely interesting.
link |
In 1914, Britain joined World War I.
link |
And if you remember your history books,
link |
it's famous that this was called August Bank Holiday.
link |
It was just going to be a few weeks
link |
where the British troops were gonna go
link |
and kick European ass and come back triumphant.
link |
And most European countries believed that.
link |
But then the war kept on dragging on.
link |
And of course, to finance the war,
link |
the government, this is what they used to do
link |
under the gold standard,
link |
governments would issue bonds.
link |
So you'd issue the bonds, people would buy the bonds,
link |
the money would be used to finance the military,
link |
and then the government would pay off the bond
link |
over the next five or 10 or 20 years.
link |
So for World War I, the British government,
link |
the British treasury issued bonds for financing the war.
link |
And this only came to light in 2017.
link |
Only a third of the bonds were actually subscribed.
link |
So people, British people,
link |
and this is perhaps the greatest thing
link |
that they've ever done,
link |
they decided fighting a war in Europe
link |
is just not my ideal way of investing my capital.
link |
It's a stupid thing.
link |
Why should I go and fight?
link |
Because the Austrians and the Germans and the Serbians
link |
are at each other's throats.
link |
I'd rather invest in something else.
link |
So they only bought a third of the bond issue.
link |
And then the astonishing thing that happened,
link |
which really set the tone for the next century
link |
of war, murder, Keynesianism, and theft and inflation,
link |
was that the Bank of England went and got
link |
two of the high ranking officials in the Bank of England
link |
to buy the other remaining outstanding two thirds
link |
of the bonds under their own name
link |
with a line of credit from the Bank of England.
link |
So it wasn't their own money.
link |
But they took money essentially from the Bank of England,
link |
bought two thirds of the bonds that financed the war.
link |
And that was how England was able
link |
to keep going into the war.
link |
So that's essentially what they did
link |
is what we today know as quantitative easing.
link |
Back then, they just got, they printed money
link |
from the Bank of England, or credit, printed credit,
link |
gave it to those two employees.
link |
They bought the bonds.
link |
The government could fight the war.
link |
Sounds like it's a nice idea.
link |
And Keynes, of course, being a huckster himself,
link |
he himself said this was, he wrote a letter
link |
to the Bank of England that was uncovered recently.
link |
And he said, I congratulate you
link |
on this masterly manipulation.
link |
I quote it in the book.
link |
Masterly manipulation is what he called it.
link |
That they basically managed to buy the bonds
link |
using the money of the government.
link |
And of course, he never had an idea of how economics works
link |
because he never could ask the question of,
link |
okay, and then what?
link |
All right, so we just printed money
link |
to buy two thirds of these government bonds.
link |
What's gonna happen next?
link |
What could go wrong?
link |
Not a question Keynesians ask themselves
link |
because their jobs depend on not thinking
link |
about what's going to go wrong.
link |
So a quick question about war.
link |
And as somebody who's been nonstop reading
link |
and thinking about the wars of the 20th century
link |
and thinking that most of those wars
link |
were unjust, unethical, and destructive,
link |
how else do you find, how would you finance a war?
link |
Ideally you don't.
link |
No, but I mean, of course there are,
link |
sometimes you wanna fight for self defense.
link |
Yeah, you finance it, taxation, or bonds.
link |
See, the people really need to want a war
link |
not just with their voices, their thoughts,
link |
their tweets, or their actual financial investment.
link |
Put up the bullets and the cost of the bullets
link |
So their life and their financial well being.
link |
That's how it was under the gold standard mostly
link |
because under the gold standard,
link |
the government couldn't print gold.
link |
And so they had a budget and they had a certain amount
link |
of gold and that wasn't just, you know,
link |
that they couldn't infinitely increase it.
link |
So they couldn't tax their population at will.
link |
And it's very difficult to take money from people.
link |
You know, you go knock on doors and search everybody's home,
link |
see where they're hiding their gold.
link |
It's very complicated.
link |
On the other hand, when you gave them paper money,
link |
which is what the case was in 1914,
link |
you could take their wealth just by printing the money.
link |
And that's what changed everything when it comes to war.
link |
That's why the 20th century was the century of total war.
link |
Because under the gold standard,
link |
governments fought until they ran out of their own gold.
link |
Under the fiat standard, with paper money,
link |
with credit money, governments fought
link |
until they ran out of liquid wealth
link |
in the hands of all of their citizens.
link |
So let's find flaws in this thinking if there's any.
link |
Okay, there's a lot of pacifist type of thinking
link |
in World War II as Hitler was expanding and expanding.
link |
Hitler framed himself as a victim of the past, of history.
link |
He never attacked anybody.
link |
Everyone's always threatening to attack him.
link |
That's kind of the narrative.
link |
And he keeps expanding.
link |
He keeps sweet talking with his charisma,
link |
all the countries around him,
link |
into sort of embracing pacifism.
link |
Stay out of the war until the war is on your doorstep.
link |
So France, just very suboptimal military strategy
link |
from the perspective of many European nations
link |
in response to Hitler.
link |
They were basically hoodwinked by his words.
link |
So then there's Churchill, Winston Churchill,
link |
who stepped up and says, perhaps irrationally,
link |
from some kind of economics perspective,
link |
saying we're not going to back down.
link |
We're going to fight Germany.
link |
And perhaps that step alone is one of the biggest reasons
link |
that Hitler failed in his expansion.
link |
That decision to fight back,
link |
how, what's the right way to do that?
link |
If you're Winston Churchill,
link |
what's the right way to do that?
link |
If you're, to fight back evil when violence is required.
link |
Evil when violence is required.
link |
Now, you could argue that no war is just,
link |
but there is such a thing as a just war index.
link |
And a lot of people argue if there is a just war
link |
in the 20th century, it's World War II.
link |
So how would you fund, if you were Britain, the war?
link |
Would you require Winston Churchill
link |
to convince the populace?
link |
Don't fight until they're fully convinced
link |
that this is the right thing to do.
link |
You can't just make a decision for them.
link |
You have to convince them fully
link |
so that they give their life
link |
and they give their money to support the war.
link |
Is that the right way to do it?
link |
And I think when you have a true threat
link |
and a true evil and a true force
link |
that people really do think is genuine,
link |
you don't need to convince them.
link |
I mean, when it's real, people will want to fight
link |
and people will want to pay to fight.
link |
And I mean, I think, though, on this particular example,
link |
I think the best way to fight Hitler
link |
is to have not fought World War I
link |
and not take out the Kaiser of Germany.
link |
If Britain and the US had not gotten involved
link |
in World War I, which really is the senseless war
link |
about nothing, what was in it?
link |
And what was the goal from anybody fighting that war?
link |
If you look at it, after World War I,
link |
there were very minor adjustments
link |
in the borders of the countries that were participating.
link |
So Germany lost some land, Austria lost some land,
link |
but really it wasn't all that massive.
link |
And it wasn't like Britain wanted to take over Germany
link |
and move their people into Germany and kick the Germans out.
link |
So there was no real value from that war.
link |
And that's why the British people
link |
didn't want to take part in it.
link |
And that's why if they hadn't done
link |
this enormously criminal manipulation
link |
of printing money to buy the bonds,
link |
Britain wouldn't have gotten into the war.
link |
Germany would still be a kingdom and Hitler wouldn't rise.
link |
And yeah, there'd be small changes
link |
in the borders of various European countries.
link |
I struggled to see how it could have been worse.
link |
I mean, I struggled to see who benefited
link |
from four years of carnage in Europe.
link |
And then this came at the height of civilization.
link |
Before that, the people of Europe
link |
had the golden era under the gold standard.
link |
They were trading with one another, they traveled
link |
and technology was advancing.
link |
And they did not expect this war to last this long.
link |
And my favorite story from World War I
link |
is the Christmas truce football game,
link |
which I mentioned in my book.
link |
British and German soldiers at the height of the conflict,
link |
they stopped on Christmas day
link |
and they played a football game against each other.
link |
I mean, this is not a real war,
link |
where it's a war for survival.
link |
Britain didn't want to end Germany.
link |
Germany didn't want to end Britain.
link |
It was just kings who were emboldened
link |
by the fact that they had a printing press
link |
playing with the lives of the people.
link |
Take that away, take away the printing press,
link |
take away their ability to print money.
link |
I think we'd have had a much, much, much better
link |
Yeah, the counterfactual history.
link |
Neil Ferguson is a historian
link |
who gets in quite a bit of trouble.
link |
Basically, well, he's a Brit,
link |
suggesting that if Britain stayed out of World War I,
link |
there would be no Hitler, there would be no World War II.
link |
Yep, I agree entirely.
link |
Yeah, so how fiat money was born.
link |
Yeah, let's get back to that.
link |
So they financed the war with that money.
link |
So what could go wrong?
link |
That's where we left off.
link |
Well, what could go wrong when you've just printed
link |
an enormous amount of credit and used it to buy bonds?
link |
What goes wrong is that the value of the currency
link |
is going to go down.
link |
Or in other words, prices of things are gonna go up.
link |
So during the war, prices keep going up.
link |
And this is, of course,
link |
this is gonna sound very familiar
link |
to victims of the 20th century.
link |
A government tells you it's because of the war,
link |
it's not our fault, it's because of the Germans,
link |
it's because of the foreigners, it's because of Putin,
link |
it's because of this, it's because of that.
link |
This has always been the case.
link |
There's always, war is a very good cover for inflation,
link |
which is caused by monetary phenomena.
link |
So then the war ends.
link |
And inflation, prices have more than doubled
link |
over the past four years,
link |
over the four years of World War I,
link |
prices have more than doubled.
link |
And then the British economy is in bad trouble,
link |
obviously, lost a lot of the labor force for four years
link |
that was out there fighting.
link |
Now those workers come back, you've got prices are up.
link |
And so people are demanding
link |
that the government control prices
link |
and the government is trying to fix the problem
link |
of inflation by doing price controls,
link |
which is what they always do,
link |
which is catastrophic because it makes things worse.
link |
When you implement price controls,
link |
you are, when you make, you say, all right,
link |
well, bread can't be sold for more than X price.
link |
Well, that's just preventing bread producers
link |
from producing a lot of bread.
link |
And that's just making the problem worse.
link |
If you let the price rise, the extra price,
link |
first of all, it makes people economize,
link |
so people will only buy what they need.
link |
And it provides the money for the bread producers
link |
to acquire the capital and the resources
link |
they need to produce more bread,
link |
which then brings the price of bread down.
link |
But price controls destroy that.
link |
Then they also implement wage controls.
link |
So you wanna also make sure that people have high wages.
link |
So you raise people's wages artificially,
link |
you lower prices artificially,
link |
and you cause an economic problem.
link |
And this is basically, I use this historical example
link |
because it's the birth of fiat,
link |
because the Bank of England was the most important
link |
monetary system in the world at that time.
link |
And because it's the prototype
link |
that basically the entire planet copied
link |
over the last 100 years.
link |
We've had this same thing happen.
link |
The government prints money because of a stupid reason,
link |
because somebody in power decided
link |
this was worth destroying everybody's livelihood
link |
And then the consequences come in
link |
and then they start covering up with price controls,
link |
wage controls, and then that makes things worse.
link |
And then they, and of course, throughout all of that,
link |
they're promising that we're going to go,
link |
oh, and also the other thing that they did,
link |
which I mentioned in the chapter is,
link |
they stopped people from using physical gold
link |
and they confiscated the, well, they didn't confiscate it,
link |
but they took the physical gold and they gave people paper.
link |
So I call it the fiat white paper.
link |
You know, in Bitcoin, we have the white paper.
link |
The fiat white paper was that the Bank of England
link |
announced to all of its banks and post offices.
link |
And from now on, you should not make payment in gold
link |
and you should take payment in gold
link |
and you should encourage all your customers
link |
to turn in all of their gold and give them paper instead.
link |
Is there an actual document?
link |
Oh, yeah, yeah, yeah.
link |
Yeah, it was, this is all new stuff.
link |
Obviously, nobody really likes to talk about this stuff
link |
because, you know, they're fiat economists,
link |
so they don't wanna talk about the original sin, but.
link |
Well, you should like republish it
link |
as the fiat white paper or something like that.
link |
There's a fascinating book by a guy called John Osborne.
link |
So in the 1920s, I think his name was Montagu.
link |
He was the chief of the Bank of England.
link |
He commissioned one of his secretaries, John Osborne,
link |
to study what the bank did during World War I.
link |
And it was a study that was kept under wraps,
link |
a confidential, in the Bank of England,
link |
only released in 2017, almost a century later.
link |
What was special about 2017, by the way, it's a year.
link |
It's just it was a year in which
link |
some of this information was released.
link |
Yeah, a bunch of people got into parts of the basements
link |
of the Bank of England and found this and published it
link |
and now you can download it as a PDF
link |
and find all of the amazing details.
link |
So they confiscated the gold
link |
and they forced people to use the paper
link |
and they promised people that as soon as the war
link |
was gonna be over, this is temporary,
link |
we're gonna be back to using gold.
link |
And of course, you know, if you told people in Britain,
link |
this is the real scam about fiat.
link |
If you told people in Britain in 1914,
link |
hey, we're gonna go off the gold standard
link |
because it's better.
link |
I mean, there might've been lynchings
link |
of government officials because the British pound
link |
at that point, it had been the global currency
link |
of the whole world.
link |
And the fact that they'd managed,
link |
the Bank of England had kept the British pound
link |
at a fixed rate next to gold for,
link |
since Newton, you know, the exchange rate,
link |
the value of the British pound was set
link |
by Isaac Newton himself.
link |
He was the warden of the mint
link |
and he made the pound a specific amount of gold.
link |
And since then, up until World War I,
link |
it was 4.25 pounds per ounce of gold.
link |
I think I might be wrong, but I have it in the book.
link |
So he'd set that price.
link |
And it was a matter of national pride
link |
for people in England, you know.
link |
The sterling is as good as gold
link |
because for two centuries it has been stuck to gold.
link |
There was the exception of the Napoleonic Wars,
link |
but for two centuries, mostly it was stuck to that.
link |
And so they went off that and then they couldn't go back
link |
because if they wanted to go back,
link |
they didn't have enough gold.
link |
They shipped their gold to the US to finance the war.
link |
And they had printed a whole bunch of money
link |
that was out there.
link |
So this begins the problem for England.
link |
And that begins the end of England
link |
as the world's superpower.
link |
And the way they tried to fight that
link |
was to get more and more countries around the world
link |
to establish central banks and have,
link |
and hold British pounds.
link |
So they'd hold, you know, basically dumping their bags
link |
like just any other shit coin.
link |
You just, if you get people to buy your shit coin,
link |
you know, that raises the value of your shit coin.
link |
Can you define shit coin?
link |
Shit coin is, in my definition of a shit coin
link |
is that it's any form of money
link |
where somebody can produce it.
link |
Not necessarily, I guess.
link |
I think the difference, so there's easy money,
link |
but the shit coin is something that someone can produce
link |
at a rate that is, at a cost that is different
link |
from the market cost.
link |
So gold, nobody can make gold except if they dig for it.
link |
And the cost of mining gold is generally in the range
link |
of the price of gold.
link |
Seems true for Bitcoin.
link |
So gold is not a shit coin.
link |
Gold is not a shit coin.
link |
Copper, I'm not so sure.
link |
I wouldn't call copper a shit coin
link |
as much as it is easy money.
link |
But I think government currencies and other alt coins,
link |
I think are shit coins because somebody could click a button
link |
and make 10 times the supply.
link |
Would it be fair to say that this began
link |
with the will for war in World War I?
link |
So the march towards fiat began
link |
with a global desire for war in the 20th century.
link |
Did war start this or was war a result?
link |
It's difficult to say really.
link |
I think it goes both ways.
link |
I think you can't have permanent war without fiat.
link |
And I also think there's a case to be made
link |
that you can't really have fiat without war.
link |
So it's some kind of weird dynamical system
link |
with a chicken and egg situation
link |
and they build on top of each other
link |
and there's a few individuals that figured out
link |
there's a way to manipulate this to play this kind of game
link |
and it escalates and nothing gives you the ability
link |
to manipulate money quite like war.
link |
When you have a war, you can declare an emergency.
link |
You can call all the people who oppose you traitors.
link |
You can get people to support you
link |
not because what you're doing is good
link |
but because you play on their sense of tribalism.
link |
In your book, you do cost benefit analysis.
link |
So you do acknowledge or think about
link |
the pros of fiat currency.
link |
Can you do just that, look at the benefit
link |
and look at the cost just broadly at the highest level?
link |
So the way that I write the fiat standard
link |
is that I try and analyze it as an engineering system
link |
in the same way that I wrote the Bitcoin standard.
link |
So with the Bitcoin standard,
link |
I looked at Bitcoin from first principles
link |
and tried to explain how it works
link |
for a reader that doesn't really have much of a background
link |
in computer science, networks or economics.
link |
And I thought I'll do the same with the fiat.
link |
Let's just ignore the official stories
link |
and look at how this thing actually works.
link |
And I think it does have value
link |
in the fact that the reason that they were able
link |
to pull it off is because it was not possible
link |
for people who don't want to be part of it
link |
to use gold independently of governments.
link |
This is really the key thing.
link |
Gold is just very expensive to move around.
link |
And the fact that it is expensive to move around
link |
means that there's inevitably going to emerge institutions
link |
where it is centralized in physical location.
link |
And then these institutions trade liabilities for the gold.
link |
So really the gold standard intrinsically must involve credit
link |
as becoming part of the monetary system.
link |
It has to be the credit and because it gets centralized
link |
it can easily be captured by the government.
link |
So to be fair, the benefits of the fiat system
link |
is that it saves us on the cost of moving gold around,
link |
which is pretty significant.
link |
Like generally, moving a bar of gold across the Atlantic
link |
is gonna cost somewhere between 0.1 to 1%
link |
of the cost of the gold bar.
link |
So you move it 100 times back and forth
link |
between the Atlantic, you need to pay the whole gold bar,
link |
the cost of the whole gold bar to move it 100 times across.
link |
Well, with fiat money, it's essentially government credit.
link |
And so it's just sending a message
link |
from one central bank to another
link |
and you can move it halfway around the world.
link |
Is there also something to be said about the cost in time?
link |
So you're saving the sort of,
link |
you're reducing the friction of the communication as well.
link |
Of the transactions as well.
link |
Exactly, it's faster.
link |
How big is that benefit?
link |
Because wouldn't you argue that that potential
link |
is the thing that enables modern economy,
link |
both the speed and the low cost,
link |
so increasing the scale and the frequency,
link |
the speed of the transactions?
link |
Yeah, arguably it does help in that regard.
link |
However, it isn't as if you couldn't have
link |
fast transactions built on top of gold.
link |
So you could have gold being used for final settlement
link |
and you could have banks settling with one another
link |
essentially using credit settlement.
link |
Can you define settlement just for people
link |
who are outside of this world?
link |
Because we'll mention that word quite a bit probably.
link |
So the way that it works is, let's say right now
link |
I'm gonna pay you $10 over PayPal or credit card.
link |
So it shows up in your PayPal or credit card
link |
within a few seconds that I've sent you the money
link |
and then that's yours.
link |
But it didn't also happen in those 10 seconds
link |
that my bank, which could be in another country,
link |
sent the money to your bank into your account.
link |
There's a lot of infrastructure underneath that.
link |
So what actually happened is that I have an account
link |
with my bank and you have an account with your bank.
link |
And when the message is communicated from my app to yours,
link |
my bank crosses out the money
link |
and your bank credits you with the money.
link |
And then at the end of the day, week or month,
link |
banks in the same city will settle with one another,
link |
banks in the same country will settle with one another
link |
and banks from different countries
link |
will settle with one another.
link |
So they won't move the $10 from my account to yours.
link |
At the end of the day or week or month,
link |
they'll tally all of the money that was sent
link |
from one bank to the other
link |
and then just settle the difference.
link |
So it turns out at the end of the month,
link |
my bank had sent $15 million to your bank
link |
and your bank had sent $14 million to my bank.
link |
So they give them $1 million and that settles it,
link |
that finalizes the transaction.
link |
So final settlement 3D is like the,
link |
you can think about it as the infrastructure of the system.
link |
And then you can think of these things
link |
as being the higher layer levels.
link |
And you had a wonderful discussion about that
link |
with Michael Saylor.
link |
So the final settlement is like the moment
link |
when you paper and ideas connect to physical reality.
link |
Or to some representation of physical reality.
link |
Yeah, and under gold,
link |
everything was tethered to physical reality
link |
because there was a market commodity
link |
at the bottom of all of this
link |
and nobody could print that market commodity.
link |
And so at the end of the month,
link |
if your bank made too many payments,
link |
if you made too many payments, there was a reckoning.
link |
If you were reckless, if you were insolvent,
link |
you went out of business.
link |
So there was no way to fool that.
link |
But then we moved to the fiat century
link |
and everything is credit.
link |
At the end of the day,
link |
the final layer is government credit.
link |
And so as long as you're friends with the government,
link |
basically you never go bankrupt.
link |
So all kinds of hucksters managed to find their way
link |
into getting into position where they don't get bankrupt.
link |
So in part two of the fiat standard called Fiat Life,
link |
you describe the effects of fiat money
link |
on a bunch of things like life, food, science, education.
link |
What is the most pernicious effect of fiat money
link |
on our world, on our life?
link |
So taking a step outside of the monetary system,
link |
actually like how that affects our life from this book?
link |
I mean, there's a whole bunch of things
link |
and I won't be able to go over them
link |
and I highly recommend reading the book.
link |
But if I were to pick one,
link |
I would say it's the impact that it has
link |
on our time preference, on our valuation of the future.
link |
So remember when we started the discussion,
link |
I said that the key function of money
link |
is that it serves as a store of value.
link |
And the harder the money is,
link |
the better it is at providing us
link |
with a way for providing for our future.
link |
And so the harder the money is,
link |
the less we discount the future.
link |
We always discount the future compared to the present.
link |
So if I told you, I'm gonna give you something today
link |
versus giving it to you 10 years from now,
link |
the same thing, you would prefer to take it now
link |
because then you'd get to enjoy it over the next 10 years.
link |
So we always prefer the present to the future.
link |
There's always a discount on the future.
link |
And that discount is called time preference.
link |
The degree to which we prefer the present to the future
link |
is called our time preference.
link |
So the higher our time preference,
link |
the less we care about the future.
link |
And the process of civilization
link |
is the process of lowering our time preference,
link |
where we start caring more for the future,
link |
we start prioritizing the present less and less.
link |
So we start being able to not consume everything
link |
that we have and store it.
link |
And so money is essential for that.
link |
And under the gold standard,
link |
everyone in the world had the ability
link |
to provide for their future
link |
by simply using the same money that they use.
link |
You would work a day and you would get paid in a gold coin
link |
and you could take that gold coin
link |
and keep it safe for 10 years
link |
and know that at the end of those 10 years,
link |
that gold coin would buy you slightly more
link |
than what it bought you the day that you earned it.
link |
So anybody could provide for their future
link |
and anybody could have very high degree of certainty
link |
that whatever they're saving is going to be there
link |
when they want it in the future.
link |
Because the money supply was only increasing
link |
at one and a half percent,
link |
whereas the production of goods and services
link |
was increasing for most cases, for most periods
link |
at a higher rate than that.
link |
So you could buy more apples and oranges
link |
and houses and cars at the end of the 10 years
link |
than you could at the beginning of the 10 years.
link |
So everybody had a way of providing for the future.
link |
And with that, people lower their time preference.
link |
And that is reflected across all aspects of life.
link |
I think it's not just the economic thing.
link |
You see it in the savings rate,
link |
the ability to deny yourself gratification today.
link |
I could take the money that I have
link |
and throw a giant party, buy a sports car, buy a yacht.
link |
And yet you decided, I'm not going to do that.
link |
I'm going to keep it so that tomorrow
link |
I can throw a bigger party or buy a better yacht
link |
or have a better life or give my children a better life.
link |
So all of human civilization really
link |
is the process of us lowering our time preference
link |
and finding harder monies that allow us
link |
to provide better for the future
link |
is how we really technologically we do that.
link |
I think of the hardness of money
link |
as being the control knob for our time preference.
link |
And you can see this reflected in the 20th century
link |
where we go from the money supply increases
link |
at around one and a half percent under gold
link |
to this current situation where over the last 60 years
link |
I ran the numbers on money supply and fiat,
link |
the global fiat supply has increased
link |
at around 14% per year.
link |
So we've done a 10X in the increase
link |
in the supply of money annually.
link |
And 14% is a weighted average.
link |
So if you take a basic numerical average
link |
for all fiat currencies, you get something like 30%.
link |
The average fiat currency increases by 30%.
link |
But if you value it by the volume of each currency
link |
so that you're not giving equal weight
link |
to the Venezuelan Bolivar increasing at 500% a year
link |
and the dollar increasing at 8% a year,
link |
if you do it by value of the currencies
link |
so that you get the total supply of fiat,
link |
it's something like 14%.
link |
And weighted is 30% you said?
link |
I'd like to see the worst ones,
link |
the people that are tracking that average up.
link |
But 14% is still an incredibly high, high number.
link |
And so you're saying that,
link |
sorry, that's the average over the century
link |
or the past 100 years?
link |
Over the past 60 years, 1960 to 2020,
link |
we get World Bank data on that,
link |
pretty reliable data on World Bank
link |
and European Union OECD data.
link |
I ran the numbers on that weighted average,
link |
something like 14%.
link |
And what effect that has on time preference?
link |
The effect is now it's much, much, much harder
link |
for everybody to provide for their future.
link |
Everywhere in the world, it's much harder.
link |
So how do I get the equivalent of the old gold coin
link |
that I could just put under my mattress
link |
and expect it to be there 10 years from now?
link |
Well, gold itself isn't cutting it.
link |
Gold can't keep up with inflation.
link |
And the reason for that is that gold is not being used
link |
as a money anymore in that you can't send it internationally.
link |
Internationally, you can't use it
link |
to settle trade internationally,
link |
which therefore means demand for it monetarily is limited.
link |
And so it's becoming more and more an industrial metal.
link |
And as a result of the fact that its value
link |
doesn't keep up with inflation,
link |
it becomes economical to use it in industry.
link |
So we're seeing gold become like silver
link |
in that it gets used in industry.
link |
So the stockpile declines.
link |
And so the stock to flow ratio declines as well,
link |
and it becomes more and more of an industrial metal.
link |
And it can't protect your wealth over time very well.
link |
So what do you do?
link |
Well, you could invest.
link |
And this is kind of the obvious answer
link |
that Keynesian will give you is,
link |
well, you just put your money in an investment.
link |
But investment is different from saving.
link |
Saving, the whole point of saving
link |
is that the thing is liquid
link |
and that the thing carries little uncertainty.
link |
You just held the gold coin and it just sat there.
link |
It didn't take risk.
link |
You knew that it was gonna be there in 10 years.
link |
Investment means you give the gold coin to somebody
link |
to go and do something with it.
link |
And it could work, it could not work.
link |
If it works, you get a positive return.
link |
You get more gold back.
link |
If it fails, you might not get any of your gold back.
link |
So taking on risk is something very different from saving.
link |
Saving is just a way of buying the future.
link |
Investing is taking on a risk
link |
and you could lose everything with it.
link |
So what ends up happening,
link |
and this is the Keynesian objection I think
link |
is very wrong and bad
link |
because investment is a job in itself.
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To figure out what to do with your money
link |
in order to beat inflation is something
link |
that there are professionals out there on Wall Street
link |
that have PhDs in finance, that have enormous computers,
link |
and they have enormous staffs of PhDs and master's degrees
link |
and math nerds that are crunching numbers
link |
and figuring out how to allocate your portfolio
link |
so that you can beat inflation.
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The majority of them don't beat inflation.
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The majority of them can't beat inflation.
link |
Not as measured by CPI, which is completely fraudulent,
link |
but if you remember.
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Yeah, that 14% or even the 7%,
link |
like if you look at just the increase in the money supply,
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which I think is a much better metric.
link |
And this is what's reflected on the desirable goods.
link |
Like if you look at the price of real estate
link |
in Miami Beach, as Michael Saylor mentioned in your example,
link |
it goes up at around 6, 7% per year on average
link |
over the last century.
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So that's, if you wanna live in a nice area,
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that's what happening to real estate.
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If you wanna go to the good universities,
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that's what's going up.
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It's going up at a rate that's similar
link |
to the increase in the money supply.
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And you can beat CPI,
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but CPI is designed so you can beat it,
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but you can't really beat the appreciation
link |
in the things that you actually want to buy,
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in the price of good food, the price of good real estate.
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So, and most investment professionals fail at doing that.
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So what hope does a doctor or an engineer or a scientist
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or an athlete have in doing those things?
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And investment is hard and saving should be easy.
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Saving is essential for us as a civilization.
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And what fiat did is it took that away from us.
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And then it forced everybody to become an investor
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or more accurately a gambler, because you're not just even,
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because the money itself is broken,
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because the money itself is constantly changing in value,
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investing is becoming more of a crapshoot.
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I mean, value investing is completely underperforming,
link |
compared to market analysis.
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You know, you listen to the Fed,
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and what matters to the price of individual companies
link |
is monetary policy much more
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than it is their own performance.
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So basically you need to be a junkie watching the Fed
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and following all of the world's central banks.
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And yeah, I need to learn macro economics
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and you need to learn what all the central banks are doing.
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And you need to understand how commodity markets work.
link |
And you need to understand how equity markets work
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and bond markets and real estate markets.
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You need to do all of those things
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just in order to be able to save and earn
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and keep the money that you've already earned.
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That's the criminal thing about it.
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Like I've already earned that money being a doctor,
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being a dentist, being an athlete, being an engineer.
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I built a house for somebody and I got that money.
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And all I wanna do is just make sure
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that I can have it 10 years from now.
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The only way to do so is to become a crappy engineer
link |
because you have to spend half your time
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not doing engineering and instead spend half of that time
link |
learning about Japanese central bank monetary policy
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and commodity markets and what's gonna happen to copper
link |
and what's gonna happen to oil
link |
and what's happening in the wars
link |
and what's happening with foreign policy
link |
and Russia and the US and all of those things.
link |
Under the gold standard,
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you didn't care about any of that stuff.
link |
Your gold coin worked regardless of all of those things.
link |
So what this means is the future,
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so first of all, we have all of the problems I mentioned,
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but also it means that the future becomes
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much more uncertain.
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So you're far less likely to provide for yourself
link |
10 years from now,
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far less likely to find an easy way
link |
to give yourself value 10 years from now.
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And so you become more short termist.
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And that is reflected economically
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in a lower savings rate and we see savings rates decline,
link |
but it is also reflected in all manners of decision making.
link |
And I think if you really wanna see what it is,
link |
take a look at a society that goes through hyperinflation
link |
and look at what happens there.
link |
How do people change under hyperinflation
link |
and compare that to essentially what we see
link |
in the 20th century all over under not hyperinflation,
link |
but under low inflation,
link |
10, 15% that you see across the board most of the time
link |
is just slow motion hyperinflation.
link |
So what happens in hyperinflation?
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Everybody gets their paychecks,
link |
they run straight to the supermarket,
link |
they spend all of their money.
link |
Nobody thinks about savings.
link |
Nobody thinks about the future.
link |
Survival until the end of this month is highly uncertain.
link |
How likely are you to be planning
link |
for what you're going to be doing five years from now?
link |
But also it's reflected not just economically,
link |
it's also reflected in all aspects of morality
link |
and all the way in which we deal
link |
with each other as human beings.
link |
When your survival is precarious,
link |
how much are you invested in the notion
link |
of being a good citizen, on caring about your reputation,
link |
on caring about not getting caught in a crime?
link |
All of these things become harder to value.
link |
So people start committing crime,
link |
people start caring less and less about the future.
link |
And we see it reflected in everything.
link |
And I argue, you see it reflected in architecture.
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We used to build houses in the 19th century
link |
that last until today.
link |
And then in the 20th century,
link |
we build essentially disposable cardboard boxes
link |
that get scrapped in 20 years.
link |
So what can you say about potential positive effects
link |
of lower time preferences?
link |
So I mean, it's a balance.
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Like basically, you're talking about
link |
an average kind of time preference,
link |
but there's some things in life
link |
where low time preference could be a negative thing.
link |
So like if I want to take on risk,
link |
not for investment, for a kind of investment,
link |
but say I want to start a business,
link |
I want to take something crazy,
link |
take a leap into the unknown, be an entrepreneur.
link |
What can you say about that kind of leap?
link |
What's the value of that within the current system?
link |
What's the right approach to that
link |
within the current system?
link |
What's the right approach overall
link |
from an economics perspective?
link |
So it's not saving for the future.
link |
It's doing something wild,
link |
taking the money from your mattress, taking on debt,
link |
and having a dream in your heart
link |
that you somehow just want to do.
link |
Maybe it's not the wisest investment decision,
link |
but it's something, you know, it's being human.
link |
It's taking a leap into the unknown
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because something in your heart says to do it.
link |
I think you're more likely to be taking the leap
link |
in the unknown when you have a little bit of gold
link |
in the mattress than when you don't.
link |
I think this is the thing.
link |
Like if you look at the late 19th century,
link |
and I discussed this in the Bitcoin standard,
link |
that was arguably the most innovative period
link |
You know, there's qualitative evidence.
link |
You know, look at the world around you today.
link |
Pretty much everything that we use
link |
was invented in that period.
link |
The car, the airplane, the telegraph, the telephone,
link |
the camera, pretty much modern life as late 19th century.
link |
You know, the period between 1870 and 1914,
link |
because the whole world was practically on a gold standard,
link |
the whole world was using the same money,
link |
and the whole world could save in the same currency.
link |
That meant that a bicycle shop owner,
link |
two bicycle shop owning brothers in North Carolina
link |
could go and try and fly,
link |
even as all the scientific experts in 1903
link |
were confirming that the possibility of flight
link |
has been debunked as unscientific.
link |
You know, Lord Kelvin said,
link |
not in a million years we're going to be flying.
link |
Thomas Edison said it's never gonna happen.
link |
No, I think it was Edison who said a million years,
link |
but Kelvin also said it's never gonna happen.
link |
The New York Times said it's never gonna happen
link |
the same month in which the Wright brothers did it.
link |
And they continued to deny that it was gonna happen
link |
even two years after they did it.
link |
But that's, why could they do that?
link |
Because they had savings in gold.
link |
They had the security with something that you know
link |
is gonna be there.
link |
And then you can take a risk with the stuff that is extra.
link |
You know, I have say three years expenditures in gold
link |
under my mattress.
link |
And I know that I could take a risk with everything else
link |
because whatever bad things happen with all of my dreams,
link |
like even, you know, flying, think about how insane that is.
link |
I still can go back to the three years of gold
link |
that I have saved.
link |
It's still okay to take on debt
link |
given the stuff, the gold under the mattress.
link |
Well, this is the thing, under the gold standard,
link |
the way that people finance things
link |
was predominantly with capital, with equity.
link |
So you would, because you had gold savings,
link |
I had gold savings, everybody had gold savings.
link |
When you wanted to start the business,
link |
you could use your own savings or somebody else's savings.
link |
So you didn't need to get into debt.
link |
Well, you could get equity from others
link |
and you could also get debt from others.
link |
But it's directly mapped to physical reality.
link |
Yeah, it's directly mapped to economic reality
link |
and that there's a hard money out there
link |
that, you know, what you're spending money,
link |
you know, you wanna build your airplane factory,
link |
you need to get actual resources.
link |
So you get actual gold, either yours or somebody else's,
link |
you borrow it or you give them equity,
link |
but there's real resources.
link |
Now, what happened with the fiat system?
link |
And this is, you know, the first part of the book
link |
where I look at it from an engineering kind of perspective
link |
is essentially, and I think this is like the breakthrough
link |
inside of the book, what fiat does
link |
is that it replaces gold mining with credit creation.
link |
The way that we make fiat money,
link |
the way that fiat is mined into existence
link |
is through credit creation.
link |
Most people think of fiat money
link |
as being something that happens
link |
when government prints money.
link |
And we still use the term government's printing money,
link |
but the vast majority of fiat is not physical.
link |
And in fact, fiat is not created
link |
when it is printed physically,
link |
it's created when it is lent.
link |
So when you go to a bank to get a $1 million loan
link |
to buy a house, that bank is not gonna give you
link |
a million dollars from their own money
link |
or from their depositor's money.
link |
They're gonna make a fresh new million dollars.
link |
When you walk out of that bank,
link |
the money supply has increased by $1 million
link |
to finance your home.
link |
So what fiat does is, I mean,
link |
it was basically born out of government credit
link |
and the credit of banks that are backed
link |
by the central bank and the government.
link |
So if you're part of the institutions
link |
that are allowed fiat privilege,
link |
where you can just issue loans backed by the central bank,
link |
backed by the currency,
link |
you are effectively creating new currency,
link |
new money every time you issue the loan.
link |
That's fiat mining is credit creation, I love it.
link |
So can you say something, I mean,
link |
you can't really have credit without a demand for credit.
link |
You can't really have an increase in supply
link |
without a demand for it.
link |
Is there any value you place in the humans wanting it?
link |
Basically, people wanting to do something with that credit,
link |
wanting to take big leaps, big risks,
link |
big entrepreneurial decisions.
link |
So is all credit bad?
link |
No, I think what's bad is anything, in my opinion,
link |
anything that is consensual,
link |
I wanna borrow money from you and we agree the terms,
link |
I can't object to that.
link |
As long as you and I both agree, I can't object to that.
link |
But in the case of the fiat system,
link |
it's not just you and the bank who come to an agreement.
link |
Everybody who uses the currency
link |
is forced to be part of that agreement.
link |
Because if you default,
link |
effectively what's protecting the bank from you
link |
is the fact that the government
link |
can just print a bunch of money and make the bank whole.
link |
So that little agreement between the bank and you
link |
is actually an agreement between the bank, you,
link |
and the entire populace that's using the currency.
link |
They're forced to provide the safety net for you and me
link |
to go and make that loan.
link |
And that safety net is the devaluation of the currency.
link |
That's how the whole thing actually works.
link |
So this is why I wrote the Bitcoin standard,
link |
explaining Bitcoin,
link |
and basically the takeaway message of the Bitcoin standard
link |
is you need to stack as much Bitcoin as you can,
link |
because this is the best money that has ever been invented.
link |
And we'll talk about that,
link |
why Bitcoin is the hardest money.
link |
But with fiat, the conclusion of the fiat standard,
link |
and again, this is not financial advice,
link |
I'm a lowly academic,
link |
you shouldn't listen to me on issues of money,
link |
but I think theoretically and intellectually,
link |
the conclusion of the fiat system
link |
is you need to be short fiat as much as you can.
link |
That's the smart winning move.
link |
So human wisdom over thousands of years is to save,
link |
try and not borrow as much as you can,
link |
try and accumulate as much savings as you can.
link |
That's reversed under fiat.
link |
If you're saving money,
link |
you're just subsidizing everybody else taking on loans.
link |
If you're taking on loans,
link |
you're benefiting from all the people that are borrowing.
link |
So the winning move under the fiat system,
link |
and this is what rich people do, is you borrow.
link |
Rich people under the fiat monetary system,
link |
they don't hold assets.
link |
If you're worth a billion dollars today,
link |
you don't have a billion dollars in a checking account.
link |
You've got maybe a hundred thousand, a million,
link |
five million or something like that.
link |
A tiny fraction of your money is held in cash.
link |
The majority is going to be held
link |
in all kinds of other hard assets.
link |
And you're gonna be borrowing.
link |
The richest people in the world
link |
are the biggest borrowers in the world.
link |
The most powerful entities in the world,
link |
the governments are the biggest borrowers in the world.
link |
And that's how they are the richest and the most powerful,
link |
because every time you're borrowing,
link |
you're giving the bank an excuse to print new money.
link |
So you're devaluing everybody else's money
link |
and you're getting a bit of the cut.
link |
If you were going to buy a house with your savings,
link |
you're accumulating the savings and they're losing value.
link |
And if I were to go buy the same house with credit,
link |
I'm getting the bank to print money for me.
link |
So obviously they can cut me in on that deal.
link |
And that's why it's much cheaper
link |
for everybody to buy with credit.
link |
That's why everybody buys everything on credit.
link |
So when we look at the global monetary system,
link |
the thing you wanna do as a government
link |
is be the sexiest currency out there.
link |
So the main currency, like the dollar currently is,
link |
is the one that has the most power in that kind of context.
link |
So you have, if you were to try to summarize
link |
what is the global monetary system as it is today,
link |
is a bunch of fiat currencies battling for position,
link |
for use outside their nation,
link |
and in so doing trying to gain power
link |
in the geopolitical sense.
link |
Is that, if we just zoom out,
link |
what is the global monetary system?
link |
Like how, what is it currently?
link |
So outside of the United States, the whole thing.
link |
Yeah, you could say that, but I think it's more realistic
link |
looking at how it has actually evolved
link |
over the past few decades.
link |
It's really a dollar system.
link |
It's not a system of currencies buying with one another.
link |
It's a dollar system, and all other currencies
link |
are just basically, I like to call them dollar