The World on a Bitcoin Standard | The Future of Money P12

How markets, economies, and society will look when the world adopts Bitcoin as money.

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What if many of the problems in the world stemmed from the same root cause: our fiat monetary system?

If that were true, wouldn’t it follow that a return to a hard money standard could solve these issues, once and for all?

As they say, ‘fix the money, fix the world.’

“La Belle Époque”, or Beautiful Times, was a short period in history during which much of the world was on a gold standard, leading society to flourish, in science and technology, art and fashion, and beyond. It was characterized by optimism, peace, and prosperity.

I believe that Bitcoin has the power to bring us back there, and that’s what we’ll explore in today’s post.

For those who are new, or want a primer on Bitcoin, check out The Future of Money.

The Problems with Fiat Money

Under a fiat monetary system, money is both cheap and plentiful. Savers are punished as the value of their currency is inflated away due to excess printing.

This system leads to unjustly speculative demand, as saving means suffering the consequences of holding local fiat shitcoin. In addition to siphoning wealth from the poor to the rich through the hidden tax we call inflation, fiat money causes a profound misallocation of capital.

Savers are incentivized to borrow and fund businesses that wouldn’t exist if capital were more expensive, as it would be in a truly free market - one in which the price of money isn’t artificially manipulated by central bankers.

Commonly referred to as ‘zombie companies’, these corporations require bailouts and cheap debt to stay afloat. This can only happen in a system where money can be borrowed easily and at little cost.

With no long-term ability to save in the local currency, and with market participants essentially getting paid to borrow money (i.e., the interest rate is lower than inflation), society at large has funded some incredibly useless things. These could not possibly exist in a hard money system, where the cost of capital is properly allocated, commensurate with the risk of borrowing it.

The examples pervade nearly every aspect of society, from science to academia, to the companies we build. This depressing phenomenon is best described in Saifedean Ammous’ work The Bitcoin Standard, and more recently detailed in his sequel The Fiat Standard.

Capital Misallocation

What is the fundamental difference between a fiat system and a Bitcoin Standard?
It is the first principle responsible for why inefficient businesses and poor ideas can survive in the former, but not in the latter. Let’s examine what that principle is.

In fiat land, where we currently live, future promises to repay debt are treated equally to present money, so long as the debt is issued by the government. Since currency is worth more today than it is tomorrow, market participants are incentivized to borrow and spend, even if the capital allocation is less than ideal.

On a Bitcoin Standard, only coins that have been previously mined can be used in an economy. When capital tomorrow is worth more than it is today, market participants are incentivized to defer consumption and allocate capital only to positive-sum and profitable endeavors.

The inefficiencies of the fiat system have proliferated in every aspect of modern life.

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A High Time Preference Nation

Time preference is used to measure one’s desire to receive something immediately, versus delaying gratification to get more of that good at a later time.

The most famous example is the “Marshmallow Experiment”, performed at Stanford University, where children are given the choice between one marshmallow now, or two at a later time. In multiple follow-up studies, participants who chose to wait showed higher rates of life success and benefits in everything from brain chemistry to overall competency.

People respond to incentives. A fiat monetary system is like having a shot clock on every decision you make at the poker table. You must learn to keep moving and act quickly, or you will forfeit the hand.

The result is that we’ve birthed a high-time preference nation, drunk on immediate gratification. While people often blame social media and other nuances for this phenomenon, those are second-order effects of society’s base layer of incentive, which is its monetary network.

Remember that money is simply time that is bottled up in a medium that is both preservable and transferrable. When people need to spend more of their time to get ahead, the result is that they resist saving in favor of immediate consumption.

But almost all good things in life come from delaying gratification:

• Building a successful relationship is a low-time preference activity while watching porn is a high-time preference.

• Exercising and maintaining a healthy diet vs. being overweight.

• Working hard vs. being lazy.

• Saving for the future vs. buying a new fancy car.

On a Bitcoin Standard, children from a young age would grow up with a sound worldview: if you delay gratification in life, you will ultimately receive two marshmallows at every part of it.

Fiat Food

When the United States severed its ties to gold in 1971, it paved the way for an increase in the money supply, which led to runaway inflation. The U.S., as every government does, and much like it did during COVID-19 when the most amount of currency in history was printed, blamed inflation on external factors.

As food prices increased people demanded a solution. Instead of addressing the root cause of the problem - the increase in the money supply - the U.S. reimagined the food system with the goal of craftily lowering inflation.

“Get big, or get out” was the motto instilled in farmers under Earl L. Butz, appointed through Nixon. Lower interest rates caused artificial demand for money, allowing farmers to increase their capital, and therefore their productivity. Many small-scale farmers either went under or were forced to sell to large corporations, which, over time, undermined the quality of our soil (and our people) as a result.

The over-farming and monocropping of our soil are a result of large-scale agriculture, which then requires more artificial fertilizer to offset. While some foods became cheaper, others did not. Grains became the base of the American diet, while healthy fats were demonized.

“As the price of highly nutritious foods rises, people are forced to replace them with cheaper alternatives” (Ammous, The Fiat Standard).

Superficially, inflation seemed to be falling. What is understated is that the basket of goods used to measure inflation changes based on what is being consumed.

If instead of purchasing a steak people choose to buy a soy burger, or if they purchase industrial seed oils instead of extra virgin olive oil or grass-fed butter, they aren’t getting the same product. Yet the CPI will amazingly show no inflation. Voila! Problem solved.

No matter what happens to monetary inflation, the CPI is destined to lag behind as a measure because it is based on consumer spending, which is itself determined by prices.

In short, people are choosing lower-quality goods as a response to higher prices, which changes the goods being measured in the inflation index, which artificially hides the problem of inflation.

If you visit a hospital with a compound fracture and the doctor bandages it while telling you the limb is no longer broken - is his claim really true merely because the bone can no longer be seen?

The result of government interference in food, both to disguise the impacts of inflation and to subsidize comestibles, which increase the prices of conglomerates that fund the politicians, has undermined the system. The result is one of the most harmful scams of our time: the food pyramid.

Industrialization perpetuated this lie by inventing foods that are terrible, but cheap. A basic premise of economics is any time there is an economic incentive to choose one good over another, there will be demand.

That something is cheap does not mean that it’s healthy. As a consequence, we’ve drowned our modern diets in hydrogenated seed oils, processed corn, low-fat alternatives, and refined sugar and flour.

All of this was executed on a quest to lower the cost of food at the expense of public health, largely caused by inflationary economic policies and the reduction of small-batch farms.

By contrast, here’s a look at how the food system will revolutionize when we return to a hard money standard.

Fiat Findings

Fiat has invaded another aspect of society: our education system. Funded by cheap government money, ideas propagate that wouldn’t otherwise.

For centuries in Italy, academics and philosophers, widely looked up to as the wisest people in society, advised politicians on future direction. Because today’s education system is largely funded by fiat, and education shapes modern culture, our entire society’s worldview has been warped.

As Saifdean notes: “Few causes are seemingly more deserving of fiat funding than children’s education. However, as funding for education becomes centralized, the providers of education have more of an incentive to appease their funders rather than their beneficiaries.”

In a free economy, market participants have choices. Under the fiat education structure, though, parents have little control over where their children learn, schools practically cannot go out of business, and teachers are nearly impossible to fire.

While people blame all sorts of ‘culprits’, the root cause is a perpetual drip of cheap money provided by the state.

Think private school is expensive? Think again. Most are already intuitively aware that parents with conscientious oversight of how their money is spent on education will outperform government entities with little oversight, recourse, or opportunity cost for the use of funds.

There’s a reason for that. Education policy scholar Corey DeAngelis finds that the average private school in Washington D.C. pays $24,000 per student, while public schools pay more than $31,000. Despite having higher budgets, public schools dramatically underperform private ones.

A common theme with fiat isn’t simply that the quality of the product is worse. It’s that an endless money spigot distorts economic incentives and the laws of scarcity found in all aspects of life. (As I argue, scarcity is still found in fiat in the finiteness of human time that can be stolen through the debasement of the currency.)

Academia is prone to the same perverse incentive scheme. It’s not only the University itself that doesn’t have to answer for the quality of its product in order to survive, but the funders of the ‘science’ they create as well.

Saifdean sheds light on the harsh reality. “As long as University funding is tied to publication, these journals can exploit the labor of professionals who need them for their livelihoods.”

In a fiat-funded world, research, and therefore science, is incentivized by the wants of the people providing the funding. In a hard money world bound by a free market, funding comes from the private sector and is directly correlated to the needs of the people and of society.

In Economic Laws of Scientific Research, Terance Kealey demonstrates how private funding spurred the industrial revolution in Great Britain at a time when government funding simply didn’t exist there. That only came about after WWI, which, of course, is when Great Britain went off the gold standard.

Fiat Consequences

At a high level, fiat allows many useless things - businesses, ideas, food, fuels - to proliferate that otherwise wouldn’t in a completely free market. Ideas are born out of collective psychology, which is heavily influenced by what is taught in school and within the culture that businesses create.

Disconnected from the required foundation of all free markets - actual demand from participants, bounded by nature’s essence of scarcity - idiotic products and ideas are rampant.

Since the basis of all economic activity and incentives - money - has been debased, the truth gets distorted. When this is expanded over nearly a century, the result is the cultural decline we see in society today, a sort of mass hysteria, and we are stuck in the middle of it.

A healthy low preference has been hijacked by the desire for immediate gratification, contaminating the food we consume, counterfeiting the quality of the businesses we create and invest in, and stupefying the conversations we have with one another.

Charlie Munger astutely observes, ‘If you show me the incentives, I’ll show you the outcome.’ With incredible salaries as an incentive, some of the world’s most talented people are working on inefficient projects that wouldn’t survive in a hard money system.

The World on a Bitcoin Standard

Since technology brings the cost of production down over time, consumption is reduced as people benefit from deferred spending. With hard money, then, one’s savings buys one more over time, not less.

When Bitcoin becomes global and money and fiats fail around the world, everyone will become aware that deferring consumption leads to an increase in purchasing power and therefore in quality of life; a stark contrast from people being forced to speculate in order to outpace inflation to stay afloat.

Any rational actor in such an economy will save and will spend Bitcoin only on immediate needs and strong wants. When one is presented with a perpetual opportunity cost through saving and then buying more later, a low-time preference, necessary for a healthy society, is positively reinforced across all aspects of his life.

Speculative demand to offset the debasement of currency will not exist. Money (Bitcoin) won’t be lent unless lenders are sure it’s worth the opportunity cost against simply saving, leading to a truly efficient cost of capital.

With a higher cost of borrowing, market participants need to be more careful about how and where they allocate their money. Speculation will naturally decrease.

The harsh truth is many businesses and services will disappear, as there won’t be demand. This is not inherently a bad thing. The free market will purge itself of ‘zombie companies’ and waste that isn’t providing real societal value. Market actors will have no choice but to work on important things that move society forward, creating a better world for current and future generations.

Capital Markets and Wealth

People’s biggest demand is not a speculative place to grow wealth. It is a secure place to park and preserve capital.

We primarily take risks because the base layer of our economic system has been corrupted through fiat. This perverse scheme forces us to seek returns continually so we might offset the debasement of the system’s currency. The level of risk one must take is proportional to the rate of theft from our purchasing power. This is inflation.

Put another way: one is incentivized to look for ways to increase his wealth through investing to avoid loss of purchasing power due to inflation. At today’s ‘official’ rate of 8% inflation, one loses 50% of his purchasing power in a mere nine years. (You can play around with this eye-opening inflation calculator for more).

Why does this matter?

The global bond market is estimated to be some $120 trillion dollars, whereas the global stock market is $100 trillion. I’d argue that far less wealth would be ‘stored’ in stocks if people weren’t economically compelled to earn 8% yearly in the markets to offset the devaluing of their currency.

Another example: the traditional 60/40 portfolio exists primarily because we lack a hard money standard. If our currency weren’t being debased through money printing (commonly referred to as ‘quantitative easing’), saving money and deferring consumption would result in more purchasing power in the future.

If this were the case now, as it will be in the future on a Bitcoin Standard, one 'Satoshi’ (the smallest unit of Bitcoin) tomorrow would buy you more than it would today.

In that approaching world, why would wealthy individuals ever hold a government bond and risk future debasement? Why would they invest a large portion of their portfolio in the stock market and risk a drawdown or recession, and then have to wait a decade to get back above water?

They wouldn’t.

Instead, wealthy individuals would hold on to Bitcoin. They would know that once they have enough stored for retirement, their quality of life will in fact increase over time. They wouldn’t seek immediate gratification.

They’ll simply buy Bitcoin and chill.

Conclusion

When we inevitably progress to a Bitcoin standard, society will once again be able to flourish. Many of today’s second-order problems will dissipate as their root cause - a fiat monetary system - is replaced

We will reinstate an era of peace and prosperity - “La Nouvelle Belle Époque” - as we row toward common, positive-sum goals.

In the meantime, I’m stacking sats and HODLing.

Alec