The Great Realignment: Money, Power, Greed & Bitcoin

Part One: Money

Part One of the book is complete. If you find a typo or something that is unclear, please feel free to leave a comment. Minor changes may follow.

Money

Long before we can begin to coherently discuss Bitcoin, we must first understand where money — the idea of money — comes from. This chapter must, of a necessity, be condensed. The topic of money is deep and interwoven. Plenty of ink has been spilled roughing out what money is and where it came from. None of it is fundamentally correct. No one has definitively defined money. There are many ideas about what money is, how it works and, indeed, why it exists at all. At the end of each line of inquiry is the very unsettling realization that money is simply a construct. It morphs and changes with circumstance. There is nothing natural about money. There is no innate quality that money possesses. Yet, we carry on with the illusion that money has fixed properties and can be understood as such.

It is most peculiar.

This is partly why much of what follows will be counter-intuitive to most. As the late David Graeber pointed out, concepts of money are so ubiquitous today that few question the origin story. Indeed, most can’t even imagine a monetary system different from what exists today. The trouble is, many of the assumptions around money, money creation, and money’s role in the world are deeply flawed, or are largely unsupported suppositions.

Those flaws are a symptom of the momentum and reach of sound-bite reasoning and faulty heuristics. Economists have done their share to further muddy the waters. The Austrian School comes closest to a sound understanding of modern money. Even there it’s not perfect. The problem with economics in general is the entire school of thought revolves around very generous assumptions. These assumptions are rarely challenged. They are even more difficult to unpack.

If you ask someone, “What is money?” you will likely hear a number of definitions. Medium of exchange, store of value, and unit of account are the Economics 101 standards. Generally speaking, these definitions come from concepts in Adam Smith’s 1776 book about money, The Wealth of Nations. For those unfamiliar, Adam Smith’s money “origin story” goes something like this:

“Once upon a time, people would trade things like shoes or oxcarts. As life and things became more complex, it became too hard to trade these things. It was hard because there is no easy way to divide an oxcart or a shoe. To fix this problem, these people created money. Then from money came lending. This naturally turned into credit and debt. Rinse and repeat for a few hundred years and we get the financial world we live in today.”

This idea holds a certain logical appeal and seems perfectly sound. There is the minor inconvenience that Adam Smith simply made it all up. If you run this story by an anthropologist, you will discover it’s a bunch of malarkey. They have found no evidence of a society on earth developing this way. Barter economies have existed. But those barter systems usually crop up after the collapse of whatever previous monetary system was in place. It is also true that people have used things like coins, shells, and beads to exchange value. But to assume that one naturally flowed from the other is a mistake. It turns out, the way we think about and use money today is relatively recent.

Rather than a system of barter that organically grew into fungible money as Adam Smith said, what we actually have is a system designed to extract taxes from a population. To understand this, we need to adjust our money paradigm a little bit. To accomplish this, we must first talk about what happens when people exchange value, whether it be time, effort, or things. In furtherance of moving this process along, let us engage in a little thought experiment.

Imagine a close friend invites you to their house for dinner. You arrive at the agreed upon time. Your friend has prepared a meal that you share. Would you expect your friend to present a bill to you at the end of the meal? I am sure it has happened at some point, but I think it would be unusual. Now, if two weeks later, your friend fell on hard times and needed some food, would you charge them?

I would certainly hope not.

Likewise, imagine when someone asks, “Pass the salt please.” Is your first response, “How much will you give me for it?” Probably not. As a general first-principle then, let us say at a minimum that human beings exchange value. Whether we call it sharing, selling, trading or something else is immaterial. There is conceptual research showing cooperation is an essential human trait. That trait has contributed greatly to our success as a species. A key part of cooperation involves the exchange of utility, services, or things of perceived value.

With that in mind, we could also reasonably say that, among close associates, most trade is frictionless. We exchange freely with our friends and loved ones. The inherent expectation is fairness. The unspoken trust is that our sharing and trading will be roughly equal measures of give and take. In fact, there is a growing body of research demonstrating people orient towards three basic patterns: Givers, matchers, and takers.

For a case on point, we all have had friends that take more than they give. Assuming we bother to keep them as friends, if they come asking to borrow something we highly value, we may require collateral to ensure we get whatever it is back. That collateral may be as gentle as social pressure. It could also just as easily be a signed contract, or an escrow agreement. Likewise, we probably all have friends that give much more than they take. These friends may range from the doormats to the grandiosely generous. If they ask to borrow, we may simply give freely out of pity, or in recognition of their previous generosity.

Our close personal relationships are often mediated by these ideas. How we treat an exchange varies based on our trust in the person we are dealing with. If I know you are a fair, reliable close friend, I will exchange value with you one way. If you are a friend that is always borrowing and never reciprocating, the exchange will be different. The point is, the further away from that “trust circle” we get, the more insurance we will demand. This is how we ensure the value given will be matched or returned in kind. The less we trust someone, the more insurance we need, or the more of a doormat we become.

Early Monetary Systems

For most of human history, human social groups tended to max out at around 150–300 people in a given “sphere of influence.” Generally speaking, value exchange in these small communities was done by informal contract. You need shoes and I make shoes, I give you a pair of shoes. In this is the implicit (and sometimes explicit) understanding that you now “owe” me an equivalent value for a pair of shoes. The Austrian School of Economics gets the “value” component of this transaction correct. Unlike modern economists, the Austrians recognize that value cannot be “intrinsic.” Instead, value is inherently and irrecoverably receiver dependent. There is no “supply and demand.” It’s just “demand and demand.”

This aspect of perspective-dependent value allows for exchanges such as the hypothetical shoe trade above to work. This is very different than the Adam Smith version. His version says value must, at all times, be bartered equally. In the actual implementation of trade, value is quite malleable. Where the economists’ models presume “rational actors” exchanging value, behavioral economics has long since disproved any such notions. For example, a pair of shoes might be extraordinarily valuable to the receiving party. In exchange, they may return anything from a hug to an oxcart, or even $20 million cash. Moreover, anything between a hug and $20 million may prove sufficient to the receiver. If both parties view the transaction as fair, it will result in both parties happily exchanging value.

Of course, in a medieval European village, such an arrangement is ripe for the problem of free riding. Free riding is the large, community-scale version of the friend who takes and never gives. One way free riding was curtailed, at least in medieval Europe, was the use of a ledger. The value tracked in the ledger could be anything from help with a barn raising to a dozen eggs. Each family would keep track of goods and services exchanged using their own ledger. In many cases, an exchange would not even require an entry in the ledger. This is because most “debts” would be immediately canceled during the exchange, or shortly thereafter, e.g., “if you help me catch my pig, I’ll give you a beer.”

But if a particularly valuable thing or service is being exchanged, the parties may write the details down in a contract. The interesting thing about a contract is, the written promise itself — again within a trusted circle — could also become a valuable commodity of exchange. A promissory note, if you will. In this way these contracts would also become exchangeable and tradable beyond the two people making the initial agreement.

If I thought you were trustworthy and I gave you a side of beef, but you didn’t have anything I need, we could simply write those details down. The writing could be as simple as, “You owe me for a side of beef.” I could then use that written instrument to trade your debt to me with someone else in the community. This way I could get something I need, like a farm tool, or help with repairing a roof from the same side of beef I gave to you. The neat thing is, the tool maker or the roofer might make the trade even if they didn’t need anything from you either. Your good reputation and your written promise to provide a “side of beef value” would allow further trade to carry on. As alluded to above, this is the crude and original form of “promissory note.”

It looks something like this in practice:

1. Adam owes Baker for something of value and writes down what the debt is for.
2. Baker takes that promise and offers to trade it to Charlie for something of value that Charlie has and Baker wants.
3. Provided Charlie knows Adam is good for the debt, Charlie accepts.
4. Charlie could then choose to “redeem” from Adam, or he could continue the chain by trading Adam’s promise to Debbie for something Debbie has and Charlie wants.

Round and round these promissory notes would go until at some point the community gets together and has a reconciliation. During the reconciliation period, the ledger accounts of who owes what to whom are balanced. Any value given and not received is made whole, or at least as close as possible. Also during this time, if a perceived or real mismatch in expected value is discovered, a select group — usually trusted elders — would mediate the dispute. Through this, the community would ensure relative fairness based on local standards.

Once the books were settled, any trivial or difficult to reconcile balances were made whole using specie (coins, usually gold or silver). Historically, that would have been the primary time specie would be used to exchange value within these small communities. There are even modern examples of the “books” being reconciled with things as diverse as cigarettes, ramen noodles and pecan pralines. Remembering, of course, this all depends on the existence of high-interpersonal knowledge and trusted relationships in the community. In small communities to this day, from small towns to prisons, it is not uncommon for people to know each other well and trade accordingly. What this shows and, especially within early medieval trading systems, is that they are not always quite direct barter. They are also not quite trading with dedicated mediums of exchange. It is often a little bit of both, with some form of ledger in-between. All of it facilitated by some level of trust and presumed fairness based on reputation and inter-personal knowledge.

The little hiccup here for the medieval villagers is trade would, of a necessity, be limited to that small group of people. The value of a promise carries less weight the further away you go. If the promisor isn’t close enough to know and trust well, let alone collect from, this type of informal ledger trade breaks down. The same problem would present itself if a stranger came into the community. A far-flung traveler passing through town would have no ties to the community. Absent direct settlement, e.g., barter, a trusted trade with them would be highly risky. It would be assumed the stranger would likely be a free-rider right out of the gate.

The solution to this was also the use of specie. Rather than demand direct barter from a passing stranger (like labor for food), they could instead just take a few coins and call it good. In turn, those coins would be helpful the next time the group needed to balance their accounts. Likewise, when a member of the local group traveled afar, they too could use specie at their destination to procure goods from another community when they themselves were the stranger. Of course, all this begs the question, “if this worked so well, why did everyone suddenly start using specie for all trade, even among trusted friends?” To answer the question, we have to understand the real problems money is trying to solve from the perspective of the people that create the money.

Imagine you are an early medieval landlord and your King tells you to tax your peasant population and send him a cut. The easy way to do this is to simply go around and take a certain amount of whatever they produce — by force, if necessary. In fact, the “great” royal dynasties of Europe are basically rooted in crude protection rackets. Their early behavior was not dissimilar to what gangs and street thugs do today. The concept is simple: If you’re good at violence, it’s far easier to extort and rob people than it is to make or grow stuff. If you’re really good at violence, you can often get other people to do the violence with, or for you.

Kings, as it happens, became kings because they were the best at organizing violence. The better at organized violence they got, the bigger their kingdoms became. This was especially true if they were both excellent at violence and still maintained an air of “fairness” to their extortion and robbery. Even better still if they’re willing and able to step in and mediate disputes.

Like a friendly neighborhood mobster, if you will.

Nevertheless, after the King’s landlord collected those taxes from their peasants, the landlord would keep a share for himself. The rest would go to the King in order to settle the landlords’ tax to the sovereign. In this way, community produced resources were redistributed up from the working peasant-class to the managerial landlord-class, and then on to the sovereign. If you didn’t notice, this is much the same redistribution process in use today. Except today, it is much more layered, and theoretically voluntary. Always keep in mind though, there is still a gun at the end of that chain. Nevertheless, the trouble with taking “stuff” is there is only so much wheat, or meat, or shoes, or what-have-you that you can store before it rots, loses value, or gets too bulky.

Meaning, direct taxation by theft or extortion of goods quickly becomes a logistics problem. Not to mention, the taking of goods leaves a lot of value exchange between your peasants that you cannot profit from solely through the theft of goods. Think of it from a King’s perspective. If building a fence is a valuable service, why shouldn’t the King get a cut of that too? The peasants, after all, are his property by divine right. Their labor is merely a rental, much like a plow horse tilling another man’s field. Certainly the King deserves a fee for divinely providing that rental service, right?

Nevertheless, the clever way the inventors of modern monetary systems got around these problems was to demand taxes be paid in specie instead of “stuff.” Such an arrangement makes a lot of sense if you’re a King and your kingdom has grown quite large. Forcing your population to pay taxes in specie instead of “stuff” forces them to trade in specie. Put another way, they are now forced to make and do things in order to get specie to pay their tax to you. This arrangement does three really great things for you — Our most honorable, wise and divine King:

1. You don’t have to store a bunch of stuff you don’t need right away.
2. You force your population to be measurably productive (no more hiding potatoes).
3. You can give your peasants the specie you took from them in tax receipts to pay them for the work you are indirectly forcing them to do, or to pay for the products you are indirectly forcing them to make.
4. Which, in turn, incentivizes them to be even more productive

Put simply, if you make shoes, then you must sell some of those shoes for specie, or you cannot pay your tax. Labor must be compensated in specie, or the laborer cannot pay their tax. Landlords must collect specie from their peasants, or they cannot pay their tax. In turn, the sovereign can now buy things the sovereign needs or wants using the same specie they collected from their peasants in taxes. Since the taxes are only a percentage of what the peasant makes, it encourages them to increase how much they make in order to make and save specie.

It’s a pretty neat trick.

Going larger still, all sovereigns caught onto this little scheme around the same time. Trade in specie was encouraged because gold and silver already enjoyed a widely recognized “value” among all sovereigns. Once trade in specie was formalized, it also enabled the sovereigns to trade with each other in a coherent manner. Just like that, you have created a relatively low-friction, hierarchical market economy that survives in this general form to this day. In short, and to sum the answer to the question, “what are the problems money is trying to solve?” I would answer that, for the population and the king respectively, money:

1. Facilitates the exchange of value in low, or zero-trust situations; and
2. Allows for the bulk extraction of fractional value from the personal or collective industry of sovereign subjects through taxation.

This definition, of course, is quite different from what Adam Smith or, indeed what most economists would say. Yet, from a historical perspective, it is a more accurate one, especially in the industrialized West.

Silver and Gold

As noted above, through most of medieval European history, trade among trusted groups tended to occur through formal or informal contracts and ledgers. Generally, specie would only be used for a collective final settlement much later on. The rough path being, I need or request something from you, you supply it to me if you want. Depending on the particulars, some form of contract arises between us that says I will repay you in like value in the future. If the transaction is large, or complex, we write it down on a ledger. Everyone maintains a ledger of accounts. At some point, we all balance our ledgers and start all over again. With that brief overview in mind, the evolution of money is obviously more complex than what has been outlined thus far.

What I aim to capture here are the broad historical strokes as they apply to the industrialized, pseudo-capitalist economies of today. In other words, the financial system that was born from the Euro-Christian nation states that arose from the Treaty of Westphalia during the late Middle Ages. As noted at the outset, there is no unified system, or theory of money. Formalized trade systems have arisen all over the world throughout history. The way they were created and functioned is far more attributable to where and how they lived, where and how they get their food, and the Gods they worshipped as a result. This is as true of the developed western economies today, as it was true of the economies of the American Plains Indians, the ancient Mayans, or the Eastern dynasties. For hopefully obvious reasons, the focus here is on the western economies in which we currently live.

With that lengthy caveat in mind, it is around the time of the Renaissance that we start to see specie being utilized in a very similar fashion as paper money today. Coins of various denominations circulating widely and nearly all formal trade being settled via the medium of standardized specie. Much like today, if one were particularly industrious, they could accumulate coins for a large purchase. Or, those savings could preserve their purchasing power to cover a rainy day. With a system such as this, it also becomes possible to balance a ledger by simply counting the number of coins one owes to another, or vice versa. This, of course, is a much simpler method of accounting. That becomes especially true in an increasingly complex system. Beyond a small village, the need to account for the particulars of each transaction would become prohibitive. Likewise, the period of reconciliation for personal promissory notes would be untenable at larger scales without complex forms of automation and error correction.

As you may have guessed, this brings us to a point where fungible money becomes a medium of exchange, a store of value, and a unit of account. This is, of course, the same destination that Adam Smith arrived at. However, our journey wove a very different path than Mr. Smith’s money origin story. It is an important distinction, because Adam Smith’s version suggests the origin of money was benign and simply born out of natural utility considerations. The more accurate version for the industrialized West instead demonstrates that sovereign money was anything but benign. It was rather a deliberate tool to more efficiently facilitate theft and extortion from the start.

Still none of this explains why gold or silver might be valued as a unit of voluntary exchange. Nor does it describe why it might be a desirable object for theft and extortion through taxation or otherwise. The Bible explicitly mentions gold and silver as money. Given the enormous power the Church wielded during the Middle Ages, it is no surprise gold and silver would be highly prized simply from its mention in the Holy Book. The trouble with that is, gold and silver were also highly prized two or three thousand years before the Bible was written. Meaning, it is more likely the authors of the Bible simply accepted gold and silver as valuable because it had been that way for as long as anyone knew up to that point.

In fact, and as best as can be surmised, precious metals seem to have an almost universal appeal throughout recorded history. Whether in China, India, ancient Rome, the Middle East, Western Europe, or the Americas, people just seem to like gold and silver. That these metals are relatively scarce and difficult to acquire and refine also seems to add to the value equation. With gold in particular, it is relatively easy to work with and shape. Gold does not corrode when exposed to the environment. It can also be reused infinitely without degradation.

The gold in your watch or wedding ring today could very well contain gold worn by an Egyptian at the time of the pyramids. Yet, a precise reason for why gold and silver became valuable remains elusive. The best answer as to why precious metals — and especially gold — have been used as a valuable, tradable commodity appears to simply be because, unlike gems, you can:

1. Readily reshape and divide gold without waste.
2. It is stable and non-toxic.
3. It is essentially indestructible; and
4. People think it looks nice when refined.

Much the same is true with silver, save for the fact that it tarnishes. That is quite literally as good of an explanation as I can find. Nevertheless, in the late Middle Ages in Europe, as societies became more complex, specie became more refined in appearance and weight. To be sure, sovereigns routinely tinkered with those weights and measures. They would change size and purity. They would recast coins at different weights. At other times, they might ban one form in favor of another. Almost universally, these changes were an attempt to deal with spending more than the sovereign collects in taxes and plunder, e.g., deficit spending.

The simplest way to explain this is: If you are a sovereign and you need more gold than you have to buy goods and services and you need to keep minting new coins for trade, the easiest way to do both is to take all the coins you minted before and make each one weigh less. Then, as the idea goes, you either trick or force your population to trade in the new coins as if they were the same value before your goldsmiths tinkered with them. Of course, the peasants and merchants often caught on to this little scheme and did some clipping of their own. This is one of the major problems with using precious metals as money. Regardless of who is driving the debasement, one can only recast a smaller coin, or mix it with base metals so many times before the population either demands more of it as payment, or simply stops using it.

Is the King of England recasting your coins? Use Italian or French ones instead. If those dastardly Frenchmen start doing the same thing? Well, just switch to Swiss coins, or German ones. This is the essence of Gresham’s law, which says, “Bad money will chase out the good.” It is also an especially vexing conundrum for commodity money. There is a weight-value to the underlying precious metal in most forms of specie. Once the face value (the denominated value) deviates significantly from the weight-value, or “melt value,” people will quit using it. Instead, the people forced to transact in the debased coins will spend the debased versions first and horde (save) the purer, more valuable ones.

As a side-note, if you have ever wondered where the origins of European hatred towards Jews first manifested, it largely came from monetary debasement and money lending. Keep in mind that, in medieval Europe, the Catholic Church still held a very powerful position of authority. Those familiar with the Bible will know that lending money for interest (usury) is a forbidden practice. The Jews were not constrained by this, at least insofar as dealing with gentiles. Thus, the European kings would rely on Jewish bankers to engage in usury (usually borrowing) and debasement via clipping, re-alloying and recasting. This gave these sovereigns both a way around ecclesiastical law, and a very convenient, non-Christian scapegoat for when their monetary schemes inevitably fell apart.

“It was not I, but rather those dastardly Jewish bankers that have ruined your money dear peasants. It is not my fault. Hang them instead of me.” Obviously not a direct quote, but that is the gist of how medieval royalty very easily avoided taking responsibility for running up too much debt and debasing their subjects’ purchasing power. This is a very simple and obvious benefit for the sovereign. Demonizing Jewish bankers was a no-brainer for Christian Kings and their loyal Christian subjects. They would often do this through mass propaganda campaigns against the Jews. For them, it was a small cost to ensure His Imperial Majesty got to keep his majestic head affixed to his royal body. Meanwhile, he’d still get to fund his next whim, whether it be a war, or a stunning new home.

Returning to the topic at hand, the sovereigns of these nation-states could have easily banded together and coordinated their monetary tinkering. As we have discovered modernly with the 2008 bank bailouts, the subsequent “quantitative easing” programs, and the 2020 global-lockdown helicopter money, coordinated sovereign debasement is much harder to detect. It is certainly more difficult to defeat. Unfortunately for the medieval rulers, they could never quite figure this out. They were too busy fighting wars and trying to steal land from each other. This, of course, got in the way of them coordinating their monetary debasement. Nevertheless, by the mid-to-late 1800s these systems had generally stabilized. Gold and bi-metal (gold and silver) monetary systems all roughly adhered to an international gold standard by the late-19th century. This loose monetary coalition continued in fits and starts right up to the Great Depression. By World War II, most of the Western economies abandoned gold as a primary medium of exchange in favor of paper notes.

The Rise of Fiat Currencies

As mentioned above, the idea and preferential adoption of fiat (paper) currencies instead of gold gathered steam around the time of the Great Depression. Despite claims to the contrary, there were many problems with the gold standard era. Nations would often try to leverage advantage by manipulating gold markets. Countries like Weimar Germany had massive bank runs. So while the gold standard was a functional system for international trade, it was far from perfect. Nevertheless, in the post-World War Two era, the Bretton-Woods agreement created a new gold “peg” scheme. Bretton-Woods launched a system where United States dollars were convertible to gold at a statutorily fixed rate. The United States dollar was chosen for this role for practical reasons. Bretton-Woods was signed in the wake of World War Two. At that time, the United States held in her vaults approximately 80% of the world’s gold reserves. The United States was also the only industrial nation that retained any significant manufacturing capacity. The European nations and their factories were little more than rubble after the fighting in WWII.

This was not an ideal arrangement for any of the nations of the world at the time. They all intuitively recognized the United States was not exactly the most stable country in the world. Keep in mind, the U.S. had just risen from a massive civil war only sixty-years prior. The U.S. banking system was world renowned for its banking scandals and financial crises. It had also only just emerged from the chaos of the “wildcat banking” era by the time Bretton-Woods was signed. But, the United States was the best the world had at the time.

So, that was what they went with.

Of course, the United States’ promise to the world that it would overcome its marginal track record in banking and finance was hardly a secure transaction. In fact, it did nothing to keep the United States from continuing on its well-trodden historical path. This was readily apparent to anyone bothering to look. The United States balance of accounts became increasingly lopsided through the 1950s. By the time the issue had boiled to crisis proportions in the late 1960s, the Bretton-Woods arrangement simply imploded. It only took a scant thirty-five years for the United States to completely renege on promises made post-WWII. Nixon closed the gold redemption window in 1971 by executive fiat. The U.S. assured the world it was a temporary measure. They continued to promise a return to dollar convertibility right up to the moment they formally abandoned the Bretton-Woods agreement in 1976 with the Jamaica Accords.

Since then, all major fiat currencies in circulation today “float” their respective values. This market for currency is based on a complex system of international exchange. It must be said here that the United States enjoys a privileged position in this exchange hierarchy. The majority of global trade is still, to this day, settled and accounted for in U.S. dollars. This is largely because of Bretton-Woods and the enormous amount of economic momentum embodied in the U.S. dollar. Put another way, it is not that the world necessarily wanted to continue accepting fiat U.S. dollars after the U.S. refused to honor their commitment to redeem for gold at a fixed-rate. It was much more a function of maintaining the status quo. By the time Nixon closed the gold window, an entire global financial system was built on the U.S. dollar.

I would be remiss to not point out the widespread adoption of floating fiat currencies in the industrialized West has also coincided with a rather unprecedented peace — at least in the industrialized West. I say this is a coincidence, because many an economist will point to this and call it a “win” for fiat currency. The base reality is more appropriately attributable to the momentum mentioned above. The threat of mutual assured destruction and the United States’ insistence — by force, or threat of force — to maintain global adherence to the U.S. dollar’s pre-eminent role in trade and settlement certainly helps. Put another way, woe to the militarily weak commodity producing nations of the world. For them, the U.S. is the one who knocks. More on this in Part Two.

Nevertheless, floating fiat currencies offer a number of advantages to the sovereign (government). Prime among them is the sovereign technically cannot go bankrupt anymore. Trouble being, if the sovereign is irresponsible in the management of their internal finances, their ability to repay foreign debts plummets. This has occurred at various times and in various countries. The German Weimar Republic is an infamous and extreme example of a country not technically going bankrupt, but being bankrupt all the same. For the last sixty-years or so, that has not been the case for the United States. The enormously privileged position of the U.S. dollar allows the United States to be incredibly irresponsible internally. All the while, foreigners keep taking her dollars anyway. This is how the United States has created an economy that derives 70% of its GDP from consumer spending. Put simply, the U.S. has been able to spend far more than it makes for a very long time. The United States accomplishes this much the same way a trust-fund baby might finance a lavish lifestyle by running up the family credit card.

The broad cause and effect loop is the United States can acquire goods from abroad by paying in dollars that are continually being debased to deficit spend at home. In this manner, the United States has been able to offload and externalize inflationary forces while increasing the material comforts of the people within her borders. It is this unique ability to outsource inflation from monetary debasement that is also the primary creator and driver of what the late Dr. Graeber termed, “Bullshit Jobs.” This misalignment of incentives has resulted in a system where the short-term gain of outsourcing most internal domestic productivity trumps long-term considerations of national security, stability, and domestic harmony. The looming trouble the United States faces now is that the world has gotten tired of this little hustle. While the U.S. blusters about, the rest of the world is resolutely moving towards a world that negates the U.S. dollar’s privileged status. To return to the trust-fund baby analogy, the family is about to cut-up the spoiled brat’s credit card. They’re just trying to figure out how to do it without ruining the family’s finances.

Returning to the matter at hand, provided the sovereign is responsible in the management of their internal spending, fiat regimes provide a lot of flexibility to finance projects. If the sovereign needs a little more money than they have, they simply create a little more money to spend. But, if the sovereign inflates their currency too much, so that the “value” of the currency drops too fast, they simply create less. The reduction in the inflation rate allows monetary liquidity to “dry up.” This is the essence of all the monetary policy talk around interest rates that dominates the financial media every quarter. Now, recall from earlier in the chapter, where it is posited that money:

1. Facilitates the exchange of value in low or zero-trust situations; and
2. Allows for the bulk extraction of fractional value from the personal or collective industry of sovereign subjects through taxation.

Then reflect upon the fact that the world of today is highly complex. Global communication is instantaneous. Nearly every point in the world is accessible by air within a day. Goods are produced and shipped everywhere. We exchange value with strangers all the time, both foreign and domestic. Perhaps ironically, the glue that holds this amazing, complex infrastructure together is ultimately trust. In the modern economy, fiat currency, and more specifically, the U.S. dollar stands in for that trust. The trust component is that in any given exchange facilitated by U.S. dollars, the U.S. dollar stands-in for the promise to return like value. For instance, I do not know the person who runs the Starbucks on the corner and they do not know me. The U.S. sovereign-backed dollar provides the contract between us. If you give me a coffee and I give you U.S. dollars in exchange, the U.S. government sort of guarantees you will receive like value later on by exchanging those dollars with someone else.

In truth, the U.S. sovereign is running a scheme where they continually inflate the supply of money. The goal they aim for is one where you (everyone) loses 2% per year of purchasing power. Leaving that aside for the moment, I have to pay my taxes in U.S. dollars. Through that mechanism, the sovereign extracts a fractional value of my industry. The sovereign in turn demands — by threat of force — that those dollars be accepted for all debts public and private. This is a very convenient arrangement for the United States. As you can see, they’ve essentially baked the “coin clipping” from days of old right into the U.S. monetary cake. They also get to force everyone to trade in their fiat U.S. dollars. Just like the medieval kings, the U.S. sovereign can then use those dollars to buy all kinds of neat stuff. The best part is, they don’t even need an ounce of gold to do it.

King William of Orange would have been proud.

Stability and Fractional Reserve Banking

In terms of economic stability, Switzerland stands out as an exemplar. Those who follow the link may notice the United States is pretty far down the list at number seventeen. That places the U.S. between Belgium and Singapore. Keep in mind, of course, the total population and land mass of both is roughly equivalent to New York City. Despite the popular narrative that the United States is the “most powerful economy in the world,” the truth is the United States is rather poor in terms of economic stability. In fact, some have even gone so far as to argue the U.S. has become a banana republic. That may be a bit of a stretch.

Of course, it may not be as well.

Recall, the Bretton-Woods agreement lasted almost thirty-five years before it collapsed under the weight of deficit spending. American adventures in Korea and Vietnam (among other things) created deficits that would have bankrupted the United States if it honored the Bretton-Woods gold peg. The floating fiat system has now lasted for about fifty-five years. It is functionally imploding as we speak. Prior to the U.S. abandoning Bretton-Woods, gold was redeemable at a statutorily fixed rate of $35 per ounce. After the Nixon administration allowed the U.S. dollar to “float” on the open market, the result was a massive inflationary spike in the United States. Once the gold peg was broken, the world dumped their debased dollars en masse. By 1980, the same ounce of gold cost $800.

Around the same time, then President James E. Carter Jr. made his (in)famous speech about a “crisis of confidence” in America. For those living in Europe during the financial crisis of 2008, the speech has a lot of familiar themes. Key among them was the need for austerity measures to “right the ship.” In fairness to Mr. Carter, what he proposed was essentially correct. Unfortunately, the first big-R republican came on the scene in the form of Ronald Reagan. President Reagan’s economic plan was to break out the national credit card via deficit spending. To understand this, you first have to understand the basics of central bank monetary policy. Without doing a complete deep dive, the simple version is the central bank wants to roughly balance the number of dollars going out vs. the number of dollars coming in with a catch: The number of dollars going out should be slightly higher than the dollars coming in.

The stated goal of the Federal Reserve is to keep this rate around 2% per year. The way they try to achieve this is by altering the interest rate they charge to banks either up or down. What Reagan did (and every administration since) was make the dollars going out far exceed the dollars coming in. The way they all achieve this is through monetary expansion, e.g. “money printing.” These images are from a paper I published on student loan bankruptcies several years back. I use it here because it illustrates well what the result of that mass monetary debasement looks like:

As you can see, starting right around 1980, there is a literal explosion of growth in both the Dow Jones Industrial Average and the rate of bankruptcies. If you look closer, you can see they almost track each other perfectly. What changed during this time? Massive deficit spending under the Reagan administration. Where Carter called for savings and austerity, Reagan threw a party and charged it to the national credit card. The result was a huge increase in credit issuance, a corresponding increase in debt defaults, and the on-going illusion of prosperity.

To illustrate how this all works, lower interest rates roughly equate to lower borrowing costs. This, in turn, roughly translates into more lending. This is a key point, because modern money is created every time a bank lends money. The way this happens is attributable to the idea of fractional reserve banking. With fractional reserve banking, a bank only has to hold a certain percentage of the funds it loans out. As an example, imagine your father loaned you $100 at 5% interest. Then imagine you turned around and loaned that same $100 to your friend for 7% interest. Not a bad deal for everyone involved, assuming your friend pays you back.

Let us change this hypothetical a little bit and add the “fractional reserve” part in. Same scenario, your father loans you $100 at 5% interest. Except this time you are allowed to loan that $100 to nine friends. But, Father insists that you keep the original $100 in your pocket. The way you accomplish this is by giving each one of your nine borrower friends a card that has a $100 limit on it. They can then use that card to spend just like cash. The really neat thing is, they all have to pay you back $100 each at 7% interest. This is a pretty good deal, because if they all pay you back, you collect interest on loans totaling $900 and you will collect $900 over time. This is pretty sweet, considering you only have $100 in your pocket. In this “Father, Friends, and You” economy, you just created $900 of “new” money out of thin air.

This runs on the idea that, as long as you lend money to people that pay you back, you will profit handsomely. Moreover, as the theory goes, more economic “energy” will be created. But, if one of the borrowers defaults entirely and doesn’t pay you back, you can still pay back the original debt to your father. In this simplified version, you have to keep a fraction (9/10) of the money you lend out in reserve in case a borrower defaults. For the banks, they have a lot of depositors that are (theoretically) earning interest. These are called demand deposits. A commercial or retail bank must keep a certain percentage of those demand deposits available for withdrawal. The idea is, as long as everyone doesn’t demand their money at once, the percentage held in reserve should cover any normal outflows. The rest can then be made available to lend out. Much like the nine-tenths reserve demanded by Father above, this was also roughly the reserve requirement the Federal Reserve had for banks in the United States until 2020. Now banks in the U.S. have no reserve requirements at all.

Today, like the Bank of England, the Federal Reserve simply relies on “prudence.”

If we expand this idea out further, what the Federal Reserve wants to do is ensure the “new money” being created through lending is roughly 2% more than the year before. This where you here terms in the media about “target inflation,” or inflation “running too high,” or “running too low.” Returning to the hypothetical “Father, Friends, and You” economy, the way Father would control how much you lend out, and to whom, is by raising or lowering the amount of interest he charges you in the first place. If he charges 20% interest, you have to charge your friends much more to borrow and still remain profitable. When it becomes more expensive to borrow, they will be less likely to want to do so.

The same holds true in reverse. If Father only charges you 1% interest, then borrowing and lending become much less expensive. Thus, your friends will be more likely to borrow. Put more concretely, Father’s base lending interest rate to you determines the cost of capital to facilitate further lending to your friends. The trouble with this arrangement is the not-so-small problem of speculation. If it is very expensive to borrow money, your friends are much less likely to borrow to pay for very risky endeavors. If they want to continue to be able to borrow, they want to be sure whatever they’re using the borrowed money to create will have a high likelihood of making more money than the loan costs.

But, if it is very inexpensive to borrow, then it is much more favorable for them to take larger risks and seek larger rewards. This is a very simplified version of the “balance” a central bank is trying to achieve. They ideally want a rate that discourages naked speculation, but still encourages wise and thoughtful investment for growth. The trouble is, a handful of people in a room trying to decide what is, or is not a “good” investment and what rate to charge for that is simply a terrible idea. To return to the “Father, Friends and You” economy, this logic presumes Father knows what is best for you and all your friends, without knowing who your friends are, what their skills and abilities may be, or what they’re even planning to do with the money. This also leaves aside the niggling problem of you getting to “make” money from nothing except for a minor default risk. If we take these same problems and scale them up, they are magnified by the fact that American banking has never been stable or reliable. That is roughly how we get to where we are today.

Which then begs another question, “why is American banking so bad?”

American Banking

Those who watch mainstream news like Fox or CNN might lean into the idea that the divisions in the U.S. are getting worse each passing day. It makes sense why it seems this way. The deeper truth is many of these divisions have been in the U.S. since day one. To understand why, we must look briefly at what the U.S. really is, from a historical perspective. When the original thirteen states of the U.S. were established, they were all intended to be sovereign unto themselves. They were, in effect and structure, “new” nation states. The inhabitants of New York considered themselves to be citizens of the country of New York. Same was true for Virginians, Georgians, and all the rest — much like how we view the nations of Europe today.

What drove the concept of the United States was a loose economic and political union of individual nations, similar to what the European Union is doing now. Some of those early “countries” in the U.S., especially in the slave-holding rural south, were particularly keen to maintain strong sovereign independence from the Union. When you hear arguments based on states rights, this is where the idea comes from. The core of that idea envisions a relatively weak central (federal) authority and strong state authority. A poor, but roughly suitable comparison might be the United Kingdom in relation to the European Union. In essence, with “Brexit” the U.K. did to the E.U. what the Confederate states tried to do to the U.S. during the Civil War.

On the other side is the concept of federal supremacy, which envisions a powerful central authority and limited state authority. While the E.U. is technically a confederation, rather than a true federation like the U.S., it shares many characteristics. Likewise, some of the same divisions and disagreements you see in the U.S. federal system are starting to crop up in E.U. confederate politics. Much as in the U.S., the political divisions in the E.U. tend to follow similar U.S. Liberal/Conservative ideologies. In turn, these ideologies are deeply rooted in historical concentrations of economic activity: Urban-centered industrialism (liberals) and rural agrarianism (conservatives). For many reasons, and only generally speaking, urban industrialists tend to dominate the political economy of a given nation. This is usually to the detriment of the rural agrarians. Not always true, but certainly more often than not.

That calculus changed in the rural U.S. south in the early 18th century. Owing in large part to slave labor and the cash intensive crops of cotton and tobacco, the rural southern U.S. became an economic powerhouse. To make a modern market analogy, the industrialized cities of the late 17th century were like General Electric, DuPont and IBM. In contrast, the rural agriculturists were like a huge swath of tech companies. Slaves, cotton, and tobacco were to the southern U.S. like what Microsoft, Apple and Amazon became in the tech economy. How does this all relate to banking? Strong central banks in the form of the First and Second Banks of the United States were tried, but ultimately failed. These failures were largely due to resistance and obstruction by the agricultural south. A strong central bank grants an enormous amount of financial power to the actors that control the central bank. For example, one of the defining characteristics of the U.K. during its time in the E.U. was its refusal to adopt the Euro. The United Kingdom kept the Pound Sterling. This was done to ensure the U.K. central bank retained its power to unilaterally set monetary policy internally.

Nevertheless, given the historical financial exploitation of rural agrarians, the U.S. south was highly suspicious of a strong federal bank. They wanted to retain control over internal monetary policy, much as the U.K. did prior to “Brexit.” This resistance to central banking led to long periods of volatility and instability in the United States. The lack of a national central bank helped usher in the era of “wildcat banking.” With the wildcat banks came hundreds of currencies being used throughout the early United States. For a modern reference point, early U.S. banking looked very similar to cryptocurrency markets today. It was all over the place. You never knew if the “money” you held one day would be valuable or worthless the next. Likewise, similar to how one cryptocurrency can be used in a particular ecosystem but be useless in another, much of the currency that floated around during this time had the same problems. If you had money from a bank in Philadelphia, it would probably work in Pittsburgh. But it was much less likely to be accepted in New York. Go a little further out and it might be completely useless in Boston.

For the most part, this was the steady state of American banking in the post-Civil War era, through the Industrial Revolution and into the early 1900s. The system was extraordinarily fragile. There were a number of recessions, depressions, panics and financial shocks throughout this period. To be fair, free banking regimes throughout the world were not universally as convoluted and fragile as what was found in the U.S. As author Lyn Alden correctly points out, beyond the confines of the United States, the track record on global free banking is “mixed.” The broad takeaway to this point should be that monetary systems and the issuance of currency inevitably create intractable problems. For these intractable problems few, if any, have ever discovered sound or reasonable solutions that can sustainably withstand the inevitable forces of corruption.

It must be said here that these problems trace back to the origins of money. Modern economists and modern economic theories condition their core reasoning around the idea that money is a natural evolution of barter and trade. As described above, however, the nasty reality is that money, in the form we use today, has always been a tool of extortion and theft. Money is not, and has never been, the result of a natural evolutionary and progressive process. It did not simply emerge from free willed exchange to the free willed use of currency units issued by a sovereign. Indeed, many of these intractable problems may well stem from the fact that it is likely impossible for any sovereign to achieve a “fair” system. This is especially true if these systems are, as this book suggests, rooted in inherently unfair practices.

Nevertheless, the U.S. compromise solution to the chaos of the U.S. free banking era was the U.S. Federal Reserve Bank (“the Fed”). While the Fed has generally (and poorly) served to stabilize U.S. banking, the current regime is also still constrained, and often befuddled, by many of the same issues and divisions present since the founding of the nation. As noted above, these problems are deeply rooted in an agricultural/industrial divide that predates the United States itself. None of this, of course, alleviates any of the core problems of sovereign money. As currently implemented today, it is an inherently suspect medium for the free-willed transaction of goods and services throughout an economy. Yet, it is an error to discount the vast history of experimentation and refinement embodied within the current system. It is dangerous and counter-productive to assume that another system can simply manifest it its place. Any such notion will unquestionably fail to retain the benefits reaped from money thus far without leaving considerable destruction in its wake.

Which is to say, even if such a change could be conscientiously implemented, there would still be no guarantee that the next system would be any better. Indeed there is a very high risk that the next system may prove to be substantially worse. Those unfortunate countries that experimented with Communism post-WWII learned this lesson all too well. The human toll extracted in pursuit of that revolutionary and seismic monetary policy shift is shocking to reflect upon. The sheer savagery and enormous loss of life that followed the violent implementation of Communism should serve as a stark warning. Anyone wishing to upend the system we rely upon now, imperfect and grossly unfair as it may be, risks much for very uncertain outcomes.

Other Money

A question worth answering at this point is, “why inflate the money supply at 2% per year?” While I suggest it’s simply “coin clipping” on steroids, others say it is just an arbitrary number. To be fair, the central banks of the world have done a fair amount of research to support the idea of a 2% inflation target. Moreover, famous economists such as Milton Friedman have also argued in favor of a relatively low, but continuous inflation rate. From a historical perspective, the gold supply inflates between 2–5% per year from mining and extraction. Given that gold has functioned as money for hundreds, if not thousands of years, it would not strain logic to assume such inflation is beneficial. It must be said, however, that much of the research done by the central banks is premised upon economic theories that say declining prices (deflation) are a negative outcome. As the old saying goes, reasonable minds may differ. Suffice it to say, some very reasonable minds very much differ on that premise.

While this may come as a surprise, ultimately the artificial target rate of inflation is immaterial. Whether the target rate is set to 1% or 20%, the effects are the same. The chosen rate only moderates the intensity of those effects. Modern economists, deeply schooled in the Keynesian tradition, will certainly disagree. They will prattle on about their models, maintaining “real” balances, labor quantity, and so on. All the while, and as detailed above, they ignore the foundational errors in the core assumptions of their field. Or, as the late David Graeber derisively termed those errors, the “founding myths” of the field of Economics. As a practical matter, the effects of target inflation noted above are demonstrable. In fact, they are readily ascertained by even the most casual observer. We need only look at what is best described as “other” money to see them.

Let us start by returning to the Economics 101 description of money: Medium of exchange, unit of account, and store of value. Medium of exchange is simple enough. I give you one dollar, you give me one dollar’s worth of stuff. Same for unit of account. You owe me $20 dollars. We know this because we both agreed to it and wrote it down. But what of “store of value?” If, as suggested by prevailing inflationary economic theories, how can a dollar “store” value if it is being reduced in value by 2% per year? The trouble here is two-fold, provided one accepts as reasonable the quantity theory of money. Put simply, the quantity theory of money says, all else being equal, adding more money to the system dilutes the purchasing power of that money. This is much the same concept as adding soda water to a soft-drink. The more soda water you add, the less the beverage will resemble a soft-drink. The same is true for money and your purchasing power. The more currency units they add to the system, the fewer things you will be able to buy with those currency units.

The two-fold problem being:

1. The purchasing power of the currency is losing 2% per year.
2. In response, everyone in the economy must raise their prices to compensate for that loss of purchasing power.

Put simply, and in line with the beneficial inflation theory, purchasing power must continually decline, while prices must continually rise. What should be patently obvious from this arrangement is that holding currency is a sucker’s game. In turn, this renders useless the store of value function of currency. Or, to put it into the Economics 101 definitional framework, one-third of the economists’ money definition suddenly becomes moot. That is, of course, provided one only views money through the lens of currency. It is here we can begin the discussion of “other” money.

What follows is well summarized by a recent quote. During a live interview, billionaire tech entrepreneur Michael Saylor noted there is a term for people that store wealth in currency. He said, “We call them poor.” The same “sucker’s game” sentiment is echoed above for the reasons stated there. To better understand what is meant here, we can engage in a brief thought experiment. If you inherited $5 million, what would you do with it? I’ve posed this question to hundreds of people. Everyone from students of mine, to co-workers, and family members. Nearly all of the respondees were some form of wage earner. By and large, they do not operate businesses. They are not investors. Just run-of-the-mill middle-class worker bees. When asked what they’d do with a $5 million windfall, almost universally, they say they would:

1. Pay off debt; and
2. Buy something.

The things they dream of buying run the gamut of tastes. A boat, designer clothes, a fancy house, a new car, entertainment systems, an exotic trip, etc. What I almost never hear is that they would buy an asset. In their mind, having a sufficient quantity of currency would enable them to acquire desirable things or experiences. A remote, and largely unrecognized second order effect for them is the relief from inflationary forces. They can all see and understand that the prices they pay for things are continually rising. In fact, they often wax poetic about it. They’ll say things like, “I used to be able to buy a hamburger for $0.99, now they cost $5.” Yet, the forces that underlie those price increases are given scant consideration. Those price increases are simply accepted as a natural phenomenon. For them, increasing consumer prices are no different than the seasons or the tides.

This is one of the more insidious and pernicious effects of gradual monetary debasement. The purchasing power of their wages is continually being debased and vanishingly few are able to increase their wages sufficiently to keep pace. This is scarcely noticed if the inflation rate is kept low. It becomes painfully obvious if the inflation rate suddenly accelerates. Nevertheless, and by contrast, if I pose the same, “What would you do with $5 million?” question to a wealthy person they respond very differently. Unlike their wage earning counterparts, they know that holding that cash is sub-optimal. They also know that spending it on consumables is a very poor use of that money. Instead, they almost universally choose assets.

The pertinent definition of an asset here is:

1. Something valuable belonging to a person or organization that can be used for the payment of debts.

In other words, money.

Hence the chapter title, “Other Money.” Based on my admittedly limited personal experience, most people do not consider non-currency assets to be money. For them, money is only represented by cash, or the number on their checking account balance. Yet, if questioned about the status of a figure like Elon Musk, or Donald Trump, they will readily acknowledge those people are wealthy. What they apparently fail to realize is those men are, by and large, cash poor. They rarely carry or hold any significant sums of currency. The vast majority of their wealth is “contained” in assets. The wealthy understand that holding currency is a sucker’s game. This is precisely why they don’t do it. If you ask them, “how do you preserve purchasing power with currency?” Their very simple answer is always, “Buy assets.”

The trouble with this reasoning is, the most commonly held assets do, in fact, depreciate or lose value. Take real estate, for example. Houses degrade with exposure to weather, normal use, and time. Equities (stocks) suffer from the same problem. If a company is not continually increasing revenue faster than monetary debasement, then that company is also going to depreciate. With that depreciation, their stock value will also decline. Art and collectibles are also subject to degradation over time. Even so-called “stable” assets like US Treasuries and bonds can rapidly depreciate if monetary policy becomes too volatile. The latter issue aside, the question we need to contemplate here is, “how does owning an asset overcome the store of value problem with currency?” The answer is embodied in a concept known as a “monetary premium.”

As the name suggests, assets can and do accumulate a premium over, for lack of a better term, their “fair” value. Keeping in mind that all value is subjective, the idea here relies upon what might be best described as a rough, local consensus value. For example, a company’s value is commonly estimated by its share price to earnings ratio (P/E ratio). This simple calculation takes the amount of earnings in a given period, divides it by the number of equity shares outstanding and then divides that result by the market price per share. A monetary premium is realized when the nominal market price of the shares is higher than the earnings per share. For a frame of reference, the so-called “Magnificent Seven” stocks currently command an average P/E ratio of 50. That ratio is double the average of the other 493 companies in the S&P500 index. This means that, on average, the dollar cost to buy a share in a “Magnificent Seven” company is 50 times higher than those companies’ actual annual earnings divided per share.

What drives this monetary premium? Investors using stocks as “money.” Or, more specifically, investors using stocks as a store of value that appreciates in nominal price. Because there is an artificial scarcity to the issuance of equity shares, when more and more people use them as a store of value, the currency cost to acquire those shares goes up. Put simply, if more people want shares than are available, the price goes up. This results in a positive feedback loop for investors. They put money in now and sell for a higher price later. Easy peasy. Easy that is, provided the illusion of “forever growth” by the company is maintained. The principle way that illusion is sustained comes from inflationary monetary policy and the Cantillon Effect.

To boil it to pertinence, the Cantillon Effect says the closer one is to the source of monetary debasement, the more benefit they will accrue. This notion, again, relies upon acceptance of the quantity theory of money. Provided you accept that premise, then the Cantillon Effect is readily explained. As new money is created, if you are the first to spend it, then the effects of monetary dilution are unevenly distributed and in your favor. At the moment of creation, the purchasing power has not yet been widely diluted. As that dilution works its way through the monetary system, the end recipients of the money are the only ones that feel the full effect of the debasement. Much like the soda water and soft-drink analogy above, if you pour soda water into the top of a large container of soft-drink and then immediately draw from the bottom, your beverage will still taste like a soft-drink. However, if you must wait to draw from the container, the more time the soda water has to reach solubility with the soft-drink, the less the soft-drink will retain its flavor.

So it is with money and monetary debasement. The first in line to draw from the spigot is, of course, the sovereign. They can use those freshly debased dollars with the same purchasing power as the currency commands at the time of creation. The next tier-down are the banks and finance companies. Both of which acquire assets and lend with nearly the same purchasing power as the sovereign. Mega-corporations feed next. Then the large corporations and minor sovereigns, such as states, counties and municipalities get their turn. Below them lie the high wage earners. Lower still are the small businesses and government functionaries. Lastly are the growing ranks of the functionally and actually impoverished low- and non-wage earners.

For the last fifty-to-sixty years, what the high wage earners and above have done is take their excess devaluing dollars and use them to purchase assets. Stocks and bonds have been the mainstay for nearly that entire period. The first 20-ish years also included using or starting small manufacturing, wholesale, retail or service businesses as assets. The decline of the desirability of those assets is directly attributable to the forces described above. As prices continually rise, while purchasing power continually declines, competitiveness in those commercial spaces becomes increasingly dependent on economies of scale. Thus, the relentless decline of the small business owner in favor of the mega-corporations like Wal-Mart and Amazon. In turn, this has led to the phenomena of the last twenty-to-thirty years, which has seen more and more dollars being devoted to real estate as an asset, especially residential real estate. In fact, this latter asset class has now become an institutional investment for everything from family offices, to Real Estate Investment Trusts (REITs), to the asset management behemoths like BlackRock and State Street. The most acute concentrations for the institutions are in multi-family and apartments, but there is an ever-expanding reach into single-family housing units as well.

Due to the relative, and oftentimes artificial, scarcity of these assets, as more and more investment dollars come in, the nominal price of these assets naturally rise. When you hear an investment advisor say things like, “The average return of the S&P500 is 10%,” or “Real estate always goes up in value,” the effect just described is where those ideas come from. What finance managers have historically tried to do is provide returns from those assets that exceed the rate of monetary debasement, e.g., inflation. The birth of the modern Exchange Traded Fund (ETF) came from research that demonstrated funds managed by someone trying to beat the market, or indeed inflation, tend to underperform a broad index. In turn, if one bothers to look, it is patently obvious that the “returns” enjoyed by the S&P500 are highly correlated to the rate of monetary debasement.

The chart above shows the M2 money supply (also known as “broad” money, the orange line) and the performance in dollar terms of the S&P500 index. This is very important to understand in the context of the current discussion. As you can see, if you had bought a “share” of the S&P500 in the mid-90s, it would have cost you roughly $400. If you held that share until today, you could sell that same share for nearly $5000. But, if you instead took that $400 and put it under your mattress for safe keeping, today that $400 would only buy between $112 to $219 worth of “stuff.”

Turn this the other way around, however, and you will see why the wealthy choose assets to preserve and increase their purchasing power over saving in cash. It will also very clearly demonstrate what a “monetary premium” looks like in practice. The $5000 price you could sell your “share” of the S&P500 today would have bought the equivalent of $1400 to $2740 worth of “stuff” in 1995. That is the power of the monetary premium, at least in the short-term. This is also the source of what is frequently cited as “growing wealth inequality.”

When Michael Saylor said, “We call them poor,” this is why.

Let’s pause for a moment here and consider a couple of important points. First, the returns on the S&P500 for the last decade are almost entirely driven by the so-called “Magnificent Seven.” Recall, the average P/E ratio of these companies is at 50. Put another way, the market value of these shares is 50 times the earnings per share outstanding. This means that the vast majority of the purchasing power “saved” by these assets is simply due to the monetary premium these assets currently enjoy. But they currently enjoy this massive monetary premium because of the Cantillon Effect described above. Nearly every entity from the high-wage earners up to the banks, finance companies, insurance companies, and pension funds are using stocks like this to preserve or increase their purchasing power.

The only reason the wealthy do this is because the sovereign issued currency loses purchasing power every year due to monetary expansion. Thus, they are all “forced” to continually add to the monetary premium in assets like stocks. This buying pressure continually drives the nominal price of those stocks even higher. In turn, this causes things like the “Magnificent Seven” to rise to nominal share prices that far exceed any possibility of them being able to rationally account for them. Most investors are aware of this on some level. The way they traditionally protected themselves from this “irrational exuberance” of markets was through a mechanism called hedging.

Plainly speaking, a financial hedge is like simultaneously placing a big bet on Red, a big bet on Black, and a tiny bet on Green on a roulette wheel. If done well, as the idea goes, you will make money no matter the outcome. Obviously if such a strategy were sound, roulette wheels would have gone out of business long ago. The reality in financial circles is they try to use probabilities to better align their hedges, with the hope of protecting their upside gains from any downside losses. If you have ever heard someone refer to a “60/40 portfolio,” that is a rudimentary hedge allocation based on a 60% weighting in stocks and a 40% weighting in bonds. The idea being, stock performance is (probabilistically) inversely related to bond performance. Put simply, and as the theory goes, if stocks go down, bonds go up and vice-versa. It’s a 60/40 split because over the last fifty or sixty years, stocks have generally outperformed bonds.

Given the monetary conditions in place since Nixon rug-pulled the world in 1970, this was a fairly sound strategy. The Fed would juice the markets a little, stocks would go up, you make money. Once the Fed went a little too far, they’d pull the punch bowl, stocks would go down, but your bonds would rally. It remained a sound strategy right up until the mid-to-late 1990s. With the increasing availability of personal and enterprise computers came a new-fangled way to hedge: Complex derivatives. Derivative contracts have been around for ages in agricultural commodities markets. In comparison to some of the more exotic derivatives employed by the finance sector, commodity derivatives are downright boring.

The idea is simple: If you are a company that makes products from corn, (for instance) you obviously need to buy corn every year to keep making products. The trouble is, someone has to grow that corn. To make matters worse, growing things is not a guaranteed prospect. Nature is a fickle mistress. Nature will often come along and screw up things like growing and harvesting corn. These uncertainties make it very hard to plan for the future. On the flip side, the grower also has problems too. If all the growers have a bumper crop, then the price they can charge for that year might go way down. Likewise, the next year might see a drought for half the farmers. Lucky for the ones that got rain in that case. They get to charge a lot more that year. The problem on the grower’s side is much like the one for the product manufacturer. How can they reliably plan for the future? Should they buy more seed or less? How many people should they hire? Is it time for a new tractor, or should they wait?

Derivative contracts are a way to smooth out those ups and downs. They are used to hedge risks against weather, plant diseases, poor yields, fluctuating prices, etc. Both sides of the trade can take out derivatives contracts against future risks. The contract issuer, in turn, can earn money for taking on the risk. The end result is a much smoother and more predictable trading experience for the producers and purchasers of commodities. Prior to the widespread use of computers, trying to use derivatives in the financial markets was nearly impossible. Unlike the much more limited range of problems that can occur with commodity producers and buyers, the range of problems that financial products can encounter are virtually unlimited.

The advent of increasingly more powerful and affordable computers, coupled with advances in complex mathematical modeling from fields as diverse as quantum mechanics, to astrophysics, and biology gave rise to the field of quantitative finance. From deep within that realm sprang forth the creators of, and the markets for financial derivatives in the 1990s. Once created, the derivatives market quite literally exploded. These financial derivatives were allowed to trade “over the counter” (OTC), meaning without oversight. By 2002, as the market for derivatives ballooned, Warren Buffet famously said these instruments are, “Financial weapons of mass destruction.” Meanwhile, the Fed chairman at the time, Alan Greenspan, acknowledged that there were some risks with derivatives. But he went on to say that he was “[Q]uite confident that market participants will continue to increase their reliance on derivatives to unbundle risks and thereby enhance the process of wealth creation.”

As everyone knows now, Mr. Buffet was right and Mr. Greenspan was terribly, terribly wrong. When the derivatives markets began to unwind in 2008, it was indeed financial mass destruction. This brings us back around to the beginning of this discussion of “other” money. As we’ve demonstrated, assets like stocks, bonds, and real estate are used as money. They are used specifically as a store of value against monetary debasement. The inherent problem with this scheme are the associated and unmitigated risks. Holding depreciating assets with the sole expectation of an increasing monetary premium cannot go on forever. Once the monetary premium far exceeds any income value derived from the underlying enterprise, the monetary premium will come down. Whether the income comes from rental fees for houses, or earnings from a business is irrelevant. At some point, it becomes obvious the monetary premium is not supported by the productive reality of the underlying instrument.

At its core, the concept of a monetary premium relies upon the greater fool theory to survive. In its simplest form, the greater fool theory says the price will always go up so long as someone else is willing to pay it. The trouble with this idea is, the higher the premium goes, the fools become fewer and farther between. At a certain threshold, the fools simply stop buying at all. In laymen’s terms, this is known as a “bubble.” In years past, when a bubble like that popped, only the last fools were left holding the bag. In market terms, they would call this a correction. The underlying logic being, the market is correcting the nominal price of assets down to levels that can be reasonably justified based on earnings or income.

The trouble we have now was revealed by the 2008 Financial Crisis. No longer are the risks simply being held by the last fool. With financial derivatives, everyone in the world has been turned into the last fool. The expression “too big to fail” reflects this. Financial derivatives are now so deeply interwoven into every single risk asset outlined above, that the widespread decline of one asset, such as stocks or real estate plummeting in value, will lead to a cascade failure of the rest. That is why the global central banks keep resorting to such extraordinary levels of monetary debasement to keep the scheme alive. To make matters worse, right in the middle of all their financial juggling, they collectively ran into the 2020 global shutdown. For perspective, during the two-years of that debacle, the United States quadrupled the M1 money supply. This is the source of the price inflation that so many are being trampled under currently. More troublingly, that quadrupling of the money supply is straining the resources the central banks have far beyond anything they have previously conceived.

Doom and gloom aside, what I aim to demonstrate here is that “other” money is what has kept the global financial system afloat since the United States abandoned Bretton-Woods. Unfortunately today, “other” money has now become the greatest source of risk to the global financial system. If you trace the complex web of derivatives to their juicy center, what you will find is quite literally nothing. There is no solvent counter-party to the risk those derivatives are meant to hedge. The systemically important bank, Credit Suisse, discovered this the hard way in 2023. The details are ugly enough that they’ve decided to keep the reasons a secret for 50 years. The constant fear among the central bankers now is what they should do if the forces that took down Credit Suisse (and others) spiral out of control. Which means, the question we should all be asking ourselves right now is, “how do we fix it?” As I hope I’ve demonstrated to this point, the answer to that question is far from simple.

Nevertheless, with all of this fresh in mind, let’s take a moment here and add in the “other” to our money definition from earlier. To answer, “what is money,” we can now say money is something that:

1. Facilitates the exchange of value in low, or zero-trust situations;
2. Allows for the bulk extraction of fractional value from the personal or collective industry of sovereign subjects through taxation; OR
3. Is an asset that appreciates in nominal price at, or near, the same rate as the sovereign increases the amount of the first two.

To put this in perspective, common folk like you and me primarily use number one. Sovereigns primarily use number two. Wealthy people primarily use number three. Unfortunately, as we’ve been discussing, all three are facing serious systemic issues. Those issues have few easy solutions.

Modern Money

U.S. banking and finance today are governed by a mix of state and federal authorities with widely varying degrees of regulatory power. Add to that significant changes in the way banks and finance companies were allowed to structure themselves in the 1970s through the 1990s, and you get modern U.S. banking and finance. In terms of relative stability, you might recall from earlier, the U.S. financial system is anything but stable.

A suitable and terribly dated analogy would be the experience of using Microsoft Windows 95. Once you think you have it figured out and working, it just crashes anyway. The well-trodden concept of a “boom-bust cycle” being a natural and unavoidable phenomena is rather attributable to central banking and the monetary policies they create. These institutions and policies are invariably and demonstrably the cause of the so-called “boom-bust” cycle.

As stated at the outset, discussions around money are opaque, difficult to unpack, and have widely divergent points of view. There are endless sources for reasoning, and endless sources of presumed authority. The point of this exercise is not to definitively state that what is presented here should be accepted as incontrovertible fact. It is rather to illustrate that commonly accepted wisdom and folklore about money is often deeply flawed. Put differently, some of what is presented here is most certainly iconoclastic. It is also inevitably at stark odds with accepted monetary orthodoxy.

What is unmistakeable are the natural and predictable consequences of allowing academics who have demonstrably poor starting assumptions to dominate discussions around money. From the days of medieval kings, sovereigns have sought to capture and plunder territories and resources. They also desperately strive to retain power once seized. Each of these endeavors requires significant amounts of money to accomplish. In pursuit of these goals, sovereigns have in the past, and continue to this day, to manipulate money to achieve those goals. What is required in all cases is inevitably more money than the sovereign treasury holds. Their very simple and insidious method of circumventing that limitation has always been to debase the money they force their population to trade with, and pay taxes in.

The uncritical acceptance of common understandings around modern money and monetary systems is much akin to uncritical acceptance of the ancient understanding that the Sun revolves around the Earth. The fact that such information is dogmatically and thoughtlessly reinforced ought to be evidence enough to warrant caution and curiosity. This is especially true if one does not agree with the sovereign “right” to take productivity from their population beyond what is required for the protection of the people that reside within the sovereign’s sphere of influence. Yet, this is the visible result today. Those results have been catastrophic for all that run afoul of the powerful sovereign nations that wish to impose their will upon others.

This chapter outlines the rough method by which those mechanisms are employed. This brief historical journey is not comprehensive. It is rather to illustrate the complexity and opacity of modern monetary policy. It is also to highlight the fact that the academics that lend support and comfort to those policies do so for a reason. Neither is because the inherent functions of money require complexity to operate. Rather, and in both cases, the complexity is a means to obscure the true purpose of the functions of money and monetary policy as employed and taught. Such obfuscation is very beneficial to those who wield the levers of power in finance, banking and international and domestic relations. In turn, those in power elevate and propagate the academic information that best helps entrench their position.

Yet, simply gaining a deeper understanding and insight into this opaque field is far from adequate. It must be said with no uncertainty that much good has also come from this devilish arrangement. While it may be easier and more satisfying to bemoan the declining state of the world, the reality is quite different. While it may not be readily apparent, the quality of life and standards of living have risen significantly across the globe since the advent of the modern monetary system. Such improvements are not uniform by any means. But, as a general rule, more people around the world are better off today than they were 50 years ago.

The trouble is, these improvements have come at a cost. Much of that growth and innovation was essentially bought and paid for with debt. The natural and predictable consequence of this mass debt experiment, unconstrained by anything but imagination and the ability to maintain the illusion of solvency, has been two-fold:

1. A substantial increase in overall standards of living globally; and
2. A massive increase in wealth inequality, which is now regressively reducing standards of living globally.

Put simply, and to repurpose an old and discredited idea from the oil industry, we may well have reached “Peak fiat.” This is the unfortunate result of relying on debt and monetary expansion to achieve the aforementioned improvements in global standards of living. Improvement through debt and debasement can only result in the manifestation of the second problem of grotesque wealth inequality and subsequent decline. The larger and much more dangerously looming issue is when the debt from monetary expansion stops working. It is much like if you ran up all your credit cards to improve your quality of life in the short-term. Sooner or later, that credit line will run out. Once it does, the quality of your life will decline rapidly thereafter.

On a global scale, this declining process is blunted and masked by the sheer size of the global economy. But underneath, the same forces are at play globally as they are at the individual level. Sooner or later those forces will inexorably result in the same outcome globally — bankruptcy. Yet, much like the overextended credit card holder, the solution to the burgeoning global monetary debt problem requires much vigilance, conscientious planning, careful savings, and a quick return to sustainable spending practices. Such a path also relies heavily on luck.

For if you, as an overextended debtor, come upon catastrophe, it is all too easy to return to the credit card to borrow your way through the problem. The same is true at the sovereign level, except the sovereign has far more influences pushing towards the easy way out (monetary expansion), with few, if any, demanding the opposite. Strict austerity measures and carefully managed debt wind-down planning are toxic to the political class. Thus, they are, for all intents and purposes, frozen in amber. Moreover, modern “sovereignty” is no longer just a king and his court. Today, the sovereign is a distributed system comprised of thousands of actors. Unlike an individual debtor, there is no one person responsible for the success or failure of the system.

As such, factions develop, with each pulling in different directions. When monetary conditions grow tighter and more stark, the factions are not incentivized to work together. In fact, they are rather incentivized to do the complete opposite. Their survival depends upon their ability to grab as much as possible before the whole thing implodes. This would be much like ten debtors all sharing the same credit card, with all beholden to none but themselves. With no one to blame and no one to lead, the result is predictable with near certainty. In fact, it has been the same result in every system that has expanded their money beyond their means to redeem the debt incurred. From individuals to the nations of the world, time and time again, for thousands of years, the end is always the same:

Catastrophic collapse.

While this may seem dire and rightfully so, such an outcome is not pre-ordained. Such outcomes are a natural and predictable consequence of centrally controlled money, regardless of form. Thousands of years of human history have clearly demonstrated this is an unpreventable outcome from the use of centrally controlled money. Whether we call it greed, hubris, arrogance, or a road to hell paved with good intentions, it is, in all cases, the central control of money that is ultimately driving these failure outcomes.

But we must also acknowledge that money in and of itself is not “evil.” And just as much as the current monetary system has wrought much evil on the world, it has also brought much benefit. The trick that no one in history has ever managed to figure out is how to avoid the former without sacrificing the latter. The modern system came close in some regards. By other measures, it has been absolutely abhorrent. But the abhorrence unleashed thus far may very well pale in comparison to the precipice financial derivatives have brought us to. Now that we are standing at the edge of this precipice, the burning question is, “Must we go over the edge?” I say confidently and resolutely that the answer to that question is, “No, we do not.”