By Thibaud Maréchal, translated from the original in French
“Overwhelmed by the dizziness the flight gave him, Icarus soared into the sky, but in the process he got too close to the sun which, due to the heat, melted the wax. “The legend of Icarus
The central bank, as well as the fractional reserve bank – two inseparable evils of monetary policies – have distorted market price signals for 50 years.
In 1971, the Nixon shock corrupted the global monetary system by severing the final link between gold and the US dollar. Fiat currencies have been freed, issued and managed by central banks. Over the years, illusionist interventionism has appropriated politicized narratives to serve a complacent middle class. The result: a plummeting purchasing power of fiat currencies.
Today savers are penalized, while speculators and spenders are rewarded. This tendency to be punished as a patient saver seems alienating to many of us. It doesn’t seem fair. Yet few are able to understand why, including banking professionals and fund managers whose salaries depend on their ignorance on the subject.
Money is Time
It is a well understood, but underestimated, fact that money accounts for 50% of the value of all transactions in the world. Dysfunctional currency can therefore have serious repercussions, as it deceives every user to make the wrong economic calculation, which ultimately leads to distortion, apathy and a broken society. The logic behind this dissection is actually very simple: the money we use is broken. To repair the money is to repair the world.
Time is an invariably forward passage, common to all humans, regardless of status, wealth, ethnicity or geography. We only have very little at our disposal. Money is an instrument for storing time for later use, ready to be exchanged with other specialized people.
Money acts as a neutral good for trade, so everyone is invited to specialize in order to be more productive in their core business – this is the beauty of specialization of work. Any voluntary and peaceful human action that emerges in a free society is made possible by money, a neutral exchange good within a capitalist society, a system built on the ability to accumulate capital for subsequent productive use.
What happens when money loses its value, wasting the time that individuals have accumulated with their savings?
How is individual psychology affected by a devalued currency, otherwise called an inflationary currency?
How do asset classes behave when individuals use them to preserve their wealth?
How are industries and markets structurally influenced when proximity to money production is highly profitable?
How do the accounts of inflation and “growth at any cost” compare to peaceful deflationary realities in which individuals see their purchasing power increasing over time?
What happens when healthy money is finally returned to people using open-source tools, such as Bitcoin?
In this brief exploration, we’ll raise fundamental questions about domestic monetary manipulations with fiat currencies, their effects on life, business, and psychology, and how a Bitcoin-led global currency meltdown will drastically drag the world into sustained deflation – the final step towards unbridled and abundant prosperity. Let’s go!
To Save is To Be Free
People save to protect themselves from uncertainty and enjoy future pleasures. A dad may want to save to feed his family tomorrow in the event of an unexpected job loss or to organize a trip for the next family vacation. A young person may want to save to start a business later. Saving is the essence of all human life. This helps build a well-balanced life. Without savings, a man is bound to get stuck on an endless hamster wheel, in the pursuit of his own shadow.
Savings are the starting point for all accumulation of capital, which is the basis for life and for investment, which leads to improvements in productivity. Doing more with less is great, and that’s what life means, starting with biological evolution. A more productive father can spend more time with his children and his wife. A more productive mushroom has more room to grow and take over a larger territory. This is all pretty basic, but fundamental.
When money breaks down over time and does not hold its value over the long term, something strange happens. People feel the need to spend it quickly, to get more immediately rather than to waiting for its purchasing power to drop because of inflation. Holding a currency that depreciates therefore penalizes the responsible saver. Better to spend and buy other goods and services quickly, or invest in yield-generating assets to preserve wealth over time – or at least offset the rate of inflation of the currency to preserve its purchasing power.
The fundamental problem lies in the forced decision to spend and speculate rather than to save voluntarily. With monetary inflation, people are more likely to buy things they don’t need and invest in things they don’t understand. The resulting artificial demand for goods and services is unnatural and triggers many ills, such as inflation of assets and consumer prices. Entire industries end up being built by producers responding to these artificially stimulated price signals, which induces systemic malinvestment, the extent of which we have yet to understand.
Industries built on the vice of fiat money
Governments today measure economic development with a national metric called gross domestic product (GDP), which necessarily depends on the consumption of goods as one of its main drivers. Consumption means spending, which reduces saving, and since saving is the basis of investment through gradual accumulation of capital, it is easy to see how imperfect GDP is.
2 great evils have emerged from fiat currencies and government measures of economic progress: consumerism and short-term financial engineering. Entire industries have been built on a delusional vision of humanity corrupted by consumerism, fueled by debt. All-out financial engineering madness is the atrocity that pushes the boundaries of exuberance when it comes to enslaving our lives: buying things we don’t need (consuming) with money we don’t have (debt).
If people consumed less because currency could preserve its value over time, would advertisers spend around $ 700 billion a year promoting goods and services?
Would social media platforms monitor their users, as much as they are, to serve the advertising giants?
Would the world’s best software engineers spend their precious time designing machine learning models to optimize online ad spending?
Would the smartest talent pool spend an outrageous amount of time working in financial services?
Global banking services are estimated to be worth around $ 5.3 trillion. As one of the highest paid industries, banking and financial services attract millions of workers, accounting for around 23% of the total global workforce, including talented engineers and software developers with the ability to move horizontally to other sectors.
The growth of the banking industry is a direct result of the corrupt fiat money system, which prompts the construction of increasingly complicated financial engineering schemes. All this to protect wealth from centrally induced inflation, deemed necessary by those who profit from its existence. For most of the world, monetary inflation ultimately only serves to increase the systemic risk of reducing purchasing power until an eventual breakdown leads to socialized losses – bailouts.
Facebook, Google, YouTube and Amazon are advertising companies – using the name of social networks for the free flow of information – receiving nearly 40% of global ad spending. About $ 618.7 billion was spent by advertisers on these platforms last year alone, prompting these companies to monitor their users as much as possible to serve their real customers: advertisers. Talented engineers are drawn to these companies not to support large-scale free speech, as social media allows, but because the salaries are quite generous, with a median salary of a quarter of a million dollars at Google for example.
In a sense, banking and advertising are industries of remarkable importance, which can add value to the world, but which have been corrupted by the evil of monetary inflation. They dominate global economic activity, when they should support the functioning of free markets, without obstructing them.
A dark and invisible beast
Above all, it is important to note that money inflation is an expansion of the money supply. Currency inflation reduces the value of all existing units of circulation, diluting their presence in the total supply. Money therefore loses value.
Holders of currencies lose purchasing power due to inflation, which encourages them to get rid of it, as we just said, affecting many aspects of life, such as “time preference”. Instant gratification is good, and inherently all biological organisms value short-term pleasure, knowing that long-term pain can nevertheless arise as a result. Going for a drink with friends is a good example. Sipping an extra glass of bourbon is undeniably nice in the moment, but the next morning it may not be.
If a person knows that saving money for later use will make that money more valuable, the incentive not to spend it right away is obvious. What happens in this case? Demand for unnecessary items can contract as people cut back on spending. Individuals may therefore start to think twice about their willingness to spend the money they have earned by working hard. “Do I really need to buy the latest pair of Nike or the latest iPhone? “. This simple shift in mindset seems trivial at first, but it leads to a cascading societal change – a complete overthrow of current norms plagued by over-consumption of frivolities.
Allowing someone to think before making his decision to deny the future appreciation of his wealth is a fundamental restructuring of individual psychology. Deferred consumption makes it possible to think rationally, avoiding superficial consumption. Instead of consuming short term life, one invests in long term life.
How does reliable and scarce money affect human psychology?
How does an individual change when exposed to scarcity as opposed to extravagant abundance?
What happens to a society protected by the incorruptible assurance of a sound money?
A reversal of human psychology
” A rolling stone gathers no moss. “
Living a carefree life that doesn’t rest on a solid foundation is unstable. Like a stone in the forest under the trees, the moss that accumulates is synonymous with a fresh and healthy environment, where time passes. A stone that tumbles into the river at the mercy of the currents accumulates no foam – a torrential existence of misery.
Man is obviously no different. Stability and prosperity come from a foundation built on safe shelter, decent food, a healthy lifestyle, a loving family, caring friends, incorruptible values, and generous savings for cold and rainy days. Not having this unshakeable foundation can lead to a life of misery without significant achievement.
All things of value are scarce and money is not excluded. Something abundantly available is of little value. Water in an ocean is not very valuable, but in a deserted area it can mean life or death. When people are exposed to truly scarce money, overconsumption stops.
Today, this phenomenon is seen in reverse, fueled by massive levels of consumer and corporate debt, going against low time preference. Consumers are spending their futures in the present by neglecting the debt burden and borrowing large sums of money to pay for items they cannot afford.
Education in the United States is an obscene illustration of this to young adults, with 44 million students collectively owing $ 1.6 trillion in debt for their college degrees. US mortgage debt is approaching $ 10 trillion, which is supporting the housing market in an unsustainable way.
In total, in the United States alone, consumer debt reached $ 14 trillion, while the corporate debt market hit $ 10.5 trillion earlier this year. Before the massive wave of stimulus measures led by governments around the world, the sovereign debt market was already at an all-time high of $ 66 trillion, or more than about 80% of global GDP. Overall, global debt fueled growth is a symptom of a disease of the currency we use around the world.
As mentioned earlier, a man with sound money lowers his time preference in the face of the irrefutable scarcity of his store of wealth. As his savings increase in value over time, he may wonder what he should be spending his time and money on next. He is now free to think before he acts, instead of running on an endless treadmill. Getting rid of unnecessary belongings is the number one priority. Leaving behind a life of frivolous spending hidden by the vicious “carpe diem” maxim, this newborn man discovers the timeless prosperity of Stoicism. Patience, dedication and loyalty suddenly emerge from the dust as strong values on which he can build his reasoning.
Learning to appreciate the beauty of things around him, this man’s heart fills with love and empathy for the others around him who are still on the treadmill. Few things really matter, and the most important are his family, his health, and his life’s work to make things better around him. Healthy money changed him. A fast-paced, bountiful life filled with comfort and certainty now seems shallow and miserable. Progress through work, pain and love enables him to face uncertainty and find stability in the chaos of life. By delaying his own gratification to plan his life with his family or business, he cuts down on his consumption, accumulating cash reserves. Saving allows him to be free and, because it appreciates over time, the more patient he is, the more he increases his purchasing power.
What if this effect on the individual spreads to society? As people demand fewer products and services under a Bitcoin standard, but also reduce their speculation in asset classes to preserve their wealth, global deflation is emerging, allowing individuals and families to attain increasing purchasing power and leading society further to prosperity, as savings lead to investment.
A new era of global deflation
When consumer behavior changes, producers undoubtedly adapt their production to meet the new demand. If there is a demand shock, prices will drop until buyers are found, so that producers can distribute past production and re-adjust their upcoming production cycle to meet lower demand levels. By producing less, entrepreneurs and organizations can focus on quality rather than volume, which should create more value for buyers, who may be willing to pay more for the products and services they receive, reducing prices at equilibrium.
In a society with a healthy currency, where money production is locked away from the greedy minds of fallible humans, as is the case with bitcoin, consumption slows down. As mentioned, in the face of unalterable scarcity, individuals understand the cost of instant gratification. Suddenly, frivolous spending stops becoming commonplace because it ends up being so expensive for the future. When cash reserves appreciate over time, products and services become more affordable and individuals and businesses end up spending later to benefit from greater purchasing power.
Inflation can turn negative. Many investment strategies based on the mandate to preserve long-term wealth and capital can become obsolete. Positive real returns are a key driver today for long-term portfolio managers who have a mandate to protect capital from the erosion of inflation over decades. What happens when inflation turns negative? In such a scenario, cash does not lose purchasing power. The famous “cash is trash” popularized by hedge fund superstar Ray Dalio is becoming a slogan of the past. Suddenly, cash is restored with a fundamentally important property of sound money: a lasting store of wealth.
In a healthy monetary society, cash is not only the most liquid salable asset, serving as a medium of exchange and a measure of value, but it also acts as a store of value. Anyone who only wants to preserve their wealth over time and have access to liquidity to meet their short- and medium-term obligations should only hold cash. For billions of dollars of capital placed in assets to preserve wealth over time, this represents a sea change. Bitcoin is the instrument that can turn the world upside down, reversing the investment strategies of many asset managers around the world.
As Bitcoin maintains a steady pace in its monetization process, it will continue to absorb a significant amount of wealth from the inflation-plagued and degrading fiat paradigm until the total collapse. Some would argue that such a particular view is extreme, while others argue that it is absurd and ignorant not to have it. As this process continues and bitcoin reaches unfathomable levels of market value, asset classes, such as real estate, gold, and stocks will be re-valued. Fundamental valuation models for asset classes exist today and are well understood. Undeniably, today most of these asset classes are deemed overvalued by many investment managers who seek to find value in undervalued assets. Indeed, most of these assets have accumulated a monetary premium, which emanates from their respective utility as decent reserves of wealth.
An asset considered by the market as a viable store of value is relatively rare compared to the currency from which the saver tries to protect himself, while being quite durable over time. Real estate is an asset class estimated at $ 280 trillion and owes a significant portion of this overall market valuation to use for wealth protection. Indeed, many investors park capital in buildings in popular capitals to preserve their wealth, often leaving their homes vacant, as is the case in Vancouver. In other words, the utility of real estate, as a housing good, is not leveraged in this scenario, but only because urban properties are relatively scarce and durable in politically stable jurisdictions.
Stocks behave according to the same principles. As a roughly $ 90 trillion market today, they are generally well understood with valuation models such as price-to-earnings ratios. Generally, beyond a certain threshold, depending on the industry and other factors, a business will be considered overvalued or undervalued. Most stocks today are used in diversified 60/40 portfolio allocation strategies to preserve wealth against fiat erosion. Bond markets are another massive segment used for the preservation of wealth, especially treasury bills which are deemed “risk free” by some market participants.
What happens when investors pull out of these asset classes to hold wealth-preserving cash? Most likely, a massive explosion will follow. The monetary premium accumulated over the years of weak fiat currencies will be demoted by a strong monetary standard, pushing investors out of risk positions to preserve wealth. The investment will be made to obtain a return on capital, not just to beat inflation of fiat currencies.
In its first phase of monetization, Bitcoin as the global monetary base, can capture significant portions of the aggregate monetary premium accumulated by different asset classes over the past decades of fiat money experimentation. As these asset classes are revalued by the markets, without artificial artificial monetary inflation, purchasing power will be restored to the people.
One might wonder how long it will take for bitcoin to become the world’s dominant currency – the underlying unit of value measurement that we collectively use to value assets and consumer goods.
This leads to other fascinating questions. Maybe we could try to answer them… another time?
How much will markets such as real estate, stocks and gold retract if Bitcoin absorbs their cumulative monetary premiums?
How will consumption patterns change for individuals and businesses operating under a deflationary Bitcoin standard?
How are humans going to refocus their time and energy if massive industries like advertising and financial services are downsized by 30%? How about 70%?
Will humans get to Mars much faster if the best talent can focus on rocket engineering rather than ad optimization?