By eliminating reasonable stores of value, the fiat economic system incentivizes us to seek debt, hope for luck and take on other poor habits.
This is an opinion editorial by Jimmy Song, a Bitcoin developer, educator and entrepreneur and programmer with over 20 years of experience.
Bitcoin changes our mental model and we can see it in a lot of people that get into Bitcoin. Many Bitcoiners start saving and not living paycheck to paycheck. Many start taking their lives more seriously and quit drinking alcohol and playing video games. Still others start investigating their diet and quit eating sugar, carbs, seed oils and other things they’ve been eating their whole lives. Some even get married and start having children. There are even some who start taking religion seriously.
These results are pretty puzzling. What does a digital money have to do with any of these things? Yet, to even ask this question is to ignore the environment that we’re in and the reality of fiat money. It’s difficult to see how the dirty water we’re swimming in affects us because we’re immersed in it. Only when we’re out of the murky water can we see objectively what was happening.
Fiat money has some terrible incentives at all levels and it’s the cumulative effect of these incentives that creates the self-destructive behavior that we see in so many people. We shouldn’t be asking why Bitcoin is getting people off of alcohol, we should be asking why people are drinking too much in the first place. We shouldn’t be asking why Bitcoiners are having more children, we should be asking why people are having fewer children under fiat money.
These are the questions I am seeking to answer in this series of essays. Where did the incentives of the modern world go awry? Spoiler: It’s fiat money.
In part one of this series, I’m going to look at individual incentives and how those incentives change how we live at a personal level. In further essays, I’ll explore this question at the company/group level, the national/country level and finally at the level of the entire world. This series will be built from the bottom up, and I’ll start here with the incentives at the personal/individual level.
Why We Lack Savings Vehicles
The current fiat system affects individuals in many different ways, but the most obvious way is with a lack of savings vehicles. Put simply, there really aren’t good stores of value in the economy. Every potential store of value has critical flaws that make saving more difficult than avoiding carbs at a bakery.
The reason that there aren’t very good stores of value is because our Keynesian overlords like it that way. Money that’s in a store of value isn’t moving, it’s parked and according to them, “not being productive.” They want the money to sluice through the economy and increase money’s velocity. The reason they want this is because they equate money moving around with prosperity. They make the dumb mistake of thinking that the velocity metric is reflective of reality.
Keynesians are famous for making such mistakes, measuring for instance the degree of employment as indicative of economic health. In a free market, the two have some correlation, but once the government starts making employment the target, say, by paying people to dig ditches and fill them back in, the metric itself becomes useless. Such behavior games the number and debases the metric in the same way that grade inflation does so to university degrees.
Velocity of money is similar. Trades that are done at the point of the economic gun of inflation are just as useless as the digging and filling in of a ditch. The actual productive trades are what you want, like money used for material to build ships, not unproductive trades, like venture-capital-funded tokens for some drooling chimp JPEG. This, by the way, is why metrics like “number of developers” on an altcoin ecosystem are so misleading. The metric is gamed by artificial rewards, and indeed, many of these developers are doing the digital equivalent of digging and filling ditches paid for by an altcoin’s premine.
The Keynesian overlords like this metric-driven way of accounting for an economy because it lets them justify just about anything the government chooses to do. War? That’ll create jobs and spur the economy! Welfare? That’ll get more people to spend and that’ll help the economy! Just about any government program can be justified. The only government action Keynesians don’t like is cutting spending. Government economists are Keynesian for the same reason false prophets proliferate. They tell the rulers what they want to hear and rationalize their policies.
Their policies aren’t against saving, per se, but they do justify inflation. And inflating is what every government wants to do because it lets them spend money they don’t have. For the inflation to look productive economically, it needs to be coupled with some rationalization on why it benefits the economy. Hence, they make saving more difficult than running an Ethereum full node.
Traditional Stores Of Value
Before Bitcoin, if you wanted to store value over the long term, you really only had three options. There’s real estate, which is scarce, but has a lot of carrying cost in taxes and maintenance. And then there’s stocks, which are vulnerable to all sorts of shocks both within and without. Finally, there’s gold, which was a great store of value for a long time, but hasn’t been since the advent of fractional reserve banking.
Indeed, gold is the original reason why fractional reserve banking exists and became so profitable. Banks for many years have issued loans of non-existent gold as paper certificates. Sadly, this continues today where many large gold depositories issue paper certificates of gold. This, in turn, inflates the supply of gold in the most liquid gold markets, which trade promises of gold delivery. Thus, physical gold is actually scarce, but paper gold is not. Like a Hollywood actress, paper gold is mostly fake.
I’m sure if you’re reading this piece that you have some suspicions about using fiat money as your store of value and I don’t need to belabor that point, but for the sake of completeness, I’ll explain why. Fiat money is extremely liquid but loses value very quickly. Keeping your money in the dollar is a great way to lose money over any reasonable period of time. The monetary expansion of the dollar has been extraordinary, with the M2 money supply going from $289 billion in 1959 to something over $21 trillion in 2023. Annualized, that’s about a 7% debasement every year. As we’ll see, this number is not a coincidence.
There are other stores of value, like sports teams, collectibles and Lego sets and even detergent and mackerel cans. On those, we’ll have more to say later. But suffice it to say that these assets all have even bigger drawbacks than the three we turn to now: gold, stocks and real estate.
Problems With Stocks, Real Estate And Gold
Here’s the problem with these stores of value: First, they all have large transaction costs. To transact in real estate is very cumbersome. Not only is the liquidity constantly fluctuating, but the time to settle is very long and there are large commissions, upwards of 3%, that you pay every time you buy or sell. With physical gold, there’s shipment to consider. Stocks have commissions and getting the right mix to properly diversify multiplies those commissions accordingly.
The second problem is that stocks and real estate require a tremendous amount of research. In a fiat economy you have to make money twice, once to make the money and once to keep the money. There’s no small amount of research that’s needed to properly invest in real estate or stocks. Two houses that are next to each other may have radically different values, perhaps because one has a faulty foundation or is in a different school district. Two stocks, even in the same industry, may have very different valuations, perhaps because one has a particularly competent management team or has access to a particular patent that the other does not. What’s worse is that this is research that’s not really productive to anybody. Trusting another person for research is a great way to get scammed out of your money (see: altcoins) and hence, the successful real estate and stock investors do their own research.
For physical gold, there’s also the problem of securing it. Do you really want to hold a 400 ounce gold bar in your house and put it at risk of getting stolen? Physical goods are very difficult to secure, which is why banks started in the first place.
The third problem is that there’s significant dependence on third parties. Real estate can be taken away through eminent domain laws. Public companies may have executive teams that commit embezzlement and fraud which may doom your stock. The gold depository may be raided by a government for their own coffers and even private gold can be confiscated by government dictate.
Running At 7% Per Year
Asset managers know that 7% is the benchmark for returns on their clients’ investments. Where did this figure come from? It’s not a figure that’s plucked out of thin air. Seven percent is the rate at which the money supply has historically been expanding. To get 7% returns per year in stocks is considered really good. Most real estate doesn’t get near that and based on data I have analyzed, gold certainly doesn’t.
The effect of not having a good store of value at the individual level is that there’s a whole group of rich people who have to keep working to keep their money. They’re on a monetary treadmill, having to run to stay in the same place. And if you know rich people, this is one of their defining characteristics. They spend an enormous amount of time managing their money. This is wasted effort and one of the reasons why when there’s mo’ money, there are mo’ problems.
Opting Out Of Extra Work
Is it any wonder, then, that a lot of people choose not to have to deal with managing money and end up spending it? This is, after all, what the Keynesian overlords want you to do. They want you to keep the money flowing whether it’s for something you actually need or not. Thus, we get a lot of conspicuous consumption among people who don’t want to run on the fiat treadmill.
Why not live it up now if the purchasing power is going to decrease quickly anyway? Why not buy a car or a handbag or a gourmet donut? If it’s too much work to keep your money, why not spend on something that’ll keep you entertained for now?
This is encouraged by the other side of the fiat equation: debt. Not only is saving really hard, but debt is really easy. Most individuals working a normal W-2 job have a tremendous availability of debt. Note for the next essay in this series that for self-employed individuals or entrepreneurs, debt is harder to secure. But for normal corporate employees, debt allows them to bring consumption forward. That is, they can have something now instead of being forced to wait and save with discipline. Debt has created lots of entitled, spoiled, immature adults.
Even for aspirational individuals, the desire to improve themselves doesn’t always work out. Many imitate startups in trying to fuel their growth through debt, such as through student loans. By “investing” in their education, they are attempting to make more money later. Except that’s not how many people who enter college use it. They instead use college as a four- to six-year vacation and indeed, about 40% of those who enter four-year colleges don’t even finish in six years. Investment turns to consumption because they don’t have discipline.
The high-preference mentality becomes much easier to fuel because of the availability of credit cards, mortgages, student loans, car loans and even personal loans. Our system tempts individuals with all manner of consumption while taxing any disciplined behavior.
Asset Inflation
The lack of good savings vehicles combined with the tremendous availability of debt means that we get a lot of asset inflation. That is, we get crazy values for things that are perceived to be scarce because there are so few good stores of value. People will invest in almost anything that has scarcity because they don’t want to lose their wealth slowly. Thus, we get high speculative prices for things like Michael Jordan rookie cards, Rothko paintings and New York City taxi cab medallions. When there are so few good stores of value, and liquid assets like stocks merely keep pace with monetary expansion, other scarce assets become more attractive. When there is no good store of value, everything becomes a crappy store of value.
What’s really unjust about this particular type of asset inflation is that the people who benefit are typically already very rich or just really lucky. Sports teams have beaten the 7% annual return by a significant amount and so has land in the Hamptons and Facebook stock before it went public. What’s common about all of these investments is that they are only available to the super rich. The minimum wealth to invest in any of those is in the millions, and it’s billions for sports teams. They are all vehicles that allow the rich to get richer.
Other assets that have done well are things that have suddenly become very popular. A lot of modern art, taxi cab medallions and even sports cards could have been bought early, but they required quite a bit of luck. After all, for every Rothko, there are thousands of artists who produced similar paintings but never got popular. For every Jordan rookie card, there are hundreds of rookie cards of players who failed to have decent careers.
Wanting To Be Lucky Rather Than Good
Investing in assets which beat inflation requires a large element of luck and that breeds a lot of resentment. The perception is that the people who benefited were at the right place at the right time. Such luck isn’t that different in substance to rent seeking. Investment has thus taken on this gambling quality. As a result, the values of the people in the economy have changed from a mindset of providing value to just getting into different investments before they become popular.
Indeed, this element of luck is also present in real estate and stocks. There’s an unfairness to these things because you had to be an insider in one of these communities (which are generally very rich) just to know what to have invested in beforehand. There’s also access to significant amounts of debt that’s required to get in on these assets with size. Many of the people who got rich on asset inflation didn’t provide any value to anyone, they got “lucky.” Which is to say, they worked hard to get into the right groups and get leverage so they could rent seek on the information they got, but such work doesn’t add value, so it’s more viewed as luck.
Illiquid, Non-Fungible Stores
Stores of value like real estate, stocks and Michael Jordan rookie cards are weak savings vehicles because they’re not fungible. One piece of land is not as good as another one and a share of IBM is not the same as a share in Google. The lack of fungibility not only means a general lack of liquidity, but also enormous risk. This is why stock managers are obsessed with diversification. There’s so many ways in which a particular stock can go wrong that putting it all in one basket seems like lunacy.
Thus, at an individual level, fiat money causes people to both work much harder to store their value, or if they give up on storing value and get into debt, to engage in conspicuous consumption. There’s also a deeper societal envy of the people who are rich because many of them get rich more by being lucky than by being skillful and adding value.
The people who want to keep their wealth have to work very hard while those who don’t care can pile up debt. The fiat incentives are to work as little as possible while consuming as much as possible.
Bitcoin Fixes This
At an individual level, these behaviors that we see in the fiat economy are heavily curbed through having a good savings vehicle. There is much less reason to “invest”/gamble if there is an alternative store value. The most productive people can keep providing value to civilization instead of working to keep the money they have.
We also wouldn’t have so much asset inflation. This means that assets like real estate can go to people who desire it for its utility and not as an investment. The store of value premium on these assets disappears and more people can own homes because they’ll naturally come down in cost. People will own only homes they use rather than homes for investment purposes. Similarly, Rothko paintings, Jordan rookie cards and Lego sets will be priced according to their utility. They will go to the people who value them for utility and not people looking for ways to outrun inflation.
Lastly, there will be much less debt availability, leading to less conspicuous consumption. Instead, capital will flow toward innovation and entrepreneurship, a topic which I’ll cover in part two of this series.
Sadly, fiat money has created some terrible incentives. Not only would most people rather be lazy and lucky than hard working and good, but even the people who work hard typically only have a limited positive impact because of the fiat treadmill they’re forced to run on. Many Bitcoiners have been unhooked from these fiat money incentives and their behaviors have changed accordingly.
Indeed, this is the real reason why so many people in the Bitcoin community seem to be getting their lives together. The ability to save and the freedom from debt really changes how we live.
Come for the returns, stay for the life change.
This is a guest post by Jimmy Song. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
