Link to the YouTube video: https://youtu.be/WIgdENe2GKg
Stephan Livera: Saifedean! Great to chat with you again!
Saifedean Ammous: Always fun chatting with you, Stephan!
Stephan Livera: So Saife, I had the pleasure of looking at some of your new work. I pre-ordered it. But firstly, just tell us a little bit about it. What is The Fiat Standard? What are you trying to achieve here?
Saifedean Ammous: The Fiat Standard was born out of the questions that were left unanswered in The Bitcoin Standard. So The Bitcoin Standard explained how Bitcoin is the hardest money ever invented in terms of its salability across time, it beats anything else that we’ve ever had because it has the highest stock to flow ratio, and it gave plenty of examples of how this generally means that this leads to Number go Up technology, which unfortunately I hadn’t had the term when I wrote the book! It would have a lot if I could have just explained NgU technology! Because of the increase in the value of the harder money, eventually it ends up dominating the other monies and driving them out of the market. So given that that is the implication of the Bitcoin standard, it would be interesting to imagine how such a process could unfold? How can the current monetary system be overthrown. And so to do that, this book begins by studying the fiat monetary system from first principles really. In a similar way to how I studied and explained The Bitcoin Standard in 2017, published in 2018. I looked at the thing, and I tried to make sense of the economic properties of it and tried to explain them with reference to debates in academic economics. And so I thought Bitcoin is a simpler, neater system, it’s a more advanced system, it’s a system that performs the functions of money and settlement in a far neater, simplified way that allows us to really discern the essential elements of these functions. And then we can apply that lens looking at fiat. And try and understand how fiat functions. And as I started to think in these terms, I started to realize really, this is quite a useful way of understanding how fiat functions. In a similar way, you and I went through a period where we were alt-curious and we looked into altcoins and read some of their stupid white papers, and when you go through this exercise of looking at the entire monetary system and trying to understand where it goes — where’s the mining happening? How are the rewards distributed? How are the transaction fees paid? And so on. You start to form a picture of the essentials of how this thing works. And so, applying that framework to fiat would be a useful of beginning to assess how fiat works, and then using that as a springboard to explain what happens as Bitcoin continues to grow and fiat continues to do what it has been doing forever.
Stephan Livera [06:34]: So we’re trying to look back at the fiat system and understand how we got into the position that we are in today. Because I’m sure in many cases, people who are transacting with gold directly never intended for it to become so captured, but — how do we end up in this kind of situation?
Saifedean Ammous: I think looking at fiat in terms of trying to understand the problem it solves and trying to understand how it behaves in the way that it behaves — I think in the same way that with Bitcoin, I thought that salability across time was the most interesting aspect and the most fruitful avenue to explore to understand how this thing works. I think with fiat, really, the killer app behind it is salability across space. The ability of fiat money, essentially, to settle trade across space at a much faster rate than all the alternatives that existed at that time, because all the alternatives effectively were based on physical money. Actual metals that you had to lug around and move around and put on boats, and sometimes the boats would sink while crossing the Atlantic or the Mediterranean or whatever. By substituting the credit of government — which is what fiat money does. Effectively, what fiat money does is that instead of having gold as the native token of the payment system that is international, you end up having the credit of the sovereign serving as the token. And so the token supply is essentially the supply of whoever can draw credit on the sovereign. Whoever can issue credit backed by the sovereign, essentially. So anybody who creates credit gets to essentially create new fiat tokens. And when you think about it this way it starts to make a lot of sense!
Stephan Livera [08:37]: Yeah, for sure. And I think that really aligns well with the way Carl Menger explains the origins of money. He’s talking about salability through time and space, and so really what is happening is some of this capture of the system happened because people wanted something salable through space, and more easily. But then what happens is people end up using custodians, they end up using these third parties, and there essentially is a lot of trust placed in that system. And so essentially it seems as though, as the system requires more trust in it — and that’s where things can get manipulated in terms of the price and the ratios, the price of gold or the reserve ratios required, or the way you can extend credit in such a system. So, can you tell us a little bit about the importance of trust in that system and perhaps the mistakes that were made along the way?
Saifedean Ammous [09:38]: If you read The Bitcoin Standard, and I think you and I — the way that we think — generally we see this move from gold to fiat as just being a completely horrible mistake! And I think the focus there in that view which I think is highly justified, is that, you look at the salability across time of gold. You look at the stock to flow of gold, and you see that it offered us a safe haven. It offered everybody a neutral medium of saving an atypical money that was international, it was available for anybody! You could start saving from the day you were born and keep saving until you die and the same gold coins can continue value throughout your life. And you could take them anywhere in the world! And because it had a very high stock to flow ratio, substituting that with government money which had a much higher stock to flow ratio, at very high cost to society and civilization which I’m sure you and your listeners are very well familiar with. But I think in a sense you would like it if those governments and central banks ran these systems based on gold, but if you start thinking about it in terms of engineering terms, if you have gold you are effectively having to trust in these people anyway. The gold has no — once you see Bitcoin and you see how Bitcoin functions and you can run your own node and you can run the numbers — once you see how this system works, you start to really think, you can see where the shortcoming of gold is from the fact that just moving gold around — salability across space in gold — is pretty inadequate for the 19th and 20th century. Well for the 19th it could keep up I guess, but for the 20th was when it really couldn’t keep up. And in that sense, whether it was the Bank of England or the US Federal Reserve, they did offer superior salability across space. I think we kind of have to grudgingly admit that fiat just allows you to send money across the world in a way that becomes much more efficient than having to lug gold pieces around, because lugging gold around is expensive and risky. And if you just hand over the entire system to the government where you rely on the trust of the government, then the government runs its own accounts, it does its own magic, and your money gets from point A to point B. But, you know, occasionally it blows up, and it’s usually bleeding value, but you can’t have everything in life! And obviously there was no real free market competition. We couldn’t build a free market alternative around gold because the nature of its centralization means that you have to be moving along with the legal and political and traditional institutions of the country in which you’re operating the system. So I think it is really the salability across space that is what gives fiat its advantage, and it’s what led to the compromise of the monetary supply. And you see that the story of how slowly but surely they went off gold, and then even though the price of gold could rise, it still could not displace a national currency because you just couldn’t build a monetary system around gold. So everybody is stuck speculating on national currencies and trying to figure out which one of them is going to be the least worst.
Stephan Livera [13:08]: Yeah. Also, one point that stuck out to me in Chapter 2 is you mention here about how essentially the government will manipulate the price of gold in terms of — that’s one of the things that they would try to do. One idea that comes up here is the devaluation of the pound to allow the banks’ reserves to back the currency. And you point out here that this would be unspeakably unpopular. The question then is, do you think people’s attitudes towards these things have shifted these days? And perhaps were they more cognizant of these matters back then?
Saifedean Ammous [13:46]: Yeah it’s quite interesting. I think about fiat in first principles terms. The whole book is almost modeled after The Bitcoin Standard in that I’m trying to locate parallels for each. And so I went back to 1914 in the beginning of the war and looking at how fiat came about. How we moved from gold — and you see, back then, I think this is a really important fact — that there was no Satoshi and there was no designer and there was no idea about where they were headed with this design. There was no vision in 1914–15 as these countries came off the gold standard. There was no end goal in anybody’s mind that in 1973 there would be no link whatsoever between gold and money. In the mind of everybody, the question was, When do we return to gold? How do we return to gold? And it was well understood that the return to gold had to happen. The Sterling Pound was a matter of national pride in England, and they’ve been on this rate of 4 pounds — I forget the exact rate for 1 oz of gold — they’d been at that since Isaac Newton himself had set that rate, so it’d been around for 200 years. It was only interrupted during the Napoleonic War, but they returned back to the original price! So during the first world war, it was initially well understood that we’re going back on a gold standard and yet they managed to drag this on for 50–60 years and never went back on the gold standard. And we moved on to this system that really emerged politically out of the politics of World War I and World War II — not through design.
Stephan Livera [15:36]: Right. Another really interesting point I saw from Chapter 2 is this discussion around this idea of exporting inflation. There’s this idea that other countries are using either the US dollar or UK sterling, and in some sense, the US and the UK can benefit from this, because they can unload some of their — they’ve got more bag holders, right?
Saifedean Ammous: Exactly! Exactly! This is —digging in Chapter 2, I’ve really come to realize the importance of something that is called the gold exchange standard. And this was a system where Great Britain had implemented with its colonies in the late 19th century, where — with some of its colonies — whose central banks essentially kept their reserves in London in the form of English pounds. And so, the Bank of England made a great trade on selling these colonies claims on gold which effectively these countries weren’t going to cash out very frequently, because they needed them in the Bank of England network. They needed them on the Bank of England platform, because they were using this to settle their accounts with all the other central banks for buying stuff. This was their foreign account, essentially. So it was kept in London so the Bank of England didn’t really have to fulfill withdrawals for this very frequently, and at the outbreak of World War I they had only 31% reserves of gold to back up the English pounds that were outstanding for the countries that were on the gold exchange standard. So that ultimately was the driver of the problems of the Bank of England. That’s why they had to — not officially, they didn’t officially go off the gold standard because they wanted to maintain their position as the financial center and they kept on insisting that that was never going to happen, but the problem started because of this, and the solution, in typical fashion— to fashion the solution out of the problem —what they did was they effectively sought to export this model to the rest of the world after World War I by implementing all these new international arrangements whereby other countries needed to hold English sterling pounds in order to settle their accounts. And so there was the Treaty of Genoa in 1922 where the US and the UK basically dumped their bags of mainly sterling — the US did a little bit of dumping — but it was really the UK that had the most bags because they had gone off the gold standard in 1914. The US did not go off the gold standard until 1917. So for the first three years of the war, the UK and the rest of Europe were bleeding gold to the US. The US only really left the gold standard in 1917 so they still had quite more gold and were in much better shape than Britain. And the US was able to go back to the gold standard in 1922 but the UK was not. So then this became popular — the gold exchange standard — they get all these countries to hold pound sterling, and usually it came along with talk about financial stability and international cooperation and, We’re gonna need you to do your part by holding our bags for us while we print more sterling. And then this became more and more popular, and then this was basically what they did with the Bretton Woods Agreement, where the US copied the model and took it over from the Brits, and started dumping their dollar bags on the rest of the world. It’s the same thing — it’s the gold exchange standard — wherein all those countries don’t get to use the gold themselves! They get to use the pound or the dollar which are backed by gold, and they get to have a promise that, Okay, your paper is redeemable as long as you don’t try and redeem it in any significant quantities!
Stephan Livera [20:10]: Right! And over time they start to shut the windows in which you are able to claim it back. So at the start it’s open generally, but then later it becomes more like, Oh no! It’s only if you’re a commercial bank. And then later it’s only if you’re a central bank that you’re allowed to claim back, right?
Saifedean Ammous: Yeah! And then nobody basically, and then they just shut it up entirely in 1971! WTF Happened In 1971? As always.
Stephan Livera [20:40]: It’s very unfortunate. And so, it takes some time as well for that process to happen. I guess it’s a process of capture. So the better your monetary good can resist it, well, the better you are as a society, stopping a cultural and societal degeneration, in certain respects. It’s also important to — just talk a little bit about the politics of revaluations? There was a sense of, when the government or the central bank and they’re negotiating and deciding, like, Oh okay, you’re coming to the table and you’ve got this much gold. And so that is like an indicator of how much power or relative strength you have versus the other “players” at the table. So there’s a bit of a power dynamic game there based on how much gold you have. But that dynamic has obviously shifted in today’s world, that we could argue that gold is not seen as that important even though central banks of today — some of them — still hold gold, right?
Saifedean Ammous [21:54]: Ownership of gold is pretty important because obviously central banks still own it. And it’s still the one monetary asset that is free from any incumbrance — well, up until Bitcoin came along — it was the only monetary asset. It had that. So it’s still kind of a big deal, obviously. But to be fair, I think it’s really more about who is able to command an international settlement network, really. That’s ultimately what it comes down to. If you’re able to secure physically an international settlement network, if you’re able to secure a settlement banking network that allows people to transact across borders, if you have the security over that, then it ultimately doesn’t even matter if you run it on gold tokens or if you run it on fiat tokens. I guess it’s not accurate to say that — it does matter — because ultimately, if you’re running it on your own tokens, we see what happens. It has to eventually become politically motivated. Eventually it gets captured, and it’s going to inevitably lead to all the problems that come with political capture of money, that have always come with political capture of money. Whereas if you had it linked to a hard asset, it would be very different. So one problem this shows us in the fiat standard is: it un-solved [reverted] the problem of money, in a sense. Because it prevents us from having this one monetary medium that everybody uses. This one universal medium, which is what we had with gold. At the early 20th century gold had pretty much already demonetized silver at that point, so it really was only gold. So we finally had this problem solved where everybody everywhere in the world was using one thing as money, and then fiat comes along and it introduces all these other tokens. And then there’s gold — that can’t be completely demonetized. And if you’re looking for salability across space, if you want to spend money in the town next-door and in the country next to you and in the other continents of the world, then you’re going to need some combination of various fiats. But if you want to save money for the future, if you want salability across time, if you’re thinking about something that you want to keep for the future, then you end up having to think about gold. And so you have to hold some gold! And so this really un-solves [reverts] the problem of money, because now you have to — you have a much more sophisticated and complicated and error-prone calculation of: how much of my money should I allocate for salability across time — should I prioritize for the future? And how much of my money should I prioritize for the present — for salability across space, by putting it in fiat. And of course, if you live outside the US, then most likely you have to keep more than one currency in mind as well, so you end up with people having to think about gold and their local fiat currency and the dollar. It just gives everybody much more mental arithmetic to perform about money, and it makes the process of saving and the process of having a cash balance much more sophisticated and complicated than really it should be. Because if you had one form of money, it would be the one form of money that would have the best salability across space and time, and then you could just have that stash there for all your interspatial and intertemporal needs.
Stephan Livera [25:58]: Yeah that’s a really nice way of putting it. The combination there of the time and space. Moving to Chapter 3 then: you’ve got this idea of the underlying technology behind fiat. Can you tell us a little bit about what the fiat system looks like?
Saifedean Ammous: Yeah I tried to look at fiat as a digital currency, because it is a digital currency, let’s remember. Something like 90% of all fiat tokens are digital. It’s only about 10% of them that get printed out on their primitive OpenDimes, which are made out of paper. It’s still a digital currency, and if you start thinking about it in that sense, it’s easier to make sense of how the network works. So if you think about the node in Bitcoin — what is the equivalent of the node in the fiat system? There’s really only one full node in the fiat system. There’s one sovereign fiat node in all the entire fiat system and it’s the US Federal Reserve. And that is the only node that is able to decide definitively on the correct record of transactions and on the balances. It can revoke anybody’s balance and it can add new coins to anybody’s balance anywhere. They can shut off entire countries and they can take money from any account and they can cancel any transactions and so on. So it’s really the Federal Reserve that’s the one central node, and then there are the other nodes that are similar to SPV nodes that are the central banks. Which aren’t really full nodes because they can’t really truly decide the monetary supply of the token that is on the network. They can’t decide the native token monetary supply. And they can’t decide on the record of transactions. But they can verify payments and clear payments for people within their country. And then you have the mining nodes which are essentially any financial institution or any institution that can issue credit, that can borrow backed by the US government. These institutions are able to mine. They can’t decide on the record of transactions, but they can mine. They’re not full nodes, but they are mining nodes because they make new money. That’s really the key analytical tool of this book, is that when you start thinking about what it means when you substitute the process of mining in Bitcoin with the process of lending. In Bitcoin you do proof of work in order to make new coins — to make new satoshis you need to do proof of work. In fiat you need to lend. You need to make a loan in order to make new coins.
Stephan Livera [30:24]: So with that, it’s really a massive power being given to those special privileged few who are able to lend out and essentially create new money. Now the government imposes all sorts of conditions and regulations and so on, on those banks and those financial institutions that are able to create new credit, but it is a massive power for them. There’s a whole convoluted operation around this, right? Because it’s not just — they sort of mask it with these different terms and processes around that. How would you talk about that obscuring of what’s really going on?
Saifedean Ammous: The reality is that it’s just a decentralized system if you think about it. It emerges as a sort of — as the government takes on the provision of the currency, as the government guarantees the central banks’ monopolies — monopoly and the banking monopoly — the government effectively becomes the [guarantor] of the banking system and that then means that the banking system’s creation of credit allows for creation of new money. And so it means that there’s really — it’s not really easy to figure just how much money there is! The money supply is not very clear, because you never really know much credit is being created, and you never really know — and of course there’s the issue of the maturity of different types of monies and what can count as money and what can’t count as money. So supply is completely for most people. It’s very hard to come up with a clear answer about what the supply is and there’s different definitions.
Stephan Livera: One other point that’s also interesting to discuss is what’s economic survival based on? In this chapter you’re talking about, It’s almost based on getting into larger debt, because you want to get present goods for future liabilities, right?
Saifedean Ammous [32:51]: Exactly! Yes. This is the key — the way that it just ends up. Which is why, the more that [you] read into this book, the more you realize that this is just — you see the technological underpinnings and the technological realities that create the incentives for these things to happen! And it makes it really look far less nefarious! It’s not like — there are serious incentives for doing this because of the way that the system works. Once you have this guarantee of debt, it just becomes more profitable for you to get into debt, because every time you get into debt for something, you’re allowing the person who’s lending you — the financial institution that is lending you — you’re allowing them to mine new tokens. And so think about it this way: when you’re buying a house, you have the choice of either just buy a house, or buy a house and mine new fiat tokens. Imagine if that happened with Bitcoin: you can just buy a house with Bitcoin, or you can buy the house with somebody else’s Bitcoin, and by buying a house with somebody else’s Bitcoin, they get to mine new Bitcoin. They bring new Bitcoin about! Which one of these things do you think is going to be cheaper? Obviously the second one is going to be cheaper in real terms because the lender has an incentive to make it cheaper for you — they would like you to do that — because if you don’t do that and you buy the house in cash, they don’t get to make new tokens!
Stephan Livera [34:35]: Yeah it’s a very dark system that we’ve found ourselves in! And there’s a whole host of other things that keep us in this world. Things like the fact that we have to use the fiat coin for tax payments, right?
Saifedean Ammous: You’ve got to stay in it — it’s a monopoly! It’s a single system that’s a monopoly system. It’s a consequence of the fact that it’s a monopoly that it ends up becoming so dysfunctional. It’s just the reality of the incentives that everybody faces. And in a sense, you could think about it as being a conspiracy in some way, but really the more you think the technological incentives there, you see why it makes sense from an economic perspective. In this kind of system is makes sense to get into more debt. In this system the people who succeed the most, the companies who succeed the most, are ones who are able to take on the most debt, while skirting the line of profitability, and not sinking into bankruptcy! That’s really the key! You just need to keep on running up a bigger loan and going from one loan to the other, and the key to do that is to have enough cash flow to continue to make your payments so you continue to make sure that your credit [inaudible 36:08] increases so that’ll allow you to grow in size. This is just how the system ends up working! You can see how it just makes sense once you made it so that it is a financial system that is guaranteed by the government, it’s just going to end up being this way, even though it’s motivated by what sounds like such good idea — let’s just guarantee the banking system and prevent it from collapsing because you wouldn’t want people to lose their savings! Savings are good — let’s guarantee savings! Well you end up just destroying savings and plunging everybody into debt!
Stephan Livera [36:48]: With the access to credit, obviously a big big beneficiary is the government itself! It can become so much larger and as you point out, the central bank and the government they have this whole song and dance, but in reality governments are very much funded through government bonds. And guess what? Central banks are the main market maker in government bonds! This is one of those points where, people who are not as into the Austrian economics of it—like reading and understanding what’s going on and how the is government funding itself —they don’t see this idea that fiat as a standard is what’s enabled the government to be so large, wouldn’t you say?
Saifedean Ammous [37:29]: Absolutely! Government can just interfere at any market in any good anywhere and tip the balances in any way it wants! Because it can just allocate an infinite amount of tokens as long as the currency doesn’t collapse! Of course the currency can collapse often and it does collapse. But until then, they can decide to go in and buy from this producer, not buy from that producer. They can decide what happens to — they can decide to allocate credits to one kind of producers and not the other, and that will completely shape the shape of the markets! It’s an enormous amount of power that they are allowed to allocate. And it’s massively distortionary of the market process, and that’s the thing that I focus on in the second part of the book, Fiat Life. Trying to think of the downstream economic, social, political, and cultural effects of this kind of system, wherein, A) you’re losing the hardness of money, so money is now much easier than gold. And you know with varying degrees across the world but still easier than gold no doubt about it. And B) on the other hand you’re also having this massive distortionary effect on markets where one monopoly entity can just come in and allocate infinite amounts of cash at any producer or consumer in the market.
Stephan Livera [39:01]: I also really enjoyed one of the thought experiments you proposed here. You say, Imagine what would happen to a country that adopted a fiat standard before accumulating significant industrial capital. This is the developing world of today. Why is that?
Saifedean Ammous: Having studied this history, I really think the start of World War I — and the abandonment of the gold standard — marked really a very pivotal point in history. Because if your country had adopted industrialization and the gold standard, which usually came hand in hand — by the time you had a gold standard, you needed a gold standard because you had developed enough of the division of labor that you were importing and exporting so much that your producers needed something like a gold standard — so once a country had a gold standard and became industrialized, that country will have developed a basic industrial base and have sound money. After World War I happened, if your country had not done that by then — these countries became the developing world, more or less— these countries had not developed enough industrial capacity and had not imported enough of the modern technologies of the industrial revolution by the early 20th, and were still agrarian economies — after 1914, there would be no more gold standard for them to trade with the rest of the world, and world trade would just get messed up, so they never managed to get to that level of industrialization and that was a massive impediment in their development.
Stephan Livera [40:48]: Yeah that’s a really interesting point to think about.
Saifedean Ammous: If I can just add — this is from Hayek. I think it was Hayek that mentioned this in some form and I quote him in his book, Monetary Nationalism and International Stability, he mentions these countries that had never developed a gold standard and then, when the developed world went off the gold standard, these countries — their development was massively compromised by the fact that they didn’t have a global trading system from which to be able to import the capital they needed. And all of these things carried on for a while.
Stephan Livera [41:37]: It spells out the importance of the overarching need for capital accumulation and a proper structure for society to actually become prosperous, and that if you don’t get the right pieces and the right ingredients then it can really stop a country from prospering like many of the other Western world nations have.
Saifedean Ammous: Absolutely. It’s completely detrimental if you’re not able to have a sound money. If you think about it, the countries that didn’t develop industrially by the early 20th century, they spent the rest of the 20th century — most of them — going through one financial crisis and one hyperinflation and high inflation, all of these coming one after the other all throughout the last century or so. These countries that didn’t develop this monetary tradition of sound money and didn’t adopt industrialization just — by the 1940’s and 50’s and 60’s when they were trying to industrialize the world was so massively protected. And protectionism had increased so much — and protectionism had started to increase after World War I precisely because of the monetary problems caused by going off the gold standard. There was very little problem with trade before World War I because when they were on the gold standard, nobody had balance of payments problems. If people bought a lot of things from abroad they lost gold and the other country made more gold and carried on! You had more stuff they had more gold, or the other way around. And if you wanted more gold, stop buying stuff! If you want more stuff, stop hoarding gold! It was a simple economic decision that everybody had. But once the currencies became disconnected from gold and prices domestically started to vary and governments tried to keep the currencies nominally at the same interest rates, you would get a difference in real prices across countries, which would lead to large movements of capital and goods and trade changes. So for somebody, the pound was overvalued after World War I for instance, and because the pound is overvalued, the British are trying to get their gold out of Britain as much as they can because it would be profitable for them to just sell it in the US and get dollars for it and then exchange the dollars in London. And then the same thing happens with trade. The country that has an undervalued currency finds its goods becoming more and more attractive for foreigners and so started exporting more, and a country with an overvalued currency doesn’t export and that causes problems for its producers. And so the whole thing leads to problems in trade and that leads to tariffs and all these restrictions on trade, which then really hamper the ability of the developing world to catch up, because they hadn’t grown — they didn’t have a gold standard, and they didn’t have access to world markets. And world markets weren’t open as they used to be. I think the transfer of technology that we could’ve had if we had stayed on the gold standard after 1914 would have been much much much larger. The developing world would have been in a much better shape if the gold standard had continued and would have been able to buy and sell. Because industrialization was spreading all around the world and engines were going everywhere and electricity was going up everywhere. World War I comes along and the gold standard falls and the whole thing goes to shit.
Stephan Livera [46:03]: There’s some hope there though! At least this time around with Bitcoin, it potentially allows people to have that single exchange, that single money around the world that they can start exchanging. I have seen news articles talking about people Africa buying goods from people in China — paying with Bitcoin and things like that. We’re starting the process of healing. The world is healing Saifedean!
Saifedean Ammous: Fiat is the real virus! Absolutely. Bitcoin is the vaccine we need!
Stephan Livera: Another really interesting topic that you touch on in Chapter 3 is some of the propaganda that they use to keep us in their system. They have these economic “facts” such as this idea that government bonds are risk-free, because the government can just print more of it, right? It’s like, how did we get into this world that the government is allowed to print money but you and I aren’t allowed to print money!
Saifedean Ammous [47:10]: There’s been history for this, obviously, it’s been going on for a long time. And it’s amazing that there’s always this belief that all the previous other governments—they destroyed their currencies — but thankfully, they are not us, and we are lucky enough to be under our government which is the good one that won’t destroy its currency! It’s quite amazing even in places like Lebanon, people just continue to maintain faith in this. I remember I was speaking to a group from Lebanon a few months ago when the Lira had lost something like 60–70% of its value at that time against the US dollar in just 6–7 months, and after presenting Bitcoin and the case for Bitcoin and the supply and all of that stuff, one of the first questions I got was, well without a central bank what guarantees the value of Bitcoin? From somebody living in Lebanon who just saw their central bank guaranteed currency lose 60–70% of its value, they still think of the central bank as being the reason that their currency is guaranteed to have value! They think that without the central bank, we wouldn’t be able to have money and the money wouldn’t be able to have value. The central bank messed up now — reasons happened — and now the currency has slipped up, but you know, things like that can happen to the best of us! And they’ll maintain it now at the new exchange rate!
Stephan Livera: Surely this time it won’t fail!
Saifedean Ammous: Surely it won’t! And then two weeks later and it drops 50%! And you just update the number in their head where the line in the sand is going to get drawn and they just continue to believe in it. I remember teaching macroeconomics in Lebanon and coming across these lines in the macroeconomics textbook about government bonds being risk-free. I would laugh in class and would tell the students this is not true! There is no way that you can make something risk-free, let alone the bonds of your government! The government that had managed to destroy a power grid and un-invent electricity! It’s not risk-free! Definitely not risk-free lending! But it’s amazing, it’s a mental construct that just has to emerge around fiat money where the government propaganda creates this idea that this thing is risk-free and everybody believes in it. It continues to work until it doesn’t work. But there was never really a good reason to suspect it works. And fortunately with Bitcoin there’s never really a good reason to have to deal with it or have to believe it because now we have an option to exit from it and that’s the beautiful thing about Bitcoin!
Stephan Livera [50:23]: In terms of the way they wage the propaganda warfare: it seems that universities and a lot of the economics jobs in some sense get captured because many of the economics jobs are actually in a central bank. You’re not gonna find a lot of Austrians who work in a central bank, right? And you’re not gonna find a lot of the people who can succeed in those kinds of environments telling the truth!
Saifedean Ammous: No absolutely not! In academia you don’t make progress in your career by figuring out why you shouldn’t get paid. You don’t make progress by figuring out why anybody in government shouldn’t get paid. You make your progress by figuring out reasons for people to get paid. And so there’s always reasons to be afraid and panicky and hysterical about things that can be alleviated by government spending. And there are always jobs to be had for people who will wear a suit and look serious while they explain why money needs to keep continuing to be printed. That’s just how it works! This is ultimately what has happened with academia now. Professor Larry White has done research on this, I think he found somewhere between 70–90% of all research done in monetary economics journals has got the funding of the Federal Reserve somewhere. You know, one of the authors has gotten Fed bucks directly from the Fed. Fresh cantillion digital tokens straight into their bank account! Virgin coins as they say!
Stephan Livera: I wonder what the premium are on those! It’s just such a funny thing. And there’s a range of ideas involved. One of the ideas is, Oh, government bonds are risk-free. Another is, Oh, national debt is not an issue because — don’t worry Saifedean, we owe it to ourselves?
Saifedean Ammous [52:43]: Yes! It’s all ‘we’! There’s that magical construct called we that just defies anything, it’s amazing! I think accountants should cringe when they hear this we, because these are different accounting entities and you can’t just put them all together and say, Well we all have balance sheets and they all have numbers so we’re all one and the same! Because that we is made up for some people who are going to spend today, and some people are going to have to pay it back tomorrow! And that’s just not the same people! The people getting to spend today are the economists with a fake job that tells you that debt is good for your children. And the people who are paying his salary are your children! And they probably could think of better things to do with their money than pay an economist to tell the world 30 years ago that debt is not gonna be a problem for them!
Stephan Livera: Anyone with common sense can see that high debt in the government means that either your children or your grandchildren are going to be paying for that in some way. They’re either paying explicitly or they’re just paying in the sense of lost economic growth the prosperity. But the thing is a lot of these economists just like our friend Paul Krugman and the Paul Krugmans of the world who will come out and tell us, Oh no, see! You’re assessing it just like a household. But see the government is different! It’s not like a household. And there’s this whole propaganda warfare around that.
Saifedean Ammous: Yeah these people get paid from it so they have every interest in believing it. But it bears no relation to reality! That’s not the way that it works. Ultimately, there are resources that need to be spent. And somebody needs to consume them and somebody’s going to have to provide them. And all the emotional bullshit in the world can’t hide behind that! That’s the scam of fiat. Basically everybody’s being enslaved to their future self. Or everybody is enslaving their future self, I should say. You’re putting your future self in debt for yourself, for you to be able to spend tomorrow. And everybody is stuck in that. The sad thing about it — well it’s not very sad — you have to stay on this treadmill even as you start getting more money. It’s not like the rich people can just— well I mean they can obviously — but if they just opt out of the system they would be giving up on serious wealth. Whereas if they just take on more debt, then they’ll be able to essentially beat inflation. So everybody has an incentive to stay on the treadmill. Everybody has an incentive to stay indebted. Everybody has an incentive to continue to live with a relatively close margin to economic problems and economic hardships and massive financial instability in their lives because everything is running on debt, everything is fragile, a couple of mispaid checks and business goes bad and you lose the business. So this kind of stress takes its toll on people, and the way that the fiat system works is that the only way that you can opt out of this — no matter how much money you have — is through giving up on significant money. If you don’t get into debt, you’re being the sucker of the inflation game. You’re the one who’s financing everybody else’s mining.
Stephan Livera [56:07]: It seems very much that even if you look online at the people who are teaching other people how to create wealth, it’s all about how to best maneuver through the debt system. How to maneuver so that you can get into debt and flip houses or do some other kind of scheme that involves using the financial system in this aggressive way.
Saifedean Ammous: Absolutely. You look at it all over and you start realizing that for small businesses and for large businesses, one of the most important components of success is knowing how to manage debt. And managing debt successfully — particularly for large businesses — basically debt arbitrage, interest rate arbitrage. This is what large companies do. Many large companies are essentially hedge funds today. If you think about what IBM does — IBM’s a hedge fund! They are big enough that they can get cheaper credit than pretty much anyone, and they invest very far and very wide and that’s ultimately more of their business I think at this point than anything else! So really managing debt and managing the process of creating debt and borrowing and lending is the key to success. Which I think is quite wasteful! Because if you had had an advanced monetary system like Bitcoin you’d just have computers doing the slave work! It wouldn’t have to be mining every day by getting into debt and worrying about our finances and worrying about missing two paychecks and becoming homeless and so on. You wouldn’t have this insecurity with your house with your job — all of this fragility — because you’re having to mine. You’ll just have computers doing the mining! Sounds like such an infinitely more advanced and better system!
Stephan Livera [57:55]: I’m also thinking now of what people are doing in response to creation of Bitcoin and the existence of the fiat system. Almost some of the most recent news with Microstrategy deciding to issue debt to buy Bitcoin, obviously our friend Pierre Rochard who spoke about this and wrote about this in 2014 — in some ways it’s almost like a real validation or a vindication of that strategy — that because as you were saying it was about managing your debt, but now that the world is slowly, we think, monetizing into Bitcoin, it’s almost like a validation of that idea wouldn’t you say?
Saifedean Ammous [58:33]: Absolutely! It’s incredible to watch it happen in front of us exactly as foretold by our glorious leader Pierre Rochard!
Stephan Livera: Also related to that as well, it’s that people are looking for an alternative because — now that interest rates are becoming so low and we know for example that governments don’t want to let interest rates rise because that would raise their debt cost and their debt servicing — it’s kind of like, this is the new way to exploit the system.
Saifedean Ammous: Absolutely! When you think about the fiat standard, when I studied it, my conclusion is that, Yeah, try and get into as much debt as you can! Try and get as much Bitcoin as you can! That’s really the winning way of playing this game, because Bitcoin is a hard asset, they can’t make more of it, but they can make more fiat. So if you’re playing the fiat game, if you’re able to get debt, you’re able to get ahead with it, unfortunately. But if you’re able to secure with Bitcoin — the incredible thing is that now we have the entrepreneurial opportunity to bootstrap the alternative to the debt-based system. Instead of having to continue to monetize debt and continue to live in this world where everybody has to get into debt, and everybody has to mine debt in order to continue to function economically, you can start monetizing a hard asset. And you monetize this hard asset by holding Bitcoin and are effectively rewarded for this entrepreneurial bet on Bitcoin through the significant amount of NgU technology that is happening. The rise in the price of Bitcoin is the entrepreneurial call being successful. This thing is rising, and it shows that the value of this monetary system is increasing. As this continues to go up, we have the alternative to that! That’s the lesson. In the long run, I think one plausible attack vector you could think about is that there would be some kind of separation where you can’t buy Bitcoin if you get into fiat debt or vice versa. This might be one way that they begin to fight back to try and prevent this kind of thing, but otherwise, it’s really exciting to watch this going on as long as it can! Because, you know, Godspeed to Michael Saylor as he continues to see just how much of the fiat of Wall Street he can get into the soundness of Bitcoin!
Stephan Livera: As you point out, this kind of strategy is not available to everybody. Not everybody can borrow at cheap interest rates for this purpose. Perhaps for the typical individual they can get a loan for something like a house for a relatively low rate, but not necessarily to get Bitcoin at the same rate. Of course, people will find ways and there will probably be people doing this kind of thing. As you were mentioning it’s about being responsible in how people are doing it as well because there certainly are a lot cases where people go into debt and try these kinds of high leverage strategies and end up getting rekt. Let’s just make sure listeners aren’t thinking, Oh yeah! Let’s just maximize — it is certainly a risk also.
Saifedean Ammous: Yeah! Don’t try this at home! Consult your local debt doctor and your local bank on what kind of debt slavery is good for you!
Stephan Livera: What’s the plan coming forward with The Fiat Standard and what’s the way that it’s going to get released?
Saifedean Ammous: Right now I’m publishing the chapters of The Fiat Standards two weeks at a time, there’s about 22 chapters in the book. I’ve sent out week 1 and by the time this will be done week 2 will be out. You can subscribe on my website https://saifedean.com/ and you’ll be getting one of these chapters of The Fiat Standard once every two weeks and also you’ll get Principles of Economics also once every two weeks — my textbook which I’m also working on and finalizing. So you’ll be getting one chapter each week from a different book. And you can also have full access to my courses Principles of Economics I and II, The Bitcoin Standard course, and the course that essentially became The Fiat Standard.
Stephan Livera: Fantastic! Listeners I would also encourage you! I’ve purchased it and I’ve got the early versions as well so listeners make sure you support Saifedean as he is helping break the model of the typical university and we’re gonna have a free market style of online education delivered in a way that is quite cost-effective, I think! And much more liberating and I think this is the kind of world that we’d like to have where people can do their businesses and services online and I’m looking forward to seeing the next chapters of The Fiat Standard as they become available. Saifedean, thank you very much for joining me on the show today!
Saifedean Ammous: Thank you very much for having me, Stephan!