Episode Transcript
[00:00:00] The idea that some authority can deduce the correct level of this balance is not merely wrong. It is not even wrong. It is methodologically incoherent. Asking for the correct interest rate is like asking how much the color orange weighs the best in Bitcoin. Made Audible I am Guy Swan and this is Bitcoin. Audible.
[00:00:43] What is up guys? Welcome back to Bitcoin. Audible we are in part 2 of 2 of number go down by Alan Farrington and Sasha Myers.
[00:00:56] Go back and listen to part one if you didn't. This is such a fantastic and as always entertaining piece on the understanding. And there's a. There's a really, really strong argument at the very end of this that I had not put together about what, because we've talked about on the show about the fact that deflation in sound money is actually the measure of growth. It's actually the very indication that growth has occurred.
[00:01:23] And I think they do such a great job of laying out exactly why that is in the second half of this piece. But then there's also an element that I hadn't considered of the excuse that fiat economists give that the reason we need inflation is because when we inflate the money supply by 2%, we expand credit, we expand investment, and what actually happens is that the economy grows by 4 or 5%.
[00:01:49] And we can actually test this. We actually know what would need to happen. Based on the obvious monetary principles and the excuses that they give themselves, we can know whether or not there is a net benefit from the expansion of the money supply. And it's actually intuitively obvious that it would need to be this. And it's proof that fiat does nothing but destroy an economy.
[00:02:15] But I will not get ahead of it. I will let Sasha and Alan Farrington break this down in the second part of their awesome piece number Go down and we are jumping right in on the section titled the effect on prices.
[00:02:37] Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel.
[00:02:44] These once unthinkable dosages will almost certainly bring on unwelcome after effects. The precise nature is anyone's guess, though unlikely consequence is an onslaught of inflation.
[00:02:56] Warren Buffett 2011 letter to Berkshire Hathaway Shareholders so far we have considered only individual decision making by entrepreneurs.
[00:03:08] That is methodologically sound, since only individuals make decisions.
[00:03:13] But having been careful on that front, we can still ask what emergent patterns we should expect from these individual decisions about capital allocation, pricing and innovation.
[00:03:25] Several conclusions follow at the level of the Individual producer. There is always pressure to increase returns, lest the avenue of investment cease to attract capital.
[00:03:36] In the short term, this may mean raising prices or lowering them prices. Perhaps counterintuitively. Which response is right depends on the demand perceived relative to the supply made possible by the existing stock of productive assets. The answer cannot be derived and is in principle unknowable. It can only be intuited.
[00:03:58] In the long run, however, it is reasonable to expect returns to tend toward equalization as competition directs liquid capital to toward its most promising, illiquid forms.
[00:04:09] That is very different from saying the process is automatic, immediate and smooth, or that it ever concludes. Capital allocation is uncertain, iterative, temporal and intuitive.
[00:04:22] The pressure here is not a natural law like fluid levels equalizing or temperature gradients dissipating. It is only a reasonable expectation about what human beings with money and incentives will tend to do.
[00:04:37] Economic forces may push in a given direction, but in a dynamic adaptive system they never produce a true equilibrium. At most, equilibrium names an expected tendency given current knowledge and incentives, and even that can be understood only counterfactually, not modeled directly. The only way to acquire the knowledge in question is to run the experiment that creates the facts one wants to know.
[00:05:04] The pressure to increase returns and, under competition, to preserve an acceptable return can only be satisfied in the long run by investment by experimentally discovering new knowledge that makes it possible to create more with less, better with the same, or something entirely new. Because this logic is agnostic as to the specific avenue of capital allocation, and because liquid capital is fungible across industries, we we can say in the aggregate prices go down only where investment has created a new support level for returns, such that producers can lower prices, take market share, and still increase returns.
[00:05:47] Producers can always cut prices, in theory, of course, but without a sufficiently improved cost base, they risk lowering returns rather than raising them. Once investment has genuinely lowered the cost structure, however, price cuts become far more likely to increase returns than to destroy them. Prices therefore, do not mysteriously go down. The price level is not an exogenous parameter. It emerges from individual decision making under uncertainty, from the drive to maximize returns on capital, and from the possibility of discovering more efficient methods of production.
[00:06:23] It is also important to note that when any individual producer lowers prices in this way, everyone else's real returns rise as well.
[00:06:33] The effect will be unevenly distributed across time and economic distance, but the ripples spread outward. Every unit produced by somebody is consumed by somebody else. That is what exchange is.
[00:06:47] So when a producer innovates and lowers prices to take market share and increase returns she is also lowering other people's costs and thereby increasing their real returns.
[00:07:00] The fiat mindset encourages people to imagine that lower prices means less economic activity. This is a silly result of static analysis. Lower prices are only possible because either more output is being produced with the same inputs, or the same output is being produced with fewer inputs. This takes us back to Jevons. The mainstream explanation is simpler than the framework discussed in this essay, but it captures something real.
[00:07:27] When things become cheaper, they are used more, not less, because new applications become economically viable.
[00:07:34] Although it may seem intuitive to fully understand the phenomenon, we need the machinery developed throughout this essay. Innovation in pursuit of returns Producers lowering prices to capitalize on improved cost structures and the downstream gains others enjoy from the resulting reduction in costs.
[00:07:55] We can state the same point more abstractly. The aggregate result of this process is the continuous accumulation of more and better tools, a perfectly respectable definition of capital, provided we understand tool broadly enough to include not only the spade, but the idea of the spade and the skill required to use it. The more tools society has, the more valuable everyone's time becomes, because it can be leveraged to create more, better and newer outputs with the same raw input of hours. Innovation and capital accumulation mean that everyone's time is becoming more valuable. This framing also reminds us that the whole dynamic depends on consumption being sustainable. Nobody's time preference is zero and returns require profit. Investment can be funded by savings, but savings cannot be drawn down forever. Savings exist only where positive returns are not wholly consumed. So there is always a balance between what is consumed and what is saved. If we only consume, we never invest, and productive assets depreciate away. If we only save and never consume, not even necessities, then producers have no signal as to what should be produced and consumers starve. Anything short of universal self starvation kicks the reinvestment engine into motion and improves living standards through deflation.
[00:09:24] These absurd extremes illuminate the tension within which a balance is discovered, and it is here that interest rates emerge. The question faced by any would be investor is always at what price am I satisfied abstaining from consumption with some portion of my savings? The price in question can only mean an amount of money per unit of committed capital per unit of time. That definition describes both returns but also interest, which is merely rate of return.
[00:10:04] To the entrepreneur, any given interest rate or return is justified only relative to an expected rate of return.
[00:10:14] If savings are flowing heavily into present consumption rather than investment, then returns on satisfying that consumptive demand are likely high and marginal. Consumers will be tempted to become investors instead. If savings are flowing heavily into investment rather than consumption, then returns will tend to be lower and marginal investors will be tempted to consume instead.
[00:10:37] That is the balancing process. It is also amusing to note that the deflationary mechanism just outlined stimulates consumption, and in a healthy way, because even when people know something will be cheaper later, there is always some price at which they crack and buy it. Now, as prices fall, demand materializes, but it does so through real price signals, rather than by forcing people to spend before the state kills the value of their money.
[00:11:04] While the logic of this dynamic can be understood, it resists quantification. It is not scientific, because no controlled experiment can isolate one variable from all of the others.
[00:11:17] The experiment is always counterfactual until it is run in reality, and running it is precisely what generates the knowledge sought. Nor can the aggregate be treated as unitary. It is and can only be emergent to the extent it meaningfully exists. It exists only as the product of individual marginal decisions. The idea that some authority can deduce the correct level of this balance is not merely wrong. It is it is not even wrong. It is methodologically incoherent. Asking for the correct interest rate is like asking how much the color orange weighs money a new car, Caviar 4 stay daydream think I'll buy me a football team Pink Floyd we deliberately left money to the very end the essay has first tried to show that price deflation, understood as a broad tendency for goods to become cheaper over time, is a natural consequence of free capital markets and the possibility of discovering new technologies and better methods of administration.
[00:12:27] One might go further and say that price deflation is not merely a consequence of progress, but a definition of it.
[00:12:35] Economic activity that does not make things more affordable is is change but not progress.
[00:12:41] So let us conclude by asking what different monetary regimes do to this process.
[00:12:49] Once money enters the picture explicitly, we must be careful to distinguish between the price level and the money supply. A first confusion to clear away is that while there is such a thing as inflationary money whose supply can be expanded, there is not really such thing as a deflationary money. One could imagine a money whose issuer periodically destroyed units or reduced balances programmatically, but we know of no relevant real world example. This is perhaps the point of maximum confusion for fiat economists, who tend to make a partly theoretical and partly practical argument along the following in an inflationary fiat system, where almost all money is really bank credit, bad loans impair creditors solvency, so creditors call in other loans to recapitalize Because a prior credit bubble has spread far more debt through the financial system than real savings ever justified. The process becomes self reinforcing. Everyone scrambles to recapitalize with real assets. Loans go bad and are called in at the same time. Investment funding dries up. Consumption dries up too, because everyone realizes they have far less genuine savings than they thought.
[00:14:05] New credit extension dries up as well. Since credit extension is treated as synonymous with money, this is often framed as the money supply itself. Contracting. Producers faced with retrenching consumption then slash prices to clear inventory. That is the beginning of bad deflation. One might call it a deflationary credit spiral. What matters is that this has nothing whatsoever to do with with innovation driven deflation.
[00:14:34] We are now talking about something much murkier than entrepreneurs finding cheaper ways to satisfy consumers. We are talking about the demand for money. Like innovation, it is endogenous and bottom up. Unlike innovation, it is purely monetary. And because demand for money is among the most abused phrases in fiat economics, we should be very clear. Read it not as desire for credit, but literally.
[00:15:03] Demand for money is a person's subjective desire to hold a given amount of wealth in liquid monetary form at the implicit opportunity cost of buying anything else.
[00:15:18] People with a high demand for money will exchange goods, services and investments for money because they value its liquidity and its usefulness as a store of value and medium of exchange. Jews fleeing German persecution during the Second World War had little use for illiquid goods or local hard assets. They wanted portable liquid money, which often meant gold.
[00:15:42] Conversely, someone with no air and terminal cancer may have little demand for money because he would rather spend everything before he dies.
[00:15:51] When demand for money rises, perhaps because of war or fear, people cash out and we observe a purely monetary and endogenous form of deflation. Another way of saying the same thing is that the price of money has risen relative to other goods and services.
[00:16:08] Demand for money at the previous price exceeded supply, so the price of money rose.
[00:16:14] From the perspective of someone using the currency as a unit of account, that looks like a general fall in prices.
[00:16:21] The monetary network is now storing more value, while the stock of goods and services has not changed. This is precisely the kind of deflation Keynesians fear, because their entire worldview assumes people should be induced to get rid of money as quickly as possible.
[00:16:38] Their pyromania aims to lower the demand for money and therefore create price inflation to bring some balance to the matter. It is true that a sharp increase in the demand for money is often a worrying sign, such as during A credit crunch. When people are no longer satisfied with IOUs from lenders or from their own fractional reserve bank, they want cash instead. Claims that had previously circulated through the system, with almost no one holding base money for long, are suddenly called into question.
[00:17:09] That unwinding causes real pain. But the correct analysis is that the pain is necessary because the problem is real.
[00:17:18] The credit expansion reverses only because it was unsound.
[00:17:24] Credit collapses are painful, but to identify the temporary price declines associated with them as the root problem is absurd. That is like saying that because hangovers are unpleasant, sobriety must be the cause and that the solution must therefore be to keep drinking. The actual solution is to not get drunk in the first place, or, failing that, to sober up. Fiat economists have a habit of responding to every crisis with the same recommendation. Just one more drink. Instead of reckoning with malinvestments and accepting that people's demand for money has genuinely increased, Keynesians refuse to let nominal prices drop. Since the average holding period of money has elongated and caused monetary deflation, the only solution is to expand the quantity of money.
[00:18:09] In a fiat credit system, money is not merely the base currency.
[00:18:14] It is a towering structure of promises layered on top of it, such as banks deposits. In the boom, those claims multiply, in the bust, they evaporate. If one wants fewer deflationary spirals of this kind, the answer is not to print more. It is to build less of civilization on fragile maturity, mismatched nominal claims backed only by other liabilities rather than by real assets. Yet the standard policy response is to treat the collapse as proof that prices must always rise, and to justify permanent monetary debasement in order to prevent the next collapse, thereby laying the groundwork for a still larger one.
[00:18:54] Economic collapse may not even be the worst consequence of fiat managerialism. Setting morality aside, inflation has two technical effects. It breaks price signals and it redistributes purchasing power.
[00:19:07] Prices are how human beings coordinate across time and space under uncertainty. They tell entrepreneurs and consumers what is scarce, what is abundant, and where capital may earn an attractive return.
[00:19:23] Within this family of prices sits the interest rate, which is not a dial. The FOMC can turn at its regular meetings to achieve full employment. It is the price of the present against the future, the terms on which savers defer consumption and entrepreneurs invest.
[00:19:43] It is the manifestation of time preference, risk and opportunity. It is an information signal.
[00:19:51] New money never arrives everywhere at once. It enters through particular channels and benefits those closest to the spigot and at the expense of those furthest away.
[00:20:03] Banks, governments, and asset holders cluster near the source.
[00:20:08] Stimulus become synonymous with financialization, leverage and the migration of talent toward politically connected activities. If you pay people for proximity to the printer, do not act surprised when fewer of them build bridges.
[00:20:25] We can visualize both this cantillon inflation and technologically driven deflation at the same time in the composition of stock market indices. By considering a period of time that captures both the ultra long term compounding effect of technological innovation and which overlaps with critical monetary shifts, we get a crude sense of what is getting cheaper and what is getting more expensive. Consider the absolutely critical industries of steel, chemicals and automobiles, once major components of the US Index. We see the relentless drive of innovation and deflation and leading to these producers becoming a smaller and smaller share of overall economic output.
[00:21:07] They've got a chart here showing the industry share of total U.S. market cap for steelworks, chemicals and automobiles. And all three of them in the 1930s and 40s and 50s are hovering somewhere between 8 to 12% of all U.S. industry each. And then they have a constant stable decline all the way into 2020, where both steelworks and chemicals look to be around 1% and only automobiles still lands at about 3.
[00:21:38] Now look at finance and focus in particular on 1971.
[00:21:45] Finance was a pretty stable 3 to 4% all the way from 1930 to 1970, then took a huge jump in 1971 and climbed as high as 20% of the entire US market. And now it's just down a little bit, somewhere between 10 and 15.
[00:22:04] In other words, it's somewhere between four and five times as large as a percentage of the entire economy as it was in 1960.
[00:22:14] We introduced these charts one at a time so as not to overwhelm the reader. But superimposing them gives the starkest impression.
[00:22:24] Pre 1971, money worked, so we needed very little and consistently little finance. But post 1971, money has been completely broken. And so we need ever proliferating financial services just to make up for all the bullshit injected at the source.
[00:22:45] The end game of this logic is visible whenever an inflationary currency reaches its terminal phase. In Argentina, businesses routinely stockpiled physical inventory. Motorcycle parts, raw materials, anything tangible, not because demand justified it, but because holding pesos was financial suicide.
[00:23:06] Warehouses became savings accounts. Entrepreneurs who should have been investing in R and D or expanding production were instead playing a logistics game, trying to convert currency into anything real before it evaporated.
[00:23:19] A factory owner filling his warehouse with four times the inventory he needs is not engaged in productive capital allocation. He's engaged in Self defense.
[00:23:29] This is what an inflationary monetary system does to the entrepreneurial process described in this essay. It turns every producer into a speculator on the currency itself, diverting energy away from the innovation that makes things cheaper and toward the frantic preservation of whatever value can be salvaged.
[00:23:51] There is, however, a non coercive way of lowering the demand for entrepreneurship. When people exchange money for productive investments like factories, machinery or R and D, their demand for money falls voluntarily. If entrepreneurs then reinvest profits into further growth, that effect deepens.
[00:24:10] This gives us a clear distinction. Central bankers try to lower the demand for money coercively by torching its value.
[00:24:20] Entrepreneurs lower it voluntarily by persuading people to invest in the future.
[00:24:26] The former makes everything more expensive, the latter makes everything more affordable.
[00:24:32] And yet fiat economists remain oddly blind to the distinction. They see a credit collapse and conclude that because prices usually rise when things look fine and now prices are falling while things look dreadful, falling prices must therefore be the problem. So the central bank must print huge amounts of money to recapitalize insolvent banks and restart lending, such that both the money supply and the price level can resume their ascent. This is not a serious analysis. It mistakes a credit pathology for a price signal. It is also what 99% of professional economists and 110% of central bankers believe.
[00:25:15] We have now built enough conceptual groundwork to debunk the absurdity of stimulating aggregate demand and setting the interest rate. Credit bubbles happen because producers misread market signals or make erroneous forecasts of the future.
[00:25:34] Artificially stimulated consumption makes them believe demand is sustainable when it is not.
[00:25:41] They observe attractive paper returns and infer that it is worth investing in more long duration productive assets of the same sort.
[00:25:49] But the apparent demand is fictitious. It does not arise because the stock of savings is already abundant enough that marginal returns on investment have become less attractive relative to present consumption. It arises because money has lied.
[00:26:04] Stimulating the economy is really just forcing people to act on false signals about how much consumption and investment anybody really wants, or forcing them to fear that the value of their savings will otherwise evaporate. The inevitable consequence is a string of investments that later proved terrible because the consumption supposedly supporting them was never sustainable in the first place. It looked as though attractive returns could be earned not merely now, but over the whole time horizon required by the project.
[00:26:35] Then everybody discovers their investments are worthless. Consumption retrenches. Depending on how degenerate the monetary structure is, people may even discover that their savings are merely bank liabilities backed by rotten assets. And so the Bubble pops.
[00:26:51] What creates sustainable consumption is relative certainty, and what creates relative certainty is savings.
[00:27:01] Savings lower the demand for money precisely because they make one more secure about future purchasing power.
[00:27:08] The more secure people are, the more their present consumption becomes a genuine signal to which entrepreneurs can sensibly respond.
[00:27:16] The notion that producers will not invest unless they are nudged by monetary lies is precisely backwards.
[00:27:24] The nudge produces investment that is more desperate, more foolish, and less informed, or else it produces mere dissipation of wealth on luxuries. Aprs moi le deluge.
[00:27:38] Consider a toy example. You live in a primitive fishing society. You want more fish for the same input of time. So you decide to build a fishing boat. That means less time spent fishing now. So you must first save fish to sustain yourself while you accumulate the productive asset that will make you richer later. If the boat does not work or you are terrible at using it, you end up poorer than before because you both stopped fishing and exhausted your stockpile on a failed experiment. For any of this to make sense, your savings must be real. As Mises notes in on the Manipulation of Money and Credit, roundabout methods of production can be adopted only so far as the means for subsistence exist to maintain the workers during the entire period of the expanded process.
[00:28:28] End quote.
[00:28:29] You need actual fish to survive the period during which you are not fishing. The idea that you would only build the boat if I first stole some of your fish is ridiculous. If I steal your fish, you cannot build the boat. You must go back to fishing. And yet this is the fiat prescription. Apparently you would not be sufficiently stimulated to build a productive asset without the threat of expropriation hoisted by their own petard.
[00:29:03] Physician, heal thyself.
[00:29:06] Luke 4. 23 King James Bible Let us entertain one final debunking before wrapping up. Suppose, purely for argument's sake, that there is some flaw in everything said so far, and that it really is a good idea to stimulate the economy by torching money rather than by unlocking real demand through innovation.
[00:29:27] Suppose that our infinitely wise overlords can know by whatever mysterious method that total productive capacity will rise in the long run if they are left to read the entrails in peace. That artificial credit enables worthwhile investments, that free capital markets in sound money would miss, and that the increase in the money supply is justified because otherwise the growth would never have happened.
[00:29:48] How would we judge whether they were right?
[00:29:51] What are the hallmarks of a good investment?
[00:29:54] That after the investment we are able to produce more with the same inputs. This enables return maximizing producers to lower prices and Take market share. In other words, we would expect deflation.
[00:30:09] Worthwhile innovation is deflationary, and deflation is evidence of worthwhile innovation. If money exists to price things at all, those are simply different perspectives on the same phenomenon.
[00:30:25] One could imagine the scheme being justified as yes, the money supply rose, and therefore your share of total purchasing power fell, but productive capacity rose by even more. So although there is more money, it is still chasing more goods. We know it was worth it because prices fell again.
[00:30:44] Falling prices and worthwhile investment are equivalent descriptions of the same out.
[00:30:53] This cannot fail to be the correct test. If prices are flat after the stimulus, the investment achieved nothing. If prices rise, it was a net negative. One can even treat this as a diagnostic test for capital misallocation. Even on the fiat theory's own terms, we can specify what evidence would be needed to vindicate its prescriptions.
[00:31:16] And when one does so, one finds no such evidence.
[00:31:22] Fiat stimulus has only ever pushed prices higher. It has never, not once in recorded history produced a provable improvement in capital allocation sufficient to justify the inflation required to produce it.
[00:31:39] How do fiat economists explain this? Not by conceding the point. They explain it through a sleight of hand.
[00:31:46] They switch back and forth between inflation, meaning the money supply, and inflation, meaning the price level as needed to preserve the illusion of coherence. The trick goes like we need inflation to stimulate economic growth. Entrepreneurs invest with the new money and GDP goes up, which is good. Prices also go up. But that's okay, because we need inflation to stimulate economic growth. End quote.
[00:32:12] Did you catch it, dear reader? Even if one grants all of their insane premises for the sake of argument, the logic still fails on its own terms.
[00:32:21] Whether they are cynical peddlers of intellectual narcotics or merely intoxicated by their own product is a question for the reader. Still, do not take our word for it. No serious argument should be accepted on authority. Unfortunately, central authorities have a nasty habit of preventing real experiments in monetary competition.
[00:32:40] Yet if they are so certain of their system, why not let people choose? Why must hard money alternatives be corrupted, outlawed, or hemmed in by coercion? If the enlightened regime of perpetual debasement is truly superior, if productivity tends to make goods cheaper over time, and if monetary inflation tends to mask that fact by distorting signals and redistributing purchasing power, then a monetary system that resists arbitrary expansion does something radical. It allows progress to appear as falling prices in the unit of account.
[00:33:18] This is not deflationary money in the literal sense, since the supply schedule may still expand slowly rather than shrink. But it is a monetary base that permits long term price deflation by resisting human tampering.
[00:33:35] Under such a regime, saving is not punished.
[00:33:39] Time preference is expressed honestly. Investment is financed by real savings rather than fragile or illusory credit, and productivity gains show up as purchasing power rather than being confiscated by dilution.
[00:33:55] None of this eliminates business cycles or bad investments. Human beings remain subject to greed and will at times miscalculate under conditions of radical uncertainty.
[00:34:07] But a money that does not lie allows errors to be revealed more quickly. And it allows a person to store the value of his work without being forced to gamble it away in assets or spend it on frivolities simply to outrun the debasement regime of enlightened overseers.
[00:34:27] Conclusion Deflation does not prevent investment.
[00:34:33] The causality runs the other way. Deflation can occur only where investment has already succeeded, where an entrepreneur risked capital, discovered a more efficient method of production, and passed the savings on to consumers and competitors alike.
[00:34:53] Investment requires the prospect of returns. Returns require sustainable consumption, and sustainable consumption requires a bank of real savings.
[00:35:04] This is not a theory. It is a description of what happens when entrepreneurs are free to allocate capital honestly.
[00:35:15] Inflationary money interrupts every link in this chain. It degrades savings, corrupts the price signals that guide investments and rewards proximity to the monetary spigot over service to the consumer. The more aggressively it is applied, the more the productive economy is hollowed out and rebuilt as a financial economy whose primary purpose is to hedge against the debasement that sustains it.
[00:35:46] People still do things, but those things increasingly fail to create value.
[00:35:52] Capital moves, but it moves in response to fictions. And so it arrives where nobody needs it.
[00:35:59] The alternative is not utopia. Business cycles would not vanish, entrepreneurs would still miscalculate, and capital would still sometimes be destroyed in pursuit of hunches that turn out to be wrong. But errors would surface quickly, rather than compounding for decades behind a wall of artificial credit. And the long arc of economic life would bend in one direction toward a world in which the honest labor of a person's hands buys more with each passing year, not less.
[00:36:33] This is what sound money makes visible. Not a deflationary money in the literal sense, but a money that refuses to lie and thereby allows the truth of human progress to to express itself as falling prices. The number goes down.
[00:36:52] This is how you know it is working.
[00:36:58] Thanks to Bitstein and Ross Stevens for edits and contributions. Thanks also to Bitcoin magazine for the agreement in principle to publish a second edition of Bitcoin is Venice in 2027, in which we intend the present essay to be a novel chapter.
[00:37:14] And that wraps up the piece again from Alan Farrington and Sasha Meyers. Shout out as always and much anticipating the new version of Bitcoin is Venice Exciting to see they're both back at it, writing again. I always, always enjoy it and find it really entertaining. But one thing that I thought so in the first section, it was Jevons paradox that really stood out to me as like, oh, it is actually completely counterfactual or it completely contradicts the very notion of what the fiat economist claims occurs under inflation and deflation. From the context of prices. It is fundamentally an opposing principle to the idea of the deflationary spiral.
[00:38:05] But in this piece, one thing that I hadn't really extended to because we talk about a lot, that deflation is actually the proof of progress. It is the proof of growth. And it is exactly how a sound money shows that there is growth.
[00:38:21] So when they say that deflationary spiral means that there would be no growth, it completely counters the fact that the growth is the thing that causes the deflation to begin with. Like, if you have $100 in the economy and you produce, you know, 100 apples, then, you know, all else being equal, then an apple is going to be roughly a dollar for all the all of the liquidity on the market going to apples. But if you create a machine or a method that produces 200 apples for the exact same time period in the exact same pool of money, well, then it's the new quote, unquote, price is 50 cent per apple.
[00:39:01] That is natural deflation because the creation of the apple got better. But notice the price does not adjust. In fact, the whole reason one would innovate is because they can still sell apples at a dollar, or they can sell the new apples at 90 cent and make a return of 40 cent because they innovated. But what that does is it just expands the access to the innovation. Other people develop or adopt the same process or the same technology, and the price gets driven down until it's 50 cent. But note, the 50 cent price of the apple is the proof that innovation occurred without actually needing to know what the hell it was that made it better. Like literally, it could have been the fact that somebody, you know, cut the price of steel in half that was needed for the machine that that was used to pick the apples. So the price deflation is actually agnostic to any particular technology or any innovation. It's simply the signal that growth occurred so the idea that deflation would destroy growth and lead us into a death spiral where nobody would consume anything is so ass backwards. It's retarded because it's actually the only reason we know there is growth. But what's funny and what they lay out in this article that I actually hadn't put together is that the only way we would actually be able to know if under inflation there was net growth is the exact same thing. You would still see deflation in the price of goods and services if you could actually inflate 1% and get a 2% gain. If it was actually on net beneficial, you would still see price deflation. That's the only way that we would. There would be an indication that the technology and the innovation and the investment was actually outpacing the inflation of the currency. You would get deflation. You wouldn't have inflated prices. So if the price level is ever just naturally rising, all you are doing is recording the amount of destruction that you were doing through your manipulation of the money supply. And in all cases, natural deflation, the money getting more valuable over time, is the only reliable indication that growth has actually occurred in any meaningful sense. It is the distinction between progress or not progress. And thus the entire fiat economist concept of we need inflation is actually fundamentally tied to the fact that our single measure, our single output of economic signal that suggests prosperity has actually been improved and that progress has actually existed, is hailed as some great evil to avoid.
[00:41:46] In other words, the very fundamental goal of fiat economists, according to any measure or assessment of what they are trying to achieve, is to prevent prosperity and to cause poverty. And their only measure of success is if they have provably made everyone poorer.
[00:42:10] There is no side benefit, there is no caveat, there is no on net, nothing. It is just making everyone poorer and explicitly diverting resources to the political, to the finance and to the rich.
[00:42:27] It literally does nothing except destroy society.
[00:42:34] But I've got a bunch of stuff saved from this one and I think this, I think this can make a good joint guys, take with the other one on Bitcoin and the human problem and understanding how it's being priced and why this is something that I talk about a lot on the show too, is that money is about trust and that what we need to do is break through this area or this era. Whether it be a Lindy effect that does it, or simple familiarity or general increase in the understanding of what Bitcoin is.
[00:43:08] And of course Bitcoin surviving additional tests. You know, Bitcoin surviving its teenage years that builds that trust. And then Bitcoin will actually be priced by its scarcity, when there is trust in its enforcement mechanism, in the fact that it can resist change while still being quote, unquote, fluid enough or adaptive enough to not be brittle. And that the risk of Bitcoin breaking under pressure of the social layer not staying enforceable is the risk that is currently mispricing it in the market. Or that's the premium that Bitcoin is losing in its price evaluation in the market right now.
[00:43:57] I guess instead of losing a premium, that's the discount that's being applied to it.
[00:44:01] But to understand that in the context of what it means for the economy that does adopt it and does get across that barrier, and the fundamental and powerful disconnect occurring in the fiat economy, and understanding also that the comparison to Bitcoin's trust or Bitcoin's resistance to change doesn't actually have to survive the test against gold, it actually has to survive the test in comparison to fiat. But we will expand on that and what it means and how all of this kind of wraps back together in a guy's take coming really soon. Like I said, I'll be doing some traveling now. I did manage to get this completed and out before we have to get on the road. But stay tuned, stay subscribed, I will update you, follow me on socials, all that good stuff, and I'll catch you on the next episode of Bitcoin. Audible until then, everybody. I am Guy Swan, and that is my two sats.
[00:45:19] Because a tree in spring buds and comes green leaves into leaf. Are those leaves, therefore the tree? If the newborn twigs in their leaves were all that existed, they would form a vague halo of green suspended in midair. But surely that is not the tree. The leaves by themselves are no more than trivial fluttering decoration. It is the trunk and limbs that give the tree its grandeur and the leaves themselves their meaning. There is not a discovery and science, however revolutionary, however sparkling with insight, that does not arise out of what went before.
[00:45:57] If I have seen further than other men, said Isaac Newton, it is because I have stood on the shoulders of giants.
[00:46:07] Isaac Asimov.
