Sep 17, 2021 9 min read

Ep. 25 - asymmetric bets & the erosion of fiat

Since 1913 the US Dollar has lost 96% of its value.

There has been an overwhelming amount of noise in the news lately regarding economic data - jobs report, stock market volatility, inflation, etc. With this comes the difficulty of deciphering between noise and signal. One pundit is spewing that a market crash is imminent, while the next is claiming the S&P 500 index will reach 5,000. This divergence in opinions has many investors, consumers, and entrepreneurs unsettled about the future, and honestly, confused.

So why does this matter for entrepreneurs? The greatest tool in an entrepreneur's tool box is antifragility. A market correction or crash cannot set you back. Antifragility must be built into both your business and your personal life. Therefore, building your portfolio is often crucial to survival, especially in those early days when cash reserves are limited.

So with that being said, many people assume their safest bet is to hold dry powder - cash. This is logical, but there's a key caveat: inflation. Inflation has hovered around 5% this year in the US with no sign of it slowing in the near future. And remember inflation is compounding, and just as compounding returns for investors is the eighth wonder of the world, the opposite is true for inflation. Effectively we’re all losing 5%+ annually on our money. Unless you're getting at least a 5% raise per year, your purchasing power is dwindling.

Even if you average an 8% return in the market (historical average), after fees and transaction costs the real return would be around 1.5% (adjusted for inflation). If you ever want to stop working these returns are negligible and will not buy you freedom.

Why are we here?

Simply because of unsound money, referred to as fiat money. Fiat money is a government-issued currency that is not backed by a commodity or hard-asset (i.e., Gold, Bitcoin). This gives central banks more control over the economy as they dictate how much money to print. Unsound money is the main culprit for inflation, income inequality, drawn out wars, and crony capitalism. It’s really, really bad...

Our current monetary system is based on fake money. Truly, there is nothing holding Mr. Trudeau or Mr. Biden back from just printing more money. It’s that simple. And once they start this train, it’s extremely difficult to stop. The current Debt-to-GDP ratio in the US is 127% (i.e., to create $1 of GDP we need to borrow $1.27). Therefore, we’re no longer in an economic cycle, we’re in a debt cycle. At the current levels of debt we cannot raise interest rates. It would bankrupt our country, and likely your neighbor. But eventually it needs to happen. Eventually the spending needs to stop.

The answer? Sound money. The US Dollar was backed by gold during the 19th/20th century (until the first world war in 1914). During this time we witnessed major advancements in technology as well as the arts. We truly went “zero to one” (see Peter Theil’s book "Zero to One"). Why was this? My argument is that people had a lower time preference than the generations that followed [to have a low time preference is someone who prepares for, and is optimistic about, the future. To have a high time preference is someone who spends and lives for the moment].

These changes in time preference are directly correlated with sound and unsound money. During the 19th century when the dollar was backed by gold, people knew that their hard-earned savings would be valuable years later. They had optimism and hope for the future. Therefore, they could spend years building a business, or sculpting a work of art. People and society were practicing the art of delayed gratification. They delayed the rewards of today for greater rewards tomorrow.

Why was gold a source of sound money? High Stock to Flow Ratio. Stock to flow ratio is exactly how it sounds. Gold has high stock (the amount currently in circulation) and low flow (the amount being produced annually). Gold is notoriously difficult and expensive to mine and is the rarest earth metal. Thus the ‘flow’ of gold increases consistently at around 1-2% per year. The gold-backed dollar provided society with confidence their purchasing power wasn’t going to erode drastically, and thus had low time preferences.

However, enter the World War I and we decide to abandon the gold-backed dollar (then in 1971 we abandoned it completed) and the government begins printing more money than is backed by gold in order to finance the war (i.e., fiat) [as a side note, the longest war before World War I was the Franco-Prussian War of 1870 lasting 7 months. World War I lasted 4 years. Afghanistan lasted 20 years. The ability to print money fuels wars. With sound money governments would instead have to raise taxes and civilian sentiment would eventually change once wealth was being eroded. With unsound money, Governments can continue printing money, continually fueling the war over and over]. Since abandoning the gold-backed currency, the dollar has continually lost its value. Since 1913 (when the Federal Reserve took over Central Banking) the US Dollar has lost 96% of it's value.

As a result, we have shifted from a society of low time preference to a society of extremely high time preference. We want everything immediately before our cash inflates away.

Here is a similar graph but inverse, the increase in the Feds balance sheet (i.e., cash).

The Fed's balance sheet has more than doubled since 2020, and has increased almost 10x since 2004. If you're going to take one thing away from this article then take this: 40% of ALL money in the US has been printed in the last 12 months. That is a very low stock to flow ratio, and one that promotes a high time preference. Oh, and the US government is spending $875m... per hour...

Enter Bitcoin

Everyone has heard of Bitcoin by now. It’s filled with people who shill 'shit-coins' and the space attracts some interesting characters, but the principles and foundations of Bitcoin are truly amazing. It’s a work of art, and exactly what our society needs at this very moment.

Note: This space is highly technical and confusing. I'm going to keep this section high-level. Here are some great resources to learn more:

Bitcoin Whitepaper ; Jameson Lopp's Website

First, Bitcoin has extremely high stock to flow ratio. Basically, there is a predetermined amount of Bitcoin (21 million) which will be mined at a predetermined interval over the next century (likely ending in 2140). Therefore, we know the asset is finite in quantity, and indeed scarce. Until the maximum supply of 21 million bitcoins has been mined, the stock-to-flow ratio (scarcity) pushes higher so in theory the price should go up. This has held true previously in Bitcoin's history. See below for Bitcoin's price chart since inception. It's the best performing asset ever.

If you look at this graph and say it's in bubble territory or overvalued I urge you to take just 1 hour to learn about Bitcoin and its fundamental principles. You can start here, or here. I guarantee your mind will be at the very least challenged, if not changed. In my opinion we are still very early. The adoption of Bitcoin is basically at the same percentage as the internet in 2005, but the adoption rate is double that of the internet. And that's the fucking internet... Early adoption of anything is always met with criticism. Look at this news article from December 5, 2000. Talk about not aging well...

I don't like giving price projections on Bitcoin because the actual utility and brilliance of it outweighs the gains we'll see in fiat terms. However, I think it's imperative that people understand the potential for wealth creation. The current price is $47,500 USD / 1 BTC. I think we'll reach $90-100k / 1 BTC by the end of 2021. Projecting 5 - 10 years out the price of 1 BTC could easily reach $500k+, based on stock-flow modeling and adoption rate. This is isn't just Bitcoin maximalists touting it either. Check out Raul Paul, famous macro investor and overall brilliant dude, and his take here: https://www.youtube.com/watch?v=RennZ2vwY74.

Is it just for the rich?

This is another contentious assumption about Bitcoin. People assume it's just for the rich - another mechanism to keep the scales of power in place. This couldn't be further from the truth. In fact we're experiencing the greatest wealth transfer ever recorded as a result of Bitcoin. It wasn't the charlatans on Wall Street or the government officials (also charlatans) getting rich, it was cryptography nerds interested in a new technology in 2009.

Moving away from an inflationary system will benefit lower-income individuals. The inflationary system we're currently experiencing favors high earners and those that own assets. Let me quickly explain this. First, let's say you earn an income of $70,000 annually with an annual raise of around 1-2% (or nothing). At the same time everything is getting more expensive by about 5%+ annually. This makes it nearly impossible to save enough to purchase real estate, stocks, or any assets for that matter. All because of our infatuation with printing more money.

Now, let's say you earn $150k+ and have annual increases of 15-20% (high growth organization), or you earn $300k+, giving you the ability to accumulate lots of cash. This can be diverted into stocks, real estate, and other assets. And here's where it gets really unfair, printing money decreases interest rates (rates are currently at 1.45% for a 25-year mortgage, which is insane). With low-rates people in this category can borrow more (buy more real estate and stocks), further driving up the prices of these assets (hence, real estate is whack).

In an ideal world, we could just listen to AOC and tax the rich. However, taxing the rich will not fix the system. If taxes are raised the ultra wealthy will just move out of the country, and entrepreneurs will have no incentive to start businesses in their home country. Therefore, production will decrease and real-wages will decrease alongside it. Sound money fixes this. Bitcoin fixes this.

Inflation is the hidden tax eating into everyone's pockets.

Concluding

If you can't already tell this is a topic I get fired up about. I believe inflation and the erosion of purchasing power to be the greatest threat facing society today. It feeds into everything. I've included some resources below that dig into the correlation between unsound money, climate change, wars, and the increasing divide between Main Street and Wall Street. Let me know what you think.

PS - The Fed's balance sheet hit a world record today - $8.446 trillion - fucking video game numbers. We're now $500 billion from a 10x increase since the 2009 financial crisis. Probably get there next week - easy.

Carbon Footprint of Fiat Money:

Jeff Booth's 'Price of Tomorrow' [amazing book]:

Income Inequality: