All right. Chapter five, Bitcoin and credit of the Satoshi Papers. Hey, welcome back. We had a little break there. We got busy with life as we do. But today we're going to move on to the next essay here. As I mentioned, chapter five, Bitcoin and credit by Jack Watt in the Satoshi Papers, Reflections on Political Economy After Bitcoin, edited by Natalie Smolenski.
Chapter five, we've already read four essays. Lucas and I are in agreement. This is a phenomenal
collection. As with the prior essays, this essay is academic in caliber in the best sense. The
author, Jack Watt, I had not heard of him before, but he is an entrepreneur and writer whose focus
is Austrian economics and monetary theory. His writing is featured on mysees.org. He co-founded
the Bitcoin-focused company, SOV, BTC, and is a professional pilot. And it says his writer's
focused on Austrian economics. This essay, Bitcoin and Credit, if you are interested in Austrian
economics, the taxonomies it creates, the way that it talks about money and economics, this essay is
excellent for that. I'm going to give a little summary here like we usually do, and then Lucas
and I are going to dissect it a bit. And I'm super excited to hear Lucas's take on this. I haven't
got it yet. And this is more in Lucas's real house than mine, Bitcoin and Credit. Credit's
such an abstract thing and I'm more of kind of a humanities guy. But that's what we do. When you
consider Bitcoin, you have to think about credit. So this essay, like I said, called Bitcoin and
Credit. And I'm just going to read the last paragraph so you can see where we're going to go.
So the last paragraph, the Bitcoin community now faces the challenge of designing and implementing
Bitcoin-based credit instruments. How these are adopted and used around the world is arguably one
of the most significant economic questions of our time. So Bitcoin-based credit instruments,
one of the most significant questions of our time. That's what this essay is going to maintain.
This essay is very rich, as I mentioned, especially for those interested in Austrian
economics, that school of theory, and its application to Bitcoin. There's an entire
section we might not get to on Mice's taxonomy of money, and maybe we'll hash it out a bit more
in conversation. But without going into too far in the weeds, kind of in that aspect, in the summary,
Here are the main points of the essay.
Bitcoiners sometimes have a problem with the whole even idea of credit, but the problem
is not with credit issuance as such.
As Jack Watt notes, markets everywhere exhibit perennial demand to channel savings from savers
to producers who in turn invest that capital into productive activity that drives economic
growth.
So just like on a base level, credit does seem to be very integrated into the way our
economy has functioned.
And so Bitcoin does seem to need to be able to incorporate some notion of credit.
The problem is also not kind of necessarily with fractional reserve banking as such.
Fractional reserve banking, which again is a method for loaning where only a fraction of the savings deposit is retained, the rest is loaned out.
The problem of credit or what makes credit problematic is rehypothecation.
So that's a great vocab word, but that's one of the takeaways from this essay.
If you take away nothing else from this convo, rehypothecation and another phrase, fiduciary media, which is another term we're going to get to.
What is rehypothecation?
Basically money or something that claims to be money being in two places at the same time.
That's kind of the simplest explanation.
Example, a dollar on a bank's ledger can be simultaneously recorded as one part of a customer's account and then lent out by the bank to another customer and used by that other customer as collateral for a loan they receive from yet another party.
So that's an example from the essay of money or something claiming to be money being in multiple places at the same time.
That's rehypothecation.
So in rehypothecation, rehypothecated money becomes something that Austrian economics, or at least Mises, according to this essay, refers to as fiduciary media.
That's the second vocab word that I think is great and kind of helps understand this essay a lot.
Fiduciary media is money.
You could define it as a money substitute.
It's a type of, you're calling it kind of derogatorily media instead of money, fiduciary media.
This is a money substitute which is used in excess of the actual money supply, a substitute which is going to enable some more liquidity, some more usage of money-like things.
That's fiduciary media.
The increase in the money supply with the addition of money substitutes, fiduciary media, leads to boom-bust business cycles, the kind of cycles that we have that seem to be inherent and integral to our economic system.
The issuance of fiduciary media drives credit expansion, this is a quote, during the boom phase of business cycles, which eventually go bust and result in credit contraction back to levels more in line with real savings.
So we begin issuing a bunch of fiduciary media, a bunch of money substitutes.
That leads to the boom phase.
And then we have the bust phase and people realize this is not actually money.
It's a substitute.
During the boom phase, we have, as we all know, the illusion of prosperity, rising wages,
production increases that tend to cater to future demand.
So we begin like investing in things.
We think people are going to buy a bunch of stuff.
Things are going well.
In the bus phase, we realize, oh, the means of production are scarce, but money is not.
We discover that savings are insufficient and people try to redeem this money substitutes they have, the fiduciary media, for real money, for real things.
And we see that capital was wasted on a half-finished projects and unprofitable ventures.
So then you have that boom and bust, and then the central banks intervene to prop up demand.
And we end with a general rise in prices and a devaluation of savings.
And this devaluation is not equal.
This is, of course, key lore for Bitcoin or something I learned as I got more into Bitcoin, one of the key concepts.
Politically connected are the best able to protect themselves in any bust phase of a cycle, any boom phase as well.
I situate and monopolize on it through what is called the Cantillon effect.
This is a really good summary of the Cantillon effect from this essay.
I'm going to quote here.
So here's our vocabulary words, I think, which kind of give us a good understanding of where we're going with this essay so far, which is money substitutes instead of real money.
And then we get boom-bust cycles, and the Cantillon effects jumps in to reward political entrepreneurs who are closest to the money printer.
The key point, here's a good quote that helps us kind of understand this all in one sentence.
money cannot be a superposition of present and future goods and be used by several parties at
once without creating a business cycle rehypothecation is exactly what does that though so
rehypothecation leads to fiduciary media or money substitutes but what is real money then real money
is defined in this essay as quote scarce money that functions as a rival good so rival goods
It's kind of a technical concept in there.
And it's just like, really, rival good is just the opposite of fiduciary media, or of
rehypothecation.
Being a rival good means that unlike a rehypothecation, or maybe unlike something abstract like an
idea, it can only be in one place at one time.
A rival good is in one place at one time.
It's not rehypothecated in multiple places.
Money must be a rival good.
Real money, that is, must be a rival good, or else it leads to limitless credit expansion.
And who loves limitless credit expansion?
Debtors do because it devalues the debts that they have.
And who is the biggest debtor?
The state.
So historically, commodity monies like gold, which are real money, it's scarce and it's a rival good.
Gold can only be physically in one place at one time, are replaced by imposed fiat currencies.
Fiat currencies themselves are actually also in their kind of most benign state rival.
They're not scarce, but they're at least rival goods because of fiat dollar.
I mean, the physical thing can only be in one place.
You only can print infinity dollars.
So but in any case, so commodity monies like gold historically replaced by fiat currencies
because commodity monies place limits on government spending.
They have a hard physical cap on paying a rival good and they place limits on government
spending and growth of industry and trade.
Bitcoin is I misspoke there.
So commodity monies don't necessarily place limits on growth of industry and trade themselves.
We're going to go a bit more into how credit aids in that.
But in any case, Bitcoin is a technological solution, according to this essay, to the problems of rehypothecation and fiduciary media in a way that gold is not.
So I'm glossing over quite a bit.
I want to say to fiduciary media, I've kind of like money substitutes, I've kind of framed it as necessarily a bad thing, but it can also be not necessarily evil, just a way to increase liquidity by using a substitute for money, introducing that also in the monetary system.
But in any case, Bitcoin has certain technological aspects that make it different than gold in a way that can't be co-opted and then rehypothecated or turned into a fiduciary media so easily.
So Bitcoin is a currency that is an absolutely scarce rival good.
It can scale its transaction throughput and it has its own transaction rails included.
And that's kind of a key point.
The problem with gold is it's hard to move around.
But imagine if gold, of course, had its own manner of transaction included in the substance of gold, which is what Bitcoin ontologically does.
It is its own ledger and protocol.
Bitcoin's properties then allow for at least three important things in the context of this essay.
So the first thing, again, as I started off at the beginning, this author thinks that figuring out the problem of credit is one of the key things that Bitcoin needs to do and is going to do.
And so one of the three important things in the context of this essay that Bitcoin does is it still allows for the issuance of short-term credit instruments.
This essay is not anti-credit. It's kind of anti-fiduciary media, which is endlessly rehypothecated credit in the form of money substitutes.
Credit instruments on top of Bitcoin is something that can actually help and address like scaling problems with limited block size on the Bitcoin network.
It also addresses the need for credit in an economic system, which is, as I noted at the beginning, allowing real savings to be transferred in money terms to the highest bidding entrepreneur capitalists.
This essay does go into depth technically into how to do a Bitcoin bill of exchange.
That's a little bit too much for this summary.
Maybe we'll talk about it in the discussion.
I'll kind of quote a bit on that just so you get a gist of what that idea of a Bitcoin bill exchange means, though.
Because Bitcoin bill creation simply reflects a transfer of Bitcoin, its contribution to credit expansion is nil.
Such bills are real credit. They grant the holder a future good, a claim to Bitcoin on the maturity date.
In this way, the pool of saved Bitcoin, real savings, is distributing to the highest bidding entrepreneur for product.
That's a capsule summary of what a Bitcoin bill of exchange can do.
And again, this essay does go into the technical aspects of how those would be crafted a bit more.
Bitcoin allows for three important things in the context of this essay.
The first thing, it still allows for the issuance of short-term credit.
The second thing, Bitcoin is resistant to the issuance of fiduciary media.
Again, fiduciary media are bad because it's rehypothecated money substitute, not backed one-to-one, not scarce, not a rival good, which leads to credit expansion and then a boom-bust business cycle.
Bitcoin, though, can allow for issuance of credit but also resist the rehypothecation being in more than one place at the same time that leads to fiduciary media.
How? Just the inherent technical aspects of Bitcoin. Bitcoin transactions preclude the opaque chains of rehypothecation to which most near monies today are subject and which create hidden leverage throughout the global financial system.
Bitcoin is just transparent.
You can trace what's happening with each Satoshi.
And so it resists being in more than one place at one time.
You can go back and see the place the thing actually is, the unique location of each unit.
So three important things that Bitcoin does in the context of this essay still allows for short-term credit, is resistant to the issuance of fiduciary media.
And then third, Bitcoin has capture-resistant properties that help it avoid the fate of physical commodity monies and transforming into fiat and being endlessly rehypothecated.
So fiat money occurs when institutions suspend redemption of commodity money.
But Bitcoin, so Bitcoin comes with its own transaction rails included.
So unlike gold, which, you know, once you centralize the control of that, everybody puts it in a bank that's held by certain third parties, the government can then step in and say, we're not going to let you take any of the gold out.
Bitcoin is a little bit different because it has its own transaction rails included.
quote, unlike all physical commodity monies, Bitcoin comes integrated with the means for
transferring balances, a digital protocol that manages a digital ledger. This is by design.
Bitcoin is an uncensorable and permissionless protocol built with the express purpose of
enabling individuals to be in their own banks to make their own payments and store their own money holdings directly without relying on third parties So Bitcoin allows for easy self And this hopefully the thought is is going to allow for large amounts of Bitcoin to be
held by individuals and not held by third party custodians, therefore kind of resisting
the suspension of commodity money that has happened in the past, the suspension of the
redemption of commodity monies when the governments want to impose fiat.
So if people are their own custodians, this will also then have the natural effects of diminishing kind of bank reserves over time and so lead to the less creation of loaned out, rehypothecated fiduciary media monetary substitutes.
The three important things then that Bitcoin does in the context of this essay still allows for short-term credit is resisted to issuance of fiduciary media money substitutes.
And three, has capture-resistant properties that help it avoid the fate of physical commodity monies and transforming into fiat and being endlessly re-eboticated.
That gets, I think, kind of most of the main concepts of the essay out onto the table.
As I noted, I omitted a lot of the really technical heavy lifting on the Austrian view of money.
There's a whole chart here.
I'm pulling up the camera.
If you're listening, you don't see it about Mycet's taxonomy of money.
It's really interesting, but it's kind of hard to explain in a neat summary.
I'll just conclude then, I think, with this is the penultimate paragraph of the essay.
It kind of does a good job of summarying the essay itself.
the potential to improve the workings of a global money economy by structurally suppressing
the issuance of fiduciary media in a way that has become nearly impossible
using legislative or political means. This holds open the possibility of dampening the effects of
vast economic discoordination that leads to boom and bust cycles or business cycles in this way.
Bitcoin is posed to facilitate human cooperation and complex production without the state. While no monetary utopia will appear as a result of Bitcoin adoption, the systematic perturbations created by limitless injections of fiduciary media into markets will no longer produce the malignant incentives that debase real savings and kill entrepreneurial initiative over time.
This will indeed constitute a new paradigm for political economy, although that paradigm is old as well.
A small public sector and real rapid growth.
So that's my summary of Bitcoin and credit.
I apologize, Jack Watt.
I'm a more humanities-centered person.
Some of this is foreign language to me, but that's the best I got.
Lucas, what do you think, man?
I think this essay is fantastic.
Again, any limitations in my summary or personal failures of myself as a human being and not due to the essay?
I mean, what do you want to add or take away or just exit the room politely on?
No, I want to dig in.
Yeah, I think you did a good job with the summary.
And I kind of want to I'd like to maybe add a little color and maybe some examples to these terms that have been introduced.
You know, rehypothecation, fiduciary media.
maybe dig in a little bit on really why it is so important that a commodity or why it is so special
that there now exists a commodity money that is capture resistant. So I think those are all
really fascinating. The first one I want to talk about is like the rehypothecation, which is just,
you know, money existing in two places at once. And I think the first place that you start when
you want to talk about that, which is there will be people listening to this podcast who do not
realize that when they look at their bank account and it says $2,000, there is not $2,000 there.
That money does not exist. What? What you're seeing. Yeah. Blow your mind, right? All right.
Just right. Wait till you hear about the dark side of the moon and how hollow it is. Yeah. So
Well, that money doesn't exist. Banks keep track of how much you've deposited and they keep track
of how much they owe you, but they have what's called an IOU, right? They don't actually have
that money. What they do is they take the thousand dollars that you put in and then they in turn
lend out $9,000 against that thousand dollars. That's what fractional reserve banking allows
you to do is basically you're making a educated bet.
You're taking the risk and you're saying that we don't have enough money to pay everyone
who has given us their money, but we're counting on not all of them asking for it at the same
time.
Yeah.
One of the things I thought was cool is like making clear that like rehypothecation is
not is different, right?
Than fractional reserve banking.
So fractional reserve banking, when it's malignant, malicious, relies on rehypothecation because there is the assumption that the money is both in the account and also somewhere at the same time.
But you could have fractional reserve bank where people are completely aware and it's transparent that the money is not in the account and that it is being loaned out and that it's not accessible, that it's not rehypothecated.
People don't rely on it being in the account, right?
And so like this essay, I mean, the bad thing is rehypothecation.
rehypothecation. It's not necessarily, I mean, I think fractional reserve banking will tend
towards rehypothecation, at least psychologically, because people will think the money is there.
But maybe Bitcoin's transparency will make people more, force them into the realization that
my money is not in the bank. I gave it to them. It's being loaned out. I'm aware of that. It's
rehypothecated. I mean, it's fractionally reserved, but I know I'm relying on the interest coming in
as kind of compensation for that fact, and I'm fine with it.
I don't know if anybody's ever been honest about it.
So I guess, yeah, I mean, not too long ago, I was reading, I don't know where I was reading
this, but I was reading a story about how like in the, I think it was the 1800s, that
was a very wide open time for banking.
Like there weren't a whole lot of banking regulations and you had what were known as
the wildcat banks, which would just be like effectively like private enterprises that,
I mean, most banks are private enterprises, but private enterprises that they're like, hey, we've got some money.
Here's our reserves.
We're going to start a bank and make loans and deposit.
And a lot of them would have their own money, like literally their own currency.
And then, you know, every once in a while, maybe some regulator would come and like check the reserves.
And this was like they had physical reserves.
They have gold reserves.
And so, you know, they've got, say, three branches in three different towns.
And, you know, so what they would do is they would take all the gold and they would put it at this bank and they would walk the regulator through and he would look at it and then be like, oh, OK, you know what?
We're going to take you to lunch and then we'll take you to the next bank.
And while they were taking him to lunch, they would take all the gold and they would take it to the next bank so that he could go verify that that also had reserves.
It was just the same gold to be around.
Uh, it's fun cause that's, um, it's an actual example of a physical commodity that in effect
is being rehypothecated.
As far as the regulator knows, it's in two places at once.
Or I guess not as far as he knows, as far as he knows, they have the gold.
Stone age rehypothecation.
Yeah.
It's acting as two, two, uh, two things at once.
The thing that, um, the thing that I find that is like the most kind of like mind blowing,
interesting takeaway from this is the, so we talked about this last week with a group and
Austrian economics has come to the realization by observing history that money is naturally chosen
by people as the thing that holds the value the best. Even today, money is not what governments
tell us it is. Like people use money substitutes in order to get best value held. They put their
money into real estate as a store of value. They put their money into growth stocks as a store of
value, et cetera, et cetera. But when money was a commodity, starting with stones and seashells and
tobacco and salt and cattle, et cetera, et cetera, you had a progressively, it went from
this type of money to the next type of money. And each time it went to a different type of money,
the thing that was different was that that money was, as they say, harder. It was more scarce. It
was more difficult to replicate. And you think about it, it's actually kind of fascinating,
I think, to consider like, it's not just how hard it is to replicate. It's also the predictability
of the issuance schedule. And in that manner, in that matter, cattle are actually probably a
more predictable money than gold.
Because you can never predict
when you're going to hit the next mother load.
But you do know that you put a boy cow
and a girl cow together,
nine months later, you get another cow.
Boy cow.
Tell me how it works out, Lucas.
I'm trying to bring it to the people where they're at.
This is, just to put an asterisk here,
this is a phenomenal and condensed explanation
of Austrian economic theory.
I'm very much enjoying.
Continue.
Yeah.
So anyway, so what you had was that
commodity money, it progresses from easy to hard. But what you find when it gets to the hard,
which is gold, when it got to hard money, that money was also heavy because gold is heavy. And
it turns out that it's difficult to move around and it's difficult to verify. It's, you know,
you have to melt it down and it's difficult to cut apart and put back together and all these other
problems that that come with gold being gold and like you mentioned and like jack um so like very
well pointed out there is no gold network like there's a bitcoin network yeah where you take
bitcoin from here and you put it there and it moves along its own path it doesn't have to exit
the system or anything like that but there's no gold network you have to physically take it along
infrastructure. Like the gold network is roads and it's trains, it's airplanes.
And it's humans and banks and malevolent actors. And yeah, all these things are part of the network.
So there's just, well, I mean, there's just, there's just more points of failure, right?
There's just more opportunities. There's more variables at play.
Bandits on the road, bandits at the banks, for sure. The transaction rails of gold is much more
error laden. Yeah.
Yeah. Yeah. One of them wears masks. One of them should.
One of them started wearing masks after COVID, right?
I was reading something about how it became awfully convenient to be a robber after COVID.
Yeah, they just never transitioned out of COVID.
They're like, okay.
Everybody just was dressed the part.
Yeah.
But anyways, yeah, so you've got to.
Yeah, so this is the problem with commodity money that led to fiat.
So you had commodity money that got harder and harder and harder until it got so hard that it was too heavy to actually use.
You couldn't.
You can't really use gold day to day.
It's too inconvenient.
And so there was a natural consequence to that.
If we can't use it, what we'll do is we'll put it all in one place and then we'll pass around something that is good as gold.
And we'll say that you can do this because it's way more convenient.
And that'll be faster.
It'll be safer.
It'll be cheaper.
It'll be blah, blah, blah.
But of course, it leaves open the possibility of a moral hazard.
And the moral hazard is always that, hey, I have this much gold and that allows me to
issue this many notes.
I'm going to say that one note is one note, one ounce, and I have 10 ounces.
So I issue 10 notes.
And then, yeah, just like with fractional reserve banking, you're like, well, I mean,
because that's all that's all that that's all that it is.
It's just fractional reserve money where they're like, well, not everybody's going to ask for their gold back at the same time.
So we can make another 10 notes and then we can make another.
And then it's like the thing that I think escapes the imagination of most people is that because the human brain thinks linearly and it does not think exponentially,
It is impossible to comprehend just how far beyond any sort of rationale that let's print some more has gone.
Like, yeah, the idea, the idea of trillion, a trillion of anything is just you can't like a trillion.
It's just a million.
I mean, yeah, it's just everything.
Right.
I think it's like it's like a million dollars.
somebody I hope will correct me, but I think like a million dollars is like 4.3 feet tall.
If it's like a hundred dollar bills, a stack of a million, and a billion dollars is like a little
longer than a football field. It's like 400 and some feet. And a trillion dollars is like to the
moon. So like, there's the, there's this, like this idea of exponentiality that comes into play
where you're like, oh, okay, a million dollars,
it's up to my chest, I can get that.
A billion dollars, it fits inside Bill Snyder Family Stadium,
I can get that.
But then going to the moon.
Yeah, when a fiat currency moons, it's not a good thing.
Like it's a reverse statement of value.
No, literally the currency is going to the moon
and the pile of it is that high.
To the moon and back.
Yeah.
Not value, it's physically the substance of it.
Yeah.
I don't know yet. That's what I think about it, I guess.
Back to you.
I really like the my favorite parts in the essay are what you mentioned too I mean this is something I kind of I guess unconsciously or maybe consciously but not articulately acknowledged is that Bitcoin has its own transaction rails included
And that this essay kind of reduces it, in my mind, to the hard physics of the situation.
Rehypothecation, these really abstract Latin words, are tough for us to get our mind on.
Orwell said, he has an essay, politics in English language.
Don't use this type of word because no one's going to understand what the F you're saying.
It's not good.
You know, you use more concrete things.
Rehypothecation.
Something can't be in two places at the same time.
It's simple.
If you just think about it like that, like the physics of it, you can't have an apple
in two places at the same time.
You can't have your cake and eat it too.
Like that's just the hard physics of reality.
Rehypothecation, you know, violates physics in that way.
Gold is a physical substance.
It abides by the laws of physics.
digital gold, Bitcoin, also
is by the laws of physics.
Exactly.
This is just like a physical,
a physics problem here
or something like that.
When you think about it in that way,
rehypothecation, again,
not as something abstract,
but just something can't be
in two places at the same time.
Bitcoin also can't be
in two places at the same time.
It has a system built into it
for verifying that that is the case
and also has its own transaction rails
built into that substance too so that it can move around again in a way that gold can't it is only
the substance that can't be in two places same at the same time it is not also the means of moving
that substance about which relies on human actors and there's that benefit from multiplying it
through complex sounding words like rehypothecation you know you just rehypothecated it that's fine
I know what you mean by that.
Surely go ahead and do that banker.
And then they do that thing and nobody knows what it means.
It's like, you know, if you have some word to justify doing something, make it complex
and abstract soundings that people don't understand.
It's just, you know, making, trying to multiply something that can't be multiplied by creating
a ghost version of it.
But yeah, I really love just the vocabulary of this essay.
We didn't talk necessarily about fiduciary media, just this idea of money substitutes.
There are things that are money.
There are things that we use as a substitute for money, these units in our bank account
that we move around, but they're not money.
No, they're not.
They're just substitutes that we use as a type of liquidity to enable us to do transactions
that might have a certain function.
But again, they're not money.
They're just things we use as substitutes for money.
Yeah.
So the Bitcoin blockchain is a ledger that is just an accounting of every Bitcoin.
Where is it at?
It's either in a wallet or it's hidden in time and it will come and be part of the Bitcoin blockchain at a certain time. And every eight to 10 minutes that gets validated and verified again with accuracy and precision.
ones. So, you know, at any given time, you can know with absolute certainty where every single
Bitcoin is. And it can only be in one place. It can only be in this wallet or that wallet,
or it can be not yet issued, but waiting in the future. It can only be in those places.
And we know that with absolute certainty. Like anyone who runs a node can verify that. And
with a fiat network or even a gold network, like, I mean, gold's in a safe. Like,
how do you know what's in the safe? Like you have to go look into the safe, you know, and like not,
you're not going to go look into the safe every 10 minutes and go, Hey, it's still here. Here's
how much it is. I just waited again. And with the bit, you know, with the fiat network, with the
monetary network of dollars and, and yin and yang and a yuan. And I don't think there's a yang
actually. I think I've made that one up. Then with that, you know, you, no one knows where any
of the money is like, yeah, because it's really just genuinely not.
It just genuinely does not exist.
And yeah, we even acknowledge that, like you acknowledge that in, you know, like if there's
a bankruptcy, there is an established order of creditors where it's like when a bank, what
happens when a bankruptcy occurs?
A bankruptcy occurs because someone has been able to somehow they have been able to owe
more money than they have to pay it. And there are people who have multiple claims on the money
that they do have. And bankruptcy filings show who gets to stand in line first, who's a preferred
creditor and who's a common creditor. And it's such a common problem that we have a legal system
built around telling people where they get to stand in line when inevitably it occurs that
the money, which is supposed to be there, is not there. It's such an often occurrence that we have
an entire branch of law dedicated to it. Yeah. But I don't think bankruptcy law goes away with
Bitcoin. If you still have any sort of notion of credit that exists, you're still going to have
people harder yeah i mean maybe it won't happen as much harder to like yeah i mean like when i was
when i was banking like you would come to me and i would say can't give you a loan until you give
me some financials and you would bring me three years of tax records and then you would make a
balance sheet for me and that balance sheet would list your you know your accounts and how much was
in them and it would list your your assets and how much they were worth as written by you yeah and
little known fact like people don't check that shit like i mean yeah you don't call around like
nobody calls around and verifies how much money is actually in that bank account nobody like you
will do if it's a big enough thing you'll go and you'll do an appraisal but you don't do an appraisal
because appraisals are expensive.
Appraisals are expensive because they are a,
they're an accreditation gated industry
that exists solely to charge more money.
Like you only do an appraisal if it's a big enough loan
that you feel like you need to justify it.
By the way, I bank, I lent money for five years.
Only one time did I ever have an appraisal
not come back where I wanted it to.
Yeah.
As far as like being high enough.
Right.
And if it did come back and it wasn't high enough, I could always call the appraiser and I could be like, hey, I need more.
And they would make it magically worth more.
It's just like the when you watch the movie, The Big Short.
Yeah.
It's just like how the how the credit ratings agencies, there's two credit rating agencies.
And if if you bring one credit rating agency, a bond and they want to rate it double A, you'll just say, well, screw you.
I'll take it to the other guys.
They'll rate it a triple A for the same price.
And being an appraiser is just like that.
I just wanted to go off on a rant about appraisers.
There's a key part of this essay that I think this is getting into the theme of, which is the author is not anti-credit.
And so, again, I left out of the summary his notion of how Bitcoin bills of exchange can be a short-term credit instrument that is going to economize transactions in a way that's good.
because we, you know, Bitcoin doesn't have the throughput.
We have like layer two solutions like lightning,
but another solution could be credit instruments
that just take place in the land of human interactions
and legal solutions and paper and whatnot.
And he thinks that that's viable.
And so his notion is, again,
one of the key themes of the essay is like,
here are the problems,
rehypothecation leading to fiduciary meeting,
leading to boom bust cycles.
How does Bitcoin allow for a form of credit
that gets around these problems?
When one is like the nature of it, it's more transparent.
So it's going to resist rehypothecation.
People are going to be more eyes open.
It's more capture resistant.
So it's not going to lead to state capture at the bus part of the cycle.
It'd be more resistant to that, at least.
And one part I wanted to add in my notes here, I wanted to get your take on is, you know, what is a Bitcoin bank going to look like?
Like the author notes, like Bitcoin banks have like, they've been around since we've had exchanges selling Bitcoin, essentially.
And the idea from the early days, like Hal Finney noted the potential of Bitcoin banks to scale Bitcoin adoption.
So it's not something completely foreign or paper Bitcoin-y to say there might be Bitcoin banks.
And he gives two models.
One, the bank has its own ledger it uses to economize on uses of the base layer ledger.
Quote, bank economizes on transaction using the Bitcoin base chain by creating accounts that hold database representations of the Bitcoin deposited by account holders and then registering transactions between accounts as database entries.
I mean, it's like the oldest idea of like the old banker, you know, in pre-nation state Italy who just maintained the account of multiple merchants and did the internal ledger entries instead of making them all transact with each other.
That's one, to maintain their own ledger.
Or two, banks mint e-cash.
Alternatively, a Bitcoin bank can take the form of an e-cash mint that issues money substitutes as tokens that can be cryptographically tied to the Bitcoin deposited in the mint.
So what's your thoughts on Bitcoin? What a Bitcoin bank might look like? Or are these the thoughts of Bitcoin banks as maintaining their own ledger or Bitcoin banks as issuing their own currency, but it being cryptographically tied verifiably to Bitcoin e-cashment?
Yeah, the mechanism of how they do it, I'm not sure what's going to work out best. The first way that you describe really just sounds like you're funding a lightning node where you're just going to say, here's X amount of Bitcoin and it's going to exist only within this node. It'll just be passed back and forth. It won't be broadcast to the system.
The e-cash thing using where it would be linked to Bitcoin, that's kind of interesting.
That makes a lot more sense and it would resist rehypothecation.
It would be a way to have a effectively kind of like fiat thing on top of Bitcoin.
And it goes back to your historical statement of like those wildcat banks.
What's that?
It goes back to your historical statement earlier that there used to be those independent banks that issued their own currencies, right? Now it's just they do it in a cryptographically verified way tied to Bitcoin.
Yeah. Yeah. I just so I think that'll be tried and I think it'll fail. And I just think it'll fail because the.
Mainly because of like Metcalfe's law. So like the the the the value of the network is it grows exponentially with the size of the network.
And the size of the network is how many people will like accept that. And so I think it just makes a whole lot more sense to think about like a like a like a one protocol type of solution, like a like a lightning or a cashew type of solution on top of Bitcoin, as opposed to individual banks that would issue theirs that would then be like, oh, well, the bank of Grant has issued their e-cash and the bank of Lucas will accept that.
but the bank of grant won't accept the bank of lucas is like it. And then, you know, like you
got to do all this cost stuff and then you create basically a forex type of foreign exchange type of
like there would be a trading market for those currencies where they would be traded against each
other. That'd be interesting. Yeah. What I think actually most about though, it's not really so
much about the mechanics of it. Like I said, I do think that it just moves to one protocol because
it is more cost effective and there's more value in having a larger network.
But what I find interesting to think about from the lending Bitcoin perspective is that
the interest rate will.
So the interest rate that we have now is just something that is set arbitrarily by people
who are trying to make sure that the money keeps flowing, because if the money ever stops,
then everything falls apart.
Because if people decide to hold their money and save it and do that, then all of a sudden all of this lending collapses because there won't be interest to pay on the promises that have been made on money that's not there.
If people, if the interest rate went to 20%, the economy would utterly collapse because everyone would just hang on to their money and they would wait for that interest to be paid.
But there's not going to be any economic activity generating interest because nobody's going to be taking loans.
What I find really fascinating to think about is as Bitcoin matures, it will become a unit of account.
So it's a store of value, right?
You put your value in it.
It stays there.
It doesn't leak.
It doesn't leak because you can't inflate the amount of, but you can't change the supply.
And so that's the store value.
And then you've got the medium exchange.
You can pass it between each other.
That's cool.
But it's also a unit of account.
And it's not a unit of account yet because it's not, it's still, I would call it, I think
we're out of the infancy stage.
I think we're into the toddler stage.
And I think, you know, next we'll be a child as it starts.
But I still think we're, you know, it's very, very young.
But anyways, as it matures,
when it reaches its full saturation,
kind of like when I as a human was 18 or whatever
and I reached my full height and basically I was,
my frame was built.
So when Bitcoin's frame is built,
it then becomes a standard by which we measure value much like the kilogram is how you measure weight or the meter is how you measure distance You can tell that I been on the other side of the world
for far too long because I'm not using English units anymore. But the thing about standard is
that it cannot change. If it changes, then it's useless. Like I can't be 183 centimeters tall
this year, not grow, and then next year be 300 centimeters tall. But the money supply can
definitely do that. Like the government will print that much more money. When you print money,
when you add money to the supply, when you inflate the monetary supply, it loses its value as a unit
of measure. It's like taking a meter stick and putting more marks on it. And all of a sudden,
now you're 300 centimeters tall and then you're a billion centimeters tall and then you're 37
trillion centimeters yeah you could almost imagine that and like in the orwellian book about like
a state being concerned that height distributions are unequal and so they start inflating the height
supply and making people taller and there's like like a lot of effect too like some people get
taller first and they get taller faster yeah they get taller faster they get the new they get the
their units first or something like that. That would be fascinating because if that was the case,
then it would be so much more obvious who is, uh, who is part of the scam. Like right now,
because people that are beneficiaries of the Cantillon effect, they walk around and nobody
knows that they're the ones that are benefiting most from the money. You can't see their bank
account. But if they're walking around, you're like, that dude's like 45 feet tall. Yesterday,
he was like six feet tall. Now he's 45. Is he a governor at the Fed? Is he a senator?
Right. Is that Nancy Pelosi's husband? But anyway, so to cap it off, what I think is really fascinating is that so all the money equals all the stuff, all the goods and services always equals all the money, regardless of how much money there is, because money is a unit of account that measures all of the goods and services.
And so what are all the goods and services? All the goods and services are a representation of the time of people and the energy of people and technology. And so what you're going to see, I believe, is you will see an interest rate for Bitcoin that is a reflection and a barometer of the improvement that technology has upon society and humanity.
whereby if we enter a state where kind of where we're thinking now with AI and robotics that
will be, say, 20% more efficient on a compounded basis year over year for, say, 20 years,
then you're going to see that reflected in the buying power of Bitcoin because it'll grow,
but it'll also become the natural interest rate where I'm not going to loan you my Bitcoin unless
you return more Bitcoin than I loaned you. And so that's the starter case. And then where we go from
there is that you as the person who wants to borrow the Bitcoin, you're going to bid to pay me as low
of an interest rate as possible. Me, I'm going to try to get you to pay the highest interest rate.
Yeah, we'll meet somewhere. We'll meet somewhere, but we won't meet at four percent. We won't meet at three percent. We won't meet at six percent. We'll probably meet somewhere around the annual growth rate of Bitcoin, say 30 percent.
And what that will do is that will mean that only people that are really serious and have a really good idea are going to go into business basically because it's going to keep, you know, there's going to be some moonshot guys that get lucky and figure out along the way that are going to get lost in the shuffle because they're never going to get a chance to compete if they're not taking cheap money out and just using it as a way to educate themselves by blowing it here.
and then learning a lesson.
Yeah.
But yeah, I think it's really fascinating to think about.
This is like that second and third order effect of things
is that in order to return that much,
you're actually legitimately going to have
to create something of value.
So it's not going to be Instagram.
It's going to be teleportation.
It's not going to be microwave food.
It's going to be gene therapy, right?
It's going to be something that is like massively impactful throughout all of humanity and is moving us in a more positive direction.
Yeah, you just can't.
Yeah, you know, positive direction.
Yeah, I mean, that's one of the ideas of the boom-bust cycle is lead to the misallocation of capital because people, you know, they have infinite money and then they realize that the means of production are scarce.
and then they scramble to invest in all these projects
to put their money somewhere
and then many of them are these ill-conceived ideas
that are just misallocations of capital.
When money is abundant, goods and services are scarce.
When money is scarce, goods and services are abundant.
Yeah, so that's a good summary there.
I don't know, man.
This essay was difficult for me, like I said,
just because the abstraction of just the bare idea of credit.
I'm such a simpleton that that is difficult for me.
This essay, though, did a good idea of building that out,
showing why it's necessary, showing how Bitcoin counteracts
the worst aspects of credit issuance
or what leads to kind of malevolent or malicious credit issuance
like rehypothecation through sharing media.
how Bitcoin inherently tends to resist those phenomena.
And so I definitely added to my understanding
of what Bitcoin is.
You know, there's a lot of interesting stuff
on Austrian economics that one could really geek out on
if that was their thing that I kind of left out here.
But even so, this essay really added a lot
to my understanding and I appreciated it.
Yeah, I want to make sure before we leave,
like to throw out my understanding of credit.
And like credit, just very simply, is that you are reaching into the future to pull wealth into the present because you want to make a bet.
And the bet is equal to your the bet is the interest that you're paying.
That's the size of the bet that you're making.
and you're reaching into the future
to pull wealth into the present,
making a bet equal to the interest rate
that at the point into the future will be worth,
what you're doing with it now will be worth more
than it is today.
And on an individual basis, that works wonderfully
because there is responsibility,
because you're betting on your own future.
I am, if I take a loan out to buy a house,
then I am saying that I find more value today
in having this house than I do in not having it. And I'm willing to work X amount and pay X amount
in order to have that. What gets really dangerous and what Bitcoin disallows and makes effectively
impossible is the situation that we have today, which is that governments reach into the future
and they pull wealth from the future into the present, but it's not their wealth.
governments don't have, there's no such thing as government money. It's the people's money,
and it's the government taking it. And so when they are taking on debt, they are not doing it
like the government should in an ideal situation, the government should exist as a symbiotic
organism. It should be the little fish that swims through the shark's teeth, and it cleans the
little stuff off of it. But what always happens because they can control the money is that they
end up acting as a parasite and they end up being like a tick on the side or a barnacle and killing
the host organism by sucking the life out of them. And by reaching into the future, pulling this
wealth into the present, what they're doing is they are they're taking something that's not theirs.
It's the people's wealth and it's the people's wealth into the future and it's the people's
wealth into the future that they did not give permission for that is then being drug back into
the present in order to feed this parasitical organism so that it can sustain itself while
killing the host. And so I think, yeah, that's my, like my understanding of credit is like,
you're reaching into the future, you're bringing it back into the present because you think that
it's worth more today than it will be tomorrow. And that is absolutely the case with fiat money
because fiat money becomes worth less over time
because they issue more of it over time.
But I think you're going to see that credit
is going to become a much more reasonable,
like you will not see credit at the levels that we have today
because absolutely the money is not worth less in the future.
It's worth more in the future.
So why would you sacrifice your future for your present?
Yeah, which is why everybody in Bitcoin gets in shape
and talks about long time preference and all that low time preference.
And I like in that definition to acknowledging part of the bad part about credit is like the state's usage of it in a policy manner to reach into the future to fund like policy goals or whatever ends they have now.
That reminds me of one of the interesting phrases I like.
This essay very near the beginning says that we're currently in an era of monetary policy and that Bitcoin is going to take us out of that.
I thought that's really interesting.
Like Bitcoin is beyond policy.
Like policy is like a human plan for how a system should play out that we impose through law.
So we have monetary policy.
That's the policy of the Fed.
That's the policy of each new incoming administration.
Bitcoin, you know, has its own built in hard program policy.
And we can have policies around that, like we can have policies around natural events and natural phenomena.
But it's not the policy itself is not the money.
And so we're going to exit the era of monetary policy, enter the era of monetary substance or physicality or reality or something like that.
It's more of a reflection.
Like, I mean, it'll be a reflection of how your policies are actually working.
Yeah.
You'll see that represented in your buying power, which you do today, I guess, to a certain extent.
Yeah.
I don't know.
I dig it.
Right on.
Bitcoin credit.
I think we're seeing, you know, the debt instruments that are currently being issued on Bitcoin by the Bitcoin treasury companies.
Yeah.
It's timely, definitely.
Yeah.
I've been trying to think.
I don't know what you should call it.
Like, it's not a speculative attack.
Like, it would be a speculative attack if there was doubt.
But since there's, it's like a, it's a certain, I maybe just call it a certain, but it's a, it's an attack with certainty on the global fiat system coordinated by the private sector.
Yeah.
Because like, I mean, why would you ever have, why would you ever have a 4% bond, 2% bond?
Why would you ever buy a T-bill that pays you 3%?
Yeah.
If you could get a Bitcoin bill, that'll pay you nine.
And if you want to, you can convert it into shares.
Yeah, that's pretty funny.
Like the Bitcoiner disagreement with the speculative attack is not the disagreement with the attack or the mechanics of it.
It's the use of the word speculative.
I've been struggling with this for a week, trying to figure out what is the proper word.
What do you mean by speculative?
I mean, I keep telling this.
So, yeah, 4,000 government currencies have existed.
3,840 of them are gone.
160 of them are down 99%.
Where's the doubt?
Why would anyone doubt this?
Yeah.
Grant, I think you crushed it today.
I think you crushed it today, Lucas.
I think there is an alluring red tint to your hair that's coming off of wherever we're at.
I'm not quite sure.
It's looking Auburn-esque, a bit sandy as well.
Yeah, that's my recording studio is like harsh fluorescent light or something like that.
We do it very professionally here is how we do this thing.
Good, good.
Make ourselves look good.
You're looking awfully red today.
Like, yeah, that's our standards of podcasting and videocasting is like.
I've got a cool hat.
There we go.
The mustache is looking very highway trooper slash almost pedophilia.
I was going to say, don't go there.
Let's stop a highway trooper.
That's more of the, I mean, in this stage,
and any mustache is obviously aspirational to that one character in Sicario
who had the mustache.
I forget his name, but he's like, I mean, you watch it, you know.
It's, wait, it's not Josh Brolin's character.
No, it's not his character.
It's his friend or whatever, his other guy who's in the special forces.
Yeah, it's the guy from the show White Collar, Donovan, something Donovan.
Yeah, that's it.
Jeffrey Donovan.
yeah Jeffrey Donovan yeah so yeah I like it you're way more buff than him well he's got the
operator frame the operator frame is leaner because you don't need like hypertrophy is bad
for the operator um that's the point that Pavel Tatsuli makes in his like kettlebell manifesto
and like you know the operator is not someone who needs mass they need like ability to operate
so yeah
nice
well what do you say
we put a bow on this one
I think we did it
you ended up with a cowboy hat on
and I ended up
just basked in red light
for whatever reason
so we did okay
great place to be
we'll do it again
alright man