- The Booth Series — Episode 2 — Innovation is Unstoppable
Just now·29 min read
Robert Breedlove: … and it’s a great point that quantitative easing, inflation… they’re just harvesting the economic surplus of the economy… it’s just a tax! That’s all it is. And they — I say They, I’m not trying to sound conspiratorial — it has been window-dressed as this necessary element for a healthy, productive growth, We need a little inflation, even the term itself…
Jeff Booth: (laughter)
RB: Monetary dilution is inflation; monetary enrichment is deflation, which is what is actually happening. So, to try to pull this back to what I thought was a really brilliant point in your book, and you’re looking at disruption, digital disruption, and you say that when Innovation collapses the cost of distribution, it’s the incumbent business models that are dependent on control over those distribution networks. Those are the ones at risk. So, the classic example would be Blockbuster, right? Their greatest asset was their distribution network: they had stores all over the country, they had good mailing system logistics dialed in… as soon as something like Netflix came on the scene — something that fundamentally had a first principles level for delivering media content — it disrupted the need for Blockbuster’s extensive distribution network. It immediately became their largest liability. Now, all of a sudden, we dematerialize the ability to deliver content worldwide — not immediately, but relatively quickly, say, within a decade — and that crushed Blockbuster. Again, operating in this fiat currency complex, they borrowed against their real estate, and their buildings, etc… all of a sudden it became this dead weight on them. And that same dynamic… when we collapse the cost of distribution, that tends to be what crushes old institutions. I think that’s even what happened — which you get into later in your book — that’s what happened with the church when the Gutenberg printing press was invented: it collapsed the cost of information distribution; it broke the church’s monopoly on knowledge, and [the church] fell from grace as the dominant institution in the world. And now we’ve done it… we’re going through something similar in the digital age, where we once again collapse the cost of information access for everyone worldwide, we all have supercomputers in our pockets now, we have the Internet… To me that’s so powerful, so that’s something we can look at, we can look at the cost of distribution as a canary in the coal mine for changes that are coming, and the digital age is just gonna collapse these things across the board. So I wonder how you look at that and how you see… Bitcoin is collapsing its own cost of monetary distribution, banking distribution… anyone can access this system, it obviates the need for banks… How do you look at that? Am I wrong to think…?
JB: No, you’re exactly right, and how early we are… [If you look] at the Blockbuster example that I used often, I use it because the same thing is happening in our monetary level by stopping creative destruction in the free market. All that’s happened is creative destruction has moved up to the monetary system. You can’t stop it, so, okay, if you’re going to stop it here and centrally control the free market, then the currency is gonna break. And Bitcoin is allowing that to happen. But that Blockbuster example… [the] management wasn’t bad management. Netflix’s business, when they had a chance to buy it at $50,000,000, was not a really good business; the business was mail-DVD, and so you had cost back and forth in the mail, renting DVDs in the mail, it was ok, but what changed the business was download speeds. And same reason Paul Krugman said, The Internet is gonna make no more of an impact than the fax machine on the economy… People miss how fast it’s moving. Linear thinking! So if you’re thinking that download speeds at that time, you couldn’t download a video, remember opening up a web page and it had lots of photos and you [wait and wait]… I gotta go to a different web page without photos because your modem *reeEEeeeeRRrr*… How slow everything was!
So, in that environment, if you misinterpret how fast that technology is moving, it’s really easy to be fooled by what seems like, which is an exponential pattern, but to you it seems like, Where did this come from?, it came out overnight…but once that happened, there was nothing that Blockbuster could do. So what they did was add candy isles to their stores. And it sounds crazy — we laugh — but, if you’re them, what do you do? It’s too late. Your entire advantage in distribution in nine thousand stores, and all the attendant costs of it, is now a liability overnight. The entire thing becomes a liability, as someone without that liability is growing like crazy… But it’s a good reference point to what’s actually happening at the economy level, at the monetary level, because it’s the same thing that’s happening at the currency level, so what is government gonna do? Now carry this Blockbuster example further, you can see the same thing: Amazon did the same thing to Walmart. In aggregating information of products, and having 600,000,000 products competing for demand, versus products 130,000 (?) a Walmart store , so what’s the cost of putting those products in the Walmart store? Somebody, a merchandising team, goes and says, I think this is better than this other one. You get to come on the shelf, you don’t. Walmart pays people to do that job, then those people — because it was the biggest store around — whatever is on the shelf sells like crazy, and those people have bias that they’re really good pickers, when anything would sell on the shelf, because they picked it, and lots of people come in to Walmart, whereas Amazon removes that type of choice with data, and everybody builds to it, so all of the people that are blocked from going on to Walmart go to Amazon. And 600,000,000 SKUs against 130,000 SKUs… the data becomes better. People find things that they never would have found before. And the distribution model completely changes out of that data… They give us more choice, and the stuff rises to the top that we want.
…customized shelves, right? Everyone’s looking at their own suggestion engine based on past data.
Exactly. And you build an AI engine around that and some of the stuff that they’re showing you, Oh, I didn’t know I would like this! We use it because it is valuable to us. It saves us time.
Do you think we’ll ever learn about exponential change? There’s that old quote that, The greatest inability of mankind is his inability to understand exponential change. We’ve now seen it, I mean, just in my lifetime I’ve seen a dozen large examples I can think of of digital disruption… is this something we’re going to learn eventually? That people are just going to come to expect exponential change?
I don’t. It’s such a hard concept… a couple things on this. I use that Amazon example. I’m carrying it further to: What is a product in the first place? So Amazon now has aggregated all those products or information, and forecasting demand for suppliers, but still built on a supply chain that’s just way more efficient than Walmart’s supply chain because of the scale of information. But take that to the next logical conclusion, or where technology is moving… Let’s use this example because IMF talks about chairs and deflation, where, You wouldn’t buy a chair if prices were going down! So let’s use the chair as an example, and we’ll poke fun at the ridiculousness of that statement… but that chair is information. It’s just organized information. And it’s somebody’s idea — information — that they organized, in their mind, put onto the drawing, prototype, computer program…test-marketed it to say, Do you like my chair, my idea, my information? Could you use my information? Now, they do that test marketing and everything else and they build a business around that chair. Then they send that chair to China and they scale up production and they ship that chair so they pay jobs to do that, they ship that chair to distribution, and that distribution they ship it to a retail store, and after all that lag time of that information, we go to that retail store and go, Oh, that’s a neat chair, and we buy that chair, or we don’t. The whole thing is information. And it has a whole bunch of cost of that production, supply chain, distribution, cost of oil, jobs across the entire thing. It was all information in the beginning. And that information, in the next ten years, is going to move from somebody’s mind into digital printing — 3D printing — it’ll be printed in your home or down the street and you pick up the chair, and all of the cost will go away, [the cost] of that chair. The next step of that — maybe even before that happens — is AI on top of that will aggregate a whole bunch of those ideas, and give you way better designs than people came up with with their chairs, and be able to print all of that for next to nothing too.
That’s where this is going. So if you think about trying to stop that innovation, which is gonna hit the market anyways — yes there are gonna be great companies around it — but those things are all going to bring prices lower and lower and lower. If you think about how much is moving into our digital world and how it’s really all just information in the first place, now the bones underneath are allowing us to exploit that information and do more with it and give more abundance, give more value… that’s what’s happening. And that’s why most of the inflation is way in front of us. What I just said, that whole thing: that’s going to happen within ten years; it might happen a lot faster. And ten years isn’t that far away. What I’m talking about sounds like it’s out of Star Trek or science fiction, but there doesn’t need to be one breakthrough to be able to bring that, it’s just the trend continuing. So I’m not talking, even in my book, I stayed away from what is bound to happen, some breakthroughs that I’m aware of… all I took is the trend on existing tech against the trend of exponential patterns, and you can see what is happening.
Well, I hope, Jeff, that you do reconsider, and write that second book! That’s exactly what I’m looking for: Where does this all lead?
Now let’s go to that part of it. That’s a crazy exciting future. And a lot of what I get to do, working with entrepreneurs… where I spend most of my time is: how do you create business value out of timing of this technology, this technology… how do you change the design of what people think of how they do something today, and how will that look in the future? It’s a wildly exciting thing to be able to do, to sit at the front seat of so many different companies and different technologies that are moving at this rate. I can’t believe I get to do it! It’s unbelievable. But even myself, to your original question on exponential patterns, that paper folding example? I’ll do it here, probably a lot of your listeners have already heard it… So, if you fold a piece of paper on itself fifty times, that piece of paper will reach from here to the sun. And why I use that example, and by the way, I didn’t know the answer either, I had to look up Google, I could have calculated it, but I didn’t intuitively know it. But why I use that example… I’ve literally asked tens of thousands of people that question, and the predominant answer is about two inches. Few people say the roof, very few. And only if you’ve heard the thing before do you say, a lot of the times you say, the moon, which is an order of magnitude different than the sun, but…
We’re just biologically not equipped to handle that level of change.
And that’s the point. So the point isn’t, I’m smarter, you’re smarter because it’s a parlor trick…The point is we never get it. And the point is I don’t either. So you have to constantly train your brain to think like this, and it’s hard. It’s really really hard. If 50% got the answer, then okay, enough people think like that to be able to avoid these traps. When nobody gets the answer, unless they know it, then it tells us that we all have this cognitive deficiency around exponential patterns. But our world is moving exponentially, so people are bound to make tons of mistakes.
Right, I think that’s a great point, and to tie it into Bitcoin, we have the first money in history characterized by an exponentially decaying money supply function: it’s cutting in half every four years. And the other way to think about that is that it’s increasing its inflation resistance — doubling its inflation resistance every four years — in the most inflationary macroeconomic backdrop there has ever been. I think that’s where you see Bitcoiners that are really deep down the rabbit hole, that’s why they’re so bullish, they’re like, You have exponential decay of the monetary system meeting exponential increase in inflation resistance in this money… it’s a black hole, that’s a common analogy.
Yeah so that’s… again, people are bound to be confused by what you just said because they’re measuring a system… even when you measure it in dollar terms, you’re measuring in existing system terms. And you know this, and a lot of people thinking in Bitcoin… you don’t actually measure in dollar terms anymore, you measure in Bitcoin terms. That’s your unit of account, and if that’s your unit of account, you see the deflation of what we’re talking about everywhere. You see prices of everything following that rate. Today in the early cycle of Bitcoin, because we’re still very early… you’ll see hyperdeflation, exactly. Price will rise so fast… at the top of Bitcoin it stops being… I don’t think it’s as upwardly… it stops being as volatile, and you see the rate of the economy underneath it, which is still deflation, which, if you assume technology is gonna continue, and there’s no way it won’t ,because technology is an information game so it keeps on moving faster and faster, then that rate, whatever rate that market would move, is the rate that we could measure disinflation or deflation.
That’s your new risk-free rate then, right? You’re holding Bitcoin, it’s consumed all the money in the world, global GDP or whatever measure is growing at three percent, your Bitcoin is growing at three percent: that’s your new risk-free rate.
But when you just said GDP growing at roughly three percent, remember, what we’re talking about, moving the information systems… it’s going the other way… different measure… there’s no way that grows three percent… productivity gains explode. But it’s actually declining growth and increased time. The growth comes because things move to free or nearly free. And when I say growth, I mean growth in productivity, or what we should measure against.
Is there a measure for just pure productivity then?
Right now it would be impossible to, in current measures. The most simple, crazy example that I used in the book: Why don’t you pay for the air you breathe, Robert? It’s really valuable. It’s super valuable. You should pay the most for the air you breathe.
Right, right. But to the point of scarcity: scarcity only exists when demand outstrips supply.
Exactly. You’ll pay a lot for the air you breathe underwater where it’s scarce. You’ll pay a lot for air if you’re caught in a fire and you need oxygen. Why don’t you pay for air? Because it’s abundant and it’s free. Look at your iPhone, look around you… look at the content you’re creating. Look at what is available on Bitcoin Twitter today. Some of the sharpest minds around: free.
Yeah, I love it. I think this gets to one of the really deep points — and something I think was explicated wonderfully in your book — is this idea of these digital platforms that you refer to as supply, so they’re aggregating or curating supply, whether that supply is books on Amazon, I guess you’re the supply on Facebook right, you’re being aggregated and curated to advertisers… but because the digital platform is very low cap ex and it’s everywhere and nowhere, it can aggregate and curate supplies faster and at a larger scale than any brick-and-mortar anything, any store like that… And by doing that, those platforms are actually participating in error correction. So we are — that’s what economic activity is — we’re trying to make ourselves, and our systems, and our actions better fit to reality, such that we can accomplish greater results with less efforts. So you could say in that sense, as Mises would say, We are trying to attain higher and better wants satisfactions, to satisfy more urgent human wants. That’s the whole game of economics. And value, then, is very simply, What people want. If you want something, it is valuable. It doesn’t mean it has a price, to your point of oxygen, necessarily, but if you want to walk to the other side of the road, that means you find the other side of the road more valuable than where you’re currently standing. And AI… the lines get blurry here for me; do you call Amazon AI? It has an AI engine… it’s accelerating this error correction, where I’m looking for this type of book or chair or household item, and instead of having to drive to three different stores, look across a number of shelves, talk to a number of attendants, I can actually just interact directly with this AI engine via search or suggestion, and solve my own error more quickly.
Yes. So let’s talk about how that’s designed…
My last point there is just that, that, what you said, the deep point was that, Intelligence is error correction.
Yeah, that’s a really big deal. So we could go there right now if you wanted, but intelligence in humans is error correction. AI is going to do that better than humans… One of the things you led [to] before is: How do these platforms accrete value? How do they grab value? In my book, I explained how it’s all about supply, it’s not about the by-side. When you have all supply, everybody comes to you. So the design of something, kind of a monopoly type of power, is having supply compete for demand against, essentially, an artificial intelligence recommendation engine. That’s what’s happening. And both sides of that, through their competition and through their choice — what they’re doing on the site — train the AI engine. So the AI engine is predicting to supply what they need to do to stand out more, and what bounty they’ll get for standing out more, whether it’s price, delivery, lower this, different color, it’s predicting this out. And by predicting, because it knows on the buying side all these different interactions, why people aren’t converting on it.
So take that concept to every single platform. Google for information — how did Google do this? They aggregated all supply of all websites, and remember, Google is free… why Microsoft missed how big a business that was going to be was: the Internet was early; there was no money in it, at all, to be able to free information; but as more and more people compete, the algorithm gets better and better to show you — specifically you, and every other person — a different set of results all competing for the top spot. And then, over time, the predictions, Hey your webpage doesn’t load this fast, so we penalize you, you go down, because we know that the user, if they hit a website that doesn’t load fast enough, they drop off. So it creates this game that constantly gets better and better. And we trust that system, because we don’t go to page 2. And even though they have 130,000,000,000,000 different websites listed, all competing to get to the #1 spot, we could go — that illusion of choice — to page 467 but we never do. We go to page 1 because we trust that. So, as that happens, it consolidates more and more power in this, because the derivative of the AI is actually us and the supplier in these interactions trying to solve our problems, trying to make it convert better for us. So how do you get that? If you’re thinking, if you’re creating a company around that kind of magnitude…. it doesn’t matter what the buyer does… if you get all the sellers there, then the buyers show up, because all the sellers are there. And it’s the same thing for how Amazon went from books to everything else: they had more choice. And the more choice gave them more feedback loops and things that the buyers never saw anywhere else — that started the whole thing. Use the example of Airbnb: imagine an Airbnb with five rooms in New York… remember when Airbnb came out and people said, I’m not gonna sleep in someone’s house! Because the choice you had versus the choice in Airbnb was: I trust a hotel. But what number of rooms, competing for you, starts to see, Wow, I could stay there for a different price than the hotel, and at some sort of number, it tips. And not only does it tip for more and more people coming to use it, it also tips to be able to be seen by those people. You start competing with other supply.
So that’s what creates all of these platforms. And that notion is actually still relatively early — there’s a whole bunch of other industries that it’s gonna move to.
It calls to mind, I think it’s Say’s law: Supply creates its own demand. So you’re actually, once you get enough supply, or as you said, the sellers, that the demand coalesces to the supply… I read this piece one time too about why Bezos chose books initially, is because he was leveraging the capacity of an Internet bookstore to have an unlimited selection… to your point, to go narrow first with a startup before you expand out to everything else, you need this penetration point before you expand the strategy, Land and expand… and he very intelligently chose to go books-first, because you’ve got, whatever, a hundred thousand books in a bookstore, there are literally millions upon millions of books possible and he could put those on an Internet bookstore.
You’ve said the point, but just to illustrate the point: Why can’t Walmart do that? Why can’t bookstores do that? Because they have shelf space; their mind is constrained by… they have to make their shelf space profitable. So all their metrics are not to support a digital world that can make unlimited shelf space — they can’t have a book on their shelf that doesn’t sell for two years, so they have to try to pick the top sellers all the time, and by picking the top sellers all the time, there’s a whole bunch of error, human error, not knowing, predicting what the top seller is gonna be, which is all human (?) … so number one, they’re bad at predicting; number two the market doesn’t see all of the choice until somebody offers all of the choice.
And we’re back to the collapsing the cost of distribution. Amazon collapsed the cost of distribution. And then it learned from customer behavior how to solve their problems more quickly, which in turn solves its own problems more quickly, which is, make revenues… we have actually, it seems, we’re always talking about wen AI, wen general artificial intelligence… but we have created artificial intelligence, essentially.
Yeah. If people knew how fast this space is moving — artificial intelligence — should we be scared of it if it aggregates into one person’s power, or one company’s power? We should be scared of it in that case. Or a government… if we should be scared of it with what China’s doing… and this is related to currency by the way too, it’s very related to currency, because if somebody has this type of currency power, they can also shut you off from the network; there’s nothing you can do from it. It turns very dystopian very quickly. We do have artificial intelligence, we have narrow-based artificial intelligence already… one of the things a number of people — not a lot — took question on [in] the book is: they’re talking about things that I’m talking about in a trend, and because they’re highlighting on something like artificial general intelligence, they come out with, Oh, we won’t have that within the next fifteen years, or twenty years. Okay. Maybe you’re right… that’s a belief system. I believe differently, but let’s assume you’re right. It doesn’t matter. For what we’re talking about , deflation driving more and more abundance if you let it, it’s on a trend. It’s on a trend that keeps on going, exponentially, and it’s not a light switch moment that one day we have artificial intelligence and the day before we didn’t and now the world changes — it doesn’t look like that. It looks like things get better and better and cheaper and cheaper, and the job of artificial intelligence is: Doing our job. And why wouldn’t we want it to?
Right. It makes life easier.
And these are big, big concepts to be able to… so I get it, I get the fear response and say, What do I do? But that doesn’t change the facts. So I understand the fear, but it doesn’t change the facts of what’s happening.
Hence the importance of it being open-sourced… the dystopian future is when it’s centrally controlled, and I think you quote Putin somewhere else in the book where he said, Whoever figures this out first is going to be the dominant nation in the world, but he’s thinking in this closed-sourced tech loop where, as we’ve seen, open-sourced networks are eating the world. That’s what the Internet is, that’s what Bitcoin is… One other question on Say’s law — and I think about this a lot and just want to hear your opinion — in looking at Bitcoin as a digital platform through that lens of being able to deliver supply differently… I just think about… people often talk about the stock-to-flow model, that it doesn’t consider demand, so therefore it’s not an accurate model, but then I wonder if… here’s kind of the way I think about it: mankind needs to trade to be more energy efficient. When we trade, money emerges. Everyone prefers a money of a more fixed supply, or less subject to dilution, so is Bitcoin, by being the first money supply that cannot be diluted, cannot be changed… is it creating its own demand in kind of a Say’s law sense? Clearly, everyone would want a money characterized by pure supply fixity, or absolute scarcity, which I know we were talking about earlier how scarcity is a relationship between supply and demand, but I think the demand for money always outstrips its supply, but if you abuse the supply too much — if we inflate the currency too high — then people just shift to another thing as money. It’s not like money breaks — money is a concept, it never breaks so long as we’re trading — we just switch from Zimbabwe dollars to U.S. dollars, or U.S. dollars to Bitcoin. So I’m kind of just out on a branch here, but I wonder what you think about that.
So, number one, when you said the stock-to-flow model, people say it can’t work, if they look at the numbers, it has worked, it keeps on proving everybody wrong! So, can it continue, what does it look like in the future, who knows, it’s a model, but it’s been remarkable as a model. So, apart from the other things… I totally agree: money is a concept, and it’s a concept for our time. That’s all it is. It’s an agreed upon concept for our time, and we trade our time for money. And so it’s worth what we think it is worth; money itself has no value. Today it’s a piece of paper… the only value is when it’s moved into something you want. But money in itself is a medium of exchange or it’s something that you trade your time with, and you store your time in something that you don’t want to lose your time. So when you destroy money, you’re destroying our time. And so it’s really simple to see why everybody is on a mouse wheel working more and more in an abstract… they don’t know what’s going on, they can’t put their finger on what’s going on, they just know, It’s getting harder and harder for me to keep up, on one side of that equation, if you’re on the bottom side of that equation — middle-class and below — while I’m equally scared about my job being outsourced away or being automated away… It breeds a whole bunch of fear and more fear, because it’s true: technology is going to do that. And on the other side of that coin, people who are getting enriched by it are going, Wow, life’s good, this is really great! So their time is expanding by that same nature of hurting the value of money, or destroying the value of money, and you could see as a consequence everything else. But to me, money in itself is worthless: it’s what money buys us, whether it’s the experiences, or our perceived experiences… for some people it buys them status or power over other people… but it’s the things that it buys you, or the things you want to be known for, your experiences… that’s what money is to me.
Yeah, I’ve never thought about it that way, but the middle- and lower-class, you could say, is getting attacked from both sides, from the quantitive easing that’s widening the disparity between rich and poor, so they’re getting pushed lower down, but then they’re also facing job loss by technological disruption, so they’re getting squeezed out, but, at least in the fiat currency standard, most of this productivity gain or economic surplus is accruing to the top, to assets…
Yeah, so in that world, your time is expanding.
That’s why it’s such a dystopian outcome: it leads to where one group of people hold all the time.
Exactly. You can look back through history to see: if the wealthy believe that they’re immune to this, when the game board’s ripped up, who gets attacked? That becomes a lightning rod… I don’t care who you are in the system, you should want fair rules for how a system is designed, because rules that reinforce what’s happening now end pretty ugly in one way.
Yeah, it seems like a virtual certainty — nothing’s a certainty but, as close as you get to a certainty — that it collapses, it’s not sustainable, so then the question is: What’s next?
One thing we might want to chat about a little bit… because we’re so far past the point of rescue in the existing system, what could some outlier events look like for the existing system? If people are making a bet on Bitcoin — you and I both believe long-term in the asset class, we’re maximalists… I will say this too, if it went to zero, it would be a bad day, but I would actually care way more about what it means if it went to zero — and I don’t think that’s going to happen — what it means for the existing system. Because I don’t think there’s another way out. I think it’s the best past for a transition to where we’re going; the most peaceful path is Bitcoin.
I just think, if we didn’t have it right now, in the 2021 post-covid scenario we’re in, it’d be a pretty bleak situation.
Yeah, because what you’re doing is you’re looking to move to safety, you’re trying to find where are you going to get out of this system and protect your money for safety because you know what’s going to happen. But now let’s say the existing system… we know that you’re building in more fragility into the system with each step, and the consequences of that fragility, not just for the system itself, but the second order consequences for populations… it’s like a powder keg wanting to go off — you can feel it everywhere — and at some point it goes off… If you’re at the fed and you know this is happening, do you bluff and let interest rates go up and collapse and blow off the steam and let stuff collapse, then go back and save the banks and restart the same thing all over again? Now, I don’t think that is possible today, and when I say possible, anything is possible. I don’t think it’s a probability today, because that’s what happened in 2008: a whole bunch of people were wiped out in 2008, and then you went in and restarted the system again and it got ever-more fragile, but that’s what happened in 2008. So, could that happen today, and what would happen in that event today? You know if that happened, a lot of people would be scared, but the U.S. dollar would get really strong; we could race to safety in that. And in that environment, Bitcoin would fall as well. Everything would fall. Asset prices would fall as people went for safety and try to get cash. And that would be, to me, an incredible buying opportunity in Bitcoin, if that were to happen. Because you know the system hasn’t changed, but you know you’re blowing off steam… the worry I think they would have from doing it today is that the collapse could be so severe, so fast, you might not be able to stop it and reset, because the whole thing is being kept afloat by more and more printing. So, even though governments would want to do that… Prices would fall so fast, and people would see what was there all the way along.
I think that’s a great point. Perhaps what would be the ultimate… the last great Bitcoin buying opportunity there would ever be…
And it might not happen…
Hypothetically, if there was this massive liquidity shock and maybe you’d say the fed drags their feet to respond… to vindicate their existence and their response, right, what was it in the dictator’s playbook, Never let a good crisis go to waste?
Exactly. Because everybody would be saying, You have to do something, you have to do something. And because you couldn’t let the economy collapse completely and every financial institution collapse… So the population would race to the fed to help us, and the same thing that created the whole problem in the beginning gets kind of, We saved the day again!
And the fed would take that opportunity, very likely, to amend the Federal Reserve Act, probably making their balance sheet legal tender where they just start paying government bills directly — helicopter money like we’ve never seen it. So yeah, buying Bitcoin in that short-term liquidity, deflationary shock would then be, over the next few years, all of that central bank balance sheet expansion would… That would be the hyperinflation event without a doubt. Once a central bank, specifically the fed turns its balance sheet into legal tender and starts paying government expenses directly, we get into pure helicopter money injections. The dollar will inflate; there’s just no stopping it. So that’s the (?) of Bitcoin: if you can buy it in the deflationary shock and own it through the inflationary aftermath, that’s the ultimate…
And last February and March, that’s what actually happened, right? Every asset fell short term, then you had this massive easing that’s pushing everything… So could there be something like that? I do see it as probably a low-probability event because I don’t know if they would risk what could happen, but in this type of market, who knows.
Yeah, it’s hard to say, and it’s interesting too — you made this point in your book — every incremental dollar of debt engenders less marginal GDP growth. The stimulus is less effective over time. You’ve spent all of the… the central bank levers are pushed to the absolute maximum right now, we’re at the zero bound, zero reserve requirements, etc… There’s nothing left to do at that point except, quite literally, open the floodgates.
People talk a lot about the debt, but they don’t connect the dots to what was driving it. So we talked a little bit about this already but… that was one of the [things] — for me, in writing and researching the book — I couldn’t square the circle and say, Why is everything I’m doing— [with] all the technology companies providing more abundance at lower prices, and I can see it all around me — why aren’t prices falling everywhere? Because technology is moving into every industry, prices should be falling everywhere. So that was something I talked about a long time, but when I actually did the research for the book and I found out that the world had $250,000,000,000,000 of debt before covid, against an $80,000,000,000,000 economy… That is take your breath away enough. That’s a big number, and that’s what everybody talked about, a lot of people talked about the debt. But it wasn’t that that took my breath away, it was $185T of the $250T came in the last twenty years — as you would expect if technology was moving faster and faster the other way. You would expect something to be able to offset that. And why the fed doesn’t see it — you could argue that the way they measure inflation is all wrong and everything else — but, they’re pouring money into a hole that’s moving into technology faster, and overall inflation isn’t moving higher because technology’s moving faster the other way.
Yeah, I think once you get… maybe even the threshold amount is that, One dollar of new debt creation, not adding one dollar of GDP over a time horizon, is self-defeating.
You can’t get out of it with more debt. “Let’s solve the debt problem with more debt!”
Yeah! The only reason you would go out and borrow money at 4%, is because whatever you’re gonna invest that capital into, you expect to yield 5%, 6%, 7%… Once that calculus flips, the debt’s pointless. And we’re very deep into that game.
We’re very deep in the negative. So how long can it go on? How long can you pretend? There is a reset coming.
And that would be the headline to — which I don’t think you would ever see this heading in the mainstream media — we’re in double-digit negative real yields today. We have at least 10–15% asset inflation. We all know CPI is just a bogus metric, which we could talk about later, but… using U.S. M2 as kind of our proxy, it was increased, what, twenty-five percent last year?
26% I think, yeah.
Well we could be nice and say it’s 10–15%… nominal yields are sub 1% in the U.S., so we’re talking about a negative real yield of 10–15%? I mean… if that was a headline? Markets would come apart.
Yeah, but why is a bunch of this smart money, the institutions, moving into Bitcoin? Because they’re starting to understand this. They’re starting to understand that the negative yield they think they’re getting is way worse, and that’s what changes this: the risk is not in Bitcoin, the risk is in the existing system. The existing system has never been the risk; they always bail out. So that belief system doesn’t change overnight, but it’s starting… The longer Bitcoin is in existence, the more network effect, the longer without any hacks, the more upwardly stable this is, the more people are starting to realize and ask questions… and you realize the existing system holds all the risk; Bitcoin holds virtually none.
Right, Bitcoin today being a risk-on asset but it’s competing to be risk-off essentially. And I think… we know covid accelerated this in terms of central bank response… I think it also accelerated it in people’s perceptions, just being forced to sit at home, sit at your computer all day, read what’s going on… the conspiracy theory, or backlash against governments, was at an all time high. Trust in governments fell as a result of this, so I think that drew people intellectually into the Bitcoin rabbit-hole. I have a friend, he’s an options trader on Wall Street for twenty years, he’s really good at what he does, and he, over the past few years became extremely frustrated, he’s like, Nothing makes sense anymore! But you just… the fed bids everything, so you just buy whatever they’re buying, and that’s the whole name of the game. There’s no supply and demand mechanics at all. And he never understood Bitcoin, he always thought it was a joke, and six months after covid he’s like, Okay now I see what’s going on here, this thing is the insurance policy, How do I buy it, how do you think about it, etc. So I’ve thought this for a long time too: the value proposition of Bitcoin, although it is complicated from a distance, once you overcome that distance, it’s relatively simple. It’s just hard money in a world flooded with soft money.
And if you come back… simplifying these concepts… people are scared, when you talk to the average person in the street about the economy, or macroeconomics, their eyes glass over, or they’re scared, because it’s designed specifically to… Why don’t we just call it quantitive easing, we’re gonna make up new money and destroy your currency, or, We’re gonna pick your pocket… the concepts, the way they’re designed, build more and more behind-the-curtain, I don’t know what’s going on, it’s so confusing, I can’t understand it… these concepts are actually pretty simple. And I get it, I get why you have to tell a population this… taxes in the ’60s were upwards of 90%, and you couldn’t tax popuolations over 100%, so you had to go off the gold reserve to pay for the Vietnam war, and move that into inflation, which is just a hidden tax. And so that exported that problem around the world, a tiny little bit all around the world, but you go through this inflation in the ’70s and early ’80s, Volcker jacks up interest rates and collapses the economy to get inflation under control. And people think that that could happen again. Now, that can’t happen again. Today, government owns the debt. In the early ’80s they didn’t. So jacking up interest rates collapses everything. So once you have inflation, if people really want inflation, worry about inflation, because it’s never going back in the box. There’s no way to put it back in the box. And so, all of these roads again lead to what we’re talking about, but in concepts, the concept is pretty simple: technology at the rate of growth today — technology generally — but innovation technology today require a currency that allows for deflation. It’s a requirement. Every other path concentrates power. And maybe slowly at first… Why we didn’t see it before is because technology wasn’t moving as fast. So you could get a population to believe inflation is an important aspect, and they didn’t see the counter-effect, and what you had to do to promote inflation, as fast, because technology wasn’t moving as fast. So it could happen slowly, and people could be… Again, if you look back in our lives, my house went up, this happened, I got pay raises, I took on some debt for this… and it was largely a great exercise — for me, for my family — and I didn’t realize that that was, until somewhat recently, ten years ago or so that, wait: this economic exercise has a loser on the other side. And in the world where we’re going, that won’t work.
- Date of publication:
- Thu, 04/22/2021 - 12:15
Click on the link - it will be copied to clipboard