Fix the Money, Fix the World

This post is loosely written, as if I'm talking.

Before I start talking about inflation and its effects on society, it's important to understand what is money. Money is the highest form of energy that humans can channel. Our savings are the result of all our energy utilization which lead us to accumulate capital over time. Energy is crucial to survival; our body functions through digesting food that gives us energy, which we use to defend ourselves from enemies or life threatening environments. Freezing weather is a life threatening environment, that's why we use energy to heat our homes. The civilization that channels energy in the most efficient way always succeeds against the rest. Guns use more energy than bows and arrows; an army with fighter jets obliterates an army with rifles, which obliterates an army with bows and arrows, which obliterates an army fighting with their bare hands.

Historically, the money that humans chose to use, or saved in, was the one that can store energy over the longest period, something that does not bleed too much over time. What does "bleeding" mean? If something uses a minimal amount of energy to produce, the value of that thing will decrease over time, that's why we don't use plants to store wealth... it's too easy to produce, it doesn't take a big amount of energy to grow a field full of plants. In prisons, people use cigarettes as money, because they know that it takes a big amount of energy to smuggle cigarettes into prison facilities, cigarettes are a scarcity in this environment (it's banned).

The reason gold became the #1 money is because it took so much more energy to find, compared to other metals, giving it a low inflation rate. People trust gold because they know that even if the value of it goes up, it's too hard to add more of it to the total global supply of gold... it's too expensive to mine.

Now let's put you in a specific scenario; the year is 450 AD, and you're a farmer living in an isolated city where there is a quasi limited supply of seashells, no one knows how they got here since the city is not located near the beach (where it is also hard to find); so people value them, everyone wants seashells, and they all look the same. I happen to live in the same city and I produce paper, all of the same type and size. The production numbers are unknown to you, but you know that people all over the city buy and use my paper for messages, announcements, documents, etc... they also dispose of it since it's so cheap to get more of it (I have a monopoly with a low cost & price). For the food you sell every day, you have the choice between accepting seashells or accepting paper that I produced. What's your choice?

Fast forward, and it's clear that seashells become the currency of the city, because everyone accepts them for the energy they put into their work.

Now let's say, since I'm the richest guy in the city, I own 51% of the seashell supply, and I managed to build an army to defend myself from enemies. The year is 460 AD, and I have full control over the city with my massive army. I make an announcement: private ownership of seashells is banned, they should all be stored at my facility, use this new paper I'm producing with my name written on it, or you will die. Now, I have control over the new money (paper) I choose who becomes rich and who doesn't, and I own all the seashells, since I ordered everyone to trade their seashells for my special type of paper that only I can produce. What is your choice? It's either paper or chaos.

I'm aware that this is not the perfect comparison, specifically because today's fiat currency standard improves salability across space, when compared to heavy and bulky Gold.

Yet, people always go to the thing that needs the most energy for an increase in its supply. This is why in our economy, people prefer to store their wealth in real estate, stocks, precious metals or art, no one wants the currency, since the government can print as much as it wants, at zero energy expenditure. And still, why do you want USD and not LBP? Because you know the LBP loses more value over time. The USD is backed by the American military (similar to my massive army in our small city). The current global order says: use USD for the global oil trade, or get destroyed (That's why it's called the petrodollar system). Saddam Hussein tried to sell his oil for Euros and look what happened. This also means that the USD is backed by energy (you need a massive amount of energy to have the most powerful military).

Now what is a better monetary asset than a special paper produced at the Federal Reserve, backed by the American military? A massive house in Miami Beach, also backed by the American military! Other than being backed by the military, it is backed by the amount of time and work required to build this house, and by the fact that land in Miami Beach is limited. If you need to store 50 Million dollars over 10 years, you better get that house instead of keeping them in the bank, because it will be valued at 100 million in ten years... and not because it grows in value, it's because the currency keeps losing value.

What's funny is that people think house price inflation is a good thing. They don't understand that it's simply the currency getting crushed against scarce assets, since the government is issuing so much of it. And where does this issuance go? Real Estate, Stocks, Bonds. If you bought $1M worth of a government bond with coupon rate of 5%, it gave you 50k a year. Say the federal reserve drops the cost of borrowing money to 0.5% (they decide the cost of capital, since they issue it right?), your 50k return is now priced at $10M, since you now have to buy $10M worth of government bonds to get that 50k a year. I don't know what you call this, I call it hyperinflation.

And here comes the biggest myth of all time: "CPI is inflation"

Measuring inflation through a "basket of goods" that the government chooses is the worst idea ever. Why? Because it can change what is in this "basket of goods". You needed a space of 200m2 to live in 1980? It's 2022, you only need 120m2... that type of stuff. You use to eat one kilo of red meat in 2010? Red meat is more expensive now, and anyway you can replace it with plants, it lowers your cost... Oh look! our basket of goods from 2022 says inflation is only 2%, time to issue more currency!

Conclusion: it's freaking stupid to measure inflation with a basket of goods, measure it against scarce & desirable assets, like Miami Beach mansions, which are up 20% to 30% this year.

This is how the system works:

- Government controls the issuance of currency

- The issuance of currency only goes to people with significant amount of resources (people that can access massive loans at 1%)

- These people then use this money to buy houses, making them short on the currency and long on real estate

- Real Estate and Stocks are the best money because no one wants USD

- Rich people stay rich, poor people stay poor

If the government increases the cost of capital to reduce inflation to 0%, no one will want to buy more houses, more equity, or more bonds, and the whole economy crashes, businesses will fail and everyone loses their jobs.

This is why most of you think inflation should be 2%.

So we should keep it that way right? No... we need a money that is limited in supply, or else most of it will be locked in other markets and slow moving assets.

What's another thing that no one talks about? Why do you think banking and finance is the biggest sector in the economy? It's because I don't want the currency! I need all of these people in banks working on finding the best investments so that my monetary energy doesn't get burned away by inflation... don't hate the player hate the game. What's the problem with that? A massive misallocation of human resources, and a massive waste of energy... civilization is not efficient when the money we use is broken. This system destroys the middle class, it destroys people earning wages and living paycheck to paycheck, and enriches people who own assets.

Another stupid argument people use for 2% inflation: "if the currency does not devalue with time people won't spend it", when was the last time you bought bread, paid electricity, or purchased clothes just because "the currency loses value"? Here's my opinion: if the currency has a max supply, it will not stop me from spending it on the things I need, or the things I really like... and that's the thing, a stronger form of money (like bitcoin, max supply 21M) will make me buy things that I really want or need, which in turn makes the goods and services providers offer better quality overall, no one will want cheap quality stuff for a currency that keeps them safe.

Again: money is energy, if your ship degrades by 2% or 7% every year, you have a big problem, you will have to allocate some of the crew to maintain the ship or else you won't make it past the Atlantic. A closed system is what is needed, where energy is conserved, all engineers know this. The funny thing is that I have a background in economics and business, where people taught me that inflation should be 2%. If these people support capitalism, they should remember that the money we use should be chosen by the free market, and the free market always chooses the money that conserves energy, just like you chose seashells and not paper. Modern economists (Keynesian economists) who support the free market totally forgot the part where the currency is determined by laws and soldiers, and not by a free market.

And this is why I am pro Bitcoin. Bitcoin is digital energy, since the network is backed by miners using energy to secure the network. It is fully decentralized, no one can change its monetary policy, no one can censor it, no one can inflate its supply, no centralized party can control it (all other cryptos are controlled by individuals)... it is the safest form of money that ever existed. History tells us that when humans have control over money, they corrupt it.

Every extra unit of currency that is allocated to real estate or equities is a misallocation of capital. This misallocation of capital is wasted energy that could be used for innovations that would make us prosper, in manufacturing, software, etc... Having a hard capped currency would also slow the time down to all of us, letting our minds focus on better things, and not be worried about what's our next investment (for the rich), and from where the next paycheck is coming (for the poor). Most of my generation will not be able to own a house before the age of 30, and they will all use debt to do it (mortgages), this is not normal.

It's important to remember that all currency used today is debt, the money in your bank account comes from someone else owing that money to a bank, which owes it to a central bank... all of it, literally. All currency is credit.

If we use a hard capped currency, real estate will be priced based on utility value, and will be affordable to most, not just the 1%. There is a massive premium on top of real estate's utility value, we're all using it to store wealth, and it's wrong. Same thing for equities, all P/E ratios indicate that all stocks are massively overvalued, but the market doesn't crash, why? because it's used as shelter against the currency, no one wants money that inflates by 10% every year. And yes, the inflation rate was 10% before covid, not 2%, just look at the returns on the S&P 500.. this is not the American economy growing, this is their currency getting destroyed. Post covid, it's 20%. Fix the money, and everything will stabilize, Bitcoin fixes all of this.

To be continued, I'm not done...