← The Bitcoin Standard Podcast
Loading summary
Transcript1 lines
- [00:00]
A
Foreign. Principles of Economics. My complete guide to understanding Economics is now available in hardcover, audiobook and ebook from seifeddin.com, amazon and many more booksellers worldwide. And now I am also teaching a course based on this book on my website, seyfeddin.com Principles of Economics will run the whole academic year from September to June and will have a new lecture every two weeks, as well as weekly live online discussion seminars open to learners from all over the world and from all walks of life. Whether you're a student, a professional, or a retiree, you are making economic decisions every day. And this course will arm you with the wisdom of centuries of economists to improve your economic decision making. You'll also get a free book of Principles of Economics. If you sign up for the course, go to seifedin.com and sign up now. Hello. Welcome to Lecture 15 of Principles of Economics. Today's lecture's topic is on monetary expansion. So this is the last lecture in the section of the book that focuses on money. It's the last lecture that is specifically focused on the topics of money, finance and banking. In the previous lecture, in lecture 14, we discussed commodity credit, or essentially how things Go Right, how banking and finance and investment work in a world in which all of the savings, all of the investments are backed with savings, in which people are foregoing consumption. In this chapter, we're going to look at what happens when we try to effectively defy the laws of thermodynamics and defy the laws of economics by trying to create capital without having to sacrifice consumption. Luther Vomnesus says in his book Theory of Money and Credit, it's a great book. It was written in 1912, so it's about 112 years old now, but it's still very readable and I highly recommend reading it. And in the introduction to the book, he says he has one sentence and he says he could summarize the conclusion of this book, that the expansion of credit cannot form a substitute for capital. I think this is really the most important idea to get from this chapter. And what this chapter does is try and understand, all right, well, what happens if we do substitute capital with expansion of credit? Is it going to be harmless? Is it going to just make no difference? Is it going to cause the same things that would have happened if we had just had capital? Well, obviously not. Obviously it's going to be different or else, you know, we'd have endless capital available for us just by expanding credit. So what then is the outcome of trying to substitute capital with expansion of credit. We're going to look into that in this chapter. So as I said, the previous chapter looked at commodity credit. This chapter looks at circulation credit. What is circulation credit? Circulation credit is the Mises term for what happens when lending institutions create money to lend or when there is no correspondent sacrifice by consumers. There is no correspondent sacrifice of consumption by savers. In other words, savers will not have to forego consumption in order to make savings available in order to provide the capital for the investors. The banks will just provide that capital without the saving having taken place. So some examples of how this can be done. 1. Fractional Reserve Banking. In this situation, depositors money is available on demand, while it is also loaned out to the borrower. This is a common thing. All world's banks today function like this. There are no full reserve banks. As far as I can tell. Central banks don't license them. And the way that it works is that when you deposit money in the bank, your money is available for you, so you can spend it anytime, but that money is also being lent out to a borrower. And so the borrower has the money that you are able to get out of the bank. And you might wonder, well, what happens if I go and ask for the money that the borrower has? And the answer is the bank will use other people's money to give them to you. Well, what happens if too many people come and ask for that money? Well, in that situation, the bank has a problem, and that was the situation throughout the history of fractional reserve banking, that banks would constantly have these failures when people start demanding, taking their money out and the bank doesn't have the money. And then the solution to that, of course, was the creation of the central banks which have effectively externalized that problem from the bank and its customers to everybody who uses the currency, because they bail out the bank by destroying the currency and destroying the value of the currency. The second way this can be done is through maturity mismatching, which is a term that refers to a practice that's similar to fractional reserve banking, but it is done across times, time scales. So the maturity of a loan refers to the point at which the loan has to be repaid. And when banks engage in maturity mismatching, we discussed this in the previous chapter as well. What they're doing is that they're lending out money that they have for a certain duration. They're lending it out to somebody who's borrowing it for a longer duration. So the bank has a savings deposit from you for let's say $1,000, and they need to give you back that money in a year. $1,000 in a year, they need to pay you back. Then they go and take that $1,000 and they lend it to somebody for five years. In that case, they're doing maturity mismatching. The maturity of the loan is different from the maturity of the deposit. And therefore they are essentially assuming that they are going to have that money for the next four years. They're going to be able to secure $1,000 from some somebody over the next four years. And that's why they make that loan. But in this situation, they are effectively making new money because they don't have that money. They've granted the loan for five years even though they don't have the money to be giving that loan out for the last four of those five years. But this is a very common practice. And again, this can create problems because when the bank needs to roll over its debt, it might not find somebody who can give it the $1,000 it needs in order to keep your loan going. So they have a problem. They need to pay back the depositor. And the borrower doesn't need to pay back the money to pay back the depositor. So they need to find somebody else to bring in the money, which can fail. And if that fails, then again they require a bailout. And that's why we have central banks, so that banks can do this kind of insane shenanigan, these insane shenanigans, and not face the consequences and so that everybody else faces the consequences. So they get the upside, which is they print money for free. And then when it blows up, you get to pay for it because your currency gets destroyed. So it's a sweet deal. Do get born to a banking family next time you're alive. If you do have a choice in it definitely beats being born to one of us plebs. And then the third way in which they do something like this is what is called rehypothecation, which is what happens when collateral for a loan is used for several loans. And so the collateral is. Sometimes what happens with the loan is you offer collateral to the lender and the collateral and the lender can keep the collateral, or you could keep the collateral stuff, but an object is considered the collateral. So your business or your car or your house would be collateral. And so you made new loans based on that money being collateralized or, sorry, that asset being collateralized. But then you could go and pledge it for several collateral for several loans, in which case you're Also generating new circulation credits. You're creating new money out of thin air and you're lending out money that you don't have and counting on the fact that you'll be able to roll this over a tiny some point. Each of these ways generates what we call fiduciary media. And these are notes and bank balances that are redeemable for money, but do not have an equivalent amount of money available on demand for redemption. So the people that issue fiduciary media are able to use these similar to money because they are redeemable for money, but the banks that issue them don't have enough money to redeem them all. So this is effectively the money that was created when the bank made the loan without having enough deposits. Why does this kind of insanity work for banking? Because money is unique as a good. And remember we discussed this in chapter 10. Money is not something that is bought to be consumed. You can't consume money and you can't invest it in capital production. You can't produce things out of money. You can't get a piece of paper to produce things on its own. You can't get a gold bar to produce things on its own. You can't get a bitcoin to make things. So it's not a capital good. It's also not a consumer good because you don't consume it. It's an exchange good. It's a good that is only used for exchange. You exchange it with others, you give it to others and they switch it around among themselves and that's it. So what happens to the good itself is different from what happens with other goods. As we discussed in chapter 10. This is why the quantity of money doesn't matter. The quantity of money is immaterial because what matters is your it's purchasing power. So it doesn't matter if you're spending $1 or 5 yen or 300 Venezuelan dollars. All of these are just numbers. The actual quantity, it doesn't matter. What matters is the purchasing power. So in a world in which say $1 and 100 yens and 100,000 Lebanese liras are roughly equal in, let's say this is the exchange rate currently, then does anybody have a preference for Lebanese liras over dollars? Because 100,000 Lebanese liras equal to $1, so you get more liras. No. And what matters is that you can exchange them. And what matters is that you can exchange it for other things. So if something is for sale for $1 or 100,000 Lebanese liras, it doesn't Matter, the quantity of the money is immaterial itself. What matters is that you are able to exchange it. And so you're indifferent between quantities, because what matters is the purchasing power. Another consequence of this is that a claim on money can perform the function of money almost indistinguishably from how money performs it. So you're not consuming the money itself and you're not using it for production. You're just using it as a medium of exchange. You're exchanging it with other people. So if you used it instead, if instead of using it as a medium of exchange, you made it, you had a claim for it, and you use that claim as a medium of exchange, that claim is all going to function like the medium of exchange. So you can just trade the claim on the good, which is not the case for any other good, because other goods, they are consumed for their own purpose. So you can't eat a ticket for a steak. A piece of paper that allows you to buy a burger is not edible like the burger. You can't just treat it exactly like the burger. You have to redeem it for the burger in order to get the burger and be able to eat it. A receipt for a sewing machine can't sue things. You need to go and trade the receipt for the machine and then have the machine build and sue the things that you want to do. An airplane ticket on its own can't fly. You have to redeem it with an actual ride on the airplane. You have to go to the airplane itself and get in there. But with money, a receipt for money can function as a medium exchange, just like money can, almost just like. But there are differences, of course. So because of this, it becomes easy to use money substitutes instead of money. We can have this being done regularly and this is what we see. We can just use the receipt for money, similar to how we use the money itself. So this fact that a receipt for money can be used as well as money has enormous implications. And it is really from the beginning, from the analysis of this point, that the Austrian understanding of the business cycle comes from. And it's, it's, it's, it's, it's an important point to understand. And I think in Mises book, the Theory of Money and Credit, he does a great job of laying out a typology of what money is and how money works in order to explain this and clarify it. And in this typology he makes a distinction between the claims and the goods. And so claims are not goods, they are means of obtaining disposal over goods. And that helps us understand that there is two differences, two different types of money. There's money in the narrower sense, which is a good in its own right. On the other hand, there are money substitutes, which are claims and legal titles to money in the narrower sense. So it's important to understand the difference between money and a claim on money. And once we understand the claims on money and how they're different from money, then we need to analyze the difference between two different types of claims on money. And these are. Or two different types of money substitutes. And these are money certificates and fiduciary media. So there's this great chart in the Theory of Money and Credit, which was later improved by Jorg Guido Hultzman, who did a translation, an improvement of the translation. So this chart was actually added by the person who translated Mises book into English. But Holtzman says that it was slightly inaccurate, so he fixes it. And then Michael Connaught, who's a great Austrian learner and reader I've had on my podcast before, his Twitter name is Konza C O N Z A and he has formulated this. He has added to this chart Bitcoin. So I took this chart from him, and I think it is a very useful way of understanding money today because it includes Bitcoin, which is useful. So let's look at figure 31. There's money in the broader sense, and money in the broader sense is the term that people use for money. But that can include two different kinds of things. There's money in the narrower sense, which is the money itself. And then there are the money substitutes, things that are legal titles for money that can be redeemed for money. Now, money in the narrower sense, there are three kinds of money. There is commodity money, there is credit money, and there's fiat money. So what is commodity money? Commodity money is a general medium exchange that is also an economic good that is exchangeable with goods of the same type. In other words, one gold ounce is identical to another gold ounce. It's not like seashells, where each seashell is unique in its size and weight and color and so on. Money, the commodity money, is a pungent good. All copper coins are exchangeable for copper coins. It's all copper, it's all silver, or it's all gold. All of these different commodity monies, they're commodities because they are fungible with one another. It's not a unique artwork. It's not a unique seashell. It's just a fungible material that can be cut up into small pieces or combined into large. Now for a quick word from our sponsors. With Fiat Money constantly debasing, preserving your wealth isn't an option or luxury, it's a financial and moral imperative. If you're familiar with my work, you know the only financial advice I ever give is to buy and hold Bitcoin for the long term. This has never failed anyone. If you want to buy Bitcoin, I strongly recommend using Swan, a group of hardcore bitcoiners laser focus focused on making Bitcoin easily accessible. While most scramble to react to each new crisis, Swan Private clients are already positioned in the only monetary asset with absolute scarcity, Bitcoin. Swan Private partners with families and institutions who share a principled conviction in Bitcoin as the foundation for multi generational wealth. With concierge service, deep expertise and uncompromising security, the Swan team helps clients exit the crumbling fiat system and secure their future in sound money. Today, Swan Private serves more than 5,000 high net worth clients who have purchased more than $4.5 billion of Bitcoin and put it into cold storage. If you're ready to move beyond the false promises of fiat, start your long term bitcoin strategy@swan.com safe but now finally Daylight have delivered a a fantastic full function tablet with a paper like screen that's easy on your eyes and great for outdoor use. I've been using the Daylight computer to write my next book and it is absolutely fantastic and it has led me to invest in this company myself. Check out my interview with Anjan katta in episode 249. The Bitcoin standard podcast is brought to you by Coinkite. Coinkite are my favorite makers of Bitcoin hardware. They produce the legendary opendime, the first Bitcoin bearer asset, as well as the reliable cold card hardware wallet, the excellent stainless steel seed plates for storing your seed phrases, and the block pieces. It is sold on an open market. That's what makes a commodity. It's sold on an open market with many producers and consumers. Anyone can make a commodity by digging into the ground and finding it and processing it and producing it. And it's sold on an open market with producers and consumers. And there are many historical examples of commodity monies which I discuss in detail in the Bitcoin Standard if you're interested. But the most common and the most successful form of commodity money are precious metals. More recently we have a new form of commodity money which is Bitcoin. I would qu qualify Bitcoin as a commodity money. I agree with Konza on this because it is just another commodity. It fits the definition of commodity. One Bitcoin is one bitcoin. All the bitcoin are interchangeable with one another, and the market for bitcoin is open. Anyone can produce bitcoin. Anyone can sell bitcoin. That's what makes them not. That's what makes a commodity. That's why gold is a commodity. But Toyota cars are not a commodity. Not anyone can produce a Toyota car. It's a highly specific thing. It's not exactly fungible. There are millions of different ways in which these things can be made to vary among one another. So that's what we mean by commodity money. Now, then there is credit money. Credit money is a future financial claim on an entity that is used as a medium of exchange. What distinguishes credit money from credit is that the recipient accepts it with the intent of passing it on to another recipient, not because they want to collect the financial claim. So if you're using a credit instrument, if you're using a piece of paper that says, this person owes me a certain amount of money, this person owes me $100, say, next year. If you go and you use this as money, if you use it to pay for somebody, to pay somebody for something, and you. And that person then takes it and then doesn't accept it because they plan on collecting the 100 that are owed, but because they're going to sell it themselves, then that person is using that form of credit as credit money. It is a form. They're accepting it because they want to pass it on to another recipient, not because they want to collect the financial claim. And then thirdly, there is fiat money. And fiat money is a medium of exchange accepted because of the legal decree of an authority. And as Mises puts it, the deciding factor is the stamp. And it is not the material bearing the stamp that constitutes the money, but the stamp itself. So anytime that you're using form of money, where the commodity from which the money is made has a different value from the market value of the money itself, because the money has a stamp from a figure of authority from government, then you're dealing with fiat money. And fiat money itself can take several forms. It can be in the form of paper money, it can be in the form of bank deposits, or it can be in the form of token coins. And by token coins, we mean coins whose value is decreed by dictate. So, for instance, a quarter dollar is fixed at quarter dollar. A quarter is not worth a quarter because that's the amount of metal that's the market value of the metal that's inside it. It's worth a quarter because the government says it's a quarter of a dollar. A cent is worth a cent because the government says it's worth a cent, not because the copper that makes it up is worth a cent. So if you melt down a cent, actually you will likely have more copper. You'll get copper that's worth more than a cent from melting down of the cent. But because it's fiat, it doesn't matter what the value, what the underlying value is. That's the distinction between fiat money and commodity money. So a copper coin that's being sold as copper that's being treated, that's being valued as copper is commodity money. A copper, a copper coin that's being stamped with a cent, with a value that says cent and $0.01. And that $0.01 valuation is happening irrespective of the market valuation of copper. That is a fiat token coin. Now, what are money substitutes in the second half of this tree? Money substitutes are physical or financial instruments that are legal titles to money in the narrow sense. So money substitutes are papers that allow you to redeem that can be redeemed for money in the narrower sense, the other half of the table. So money substitutes can be redeemed for money on demand and are used as a medium of exchange in transactions. And money substitutes come in two forms. There's money certificates and fiduciary media. Understanding the distinction between the two is enormously, enormously important. A money certificate is a financial instrument or piece of paper redeemable in full for money on demand. The value is 100% covered by the issuing authority. So examples include a dollar bill redeemable in gold under a strict gold standard, or a bank account based on gold backed dollars. You've got a bank account, so you have a piece of paper that says, I am owed this amount of money by the bank. They give you a statement and it says, this is how much gold you have in our gold bank. And you can go and you can redeem that gold in full at any point in time, because they have all that gold sitting there waiting for you because you have a money certificate. So all that they're doing is saving you from the hassle of having to carry the gold coin around by having the gold coin placed in a safe deposit at the bank. And then you get to carry the piece of paper around as long as they have the exact quantity of gold as the quantity that is listed on your money certificate, then this is a money certificate if they start issuing more money certificates than they have gold on hand, they've moved to the second part, which is fiduciary media. So another example for money certificates, receipts for bitcoin held by a financial institution are an example. So if you're using, say if you, if you're using a receipt for bitcoin from a financial institution like say Coinbase or Kraken or Bitfinex, they could start issuing pieces of paper that are money certificates or digital pieces of paper that are not digital pieces of paper, but digital certificates that are redeemable for gold. That if you take this piece of paper and send it to Coinbase, they'll give you, sorry, redeemable in bitcoin. Then if you start using that piece of paper as money, then you're using a 100% bitcoin backed money certificate. But there is one new and unique kind of money certificate which is kind of a technological breakthrough for bitcoin, which is bitcoin on the Lightning Network because it's not exactly like bitcoin on chain, because it is not exactly on chain. Bitcoin, if your money is tined up on light, in Lightning, in the Lightning Channel, you can't use it on chain as long as it is on the channel. So it's not exactly money. It is a money certificate. However, what is really interesting about it is that its redemption is not dependent on a third party. So you're putting the bitcoins on the Lightning Network and you're making these bitcoins available for the trades that you are conducting. But if you want to take it out, you don't have to call the bank and ask them to release your bitcoins. You can close the channel anytime you want. It's your channel. You are able to close it and open it at any point. And that is, I believe, unique because we don't have any other kind of trustless money certificate other than the Lightning Network. So it allows, just like the paper money certificates allow gold money to travel faster, Lightning money certificates allow bitcoin to travel faster. So other examples of money certificates, of course are 100% bank deposits. So if you've got a paper from a bank that says you have a certain amount of gold and they have all of that gold on hand, then that's a money certificate. 100 notes, notes that are redeemable for money and 100 token coins, token coins that are redeemable for money. I don't know of examples of 100 token coins. So this would be a situation where you have A say a copper coin or a nickel coin that says $100 and then you can go and redeem it for a hundred dollars or it says one ounce of gold and then you can take this coin and redeem it for an ounce of gold so you don't have to carry the gold around. It's like a paper receipt for gold, but it's a metal paper receipt, which I've never seen. I don't have any examples of it. And if anybody has heard one, please do let me know about it. So that's for money certificates. And then the second one is fiduciary media. What are fiduciary media? They are money substitutes that are not backed by gold by money holdings. So when a financial institution issues money substitutes but does not have the money to redeem all these substitutes, the difference is fiduciary media. So the amount that they can redeem is money certificates. The amount that they cannot redeem team is fiduciary media. This is a key term in Mises explanation of the business cycle as it is precisely the creation of these media that sets in motion the boom bus cycle. In the digital realm, these would be the equivalent. Now for a quick word from our sponsors. The Bitcoin Standard podcast is brought to you by the safehouse.com my independent publisher and bookshop selling the best bitcoin books and high quality cloth hardcovers built to last for generations. Most books these days are pretty fiat, they're flimsy and they fall apart quickly and I did not want that for my books. So I set up the Safe House especially to provide you with beautiful long lasting classic cloth hardcovers you can proudly pass down for generations. You can get copies of my three books, the Bitcoin Standard, the Fiat Standard and Principles of Economics. And you can also get copies of Lyn Alden's Broken Money, Parker Lewis Gradually Then Suddenly and Matthew Lisiak's Voice, Fiat Food, to which I contributed a few chapters. We now offer bulk discounts so you can buy books for yourself and for the friends and family you'd like to learn about bitcoin. Buy any two books for $50, any five books or more for $20 per book. And for more than 50 books it's only $15 per book. Go to the safehouse.com thesai fhouse.com where you can get all of these books in high quality cloth hardcovers delivered worldwide and get 10% off for paying with bitcoin. This podcast is also brought to you by the Bitcoin Way, your professional Bitcoin IT team offering you personalized, secure and comprehensive solutions for every step along your bitcoin journey. The Bitcoin Way offer live concierge service to guide you with your Bitcoin cold storage, running your node, privacy best practices, inheritance planning, corporate strategy, and multisig solutions. They don't touch your coins. They guide you through the process of acquiring your coins and securing them. If you'd like to make your setup safer and more reliable, book a consult with them and see what they have to suggest. If you want to give someone the gift of bitcoin, get them this professional service that will ensure they start off knowing exactly how to manage their coins and not lose them. Go to thebitcoinway.com and start bitcoining more confidently. Foreign bitcoin denominated credit issued without equivalent bitcoin backing. So ftx, for instance, they went bankrupt because they had, they were effectively issuing fiduciary media. They were giving people accounts on their app on their platform that entitled you, that said you have this much bitcoin and then you could send that bitcoin from their account to somebody else's account on their platform or somebody outside their platform, and you could use it as money. But if, if a bitcoin exchange had 100% bitcoin backing, all of their claims of bitcoin that they gave to their customers, that would be an exchange that determines dealing only with money certificates. In the case of ftx, they were issuing fiduciary media. And we saw how well that worked out. Obviously it came crashing down and I think we'd see a lot more crises and a lot more crashes in the regular financial system if it wasn't for the fact that central banks can bail out banks by simply printing money. And so we don't have somebody that can do that with Bitcoin. And that's why when they try these shenanigans with bitcoin, they end up destroying the lives of millions of people. So it's important here to understand that money's function is orthogonal to its physical form. And this was a revolutionary thing. It might sound a little bit obvious now. Well, it's not very obvious, but it was definitely very, a lot more revolutionary when Mises came up with this idea, which is, look, it doesn't matter what the physical form the money takes. What matters is whether it is real market money, free market money, or whether it is a 100% backed claim on that money. So bank deposits, for instance, they can be money certificates. They can also be fiduciary Media, or they can be fiat money. So if the government calls a bank and says, we need you to create an account of $1 million for this person, and then the bank just creates that one million dollar out of nowhere, that's a bank account, that's fiat money. If a bank account issues fiduciary media, so credits, I mean paper that is redeemable for money without full backing of money, then that bank account is fiduciary media. And if that bank issues money certificates that are fully backed by money, then that bank account is a money certificate. So the same thing, the bank account itself can be money certificate, it can be fiduciary media, it can be fiat money. Same is true for paper money. You can make paper money that is a money certificate that's redeemable and that is backed 100%. You can make paper money that is fiduciary media that is not backed, or you can make fiat money, wherein the government just issues money, prints paper, and says, this is the value of this piece of paper. So this, I think, was an enormous, enormous analytical step forward for economics, because before that, people were a little too fixated on these physical manifestations of what money is. And so for many people, the distinction was between gold and paper, which is not true because some paper is as good as gold as long as it's redeemable for gold. If you can just go to the bank and reduce, redeem it for gold, then it is as good as gold as long as, of course, the bank has as much money as it does. So the problem is not money certificates if they're paper, the problem is not paper. The problem is not bank accounts. The problem is not solved by just simply getting rid of these physical manifestations of the problem. The problem is when new money is being created by the banks independently of the markets system. And that is what creates all of those issues. And so by stepping away from the physical forms and explaining the difference between fiduciary media and money certificates, Mises could provide an explanation of business cycles grounded in human action, which is a huge deal. So the primary distinction again, is not the physical issue. It's not about them being metals or coins. The primary distinction is that fiduciary media increase the supply of money, while money certificates do not. And this is the important point. So if we look at the chart at Figure 31, we see the distinction between money certificates and fiduciary media is that money certificates do not increase the supply of money. You can't use the money certificate and the gold as Money. The money certificate is only used as money if the gold is locked up at the bank that issued the money certificate. So therefore, you're out there spending the money certificate, but the gold is locked up in the bank. If you redeem the money certificate, you get the gold, you can circulate the gold. But then the money certificate is not circulating. So one of the two has to be there. Therefore, the creation of money certificates does not increase the money supply, but the creation of fiduciary media does increase the money supply. So governments used to mix base metals into their precious metal coins in order to fund their operations. So what Roman emperors would do is they would say, there are some bad coins on the market. We need to make sure that the quality of all coins is good. So they confiscate everybody's coins and they tell you, we're gonna check them and we're gonna mint new coins out of them and next week and take your coin. So everybody gives them their coin and they wait a week and then they go in a week and they get those new shiny coins that have been melted and cast. And you look at them and they look all new and shiny because they're new. But what the government would have done, what the king or the emperor would have done at this point, is that he would have taken, we would have added a little bit of base metal into the mix. So instead of the coin being, say 99 gold or 95 gold, he adds, say 10% of a mix of copper and nickel, and now you're left with 85% gold and 15% copper nickel. So what have you done? If you've gone from, let's say, just for simplification, let's say we've gone from 100 gold to 90% gold, what happens to the quantity of coins that you can make? If you'd collected a million gold coins and you moved and you melted them down and mixed in some cheap nickel or copper, and you're going to make the coins now with 90% gold content rather than 100%. Well, now you can make a free 10% extra coins, or 11 extra coins, to be precise. So you can make 10, 11 extra coins by simply adding the copper and nickel. So what is going to happen to the market valuation of the coins? The market valuation of the coins is going to decline, and it is eventually going to correspond to the precious metal content. In other words, the things that you could buy for one coin that was 100% gold are now going to be bought for the same amount of gold. But that's going to take 1.1 coins because the coin has had 10 of its coin taken out. So you need to add 10% of another coin. So now you need 1.1 or 1.11 gold coins to buy the thing that you could buy for one coin. Previously, this is how inflation used to work back in the day, but now modern technology has allowed this process to become a lot more efficient. And modern education, modern economics education in particular, has allowed this process to succeed in convincing people that it is more respectable than just blatant theft, when it really is blatant theft theft. What governments do today is they do something very similar by effectively forcing the use of unredeemable money certificates. When you read suspend the redeemability of a money certificate, what happens? The money certificates become fiduciary media, which increases the overall supply of money money. And so as long as the banks are only making money certificates, then there is no inflation of the money supply. But if the banks start making more money certificates without the backing, then they're not making money certificates anymore, they're making fiduciary media. If governments force you to accept these fiduciary media that are being issued by the banks, then they are able to, along with the banks, increase the money supply. And that's the true cause of the business cycle. This is why the business cycle comes along. And mainstream economists, of course, have no coherent explanation what causes business cycles. In fact, they take pride in not thinking about it. And success in modern fiat academia is primarily a function of fealty to central banks, not coherence. You don't need to make sense, your models and papers don't need to help anybody understand the world. In order for them to help you succeed, to succeed in your career, you need to just tell the story that the central bank wants to hear. And they don't want to hear about all the problems that they cause. They want to hear about why they are good and why they are helping the world get much better. So, unburdened by having to tow the central bankers line to secure funding, Austrians are able to offer more than the dubious Keynesian recommendations. Exiting the depression. They can offer an explanation for how to avoid a depression in the first place. Keynesians, I mean Paul Krugman himself, in a book, in his introduction for Keynes's General Theory, he says the genius of Keynes was the fact, and I quote this in the book, the genius of Keynes was in the fact that he didn't spend any time trying to think about the causes of the depression. What matters is that he thought about solving it, which I believe is ridiculous, because you can't figure out how to solve something if you don't know what is the cause of it. But that's what Austrians do, and that's not what Keynesians do. Keynesians don't think about causes and consequences, they just think about feels. They go by vibes. People can't spend money, clearly just print money and hand it to people, then everything gets better. Don't think about why people can't spend money in the first place. Don't think about why we're in a crisis in the first place. Don't think about why there was a financial catastrophe in the first place. Because. And the reason here is very obvious, if you did think about it, you're going to realize that what you're doing is the thing that is exacerbating this problem. And that the best thing for you to do if you really care about those people, is for you to stop doing what you're doing. But nobody wants to be told that they are the problem. So the Austrian theory of the business cycles builds on the Austrian theories of time preference and the Austrian theories of of money. The basic premise is that resources cannot be conjured by creating more unbacked claims. There is no free lunch. There's always a cost. And if you don't, and if you think there is a free lunch, then you simply just don't understand how you're paying for that lunch. The essence of the story of the business cycle can be summarized in this paragraph from the book. Governments and banks attempting to pass off unbacked claims for economic resources as equivalent to the resources or backed claims to them results in an increase in the supply of money, manifesting as an increased amount of financial capital in the hands of entrepreneurs. The increased financial capital causes entrepreneurs to engage in investments for which they do not have sufficient resources. Something which only becomes apparent after they begin spending their financial capital cost, causing an unanticipated rise in the price of their input goods, preventing them from completing the projects. This is. If I were to give a one paragraph summary for the business cycle, this is it. You make more money and you hand it out to entrepreneurs. This is the cause of the cycle and it's. It's important to understand here that the cause of the business cycle is in the creation of credit money. In particular, if you just printed money and you hand it out for people to consume, you don't create the Austrian business cycle, you create inflation, you create price rises. So you've inflated the money supply and that results in the prices rising. If you just handed out paper money to people, people are going to spend them on consumption. But if you create credit, unbacked credit, if you create fiduciary media, who's going to get the fiduciary media? It's going to be entrepreneurs. And they're going to use them for producing things. They're going to use them in the production process and that's going to result in the rise in the prices of the input goods during the production process. And that's going to surprise entrepreneurs and that's going to destroy their business plans and it's going to render their economic calculation wrong. And this is what it comes down to. When the value of the money is changing because of the expansion of credit to entrepreneurs. It initially feels like a boon for entrepreneurs because look, everybody's getting funded. But then when the entrepreneurs go and try and spend that extra money, you realize why everyone wasn't getting funded. Everyone wasn't getting funded because there wasn't enough resources for everyone. Now we've just printed out a bunch of papers. That does not mean that we've created resources for everyone. It just means that the same resources are going to be misallocated now because we don't really know how to allocate them properly because we are witnessing a bidding war where the prices are rising. So if you happen to buy your resources early, then you might be able to get all the resources you want because you are. If you're the first to buy with the new money, then the prices of the things haven't gone up. But the people who come in later will not be able to afford the resources they need. More likely that's going to be the case for most people and that's going to result in in large number of business failures. Instead of these investments succeeding and increasing productivity, they are going to cause business failures and cause a recession. So in an economy with only commodity credit, interest rates are determined by individuals preference for borrowing and lending. All loans require someone to forego consumption and lend. In this world, opportunity cost is real. If you're going to create credit, if you're going to give somebody credit in order to invest, that's going to require somebody to forego consumption. In that world, when the resources are, when the financial capital is given to the entrepreneur, it corresponds directly to physical capital to input goods that they can buy. But when you sever that link by increasing the money supply through the issuance of fiduciary media, then the financial capital does not correspond to physical capital. And so if you don't consume corn, you can use it as a seed. You've turned it from a consumer good to a capital good. But if you consume the corn, you can't use it for a seed. Even if somebody issues you a piece of paper that says this piece of paper entitles the holder for corn, because you can use that piece of paper as a medium of exchange, but you can't use it as capital. And herein lies the problem. So if it was just printing fiat money, as we said, prices would go up. But if you're increasing fiduciary media, then you are giving people giving entrepreneurs the impression that they have a lot more capital than they actually do, and that's going to cause them to make economic calculation mistakes. And so without the sacrifice, then you are going to have a bad time. So if you don't consume corn, you can use it as seed. If you consume corn, you can't use it as a seed. To use a more sophisticated example from a modern economy, if you don't go on a vacation, the resort that you were going to go to now has less money to hire the marginal worker. You save that money in the bank and the savings. Now, because you're saving your money in the bank, the savings become available for a factory that's going to borrow and use that money to hire that marginal worker that the vacation resort didn't take. I guess this is really the point that I'm trying to make here, and I believe it's incredible that Keynesian economics have managed to pull the wool over people's eyes to not see this. If you don't create money, if we're only using commodity credit, then your spending is what determines where the capital goes. If you decide that you're going to spend your money on a vacation resort or on a consumer good, or go and say to a restaurant, you're giving more money to the restaurant, you're giving more money to the resort, you're telling that resort and that restaurant take that money and hire more people because you're getting more customers, you need more people to serve us, and so you give the money for them to go and hire somebody. If we live in a function, if we live in a world in which nobody can create circulation credit, then the money going to the resort must come at the expense of money not being saved in the bank and not being given to the marginal factory that's going to invest it. But if we live in a world of circulation credit, then we live in the Delusion that we don't have to choose between the two. You can go to the vacation and the bank can issue credit to finance the factory. And so the factory is going to have money and the resort is going to have money, but then the two of them are going to fight over the marginal worker. And where is that worker going to go? Well, there's only one worker in this situation. Obviously, to oversimplify, there are more workers in the economy. But just to simplify, if there's a fixed amount of capital or labor that those two businesses are fighting over, you know, the consumer good versus the capital good, the production of vacations versus the production of cars or machines, that fight over the capital is going to be carried out through a bidding war. And so the resort is going to offer the worker a wage and then the factory is going to operate, offer the worker a wage. And the result is that the wage of the worker is going to go up. And the result is of course, that the wages are all wages are going to go up and all prices are going to go up because we've increased the money supply. So you haven't really solved the problem of scarcity by printing new credit. All that you've done is you've misallocated capital. And so as long as we are on commodity credit, consumption decisions reflect real individual preferences for real world resources. If we go on a circulation credit system, then we sever that link between real financial, between real resources and financial resources, between actual physical capital goods and financial capital. And therefore you distort those markets. And the result is people perform economic calculation mistakenly based on prices that are going to be shifting. And therefore their business plans do not succeed. And so you get a large number of failures in the same line of business at the same time in the same industry. And that is what creates these problems. So if you lend circulation credit, fiduciary media increase the supply of money, the bank issues credit to the farmer to buy the seed coin that's already been eaten. In the simplified example of the seed corn, this is a situation where the farm has already eaten the seed or the entire city has already eaten all of the corns that we have. And the bank just says, don't worry about it, we'll make you a loan so you can go and buy more corn. But if you've made a loan, if you've issued fiduciary media and there's no corn out there, you can't manifest corn by issuing credit for corn doesn't work that way. So you cannot get over the loss of the capital that you consumed. But somehow this stops being obvious when you move to the level of abstraction of financial capital. If you tell people, look, it's just corn. You can't make more corn. You can't grow corn. If you eat all the corn, they get it. But it's the same thing with a very sophisticated economy. It's a lot more complicated and there are a lot more steps along the way. But that's what it ultimately comes down to. There's seed corn that's being eaten. And if you spend your money at the resort, that means your money is not available for the factory. That means that the worker that the factory needs has been hired by the resort, means the plot of land that the factory would have wanted to buy has been purchased by the resort. You can't go and manifest new workers, you can't manifest new plot of land. These are scarce economic resources. And of course you can get more workers in the real world. But what ends up happening if you create more money is that you're raising the price of the workers. And so when you're raising the price of the workers, then you are unable to complete the business plan according to your calculations because your calculations relied on measuring the cost of the worker according to the previous prices. So when the money is first issued, it's hard to tell that it is going to be a problem, because what you know, most people are educated to believe that creating more money doesn't create problems. So they just think, well, new money's been created and that's going to make the world a better place. Only the Austrians can see the problem here. That's why they get called names, because people don't like to be told they're being delusional idiots. And instead of getting angry at themselves and trying to improve themselves and stop being delusional idiots, they get angry at the people that are telling them they're delusional idiots. But once entrepreneurs start buying their input goods, the prices of these input goods will rise, which means that they can't afford all the inputs they need to complete their project. So the seed corn price rising makes farming no longer profitable. The wages of the workers make the factory no longer profitable, because all these entrepreneurs are bidding with all their new credit money for these workers, and the workers are no longer affordable. So the resort has the customer's money and the car factory has the equivalent credit from the bank. And therefore in that situation, both will bid for the workers and land raising prices, the wages of workers and land prices rising means the resort can no longer sustain its demand. Entrepreneurs plans are ruined because their economic calculation is distorted. What was profitable before monetary expansion stops being profitable. Initially you mailed, you made your economic calculations for your factory and for you. You thought, well, the workers earn $5 an hour, and I need a thousand workers a day to work 10 hours a day. So that's 10,000 hours of work a day times $5, $50,000 of wages, labor per day in order for my factory to function. And then the fiduciary media is printed. And now you can't just get the workers for $5 an hour, you need to pay $8 an hour and the wages have gone up significantly. So now your business requires $80,000 a day, day for wages. Now your business is no longer workable. The cost has gone up. Now you can't operate it profitably. Another way of looking at it is through the cost of interest rates. Imagine in a world of interest rate of 6%, if your business can offer a 4% return, then nobody will fund that business because the going interest rate is 6%. So you can go to most at the current 6% price, all the money that is being saved, all of the money that is being invested is going for projects that get 6% or more. Nobody's going to want to invest in something that gets 4% because it's not going to be profitable compared to the interest rate of 6%. And so these projects don't get financed. Now what happens with the creation of fiduciary media is there's now an increase in the money supply because of the creation of the fiduciary media. And so capital becomes more abundant. Basic supply and demand because of capital is more abundant. What happens to the price of capital? The price of capital drops down. So the creation of fiduciary media will drop the interest rate from 6% to 3% in this example. And now what has happened to your business? Now it's profitable. Now you can find people to lend you capital because capital has become so abundant that a 3% return is the cutoff. And now you make the cutoff so simply by printing money. And this is, you know, Keynesians talk about this as if it is some miracle. And they think Austrians are just incapable of understanding this supreme magic when it's just a scam, it's just theft. You're not making these people magically profitable. You've just ruined the mechanism for economic calculation that allows those entrepreneurs to determine whether they should undertake these businesses or not. So it's exactly as idiotic as thinking you can make your room warmer by taking a lighter and putting that lighter next to the thermometer and getting the thermometer reading to go up. So if we just make believe, make the thermometer believe that the temperature in the room is, say, 25 Celsius rather than 10 Celsius, then we've got to make the room warm. Right. If you just light up a tiny little bit of fire next to the thermometer, the thermometer is going to go from 10 Celsius to 25. Does that mean that the room has gone from 10 Celsius to 25? No, it does not. But it's a lot cheaper to just make the thermometer itself warm than to make the room warm. And that's exactly the moronic logic of Keynesian economics here. We can't make this business work because it's not profitable based on. On current calculations. Okay, well then that just ruin the thermometer, ruin the way in which we make those calculations, ruin the unit of calculation, which is money. If you devalue the money, if you increase the supply of money, then you make more money available. And if you perform the economic calculation when the money has been created but before the money has been spent by the entrepreneurs, then you are able to deceive yourself because you're in that sweet spot, spot where the new money is in your hands and the prices of your inputs haven't gone up yet. So now everything looks profitable. Now you look like you could be profitable because the interest rate is 3% because of all the extra money. And so the businesses with this 4% business will get funding. But of course, issuing the fiduciary did not make the capital more abundant. It's not going to make this business profitable. It's not going to work. It's only going to create a disaster. A good way to illustrate how this disaster work is to look at a graphical analysis based largely on the work of Hayek on the business cycle, which helps us understand how these things work. So three graphs that we're going to be using. The production possibilities frontier the market for loanable funds and the intertemporal structure, structure of production triangles. This is figure 32, which you find in the book, and it's based on the work of Roger Garrison, an Austrian economist, I think, at the University of Alabama, something like that. In any case, you see these three graphs. So the first one is the stages of production. Think of this triangle as the process of production. Capital production is, is a process that makes this triangle Longer and longer, the more capital intensive the production is, the more stages there are to the production process, the longer this triangle, the more extended this triangle is. So when you decide to invest in building capital goods, you are effectively elongating this triangle. So if you think about the production process for just catching fish, it would be like one tiny little bit of the first part of the triangle where you go to the beach and you catch fish with your hands. And that's the first, that's the process of catching fish. Now if you, instead of just catching fish with your hand, if instead you go and you build a fishing rod and then catch fish, you've made the process of production longer. But why would you do this? Going back to the chapter on capital, why would anybody want to spend more time producing things? Because with a longer production process, you're able to develop capital which increases your productivity. So even if you spend half your day building the fishing rod, you will catch more fish. At the end of the day, even though you spent half the time fishing, you'll catch more fish because the productivity of fishing goes up significantly after you've built the capital. And so the more capital you have, the higher your productivity. And so the process of capital accumulation is the process of elongating this triangle by reducing our consumption. So think about the horizontal axis, sorry, the vertical axis on the right side of this triangle. As you see, this arrow is bringing us down. So instead of consuming all the resources that we have, we consume a little bit less. And where do we take those resources that we don't consume? We move them to the early stage of production. And that allows us to have a longer structure of production which results in higher productivity. This is the stages of production triangle. Now that can also be projected onto the production possibilities frontier, which you see in the second graph in this figure. The production possibilities frontier shows us all the combinations of consumption and investment that can allow us, that are possible for us. So we have a certain amount of products that you could see. Think of the example of corn. And the best example to try and understand this is this is the quantity of corn that you have. And the curve on this production possibilities frontier is all the combinations of corn seed and corn feed that you can make. So, so you can, if you want, if you go at this point where I is equal to 0 and C is at its highest level, you're getting the highest amount of consumption goods and you're producing no investment goods, you're not investing anything in capital. If you were at this point point C on the Y Axis on the vertical axis. In this situation, you are not producing any consumer goods. Sorry, you're not making any capital goods, you're just producing consumer goods. On the opposite extreme is when you are on the X axis, when all that you're doing is taking the corn and using it and turning it into investment goods. So you're taking the corn and you're planting it and making an investment good out of it. And therefore you don't have any consumption. Of course, neither of these is workable. You're going to have to be somewhere in the middle where you can consume some and you invest some. And so in this situation, in this graph that we have in front of us, figure 32, you see the light gray point on the production possibilities frontier. That light gray point is the initial point where we have this, a certain amount of consumption and investment. Now what happens if we decide to switch from that gray light gray point to the black point? We've reduced our consumption, as you can see. So C has gone down because we've gone down the curve, but we've increased our investment. So I has gone up. And so the amount of investment that we have has gone up and the amount of consumption that we have has gone down. That corresponds to the lengthening of the stages of production. That corresponds to the triangle declining in height and increasing in width. The stages of production became longer. The final output that we can consume today has declined because we took some of our consumption goods and we used them as production goods. And so we elongated the process of production in order to generate more profit. And that can also be seen in the market for loanable funds. The market for loanable funds is the market that we've discussed earlier in the chapter on interest rate and on time preference. We have a supply of lending and we have a demand for lending. The supply curve slopes upward, as you can see, S and then the demand curve slopes downward. D. So initially we're at the intersection of curve D and curve S. And that's the light gray point. And at that point we have an equilibrium interest rate and a set amount of savings going into investment, all of the savings being invested. And we have that amount and at that interest rate. So at an interest rate of, let's say this is the interest rate of 6%. At an interest rate of 6%, the quantity demanded of loans, the amount of loans demanded is equal to the quantity supplied of loans. And so at an interest rate of 6%, we have a fixed quantity of saving and investment that's being carried out. So then what Happens when we shift from that light gray point to, to the black point. What we've done here is by lowering our time preference, we've reduced our consumption and therefore we've increased the availability of capital. And therefore we've lowered the interest rate. Because now we're consuming less. So there's more capital available. And so capital becomes cheaper. So the interest rate declines and the quantity that is saved and the quantity that is invested increases. And that results in more investment, less consumption in the short term, but then also a longer structure of production on the triangle, on the stages of production triangle. And so why do we do this? Why would anybody want to consume less? The answer is for the same reason that the fishermen decides to take time out from catching fish or from laying down on the beach to go build a fishing rod. It increases your productivity, it allows you to have more fish. It's the same reason that millionaires and billionaires today buy stocks with their money instead of just buying consumer goods. Because when you buy stocks, you are investing and increasing the productivity and allowing yourself to make a return and hopefully a positive return. So when you do this, of course there is no guarantee that it is to going, going to be a positive return. But if it is a positive return, then what happens is we have a higher level of output for the next year. So the production possibilities frontier will shift to the outward. The entire curve on the production possibilities frontier will go outside. And so now we can have a bigger combination of C and I. We can get more C and more I, more consumption and more investment because we have more output, right? So just like with the fisherman, when he has got a fishing rod, now he catches more fish. So now he can decide to dedicate more time towards catching fish, or dedicate more of his resources towards catching fish, or toward producing good capital goods or exchanging the fish for more capital goods. So in brief, this is what we're Describing in Figure 32 is how things go, right? Economic growth, time preference declines, consumption is foregone, capital availability increases, the stages of production triangle elongates, the loanable fund supply curve shifts to the right, the interest rates decline and lending increases. So we move to this point, the intersection of curve S prime with D. And if the business is profitable, after we've reduced the extra investment and reduced the lower and reduced the interest rate, if the business is profitable, the production possibilities frontier will shift outward, the product will increase, the amount of production that we make increases, the consumption increases more than the initial foregone consumption. That's what it means to have made a profitable business. And so the stages of production triangle goes higher and higher. And that's how we continuously have more output and more consumption. We are investing more. So now we've seen how things work in, in the scenario where things go well, now we're going to see how things go badly, how things go wrong. And that happens again. All of it goes back to time preference. It happens when we don't lower our time preference and still expect to to get the things, the nice things that happen to us if we do lower our time preference. It's cheating. It's really like the child who doesn't study for the exam and still thinks they can get the high grade because hey, we can just cheat. This is exactly what gains in economics essentially is doing. So you start off with no decline in time preference, which means there's no consumption foregone, which means no more resources are being dedicated for the production of more capital. So this means that the stages of production are not are elongated, but without the necessary capital. So we want to keep the stages of production triangle. We want to keep the vertical axis. We want to keep it at its full length. We want to consume everything that we want and still manage to increase the horizontal axis by making it longer. So we want more stages of production without having to forego consumption. We want the fishing rod without having to spend any time fishing building the fishing rod. We want to still spend our time consuming and still manage to manifest the fishing rod. This is the insanity of it here. And we think that it can be done just because we have financial capital, which is more complicated than than just looking at a simple example of a fishing rod or corn, as I like to use, and so on. The production possibilities frontier we see. This gives us all the combinations of consumption and investment that we can use. We are on. We start off on the black point here. And instead of trying to go to the white point, which is what we did in the previous example, we try and shoot for the X that is outside the curve. We try and shoot for this unattainable goal which entails more consumption and investment in total than what we have. So this is similar to how we, we say it in the stages of production. We're trying to keep these stages of production triangle high while extending its base without reducing it. Of course, if you wanted to make it longer, we need to reduce the consumption. So we reduce our consumption. Therefore we have more capital goods. Alternatively, what we're doing here is we're keeping keeping our consumption high and we're increasing our stages of production, assuming that we can just make the extra capital goods, and that's not going to work out on the ppf, we're doing the same thing by thinking that we can, we don't have to reduce our consumption, we can stay on consumption on point C and still manage to increase the amount of investment by going, or increase our consumption and increase our investment. Instead of staying on the. On the black point here, we're going to go to this X point in the ppf, and so we're going to have more consumption and more investment than the resources that we have. So effectively, if the corn example, we have 10 bushels of corn, we've decided that we are going to divide them into seven bushels for eating and four bushels for investment. If you know basic arithmetic, which most Keynesians don't, seven plus four equals to 11, that's more than 10. So how are you going to get to eat seven bushels and plant four bushels when you only have 10 bushels? That's Keynesian magic. They think that they can just cheat physics by issuing pieces of paper that say, you can get an extra bushel here. So when this happens, we can also see it in the bottom graph, which is the market for loanable funds. In this situation, what is going on is we're not lowering the interest rate because the time preference has declined. If the time preference declined, then, yes, the S curve would shift to the right, and so therefore we would have more savings, and so we could have a lower interest rate. But here we didn't shift the S curve. So the S curve is still where it is. But what happened was we lowered the interest rate artificially. But if we're still at the original S and D curve and we've lowered the interest rate artificially, that means that the new interest rate, at the new interest rate, the demand for loans, as you can see the point D, the white circle here on the D curve, the demand for loans is higher than the supply of loans. Because the interest rate dropped, people are demanding more loans, and because the interest rate dropped, people are saving less. So we have less capital to go around and more people demanding capital. And that discrepancy is the difference here between s2 and i2 on the bottom curve. So i2 is the quantity we invest, whereas s2 is the quantity that we are saving. And so there is a mismatch. I2 is larger than S2. We have more investments than we have savings. And that's only because we are believing in this ridiculous idea that we can make more investment without having to make more saving because we've generated five fiduciary media. That's it. So how does this work out then? No decline in time preference means no consumption for gone means capital availability does not increase, means the stages of production are elongated without the necessary capital, which means we move to a point outside the production possibilities frontier, which means the loanable funds curve splits, investment goes up without saving, supply increasing, which means interest rates decline, which means increase in investment without the requisite savings, which is what results in the bust. We can no longer maintain the businesses investing without the actual capital. And so the stages of production triangle is broken because we can't keep building to get the level of consumption that we want on the production possibility frontier. Our attempt to reach that unattainable X point is leads to collapse and we go back under. And because we've destroyed capital, we now have a lower amount of consumption and investment available. So the ce so the PPF will shift inward and it'll give us fewer possibilities. And as we see in the loanable markets fund, we get a disequilibrium where the quantity invested is larger than the quantity supplied. That's how the problems happen. So this difference between the investments and savings is what is called mal investment. As the prices of inputs rise, businesses reliant on them get liquidated and lay off workers. Recession. The businesses that are relying on these inputs can no longer continue to operate, so they all go out of business around the same time. Why does a recession happen? This is really the key question that the Austrian theory answers, which no other theory answers, which is why do you get all these failures across the specific sectors of the economy? It's entirely understandable that one company would fail, one construction company would fail, or one software company would fail. But why is it that in the year 2008, all of the construction industry goes to trouble, all the real estate developers go into trouble. Trouble at the same time. They can't all just have decided to become idiots around the same time. Same is true. And say 2000 with the dot com bubble, not all of these startups decided to become incompetent at the same time. So why do you get all of these failures everywhere? The answer is because the capital market for these industries has been distorted by the issuance of the fiduciary media. As we saw in the figure 33. This distortion causes the amount of investment to exceed the amount of savings, so there isn't enough resources. And that is then reflected in a collapse in the businesses that can no longer maintain their operation. As an economy advances and becomes increasingly sophisticated, the connection between physical capital and the loanable funds market does not change in reality, but it does get obfuscated in the minds of people. Is a good analogy. To think about it, imagine you are a developer who wants to build 100 houses. A house requires 10,000 bricks. One million bricks are needed, therefore. But then a Keynesian contractor comes and offers to build 120 houses with 800,000 bricks. Just like interest rate manipulation reduces savings and increases borrowing, in this case, he's telling you he can give you more houses for fewer bricks. Of course you're going to choose to go with him. If you make the mistake of believing him, you're going to go with him because he's costing you less money and giving you more houses. That's a very good thing. But that can't last. At some point it becomes clear that 120 houses cannot be finished. 800,000 bricks are not enough for those houses. And so as he starts to build that, at some point you're going to realize that he cannot finish 120 houses. Now, if you leave it until the end, if you let him finish, you're going to end up with 120 houses that are unfinished. You're gonna have 60% or 80% of 120 houses completed. Or actually, yes, around 60 of 120 houses. So each one of them is 60 complete. Each one of them doesn't have a roof. And what's the value of a house without a roof? Nothing. So you're left with nothing. If you don't do anything about it, you can consume the entire capital stock. Because 120 houses that are not complete is not something that you can just change into regular houses. Because you can't just take two 60% houses and sell them as one house because they're not functional as houses. If you figure this out halfway along the way, then you still have half. You say, after he's put 400,000 bricks into the 120 houses. So now you have a little less than a third of 120 houses, but you have 400,000 bricks. If you figure this out, you can take the 400,000 bricks and use them to finish some of the houses, and then you'll end up with something like a third of the houses being built properly or half of the houses or whatever, but you're going to end up with some houses properly built, and then you're going to end up with a lot of wasted capital. And that's the Mal investment. If you discover it the first day, then you don't lose a lot, you lose only a little bit. So you might end up with 99 houses. So the more time it takes to discover this, the more capital is spent on the extra, extra 40 houses that we cannot afford, and the more capital is wasted because those houses cannot be completed. The sooner you realize this, the sooner you realize the only thing that you can do is build 80 houses, the closer you're going to get to getting actual and to actually getting 80 houses. So the question then becomes, do one, do you come to terms with reality, or do you kick the can down the road? As Hayek put it in a nice metaphor, we now have a tiger by the tail. How long can this inflation continue? If the tiger of inflation is freed, he will eat us up. If you're holding a tiger's tail and he likens it to catching a tail of the tiger, the tiger's not going to be happy if you're holding onto his tail. So what's he going to do is going to start running away. And that's what happens when you started on the path of inflation. So there are no good options. The best thing to do if you find yourself holding on to the tail of the tiger is not to have found yourself in that position in the first place. Once you've already done it, there are no good options. The tiger is angry because you're holding his tail, so he's running around. So he's dragging you all over the earth and smashing you up as he runs around very quickly. So that's not nice. But then you want to let. So maybe you should let go. Well, that's also not nice, because if you let go, the tiger is gonna stop running around. He's gonna turn around and gonna get angry at you, and it's gonna start devouring you and eat you. If the tiger is freed, he will eat us up. Yet if he runs faster and faster while we desperately hold on, we are also finished. That's why Hayek says, I'm glad I won't be there to see the final outcome. Hayek died in the 90s, in the early 90s, I believe. And, yeah, he has not seen fiat continue to ruin things. And I think it's continuing to get worse and worse. So, effectively now the question here becomes, well, what if banks just make these fiduciary media and people accept them, then why is. Why are you bailing? Why are you blaming the government? If people want to accept those things, banks want to build them that's just a free market. And that's a failure of the free market. It's a failure of capitalism that these things happen. Well, not quite. I think, I strongly believe that fiduciary media would be unlikely to survive on a free market. Sure, you have the freedom to create them on a free market. The government is not going to put you in jail if you create them. But they will fail because if people try to redeem them, they won't be enough money. And so people will learn the lesson that you don't want to deal with any institution that deals with fiduciary media. And there's going to be an enormous demand for institutions that can prove to their customers that they are not engaging in the issuance of fiduciary media and that all their money is as issued as money certificates. And so this would, you know, in the case of gold, for instance, you could do this with regular audits. You get third party certificates that come and audit and look at the gold supply. And you allow open audits, you allow strangers to come and audit themselves if they want. And you have an audit of the papers that you issue. So you say we have serial numbers on the paper and the highest number is this much because these are the only papers that we have. So let's say we have a million papers outstanding and we have a million gold coins. And anyone can verify that we've never printed a piece of paper that has a serial number that is higher than a million because that's all that we have. And anyway, come to the safe and verify that we have a million gold coins. This is the sort of thing that I would believe would emerge in a world in which we did have a free market, but we don't have a free market in banking. What we have is a system wherein governments limit the ability of people to compete in the banking industry, therefore allowing banks a huge margin of safety if they were to engage in this fiduciary media inflation. So fiduciary media did exist under the gold standard because gold had limited saleability across space in a modern economy, creating a strong incentive to not redeem fiduciary media. So a big part of the reason why it existed is a, that in, in a world in which trade started to move quickly, people started moving goods around very quickly. As you know, we have developed trains and ships and cars and airplanes, so things can move around very quickly, but money is moving around relatively slowly. In that kind of world, having your gold in a bank allowed you more salability because your bank Had a central bank, and the central bank could deal with the rest of the central banks in the world. And if you wanted to send money halfway around the world with your, by going through your bank, it was relatively straightforward. Your bank would debit it from your account, it would contact the bank in the other country, and then the central bank would take the money from your bank's account. And when the two central banks settle with each other at the end of the month or the year or week or whatever, they would settle that sum between them and all the other transactions that take place between them. And meanwhile, before the settlement happens, your recipient's central bank will have given the money to the recipient's bank bank, who will have given the money to the recipient. So that allows the money to travel a lot faster. And so that gave, that gives banks a real value addition to money. In other words, they increase the value of money because having money in the banking system allows it to travel much faster. So fiduciary media in the form of paper money or bank credit was far more salable across space. And so redeeming fiduciary media for gold leads to a loss of salability. And so that makes it so that people want to keep their money in the banking system. And the less competitive the banking system is, the bigger the margin that the bank can take in issuing fiduciary media. So yes, because everybody wants to keep their money in the bank, the bank can make a few fiduciary media and get away with it. Because not everyone is going to come and demand all, all of their money at the same time. And the fewer banks there are, the more of an oligopoly the banking system is, the more they can get away with it. And this is why I believe the issue of fiduciary media continued. Because in, say, for instance, in the 19th century, US banking licensing laws made banks an oligopoly, allowing them a very good margin for inflation by fiduciary media. There were a limited number of banks, and it wasn't easy to open a bank. And bank licensing laws were pretty complicated. Also, governments gave banks all kind of regulations that allowed them to be protected from competition. And that resulted in boom and bust cycles. The bank would issue fiduciary media, the investors would take all of that media, they'd start investing. They think, we have an enormous amount of increase in productivity taking place, but then prices begin to rise, and then the businesses collapse and the entire thing comes crashing down. But the good part of it at least was back then that if you stayed away from a bank that was doing those things and kept your own money in the form of gold on yourself. Or if you only dealt with banks that didn't do this, you weren't affected. Your money was gold. Nobody created more gold, so nobody devalued gold. What was devalued are the paper claims to gold issued by your bank. And you could just continue to use your money. Your money wasn't affected. But then, so you would imagine that in that kind of situation, if we'd had a more free market, and this is what I strongly believe, if you had more of a free market in banking, you would have had more freedom for people to choose banks that protect them from fiduciary media issuance. And therefore you would have had more free market banking. And therefore, I believe you would have moved toward the model of based on money certificates rather than fiduciary media. But instead of liberalizing banking and instead of letting competition take care of this issue, instead of letting banks fail, banks who engage in fiduciary media, of course, the best way this happens is that these banks, banks who try this fail, and the people who give them their money go bankrupt. And then everybody who wants to try those things becomes poor. And then either they change their lives or, and they figure out how to deal with money certificates only, and only with banks that only issue money certificates or they stay poor. That's how the markets work. That's how market and money evolves. Of course, the banks went the opposite direction. Banks have an enormous amount of political power, and so instead of one, instead of getting more competition, they get more protection. And that culminated in the creation of the Federal Reserve Board and central banks all over the world, which essentially allowed the banks to engage in the creation of fiduciary media to increase the money supply by backing them up in case that fiduciary media collapses. States that fiduciary media fails. And so now you have effectively generated the system that is out there, subsidizing banks as they engage in inflation, rather than letting the market punish them and destroy them and therefore have a hard money. What the Federal Reserve does is that it punishes everyone else to reward the people who engage in inflation. So you get to print money for fiduciary media. And then when the fiduciary media inevitably collapses, the Federal Federal Reserve bails you out, either through actual money printing to give you physical cash, or through digital money printing, which is what they do these days, or through quantitative easing by buying off bad assets from the bank at Higher prices or all kinds of other different tricks that are effectively all a bailout. And all of them, all, all, all of these come from the devaluing of the currency. All of them involve the creation of more money. So the banks issue more fiduciary media, which is inflationary, but then the market corrects for that and destroys the value of those fiduciary media. When a panic happens, that's where the central bank steps in and protects these banks from the consequences of their actions and therefore makes their, makes the money lose value. And so people lose value and their money, and that's why this fails so often. So in order to protect financial institutions from the consequences of unbacked lending, a socialist central planning board was placed in charge of the market for money and capital, the most important market and one integral part of all markets. But a capitalist system cannot function without a free marketing capital, where the price of capital emerges through the interaction of supply and demand, and the decisions of capitalists are driven by accurate price signals. Recessions and financial crises are best understood as the failures of capital markets. When central planning restricts monetary freedom. And this, once you understand it from the Austrian perspective, you realize that it isn't the central bank that's out there protecting us from the business cycle, which is happening because evil capitalists, like, do evil things. You realize that the central bank is not the firefighter. The central bank is the arsonist. The central bank is the only reason that we have these financial crises in the first place. The financial crises are an inevitable consequence of meddling in the money market. Just like potato shortages and surpluses are the inevitable consequences of government coercive meddling in the potato market over time, the result is the destruction of capital, money, the ability to save, and the division of labor itself. Placing money in the hands of government monopoly is far from a panacea. It is destroying the foundations on which human society and modern capitalist civilization are built. And this is the conclusion of the part on money, which I believe is an enormously important topic because of this, because you might think that these Keynesians are just being silly clowns, thinking that they can create money out of thin air, and then a bunch of people are going to hurt, are going to get hurt and go bankrupt, and then life goes on. I believe it's a lot more sinister than that. I believe that undermining the market for capital and undermining money and undermining people's ability to save will undermine the division of labor itself, will undermine people's ability to engage in trade in A marketing economy and will in effect destroy all of the mechanisms of economizing that we have developed and that I discussed extensively in this book and in the 15 chapters of the book so far. Everything is undermined when the money is undermined. And that's something we're going to discuss in the next chapter. So everything that we've been doing so far has been in this book and in this course we're understanding all of the mechanisms of economizing and then seeing the amazing intricate structure that is modern civilization that is built out of this, that is built out of people acting out of their own self interest, people working, people accumulating capital, people trading, people engaging in monetary order, people trading within a large market, people trading on a global market. All of that. And then the development of money market, all of that is the structure of civilization that we've built over thousands of years, which is absolutely astonishing as a product. And all of that is getting undermined because if you destroy the money, if you destroy the integrity of the money, you destroy the integrity of everything else. Everything else is done with money. All economizing in a modern economy has to be done with money because it's the only way that we can scale economies. It's the only way that we can get over the problem of the coincidence of wants. And that is the foundation of modern civilization. And undermining money, I believe, is undermining civilization. And the next three chapters of the book, the last part of the book, the last section of the book discusses the topic of civilization. Having built all of this, what is civilization? How do human beings arrive at that? And of course, before we get into the final chapter, which is is titled Civilization, the next chapters will look at the market for defense and protection and violence and protection from violence. And this is a different topic from what we've explored. And remember at the beginning of the course we said two ways of interaction between human beings. Consensual and violent coercive interaction. So consent versus coercion is the distinction. So everything from chapters four to chapter 15 so far has been focused on interactions that are consensual and people trading with one another and people being able to conduct business with one another. But then we keep all of that is reliant on money. And now in the next chapter we're going to start looking at the other form of interaction between human beings, which is violence and coercion. And we're going to understand the economics of that. And we're going to understand the economics of how people protect themselves from that. And then we're going to understand how this helps us understand civilization and the dangers facing civilization and why civilization is an intricate thing, why we couldn't be worried about it, but also why we can maybe be optimistic that we. We're going to find a way out of this catastrophe that modern central banks have plunged us in, which is destroying our money and destroying our civilization. So join me for the next three lectures. Thank you.