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The "What is Money?" Show
WiM026 - Money Hierarchies with Nik Bhatia
03:13:40
Nik Bhatia joins me for a conversation covering the concepts laid out in his book "Layered Money."
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- [00:00]
Robert Reidlove
Foreign. Hey guys, this is Robert Reidlove from the what is Money? Show. And as you've learned by watching this show, Bitcoin is the single most important asset you can own in the 21st century. And one of the most important companies in Bitcoin today is NYDIG. NYDIG's mission is to facilitate financial security for all. They accomplish this by bringing a high level of professionalization and sophistication to the bitcoin marketplace. As a true game changer in the industry, NYDIG is safely unlocking the power of Bitcoin for forward thinking individuals and institutions alike. By using nydig, you will gain access to an end to end institutional grade platform providing bitcoin OTC transactions, bitcoin collateralized borrowing, secure custody, asset management, derivatives financing, market research, and more. And all of these services meet the highest regulatory, governance and audit standards. Led by Robbie Guttman, Yin Zhao and Ross Stevens, NYDIG has absolutely exploded onto the bitcoin scene recently and is leading the way for ongoing institutional adoption in this nascent asset class. So please be sure to check out NYDIG as a single source for all your bitcoin needs. Welcome back to the what is Money Show. I'm sitting down today with the author of Layered Money, Nick Bhatia. Nick, welcome to the show.
- [01:36]
Nick Bhatia
Great to be here, Robert. How are you, brother?
- [01:39]
Robert Reidlove
So good, man. And it's so good to have you here. And I just got to say, to start out, the book is a masterpiece. I was telling you before the show, I. I often communicate to people that fiat currency is a pyramid scheme. And I think your book brilliantly dives into the intricacies of that scheme, how it evolved. That sounds like maybe it's a conspiracy theory of some kind, but this thing really does evolve organically over time. And your book just flushes out the history beautifully. So thank you for writing it. It's my new number one recommendation for people to get to dive into this and then to ultimately understand how Bitcoin is its own pyramid as you describe. It's its own brand new conception of money. A first principles, disruption of money. So thank you for writing it. It's really good.
- [02:34]
Nick Bhatia
Thank you. I'm honored. Very kind words.
- [02:39]
Robert Reidlove
So I thought we'd just start walking through it. I read it in two days. I mean, I couldn't put it down, frankly. It was really good. And your book starts out in talking about gold, which is still the number one monetary asset in the world today, I guess. Base layer monetary asset. It opens with this great quote Which I really like from Cortez. He said, quote, I and my companions suffer from a disease of the heart which can only be cured with gold. So money clearly emerges based on individual pursuit of self interest. And the market just kind of zeroes in on this asset that serves as the most marketable good. But that's not the end of the story, right? That's kind of the beginning of money's story. And then it starts to evolve in these different layers to satisfy these different functions. So maybe we could just start there. We just start at the beginning. And that's kind of the namesake of the show. What is Money?
- [03:52]
Nick Bhatia
Yeah, layered money. The idea came from the concept that we use different forms of money for different things. I think that that is now widely understood. We use our checking account, we use Venmo, PayPal, we use cash. There are so many different types of money. Then you introduce financial instruments. So money market funds. I worked in the bond industry for several years. And so you see the impact that U.S. treasuries have in the whole idea of money. They're really more money than an investment in a lot of parts of the US treasury sector. So with all of those different forms of money, now we have Bitcoin, a brand new type of money. How do you properly contextualize Bitcoin in the current dollar system? Because the two are independent of each other. And when I explored how to do that, I landed upon money hierarchy as the core framework that I needed to build upon. Because you know that bitcoin is, when you study Bitcoin, you know that it is an independent asset from anything else. It originates because of the computing network that you know it, the nodes, mining and otherwise the nodes are where the network is. And so it doesn't come from a balance sheet, it doesn't come from the earth's crust. And so Bitcoin is independent, but the current financial system is greatly hierarchical. And then you see Bitcoin deposits at exchanges and it's the same thing. It's a money hierarchy all over again. And that is what led me to layered money. And I have to mention right away that the paper that changed the game and set this whole thing in motion was the Inherent Hierarchy of Money by Perry Merling. He's an economics professor. Actually, you were there the night that I gave the first talk about the hierarchy of Bitcoin in LA in November or December of 2019. And that was the foundation of layered money, where I had just read that paper for the first time and understood that bitcoin needed to be explained with the backdrop of money hierarchy. Then I said, well, the paper was just a framework. I said, now we have to tell the entire history of the hierarchy of money and then explain Bitcoin and then explain why Bitcoin will atop the hierarchy of money in the future.
- [06:58]
Robert Reidlove
Right. I remember that event. That was a Lightning Network meeting, I think.
- [07:03]
Nick Bhatia
Yes, it was.
- [07:05]
Robert Reidlove
And I remember you describing the hierarchy of money. And I think at the time we were just debating about the hierarchy a little bit, like, what would it look like? I remember that.
- [07:16]
Nick Bhatia
That's right. We were debating about the relationship between Bitcoin and lightning. In a hierarchy standpoint, is it the same layer? Is it a different layer? We know that it's a layer two solution in Bitcoin. From the protocol standpoint, Lightning Network is its own protocol and quite strictly a layer two of Bitcoin. But when you talk about it in the form of money, if Bitcoin is the first layer of money, is Lightning Network really a second layer of money? It can be argued that it's not. And that was the debate we were having that night, was more of a nuanced one.
- [07:58]
Robert Reidlove
Right, right. Yeah. So I love your book, really. I mean, you can come into this book with, I think, basically zero knowledge of finance, money, anything. And it builds from first principles. Very solid foundation, very understandable language. But then you build into a very complex domain. I mean, by the middle of the book, you're reading about the Eurodollar system. That's one of the most complicated systems in the world. And so you start in the first paragraph. I'll just read a quote here. It says, money is a tool that allowed us to progress away from. From reciprocal altruism, wherein animals swap favors, like when monkeys groom each other. I mean, it really is that. It's just a tool for swapping favors. Right. That's the core of economics. But it gets really complicated when we try to figure out which tool best serves that purpose. Because there tends to be a lot of trust involved and a lot of potentially broken trusts in the form of corruption and other things. So mankind tries to zero in on this tool that's corruption resistant, or tool plus hierarchy that's corruption resistant. Over time, we've tried a lot of different things, but today we have a system that has scaled. It encompasses the world. But as you get into later in the book, it's really starting to show its age at the same time.
- [09:35]
Nick Bhatia
Very much the age analogy fits perfectly with my bandage analogy, because there are bandages all over this pyramid now. And the Fed has Applied them. And the wounds are open wounds. Right. And so they bleed out, and then they have to apply more bandages. And so that. That comes with age. Right. And that's, it's. It's a great way to frame it because it really is due to age. You know, one of the analogies, you know, is the. Is the breaking apart of the facade of the pyramid. Also, when buildings break, it's because of age.
- [10:22]
Robert Reidlove
Yeah, right. Or poor.
- [10:24]
Nick Bhatia
Or poor construction technique or both. Right. And so it definitely is showing that age.
- [10:35]
Robert Reidlove
So where did this all start then? And we've talked about coinage originating, and Lydia, maybe we could just start there. What was the point? How did we get to the metals? And then why did we start issuing coins in the first place?
- [10:52]
Nick Bhatia
Yeah. So one of the challenges for writing this book was when to start the story, because you can do the sapiens dive, you can do the Origins of Money by Nick Szabo dive, which are both great human anthropological deep dives that I believe you need to do to fully get money. I'm sure that you would agree there that you need human anthropology first to get later in a very sapiens type of way. And so my goal with layered money was where do I start the story? And I decided to start it in the year 1252 in Florence, when I decided that I knew I had to fast forward from 100,000 years to 1252 AD in a few pages. So that was a challenge. Right. And so how do I sum up the origins of money in a sentence? That's the reciprocal altruism sentence, right? You want to understand more about reciprocal altruism? Go and read Nick Szabo's Origins of Money. It's footnoted in the book for people and bring them up to speed. But basically that swapping favors, and we need a tool for that, is the reason why a tokenized form of money works. Because then you and I can hand it to each other and just think of that as the value storage of the favor.
- [12:27]
Robert Reidlove
Right.
- [12:28]
Nick Bhatia
I owe you one. Here's the thing. So IOU is a credit system today, but tokens themselves can be an iou. If the token is just a shell, it's just something you pick up at the beach. Right. It's not necessarily a credit instrument or not. Right. It's just a form of money. And so I fast forwarded all the way to the consensus that was gold and silver. You know, gold and then to a lesser degree, silver. But really both of these metals throughout history, when you. When you study it, both of these Metals. The reason that human beings holistically set it on, settled on the two of them, was that they maintained value across tribes, across oceans, and across generations. Nothing else could do all of those things over a long enough time horizon. So it's easy then for me to summarize that really quickly also, because you can just say that, listen, nothing else held the value across continents and generations that these two metals did. Human beings decided on these two things as the best forms of that tokenized money. Right. Then you can get into the problems within using gold and silver, the metals as money. One obvious one is that my gold jewelry and your gold jewelry don't resemble each other. I don't know how pure yours is. How you don't know how pure mine is. And so to gauge how much value you have and I have, you know, in a. In a business transaction where every, you know, in this. In this case, every gram counts. Right. We need a better way to do that than my gold chain. And your gold chain and coins offered an advance on that front. The measurability and the execution of a transaction, the speed of a transaction. Money velocity, which is something that we talk about in the book. Money velocity is a very modern measurement of the speed that currency moves through the system today. But it can also be a philosophical concept. The velocity of money is philosophical. It's theoretical in that how quickly are you and I willing to move money around because of how we view the thing that we're moving? So if it's some ancestral gold chain, philosophically, and, you know, thematically, you're unwilling to part ways with that.
- [15:36]
Robert Reidlove
Right.
- [15:37]
Nick Bhatia
Coins change the game there. So coins, you know, are an advance in the velocity of money, in the way that we're willing to move it. And that's where Lydia comes into play. So that's, you know, about seven centuries B.C. but again, you want to fast forward through the coin stuff as well, because coins are just another form of shells. It's not a pyramid. It's not a hierarchy. It's still a token money. That's fine. That was the natural evolution from shells to gold coins. Makes sense. It should make sense if you have that, if you have that historical background. And so that's why I. And we can talk about coins before the florin for sure, because I spend a chapter on that. But I did want to move as quickly as I could so we can get into a layered money system, not just a coin.
- [16:50]
Robert Reidlove
Right, the hierarchical money. Yeah. And so my read on that is we basically discovered gold and silver as satisfying the Properties desired. In this token of reciprocal altruism. It was just literally experimentation over generations settled on this gold and silver and.
- [17:13]
Nick Bhatia
Then core generations and across tribes and cultures.
- [17:18]
Robert Reidlove
That's right, yeah. So lots of generations and lots of different places. And then as these networks become interconnected by trade, because there were many examples where gold would out compete the seashells or whatever, people are always coalescing to the hardest money, more or less. And then coinage was the way I think about this is we standardized essentially. So once you standardize a monetary unit, it's much easier to spend to your point, it's faster, easier, cheaper. Transaction costs collapse. So velocity of money increases, trade flourishes, wealth and innovation come right behind it. I thought that was really beautifully put. And then when I guess you get into. Maybe we could just fast forward a bit then, and the hierarchy of money comes into existence. Once there are layers of trust being introduced effectively. Because when you're just exchanging coins, you're basically settling with finality. Once someone hands you that coin, you don't need to worry about them anymore. You don't need to trust that individual. They've settled with you. You've given them fish, they've given you coins, whatever it may be. But that doesn't work in a world where money, it restricts the velocity of money effectively. So we get into these other forms of money that are hierarchical, but introduce the need to trust the individuals and institutions within that hierarchy. So where do you take it then? From gold and silver?
- [18:59]
Nick Bhatia
So the coins don't require the same trust that a credit money requires, but it still does require trust. And that's kind of the nuance here is that you still have to trust that the face on the coin, which is going to be the regent or whatnot, that leader or that government has not already bastardized the coin, that they have produced a coin that is hard enough to counterfeit that we won't see duplicates in the system. There's all these nuances to this idea that trust is not involved with coins. Well, it is in a way, but not in the same way that a strictly iou, it's still a bear asset. And you can measure and test the coin on the spot if you need to. So then you can eliminate 99% of that trust, or let's say the, you know, counterfeiting problem that you face potentially. So with that being said, you know, gold coins were the basis for a layered money system because they were easily assayed. Right. And so it still takes equipment to measure and test the purity of gold. But even that is a readily available technology that makes gold coins perfect base money that you can use it for final settlement. But in the interim, we can move quickly by saying, me saying I owe you and you saying you owe me. And what I found fascinating in the research of layered money was that layered money didn't start with gold certificates circulating. Right. It actually just started with banking networks meeting at fairs and having their own books. So I have credit and debit and you have credit and debit, and we just cross off each other. Like when we meet, we balance the books by you balance in yours, and I balance in mine. So a double entry system or two ledgers. You don't ever have to even see mine, I don't ever have to see yours. But as long as our numbers tie, we are okay with paring it down or rolling over the debt or, or striking it and all that. That was fascinating to me that it didn't even require a paper instrument to move the layered money system forward. All that was required was bankers, the Medici, others saying, this is what you owe me then, and then meeting then and settling up or rolling it forward. And the settlement tool was these coins, like Florin, but other coins as well, gold coins, silver coins. That was definitely always the final settlement, but in the interim, just roll it over on your books and my books.
- [22:27]
Robert Reidlove
Yeah, just this system of net settlement reminds me of we used to play this game called Chinese poker in Las Vegas. I don't know if you've ever played, but you just keep a running tab. Basically, you'll play for a few minutes or a few hours and you'll be like, all right, you owe me this, you owe me that. And then you just settle once every month or whatever. And it really is that again, it's just trading favors. That's all really. Money is intended to be. But there's this trade off between trust, I guess, and scaling. If you minimize trust that you're just settling with physical gold every time or whatever it may be, that would be very trust minimized. You don't need to trust the other guy, the other counterparty. But that's very slow, cumbersome and efficient. So if you want to scale the actual transactional system, you need to introduce these layers of trust, which is what gets you into the hierarchical money. And that's a fundamental trade off. We even see that in Bitcoin today, that to scale Bitcoin transactionally, you give up a little bit of that trust minimization by trusting something like the lightning network. There's different trust factors involved there versus settling on the base layer. But it's necessary to move from trust minimized money to I guess, scalable money.
- [23:52]
Nick Bhatia
Absolutely. The only reason that, and I do believe this, the only reason that we grow economies is by having this trust system where we can move things quicker so that we can get things done quicker as a species. There's a balance there. And Bitcoin brings empowerment to people because it lets them bring the settlement back to themselves in a few minutes at a very non material fee. Like you want to complain about $5. Okay. We're talking about the ultimate form of property rights that mankind has ever known. So what are you talking about with a complaint about $5? It misses the point that money scales in layers and we used other layers to move it quicker. But you pay $5 to settle your life. That's. I mean, it's a foregone conclusion.
- [25:08]
Robert Reidlove
Yeah. You're sending gold around the world for five bucks effectively.
- [25:13]
Nick Bhatia
Right.
- [25:14]
Robert Reidlove
But you can't just compare that to Venmo. You have to compare that to the container ship of gold you have to send. So this is.
- [25:21]
Nick Bhatia
Yeah. And Lightning Network, just to bring this back. Lightning Network is definitely one of the original things that just captured my imagination about Bitcoin. So I entered the bitcoin arena during the SEGWIT proposal phase. So I was like, everybody was talking about Segwit, so what is Segwit? Why is it so important? Oh, it's a Lightning network. And it's like, wow, Bitcoin has solved the scaling problem. Yeah, it has to roll it out. This was pre Segwit, so pre lightning. But it showed me that you've solved the scaling problem already. So bitcoin, it becomes a no brainer for a financial system away from digital gold like that.
- [26:14]
Robert Reidlove
Yeah, yeah. We'll get deeper into that later in the book. But I remember that's how I discovered your work, frankly. You're writing about time value of Bitcoin and the Lightning Network and it's very unique because I said there's this trade off, less trust, minimization for more scaling. But Lightning Network is fundamentally different too in that it is as trust minimize of a scaling solution as you could possibly have. You're trusting smart contracts instead of people, which is really interesting. So I guess the crux of the issue here, as your book explains it, is this difference between deferred settlement and final settlement. Have the books been closed between two parties or not? If not, then there's trust involved and there's some hierarchical system to support that. If they have, then there's a transaction cost with that and there's less trust involved. So I mean, that's what drives the evolution of these money hierarchies. Is that correct to say?
- [27:24]
Nick Bhatia
Absolutely. And if you even fast forward to today, think about the levels of trust involved with a money market fund that only owns treasury securities, you're trusting an entity that's regulated in a way that basically there's no way that they can't own those treasury securities. They have to prove all the time that they own them. And the treasury securities themselves have no counterparty risk because they're attached to the US Government. That is layers of trust. But you're not that far away from final settlement, which in this case is US Treasuries, you're not that far away from it. But in gold certificates you are infinity away, unless it's a really trusted system. And so that was a problem for centuries, really, is that there were no Wells Fargo's in Bank of Americas that were regulated by FDIC insurance. So you know that your $250,000 checking account is going to be made whole no matter who is the bank. Right. That which I get into in the American portion of the history, that's an important evolution of money which satisfies this age old problem of if you just have a deposit, you don't have gold, you are so far away from ultimate settlement, even if it's only one layer, even if it's only just one promise between. And so that's why the Medicis were so successful for centuries, because they established a trust in their name that allowed them to lend more and have their deposits circulate as money. Because people trusted.
- [29:28]
Robert Reidlove
Right? Yeah. The relationship here between the trust necessary to scale one of these hierarchies and reputation is you can't get rid of that. So the most reputable firm or group, they tend to accumulate the most trust. And so I think we forget, you know, it's easy to forget that we're living in history. There's people today seem to think like everything we learned about history just happened then. And now we live in this stable world, but it's happening, right? It's still happening today. And you even. This blows my mind, this is something I've written about as well, that it was in 1202, the year 1202, that Fibonacci was really coming of age. And this was a time when the mathematical system itself was spreading across the world. So we didn't even have. We're talking about reconciling books here. We didn't have common systems of numerals everywhere in the world. Rome was using Roman numerals. There was this system called the Hindu Arabic numeral system that was based on zero, which was really important that ultimately outcompeted everything else. So it's easy to forget what we think. We take things for granted that, oh, the system is stable and we have this certain type of money today. But we didn't have consensus on mathematics until what, 800 years ago. It's not that long ago. And that's the most fundamental language for human interaction. So how did Fibonacci fit into this? I mean, it was kind of a revolution in mathematics which led to a revolution in bookkeeping, which led to the foundation for these money hierarchies.
- [31:24]
Nick Bhatia
Yeah. And first of all, I love your piece about zero.
- [31:28]
Robert Reidlove
Thank you.
- [31:31]
Nick Bhatia
It's a fantastic work. You're so right about the mathematics consensus around math hadn't even developed. So how can we get into layered money and hierarchies and all that? Because that's built upon bookkeeping, which is built upon math. And so, yes, the coin history is its own path, but the math history is independent of that. And so when I. So hierarchy of money requires only one thing and that's a relationship of balance sheets. Right. It doesn't require, you can do, you can do layered money with shells or something else. Right. It doesn't require gold, it just, it just requires accounting and trust. Trust system. So when I'm, you know, trying to trace the origins of the hierarchy of money, you get back to double entry accounting. And then you. And then I, you know, and then I read a great book about, about accounting, you know, Double Entry, a book about double entry accounting. That was a big part of my research early on. And, and then I realized that, you know, while researching that the origins of double entry accounting, that it comes back to Fibonacci and the book that he wrote, Liberabachi and Book of Calculation, which he brought because he was living on the other side of the Mediterranean in northern Africa. And in the bazaars he learned the Hindu Arabic numeral system and the accounting techniques that they were using, which mirrored double entry accounting. It's not the same system that was called the Venetian way, the way that we do books today, but the origins were there. And so then you learn that in Europe at the time they were still using Roman numerals, which wasn't capable of just the basic arithmetic methods that the Hindu Arabic system were using. And they were using in northern Africa at the time. And so Fibonacci brought those, basically the math portion, the arithmetic, the geometry, the numeral system and also accounting techniques, all in one book to Europe and popularized them with his. One book, his masterpiece. And so that changed the game forever because then you could start to get. That was basically the spread of the consensus math, as you. As you just put it. So Fibonacci brought consensus math to Europe from Africa.
- [34:54]
Robert Reidlove
Yeah.
- [34:55]
Nick Bhatia
That, you know, the Hindu Arabic numeral system was in existence for thousands of years. Right. What you tell me, you're the, you're the expert. What was the, you know, how long had that system existed?
- [35:08]
Robert Reidlove
Yeah, I think it was 7th century, if I recall correctly. And it came out of both Cambodia and India was where they traced it back to.
- [35:20]
Nick Bhatia
Right, right. So, you know, a system that was better than Roman numerals.
- [35:25]
Robert Reidlove
Yeah.
- [35:26]
Nick Bhatia
For commerce. I mean, that's what really what we're talking about, the progression of mankind and economies growing is built off of trade, mutually beneficial trade. And so, you know, advanced math, it wasn't even advanced math from that perspective, but versus Roman numerals. And the old school way of doing it was an advancement. And so Fibonacci brought the tools for an emergent merchant banking class.
- [36:04]
Robert Reidlove
Yeah, yeah. And there's a lot of parallels here, I think, with the ways money competes and spreads too, because a lot of what supported the selection of the Hindu Arabic numeral system were merchants. They're just choosing the best tool that lets them exchange information most efficiently to reach consensus most efficiently. And that's what money is doing as well. It's allowing us to reach consensus of human action effectively to settle our books or what have you. But math is doing the same thing, just maybe at a slightly more abstract layer, but they're also very interrelated. So through that perspective, it becomes clear that it's Darwinian. It's. Whoever's using a Hindu Arabic numeral system is just going to facilitate more trades more quickly, less error. They're going to scale their business more quickly, they're going to generate more profits, they're going to out compete anyone that's ideologically stuck to the Roman numeral system or whatever it is. And that individual will go out of business. The guy using the Hindu Arabic numeral system will thrive. Ultimately it out competes everything. And the same is sort of true with choosing the right money. If I keep choosing to store my wealth in silver and other people are choosing gold, I'm going to be eliminated. I'll be naturally selected out of economic Existence effectively. So I thought that relationship was so interesting and really fundamental. But within all of this, so you get math, you get double entry bookkeeping, which is a key component to capitalism, to scaling trade, let's say worldwide. But with that you get, then we're getting into the hierarchies. You get this very important concept of counterparty risk where you've got to now trust the counterpart to not doctor the books or not make good on the deferred settlement and all of these other things. I thought that was a really good point too. You introduced counterparty risk from a really first principle standpoint and talk about how important it is in these hierarchies because that plays into later how bitcoin influences and changes the game of counterparty risk.
- [38:25]
Nick Bhatia
Yes, and thank you to the one particular person that helped me hammer home that point. After reading an early version of layered money, he said you got to bring counterparty risk early and hard because it sets up the bitcoin thing so much better. And you're circling it, the story was already told. But he's like, you got to introduce counterparty risk really early and hit it hard. It is, it's about default or not, you know, and it's default or not, trust or not, trusted or not. And that's what counterparty risk is. And so if your counterpart is good, he's going to, he or she is going to make good on, you know, the promise. And if not, you're, you're in trouble. And down the road the system gets in trouble when it becomes interconnected. And that's also important to set up. It's not just about you failing, but when we get into bank of England and the idea of the lender of last resort in the middle of the 19th century, that was the first time when counterparty risk really moved completely past the risk to you, the, you know, the holder of the risk. It's actually the risk to the system and then thereby risk to our livelihoods, it turns out. Right, yeah, that's the case that, you know, while the monetary policy of the Federal Reserve might frustrate me, and this is where I think I differ a little bit from traditional Austrian thinkers and a lot of bitcoiners may be, is that it's not that I love QE and what it does for my dollar earnings and unit of account, it's not that I love QE for that, but the argument that they made that they needed to do that to prevent systemic collapse, because if the banks collapse, everything else collapse and our livelihood goes down is justified from their perspective, let's just say, right, maybe I choose a different approach and a solution. But you have to understand it's their system and they're justified in protecting it by printing unlimited money. We go and buy bitcoin as our frustration and our nonviolent protests to this. And that's a core component of what it means to be a bitcoiner. And I love that about bitcoin, but you can't complain about QE because it's the only thing that they know to keep their game alive.
- [41:40]
Robert Reidlove
Yeah, it's sort of a, this is a tough one for me too. As a bitcoiner. It's like sort of like don't hate the player, hate the game. The game is corrupt or just non sustainable at least. But the individuals, central bankers sitting in that chair, they have no choice but to print money to put more duct tape on the pyramid.
- [42:05]
Nick Bhatia
Basically, that's the best way to put it. You can't hate the players in it. The system is now at a very minimum 108 years old if you're looking at the Fed and arguably centuries older if you step into a layered money approach to things. But as it is 1971, 73, when gold left the dollar pyramid, that is, you know, that is the experiment and that is the system that is broken and needs to be addressed. It doesn't need to be addressed with gold necessarily. But bitcoin is making a stronger argument for its role in the evolution of that. And the bigger the problems get in the dollar system, the more people will come into the alternative system.
- [43:12]
Robert Reidlove
Yes, agreed to me, because there's an important deep point here actually is that the hierarchy bring stability. And this is, I'm a big fan of Jordan Peterson. He talks about that like every, like nature organizes itself into hierarchies. He talks about the lobsters and whatnot. But that brings stability in the social group. But the risk associated with that is tyranny. Right. Like there's people that scurry up the hierarchy that can't oppress those lower down. So we need, basically this is not something that even humans came up with. It's a natural organizing principle that many social animals organize themselves into hierarchies. Central banking is one form of hierarchy in the sphere of money, which is a very important tool for humans. I agree that they have to do what they have to do to keep the system going. But the problem to me comes into play when they try to suppress other options. If they try to suppress Bitcoin. Anytime you're trying to suppress freedom. That just doesn't ring true with a human instinct, I guess. And so what would? Not to belabor the point too much, but would the right approach then be for central bank to be like, look, we're going to print unlimited money, we're going to keep putting duct tape on this thing. But to be intellectually honest, assuming they know what is going on, they know this thing doesn't work, do they then say, but we also think the system's not sustainable, we should be buying Bitcoin as a hedge against this whole thing. What's an ideal scenario for a Jerome Powell? Let's say to be intellectually honest about what he's doing, because we know printing the money is stealing from the middle class effectively, or stealing from the lower end middle class. There needs to be something on the other side of that in the event that that hierarchy does not hold up.
- [45:18]
Nick Bhatia
Yeah, well, I think that. So the way that I like to phrase it, it's not that I disagree with that it steals from middle class, but this is the way that I like to frame it. QE printing money, it enables those closest to the money spigot to continue to benefit and capitalize. That's another way of saying the rich get richer. It directly enables that because it's the purchase of US government debt which underpins the system. And then corporate America borrows off of that rate and the banking system is held in proper standing and they're able to issue credit to those that already have the existing relationships with them and the credit worthiness within their system. So QE is the rich get richer 100%. So stealing from the middle class is a different way to put it, but it really is the enabling of those closest to it to continue to benefit. Right. And so when the Fed says we are trying to goose the wealth effect, which is that when stocks go up, Americans 401k goes up and they feel richer, so they go out and spend and consumption goes up on a aggregate level in the economy. They are being intellectually honest about that. And so I always like to joke that the Fed's third mandate, official mandate, is the S&P 500. They have also acknowledged that. I mean, they don't say it, it's not legislated in Congress, but they have said many times we are trying to support asset prices because it increases the wealth effect. Bernanke said this early on, and everybody believes it, every Fed chair and everybody believes it that we got to protect the stock market. So again, that comes from QE corporate borrowing. They Buy back their own shares, they support their own share price. All of that is in the mix. So they're not even, to me, being dishonest about that. If you read between the lines, you can see that that is what they're trying to do. Where I draw the line is Bitcoin, just like you. This is, it's actually an inalienable right. And not by, you know, any government or declaration of Independence, but by whoever you consider your own creator. Like, you believe in math Very much so. Robert, you are a math guy. You're a numbers guy like me. I'm a math guy. I can make sense of numbers. And you know what? We're not alone. Most bitcoiners are math people. They're inclined towards math because they're able to make sense of something that is potentially infinite and something that is not and make a decision between those two things. So those people are mathematically inclined. But also anybody who runs a business is, you know, mathematically inclined because you have an input and an output and the difference is your livelihood. And that's a, that's an, that's an arithmetic equation itself. So don't deny us something that is mathematical in nature and we believe in and is a form of speech. Not even by my own theory, because I didn't come up with this idea that bitcoin is speech. But reading the cypherpunk literature pre satoshi and then part of the research to layered money was the federal court case that protected cryptography as speech. Because what they said is that they actually said any mathematician that is using a math model to back up their data, a cryptography is using a system in a similar way. It's a form of expression. It's a form of mathematical expression.
- [49:43]
Robert Reidlove
Right.
- [49:43]
Nick Bhatia
So I am encouraged as an American that we don't have banned bitcoin rhetoric flying free. We have a sensible conversation. We also have one of the biggest IPOs of all time. That's a bitcoin centric company. No matter how popular or not they are with bitcoiners itself, it matters. If there's one thing that matters to the government of the United States, it's its corporations. And so bitcoin is not going to be banned in the United States. Enough people recognize it as a form of expression, math and freedom, that the restriction of ownership and the restriction of using doesn't seem like it's in the cards. If it is in the United States, the United States is in trouble on a longer term horizon. Let's just be honest. And so I think that every government wants to protect longevity. And so when the politicians really take a look at it, they'll see that the path of least resistance toward bitcoin is going to be beneficial to the nation. They will also piggyback off of other nations that win by being first and the competition will. That's regulatory arbitrage. I say it in every single interview because it's going to govern the way bitcoin moves in the future. Jurisdictional arbitrage mandates that companies and people will move to where they can use things the easiest. So how can the US go AWOL on bitcoin and survive? They won't be able to do it, therefore they won't do it. I just don't believe that. I'm an optimist, but I believe that and I hope to be a part of the conversation too.
- [51:46]
Robert Reidlove
Yeah, I think it's a great way to put it. The other thing, at least in the US by virtue of being the global reserve currency, it further reinforces the sense making of putting more duct tape on the hierarchy, printing more dollars because we're exporting a lot of that inflation. I think the world, it's quoted in your book somewhere maybe half the world's transactions are denominated in dollars, something to that effect. So we're able to. That's probably our largest export is the US dollar and the inflation associated with it. And it is important to realize that this, again, the concept of hierarchies runs very deep. And for humans to keep the hierarchy vitalized and functioning properly, you need the free flow of information throughout the hierarchy. And that is the importance of free speech. It's this concept of letting your ideas go to battle and fight and die so that, you know, we don't end up in kinetic real warfare.
- [52:59]
Nick Bhatia
Right.
- [52:59]
Robert Reidlove
We need to be able to. That's, that's why free speech is the cornerstone of Western civilization. It's like, so we can operate on this plane of reason and intellect and reach consensus. Non violently, effectively. Yep. And that's why I wrote the book.
- [53:15]
Nick Bhatia
Because it's, I mean what, what else do we have other than trying to communicate things to our fellow humankind? And I was encouraged by people to keep writing like yourself. I mean, early conversations with you were key for me because we talked about, you're asking me how do I teach? And I'm asking you how do you write so much? You know, you're a beast. I mean, we've had that, those talks and it's all about trying to spread ideas. And so it's like it's like you're gonna. Would you ban writing books?
- [54:03]
Robert Reidlove
Right.
- [54:04]
Nick Bhatia
I mean, really, that. It's. It's that slippery of a slope. It's that slippery of a slope. And don't get me with, you know, financing terrorist activity or like, money laundering narratives. They're not gonna hold over the long term.
- [54:20]
Robert Reidlove
Absolutely correct. And it's, It's. It's such a slippery slope. It's the slippery slope. You try to constrict speech in any form, you end up with absurdities like certain numbers are illegal. It's like, it makes it. It's not even conceivable. I do take a very, I think, absolute stance on that. That freedom of speech is always has to be of highest importance.
- [54:46]
Nick Bhatia
And two, there's so many nuances within the freedom of speech. Like, yeah, well, what about racist speech? What about hate speech? What about all these things? That's its own debate. This isn't that. Bitcoin isn't hate speech at all. You can have your own debate about hate speech. And what is the line to cross between what we should restrict as speech or whether Twitter can ban this person or that person from saying things. Those are their own debates and political. And it really doesn't matter where you fall on those debates when it comes to Bitcoin. It's just not in that realm of where the debate about speech is today.
- [55:33]
Robert Reidlove
Yeah, I think it's safe to say that mathematics and cryptography cannot be classified as hate speech, if it ever is. We've really gone off the fiat deep end. So just bringing it back to the book, the first hierarchy you display, and it has these great visuals that I think visuals are very important to bring home the point. You have gold and silver coins at the apex of the pyramid. We have the Medici banking family as the second layer below that, and then the bills of exchange that they issue. So that was sort of the first, I mean, at least the first hierarchy of money that you're analyzing here. And with this, these bills of exchange, so they're holding, I guess we call it base or layer. One, money, gold and silver. Medici family is the intermediary then issuing bills of exchange to that money. This introduced, not only did it introduce counterparty risk in the form of the Medici family themselves, but also introduced this concept of the elasticity of money, because now they have the wherewithal to expand the supply of bills of exchange beyond what they maybe have in reserves. And this is a very fundamental concept in the understanding of hierarchies as well.
- [57:00]
Nick Bhatia
Fractional reserve money is absolutely fundamental to understanding what a credit money system is, which is the dollar system that we all live in. You either have what you've promised or you don't have it. And when things are good, it doesn't matter whether you have it or not, because nobody is fleeing lower layer money for higher layer money. But when that does happen, things can get very crazy very quickly. And so elasticity is an important concept because gold cannot be stretched like a rubber band. Its supply cannot be expanded. It does not have elasticity. It can be mined, it can be melted down, but it can't be expanded. Credit can be expanded, which makes it really an amazing tool, frankly. It brings instabilities, it brings arguments, it brings moral arguments into the play where if you have the ability to issue loans that serve as money, it's a form of privilege that can be abused, and governments can take over that and abuse that privilege. And it brings moral questions into play. But the hierarchy of money is basically the government saying, we want our money to be the trusted money and really monopolize that issuance. When the Medici family issues bills of exchange, they're expanding the money supply. The government comes in, they issue government currency, which expands the money supply. But it also brings into what are you doing with that money? And what's your process in administering that free money that you've given yourself? You call it counterfeiting. There's a lot of ways to describe that. And so, yeah, the Medici family, like you said later, it's not the second layer. They're the intermediary. They issue the second layer. And they can issue as much as they want until they're called on it. And so certain families build that dynasty. Certain governments do as we see later in history. And then certain ones are not able to sustain that. They get called and defaults happen and instability happens.
- [60:06]
Robert Reidlove
I think called is the right verb there, because it is. They're purposefully expanding their own optionality effectively. They're holding real money, expanding bills of exchange arbitrarily to do whatever they want. They dole it out arbitrarily, they spend it, what have you. And I love the analogy you use that when things are good, no one's demanding final settlement. It's just layers and layers of deferred settlement upon deferred settlement. But then when there's a shake in the confidence, that people scurry up the pyramid. So they're running out of bills of exchange, trying to get into gold and silver, because they know that's the trust, minimized money you described it this way. You said first layer of money emerged as a better way to store value over longer periods of time. And second layer of money emerged as a better way to transact because it was more flexible to use than coinage. And I've described this as, I say that money's a tool for storing value across time and space. You'd say the first layer of money, really good at storing value across time, but hard to move across space because high transaction cost. But this introduction of second layer of money now gives us transactability across space, but it mitigates the transactability across time because of these counterparty risk and scurries up the pyramid as you describe them.
- [61:33]
Nick Bhatia
Absolutely. And if that's an 800-year-old problem, then how amazing is bitcoin because it blends space and time in a way that we never have. And that's why I wrote this book. You got to give the context, the 800 year context and more for how amazing this innovation is. People just, in bitcoin, we all get it, we love it, we're in it. But like you said, people that don't know a thing about finance can pick up layered money and really take that dive into understanding, wow, this is an innovation and it's pretty cool.
- [62:23]
Robert Reidlove
Yeah. So again, the analogy to something like the options market, you're issuing these second layer monies on top of first layer money as derivative. It's a derivative instrument. So you're increasing again, transactability, but it's increasing risk as well. So you're increasing volatility in the marketplace. And another line from your book here, you say second layer of money is therefore inherently unstable as the power to create it will always be subject to human abuse. Similar to our example of the English goldsmith who abused the public's confidence and his creditworthiness. So to the issuer or the custodian of the first layer money themselves, they now get this additional optionality in the marketplace. But with that comes the temptation and incentive over time to abuse that. Because they effectively have a free, have a money printer. They can just print these bills of exchange for real money and do it as they please. And then bitcoin. To your point, it's like we finally have a money that's purely informational, that you can settle with finality more or less instantly, within an hour, anywhere in the world. And it just cuts out the need, a lot of the need for this, this counterparty risk, effectively, that's been so integral to monetary hierarchies historically.
- [63:57]
Nick Bhatia
Yeah. And that's why I always Recommend that people read your work because one of the things that you do is you try to envision the benefits to society from this shift in property rights, fundamental shift in property rights for our species that we've never had. And you have to be a dreamer to embrace that and how important Bitcoin can be. Because having the confidence of that final settlement through many generations looking forward can change humanity and it can change the way that we do things. And because Bitcoin is so obvious to me because of what the Internet did to the world, that's like. I mean, I try to make a few analogies in the book to bring that point home that things like email and HTTP, these sort of protocols have changed the world and the Internet number of Internet users and global adoption has followed a curve that is being followed by Bitcoin. And the way that the Internet changed the world. Bitcoin is going to completely alter how we think about property across the world. It definitely changes this idea that Americans have a leg up because they have better access to the dollar system and dollar credit markets and can capitalize on that. It definitely is. I don't think it threatens the dollar explicitly, but it just like the Internet didn't threaten the United States, right? Yeah, the Internet didn't. Looking back, it didn't threaten the United States, even though it brought more decentralization to everything. Yeah, maybe the dollar has lost some world reserve currency status at the margin since the Internet came to be. I'm not sure that you could directly correlate it. Maybe you could, but Bitcoin is not the demise of the United States. Especially if Americans are the ones that are investing in Bitcoin and have a lot of Bitcoin and are building Bitcoin focused solutions and businesses for people all around the world.
- [66:55]
Robert Reidlove
And it really comes down to how willing the United States is to embrace Bitcoin. Because with the Internet they took the do not harm approach. This is just let the free market figure itself out. Let these innovations flourish despite any theoretical threat that may have represented to centralized power structures. They let it more or less play out. And that became a huge boon to the United States. The most powerful and valuable companies that came out of that revolution, they all came from the U.S. so I think that, yeah, it's incumbent upon U.S. policymakers and legislators to really take a similar approach with Bitcoin.
- [67:43]
Nick Bhatia
Yeah. And I think that I've said in the past that I think the US is going to approve Bitcoin ETFs, but if they don't, that's Also a do no harm policy. It's not an anti Bitcoin stance to not approve a Bitcoin etf. Bitcoin can grow without an etf. People obviously are finding their way into the market in other ways. And with Coinbase trading public now, it brings people more confidence that they can use third parties to get involved and they don't maybe necessarily need an etf. But yeah, it's a do no harm. And I see that that is unfolding the fact that we're 12 years into this thing and there's no ban, there's no restriction of usage, there's no laws against operating a node, there are no laws against mining. There's a public company now that's Bitcoin centric. So I'm hoping that that will continue.
- [68:49]
Robert Reidlove
Yeah, agreed. So the whole bringing it back to the book here, all of these things just dissipate transaction costs. Even the Internet dissipated the transaction costs associated with information. We could just communicate with much less friction. And now Bitcoin's doing the same thing for commercial value. Effectively. We just can move value with much less friction. And this is a problem like as your book explores. This is as old as humanity itself. We've been building different institutions to decrease the friction of information and value flows since the beginning. And one of which you talked about was, you get into the creation of. I don't know if I'm pronouncing this right, the Antwerp Bourse, 1531. And this was the. The first stock exchange or one of the original stock exchanges. I'll just maybe let you describe some of that and its relationship with the Joint Stock Company and how that led to the proliferation of capitalism.
- [69:55]
Nick Bhatia
Yeah. The word bourse or burst is universal in European languages. It means exchange or stock exchange in pretty much every European language. The original one was nearby Antwerp in Bruges. That place was a meeting place for merchants and bankers to come and do the book settlement that we talked about. It was like a club. And In Antwerp in 1531, we had the first place ever that bills of exchange issuers could come and meet and in an open outcry sort of way, trade with each other every day. It was the first meeting, like, you know, it was the first exchange ever where people came and traded and they weren't trading just other commodities like cloth and metals and things like that. They were trading bills of exchange. They were treating credit money instruments, and they put a price on bills. Bills didn't settle in the interim. Before Antwerp, it was just a maturity game. And that was A huge shift in the story of layered money because now these promises, these credit instruments, these IOUs, all can have a live price. And it also coincided with the birth of the financial media. The first ever quotes in a paper, in a newspaper happened because of the price of borrowing and the bill market in the Antwerp Boris in 1531. Now, Antwerp was the international commerce hub at that time in Europe because of its position geographically. But during the Dutch revolt, Antwerp was blockaded and the hub, both of European commerce and finance moved to Amsterdam. That really gets the story started. That's where the story gets really interesting because you have three things happen in succession in Amsterdam that leads to the bank of Amsterdam. The third thing being the creation of bank of Amsterdam. The first thing is the creation of the first ever joint stock company. This is the Dutch East India Company, otherwise known as a voc, which is the Dutch translation. The VOC was an imperial type of company, going to Asia, ransacking commodities and bringing them back and engaging in trade.
- [73:11]
Robert Reidlove
It was like its own nation state, right? They had their own army and everything.
- [73:15]
Nick Bhatia
They had the right to wage war in their charter. They could wage war on behalf of the Dutch Republic and things of that nature. So the company itself was wildly successful and was the coming together of many merchants that were doing that type of business in Asia. So basically the merchants got together and said, we can raise capital jointly and really compound and leverage. This is an example of leverage. And so they did that. They got a charter right away. People wanted to cash out of their shares because the company was doing so well. And so where could they sell their shares? The first in? Just like when a company goes public, the early ones want to cash out. Where do you cash out if you own VOC shares? That's where we get the founding of the Amsterdam Bourse, the first ever stock exchange in the world, because of the first ever stock company, a joint stock company. And so these shares traded in the Amsterdam Bours because they needed a market for liquidity, these shares needed liquidity. Liquidity is simply turning something that can't be used as cash to something that can be used as cash. So the shares found liquidity at the Amsterdam Boris. Then the government, the City of Amsterdam said we should have a clearinghouse where we can monitor and surveil all the activity going on in VOC shares. We want to see it and we want to clear it. And so it's an innovation because it helps the velocity of money. If I'm selling shares to you and you just credit my bank of Amsterdam account Instead of giving me coins or writing me a promise. Now we know the City has this chartered bank that holds gold and silver in reserves and we can all trust its deposits. We can really trust it because it's the City of Amsterdam and it's the year 1609 and it's going to make everything better. Through that, government monopolized the issuance of second layer money in my framework. It's an incredibly fascinating seven years and I've told the story, I read the paper on that era like 20 times to try to just figure out how to tell this portion of the story, because it really was this. It opened up the idea of privileged lending, which is QE and Treasuries on the balance sheet of the Fed. It's all privileged lending. I actually saw a mocked up balance sheet of the original bank of Amsterdam and it was basically like liabilities were boa deposits and the asset side was gold loans to the City of Amsterdam loans to the vocal. And it just sparked these light bulbs like, oh my God, that's the same thing as the Fed's balance sheet today minus gold. Right. And so the parallels were a little mind boggling and really got the story moving for me.
- [77:03]
Robert Reidlove
Yeah, it's so interesting. It's like we figured out again the mathematical revolution that gave us this language of consensus globally and then we figured out how to actually apply that to make capital and risk more deeply fractionated so that you could draw on a lot more participants. Because typically these business ventures I assume would have been reserved for just a few high net worth guys that are meeting to settle their books, but all of a sudden they can now get exposure and access to public capital and that just leads to more concerted human action at scale. All of a sudden we can capitalize much larger and longer term projects. This was essential to the scaling of humanity effectively to be able to pull capital in this way and create so much liquidity that people could get in and out and share risk and all of this. It's almost like the wiring together of. It's like the wiring together of the global mind. Not global at this point, but a pocket of it. And this is the framework on which we would basically globalize the world. This is the core foundations of capitalism in a lot of way. Just this act of free exchange and this one line in your book I think is really important. So that Antwerp prided itself in its regulation free environment where the trade between first layer coins and second layer bills and between the bills themselves didn't require licenses and wasn't subject to taxes. So it was removing these impediments to free trade. It was maximizing its utility as a marketplace. And that's what enabled it to create so much wealth effectively.
- [78:56]
Nick Bhatia
Well, and in Antwerp, that's why all the other trade was done there too, like English cloth and spices from Asia. It all went through Antwerp because it was a free trade hub. And Amsterdam picked up a lot of that from the free trade standpoint. But then with their innovation in the joint stock company, it made the free trade itself less important. And the ability to pool capital as you just put, put that center stage that we can. It doesn't have to be about the lowest taxes here. It's like our unit brings people in and that can, you know, and through that, we can pool capital through our unit, the bank of Amsterdam, deposit and build consensus around that Dutch gilder unit and build that. That's what we saw in Florence in the 13th to the 15th century, that the unit itself had consensus and that brought wealth. And so the Dutch fielder did serve that function. And for that reason, it's probably the first world reserve currency that matters. Because a world reserve currency, that's just a coin in terms of the Spanish and the Portuguese coins in centuries prior to the Dutch guilder, doesn't really convince me that that is important to classify as a world reserve currency. But the Dutch guilder brought capital in, and capital was held abroad in this unit because it fit the reserve status. And it was a second layer of money. It wasn't a gold coin. It was a deposit with coins held in reserve. And for the most part, the bank of Amsterdam was mostly reserved. They had some fractional, they had some loans to the voc. So obviously some of their deposits were backed by loans to counterparty worthy borrowers like the privileged VOC and the City itself. But it was trusted and it held for 100 years.
- [81:50]
Robert Reidlove
Yeah, it's as if the, I guess they establish this reputation for themselves. And it's that reputation that actually draws in the trust of others, other market participants to basically scale the hierarchy. And so that gets us into the second hierarchy in your book, where you have gold and silver coins at the apex. We now have the Antwerp bankers in the middle. And then you have bills of exchange and notes at the bottom of the pyramid. So we see that the hierarchy is expanding based on the technological realities of the time and the way we're. The way that systems, the hierarchy was being organized led to its growth, I.
- [82:35]
Nick Bhatia
Guess you could say, right, because now when the bills found a price, you didn't pay coins for them, you just paid with another piece of paper. Those were called notes. And so the origin of notes were we need a piece of paper that we can exchange with each other at the end of the day when we're done trading bills so that we still don't have to use coins and so we use notes. And so that's the origin of cash right there. It was a really fascinating thing.
- [83:11]
Robert Reidlove
So we had then the bank of Amsterdam essentially become the world's first central bank. And then that that model was then adapted in England to become the bank of England, which was a really consequential development in world history.
- [83:37]
Nick Bhatia
Absolutely. The bank of England definitely drew inspiration from the bank of Amsterdam. Not only the central bank being able to monopolize the second layer of money and use it to their benefit in the form of war finance at the time, but also it was really important for the development of a three layered money system in which commercial banks and the central bank have a relationship and a hierarchy between them in terms of the instruments that are used in a financial system. So the bank of England purchasing debt of the Government of England at the time in order to wage their war, rebuild their army in 1694 was a little bit of a play on what the bank of Amsterdam had done with the voc where they're lending the VOC money to do their thing. That's not the innovation of the bank of England. The innovation there was that they have bank of England deposits that are then leveraged by commercial banks to create a multi layered system of credit elasticity that brings more risk into the system. It also brings more regular financial panics and the idea of bank runs that are cured by a central bank, the central bank now assuming a role of stabilizer in the system. And then finally, and I say finally because this is when central banking really coalesced around a single narrative which was lender of last resort within a system. And that came from Walter bagehot in mid 19th century. That's the model that the Fed used when it was created. It's an issuer of reserves to the banking system. It can issue a paper currency that can circulate. It regulates an entire banking system of leverage by its own governing. And it's also there to be a lender of last resort when there's a liquidity crunch on more counterparty risk laden layers of money.
- [86:37]
Robert Reidlove
Yeah, you say in the book that basically they were replacing this decentralized system of goldsmiths which held gold, circulated notes, discounted bills with a more centralized system. Effectively, and I get the original impetus for that was war financing, is that correct?
- [87:03]
Nick Bhatia
The creation of the bank of England was to finance the rebuilding of the British Navy. And so that motivated it. But then you use all the other things like it's going to be great to have a unified unit of account because the trend was a very decentralized issuance of money where this goldsmith issued these notes and that goldsmith issued those notes. And both of them are trustworthy, but they're not fungible with each other necessarily. Or it just slows down the velocity of money a little bit. So you can use all those other things as good coverage. And it's not like it wasn't part of the reason. But let's be honest, it always comes down to war finance. When you really study history. The Fed is not a stranger to that as well. World War I and World War II were financed by the Fed.
- [88:10]
Robert Reidlove
Yeah, I think it's from the American side.
- [88:13]
Nick Bhatia
Yeah.
- [88:14]
Robert Reidlove
Really important point that they're. There's a deep relationship between war and the central bank. Also with the bank of England. It was instrumental in ushering in the global gold standard. They were the leader to that effect. And Isaac Newton, was he the head of the bank of England for a while, is that right?
- [88:39]
Nick Bhatia
He was the master of the Mint, Master of the Mint for the bank of England. And he was tasked with a study of gold versus silver and the exchange rate between the two and the role of each in the minting of coins at that government level. So what I think nobody is able to really identify is what exactly Newton's motivation was to bringing a gold standard into the foray. But what he did was he studied the exchange rates between gold and silver across Europe and he came up with this number that he thinks he thought that this is the right exchange rate. And the exchange rate that he picked eventually obsoleted silver entirely from the English monetary system. And because the British Empire became what it did in the 19th and then the early part of the 20th century, the British pound backed by gold was the world reserve currency and then drew in, much like Bitcoin's gravity, which we like to talk about pretty often the gravity of gold. A gold backed pound brought other currencies into gold backing so that they weren't actually being pulled by the pound, they were being pulled by gold. And so they were trying to mimic that that spread throughout the world. Finally in 1900, you had the Gold Standard act in the United States, where silver also left our monetary system here in the US but that all started with Newton. And the master of the mint. So it was a long path from the early 1700s, when Sir Isaac Newton made that decision, to the year 1900, where it was a full global gold standard.
- [90:55]
Robert Reidlove
Yeah, yeah. He was kind of a mysterious guy. A lot of his work, I think when it was uncovered, he was a known alchemist, actually he was very deep into the study of alchemy. And I don't know, this is not confirmed, but there's rumor that part of that study was to determine what standard to put the bank of England on. Once he determined that you could not create gold from lead, he said he decided that gold was the right metal to found or to premise the central bank upon. And then he created, to your point, he created this exchange rate that made it profitable for arbitrageurs to export silver and import gold. So this created an incentive system that centralized the custody of gold into the bank of England and eventually through combination of that and England's imperial efforts, they became the central bank of the world, effectively.
- [91:54]
Nick Bhatia
So I like your Newton story, so maybe in the second edition we'll add a little bit of that because that, that makes the story a lot better. For sure.
- [92:08]
Robert Reidlove
Yeah. Whatever the motivations were, it was, you know, in the scope of history. Genius put, being put England into the seat of world superpower for, for centuries to come. So then the, the, so the next pyramid that you show or the hierarchy that you show in your, your book here, I guess we're fast forwarding a little bit. So bank of England became, I guess, the blueprint for modern central banks as we know them. And so what we have today then is gold at the apex, central banks intermediating. And then you have currencies at the bottom layer, like the pound, US Dollars, French francs, German marks, et cetera. Up until that point, that's what they were. They were redeemable for gold notes redeemable for gold through the central bank.
- [93:04]
Nick Bhatia
Yeah. That pyramid is a very simplified look at the international monetary system because it doesn't even include the commercial banking industries within those countries that are anchored to each one of those currencies. That's only to show you that multiple currencies were redeemable for gold. Gold existed by itself on the first layer of money. Everything else was anchored to that.
- [93:34]
Robert Reidlove
Yep. And those names, a lot of them, like the lira, the pound, maybe Frank's as well, they actually are terms for weight. So they were weight. They were redemption certificates for a certain weight of gold. That's where they get their name, effectively.
- [93:53]
Nick Bhatia
Yeah, the pound, definitely the Word comes from a weight of silver. That's where the origin is. Currencies are inextricably linked to precious metals just in the way that they formed. Currency is simply a current. It's simply flow. It's not meant to be an asset, a commodity, or a storage vehicle. They are very different words. I was speaking with somebody about the nuance of calling Bitcoin a currency, and they said, you know, I don't. I don't love when we call it a currency because they prefer money. Right? They prefer the word money. But I said it is a currency because it flows. That doesn't mean that it's the only word or the best word. But it's not an incorrect word to describe Bitcoin. It's an asset also. It's a numerical commodity. It's all these different things, but it's definitely currency because it has current. And so these government currencies were just meant to be a current of gold, not gold itself. And that facilitates the functioning of governments and industry and trade and all those sort of things. That's why governments furnish currencies so that there can be money velocity within their jurisdiction. That's not governed by gold. Because if it's governed by gold, what good is the government? Government doesn't have any control or power to influence things. The government, whether or not it's doing it for its own benefit or whether selfish or not, the government is trying to facilitate things for its economy itself. And so currencies are meant to do that.
- [96:05]
Robert Reidlove
Yeah, it's like the currencies are introduced to stream gold in a way. Right, because gold.
- [96:12]
Nick Bhatia
That's absolutely it.
- [96:14]
Robert Reidlove
Gold has all those transaction costs that are hard to overcome. So we insert technologies and institutions to overcome those transaction costs effectively and scale gold.
- [96:25]
Nick Bhatia
That's right.
- [96:26]
Robert Reidlove
And at this point, we hit on this earlier, but there's a great line in your book that ties it in. Says as the pyramid of money grows, the lower layers in the pyramid have the most elasticity, but also the most fragility as a byproduct. So we're getting this ability to stream gold, to leverage gold, I guess you could say as well, because you're expanding, you're fractionally reserving, you're expanding the supply of notes, of notes, banknotes, and it's growing. We're moving faster, we're stimulating economic activity. You can do all these things with the magic of inflation, I guess you could say. But all the while, as the pyramid grows, it's also becoming inherently less stable, which I think is A really important point.
- [97:20]
Nick Bhatia
When you look back at history, we can see that financial panics and boom and bust cycles and runs on banks and business cycles themselves, which is associated with boom bust, that these are now constants in our society. They've been going on for hundreds of years. They are a byproduct of a layered money system in which there's fractional and even when there's not, just the fact that there's trust involved means that there's going to be defaults and defaults cause busts and things like that. So it's almost like you have to diagnose why there are crises, but you don't have to do much more than that because they've never gone away. You know, there's a book called, you know, eight Centuries of Financial Folly. That's the subtitle, I'm blanking on the name. I'm sure you've read it. Reinert and Rogoff.
- [98:34]
Robert Reidlove
Oh, this time is different maybe.
- [98:36]
Nick Bhatia
Yeah, exactly. I read this time is different for layered money. I ended up not using it as a reference or pulling anything out of it because it was actually just trying to compare different financial crises to each other and group them and diagnose them and basically say that it's never different. They all follow the certain, you know, the same pattern within these several categories that, you know, that's not that informative to me other than that they, they happened. Yeah, you know, they happened and you know, yeah, some are like government, some are leverage caused. But if we just put it into the framework of layered money and that hierarchy breeds fragility due to trust, to layers of trust and then you introduce fractional reserve, of course you're going to have crises and they're getting bigger. And that's, that's really the point here is that when we fast forward all the way to 2008, 2020 in the US, 2011 and 13 in Europe, and then these emerging market crises that we have keep rearing their heads and certain currencies in Brazil, Turkey, and then not to mention the total dumpster fire ones like Venezuela. It just goes to show that fragility cannot be fixed in an aged system. It can't be fixed without a brand new system. Do central bank digital currencies really do anything to reinvent their current architecture of their system? I'm not sure that it does. And so that's why we need Bitcoin. It's not like CBDCs just all of a sudden are a new system and everything is fixed.
- [101:03]
Robert Reidlove
It's a New band aid. Right.
- [101:07]
Nick Bhatia
It's a new parallel system within their system. But the, you know, it might not be a band aid but it's definitely not a new system. It's actually just a new, it's just a new second layer joining, joining everything else. It doesn't change the relationship between the second and the first layer. And it also doesn't affect that the first layer of money today is US Treasuries and nothing else, which is a huge part of the longevity problem to the system because that's just a blank check to the US government. And geopolitically speaking, that's not something that the world wants to go on forever. It's not just like we don't want to use the petrodollar because of the oil trade and let's buy oil and Euros and that fixes the thing. It doesn't fix the thing. The thing is a blank check to the U.S. government. And that is not something that, let's say China wants to keep going forever. And now we see that in other countries as well. US dollar is declining at the margin all the time in terms of its reserve status and its status as an international medium of exchange. Even though US Treasuries are still the dominant reserve, they call it the risk free asset of the world. It's still dominant. They are making so much of it that people are seeking that alternative. And so that's why you see, I really do believe this, stocks going up so much because you know what, shares in Apple might just be a much better long term store of value than US Treasuries because Apple can change its denomination at any time. And Apple isn't in the US dollar system nor any of those tech companies. And while the valuations might appear stupid, what premium do you put on gold? It's infinite because there's no use to it ignoring the industrial uses, all that kind of stuff. The multiple of the price to earnings ratio of gold is infinity.
- [103:30]
Robert Reidlove
Yeah.
- [103:33]
Nick Bhatia
So what does it matter if you've paid 100 times earnings on a tech company when the alternative is a fixed income asset tied to government that's tied to a burning building.
- [103:48]
Robert Reidlove
So yes.
- [103:51]
Nick Bhatia
I'm not endorsing, you know, equity market investing or even trying to justify the valuations, but there is an explanation beyond earnings that goes into those valuation and it comes down to multiple because the alternative is something that I think people are not able to wrap their minds around. So they'll pay 100 because it's a number and you know, that's why they still own gold around the world because you know you have to escape this fixed burning building, you know, you know, the fixed income stream from the burning building. You have to escape that by buying gold, by buying some asset, by buying a tech company or by buying Bitcoin or by buying real estate. And we all know that real estate has its own multiple to cap rates. And these things are part of valuation of real estate. How much can you get rent and what's the yield on your property? The inverse of yield is a price to earnings multiple that can go up to 50, it can go up to 100 because you can actually measure it and you can change the unit at any time that you're collecting your rent in. And so that is part of why we have stretched valuations, because they might not be stretched for the people that are buying them.
- [105:21]
Robert Reidlove
Right? Yeah. This is such a really great point and seemingly just not understood by many market actors. They're trapped within system thinking. Right. The way it's worked for the past hundred some odd years is just the way it works, period. But there's systemic issues and they're accumulating more and more rapidly. And this back to the bank of England was originated by that model. They were the first central bank to insert debt, government debt, as base layer money alongside gold, effectively. Is that right?
- [106:05]
Nick Bhatia
The bank of Amsterdam had privileged lending also the bank of England when it financed the war and government debt was the staple of the balance sheet of the central bank. Yes, that was the first of its kind and really set the tone. But they drew inspiration from Amsterdam for sure.
- [106:33]
Robert Reidlove
So we've then at that point, by inserting debt as layer one money, we've removed some equity. What gold would just be equity based money, We've inserted debt and now more debt, more fragility, more volatility, it just sort of percolates down the pyramid, if you will. And that to your point about bonds, people have to leave these fixed income instruments because the income's being paid in an instrument that is actually being used to implicitly default, effectively. So they're actually externalizing the inflation through the currency. Basically that's what inflation is doing. And it's this instead of. Again, we're back to the whether it's a store of value or whether it's good for moving value across time or good for moving value across space. When you start putting debt at the base layer, the whole thing, the whole hierarchy becomes much less robust across time because you now have all these intertemporal trust arrangements that weren't there when you had gold as a base layer. To your point, you say gold was a disciplinary force. Gold is a force that keeps the whole hierarchy honest effectively. There's an option to settle to a layer that no one can politicize, corrupt or manipulate. And when you remove that optionality, you make the whole thing less stable.
- [108:06]
Nick Bhatia
Well, and you can also just paper over it very easily. And that's what we see the Fed doing is they just have this ability to paper over because they don't have any disciplinary constraint. There's a great line from, I believe it's Merling's work is that the disciplinary constraint today is just what central bankers are willing to do in their own conferences, like in their own chats, like what they're willing to do. That's the only constraint that they have. It's their own, you know, long term reputation. So they do as much as they think they can do, you know, to get away with and which is no constraint, basically. Right, right, right. Well, we've seen that. I mean, you know, quantitatively speaking, it's just, there's no limit. They, that's what they said during COVID It's unlimited qe.
- [109:09]
Robert Reidlove
Right.
- [109:10]
Nick Bhatia
That's the new policy. When they talk about tapering qe, it's a joke because if they lower it, when they increase it again, they're just going to say, oh, it's infinity on the upside. So it doesn't really matter. They've established that that's the official monetary policy is infinity. Creation of second layer money to sustain, to sustain the system.
- [109:45]
Robert Reidlove
Unlimited duct tape.
- [109:48]
Nick Bhatia
That's right.
- [109:49]
Robert Reidlove
That's right. So we're recording this in late May 2021 and we just had Ray Dalio come out yesterday and say he owns Bitcoin and he'd rather, I think his quote was, I'd rather own Bitcoin than own a bond, government bond. I mean, that's a huge seal of legitimacy from, from a guy like that and a testament to the outcome of unlimited duct tape. It is coming apart. He's also said cash is trash and a number of these things. That's where we're at today. It's just been pushed to an extreme like we've never seen it before. And there's a line in your book that I think speaks to sort of where we're going is that it said if elasticity wasn't flexed when needed, a cascade of defaults could ripple through the third layer of money. I think we're talking about Beigehot when we say this. He concluded that the central bank must ultimately create second layer money in abundance when the system needs it most. Underpinning the modus operandi of central banking ever since.
- [110:55]
Nick Bhatia
Absolutely, yeah. Bagehot basically said that you when the third layer gets into trouble, the bank of England has to be able to purchase anything on the third layer with second layer money. And in order to do that, you have to be able to create second layer money on the spot. And that's what it comes down to. And that's the badget dictum. And it's the lender of last resort. And it's always central bankers have always basically held this as their modus operandi, their number one governing methodology.
- [111:39]
Robert Reidlove
Then that becomes the blueprint for the Federal Reserve System effectively.
- [111:45]
Nick Bhatia
That's right.
- [111:48]
Robert Reidlove
You opened the chapter with the great quote from JP Morgan that gold is money, everything else is credit. Very simple phrase. Huge implications for understanding the history of money.
- [112:05]
Nick Bhatia
That's right. Because it is the difference again between currency and commodity, or the difference between current and asset, or the difference between flow and stock. Flow is fine, credit is necessary. All these things are important in a financial system. But none of them flow isn't money. Neither is current and neither is credit. What he's trying to say is that ultimate settlement is its own brand. And today if you want to take custody of a Malibu mansion that's ocean facing, that has its own characteristic as ultimate settlement in a similar way that a 1963 Ferrari would have, or in a similar way that a Picasso would have, and in a similar way that some UTXO with X amount of Bitcoin in it, they're all a form of value that is based in stock in the stock to flow relationship of things. What JP Morgan is trying to say is that stock is one thing and flow and credit are another and they're not really the same thing. And for me, my stock is gold. Yeah, that's what he's trying to say. That's what he's. His unit is gold. His savings unit is gold. His multi generational unit is gold. If you don't care about anything other than the Pacific Ocean and surfing life, the Malibu mansion is all that you want. That's your ultimate form of settlement. And no one can take that away from you given your property rights in the state of California. And so we have to take these analogies of assets and apply them to Bitcoin and separate them from what we think of as other forms of money, which are just forms of credit and just trust promises.
- [114:33]
Robert Reidlove
Yeah, you could almost say that maybe one way to delineate between the two is that money is rooted in sacrifice. You actually have to go out and expend energy and resources to obtain gold, whereas debt is something more rooted and maybe you could say artifice in a way that you can create debt on the spot. There's no cost to it. I can extend credit and it's necessary. It's not to say that it's completely an illusion, but it's. One is very easy and elastic to expand, the other is not.
- [115:12]
Nick Bhatia
But let me ask you this. When a current is flowing and you need to store that energy, it's no longer a current. That's right, it's in storage, it's in a battery. And so they're, they're different battery versus current.
- [115:25]
Robert Reidlove
That's another good way to look at it. And yeah, to your point there, it's like, okay, you can choose whatever your unit of multi generational wealth is, but so long as you're choosing in the sphere of money, you can choose right and wrong, you can choose a better or worse battery, and your battery can be out competed by others. So not only was it gold became the multi generational money of choice for JP Morgan, but it's also becoming that in the world it's out competing all other forms of money and it serves as this ultimate energy, monetary energy battery, if you want to use that analogy, which has important framing for Bitcoin's emergence later on. It's not like, sure, gold and Bitcoin could operate side by side for hundreds or maybe even 1,000 years, who knows? But in the long run, as economists say, it's going to coalesce towards one solution. So maybe one day someone will say the same quote, but replace gold with Bitcoin.
- [116:35]
Nick Bhatia
Yeah, I mean, it really is why we like to describe Bitcoin as digital gold. Because there's so much history in the word gold and so much history of being the best battery that exists to store current across time and space. And so in the future, I don't. It doesn't matter if gold is going away. And that's what, you know, I've been thinking a lot about lately, because the digital world isn't limited by any space restrictions. And so if Bitcoin is the reserve currency of our digital life, gold can hang around as a monetary metal for the physical world in its own way. And it might always be viewed as that. It might never lose its reputation, it might lose its crown in terms of market capitalization to Bitcoin. And I do believe that it will as the virtual world. Doesn't have any of those same restrictions. And bitcoin serves way more than just being a great battery for current, for our species. So. But yeah, I mean, gold could continue to exist, but still bitcoin. And just the way that we're going, bitcoin is better than gold for what we need it for as a species. And that's what matters going forward. And that's why you think about bitcoin exceeding that valuation, because the market people have put a certain price on gold and what its function is. And I believe bitcoin's path is. I mean, its future is much larger than what gold provides to us today. And therefore we'll get that famous quote from somebody rephrased in the future.
- [118:53]
Robert Reidlove
Yeah, I think this is if we really just boil it down to the transaction cost. Again, like we said in Antwerp, it was lowering the transaction cost of exchange in terms of money and other forms of capital. And that sucks in a lot of capital, basically, because you can go and create more wealth there and you have very little frictions to trade. And that's what America was premised on as well. Initially, it was this country, not even a country. It was decentralized sovereignty among the states. There was very low taxes. You could freely exchange. It was an environment of low frictions to free trade, we would say. So that sucked in a lot of capital, created a lot of wealth. And then what you're describing there with the Internet, it just seems natural that a lot of economic activity, all the economic activity that can migrate there will. Because it has these extreme. It's totally collapsed transaction costs. And to do business on the Internet, so long as. So far as we can tell, it's like you're going to have to interact with bitcoin. Bitcoin is effectively the native money of the digital domain. And you can really almost look at it just through that lens. It's like, go wherever the transaction costs are lowered in terms of taxation, regulation, inflation, friction, whatever it is. And that's where more wealth will be created and that's where more people will naturally converge.
- [120:29]
Nick Bhatia
Yeah, it's ridiculous to try to use money on the Internet these days. That's not bitcoin. So one of the things that I've been doing a lot more these days is invoicing and Bitcoin. And it just. I've actually, it sounds funny to say it, but I've fallen in love with bitcoin all over again this year. Using bitcoin in commerce, it's like, I didn't use bitcoin in commerce a lot between when I got involved in it and this year. You know, you're just stacking stats and building a position and researching and writing. I'm not a bitcoin trader, frankly. Suicide, you know, just, you know, from my perspective. But you know, I sold some books to a guy in Slovenia today and he paid me on PayPal, which is great because you don't have to. I didn't have to download anything new or start a new account. I already have PayPal. Listen, you pay for something in PayPal, it's easy. It happens in one second. You try to get your money out of PayPal, they fleece you on the fees and you can't get it out. I like tried 50, 15 minutes refresh that to do and I couldn't get it. I have to try again tomorrow because it errored out. It's actually, it's so frustrating and people are like, oh, but the volatility. You're missing the point. You're missing the point completely. The technology is so advanced in bitcoin, it's instant. Like I've used lightning so much this year. Instant settlement. I don't need to close that channel.
- [121:58]
Robert Reidlove
Yeah.
- [121:59]
Nick Bhatia
You know, and if I do, I can do it and I get my money, you know, in 10 minutes. It's like you just, there is such an advance to a native money PayPal and these things, they might happen on the Internet in appearance, but oh my Lord, that is not Internet based money. It is the same disaster behind the screen that our 2008 financial crisis showed us that we have. It's the same system that's behind there and it is totally archaic. And I'll just tell you this, trading treasuries and treasury repo at the highest level, you would be shocked that they're still faxing things to each other to settle, to settle stuff. It's like, you know, hundred million dollar wire and it's like I have to send you a fax or I have to like print something and scan it. And it's like, you know, what year am I in? What year am I? Have you used the lightning network? And so, you know, the, the advance in technology is so large that it's undeniable. It's also why central banks have gone all in on central bank digital currencies because they realize if the Rails are still these faxes that you're never going to be able to get out of it. Let's at least modernize the infrastructure of the dollar so that people can get their money from point A to point B, which is still super difficult. I've done a lot of international transactions this year. I have to give my checking account number to people in XYZ countries. It's sucks man. It's like it just the technology sucks. And I wish that I could invoice everyone in bitcoin now. And if I need dollars to pay the bills, like I gotta buy more books because I get orders. I gotta pay dollars for those books. I'll sell it. I'll do it myself. I'll sell it and I'll buy the books with the dollars. Let me handle that. Let me invoice in bitcoin.
- [124:35]
Robert Reidlove
Right? Yeah. No, it's great point. The whole point of money is to get again something that's trust minimized. And all these layers between us and our money are just their headaches frankly. So we had the United States.
- [124:53]
Nick Bhatia
Declare.
- [124:54]
Robert Reidlove
Their independence from Britain. In your book you talk about the second Congress of the U.S. they passed the Coinage act in 1792 establishing the dollar as the country's official unit of account. And $1 was equal to both 1.6 grams of gold and 24 grams of silver. For a while the United States resisted the implementation of a central bank. Maybe we could just talk about that a little bit. What the principles the US was founded on and why it was resistant to the central bank. Which I'm guessing has to do with its citizens experience with the bank of England.
- [125:42]
Nick Bhatia
Yeah, and it's also the states versus federal debate that was very intense during. Well it still is 250 years later, but especially at the beginning of the country, a large debate was how much power should we concentrate in the federal government versus how much power should we leave with the states. The central bank hits two things. First it hits the idea that the federal government is its own powerful entity that is going to make all these decisions. That itself was highly politically contentious early on. Ergo opposition to the central bank, to the idea of a central bank. But also central bank is a banker's bank. It makes the money spigot concentrated in one place and it centralizes the system from that perspective. So coming from a culture, a pre Declaration of Independence culture, monetarily that was decentralized. So a decentralized monetary culture, A monetary culture that basically was a free for all with banks issuing currencies, wampum being used as currency, gold coins being used as currency, Spanish silver dollars being used totally decentralized to now a proposal to make everything centralized. And I'm sure local bankers in the south were not thrilled about a central bank in the north. So there are lots of sources of opposition to a central bank in the early days of America. I couldn't even pinpoint one in particular. But if you look at the Federalist Papers debates or the Hamilton debates, what you're looking at there is how much power is concentrated in the federal government versus how much are. Is it these United States as opposed to the United States as an entity? Is it the United States or these states that decided to unite? And I think that's at the crux of the debate early on.
- [128:40]
Robert Reidlove
Yeah, the contention between just where power resides. Right. Centralized or decentralized. And what specifically if the central bank.
- [128:49]
Nick Bhatia
Was proposed in Virginia, does the debate go a different way perhaps?
- [128:58]
Robert Reidlove
Yeah. And I guess so. There were two central banks, both of their 20 year charters expired. And then finally we had the Federal reserve incepted in 1913. And your book, you distinguish between wholesale money which are actual Fed reserves and retail money which are Federal bank notes that we're accustomed to. You make a very important point that Federal Reserve, they're really only managing the money supply through the reserves themselves, are actually issuing reserves to top tier banks that then through the money multiplier effect expand or contract the money supply. So what the Federal Reserve, I mean, maybe just talk a little bit about the inception. What was the impetus behind that? What was it originally intended to do and how is its original structure intended to be versus what it's become today?
- [130:05]
Nick Bhatia
Yeah, it came to be because of the panic of 1907 was basically the last straw in a series of financial panics. There was now enough political clout to ram something through banking failures and acute recessions. Due to banking collapse and financial crises. They had become very common and it paved the way for the Fed in 1913. So commission was set up after the financial panic of 1907 and Aldrich was able to push this through, basically looking to other central banks in Europe and showing how a central bank can help us wage crises and normalize things. And it can be a good political tool as well and something that we need here in the United States. I think it was. We like to talk about the late winter holiday passage of the Federal Reserve where not many senators were present and ramming something through. But even without that, I think that you were going to get a third central bank in the United States. Now what was it created for? It was created for financial stability and to be a, a banker's bank. And that's really what it comes down to. It was trying to achieve stability by being the bank that banks in the United States could turn to, to furnish that, to furnish an elastic currency is in the original Federal Reserve Act. And so there's a few words that are important there. Furnish and elastic. Elastic, meaning that this is going to be a fractionally reserved system that can expand when needed. And it didn't even say necessarily that this is at the central banking level. They're really implying that this is going to be at the central banking and at the commercial banking level, the elasticity. And to furnish it means you're the one that is going to goose the system's elastic elasticity when it needs to be goosed. And so that was the intent. And so I don't think that that ever changed. That's still the intent for them to be the Reserve bank of the banking system. That's why the policy is qe. It's reserve creation today. And so it did evolve through time, especially in the way that it's. Its balance sheet was made up as it started with mostly gold and then gold dwindled down toward the minimum ranges through time and then eventually disappeared. An important early change to the Federal Reserve act was that once World War I started, the Fed purchased U.S. treasury bonds. So they needed to change the legislation so that the Fed could hold US Treasuries. That obviously had big implications. But that could have happened in World War II if that's when the first time that a crisis or the government needed to call upon the central bank. So that could have happened later. But yeah, I really don't think the theme of this change is basically apply band aids when needed was the intent. And it's very much the case today.
- [134:03]
Robert Reidlove
Yeah. So then the depiction in the book is I have gold U.S. treasuries at the apex. Federal Reserve is the first intermediate layer. They're issuing reserves, which are wholesale money to banks, and also issuing notes, which is retail money. You then have private sector banks which are custodying, I guess, both reserves and notes and really creating their own notes because they're relending customer deposits through the money multiplier effect. And that's through a number of tiers at the private sector bank level. And then finally you have deposits, which are the money we hold in checking and savings accounts. Effectively.
- [134:43]
Nick Bhatia
Right. With the Fed, what happened was the banks issuing their own notes then that was now made illegal. That was the banks couldn't have their own cash circulating. They were allowed to have their own deposits that circulate throughout the financial system as banks wire money to each other. And settle in their own accounts in an interbank way. The private sector banks, their job was to provide elasticity to the system by lending and creating deposits. And then they use the Federal Reserve notes and Federal Reserve deposits, which are called the reserves in the system, as the wholesale money that they use to. I'm sorry, they use the reserves as a wholesale money to back the retail money that they issue to the public, which are deposits. The Fed has their own retail money notes, but those had a place in the old financial system. They don't have a place anymore. The Fed doesn't use notes in any sort of monetary policy way. They're actually almost frustrated that when they print notes they get hoarded by people abroad because it's the hardest money that they can get their hands on with dumpster fire currency regimes.
- [136:07]
Robert Reidlove
Yeah, right, Makes sense. And that set the stage for the Fed to retire gold effectively, which is the title of the fifth chapter in your book. And talk about this swarm of money creation that occurred during the Roaring Twenties. This was antagonistic to gold's constraining function, its disciplinary function. So there was more demand for more elasticity, more credit creation. And I guess it started to create the pressure to separate the dollar from gold in the long run.
- [136:43]
Nick Bhatia
Yeah. And the credit creation happened on the third layer, which is an interesting part of the story, because the third layer of money is being issued by these commercial banks which are setting their own reserve ratios in a wild west sort of way. So they're not governed by any disciplinary constraint of gold whatsoever. And this is in an era when they didn't really have deposit insurance or anything like that. And so with all the money creation, and when the bust finally came, you had thousands of bank closures, and that was even post Federal Reserve. Right. The central bank existed. Yet you still had a collapse in the banking sector as banks went over leveraged and they weren't able to make. They were run on. It actually brought about this idea that we need a retail money that the public feels is safe so they don't cause systemic collapse when leverage creeps into the system. And so the FDI insurance giving, I think it started, I believe at $5,000 on the account of 2,500. Then they quickly increased it to $5,000, your first $5,000 in the 1930s, no matter what bank it was at, as long as it had an FDIC insurance policy, your money was safe per the government. And so that's one of their first big band aids. And that came from the government. It didn't come from The Fed necessarily. But the government realized that we need this first band aid or this, an insurance apparatus to make sure that banking runs are not commonplace. So trying to rid the motivation to run on banks was a big thing and a response to all that roaring 20s money creation.
- [139:09]
Robert Reidlove
Yeah, to give peace of mind to market actors, which makes sense. And then we get into Executive Order 6102 where the private ownership of gold was actually illegalized, was punishable by up to 10 years in prison, I think, or by fine. Then this led to what you described as this immense devaluation because, well, they illegalized it. Then they devalued gold where they let the price increase from $20.67 an ounce to $35 an ounce. So they were devaluing the dollar, actually I should say against gold. And then this immense devaluation was a surgical strike in an ongoing worldwide currency war wherein countries attempted to cheapen their currencies as much as possible relative to their trade partners. Their goal was to attract foreign demand by having the cheapest prices. So now we're really getting into this game theory of fiat currency, which is the race to debase. That's still going on today. That's what's happening all over the world today as governments are printing money and then shaking their finger across the aisle at other countries saying hey, you shouldn't debase too quickly. And it's just destructive. It's a self destructive dynamic.
- [140:43]
Nick Bhatia
They all take turns and asset prices go up. And people still want to deny a correlation between the round of currency debasement and the race to the bottom and increasing asset prices. But if you look at the. Here's the best. I always say price is truth because as a chartist and something, I'm only looking at the price to give me all the signals. What do you think about a price chart between the dollar and the euro that chops between parity and 140 for 20 years? That's just a seesaw. And so what happens at each end of the seesaw? Trillions are created in each of those currencies. So the euro versus US dollar, Not Euro dollar. The euro versus USD exchange rate chops between this range. Every few years it goes up and it goes down again. And then the other central bank announces QE and the other central bank, meanwhile, stocks go like this. Real estate goes like this. And Bitcoin goes like this. Yes, you know, parabolic.
- [142:01]
Robert Reidlove
Yeah.
- [142:02]
Nick Bhatia
So the price is the truth. One is a seesaw, one is a steady ascent. And what. And why is it a seesaw because it's a. They take turns. Yeah, you cheapen, then I cheapen, then you cheapen, then I cheapen and. And meanwhile other things go up and you can all, you can see it, it all in the price.
- [142:22]
Robert Reidlove
Yeah, it's oscillating, but directionally everything is. They're depreciating against gold and hard assets, real estate, bitcoin, et cetera. And so, man, it is such a tricky game for people because you're playing with economic perceptions. People think it's insidious and deceptive because people are thinking in dollars or euros and you're like, oh, my portfolio is going up, my home's more expensive, my salary is going up, whatever. But all the while in real terms, you're actually being. There's a value being siphoned away through inflation, effectively.
- [143:07]
Nick Bhatia
Right. Or my European or American vacation is the same as what it was eight years ago. So there's no, there's no worry about my currency now. Things go up in price all around the world and things like that. But you're not attributing that to a bad exchange rate because Euro versus USC is. The exchange rate is the same it was as it was Hiding in plain sight. It's hiding in plain sight. That's right.
- [143:39]
Robert Reidlove
The more percentage of assets you're holding, the less exposure you have to this. Clearly, your asset price increases offset the inflationary dilution, let's say, but it doesn't change. This is almost one of. I've almost got to the point where you want to bang your head against the wall when you talk to, what do you think smart people are about inflation? And they're like, it's not there, it's not happening, but here it is. It's in broad daylight. You just have to actually think about how you're looking at it, what you're looking through. I think a lot of people just let, they just think in dollars and they don't think below that. They don't think below the dollar, which is.
- [144:23]
Nick Bhatia
Yeah. And I also am a big fan of the deflation narrative. I talk about it a lot because I think it's there as well. There's an inflation narrative that I can play up for sure. But I like to just talk about the asset prices because consumer price index and things like that, they measure their own things. Everyone's inflation rate is different. And if you have a taste for luxurious luxury items and all those sort of things, inflation is there. If you have a taste for, for fast food, then you might not see the same inflation that everybody else does. And you know what? The inflation narrative is just as important as the deflation narrative for Bitcoin. I think that that's something that isn't explored a lot. But the fact that certain things are going up in price and are attributed to a bad unit of account that's on fire and other things that keep getting cheaper and cheaper and cheaper, like technology driving it forward, driving people to more of an Internet based existence that is also a supporter of this narrative that we only need Bitcoin as the online currency, we don't need government currencies on the Internet type of thing. They're both bullish for Bitcoin. Everything is bullish for Bitcoin if we're being honest with each other. But I feel your frustration and banging your head against the wall when people aren't able to see the inflation. But it's a very narrow view of inflation. It also is why I didn't use the word inflation once in the book. I don't know if you noticed that, because inflation as a word is poorly defined and has a wide range of definitions. And I didn't want to spend 10 pages breaking down all the different ways that inflation is and then convincing people that my way of using the word is going to be the right way for the rest of the book. I think you lose a lot of the readers, especially because of what you're saying. You're banging your head against the wall because people, you say the word inflation and people just so opinionated about it, you can't get them to stop believing that the way. And so when I thought about that, I said I better not use the word even once. And so I'm proud of the fact that inflation and deflation are not. You won't see those words in layered money.
- [147:14]
Robert Reidlove
I think that was a smart move. I actually didn't notice until as soon as you said it though, it crystallized like, wow, he really didn't talk about it the whole time. But you covered all the impact of it in the terminology of first layer versus second layer of money and elasticity. And yeah, I think inflation may be one of the most successful euphemisms of all time.
- [147:36]
Nick Bhatia
Yeah. And that's why I don't love to debate about inflation even then because it's so nuanced. There's so many different. I can go on a rant about monetary inflation and how it's rampant and extremely destructive. And I can go on one that says that we are in a very deflationary environment because of demographic factors and technology, and I believe both. But you'll lose the reader in a lot of those things. And it's something that I've wanted to write, just something like on inflation. So we'll see if I can pump something out.
- [148:16]
Robert Reidlove
Yeah. It is so nuanced and easy to get lost, especially once you start considering whether you're discussing the money supply itself or the price level. And to your further point, on the price level, it's purely subjective. It's more like a coefficient. It's like, what are you trying to buy? What are you aiming at?
- [148:32]
Nick Bhatia
Right.
- [148:33]
Robert Reidlove
You could say inflation.
- [148:33]
Nick Bhatia
Everyone's inflation rate is different.
- [148:35]
Robert Reidlove
Exactly. Based on. It's as subjective as value. It's like whatever you value, that mix of things you value determines your inflation coefficient, if you will. The tech deflation narrative is very important too, and it almost is extending, in my opinion, the Runway of central banking, because we have digital tools and technology, mostly other technologies as well, but making us much more productive, creating much more economic surplus in the world. And if you consider from a first principle standpoint, when they're increasing the money supply, they're basically just harvesting that economic surplus. So if prices on average were going to go down 10% due to this productivity gain, but they've increased the money supply such that they go up 2% on average, instead they've harvested that 12%. But because people can't see what would otherwise be, there's no way. There's no way to see what would otherwise be. Basically, you couldn't see what the price level would be on a purely hard money standard. So there's no point of comparison. And then we just get indoctrinated into this belief that CPI is inflation. And then the determinants that go into that calculation purposefully exclude anything that changes in price. It's like the metric designed to measure changes in price is excluding the things that change in price. And you just get. I mean, it is so incredibly frustrating to talk about. I probably take a page out of your book and just avoid it altogether. So maybe we can shift gears a bit here now and get into. And I'm so glad your book talked about this. Most people ignore it completely. Most people are totally ignorant of it. I've read very few books that touch on it much at all. They don't usually typically go very deep. The best thing I had heard on this previously was Eurodollar University, which I'm sure you probably listened to on Macro Voices with Jeff Snyder. He does a great job really going into the details of the Eurodollar system. And to your point earlier, we have to disentangle. This is not the euro currency of the European Union. This is the Eurodollar system, which I guess I'll describe as an emergent derivatives market for offshore dollars. And then I'll just throw it over to you. Maybe you could just walk us through the Eurodollar system at a high level and how it impacts these hierarchies of money.
- [151:12]
Nick Bhatia
It is an emergent derivative system of the dollar and it happened offshore originally. The Eurodollar story is a very important one and one that's not told very well. Jeff Snyder's Eurodollar University on Macro Horizons was fantastic. I strongly recommend people go listen. I acknowledge Jeff Snyder and his work. Thank you to Jeff for all the research that he did. The stories that he told in Eurodollar University were pivotal in my deep dive and trying to figure out where this system came from and why it came into be and in my opinion, what it is. Dollars were becoming the world tool to participate in global trade. And you couldn't get them very easily in London and Paris. And so banks in Europe decided to issue dollars to their customers in a deposit form. So obviously they can't print Federal Reserve notes in, you know, at the Barclays bank, but they can issue USD deposit to their customer. They did that without asking anybody. That's why it's an emergent system. It's because clients in Europe needed dollars. They needed to borrow money, they needed to borrow dollars. European banks said, okay, here are some dollars and we'll issue a deposit to you and go see where you can spend those dollars. And they were able to spend them by transferring them to other European banks. Like interbank transactions in Europe were starting to be denominated in dollars. You have this parallel separate dollar system happening abroad at the same time where you have an onshore US dollar system governed by the Federal Reserve and private sector banks in the United States that have ratios and all these requirements and have interchangeability between their reserves and cash. Federal Reserve notes. None of that existed in Europe because they weren't trying to use it for that. They were trying to use it to participate in global trade. It was almost an innocent beginning to the euro dollar, emergent as you describe it, and derivative in that it held. It was called a dollar in Europe because when people tried to price euro dollars versus US onshore dollars, the price was par. People said it's the same. I think it's the same, even though qualitatively we know it wasn't the same because it didn't fall into the Federal Reserve's hierarchy of money, nor did it fall into their lender of last resort apparatus. And the system blew up in popularity because people trusted it as a unit and a thing that they could use. And that all came to a head in 2008, where the financial system realized that onshore US dollars are not the same thing as offshore Eurodollars. They're in fact, completely different. Offshore Eurodollars are a time bomb. And unless we, the Federal Reserve, issue a central bank swap line to the European Central bank in which the ECB can create euros out of thin air, post them as collateral to us, we will then lend them dollars infinite, because they can, you know, ECB can create as many euros, we can issue them dollars, and then the ECB can take those dollars and funnel them through their domestic banking systems in order to put a bandage on the euro dollar and its fragility. Because if we provide a liquidity line, we have basically nationalized the Eurodollar system at the Federal Reserve level because of that band aid that we decided to apply with the introduction of a. This is a late 2007 impetus where we start to get this idea that the Eurodollar is in a lot of trouble, right? And so the ECB is now an arm of the Fed because of this. People don't understand that. They don't understand that it's an arm of the Fed now. And it doesn't. It doesn't mean that the ECB has to ask the Fed for permission to do things. That's not what I'm talking about. Christine Lagarde is doing her own thing. She doesn't have to call Jay Powell to say, can I do this? They make their own policy. But when shit hits the fan, the Fed has to come and lend dollars against euro collateral to the ecb, which is a mirage in itself and part of why the dollar is so ephemeral today. You can't put a definition on it because they've spread themselves so thin in terms of what a dollar really is. And all of that is why we need Bitcoin to provide what's called the off ramp, right? What does everybody say? It's the off ramp. It's the exit. It's the exit because that pyramid that I build throughout the book, through the first six chapters, so many bandages on it, it's so old and aged. I wish I had used that word aged in the book, that all you want to do is leave it. You don't want to, like, put a better Bandage or research bandage technology or you don't want to do that. You just want to get out. You don't want to ascend to the top because the top is U.S. treasuries. Do you really need that?
- [158:07]
Robert Reidlove
So this Eurodollar system, the way I think about it, maybe you could help me if this is the wrong way to think about it. It's almost like a pyramid scheme squared. It's like the pyramid scheme that the Federal Reserve is monopolizing, controlling this own hierarchy that is the US dollar with just Treasuries at its apex, essentially. But there was so much demand for money abroad, unmet demand. We could say that the free market in a way created this second layer pyramid scheme or pyramid scheme on top of a pyramid scheme. That is the Eurodollar market just derivative of the first layer Federal Reserve pyramid. And to your point, it's not that Christine Lagarde is beholden to Jerome Powell necessarily, but the policy of layer one directly impacts the policy of layer two, and they're now dealing in US dollar derivatives, which is a derivative of policy of the US Fed. So there's that. That's a lot to let sink in. It's like this thing, it's replicating itself and becoming even more elastic and fragile in the process, and more opaque, I guess would be another really important point. Like when Snyder talks about this, he's like, look, I'm giving you the best data we can get, but we really don't know. We don't know how big it is. You don't know where it is. Like, it's really just kind of a big dark monster in a way. And I thought one of the other interesting things about this was that you said part of the impetus for the development of this market was the Soviet demand for dollars, but they simultaneously demanded privacy of those deposits because they wanted to reduce their counterparty risk to the US Government. There's this free market impulse towards one money. That's what caused gold to become money. That's what effectively causes, I guess, contributes to the US dollar being world reserve currency. Clearly they pass laws that affect that as well. But people want to denominate and think in one money it's just simpler and it's more economic, as we talked about with zero and all the developments of money throughout history. So it's almost as if the Federal Reserve has this legal monopoly, but the free market forces surrounding it created this, this second layer that was satisfying unmet demand. And to me, when I was going through Eurodollar University and reading your book as well. It's like I sense that the free market is trying to call forth something like Bitcoin almost. There's this quote in your book. It says, former Federal Reserve board member and prolific author on monetary economics, Charles Kindleberger described Eurodollars as a product of the natural demand for the free flow of capital around the world, which is a system that a Bitcoin would provide. And then he further says that this suggests that the forces of integration in the world of goods, markets, or markets for people and of the markets for capital are stronger than political boundaries which divide countries. So this demand for integration, this free market impulsion, was just flowing around the legal artifice of the Federal Reserve. And that's how we ended up with the Eurodollar system.
- [161:48]
Nick Bhatia
And Kindleberger is a genius. I would recommend people go check out some of the references that I put of his. He was definitely ahead of his time and a great monetary historian when he said that. I had to put that quote in the book because it is Bitcoin. And it shows you that the Eurodollar wasn't created out of malice or corruption or pyramid scheming. It's just that people wanted to move commerce forward and they needed an easier to use tool to do that. And the Eurodollar was that solution to go back to Russia. The Soviet Union doesn't want to domicile their deposits in New York. They'd prefer London. Shanghai preferred Paris. It's not that it's not just the demand for money, it's also political. And so there's both of these sources of demand for Eurodollars. And that's why we ended up with this whole system. And it's not even widely recognized that much. But I think in at least the central banking circles, they realized that a permanent swap line between the Fed and the ECB is a staple of our monetary system now.
- [163:33]
Robert Reidlove
Yeah. To echo that point, there's this other aspect of demand which was demand for sovereignty over these funds as well. Soviet depositors did not want to leave their money in New York given the political tensions between during the Cold War, effectively. So to be in London was a more. Gave them more optionality, more confidence, more sovereignty over their money, but still allowed them to be the hardest money available to them, which was the dollar.
- [164:05]
Nick Bhatia
Right. We talked about call options already today. What call option do you value more? One that you know you can execute or one that you're scared you can execute?
- [164:14]
Robert Reidlove
Right? Yes.
- [164:15]
Nick Bhatia
And so you even pay a premium for that call option options theory, you can Apply this here into the game theory. So you could even pay a premium for that deposit because of your confidence in being able to execute.
- [164:34]
Robert Reidlove
Yeah, and I think it was Friedman describing this system. He said it's all born from the bookkeeper's pen.
- [164:43]
Nick Bhatia
That's right.
- [164:44]
Robert Reidlove
But yeah, maybe when I say pyramid scheme that maybe that does impart the sense of intentionality. Like some evil guys in a room sat around and said let's do this. But that's not at all how it happens. It's the band aid thing again. There's demand. Certain players try to meet that demand in a certain way and before you know it, this whole complex just sort of develops that we now call the Eurodollar system.
- [165:09]
Nick Bhatia
Yeah, it's not a pyramid scheme, it's a fractionally reserved pyramid. And that in itself can be very fragile. And when you step into the Eurodollar space, there's nothing at the top of the pyramid itself, which makes it a little bit of a scheme for sure. But it's just an absolute absence of monetary reality. And that came to a head in 2008.
- [165:43]
Robert Reidlove
Yeah, to your point, there's nothing at the apex because it's Treasuries, it's debt.
- [165:53]
Nick Bhatia
No, but even in the Euro dollar, it's just the loans that are on the asset side of the bank balance sheet of the London banks. That's why I put a question mark on the top, on the apex of that Eurodollar pyramid in the book, because you don't, I mean it's just loans to whoever borrowed the money. We don't really know what that is. It's not even as good as US treasury debt backing the system.
- [166:18]
Robert Reidlove
Yeah, that's a great point. It's lower quality debt. But even in the super high quality the US treasury market, which is the risk free asset of the world, it's still debt based ultimately. And you have this quote in your book. Whereas Treasuries themselves are a form of credit, their credit worthiness comes from the assets of the US government and the power to collect taxes from its citizens. So it's trust instead of holding something like gold or Bitcoin, which is trust minimization. That gets us into this treasury repo market, which I thought you did a great job expounding upon. Maybe you could just talk a bit about what is treasury repo market and then what's its contribution to the Great Recession of 2008? Is that what we call it now?
- [167:17]
Nick Bhatia
People love to call it the GFC, the great financial crisis of 2000. 2008. And I like 2007 to 2009 better because it did start in 2007. Calling it 2008 misses the point that this started in 2007, in August, when the Eurodollar system started to show some real problems in trust, which very few.
- [167:44]
Robert Reidlove
People talk about, by the way. And I'd love for you to expand upon that. People often think it's just, oh, subprime real estate. That was a whole issue. Not at all. This is a Eurodollar issue.
- [167:52]
Nick Bhatia
It's a Eurodollar issue. Subprime mortgages were the debt that triggered a lot of liquidations and brought about a realization that the Eurodollar system is leveraged beyond belief. So subprime debt and bad mortgages that were made in the United States triggered but didn't cause the panic in 2008, 2007, the indication was that the Libor interest rate, which is the interest rate on interbank deposits in the Eurodollar system, started to spike when the onshore fed funds rate didn't. And that was the indication that these two assets or these two units weren't the same anymore per the market. And that price separation was the start of the crisis that happened in August of 2007.
- [168:50]
Robert Reidlove
Yeah. And so it was. You say subprime mortgages were a catalyst, but it was exacerbated by the excessive leverage of the euro dollar system.
- [169:01]
Nick Bhatia
Absolutely. Well, the leverage of the Eurodollar system was what was unsustainable. The subprime mortgage crisis brought that forward because some of the assets were those bad assets. And so when the asset price collapses, you can forget about the fractionally reserved liabilities that they have issued against them. And so that's kind of what happened there. To go back to treasury repo is another form of money. You have the stock of U.S. treasuries, and now that it can pledge for collateral borrowed against, and the money that's lent to you is now as good as any other checking account deposit. So it's a new type of money that circulated with the on par with the other types of money out there. So treasury repo dollars, where it's just dollar number three, you got dollar number one, the onshore dollar dollar number two, the euro dollar dollar number three is the treasury repo dollar. And everyone's using all of them as the same thing around the world. Talk about monetary inflation. Treasury repo. The introduction of treasury repo as a par money, it brought about more leverage to the system. And so it also kind of a little bit obsoleted deposit banking for the larger institutions where now they didn't have to get retail deposits in order to build up a reserve to lend money against, but rather they just needed a stock of treasury securities and they could borrow 98% of the price and leverage that however they wanted because the dollars were fungible with other dollars. So the fungibility of treasury repo dollars is one of the sources of the expansion of money supply during the 70s that we can track. There's a paper that I reference about that as well, where we can see the direct correlation between the increase in treasury repo and the increase in the dollar money supply when the Fed still knew how to measure it. They don't know how to measure it anymore, which is a fun part of history. But at the time they were able to directly correlate the two.
- [171:32]
Robert Reidlove
So that meant this repo market was effectively a mechanism for debt monetization. Is that accurate to say it's a.
- [171:42]
Nick Bhatia
Way for the US government to issue debt a lot faster than they would otherwise be able to? Because now you can park the debt on the bank's balance sheet without a charge to the bank because they can borrow 98% of the money for next to nothing. So it's more that it facilitates the issuance of debt. QE monetizes the debt. I know that you agree with that, but it's almost more about the liquidity of the debt. It increases the liquidity of the debt and it increases the stock of debt that you can issue. Because there's now a market where the debt itself is pristine collateral in the system. Having the collateral property now at the Treasury US treasury level like set the stage for a post gold or it's correlated with the post gold world where we needed a new form of perfect collateral and treasury served that function going forward. Post gold.
- [172:56]
Robert Reidlove
So the outcome of this was more elasticity at higher layer of monies. Right?
- [173:03]
Nick Bhatia
That's absolutely right.
- [173:05]
Robert Reidlove
Okay. Yeah. And so just to get back a little bit on the great financial crash, again, common conventional wisdom, it was a subprime mortgage issue. Clearly the Eurodollar system was a very large component of it probably would not have happened without the excessive leverage in the Eurodollar system. I guess we could tie both of those together and say that really. And this is just Austrian business cycle theory, they're both a fiat problem. The great financial crash really was the lending criteria that were relaxed such that banks took on excessive risk. And then as we touched on the expansion of the Eurodollar system, these were both premise on the existence of a legal monopoly in money. The reason this thing was so bad is a consequence of fiat currency. Would you agree with that?
- [174:07]
Nick Bhatia
Yeah, the fiat currency and the abuse of it is something that. The abuse of being able to issue it is something that I think bitcoiners struggle a lot with. And it's why, it's why when you look at it over a longer term time horizon, how could you justify storing your work in dollars? It's very difficult for bitcoiners to do that. I think it's because of this issue that you're bringing.
- [174:52]
Robert Reidlove
Yeah. So you also, in the book, you do a great job of explaining. This is where things start to get complex because we're getting into the modern age of money. This relationship between money market funds, T bills, Treasuries, treasury repo lending, commercial paper, all of these become components in the modern hierarchy of money. And then, which I guess I'll try to roughly describe it here, the image you have. So you have U.S. treasuries at the apex, Federal Reserve banks and money market funds is the next layer. You then have wholesale money, retail money in terms of reserves and notes. You have treasury repo market also at this next layer, and shares and money market funds. Then in the next layer below that you have US banks and money market funds. And the banks have deposits and the money market funds have shares. Yeah, it's becoming bigger and has a lot more elasticity and a lot more fragility. And those consequences are realized time and time again in the real world. Great financial crash, March 2020. And that didn't even include the Eurodollar system, which I guess the Eurodollar system would be its own complex, built sort of outside and. Or on top of that or below that, I guess you would say. So what then happened? We had 2008, we had this run up the pyramid, I guess is what it was. And then they absolutely, when there's a run up the pyramid, then they try to actually ease the lower layers of the pyramid. Through all these machinations we've explored. Where do we go from there? Do we go straight into 2020 from there? What happened in March 2020? Or is there more to tell in the great financial crash?
- [177:02]
Nick Bhatia
You know, the way that I wanted to frame the book was that there are two worlds. There's a pre August 2007 world and a post August 2007 world. And what happened in August 2007 is that the price of Libor separated from the price of onshore deposits. And that broke the system forever because it showed that half the system is Built on a mirage. But we can't acknowledge that by letting it fail, we have to support it forever. No, there's nothing different about the pandemic panic because the solutions were the same and the problems were similar in that that liquidity needed to be provided by the Fed to the ecb, to the treasury market, to the treasury repo market. Both, like they needed to do qe, which is buy. They also needed to provide repo to those that already owned it but didn't have the money. They never had the money to pay for it in the first place. They just borrow overnight every night to pay for that stock. And when they can't roll the debt. But what happens? You get your treasury seized through repo. I mean, that's what repo is. It's not repossessed like a car repo, but it's a repurchase agreement. You can't execute the repurchase of the treasury, so you lose the Treasury. And that's what wasn't allowed to happen at the Fed in 2020. So that's why I set up the Eurodollar story so, so heavily in the book. Because really, once you understand what happened in 2007, it's in permanent disrepair, the dollar system. And there is no fix. There is no reverse aging technology in the central banking world. There's only Bitcoin. And there's only novel first principles thinking, which is what you're all about. And so from first principles, you have to get away from the current balance sheet hierarchy because it's broken. And so you need a new hierarchy. Because it is my conclusion that money is inherently hierarchical, as concluded Perry Merling. It's a quote that I use in the book. And if it's inherently hierarchical, then Bitcoin should be hierarchical too, right? And yes, it is. People hold Bitcoin on exchanges and when they don't want that counterparty trust, they withdraw and settle. But they still keep it on exchanges. It's not like they don't. They still use second layer Bitcoin. From that perspective, you have 100% risk to the balance sheet of that exchange. That's fine. People do it and then they settle. And so Bitcoin is inherently hierarchical because it's money. And so looking forward, you need a new pyramid, a new system, a new hierarchy. And it's obvious to me that Bitcoin is on the first layer of whatever that pyramid looks like. Will it be joined by something else? Will it be joined by gold? Will gold never be a part of that? In my opinion, bitcoin is alone up there at that apex. Other cryptocurrencies have value because they have a price relationship with Bitcoin. That's the only reason why they exist, because you can settle them for Bitcoin. That doesn't make them a first layer money. It actually makes them a second layer of money. And if you actually look at fast forward a few years, if central bank digital currencies are able to convert into Bitcoin or trade for Bitcoin in a way in which there's price transparency, you can now argue, even though no central bank might own Bitcoin at that point, you could still own argue that Bitcoin is on the first layer of money by itself and that other fiat currencies only exist because their CBDCs have a price in Bitcoin and that's when the pyramid shifts. That's what I tried to forecast in my book's conclusion and look to the future. I marketed this book as a monetary history and as an explainer for Bitcoin, but I haven't marketed it that hard as a diagnosis of central bank digital currencies and why they will succumb to Bitcoin in the future. I just threw that in there and let people realize it as they go forward. I think that central banks will realize that the only thing that they can do is let their currency trade against Bitcoin. Otherwise the market might not give it a price at all. Like what happened in Zimbabwe, for example.
- [182:35]
Robert Reidlove
Right, right, right, yeah. So Bitcoin being the base layer to its own hierarchy. But it could also at some point start to subsume the existing hierarchy, at least marginally. If it's ever acquired by a central bank as a reserve asset. Right. Then it becomes.
- [182:56]
Nick Bhatia
It doesn't even have to be acquired by a reserve, by a central bank as a reserve asset. Because if you've denominated in Bitcoin, Bitcoin is already at your apex. And that is already the case for people around the world, for corporations, for, not for governments publicly yet, but for plenty of people, family offices, whatever, have IT giants like these investment houses that are starting to build Bitcoin products and buy Bitcoin for their clients. If you've redenominated, doesn't matter who buys it when it's. How do you price everything else? I price it in Bitcoin. So Bitcoin's at the top.
- [183:39]
Robert Reidlove
Interesting.
- [183:40]
Nick Bhatia
It's all about redenomination, Robert. It's like redenomination is the name of the game here. And I don't Think I articulated that very well in layered money. It's difficult to, and I don't think anybody has articulated it perfectly yet, that redenomination is a whole mental shift, and that's how everything happens. I think bitcoiners fundamentally understand that that's why they stack, because their unit, they've decided upon their unit, they've redenominated. You've redenominated, I've redenominated. So we've already done that. 100 million people have also done that. Let's say plus or minus. But how does 100 million people become a few billion? Is one question. And can bitcoin still remain at the top of the pyramid if we never get above a billion users? And the answer is yes, because it depends on what's the size of the settlement. Like, people might never use bitcoin as a first layer of money. They'll use government currencies as a second layer of money forever. But those that don't want to keep it because it's more current than stock, they convert to bitcoin and that's how they're denominated. So it always rests at the apex of the pyramid. And that's how I see. It's actually already how I see the world. And that's how I wrote the book. The book ends with bitcoin at the top. So that is the vision, but I think that it's already started for those like myself, and we just have to propagate the redenomination mentality. And I hope that people get that out of the book.
- [185:36]
Robert Reidlove
Yeah, this is. No, I like the term redenomination makes you think that money, again, one of the answers to what is money is just a claim on savings. Effectively, whatever capital is in the world, money is a claim on that. And so money becomes in the denominator for savings. We talk and speak and think in terms of money instead of number of cars or houses, for instance. So it is once market actors shift towards that unit of perception or denomination that that is actually putting it in the hierarchy, you're saying.
- [186:16]
Nick Bhatia
Yes, yes. It's how you view it, right? It's if you think of your work like, okay, I have book sales right now, when my royalty payments started coming, I thought to myself, obviously, they're in dollars, right? I thought to myself, I have bills to pay, right? So, you know, I can't. I can't convert all of it to bitcoin. But are you going to tell me that, like, I wrote this book and I, you know, got royalties from it People bought it all over the world. And I'm not going to convert some of that to bitcoin. I'd be insane. I'd be insane to do that. So I've redenominated in that my royalty payments have to be. Have to convert themselves into sats at some point or I've done my future self an injustice because I've mentally redenominated already. What do I want the dollars for? I have bills to pay. Right. I have things to buy and I have investments to make. But I also like, other than investments, I also need sats as security because they're my monetary reality. That's what redenomination is. I've done it. And I think you don't know that you've done it until you wake up and you realize that all you care about is the latter. Right? Not the former.
- [187:55]
Robert Reidlove
Right.
- [187:56]
Nick Bhatia
People that are still like, when are you gonna sell? You can sell bitcoin, you can still sell bitcoin. But having redenominated in, after re. After re. Denominating in bitcoin because you have things to do with dollars or you want to buy other things that you need dollars for.
- [188:19]
Robert Reidlove
Yes.
- [188:20]
Nick Bhatia
Like you can sell, but you're not. I promise you, you're not selling for dollars. You're selling so you can buy something else, hopefully another asset, right?
- [188:31]
Robert Reidlove
Yeah.
- [188:31]
Nick Bhatia
Maybe another productive asset, maybe not. But you're not selling it for dollars. And if you are, you haven't shifted your denomination mindset, appropriately enough, because you're just in it for the gains. It's not about gains, it's about redenomination.
- [188:53]
Robert Reidlove
Yeah. So whatever you need, currently you need currency to satisfy, to go out and spend. But whatever wealth you're looking to preserve or put in the battery or make your stock, whatever's not your flow, you want to put in stock in Treasury. Bitcoin is the perfect technology for that.
- [189:19]
Nick Bhatia
And it's not just bitcoin. It's what is the asset. Bitcoin is this amazing asset. So it enters that realm. I'm not going to be. I promise you, I'm not going to be collecting art. I'm not going to go out and price a Picasso out and stuff like that. That's not where. That's not where I'm going to allocate. But I'm looking at land, right. I'm looking at ways that you can invest in assets. And that's, you know, and then I'm pricing things in bitcoin. So it's. That shift in denomination is one thing. And Then choosing your asset is a separate process. And oftentimes people are. The answer is the same to both of those things. It's bitcoin.
- [190:12]
Robert Reidlove
This is why bitcoin's hard to understand, too. It's meta, right? It's not just dollar gains, bro. This is. You're shifting. You're swapping out your lens of perception on the world. You're moving to a world where you no longer think in dollars. It's like a software update to the brain. Sounds radical, but it's.
- [190:36]
Nick Bhatia
The bitcoin software is an update to your brain. I really believe that. That's why I always hammer home mastering Bitcoin and understand the software, figure out what a nonce is, use private keys, encrypt and decrypt yourself, send and receive. When you do that, you've upgraded your brain to like, oh, this is obviously money. So those that have never used bitcoin or will never use it as a software are at an extreme disadvantage because you're functioning without a software upgrade to your brain that allows you to step into a new monetary reality that is anchored by this computational network. And the power of that drives people to go all in on Bitcoin spiritually and with their careers and things like that. And so go get you your upgrade, or else you might not be able to see it.
- [191:48]
Robert Reidlove
Yeah. By ignoring bitcoin, you're doing yourself a serious Darwinian disservice. I think your children will not. Thank you, Nick. This has been awesome, man. Honestly, your book, I can't sing its praises enough. If you're listening to this, go out and get it now. It spells the whole thing out. I think you just read this one book and you'll. So much of the picture will be crystallized for you and it's written. I'm a big proponent of nice writing, like, stylistic smooth, easy to read, and I can tell you put a lot into it. It's very polished, it's very good. So just wanted to say that and your efforts do not go unnoticed. So maybe you could just tell everyone where they can find you, where they can find the book and any parting thoughts you may have.
- [192:47]
Nick Bhatia
Thank you. I really appreciate your praise of the book and it makes me very happy that you enjoyed it because we've been friends for a long time, so I'm glad to know that it made an impact on you. You guys can find the book on Amazon. Just Google it. Layered money. You can find it anywhere now on audio, it's on audible ebook, and you can find me@LayeredMoney.com and links to the book. To purchase the book@LayeredMoney.com you can find me on Twitter imvalue of BTC and send me a message and let me know how you like the book.
- [193:29]
Robert Reidlove
Awesome. All right, Nick, thank you so much.