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The "What is Money?" Show
WiM047 - The Saylor Series | Episode 11 | The Failures of Fiat
01:24:55
Michael Saylor joins me to discuss anthropology, energy, and technology from first principles as we build the intellectual foundation necessary to truly grasp the historic significance of Bitcoin.
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- [00:00]
Robert Breedlove
Foreign hey guys, this is Robert Reedlove 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, 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. So gold fails while globalizing, digitizing society. And then we have fiat introduced and where does that take us?
- [01:46]
Michael Saylor
If I can't use gold, I need money that's going to be stronger and faster and smarter. What is an example of stronger money? Well, I'm in London, I have $100 million worth of money. I need to get it to Rome, I need to get it to Rome on a telegram or I need to move it to Rome at the speed of a single horse and I can't haul that much gold. So I use a letter of credit, right? If I, if I can project money via some credit network, whether it's the Rothschilds network or it's an imperial network or something else, then I've got stronger money and I've got faster money. And if I can, if I can offer you that money in return for 3% interest, it becomes smarter money. Smarter meaning I created an application that does something complicated like when I give you money for 30 days and at the end of 30 days you have to pay it back to me plus 4% I created a derivative of the base layer money or a security of sorts. So the ability to create securities and the ability to project them distances with speed enables a more sophisticated economy and is good for economic productivity. So hence the idea of a fiat. And you know, I think the earliest fiats were yeah, they could like Trading stations, you know, in French, in the French territories of Canada. Right. They had credits, you know, credit systems on ships, merchant credit systems. There was, there always been private credit systems. And then eventually there became municipal credit systems like the mayor of a city, state or something, or mayor of a hamlet. And then you get to statewide systems and federal systems and agency systems. And who knows whether or not churches didn't generate their own credit systems. And we know when the military, the military generates credit systems, sometimes they'll credit vouchers or travel vouchers in the military or. Right. I remember, I remember the airlines used to give you these tickets where you could fly space available and they would give them to their employees like flight attendants. So the flight attendants are able to use that and give one to their wife or husband and they sell those things. They actually became a secondary market in travel vouchers because they have monetary value. And so you have private monies and you have public monies and then you have quasi public monies from any food stamp or institutional voucher or military voucher that gives you a right to. Something of value becomes money in and of its own in time. The real question is, why does fiat fail? We know why it works. The reason it works better than gold is because you put it on a piece of paper. And ultimately the rise of databases, along with the ability to shuffle paper around meant that you could. It's a lot easier to create an application of fiat base layer money by. All I got to do is take a check. Every time I write a check, I created an application, right? Hey, pay. Robert Breedlove $797.52. Doing that in a fiat standard takes about 20 seconds. Creating $792.27 of gold is impossible for all but 1 in 100,000 people and would take a day. So it's pretty obvious why it works. Because you can create applications faster. You can create more beautiful, complicated applications, types of credit. You can move them around faster, you can travel with them further distances. Also, they don't invite violence to the same degree. For example, a very famous example of a private money that was created in my youth was American Express Travelers Checks. I don't know if you remember American Express Travelers checks. They actually became popular before the credit card. If people were going to travel internationally and you were going to go to some place, they would say, well, you know, before you go, you should convert your money into American Express Travelers Checks. I mean, literally, this is a big business. And the number one use case was that way. If you Lose them or they're stolen, you can get them replaced. It was like, I guess the idea was you were less likely to be robbed if you're carrying the traveler's check. Then if you.
- [07:53]
Robert Breedlove
Analog, multi sig, maybe, something like that.
- [07:56]
Michael Saylor
Yeah, like a multi signature version of money or wrapped money. And American Express made all their money because people would buy $100 million of travelers checks and only redeem 95 million. And there was the float and then there was the unredeemed amount, and that was the difference. And so people used to be very, they were very excited about these sort of things. I mean, a travel check is almost like a derivative of a derivative.
- [08:30]
Robert Breedlove
Right, right.
- [08:30]
Michael Saylor
I mean, the paper money is on top of the gold or itself. Although now I guess paper money is just base layer money. And the traveler's check was on top of that. And people like that idea. And I suppose credit card is just another example of a fiat application. And the idea is you send your kid, you would send your kid on vacation with a credit card, feeling comfortable that you could reload the credit card if they ran out of money. But if your kid said, dad, I need $25,000 in cash just in case I have an emergency and I need emergency appendectomy or something like that, there's no way you want them traveling with that. And of course, they couldn't even get across the border with $10,000 of cash. Try it. Right. So 99% of the world has more than $10,000 that they could put on the credit card, but Nobody can take 10,000 in cash. So the fiat standard is appealing because of the portability of the purchasing power and because it doesn't invite violence. If someone steals your credit card, you could cancel the credit card, they stole your traveler's checks, you could cancel the traveler's checks, things like that. I was like, make sure you write down the serial numbers of your traveler's checks. All of these things. But why doesn't it work in the modern era? The fundamental problem is we start with inflation again. The government can create more of it. But here the inflation problem is not a minor problem like gold. It's a major problem. Instead of getting a guaranteed 2% inflation with an occasional 20%, you get a guaranteed. I think Safedin suggested the number was more like 10 or 11% guaranteed, 7% guaranteed in the US, more in other countries. So you're getting a guaranteed inflation of somewhere between 7 and 11% a year, and you're getting occasional inflation of 30% or 40% a year. So the base layer protocol doesn't work so well. It's not conservative. If you have a shared ledger, that's not conservative, it's collapsing. And that rates. There's just nothing. I said to people, there's no engineered machine or structure that works with that degree of error or inflation. If you had a 2% leak in your gas tank, over what period? If you're leaking 2% a day, your car won't work. Leakage of your swimming pool or a balloon, or any electrical system or any thermodynamic system at all just doesn't work with that much leakage. So the inflation, ironically, inflation implies you're getting more, but really it's dilution in a way. It's guaranteed solution or depletion. The first problem with fiat is it's just depleting energy at too rapid a rate. If we just said 10% a year on average, then a system which is losing 10% of its energy every single year, or almost 1% a month, it's kind of a crippling first order problem. On the base layer, it's almost like building on. If I'm building on sand and the sand was sinking 10ft a year, what structure can you build?
- [12:43]
Robert Breedlove
Right?
- [12:45]
Michael Saylor
When you're building on something, you want to build on granite and you want the minimum deflection. Granite doesn't deflect, steel doesn't deflect, sand and clay deflect. Swamp land deflects. The problem that we start with is the base layer is collapsing. The second problem of the fiat standard is confiscation. Is the government can seize, they can seize your currency or they can seize the asset to a lesser extent. Other people can seize it. If you carry your cash around. There's the famous image of Pablo Escobar sitting and burning $100 bills to stay warm. If you can carry it around, someone with a gun can seize it. So that's a problem. If you don't carry it around, then the counterparty that you trusted it with, generally the bank can seize it, and in all cases, generally the government can seize it. And so these are three fundamental defects with the fiat standard. Your property rights are weak under the confiscation risk, and your property is defective because of the constant inflation. You literally bought swamp land in Florida that's sinking. It's worse than that, right? Because swamp land doesn't sink forever. You know, it's pretty much as bad as it's going to get. This is worse than that because it just keeps getting worse and worse and worse.
- [14:24]
Robert Breedlove
Yeah, yeah, right. Sorry. Just to insert one thing here. This. There's a conundrum of money here where this is the tool or the economic medium that's intended to be trust minimized. So you can put your wealth there and you don't need to trust anyone else. It's like a safe place to park wealth. But to get that, you come with all these limitations of gold historically. So to pick up these stronger, faster, smarter qualities of money comes with a cost of counterparty risk. So it's like the conundrum is gold. You can trust nobody, you don't need to trust anyone, but you can't really trade with anyone because of all of its limitations. Or you can use fiat in which you need to trust a lot of counterparties, but you can trade with a lot of people. So there's this conundrum we've been stuck between historically, and Bitcoin is the answer. It's the collapse of counterparty risk.
- [15:25]
Michael Saylor
Yeah. We go from heavyweight indestructible money that's a brick that is too heavy to pick up off the floor to lightweight cotton candy, which is really easy to move around, but ultimately not satisfying. And blows with the wind. Blows away with time.
- [15:49]
Robert Breedlove
Yeah.
- [15:51]
Michael Saylor
And I mean, and the counterparty risk, you know, is the explanation for inflation. Right. The government's inflating it. And the counterparty risk is the root problem with confiscation. But, you know, again, even if you had your cash in your pocket, you don't have counterparty risk in the near term. But what you do have is an invitation to violence, and it's too difficult to move it. Then you've got counterparty risk in the form of hypothecation, which is the third problem, which is you put your money in the bank, maybe they won't steal it, but they're making more of it because they're loaning it out with a reserve ratio of 1 to 10 or 1 to 20. And so you put a million in the bank and they create 10 million more, which dilutes your million. So the hypothecation is the third failing of a fiat standard. The fourth is the authentication again, because, remember, we wanted to actually be able to move it distances, but you can't authenticate it over a distance in its bearer instrument form because you can't pay for something with cash. So the way to authenticate it is through a counterparty. So I have to put my money in a bank. The bank has to issue a credit card, then I have to input the credit card into the website. Then maybe the credit card gets approved. Then I have to do the transaction and maybe the transaction gets approved and maybe it doesn't get approved and it doesn't cross all borders. It would be impossible to do a transaction via credit card with a vendor in Cuba or Nigeria or China. I mean, all sorts of places where if you cross central banks, the credit cards don't cross those jurisdictions. So that is another way of saying it's an authentication and a transportation problem. How do I transport fiat currency? Well, how do I transport a million dollars? Do you know anybody that any private individual that's ever moved a million in cash over a commercial airline, there's almost a presumption that if you had a million dollars of cash in your luggage that you're a criminal. Right. Isn't that interesting? There's a presumption that if you try to do it yourself, it's a bearer instrument that you're a criminal. And so what we have is we have a monopoly on transportation through the banks, but the banks only can really move within the central bank network. Otherwise they have to cross central banks. And so the monopoly is at the bank level that the central bank level. And then the central banks answer to the government, state departments. So the central bank of the US Won't do business with the central bank of Cuba.
- [19:03]
Robert Breedlove
Right.
- [19:04]
Michael Saylor
Period. Won't happen. Transportation across jurisdiction is difficult and dangerous. Where it's possible, it either works. You're either in the zone where it's working like you're in the U.S. moving money between bank of America and Citigroup at 3pm on a Tuesday. And then maybe it works. Although the truth is I get denied. I tried to do little credit card transactions between my credit card and my phone. I get denied like a third of the time.
- [19:39]
Robert Breedlove
What type of transaction?
- [19:43]
Michael Saylor
Try to move $2,500 to cash app from your bank. From your bank. And the bank might actually stop it or anything like that. You know, if it looks like it's a transfer, you get all sorts of limits on the rate at which you can move money. And if you want to go to higher volumes, if you wanted to move 50,000 or 100,000, invariably those are. You have to have a person, a trusted banker, a human being that's calling you on the phone to move those wires.
- [20:23]
Robert Breedlove
Yeah.
- [20:24]
Michael Saylor
And so the way that we move large sums of Money is between 9 and 5pm with a trusted banker with a manual authentication. And I mean, it feels to me like that hasn't changed in 30 years. Right, right.
- [20:42]
Robert Breedlove
Yep.
- [20:44]
Michael Saylor
So you can't, you can't move outside of the 9 to 5, and you can't do it without that trusted banker. And you can't cross any kind of technical jurisdiction or any kind of political jurisdiction that's not in their free fly zone.
- [21:05]
Robert Breedlove
Right.
- [21:07]
Michael Saylor
And the result of that is that the impedance to move that money is extreme. So on one side, yeah, it might take you 72 hours and the real cost is hundreds of dollars. On the other side, if we go back to the credit card network though, you have a monopoly in the credit card network and the result is there's a 2.5% credit card fee, right? So where the money does move, there's a 2.5% fee and that's under the best of cases, right? But the remittance network gets up to 10% sometimes. So you've got fees that range from 2.5 to 10%. If you're lucky, you get one of those cash back cards. And so the effective cash back is 1.5% or something. So the effective cost is only 1%, but it's 100 basis points, which is a huge amount of money, insanely large amount of money. And the network really isn't competitive and it hasn't changed much in 30 years. And there's massive fraud, chargeback issues.
- [22:19]
Robert Breedlove
And all of these impedances you're describing, I would argue too are essentially an impairment of property rights, where in a pure property, right, you should be able to send, express, receive, move the asset however you choose. But when you have to then answer to a counterparty or go jump through these hoops, or wait, all of these things impair your property rights and money.
- [22:45]
Michael Saylor
Yeah, I would agree with you on that. I think that your property is impaired, it is taxed. And it's either taxed, it's either explicitly taxed by a government, a municipality, a state or a federal government, or it's privately taxed by the money transfer network that's charging you a fee to move it around. And that's a challenge. So transportation either difficult or dangerous or it's impossible or it's expensive. Those are the problems with that. And then that leads to two other real deficiencies in the fiat standard. One, you got a lot of credit failures because lots of complex debt is layered on top of the base layer money, and that's complex debt and credit instruments with counterparty risk, check kiting, check fraud or anything like that where someone stood in to pay. Lots of fraud and lots of credit failure. And then you've got securities fraud and I guess with security fraud, what I mean by that is there's too many complex applications that are constructed based upon a counterparty's representation to you, and there's no way for you to transparently authenticate or, or assure yourself that, that the application is properly constructed and properly backed.
- [24:25]
Robert Breedlove
Right.
- [24:27]
Michael Saylor
And you're destined to have that. Someone says, oh, we have $2 billion in reserves, but they don't. But you don't know they don't. And then there's a collapse of the securities they issued or the credit or the vouchers or whatever they issued. And so those things are inevitable. And the question is why? Why do you have credit bubbles? And then why do you have securities fraud on top of the fiat standard? And I think the answer, if we come back to our base, our base first principles is the base layer protocol of fiat is defective. The base layer money is defective. Right. Is it a shared, immutable, correct ledger? The answer is no, it's not shared. It's not immutable, it's not correct. Yeah, right. It's a, It's a quasi. It's an imperfectly heterogeneously shared. Right. Mutable incorrect ledger. So I guess what you could say is it's a ledger, right? Yeah, it's a ledger.
- [25:52]
Robert Breedlove
Ledger, yeah.
- [25:54]
Michael Saylor
But it's not shared. It's not immutable, it's not correct. You don't have final settlement, so you have massive fraud on the credit card network. You have transfers that didn't take place that are represented to have taken place. You have balance sheets that don't exist, that are represented to exist. You have an issue there with the base layer. The second problem you have is, is the application layer protocol. It's random and manual. The protocol by which I would create applications of base layer money, like a security, is an application, a credit card is an application, all of these things. There's no technical protocol or programmable. There's no API. It's a manual protocol. So every single bank creates their own application. Like a bank loan is an application of fiat, and every bank executes their own set of loans, and they're all expected to maintain a certain degree of reserves, right? Yeah, but they're audited. And the fact that they have to be audited is proof that they're all just manually executed and heterogeneous. So there's no transparent, no transparent, perfected application protocol. And the result of that, or the implication of that is that the applications in the fiat standard have no integrity. They have no integrity in a Mathematical sense or a technical sense or an engineering sense, a physical metaphor is in the real world I'm standing on solid ground and in the fiat world my eyes are closed and someone told me I could take two steps to the left and I would be standing on solid ground.
- [28:09]
Robert Breedlove
Right?
- [28:10]
Michael Saylor
But I don't know that I'm standing on solid ground. I don't know that I'm 100ft from the cliff. I might be one foot from the cliff, someone told me. And I don't have a protocol to ascertain whether it is true or not true.
- [28:30]
Robert Breedlove
Right.
- [28:31]
Michael Saylor
And, and so, you know, you could generously say people just make mistakes all the time. I thought you were 10ft from the cliff and you only were nine and so that's why you're dead. Maybe it's just an honest mistake, right? But then again, maybe it was in my vested interest to tell you you were 10ft from the cliff and you were really 5ft from the cliff.
- [28:58]
Robert Breedlove
And this gets straight to the heart of Bitcoin where it's removing the need to trust. You know, don't trust, verify. And the securities fraud you're describing, I mean, it culminates in the weapons of financial mass destruction with this huge gigantic derivatives market, which is really premised, I would argue, largely on this gap we have between trade and settlement. In the fiat system, there's no final settlement occurring, which is the verification mechanism. So in that gap we have an accumulation of hidden risk that ultimately becomes systemic and lead to giant systemic blow ups. And to your point, there being no integrity, it's like, of course there's no integrity. I would say the lack of integrity is synonymous with corruptability. And so not only does it not have mathematical integrity or financial integrity, but you could ultimately say there's no moral integrity because these systems that just don't hold up to corruption.
- [30:03]
Michael Saylor
I can't take personal custody of a billion dollars of gold. So therefore I trust it to the bank and I take their gold derivative. And I assume that that is base layer money. And I can't take delivery of a billion dollars of currency or fiat. So therefore I entrust it to the bank and I take their credit instrument as my base layer of money. And you could say that what you've got is two fundamental shortcomings here that cause these two systems to break. One is the base layer protocol is defective. You need a base layer protocol where you can take final settlement at any scale.
- [31:00]
Robert Breedlove
Yes.
- [31:01]
Michael Saylor
Can you take final settlement of $387? Can you take final settlement of $38,000,000? Can you take final settlement of, $38,000,000? Can you take final settlement every day? If you can take final settlement at any scale, at any frequency, then the underlying gold standard or fiat standard would have some integrity, at least a modicum. The second problem is there's no application protocol. So there's no way to create a security or derivative or some layer 2 application on top of the layer 1 monetary token. We need the applications, right? The world needs more than just base layer money. Like you need credit or you want yield, or you want to build an insurance contract, or maybe you need to be able to post a security deposit and you need to be able to get the security deposit back. Or maybe you want to put something in trust with a multi signature arrangement for 37 years. There are lots of applications that make the world work, but there's no application protocol. In both cases with gold and fiat, the base layer protocol is defective and the application protocol is either non existent or defective. And what makes Bitcoin special and what makes it digital money is Bitcoin gives you a base layer protocol to take final settlement and it gives you an application level protocol too. Either we could debate back and forth, right? Is the application protocol on the base chain, the blockchain? If so, it's a bitcoin transfer. Or is the application protocol on the lightning using a layer too? Either of those could be viewed as an application protocol.
- [33:19]
Robert Breedlove
You're still maintaining the option for final settlement, even on lightning. I think the core, and this is so critical, if people can understand this, the antifragility of the world economy even is dependent on this simple fact that if we can have higher frequency final settlement, we can have more verifiability in the economic structure, which means less corruption and less blow ups. Whereas the fiat system right now is the complete reverse of that very low frequency final settlement, very low verifiability, tons of corruption, lots of blow ups.
- [33:59]
Michael Saylor
Yeah. Final settlement with high frequency creates reality. Yes.
- [34:11]
Robert Breedlove
That's what the blockchain is, right?
- [34:13]
Michael Saylor
It's reality, yes. And every single second gravity is testing your structure and testing your orientation. There's that phrase, can you defy gravity? The answer is maybe, if you're a great athlete for a second or two, right, For a very short period of time, can you defy gravity? It requires extraordinary strength, extraordinary agility, and it still comes at great peril, right? I mean, you could try to do a backflip and you can land on your head and you can break your back and you'll be dead or paralyzed for Life within a couple of seconds. So there is a final settlement. When you look at, if you're considering a crypto asset network like Bitcoin. And Bitcoin is the greatest, maybe the only successful example, but certainly the greatest example of a crypto asset network. The frequency parameter and the block size parameter for a crypto asset network is the equivalent to the space time constants in a universe. The 10 minute frequency, that's how fast the universe evolves. And the block size is the gravitational content. How does, how much mass or what is the relationship between mass and energy and, and how tightly packed is mat matter? And once you've established those two constants, you've, you've defined the constants that run the universe. Right? Everything else evolves around those two constants. This is why you would never want to change them, because changing them is playing God. And you only get to play God once. When you start the universe. If you change the frequency and the block size of Bitcoin, you invalidate all work that's come before.
- [36:49]
Robert Breedlove
Right?
- [36:49]
Michael Saylor
You, you imperil all structures that have formed in the universe since the beginning of time. You, you impair every mechanism that's been created within that set of structures. You, you impair them and maybe break them, and you throw the future into chaos. Yeah, right. All of those things. It's, I mean, it couldn't be clearer to me, but if you want the physical metaphors, like what if I triple gravity on the surface of the earth right now? If I could snap my fingers, triple gap gravity. How many pieces of furniture do you have that crumple? How many chairs collapse? Right. How many people's hearts stop? Right, Right. How many ships sink, how many planes fly, how many factories keep working? Stuff breaks. Not just factories start breaking, buildings start collapsing, bridges collapse, tires deflate. The person that worked for 100 years to create that great company or the Rockefeller center, and it just crumbles. Yeah, okay, so like, and so you work for 100 years and you did something and it was beautiful until. Oh, it's. Everybody's dead.
- [38:14]
Robert Breedlove
Yeah.
- [38:15]
Michael Saylor
What happened? Well, you change the gravitational constant, you change the space time constant. And therefore the structure, which had been carefully constructed since all of eternity forward, the structure is now rendered null and void and it collapses. Ships are designed based on the Reynolds number. There's something called a hull speed. And the hull speed is a function of the shape of the hull, and that's a function of the way that fluid flows. And these are basic constants. And no matter how fast you push that Hull, it won't go any faster because the water pushes back as hard as you push it. That's why a 150 foot vessel that's 30 foot wide will cruise at 12 and a half or 13 knots. And it doesn't matter the horsepower of the engine in it.
- [39:11]
Robert Breedlove
Yeah.
- [39:12]
Michael Saylor
It's just the way the world works. Another example of that is shock waves and the speed of sound.
- [39:17]
Robert Breedlove
Yep.
- [39:18]
Michael Saylor
There's a reason for the speed of sound. I mean, it's a fundamental constant. You go faster than the speed of sound, then you're moving faster than the air can move out of the way, you get a shockwave, lots of devastation. What happens if you change the speed of sound? What if you change the speed of light?
- [39:40]
Robert Breedlove
Yeah, exactly. I love this because maybe we're creating another meme here that bitcoin is the E equals MC squared of money. And that to your point, you only get to play God once. And Satoshi did that. Satoshi set the rules and the strategies we build based on those constants. They are dependent on the invariance of those constants. If you go and change them, then all the strategies that have been built up around them collapse.
- [40:13]
Michael Saylor
Yeah. The entire bitcoin mining industry, it's all predicated upon bitcoin coming out at a certain speed and the protocol tapering off. And the value of all transaction fees are predicated upon the block size. If you increase the block size, the transaction revenues collapse. If the transaction revenues collapse, the bitcoin mining profitability collapses. If the bitcoin mining collapses, the energy usage collapse, the security collapses, the network collapses. You don't. What's going on with some of the proof of stakers is if you flip from proof of work to proof of stake, you destroy your entire mining industry. If you destroy your entire mining industry, all of the security, all the social, political, economic, thermodynamic security collapses. If it collapses, the integrity and the durability of the money collapses. There are all sorts of second order, third order, fourth order consequences to this. And the fundamental basis of integrity is one has to know that God is not going to change the rules on you. If you spend your entire life working on something, right, if you want to drive people insane, change the rules. Like if I just, you know, I change the speed of light and the speed of sound and I quintuple gravity before you compete in the Olympics, and then when your competitor starts competing, I turn, I dial down gravity to the moon gravity and they jump 180ft in the air and they beat you. Right. And then what happens next? You're like, well, that guy had moon gravity and I had Saturn gravity, and my knees are. My legs are broken and my hips are broken, and I'm lying on a gurney with an IV in my arm and my heart's about to stop, and the other dude is bounding over the stadium. Doesn't seem quite fair. Okay. And at some point when. When the gods toy with you like that, then you say, well, I'm not going to play this game anymore. Right, right, exactly. And. And people withdraw from the ecosystem. It's like, what would you do other than run as hard as you could away from a random universe that wanted to kill you?
- [42:46]
Robert Breedlove
Right. We're back. Sorry. We're back to the original introduction of immutability, how important that is for money. I've said this before, but I think the way you're articulating it here really unpacks it. Is it. This is really what bitcoin's doing. It's radically changing the world by virtue of being unchangeable. It's like the first unchangeable set of rules we've ever had. So it's causing us all to reorient our strategies, whereas fiat is a constant changing of the rules. So you talk about driving people insane. That's why we're going mad in the.
- [43:22]
Michael Saylor
World with every election cycle. You could argue with every political appointee.
- [43:27]
Robert Breedlove
Yes.
- [43:29]
Michael Saylor
Because I could even appoint a different head of the Fed tomorrow, and I would get whatever. The immutability of bitcoin, though, is, it's an emergent property. People would say there's nothing that's absolutely immutable short of being God. It's not absolutely immutable. It's an emergent property. But as bitcoin becomes more decentralized, I guess the thermodynamic inertia of the thing increases, and it becomes more immutable. When there were 100 holders, it was something. When there was a million, it was more immutable. When there's 100 million, there's more immutable. When the bitcoin mining spreads further, when the holder spread further, when there are more institutions and organizations and jurisdictions holding, the more it spread, spreads, the more immutable it gets, and therefore, the higher degree of confidence you can have in the integrity of the entire thing. So that, you know that. That is what's interesting about this entire phenomena. I mean, I've defined. I've kind of described it as a fire in cyberspace. But. But a better metaphor might very well Be a monetary virus in cyberspace. Right. It's a living creature. And we can go back and forth over what kind of living creature. It's a living creature that's massively decentralized, massively fault tolerant, that's got a genetic code, and it's a swarm creature. Right. It's genetically reproducing its DNA. And the more it reproduces, the more it spreads, the more decentralized it gets, the more immutable it gets, the more vital it gets and the stronger it gets.
- [45:45]
Robert Breedlove
And therefore paying us to live in symbiosis with it. That's how it's growing. It's paying or incentivizing everyone to interact with its network favorably. Whether you're a miner, a holder, a developer, everyone's aligned with the success of Bitcoin by virtue of its incentive design.
- [46:08]
Michael Saylor
Yeah, it's some kind of swarm of cloud of truth living the living truth. Nebula.
- [46:20]
Robert Breedlove
Yes. Sorry, I tweeted this out the other day. I thought you might like it because Fiat, I think, is such. It's the opposite again. It's like a cloud of self deception. You know, we think we can just print more money and make things. Okay. Paper over past mistakes. And the remedy to self deception, I've been talking to this guy, John Vervaeke, he says is wisdom. So you might say it's this cloud swarm of organism of wisdom as well, too, that we're getting back to the principles of money.
- [46:53]
Michael Saylor
Yeah. Extraordinary thing. Extraordinary.
- [46:59]
Robert Breedlove
And to outsiders, we sound crazy.
- [47:03]
Michael Saylor
So the human race tried with metal money, and then it went on to fiat money. Then we invented computers, and then we put them on a network, and then we perfected cryptography. Once we checked off the computer box, the network box, and the cryptography box, then you had all the components you needed in order to create a crypto asset network. And that's what Bitcoin is, Right? Maybe not the first, but the first successful crypto asset network that emerged as the ideal technology for money.
- [47:51]
Robert Breedlove
All right, guys, that was episode 11 of the Saylor series. And this episode, I think, Saylor just did an amazing job of going through fiat currency point by point, explaining its history, its emergence, and really all of its failings at a very detailed level. So I think the simplest way to understand this, again, if we get back to that original definition of money, one of the original definitions of money is as a device for expressing value across space and time. And we know gold historically was selected through this free market process as the best asset for storing economic value across time. But due to Its physicality, its bulk, which effectively caused it to have technological limitations as money. It could not adequately express value across space. We as a species were forced to abstract it into a currency to try and augment its portability, to try to make it better for transacting across space. This gave us a lot of additional functionality, but it also came with a lot of risk, the biggest of which, as we went into, was counterparty risk. As Saylor puts this, by abstracting gold into currency, we gain a lot of advantages. The harder, smarter, faster, stronger money is able to be captured at a fiat currency layer because we can do additional technological things to it at that layer that you can't do with gold. Gold's just the shiny dumb rock. It doesn't have APIs, it's not programmable, it cannot be beamed through a telecommunications network, which, if we're looking at money through that ideal lens, again, this immutable, truthful spreadsheet in the sky. Gold is just very limited in that respect. So one of the things abstracting in currency did was it allowed us to have smarter applications, smarter here, meaning that it would allow you to generate yield on your savings or on your assets. In fact, this is the original purpose of banks. As people would accumulate savings, typically in gold or silver, you would custody that money with a bank for a couple of reasons. One, to secure your stash, you didn't want to keep it in your home. The economics of securing gold actually were favorable to centralizing its custody to a central counterparty. And two, you could then optionally, as a saver, you have savings, you could optionally let the bank match your savings with a borrower. So an entrepreneur perhaps trying to go out into the world and create some new project or add value, they could then borrow your savings at interest, which would allow you to earn a yield on your savings. So this was something. This maturity matching function and risk matching function is something historically provided by banks. And again, this was due to the custodianship of money that banks provided. That's what led us into. And that's why I think this is the best way to think about banks, is it's a money warehouse. This is actually how it emerged originally is we had these centralized custodians that were just warehousing the money and issuing warehouse receipts that were redeemable for money, redeemable for gold. And it allowed us to have all of these extra features. But the problem was the need to trust the counterparty, as we covered before. So that paper certificate that was redeemable for gold actually became a debt based money. The paper itself is not the money. It's not the instrument of final settlement. It is a claim. Sorry, not a claim. It's a call option on the money. So you can take that paper certificate to the bank and call your money, like take possession of the gold. And what this does though, and the pernicious thing about this is that you get into this sequence of deferred settlements. So every time you and I trade this paper note in a transaction, which again is much more portable, much more transactable, much easier to do in day to day transactions especially than physical gold, we are not actually settling with finality. I haven't actually given you money, I've given you a call option to money. And it's only when you take that to the bank and redeem the actual money that you have been settled with finality. You have no more debt on your balance sheet. So this is a very important aspect to understand about currency and fiat currency especially, is that it is a debt based instrument. If it cannot be redeemed for money, then it is not money. It is a money substitute, effectively. And when we went off the gold standard in 1971, that's what put the globe onto this fiat currency standard that is now an irredeemable debt certificate. The dollar is not redeemable for gold or anything else. It's a pure confidence game or pyramid scheme. And that's why things from a socioeconomic standpoint have come off the rails since 1971. It's pernicious because we didn't have another option. It's like we had gold or we had currency which added all this feature set to money, but came with this really potent form of counterparty risk that in many times throughout history wiped people out. People had their entire savings wiped out either through inflation or outright confiscation. So another advantage of these and say, let me make the point that these debt based instruments, they're actually, they change the incentives to violence somewhat. And he gave the example of Amex travelers checks in that you didn't have to walk around with this bearer asset money like gold coins, if they were stolen, there was no mechanism to reverse that involuntary exchange of theft. But if you had something like an Amex traveler's check, which is one of the older fiat applications, effectively you would always write down the serial number on your Amex travelers check. So if you took them traveling internationally and they were lost or stolen for some reason, you could then contact the counterparty, in this case American Express, provide them with the Amex traveler's check number and then they would reinstate your traveler's check. And I'm not completely sure on all the details of that system, but that was the purpose essentially. And it's kind of like, if you're thinking about this through a bitcoin lens, it's kind of like an analog multisig. But the counterparty, well, you know, with a multisig you choose who holds the shards of the key. This would be kind of a centralized multisig model where the counterparty is, not only are they monetizing the float, so that would be all the funds provided to it before they were redeemed. You know, they have a time value of money, business opportunity there. And they also, I think Saylor said they only redeemed or about 5% of the funds went unredeemed. So that would be effectively be free money to the counterparty. So that kind of highlights the advantages and disadvantages of credit based money and fiat applications more generally. But the main theme here, I think is that credit based or debt based money, fiat currency, this was very important for a globalizing society. We needed high velocity money to satisfy the needs of a globalizing marketplace, frankly. So then we got into the major problem of fiat currency, which is a component of this counterparty risk we've been discussing, and that is inflation. It is a monstrosity in the world economy. And I don't think I'm overstating it. It's the term. We've been conditioned by Keynesian propaganda and traditional economic curriculum to think that it's a normal part of economic activity. But it is in fact nothing more than arbitrary reallocation of resources, to say it nicely, violation of property or theft, to say it more accurately, in my opinion. And Saylor in his engineering mindset, he describes this as the error rate. I think in the U.S. roughly, when you look at how much inflation we've suffered in the dollar historically, it's been around 7% on average and abroad tends to be a little bit more like 10% because you get not only the US dollar inflation, but also the inflation of the other, the weaker currencies themselves. So this is an error rate and a rate of theft that's been integrated to our monetary system for a really long time. And the consequences of this are really bad. Again, as Saylor says, there's no engineering system in the world that would tolerate such a high error rate. Or another way of saying this is like leakage of energy, that this instrument that is designed to express value or energy across Space and time is just bleeding out. Even when it's not being transacted, even when it's just being held and stored for future use, it's just bleeding out. And this is, you know, you could imagine if you were trying to build a house or something and the value of the meter was constantly in flux, constantly being diluted or deteriorated, that it would just make planning really difficult. And that's what we have with money today. We lack a universal metric system or something comparable in the sphere of money. We lack an engineering standard for money. And that's really what Bitcoin is. It is this first universal metric system or value system for money. And it can't be violated, it can't be changed. And this is very important for harmonizing human action at scale. The other pernicious thing about inflation is that it's nominally deceptive because you think, okay, my house was worth $400,000, now it's worth $500,000, I'm richer. But what's actually happened is that that unit of economic perception, money as we're using it as a unit of account function, it's integrated into our mental software. It's actually been depreciated. So you're perceiving the value of your home through a diminished aperture. That is what's happened. You're not actually richer. The dollar is actually worth less. And this has just been the most simple yet brilliant illusion, I think, ever perpetrated, is people just think they're getting something for nothing all the time via inflation, when in fact the opposite is true. They're being robbed constantly in broad daylight. It's a bitter pill to swallow. But I think when you really come to see it as it is, it's an important awakening, I think, for most people. So it has this nominal deception where you think things are getting more valuable. But what's in fact occurring is there's a destruction of value in real terms. And the second order effect of this is price signal distortion. I talked about this separately, but again, when entrepreneurs are unable to properly conceive or perceive of the world, then they're led into misallocation of capital. So you may think that you could borrow money at a certain rate and then execute a project with a higher expected rate of return and net the difference. But what this fails to account for is the inflation itself. So when the entrepreneur borrows and then he goes out and tries to buy inputs for his business, the inflation starts to manifest itself. The cost of inputs increases, and all of a sudden these believed to be profitable Projects become unprofitable and these cumulative misallocations of capital caused by fiat currency inflation. This is the boom and bust business cycle that we all think is completely normal. And it just happens that we have these gigantic economic crises every 10 or so years. This is a direct consequence of, of manipulation in the market for money by central banks like full stop. There's always volatility, there's always errors in the market, but the market is what clears errors. When we paper over the errors in the marketplace, we're interrupting the evolutionary process, the error clearing process of markets. And we allow the errors to grow much larger and much more significant. And it's just very disastrous all the way around. And so this, you know, it's effectively a non solid foundation. And this is kind of the core message. You never want to build your house on sand, right? So why would you want to build your civilization on a fluctuating currency, on an, on an uncertain rule system, right? We cannot even develop a strategy around it because you don't know what the rules are going to be. You don't know the money supply is going to be. You don't know what the interest rate is going to be. You don't know how much more it's going to change in the future. The great example here is Wittenstein's ruler, who said a long time ago, if you measure a table using a ruler and you can't trust the reliability of the ruler, then you're not sure if you're measuring the table or you're measuring the ruler. You get into this domain of complete relativism where everything is only evaluated through the lens of something else. There's no absolute standard by which to evaluate something. And again, you know, it's. We would never accept this in the realm of spatial or temporal measurement, right? If the value of the second or the hour fluctuated randomly based on some central control board or the value of the meter or the mile, it would just, would make no sense and it would throw all human cooperation into total disarray. Yet that is exactly what we have in the market for money. So it's really bad. Fiat's really bad. It's just not worth the trade offs even that we made for it, right? So the other problem with fiat is that confiscation is enabled. The counterparties, or the currency issuers in this case, they can just confiscate property very easily, very cost effectively. So instead of a government, for instance, having to go out into the world and directly, explicitly, visibly violate the property rights of an individual homeowner coming to their house, kicking them out, performing eminent domain or whatever it may be, they can instead just print money. And again, so long as everyone's caught up in this spell, that printing money is somehow a net positive and they don't ask too many questions or push back, then government can just get away with this for a very long time. Yet it is in fact the same thing. They are again allocating themselves this call option on property called money, and externalizing all of the inflationary costs onto property holders. So again, it's nothing more than a violation of property rights. It's just done in a much less visible fashion, but therefore done at a much larger scale because people don't see it or understand it enough to push back against it. So this kind of leaves us in a conundrum, right? So we have this conundrum of money we talked about. You can have gold, which is a trust minimized asset, holds its value really well over time because its supply is relatively predictable, yet it comes with extremely high transaction and security costs. So to move gold over time, move gold across space, or even to secure gold in a vault over time, the costs are very high and the costs tend to scale with the amount stored. So that causes market actors to then want to amortize that cost into a centralized custodian. So this develops a business model for centralizing gold. So then we get currency, or later fiat currency. We get all these advantages of lowering the transaction cost of gold. We've increased its portability across space. So now we have a high velocity money. But we've assumed, now we've given up some attributes of gold, and we've now assumed the interpersonal trust and counterparty risk that comes with centralizing the custody. So the conundrum is we're stuck between do we want to express value well across time with gold, or do we want to express value well across space with fiat? But each one can't do the opposite. Gold does not express well across space. Fiat does not hold its value over time. So we're stuck between these two worlds. And historically, we just didn't have a good option. We've just had a boom and bust in civilization driven by this technological conundrum between gold and currency. The other problem with fiat clearly is the hypothecation issue. So hypothecation, rehypothecation essentially means reborrowing or reusing collateral. And this is also called in the banking system the money multiplier effect. So if a bank takes in $100 of deposits that is a liability to their customer, they owe their customer $100. But if they then in turn take say that, and this is premise on the reserve ratio. So typically it's around 10%. Right now it's 0%, which is a real problem with a 10% reserve ratio. Banks are then allowed to take $90 of the $100 liability, the money they owe their customer, and they're able to loan that to another customer. So they've effectively increased the money supply by $90. So the money supply goes from $100 to $190. And then this same effect repeats from bank to bank and that you get into these money multiplier effects where the original $100 in deposits can be expanded even on a 10% reserve ratio, 10 plus X. So $1,000, say increase to the money supply. And this just injects a lot of leverage into the system. So again we're amplifying the boom and bust business cycle. We're causing a perceptual disturbance in the economic system that actually causes the accumulation of hidden risk and blow ups. It's really bad. We can very simply think of leverage as a tool that amplifies gains or losses. So if you bet correctly with leverage, you can have outsized gains. If you bet incorrectly with leverage, you can get liquidated and wiped out. So it's no coincidence that when we start injecting leverage into our monetary system, we polarize the outcomes. We've had the stock market up 7% year over year for a decade straight. It just seems like really strong economic growth. But what we're not seeing is what percentage of that growth is actually just the dollar being diminished. And then in year 10 or around about then you have a correction back to economic reality, which is like a 2008 type event or even a March 2020 type event. So we're doing this to ourselves. It's the corruption and the undependability of money that's injecting these hidden risk into the economic system. This is not the natural order of the world. We are doing this to ourselves through the corruption of money. And the other problem Fiat introduces is this authentication problem, right? So if you want to move money, especially first of all, you can only move it within business hours, which is a pain. You can only move it within certain jurisdictional bounds. There's typically large fees to move larger amounts of money. So the expense of moving money scales with the amount moved. There are delays if they don't know. If the bank questions the counterparty, you're sending the money to, then they may delay you could be days, could be weeks. There are the possibility of account closures. So all of these strictures in the market for money, in the system of liquidity, these are effectively limitations on your property rights. So again, property, this is the basis of civilization. If you own property free and clear, you can do whatever you want with it, so long as you do not transgress against the property of others. Yet in the banking system we tolerate this impairment that some overlord gets to decide when you get to move your money, how you get to move your money. They get to ask questions, you know, who is this company? Who are they? This gets into all the problems of KYC and aml. It's honestly just one giant scam, right? It's one giant mechanism of attempted top down command and control over your property. So this is a force that is countervailing to civilization itself, yet we tolerate it as if it's the norm. And it's hard to believe things have gotten this far, especially in the 21st century where we consider ourselves to be so advanced in this dynamic. Central banks and banks effectively become the deputies of government. They're constantly checking on who's moving money where and determining if they're good actors or bad actors. But all of this is relevant to the aims of the government itself. And one manifestation of this is the censorship you commonly see. And this takes place in many parts of the world in the interface layer between banking and crypto platforms. So many people have reported this trying to send their money onto an exchange to buy Bitcoin. They're often getting censored or they're getting their bank account closed, or they're getting delayed. And this is just because again, you don't have absolute control over your property when it's in the bank. You have an IOU from the counterparty. And all of a sudden when you go to redeem that which, when you buy Bitcoin, it's equivalent to being in a bank in the early 20th century and taking your dollar in to redeem gold. You're basically swapping your money substitute for real money. But this again shows you where the bank tries to stop you from doing that because they have a vested financial interest in keeping you in their custody, right? Where they get to control you and profit from you, that's a real problem, right? This is a limitation on property and therefore is a decivilizing force. And I mean, it's your money, right? It's your money. You sacrificed your time, your most personal property, which is yourself and your time, your skills, your ingenuity your know, how you sacrifice that, that every day to obtain this money? Okay, that's property, right? And money, the most important property, right we have outside of our own control of ourselves is money. We put it inside of an institution where we do not have complete control over it. So we are sacrificing and serving this panopticon, this institution that impairs our property rights. And when you start to think of it like that, it's quite mind blowing in my opinion. The point here is that the base layer of fiat currency is defective. It's subject to political whim. They can violate your property at will. And then importantly, it doesn't scale. It's got a lot of fraud built into it, which is basically an unsound substrate for human civilization. And then we start to look at the application layer. I think Saylor made a great point about this. The base layer is defective, but then we roll up to the application layer. It's not automated. Each little bank is performing its own manual review process because they're running their own processes. The base layer is defective. They can't communicate on a standard protocol. So it does not scale. It's a very inefficient monetary system. And Nick Szabo wrote a great piece on this. I forget the title of the piece, but if you just google Nick Szabo S Zabo and his term that he coined, social scalability. He talks about the importance of scaling systems where we need to be able to create systems that conduct important operations without us having to allocate human brain power to every movement. That's how we scale as a civilization. When we can systematize important operations and then free ourselves to go and focus on other aims that we can't systematize. That's how we scale, that's how we economize and that's how we create wealth in the world. The entire layer of banking is antithetical to that process and it's anti entrepreneurial, it's anti civilization, it's destructive. And this is why a lot of people use that parasite host analogy which I think is very apt. It's just a rent seeking group siphoning wealth off of productive economic actors. And without engineering standards you can't have APIs. So the application layer itself, not only does it not scale, but it doesn't interact right. You have these little silos of applications which you will have noticed depending on what banks you've used, they all kind of have their own custom thing and without that, the application layer lacks integrity. There's no mechanism through which to settle the application layer into final settlement. The fiat dollar is incapable of final settlement. It has debt and counterparty risk integrated into it. And that risk is being constantly realized through inflation. So the government is effectively going through a slow motion default of its debt through inflation. So it's just printing money to pay off its debts and keep itself sustainable, pushes that cost onto society. So everyone, and this is so important because you work, depending on your tax bracket, two to six months out of the year for government, you work to pay for government. That's your direct tax bill, right? That's your, say, 20 to 50% effective tax rate, depending where you are in the world. I mean, everyone's got their own coefficient. This does not account for the fact further that the currency is being inflated and that inflation is being used to further tax population. So without an ability to settle with finality, to get out of dollars into something that can't steal from you, into a money that can't steal from you, that you're just being further and further subjected to this economic tyranny. And so in that sense, this is why we talk about the difference between deferred settlement and final settlement. Final settlement is truth, right? Final settlement means you have received an asset that is 100% equity and 0% liability. And this is the equation in accounting, by the way. Assets, this is your balance sheet. Asset side of your balance sheet equals liabilities plus equity. So for a dollar, you have asset side equals a percentage of liability, which is all of this counterparty risk you assume, plus a percentage of equity that you have. But with Bitcoin or physical gold, you have an asset that is 0% liability. It's a bearer asset, which means 100% of your asset value is equity value in your hands, the owner. It's a full and robust property, right? And so to have a mechanism of final settlement is what keeps an economic system honest. And this reminds me of the old Buffett quote, when the tide goes out, you see who's swimming naked, right? So many actors can do really well when the market's moving up and you're borrowing and reborrowing and reinvesting and everything's again debt, amplifying your gains. But when the tide goes out and pulls back, it's those who have strong equity positions, so strong balance sheets or are in a solvent position that do well. And an instrument of final settlement or a money that's pure equity is completely necessary to be in that position. And that's what is so different about Bitcoin is that gold was a great instrument for final settlement, but it could not be conducted at high velocity. And for the first time with Bitcoin, we have a system that can settle anywhere in the world to the base chain. This is ignoring lightning network and other features that accelerate it further. We can perform final settlement anywhere in the world to typically within an hour. So what we have now is a money on which to build our economic system that is capable of conducting high frequency final settlement. Which is to say high frequency truth or high frequency verifiability. This is back to the ethos of Bitcoin. Don't trust, verify. I don't need to trust the individual. I can just trust the Bitcoin network that the transaction and the money has been verified when it's sent to me. This creates an antifragile economic system, whereas fiat is the exact opposite of this. We have no final settlement, not even low frequency. It's not even possible. You can't even settle outside of the dollars if you're purely within the fiat system. So you just have deferred settlement on top of deferred settlement, just getting, just expanding with more and more hidden risk as the economy booms. And then when it busts, it's cataclysmic, right? So no final settlement, low verifiability, and therefore extremely high fragility. And that is what the economic System, especially since 1971, has been characterized by. Extreme booms, extreme bust, extremely high fragility. And this has real consequences in the lives of people. And it's all rooted in this. It's a poor engineering standard, it's a non well thought out system of economic activity. And it literally can be fixed, right? This is why we all say Bitcoin fixes this. So to finish, Bitcoin is changing the world by virtue of being unchangeable. It's a really big phrase. But to Saylor's point, if you want to drive people insane, just constantly change the rules. And you know this intuitively, right? If you walk into a poker room at a casino, the hand rankings in the poker game and the rules and the rake and all these different aspects of the game, they don't change, right? You need invariant rules in a game so that players can develop strategies and compete with one another. If the rules change, then all of a sudden the incentives are twisted towards, well, how do I control the rules and bend them to my favor? And that's exactly what fiat is. Fiat is a constantly changing set of rules driving the world insane and causing the most unscrupulous among us to fight for control over the rules so they can benefit from this free lunch. This is why I am so passionate about education and showing this for what it is. We are doing this to ourselves. This fiat currency is self deception at scale. And if wisdom is that which allows us to cleanse ourselves of self deception at the individual level, then I would argue that Bitcoin is the wisdom of money. It's a technology that prevents us from deceiving ourselves by thinking we can print money to solve our problems, which, if no other lesson of history has been learned, that one has been learned so strongly, so repeatedly. And so in that way, Bitcoin is just this absolutely invariant rule set. And that's why it's such having such an impact on the world. It's forcing everyone to adapt their strategies to these unbendable, unbreakable rules. You see it at the individual level, we're seeing it most recently at the corporate level with companies like Saylor's Microstrategy adding Bitcoin to their balance sheet, anticipating future adoption because they understand these dynamics very fundamentally. And that same dynamic will be playing out at the nation, state, sovereign wealth fund and central bank levels as well. Because what all these things have in common is they're all strategies. Life is a strategy, organizations are a strategy, organisms are a strategy, communities are a strategy. And what do they do? They adapt to the rules that best favor them. And invariant rules that you can depend on for consistency over time are the most favorable rules to play by. So in this way, Bitcoin is inducing everyone to play its game over time. And that's why it wins. That's why it's such a big deal. And that's why it's an answer to the insanity being induced by fiat currency. So I hope you enjoyed this. This was again episode 11 of the Saylor series. We've got more coming down the pipe. I'll see you guys back here again soon.