The Biggest Lie in Economics | Allen Farrington & Sacha Meyers

Summary

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Podcast Summary: What Bitcoin Did

Episode: The Biggest Lie in Economics

Guests: Allen Farrington & Sacha Meyers

Host: Danny Knowles

Date: May 4, 2026

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Episode Overview

This episode explores the prevailing assumptions in mainstream economics around inflation and deflation, targeting the origins and validity of the “2% inflation” dogma. With Allen Farrington and Sacha Meyers—authors behind "Bitcoin is Venice"—Danny Knowles guides a deep discussion about economic orthodoxy, the real history behind inflation targets, the paradox of thrift, innovation-driven deflation, and the possible role of Bitcoin as a disruptive, deflationary alternative. The tone is irreverent, intellectually rigorous, and often satirical, aiming to challenge foundational beliefs about modern monetary systems.

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Key Discussion Points & Insights

1. The Myth of 2% Inflation

• Origins of 2% Target:

  • Allen explains that the 2% inflation target “was literally completely made up. It was in a TV interview.” ([00:02])
  • There’s no empirical or theoretical rigor behind the number; it became policy due to lore and repeated citation.
  • The story about a New Zealand official arbitrarily picking the number is historically accurate but irrelevant to the broader dogma ([07:06]).

• Mainstream Justification:

  • Sacha: The core reason is the “paradox of thrift” — the belief that people must be nudged into spending with the incentive of mild currency debasement, lest the economy stalls in a deflationary spiral ([04:47], [13:03]).
  • Allen: The assumption is so ingrained that people treat it as self-evident, rarely questioning its basis ([04:19]).

• Critical Insight:

  • Successful economies have operated under deflation for extended periods. Most Western innovation booms happened under gold standards, environments with sustained deflation ([04:47]).

Notable Quote

“You find that [the 2% target] was literally completely made up. It was in a TV interview... It's an amusing footnote in the development of this very poorly conceived theory.”
— Alan ([07:06])

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2. Conflating Deflation Types & The Paradox of Thrift

• Two Types of Deflation:

  • Credit-deflation: Occurring from a house-of-cards debt collapse (e.g., Great Depression), leading to economic shocks ([18:58]).
  • Innovation-driven deflation: Prices fall as productivity and efficiency increase—a healthy sign, not a crisis.
  • Sacha: Mainstream policy wrongly tries to eliminate both forms, “throwing the baby out with the bathwater” ([18:58]).

• Paradox of Thrift - Explained & Debunked:

  • The orthodoxy fears that falling prices cause people to delay purchases indefinitely, stalling growth.
  • Allen and Sacha argue this misunderstanding arises from neglecting how savings power investment and subsequent innovation ([21:54], [23:49]).
  • Delayed consumption fuels investment (factories, AI, etc.), ultimately unlocking greater productivity.

Notable Quote

“If you're delaying anything, you're not just not doing. It's not like there is something versus nothing. There's something today versus something tomorrow. So you need to think about your opportunity cost, what else you're doing.”
— Sacha ([18:58])

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3. Malinvestment and Price Signals

• Investment vs. Malinvestment:

  • Sacha: It's impossible to perfectly distinguish investment from malinvestment ex-ante; malinvestment is inevitable in noisy, manipulated markets ([25:15]).
  • Interventions (like low interest rates) distort price signals and encourage riskier, longer-horizon projects than actual savings would warrant.

• Price Signal Integrity:

  • The less “noise” (policy interference) in the system, the more accurately market prices can guide rational investment; adding noise only exacerbates human error ([25:15], [27:26]).

Notable Quote

“If you think that you can improve the faults of human psychology by adding even more noise on the line, you're deluded. That's never—I would like to see a scenario where that's actually happened, because I don't know of one.”
— Sacha ([25:15])

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4. Deflation, Debt, and Wages

• The Debt Trap of Deflation:

  • Danny raises the concern: if both wages and prices fall, but nominal debts stay fixed, people get trapped ([35:48]).
  • Sasha: Wages may not fall (they could stay flat or rise, depending on innovation), but the real issue is introducing rigidity (like fixed debt) into a dynamic, deflationary environment creates fragility ([36:17]).
  • Allen: Deflation only occurs when labor is worth more; wage dynamics are complex but shouldn’t be assumed to fall in line with prices ([39:03]).

• Fiat Policy as a Patch:

  • Instead of addressing over-leveraged, fragile systems, modern policy just “inflates away” those nominal obligations rather than fixing the underlying causes ([36:17]).

Notable Quote

“You cannot have deflation unless your labor is worth more.”
— Alan ([39:03])

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5. Orthodox Economics’ Blind Spots: Time, Measurement, and Complexity

• Measuring the Unmeasurable:

  • Allen and Sasha criticize how mainstream economics relies on macro statistics (like CPI), which are inherently imprecise and often misleading ([31:39], [32:09]).
  • The “physics envy” of economists—wanting to treat economies as mechanistic, predictable systems—leads to false confidence in intervention ([32:11]).

• Ignoring Time & Causality:

  • Orthodox models remove time/dynamism, treating economies as maximizing equilibria (“Valrasian auctioneer” as satire). Real economies are radically uncertain, not modelable in static equations ([50:02], [54:06]).
  • Opportunity cost and causality matter more than tidy models.

Notable Quote

“Fiat economists treat time as inconvenient friction. In the hallowed halls of neoclassical theory, time does not exist. There is only an equilibrium...”
— (Essay excerpt, quoted by Danny at [51:20])

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6. Can a Deflationary System Emerge? The Bitcoin Angle

• Practical Transition:

  • Sacha: The transition must be bottom-up and voluntary; they don’t advocate authoritarian policy shifts, but argue for systems where “innovation manifests at the output as deflation” and minimal noise ([44:14]).
  • Allen: If people understand the arguments, they’ll seek better (possibly Bitcoin-based) money systems without coercion.

• Bitcoin Standard?

  • Both agree: the creation of a monetary system like Bitcoin, with no centralized control and maximum resistance to takeover, is the logical endpoint if their arguments work out ([46:17], [57:05]).
  • When will we know? “The day you denominate the market cap in bitcoin, that’s the day.” ([47:59])

Notable Quote

“A money that is...creating an environment whereby innovation manifests as deflation is going to be one that is maximally beneficial and that people will therefore want to willingly adopt.”
— Sasha ([44:14])

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7. Satirical and Memorable Moments

• Allen and Sasha intentionally mock the convoluted jargon and internal logic of neoclassical economics:
  • “If you don’t get that [the auctioneer paragraph], that’s probably healthy. That means you haven’t wasted a decent amount of your time learning what these things allegedly mean in the first place.” — Alan ([52:19])
  • “It’s always time to print. That’s a very important, very important thing to understand.” — Sasha ([31:04])

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Key Timestamps

• 00:02 – Origins of the 2% inflation myth
• 03:47 – Essay context & “Bitcoin is Venice” background
• 04:47 – Why inflation is assumed necessary; paradox of thrift
• 07:06 – The New Zealand “TV interview” lore for 2%
• 13:03 – Keynesian rationale for fearing deflation
• 18:58 – Two types of deflation; why delayed consumption is good
• 21:54 – Paradox of thrift challenged: savings as investment fuel
• 25:15 – Price signal corruption and malinvestment
• 36:17 – Debt fragility in a deflationary world
• 39:03 – Labor value as the prerequisite for deflation
• 44:14 – Would a deflationary system work? Bottom-up transitions
• 47:59 – “Denominate the market cap in bitcoin—that’s the day”
• 50:02 – Satirical, jargon-heavy critique of equilibrium economics
• 54:06 – Complexity vs. modelability in economics
• 57:05 – Is the answer “move to a bitcoin standard as fast as possible?”

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Memorable Quotes (with Attribution & Timestamps)

• “You cannot have deflation unless your labor is worth more.”
  — Alan ([39:03])

• “If you think that you can improve the faults of human psychology by adding even more noise on the line, you're deluded.”
  — Sacha ([25:15])

• “When you delay consumption, what are you often doing with your money? You’ll be investing it, saving it... you’re creating liquidity for the monetary framework, which means you’re creating a more stable way for entrepreneurs to use the money system.”
  — Sacha ([18:58])

• “It’s always time to print. That’s a very important, very important thing to understand.”
  — Sasha ([31:04])

• “Fiat economists treat time as inconvenient friction. In the hallowed halls of neoclassical theory, time does not exist. There is only an equilibrium...”
  — (Essay excerpt, quoted by Danny, [51:20])

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Closing Thoughts

Allen and Sacha argue that the economic orthodoxy around perpetual mild inflation is built on shaky foundations and “just-so stories” rather than empirical evidence or logical rigor. Deflation—if rooted in innovation and productivity—is both natural and beneficial. Price signals matter, and their distortion via fiat intervention causes more harm than good.

Though their essay and discussion deliberately avoid relying on Bitcoin as a rhetorical crutch, both see “maximally beneficial money” as converging on something like a Bitcoin standard over time—if people are free to choose and markets are free to signal.

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For further exploration:

• Read "Bitcoin is Venice" and keep an eye out for the second edition with the new essay "Number Go Down."
• For practical debates and more technical depth, follow Allen and Sacha on Twitter/X and in forthcoming podcast episodes.

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Transcript

[Alan]

This 2% figure, it was literally completely made up. It was in a TV interview. You cannot have deflation unless your labor is worth more.

[Sasha]

The current system is going to operate under these assumptions until it no longer works. You're getting deflation because you're essentially just crumbling a very fragile house of cards of debt. You would indeed have a massive issue. But if you think that you can improve the faults of human psychology by adding even more noise on the line, you're. You're deluded. Very successful economies have operated under conditions of deflation for thousands of years. The most innovative periods of Western civilization. A money that is creating an environment whereby innovation manifests as deflation is going to be one that is maximally beneficial and that people will therefore want to willingly adopt.

[Danny]

Alan, good to have you back. Back on the show. And Sasha, I've never met you. This is the first time we've. We've ever met. I've told Alan this a bunch, but Bitcoin is Venice is my favorite bitcoin book. He always says it's not a bitcoin book, but for me it is. But it's really good to meet you. Thank you for coming on the show. Do you want to just tell everyone a bit about who you are? Because the audience doesn't know you as well.

[Sasha]

No, I'm the elusive partner in the duo here. That's how I like it now. So, look, I used to work with Alan. We met at an investment firm that we both worked for. I still work there. So by trade I'm an investment manager. And I have background in environmental sciences and not studied economics either. That's what you were saying earlier, before you started recording, perhaps. And it's just an interesting area that I've developed, and Alan and I have been sounding boards for each other through the years, and we now and again, over a couple of pints, start developing an idea a bit more than another. And then that's when we start thinking, hey, maybe this. This is something we ought to develop. So then it turns into busy afternoons and evenings and weekends where we just try and get some drafts together. And yeah, it's been. It's been a fun intellectual partnership.

[Alan]

One thing I'd add to that, just given Sasha isn't as kind of out there in the bitcoin community, is presumably what most of your audience is. Danny, I'm not sure how well known this is. I don't know if I'll have said it publicly in exactly these words, but Bitcoin is Venice. Just the book, the collection of Essays is basically what we spent five years talking about and then in lockdown, had a good excuse to write for once. That's basically where it came from, but.

[Danny]

And now the band is back together, we've got a new chapter. Are you going to do a new version of the book?

[Sasha]

Yeah. Yeah.

[Alan]

Good question. So it's this one. Number Go down is intended as a standalone essay, so you can read it without any other context. But we intend as well to probably modify it a little bit, but to slip it in as a new chapter for the second edition of Bitcoin is Venice. So I'm not sure how much we're actually allowed to say about this. I mean, I tweeted some of this, but Second Edition will come out sometime next year. We're hoping that we can launch it at next year's bitcoin conference. There's other fun details that we're hoping for that Bitcoin magazine will probably get mad if I say now. I'm not sure they're entirely confirmed, but yeah. So standalone essay, but will be slotted in.

[Danny]

Awesome. Right, let's get into the essay then. So number Go down. This is all about deflation. Do you think we should start this conversation by talking about inflation, though? Because, like, this is, to me, as someone who came into Bitcoin with really, like, never having dug into economics at all. Like, the idea of inflation was always presented as a good thing. You know, like a healthy economy would have 2% inflation. But, like, you start this by talking about that as obviously being one of the big myths of, like, Keynesian economics. So can we start there? Like, what is the myth of inflation?

[Alan]

What is the. You need it. I guess this is. You kind of alluded to it there, that it's just presented as common knowledge. Like, kind of obvious, I guess. I mean, it's sort of difficult for me to remember if I ever even believe this or what it is people typically believe, but that it's just, you know, obviously you need a bit of inflation, because otherwise we'd all starve and die. I don't know. Do you want to give a more serious answer than you're still in tradfi. What do they think?

[Sasha]

So I'll answer your question in a slightly different way. I'll say that one reason we're addressing this is because it is one of the axioms of traditional economics. So any school of thought is going to be based on a number of assumptions, and those are the core assumptions that then you build on to have all of your other workings. And when you come with a fundamentally different understanding of how things work. You also need to sometimes go after the fundamental assumptions and knock them out. So this is, this is our attempt at doing that. I would say that none of it individually is new. It's just taking arguments from bits here or there, and then we are working through it with our own logic and then maybe building on some of this. But look, the idea that things need to inflate over time is based on a number of assumptions which we talk in the essay about how you derive that 2%. Nobody really knows. It's very much a finger in the air sort of thing. But the reason why you need it is also based on some assumptions, such as paradox of thrift, which is that you need people to feel almost coerced into spending, otherwise they won't. And then this has deleterious effects which feeds on itself. And so these are the core bedrock assumptions. And what we're saying is, look, you have a completely different way of thinking about it. You don't need to make those. And the economies, very successful economies have operated under conditions of deflation for thousands of years. Really like hundreds of years, the most innovative periods of Western civilization have operated under gold standards, where the natural order of things was to have a nominal deflation in price. So this isn't something that is completely out of the ordinary, out of what you can tangibly observe. We are now operating in an environment where we just assume inflation is how things are and it's the water we swim in. And so we don't question it. And well, yes, we want to start questioning it a little bit, but where

[Danny]

did that assumption initially come from?

[Sponsor/Ad Host]

Because you talk about. I think it was a New Zealand

[Danny]

banker who kind of made a throwaway comment. And was that the start of this?

[Alan]

I don't think so, no. I think that's entertaining in terms of this 2% figure, that it has this kind of odd lore behind it because it's always presented as, you know, state of the art. And I guess again, it's difficult for me to remember if I ever even bought into this, like how a normie would buy into it. But I'm pretty sure that it's understood or at least it's mis. Presented as being in some way derived, you know, scientifically or mathematically. Like it's. It's really serious, right? It's very serious. People have. Have thought about this and come up with the optimal answer. That's the way it's generally understood. And when you dig into where this number, basically when you do exactly what Sasha just said. Okay, but why? Where. Where does it actually come from? You find that it was literally completely made up. It was in a TV interview by this. I forget the guy's name, the New Zealand. Was it finance minister or something? I wouldn't say, though, that that's the. There's a distinction between, you know, the 2% number and the broader, you know, base of knowledge and belief that gives rise to it. I think at risk of maybe going a bit deeper than you want to right now, we're not just critiquing this one guy and, you know, everyone eating 2% mindlessly since then. I think it's more that he was in a position to say that. And it. It then became lore because of the much more widely accepted macroeconomic thought that's. I think it's basically fair to just call it Keynesianism. You use that word already. But that had been prevalent for most of the 20th century and particularly acute in practice since 1971. So if anything, maybe it's like an interesting historical counterfactual. If this hadn't happened and everyone hadn't latched onto this number, how would it have been understood since? How would it be justified? Um, so, yeah, so that guy. And that number isn't really that important. It's just like. It's an amusing footnote in the development of this very poorly conceived theory.

[Danny]

But does that signify something that, like, you say that's not super. Like him alone saying that isn't super

[Sponsor/Ad Host]

relevant, but does it signify something?

[Danny]

Because, like, it's the same thing as when Jerome Powell goes out and talks about interest rates, which might, like, not have a meaningful impact in reality, but like the vibes of him saying that has a huge impact on markets. Is it the same kind of thing?

[Alan]

No, I don't think it is quite the same. I mean, that example with Jerome Powell or the Fed and the inflation expectations and whatever else that's interesting to get into later. This is more. I think the reason we put this up front is precisely because of how silly it seems it is.

[Sasha]

Just this.

[Alan]

It's lore. I think I've landed on a nice way of capturing it that again, you would think from the way it's talked about, that there's a much more serious source of this number and there just isn't at all. It's literally just some guy thought of it on the spot and then it stuck. It's kind of. Again, it's. Incident like that. It could be any number. Right. It doesn't have to be two. It just happens to be two. For this particularly silly reason. I think the stuff about, you know, comments from the Fed chair that's a bit. That's more insidious, that's kind of deeper in the rot of what we are,

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[Danny]

get more deeply into like deflation, can you kind of give me the Keynesian argument as to why deflation is a terrible thing that must be avoided at all costs? Like, what is that? What is their reasoning for having that line of thinking?

[Sasha]

So, as I mentioned before, paradox of thrift is the core one there. So look, even though, as Alan said, the 2% is something that just selected in a slightly random way, we'll say charitably, the idea, the more grounded idea is that it should be low and stable. So 2 is the conclusion on low and stable. So why do they want low and stable? Why should you start inflating the money? There is at the heart of this argument a belief that you need to spur people into action. You need to spur people into spending money. And it is through this initial impetus that you then create a virtuous cycle whereby I'm, oh, I, I better spend now because the money is going to be worth less in the future. So I'm going to go out and buy a new laptop or buy a whatever, and then this is going to create demand which is going to then feed into employment and it's going to have this, this nice, nice cycle. And the idea is to try and maximize the health of that cycle by finding a rate of inflation that is neither too high, that it starts to mess up everything. Because I think even Keynesians will concede that if you put that number at a, at a very high level, if you start inflating your money too quickly, you'll degrade price signals to a point that is completely unhelpful. And, but they still believe that there is this maximum, almost like a quadratic function where the, you're slowly improving the economy as you increase inflation. And if you go past that point, it starts to degrade. Our point is just that you immediately degrade. So you're just making it bad from the start. And so that's, that's their, that's, that's their underlying assumption behind, behind this.

[Danny]

Is there also like a conflation between the idea of like deflation being prices falling and deflationary busts and like credit collapse? Are those two things intertwined in their thinking?

[Alan]

Yeah, yeah, yeah, yeah.

[Sasha]

I was I also think so. You need to understand how schools form. They often form around or after a crisis. And in the event of fiat, you need to look at the 29, 19, 29 crash and also some of the failures of central banks in dealing with these periods of economic distress. And through that crisis, you then find solutions that maybe address this specific environment. And then you think you have found now the answer, the answer to everything. Instead of maybe something that either a completely misguided answer that worked for other reasons, and then you establish that school around it and you will not want to challenge that unless or until there is another crisis that emerges. So frankly, I think that the current system is going to operate under these assumptions until it no longer works, because I don't think you're going to convince people at central banks to slowly get rid of these models and start adopting a different understanding of the world. Look, we will have some thoughts on how that is spurred into action. But yeah, the idea is to at least lay down some foundations before the crisis such that after it's happened, hey, you have a set of tools that you can now try and understand the world with.

[Danny]

So with the idea that if prices are falling, people are going to hold off spending. Why is that not true? Because for me as a bitcoiner, like, I know that my bitcoin is going to appreciate in value over time. And so especially with bigger purchases, I do do that. Like I've wanted to buy a house for a long time and the thing that I always think is, well, it will be less bitcoin in a few years time. So why do you think that wouldn't be the case?

[Alan]

I'd be careful with that, Danny though, because for one, bitcoin we would argue is currently monetizing, right? It's not stable. It's likely to appreciate in value purely by sucking value from other currencies. The, I guess, narrowing in on our argument though, the word bitcoin doesn't actually appear in this essay at all, which is kind of a bit of a, I don't know, like a nod to our overall approach in Bitcoin is Venice. Obviously the word bitcoin does appear throughout Bitcoin is Venice. But that's why, you know my joke about it not really being a bitcoin book, that's just clickbait for bitcoiners to instead learn about economics and capitalism and all our other random thoughts of trying to tie all this together. So, yeah, without going too far off on that tangent, I'd be careful about applying it in a Contemporary context where you have bitcoin as an alternative. Because I'm sure you would agree, I'm sure most listeners would agree these circumstances are basically historically unprecedented, which I guess so, I mean, in rounding off, I'm kind of avoiding the question entirely. You can maybe you can probe again, we can go a bit further with it. But that's a good reason to try to think about this as clearly as possible, to think about it as. From first principles as possible, because it's unprecedented and all the fiat nonsense won't work.

[Sponsor/Ad Host]

Let me give you a different version then, because. So for a long time, people have

[Danny]

been saying that I should translate or have someone translate the podcast and do it in Spanish because there's a massive audience that maybe benefit from getting bitcoin education that just don't speak English. And so we did look into this, and we looked into getting like, essentially voice actors to do it. This was years and years and years ago. And then over the last few years, it's like, well, I'll just wait until I can do it, which it now can. And it's something that I may potentially do in the future. And again, that's. That is down to how much things like this will cost us.

[Sasha]

So two things. One, let me, by the way, just answer very quickly the previous question, which I'm now realizing I didn't really address

[Alan]

properly, or I also didn't answer a different one.

[Sasha]

Don't be afraid to just catch us on that. So one, what I was saying previously is because. So the school is formed from a moment where there was a credit bust, and so you got deflation. And we talk about this in the essay. You're getting deflation because you're essentially just crumbling a very fragile house of cards of debt, right? And so that's creating deflation. And so the school is created as a result of that. And so it's saying, hey, deflation is the reason we're here, therefore no deflation, please. Inflation. Good. So let's have inflation. And you at that point, throw the baby with the bathwater. Because we say there's two types of deflation. There's a deflation caused by a collapse and a credit crunch, and that's caused by fragility in a system. And the other type of deflation is deflation caused by the innovation over time. Okay? So that's why you need to be careful here. The school is here to look after one type and is inadvertently also killing the other. And we think that actually by doing that, you're creating more harm Than good. On your second question, I'm delaying consumption for some things because it's going to be cheaper in the future. Yes, absolutely. And we think that's also a good thing. We think it's a good thing because when you're delaying consumption, what are you often doing with your money? You'll be investing it, saving it, putting it in some form of. Even if you're storing it as money, you're actually creating liquidity to the monetary framework, which means you're creating a more stable way for entrepreneurs to use the money system, to use deep pricing signals and be able to understand how things are operating. So as deflation occurs, it unlocks things that you wouldn't want to be doing before now. You can get your podcast down, translated, if that's great. The reason that's there, it's because there's a ton of money going into AI and data centers. And guess what? When you build a data center, when you build AI, especially when you're building models, you're training models, you're buying, let's say you're buying GPUs. To make a GPU, first you need to make a lithography machine. To make that, you're going to need a, a factory. And once you have these GPUs, you're going to need to have a training cluster. And then you're need to, you're going to need to train that model for months and, and have everything ready before you can even start doing any of this translating. And for that, you're going to need literally hundreds of billions of dollars. Invest it. Where's that money going to come from? It's going to come from people saying, hey, you know what? I'm happy not spending today. I'm happy not buying a car right now. I'm happy instead investing this. And then that way we can build this factory. That way we can then create a model that can translate this thing, that can now create a high standard of living for everybody. That's the function. It's not about. If you're delaying anything, you're not just not doing. It's not like there is something versus nothing. There's something today versus something tomorrow. So you need to think about your opportunity cost, what else you're doing.

[Alan]

I think I'd add to that the, the paradox of thrift is seductive because it's not complete nonsense, right? It feels plausible, provided you're lazy in your assessment of causality. So it does feel somewhat. I wouldn't say it feels right necessarily, but it feels plausible that if you don't spend well, then how's anybody going to earn, to employ, to invest, blah, blah, blah, blah. But that's exactly the wrong order in which things actually happen in terms of how you arrive at a situation in a remotely complex economy where you can buy these things that have gone through a production process. They only exist to buy because of enormous investment, as Sasha just described. And the enormous investment is only possible with savings. And I think a good, A good kind of heuristic, almost like a mental hack that we use a couple of times and actually we use it a lot just in the rest of Bitcoin is Venice too, is to unwind the kind of. The seductive trappings of the paradox of thrift that are. That arise in the first place because of how complex our economic circumstances are. And just think about, you know, it could be like desert island economics or what we like to use a lot. Just a farmer with seats, right? When you're saving, when you're investing, you're. All that really boils down to is you are choosing to use your time to create more in the future rather than consume what you have now. And the more complex an economic structure, the more kind of obfuscated this becomes in terms of what you see as a consumer. You might just see, oh, I'm going to buy this. You know. Well, like AI examples are maybe a bit confusing, but. Well, that's. That it's actually good that they're confusing.

[Sasha]

Right.

[Alan]

That makes the point. It's like, I'm going to buy this, or I'll use your example, Danny, I'm going to buy this translation service now, or I'm just going to wait for like a Claude subscription to deflate in a couple of years or whatever. But that can only exist for the reasons Sasha described, which are incredibly complicated and are ultimately rooted in saving as opposed to consuming. It's. And that's the crux of it, that it's. It's. It's. I maybe even. I'm not sure, I'm not disagreeing with you, but reframing what Sasha said a little bit, that it's not like these are sort of orthogonal. It's that when you really drill down to it, it's sort of. It might feel orthogonal in the moment as a consumer, but when you really, really drill down to it, you are either consuming now or saving for later. Right. There's not really any middle choice and you certainly can't do both.

[Danny]

So that makes sense. And back to what Sash was saying, I guess in that example I gave initially about the house and Bitcoin. It's like this is where investment and malinvestment get kind of murky because the idea of me feeling like I need, if I was living in Vietnam, feeling like I need to get rid of money now before the house price inflates away from my, my sort of what I can afford, like it becomes, it potentially becomes mal investment. But the, the question that I've asked you before, Alan, and I'd like your opinion on Sasha, is like, how do you know what is investment and what is mal investment?

[Sasha]

So this is the very pernicious heart of this issue. And the moment you do not know, that's it. That's why it's so bad. Because an investor is going to go off signals given by prices and you want these prices to not be corrupted. If they are corrupted. You could be a completely rational investor who is incredibly thoughtful, forward looking, best intentioned and you're going to malinvest. And it's not your fault because you are investing on the back of a false, a faulty set of assumptions caused by a distortion in the price mechanism. We see it through bubbles. We see it when you make the cost of money too low, you bring the interest rates down. You're creating essentially a longer duration investment than is justified by the amount of savings. But this is only recognized after the facts. So we also talk a lot in RSS about how you need to run experiments, practical experiments to know things. You can't just theorize your way to an answer. And a bubble is only something you can diagno, that you have a diagnostic understanding of after it's burst, before it's burst. It's not a bubble. It could be completely legitimate. It could be a completely legitimate allocation of capital to respond to needs be brought about by consumers and innovation. And even in an environment with no sign, no noise on the line, there's no corruption. You will still get it wrong because there's human fallibility. People are excited, there's a boom and there's a bust. And that's human psychology. It will always be with us. But if you think that you can improve the faults of human psychology by adding even more noise on the line, you're deluded. That's never. I would like to see a scenario where that's actually happened because I don't know of one. So that's the trick here. You don't know about malinvestment, but let's at least ensure that the amount of malinvestment we are likely to cause is as slow as possible.

[Alan]

I just want to build on that with again, a tangible example that's kind of cutting through the complexity of assuming we're in this incredibly complex economic system that we are. A rhetorical device that we use in the essay is this point about would you. If you knew that it would take you something 2% longer to do just in terms of time, like again, cutting through even money being part of it, just time, if it would take you 2% longer next year, is that the only reason you would ever do it? Because. Which sounds absurd, but it is pretty much logically equivalent to the fiat Keynesian argument of we need. The Asasha was saying a couple of answers ago, the stimulus of the expectation of inflation to ever do anything. Now, this is a good way of trying to wrap your head around just how insane it is to really to, to, to not. What's the best way of putting this? To. To not be as aware as it's perfectly, you know, you're perfectly capable of being of this point of misinformation that Sasha's making. Right. This idea that you can, you know, malinvestment is effectively acting on false signals or noise, I guess. Right. Is acting on noise in terms of your entrepreneurial decision making. If that sounds a bit too abstract to imagine, like, okay, well what would that mean? And how would you even know? This 2% thing with your time is basically the way, you know, it's like, would you ever. Do you do things basically, do you do things now or do you need somebody threatening you with it taking a little bit longer next year? If you'd rather just do them now, then you can cut through all of this.

[Danny]

Can we talk like. So you both brought up the paradox of thrift. And one of the things that you, you were sort of hinting at in the essay, which I didn't fully understand, is the idea that the sort of traditional economists think that progress in the economy is potentially a threat to the system. And I don't exactly know what you mean by that.

[Alan]

I forget exactly where we mentioned this, but I, I think I know what you're referring to. That they, because they are so insistent on this constant stimulus, like they, they, like they actually use the word. We're not even mocking them there. They say the word stimulus. If there is ever widespread enough deflation, which is always in everywhere. You know, in reality, this is a micro phenomenon. It's. It's individual goods. Their prices deflate. But if it's widespread enough that it makes its way into macro statistics, they get Scared and they want more inflation. I, I think that's what we're referring to. I don't know if you remember this in any more detail.

[Sasha]

There are other angles around how if you start to innovate fundamentally innovation is going to be doing more with the same amount or doing more with less or more efficiently or faster, these sorts of things. There's also a fear of ending up with resources which are not used. And so maybe now people are unemployed, you've just made something much more efficiently. You no longer need as many people in the factory. You now no longer have this demand. This demand is gone and as a result the flywheel is no longer spinning and it's time to print. It's always time to print. That's a very important, very important thing to understand.

[Alan]

The ultimate flowchart.

[Sasha]

Yeah, exactly. This all gets to the heart of it. It's time to print is essentially the conclusion of every Powell interview. It's just about how much really this,

[Danny]

this might be a stupid question but like, especially when you break these things down in, in the essay like it, this, the whole like the economy is a very complex thing. There's loads of like second, third order consequences of any decision. Like can it actually be measured or is the problem that they're trying to measure it too much?

[Alan]

I very much think the latter. Yeah, it's some things can be measured, but I don't think anything can really be measured perfectly. And most things can only be measured poorly or not at all. So the more they try to. What they typically do or what they typically try to do, they don't really. It's impossible to succeed. But what they're trying to do is use measurements that they're pretending are good or even make sense when in fact they're bad or they.

[Danny]

Things like cpi.

[Alan]

Sure, yeah. I mean any, basically any macro statistic is kind of false. For the same trap I was mentioning before, they want to use that as justification because it seems like real data, basically. I mean we use this expression here and many, many other times of physics envy. They have pretty hardcore physics envy in that they think in these very kind of mechanistic terms. They, they want to interpret, you know, quote the economy as like a Newtonian classical system, such that if they have enough data about its initial conditions, they can then reason counterfactually about what it will do or, or what it would do if they intervene in a particular way. And all of this is nonsense, but it's in terms of the way the methodology is presented. It's by their Logic, it's dependent on having this data. And so to your question, yes, they have to pretend that this data exists and is meaningful, but it either isn't or doesn't.

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[Danny]

But when they say that deflation could be a threat to the system, are they right? In some ways? Because the thing that I struggle with is let's say I just for easy math, let's say I earn 100k a year and I have a 200k mortgage. If we live in a true free market deflation economy and my wages then are deflating as well as the price of everything, the debt remains at 200,000. And so like these things get harder and harder to pay off over time. It kind of completely flips that on its head.

[Sasha]

So, so your wage. So let's.

[Danny]

Yeah.

[Sasha]

So the, the short answer to your question is yes, but we need then to dig into it. This is a really good, this is a really good topic to explore. So your wage, just to touch on that very quickly, it might not deflate. It might be nominally stable, it might be the same amount as things become cheaper, it might actually go up as things go lower, or it might come down, but not as fast as other things. So we don't know exactly. But over time, if you're in an environment where you have strong innovation, you should still expect the price of things to fall faster than your wage would fall. But your wage might not fall. It might be either static or going up. So that's number one. Number two, you're then essentially putting this against a fixed number, which is your mortgage. And what happens in an environment which is incredibly dynamic, fluid, where prices can move and then you increase, you introduce rigidity, you're getting fragility, you're getting a system that can break. That is why debt is very dangerous. So the fiat will say, and this is where it's coming from. That's what we were talking about in 1929. You're getting a system that's building a lot of debt, creating fragility, breaks under the weight of that fragility. And then Says, well, we broke under the weight of the fragility. So instead of fixing the root cause, which is maybe don't create a system which is incredibly fragile with a ton of debt and massively over financialized, instead of doing that, instead of fixing the root cause, you say, no, no, no, we'll just essentially have the cheat code, which is going to be all of those nominal obligations. We will slowly make them less and less relevant, which is what inflation is. Inflation is simply a way of taking those nominal obligations and inflating them away. Okay, that could be your answer. And it's, it's very legitimate. So, for example, if you today took the economy under a, whatever currency you're operating under, whether it's the British pound or the US dollar, whatever the euro, if you took any of these and you flipped the framework from inflation to deflation, you would indeed have a massive issue because these nominal debts would not go away. But that's not a good reason to still operate under this system. It's the same as saying, if I stop drinking, I'll have a hangover. Here's the dog. Okay, it's the classic thing, right? We all know this, this analogy, but that's fundamentally what we're talking about here.

[Alan]

Can I, can I push back on the, the wage point just in, in a completely different direction to the way Sasha answered? I would suggest that it's very sloppy to say, oh, my wages will also decrease, and that this is. Knowing where I'm going with this. This is quite abstract. Sasha's answer, tangible. I also want to be wary that you can't be too definitive with this in the sense that everything we're talking about is predicated on dynamism and innovation. And it is of course possible that that will cause certain jobs to simply cease to exist. So you can't say, oh, every wage will stay the same or even go up forever, or anything to that effect. But if you just think about the value added by labor, if you treat it in slightly more abstract terms like that, there's really no reason to think that that will go down. And if anything, there's very strong reason to think that it will go up if there is any deflation at all. And I think this is back to being as clear, at least trying to be as clear as possible about the causality in all of this. How you unpack the paradox of thrift, if there is any deflation, it's not. This is another thing we say a couple of times in this essay and we've said elsewhere, it's not a metaphysical abstraction. It's not like the temperature. It's not something that's out there in the universe that you can measure. It's a causal process that is fundamentally rooted in innovation. I mean, that's basically, that's a decent summary of this entire essay, right? We don't have time to go through all the details of this that under the circumstances that actually you would expect without monetary interference, if people are able to innovate, you can trace what will happen and very reasonably expect deflation as a result of basically just getting better at things. Right? And it's even back to the time thing. It's the inverse of the if it would take you 2% longer, it's actually reasonable to expect it'll take you 2% less or considerably less than that. You know, as we even just in the labor example, as you practice things, as you get better at it. And that's, I mean, that's a decent way of thinking about what capital accumulation actually amounts to. It's just not necessarily all in your head, right? It's like in the creation of tools. The more tools you create, the more valuable your labor will be, the more stuff you can create with your labor. And that's deflation, right? So you have to go through this process. You can't just like stick your finger in the air and go, oh, it feels like 2% deflation today. I wonder what my labor is worth. You cannot have deflation unless your labor is worth more. So again, you got to be careful. It doesn't mean that you can therefore predict what everybody's wages are going to do, but in general, it is very reasonable to expect that your wages will not deflate.

[Sponsor/Ad Host]

Can you explain that in more detail?

[Danny]

Because like, so Jeff Booth obviously talks about deflation all the time.

[Alan]

Give a 10 minute answer this time.

[Sponsor/Ad Host]

But the question I have though is

[Danny]

like, Jeff Booth obviously always talks about like things dropping to the marginal cost of production. And so like, over time, as innovation's happening and things get more and more efficient. I understand that argument, but like, what if you take it to the nth degree and you're like, we, we. Because if the consumer of a product that a company is selling is paying less and less and less over time, then the income for that company gets less and less over time. So.

[Alan]

Well, no, not, not necessarily because it's, it's very likely that they're creating more and more, so the price is going down. But there's not again, you here, you have to be careful for basically the same reason that you can't, you can't say this will happen universally, but in general, there's no reason to expect that a given company's revenue would go down with deflation. If anything, you, you, you gotta be very, very careful here. But you might expect it to go up on the basis that it's innovate. And this is exactly, again, this is the logic that we go through in much more meticulous detail than it would be advisable to try to do now. But the extent to which it is successfully innovating is in some sense captured by how much can it therefore afford to lower prices in order to take more market share in order to boost its own returns? And that's ultimately what, you know, the, the rationale of the individual entrepreneur, you know, the decision maker in the capital allocation process is coming down to, is trying to boost returns. And the essay is basically about tracing that logic and how that ends up impacting prices. But to the extent that they're successful, I mean, I guess in particular, if they're disproportionately successful to their competitors, the act of lowering prices will feed through to them making more money.

[Danny]

Okay, that makes sense. And that's kind of like the supermarket example that you give in the piece, right? Yeah. Okay, so if the question I have is like, do we have any shot of something like this happening? Like if I put you two in charge of all, all economies all over the world, you get to now pick economic policy.

[Alan]

Like, this is. I feel like this is a bit of a trick question because if we were in charge, we would just do nothing.

[Danny]

But, but so what can, like, can it actually go from the system that we live under today to a, a more free market deflationary system?

[Sasha]

So I would say one thing about this is our approach is fundamentally, even though we are making quite strong arguments, and I'm very willing to back them in discussion and argumentation, we are taking, adopting a position of humility in the sense that neither of us wants to enforce this. We're not going to force people to adopt an environment that's driven or that manifests deflation. What we're simply saying is that a money that is structured such that it has minimal noise on the line, that's creating an environment whereby innovation manifests at the output as deflation, is going to be one that is maximally beneficial and that people will therefore want to willingly adopt such a system. So I will. We're not here to. If we were, if we were to literally run the economy, we wouldn't Run the economy. We would just like, say, oh, well, you guys just figure it out. And we think that that's where you'll end up. But let's be humble here. This is an incredible. As you mentioned, it's incredibly complex. A lot of what we're talking about is theoretical. We're trying to be logical and make sense of these arguments, but we could have faulted in any individual step or any individual core assumptions. And as a result, I don't want to have billions of people operating under a very strict system that I am convinced is going to be beneficial. That's totalitarianism. And no, that's not what we're about. But it should be bottom up adoption, and it should be bottom up adoption of something that has been created that meets these requirements and that can essentially escape any attempt at being either taken over, coerced, or put down. Oh, if only there were such a system. It would be fabulous.

[Alan]

Yeah, Danny, I know you're trying to trick us into saying bitcoin, but again, yeah, we have a swear jar for that. No, again, seriously, we don't use the word bitcoin in the essay very, very deliberately because our attitude to this is kind of, if you believe all of this, bitcoin will just come to you naturally. And maybe this is kind of the inverse of like Sasha's saying. In the argumentation, we're humble, we think, but in the marketing, we're trying to be as obnoxious as possible because we want as many normies as possible to read this. Like, your audience agrees with all of this. All right, like, probably 99% of them agree with 99% of it, realistically. But we've written this in such a way, and we kind of have in the back of our minds that we hope bitcoin is Venice can work in this way. I mean, you know, it's hard to read, so it's not like a good introduction to bitcoin. But for. For certain people that are susceptible to these kinds of arguments, we want them to realize they believe in bitcoin without even mentioning bitcoin until like two thirds of the way into the book. So. And this, this essay will be chapter six, I believe. So it's. Well, before we start talking about bitcoin,

[Danny]

you, when I brought a bitcoin before, you, like, rightly push back that it's in this kind of monetization phase. Like, how far does bitcoin have to go until it can actually sort of fulfill what you're talking about here?

[Alan]

Oh, that's hard I don't know. Well, a lot, clearly. We're obviously not there yet. How far? I mean, do you even have, like, what kind of answer would make sense here, do you think? Because it's not clear to me how to try to answer that.

[Danny]

That's why I asked it, because I don't know the answer to it.

[Sasha]

The day you denominate the market cap in bitcoin, that's the day.

[Alan]

Yeah. That's a good answer, actually. Yeah, I've had this thought before that's like, it's a bit too. No one will ever actually do this, I guess, until it happens. And, you know, somewhere between 10 years and never that. Yeah, you obviously have to start talking about it.

[Sasha]

Sorry.

[Alan]

You have to stop talking about it in dollar terms. And my idea was like, in the interim, is there a way of communicating its value as something like the percentage of global M2 and gold or something like that? But, like, no one's ever going to, you know, me and three other people will actually like that and no one will adopt it. And so, yeah, I get maybe to Sasha's point, it's like, you'll know it when you see sense that you definitely need to stop talking about it in dollars. But I don't know what you start talking about it in either.

[Danny]

That's. That is pretty much the same answer you gave when I asked about investment and malinvestment on a previous show. You were like, you'll pretty much know it when you see it. That's kind of the answer.

[Alan]

Um, I feel like that that captures a lot of our thinking. Right.

[Danny]

Like, you got to experiment.

[Alan]

You can't just figure it out.

[Sasha]

Yeah.

[Danny]

Were you going to add something there, Sasha?

[Sasha]

No, I was just going to say you need to run the experiment. You need to run the experiment and you don't know. I think realistically there will be a few telltale signs. Okay. Yes. If legitimately, when you ask them how much is a bitcoin worth, they say it's worth a bitcoin. Like one bitcoin is worth one bitcoin. But they don't mean that they literally. That's where their brain goes to immediately.

[Danny]

We got a long way to go.

[Sasha]

That's when you know you're. You're. You're probably there at that point or you're very close to it. But how long does that take? I have no idea. And you need to just run the experiment. And hopefully people recognize along the way there are signposts that as we get closer to that, we are benefiting from operating on this monetary system.

[Sponsor/Ad Host]

Okay.

[Danny]

I'm going to use this as my personal education session now because there was a bit in this that you. I'm gonna find the quote because I got totally lost on one paragraph.

[Alan]

That probably just means we need to redraft it. This will be good for the book.

[Danny]

It was when you talked about time and there was the Valrasian auctioneer tatanment and I got fully lost and I don't know what you were talking about.

[Alan]

That's all right.

[Sasha]

Did you. Please, please, for the listeners, please read it. No, no. Do you have it?

[Alan]

Do you have.

[Danny]

Was one paragraph.

[Sasha]

Okay, so I will. I will just. I'll eat the air whilst. Whilst you. You go and look for it. But just prefacing this, the idea is not necessarily that we want you to understand exactly what's being said in that paragraph because summary of pretty much everything. Even though we are. So we do want to say. We do want to show a couple of things. One, we actually understand what the other side is saying. So we are representing the argument in a way that is technically accurate but also very clearly funny or satirical.

[Alan]

Yeah, we're. We're mocking it because we understand it. Yeah.

[Sasha]

And the idea is not for you to read that and think. Yeah, I completely get it. The idea is. It's kind of ridiculous, but this is how it works. So if you have it, please go for it.

[Danny]

The quote. Let me. I can find it. It'll take me a minute. Let me find it. A few moments later, I think this was. Was. Fiat economists treat time as inconvenient friction. In the hallowed halls of neoclassical theory, time does not exist. There is only an equilibrium. The market has achieved a Pareto optimal stasis via the Valrasian auctioneer's Tatommen yielding a price vector of 0 aggregate excess demand. Every autonomistic utility maximizer has aligned his marginal rate of substitution with the price ratio which while firms reach a profit maximizing zenith where marginal cost is perfectly aligned with marginal revenue. Perfection, as my Michael Fassben might say. That. What.

[Sasha]

Let me just say something. If you don't get that, then I don't know what to tell you because we really tried hard to explain the logic and internal consistency and just how approachable fiat economics really is.

[Alan]

So I don't know what to tell you.

[Danny]

You don't have time to convince me.

[Alan]

I mean, I would. I would say less sarcastically that if you don't get that that's probably healthy. That means you haven't wasted a decent amount of your time learning what these things allegedly mean in the first place.

[Danny]

This is like. Do you remember when you did that tweet years and years and years ago, Alex, where it was like you were comparing Bitcoin to the Fiat system and, and you did that diagram where there were just lines going everywhere.

[Alan]

Oh, diagram, Yeah, I still have that piece of paper. I feel like I should get it framed.

[Danny]

Yeah. So go on, try, try and explain what, what this section is about, because I don't know.

[Alan]

Oh, I mean, it's. Well, do you want to do it? Not sarcastically.

[Sasha]

You could go through every single one of these things, but fundamentally the core idea is that you are, you have, you have equilibriums and you're trying to maximize things. So whether it's a firm, whether it's a consumer, you're feeling your way towards an optimal. And then your, your vector is. So you're basically. It's about optimizing, it's about having very complex models and maximize. Yeah, maximizing things, which we fundamentally reject as a premise for how you operate in a system that is completely uncertain. Uncertain, not risky. Uncertain. That has radical uncertainty, that is unquantifiable in some ways and unpredictable and unmodelable. So against that, you're getting all of the terminology from, from, from that school, which is very technical. And frankly, look, some of these models, I think that individually they're making interesting descriptions which can get you to. So for example, the tatonment, which is really about price discovery. We do talk about price discovery, but the way in which, the way in which the Walrusian auctioneer is operating is just not the same as the way we would describe it. So it's almost an ontological difference between what we're doing and.

[Alan]

Well, I'm starting to feel a bit sorry for potentially very confused listeners. Just to try to wrap all this up into a more direct answer to your question, Danny, that paragraph is us invoking as much fiat economics jargon as possible, accurately, but in such an over the top way as to try to make the point about how ridiculous it is. So I wasn't kidding when I said before that if you, if not only you, Danny, but if one doesn't understand it, it's honestly a good thing if you, if you bothered to work through the meanings of all these terms which are like, not that ridiculous in isolation, but when we cram them all together, the joke we're making is it is ridiculous if taken to an extreme that by their methodology ought to be allowed. It's actually revealed to just Be ridiculous.

[Danny]

Well, I would take that as a compliment if I didn't go back and read that paragraph three times, being like, what the fuck are they talking about? Okay, so, so, but this, you then like, go on to explain, like, how they think about time as a, as a part of the economy.

[Alan]

Well, they don't think about time. That's the point.

[Danny]

Yeah, and they get that wrong. So can you explain why? Because, like, with time, there's obviously there's always cost of capital. Like, what is it that they look about incorrectly?

[Sasha]

You mentioned causality. So that's one. Causality is a really good one. We even talked about the idea of delaying things and doing something. So I think there's both. It's both time and space almost. So one is, is what preceded this action, what is causing what is happening right now, what will this then cause later on, rather than just almost taking things in a very static, static way. And then the. The other side is, if you're not doing this, what else are you going to be doing? So it's also thinking in counterfactuals, opportunity costs, and these sorts of things. And that's a. That's a form of causality because it's going to then lead you to understanding if there's then that, then after that, this. And then it's much more complex and dynamic. And the issue is when you start thinking dynamically, you can't think with many of these simplifying assumptions that they make because there's no more equilibrium. Everything is constantly moving and all of those things. So I think one reason why they have to abstract that away is because it just creates complexity that they can no longer resolve. And so it's just. It's just an. It's an annoying factor which it's better to just get rid of in some ways.

[Danny]

Well, I think so. I know you have got to go. I think we should do a part two because I have like four other sections with a ton of more questions that we get into. Like, I feel like we've covered like, not even the first 40%, like the first 20% of this article.

[Alan]

Part two of seven.

[Danny]

Exactly. But I am just very glad to see you guys back writing again. As a last question, it is. I know you don't mention bitcoin, I know you purposely don't mention bitcoin, but is the real way out of this for anyone that's listening to. Just move to a bitcoin standard as fast as possible.

[Alan]

Yes. Next.

[Danny]

All right, we will.

[Alan]

Do you have a less facetious answer?

[Sasha]

To that? No.

[Alan]

Okay, good.

[Danny]

Well, we will be back with a part two, potentially. I'm. I'm very glad you guys are writing again. I'm looking forward to the second edition of the book. Thank you, guys. And I do think there's a lot more to unpack here, so we should do it again.

[Sasha]

Of course. Hopefully sooner rather than later.

[Danny]

Sasha, everyone knows, Alan, you've not been on the show before. Where do you want to send anyone? If you want to find out about your work?

[Sasha]

I would like to send them to the nearest bookshop and pick up some. Pick up a book that you think is interesting.

[Danny]

There you go. All right. Thank you, guys. I appreciate the time.