Bitcoin Standard Ch. 6 & 7

 Ch. 6 

Money plays a vital role at a societal level as a means of communication. Recently, we've seen the prices of lumber change dramatically. What did this tell you? We could have inferred that the supply was low, perhaps a processing facility was shut down for some reason, or that the supply chain was compromised. Perhaps that communicated to you that a project you had been planning should be put off until lumber becomes more easily available, or that you should charge more for the products you are putting out in anticipation of increased costs of business when you next need to purchase lumber. In a centralized economy, the government decides what lumber should cost. Yay, no more skyrocketing prices for lumber, how lovely! Except now you don't know to put off your project so you go out and buy the tools you will need and start excavating or whatever prep you need. Now you don't increase your prices to offset the incoming increase in raw materials that you use. Now people building houses don't know that a shortage is just around the corner. People planning on using the resource exceed the amount of the recourse that is actually available. Projects will be started that must then be delayed or cancelled, meaning losses for the investors, and businesses will lose money because they sold lumber products at much lower than their current value. Let's consider the inverse scenario. Say there is an abundance of lumber, and the centralized economy prevents costs from dropping. How very caring of them, we wouldn't want the lumberjack's commission to go down, now would we? Except the fixed price is still withholding market information. Planning on building a house? You'll pay more than you need to. Maybe you're the lumberjack with tons of lumber. You can't lower the price to get rid of it quickly, so it sits around getting older and more weather damaged. Just count yourself lucky that you don't have an excess of a more perishable good, like food or milk. As happened in the Great Depression, you might have to dump it and let it go to waste, because you can't sell it at a price that is acceptable to both you and the buyer. Investors without the vital market information conveyed by varying prices cannot make informed investments in the things that society needs and wants most. All the knowledge involved in the supply, demand, difficulty of acquisition, difficulty of transfer--all of which fluctuate--cannot be centralized in a single person or governing body, and therefore economic policy cannot be effectively centralized there either. Hayek's book, "Use of Knowledge in Society", discusses this decentralized nature of knowledge, and inspired the creator of Wikipedia. A more modern work, that I believe has a similar subject matter is "I, Pencil," about how no single person has the knowledge and skills required to manufacture a pencil. 

Luckily for us, we don't have to deal with fixed prices, right? Except that we do--the fixed price of interest rates on loans. Banks loan out more money than they actually have at artificially low interest rates. Hence, there is no communication about how much capital is available. Too many investors take out loans, and there is too much money circulating. The investors out bid each other for resources. Prices rise in response to the eager bidders, businesses fail, now having insufficient capital for the higher prices. Unemployment rises, and now you have a recession. And the banks that loaned out money that they can't get back? They get bailed out, easy peasy. Now, we can look at the same phenomenon at a more macro level. The government increases the money supply, which starts off the same cycle. More money circulating means higher prices, higher prices means businesses unprepared for this fail, means more unemployment means a recession. But government can't exactly own up to their role in this, so instead they...you guessed it, they print more money! Yay for government "creating more jobs"!  

So basically, price controls (and socialism) fail because they stop the the communication of value, ie supply and demand. This results in misallocated funds which leads to shortages and surpluses, 

Ch. 7

Keynes's monetary theory, the prominent economic theory of our day for reasons that will become apparent, is founded on the idea that the primary measurement of a  society's prosperity is their spending. If they are spending a lot, that means they are rich and prosperous. In this framework, recessions are caused by insufficient spending. Well, what causes insufficient spending, you ask? Why, "flagging animal spirits" of course. Not sure what 'flagging animal spirits' means? Don't worry, no one really does. Who cares? We may not be clear on what causes recessions beyond some mystical jibberjabber, but we know how to fix them, and that's what counts. So how do you trick people into spending more money? Well, you could lower taxes. People would keep and therefore spend more of their paycheck. But that brings the scary possibility that they might instead *save* the extra money, and Keynes hated savings (remember, spending is all that matters). Government's role, then, is to force a high time preference by printing more money. Since in the Keynesian framework inflation only happens when spending is too high, printing money in a recession won't cause inflation, right? (Wrong, but I'm learning that Keynes is wrong about a lot). And what about long term effects of this system, of repeatedly printing money to stave off recession? Well, in Keynes's own words, "In the long term, we're all dead." In other words, let your children and grandchildren deal with it! As further proof that Keynes was an idiot whose works only gained traction because he was well connected with the British royal family (in case the 'flagging animal spirits' nonsense wasn't enough), the author offers this tidbit. In the Keynesian system, inflation and recession are caused by too much and not enough spending, respectively. Therefore, they cannot coexist. But they have coexisted, many times, including in the 70s amid the popular phrase, "We're all Keynesian now". 

Keynesians, while the predominant species of modern economists, are not wholly unrivaled. There are also Monetarists. The author calls them the "battered wives of the Keynesians" whose sole purpose is to be a Strawman counterpoint. They agree with the Keynesians in most respects, but they are for cutting taxes instead of printing more money. The Keynesians then mock them for being heartless, evil capitalists who hoard their money and don't care about the poor, so that no one will take them seriously. But tax cuts increase monetized debt, which is essentially the same thing as printing more money, so there really isn't much difference. Monetarists see deflation, rather than recession, as the biggest economic threat because if the price point drops, people could hoard their money, and there could be collapses in the banking sector. But Keynesians and Monetarists agree: Government should be in charge of increasing the money supply at the proper rate to stabilize the economy. 

In contrast, Austrian economists believe that sound money is chosen by market forces; the most scalable, salable, the hardest commodities win out. For Mises, the lack of government control was key, because of the temptation to increase supply, making for soft money. Bitcoin's absolute market cap of 21 million Bitcoin shows that Nakamoto was more influenced by the Austrian school of economics. 

The author likens Keynes's theory that the government should force a high time preference to increase spending to the marshmallow experiment discussed in a previous chapter. Only in Keynes's version of the experiment, the child gets one marshmallow now or only 1/2 a marshmallow later. That's a much easier choice than the original experiment. This analogy also made more clear an earlier argument of the author, that a low time preference is good for society in areas of life beyond just financially. The children from the original marshmallow experiment were followed up with years later, and it was found that the children with a lower time preference, those who waited for the two marshmallow reward, did better in school and were more successful in their professional and personal lives. Delayed gratification is a good skill in many areas of life. 

One terrible consequence of government controlling the money supply is one that is terribly relevant to today's news cycle, although they probably won't discuss this on the news. Unsound money really began, as has been discussed, with WWI. Rather than tax the people in order to fund the war, governments simply printed more, stealing value from their constituents in a sneakier way. This allowed them to continue the war much longer than they would have been able to afford had they been limited by a finite money supply. I watched a clip of Julian Assange yesterday saying that the whole point of keeping the war in Afghanistan going as long as it did was to launder money for the military industrial complex. Watching things collapse with our exit, it's hard to know what else it could all have been for. Had the government been limited by the financial realities that limit you and me, we would not have been there for nearly as long, possibly not at all. Unsound money enables (and indeed encourages) financing of forever wars. The author gives two more reasons unsound money enables war: 1. Unsound money is itself a barrier to international trade. On the gold standard, it was easy to convert currencies in a fair way. Now, traders play with fluctuating exchange rates, manipulated by governments, to try to come out on top. It inherently makes us if not enemies, at least competition. 2. Sound money leads to low time preference, a more long term frame of mind. This leads to cooperation rather than conflict. 

The next section discusses the difference between liberalism and liberality. Liberalism protects individual liberty while liberality is being more free with spending. Unsound money enables liberality, because governments can print money in order to buy loyalty and allegiance. This was discussed early in the book as something that lead to the fall of Rome. Sound money is destroyed to cheers for things like better education for children, worker liberation, and other feel-good causes, but once the money becomes unsound to pay for these things (and make no mistake, it also pays for terrible things along with the good things, like bombing other countries for twenty years), but once the money has been made unsound, it enables tyrants. It is no coincidence that Hitler, Stalin, Mao, Pol Pot, etc. had unsound government money to fund their atrocities. 

The last section discusses what is called, "the bezzle", which basically refers to the fact that, with unsound money, there is less incentive to produce something of great value to your customers and society, and more incentive to spend and borrow recklessly, and more incentive to embezzle. Politicians spend too much on ridiculous projects to buy votes, academia is pressured to study and publish things that will get more government grants rather than things society wants and needs, bankers have incentive to loan out too much money and just get bailed out. With sound money, these groups would have to produce things we wanted enough to voluntarily pay for, rather than the government just stealing our wealth to pay for them, whether we want them or not. 

I've started chapter 8 and guess what? We're finally talking about actual Bitcoin! Stay tuned...