Category: Economics (Page 1 of 2)

Bitcoin Nation – PATHOLOGY OF HYPERINFLATION (Pt.1-Ch.4)

November 28, 2023 / michaelantonfischer / 0 Comments

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

The death of a currency usually occurs through a so-called hyperinflation. There are various definitions, but today it generally means a price increase of over 50% per month. At the peak of hyperinflation, as in Germany in 1923, the devaluation of money even led to a doubling of prices every 24 hours.

Depending on the definition, over 50 hyperinflations have been documented in recent history. This raises the question, whether they are inevitable, or if people are simply crazy and keep making the same mistakes.

As is often the case, the answer to this question lies far beyond black versus white.

Hyperinflation could be easily avoided if there were a currency with a strictly limited money supply. However, the technical and social introduction of such a currency is not trivial.

In previous chapters, we discussed why a gold or precious metal standard are so susceptible to manipulation of the money supply. But why does this remain undetected and seemingly without consequences for decades or even centuries? And why do people keep playing this fatal game?

To understand this, we must look at how new monetary units enter the economy.

Once a central authority, usually a state central bank, has forcibly and gradually established itself as the sole ruler over the currency of a monetary area, it can theoretically create money at will. In practice, however, the average citizen initially stands in the way. As limited as the general understanding of money may be, people are hesitant to accept something unfamiliar. Gold works, but paper money is new, and there is a vague collective memory that unbacked money has failed multiple times in history.

A central banker or politician who openly calls for the abandonment of the gold standard will quickly find themselves out of office, and sometimes even in danger of losing their life.

That’s why they must initially act in secret. In a coin-based system, copper is secretly mixed in, or taxes must be paid in new coins, while state expenditures are made in old, worn-out coins. In the case of certificate money, a so-called fractional reserve is employed.

The bank issues certificates that certify more value than is actually available in the vault. This practice has historically worked quite well as long as the reserve is above 50%. Even with 30% precious metal to certificate ratio, a bank is still relatively stable. With each percentage point fewer reserves, the risk of a bank run increases exponentially.

A bank run occurs when many people try to exchange their certificates for deposits at the same time. If the bank has covered less than 10% of its certificates and every fifth depositor wants their gold, the bank becomes insolvent.

A bank run can be triggered by many factors, often simply by competition between banks. One bank senses the weakness of another and demands all its deposits from the weak bank, while simultaneously leaking the liquidity problems to the local press.

Central banks have also historically used this tactic to assert their authority. If citizens don’t accept the central authority over money, attempts are made to target popular private certificates or note-issuing banks with bank runs, forcing them to their knees. This then gives the state a double opportunity to present itself as the rescuer, and create trust in its own currency. At the same time, it promotes acceptance of strict laws against the evil private banks that have deceived their poor depositors.

Subsequently, the central bank plays the same game as the private banks did before.

Central banks will fractional reserve with ever-increasing leverage, just as many commercial banks do. The sole difference is that in case the liquidity runs out, states can simply ban the right to exchange the certificates to gold. Thus, the central bank doesn’t have to admit its bankruptcy during the national equivalent of a bank run. Instead, it can pay off uncovered debts, by printing money, ultimately culminating in hyperinflation.

One could, of course, attribute ill will to both private and central banks and spin wild conspiracy theories about why they manipulate money and impoverish people. The sad truth is probably much simpler and at the same time more concerning.

Everyone sees themselves as the good person. Even mass murderers find an excuse to justify their killings. So, it’s not surprising that self-interest and a lofty goal are usually the cause of the fatal expansion of the money supply. A central bank might, for example, claim that the money printing is necessary to prevent economic collapse. But how is it possible that many politicians and central bankers convince the general population that a fiat currency is a good idea and that inflation is acceptable, even necessary?

Bitcoin Nation – THE SINS OF THE CENTRAL BANK (Pt.1-Ch.3)

November 21, 2023 / michaelantonfischer / 0 Comments

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

For many people, the existence of fiat money and the central banks that control it is almost a natural law. They are often surprised to learn that less than 150 years ago, there was a time of free banking, where no central authority existed to control money. Even more surprising to many is the fact that the era of free banking was the time of the greatest and fastest increase in prosperity in human history. In the United States, the central bank was not established until 1913 and only since 1971 has it had complete control over the creation of base money.

So, how did we come to use central bank money in almost every country in the world today?

The causes lie in the physical properties of gold. As I mentioned earlier, gold was the best commodity to use as money for the longest time in human history.

Gold allowed for the exchange of great value across continents. Once gold coins were minted, they were – except for deliberate destruction – indefinitely durable.

That is why gold prevailed over barter or other currencies, such as voucher currencies, in most parts of the world early on. The latter were not so dissimilar to our beer vouchers from the previous example and while they worked well regionally, they had massive difficulties in international trade.

A voucher denominated in grain, issued by the largest trader in Mesopotamia, would be accepted within a day’s travel radius, as everyone knows the trader and he is liable for the voucher’s coverage with his reputation, wealth, and even his life if necessary. However, the voucher would hardly convince a trader who delivers goods from distant China. He does not know the issuer and would have to travel for months to redeem the voucher. Direct barter would be much more convenient.

But grain is a bad currency. It spoils easily and is so widely available that it requires whole shiploads to handle even relatively small transactions.

Over time, gold became the currency of choice because it combines the six aforementioned properties better than any other commodity. Of course, gold is not perfect. Its divisibility, for example, is limited. A coin with only a few micrograms is impractical in everyday life, but would be needed for buying bread. Most economies solved this problem by using silver –the second-best material for money – for small transactions.

Large and international transactions, on the other hand, have always been and still are the Achilles heel of gold. Due to its weight, it is very cumbersome to transport gold from one place to another, and the risk of robbery is enormous.

As a solution, history once again turned to the proven technique of vouchers. The Order of the Knights Templar, for example, used gold certificates nearly a millennium ago. They solved the problem of voucher acceptance by using an international association as a backer of the coupon. A Templar who deposited his money with the Order before leaving Europe received a certificate for his deposit. Later, upon arrival in the Holy Land, he could have the local branch of the Order pay him back in gold and silver.

This provided several advantages:
If a Saracen stole the gold certificate, they could do little with it, unlike a treasure chest. No Templar would believe that they were the European noble mentioned in the certificate. If the certificate holder died or the paper was destroyed, a relative of the unfortunate could go to the Order and request a new one.

However, the other disadvantages of vouchers still existed in the certificates. For example, a knight who had the misfortune of depositing money with the Templars when they were disbanded by the Catholic Church lost everything. The counterparty risk persisted.

This counterparty risk, and the methods developed throughout history to minimize it, explain why the last 5,000 years of monetary history have been an endless cycle of the same four stages. A gold standard, accompanied by an increase in prosperity, is followed by a creeping devaluation of money, leading to fiat money without backing, and eventually a collapse, starting a new cycle.

With variations, this cycle has always followed a nearly identical pattern. Usually, gold coins were introduced first, minted by a powerful merchant or state, enabling people to quickly verify the authenticity of a monetary unit. Standardization and centralization of coin minting were necessary compromises, as gold can be tested for authenticity with some effort, but an effort too high for everyday use.

This opened up an attack vector. A mint is a trusted party; all users of coin money must rely on the coins containing the stamped precious metal content.

Throughout history, however, this content has been successfully manipulated. The Roman Empire, for example, used various techniques to reduce the precious metal content of its coins from over 90% to almost 0% over several centuries. This allowed for the financing of wars and palaces that the population would hardly have been willing to finance through more transparent taxation.

Since coins, like certificates, carry counterparty risk, and certificates are also easier to transport and can be provided with a certain degree of theft protection, the latter gradually gained ground over coins.

Usually, it was either private banks or states that standardized and issued these certificates.

Sadly, like the clever innkeeper’s son from earlier, the certificate issuers quickly realized that they did not necessarily have to hold 100% of the certified precious metal amount.

Some certificates get lost, while others are not redeemed for a long time, either because they are used for saving or as a convenient substitute for gold in transactions.

Over time, more and more customer deposits were taken for personal gain, until one day all historical certificate currencies had as much precious metal backing as the late Roman Sesterce before them. Zero.

Once a currency is no longer backed by a scarce asset, it becomes fiat money. The issuer of the money is the one who controls the scarcity of the units and can simply create more with their command “Let it be done!”.

The incentive for the creator of the money is obvious. Why work hard to earn money when it can be created much more easily?

But why don’t the other market participants resist?

Bitcoin Nation – VALUE AND PRICE (Pt.1-Ch.2)

November 14, 2023 / michaelantonfischer / 1 Comment

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

“I have a very valuable watch.”

What comes to mind when you hear this statement?

Depending on your personal experiences with timepieces, an image will likely appear in your mind that falls into one of the following two categories:

An expensive watch.
An emotionally significant watch.

The first category creates an image, such as a man wearing a suit with a gold Rolex on his wrist.

The second one evokes a picture of a boy receiving his great-grandfather’s watch, which was bought with his first salary after the war.

How can this one word “value” have such different meanings? How can something be valuable in terms of market price but completely worthless to you, and vice versa?

To understand this, we must recognize the difference between subjective and objective value.

We have already considered subjective valuation at the beginning of this book. It is characterized by its relationality, temporal volatility, and the impossibility of quantification, which is called “ordinality”.

Objective valuation arises from subjective valuation through the price discovery process of the free market. Whenever two individuals voluntarily exchange goods and services, two subjective valuations meet.

If we trade 1000 eggs for a pair of boots, we only do so because at that moment, I value the boots more than 1000 eggs, while you, conversely, want the eggs more urgently than the boots.

The objectively observable action does not reveal how we each value the goods, since I might have also paid you 2000 eggs, or you might have accepted 500 if one side had negotiated more persistently. We cannot verify this objectively. It is evident however that the intersection of our respective priorities is precisely at 1000:1.

If we make this observation across an entire economic space, it turns out that there is an equilibrium price for every good. This is also called the market-clearing price, as at this price, theoretically, all demanders can receive a good and all suppliers can receive money.

In short, when many individual transactions are made, misjudgments converge to zero on average. It should be emphasized that the “error” of judgement here is not necessarily an error from the perspective of the acting individuals, but merely that the person who paid more than the equilibrium price was not maximally economical with their resources. They could have apparently obtained the good from another trading partner at a better price.

There are many valid reasons why people pay “too much” for a good, such as the cheaper dealer being significantly further away.

People act to reduce their dissatisfaction. In doing so, it is natural for them to try to minimize their dissatisfaction using the means available to them.

This implies that although individuals subjectively perceive what reduces their dissatisfaction, it is universally true that people do what they think contributes most efficiently to their satisfaction.

If a pair of shoes costs 1000 eggs here and 500 eggs 100 km away, it is my subjective decision whether the expenses and travel time are worth saving those 500 eggs. However, if two dealers at the same location offer equivalent shoes at such different prices, I will always choose the cheaper option as a logical thinker.

The market price of a good thus contains concentrated information about the value judgments of all market participants. This information cannot be reverse-calculated to quantify individual subjective value judgments. Nevertheless, this information is important.

Just as the hash function in cryptography cannot be reverse-calculated but still carries essential information, such as proof of possession of Bitcoin private keys, the market price indicates how scarce and in demand a good is.

This is of course only true if the money in which this market price is expressed has not been manipulated beforehand.

But how do you know whether money is manipulated or not manipulated?

Bitcoin Nation – WHY DO WE USE MONEY? (Pt.1-Ch.1)

November 7, 2023 / michaelantonfischer / 2 Comments

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

Throughout the millennia, a lot has been written and talked about money. Unfortunately, the understanding of what money actually is remains regrettably low. Today, money is widely assumed to be bad, shady, or even dangerous.

One could rightly blame the church and the state as the originators of this miserable reputation. Both institutions controlled education for many centuries and had a vested interest in ensuring that the masses did not understand money. This allowed those in power to covertly increase taxes through inflation without finding citizens armed with torches and pitchforks at their doorstep. The Catholic Church, in particular, has often unfairly maligned money while hoarding gold themselves.

Nevertheless, the 20th century clearly demonstrated that most citizens have a broad disinterest in how money works and thus share the blame for their ignorance.

As early as 1921, Alfred Lansburgh, writing under the pseudonym “Argentarius”, warned of an impending financial disaster, which Germany would indeed later experience in the form of hyperinflation in 1923. He noted the population’s lack of interest in his warning along the following lines:

As long as money works well enough, people don’t want to think about it.

According to Argentarius, a major monetary crisis hits a country about every 100 years, or whenever those who experienced the last one have died.

Another aspect is that money is such a fundamental building block of our society that a single discipline is not enough to explain it. To fully understand money, one must be a universal genius, well-versed in all sciences. Therefore, I do not presume to provide a comprehensive explanation of all aspects and social implications of money in this book. Luckily, that is not necessary, as a basic understanding of money will suffice for most people. The aim of this and the following chapters is to make the aspects of money that are important to you in your daily life understandable. In doing so, I hope to give you a competitive advantage over all those who lack this understanding.

So, what is money?
Before we can understand that, we must first ask: What does money do?

A core function of money is to be a medium of exchange. This means we do not use money directly but indirectly. Most goods are either consumed directly or indirectly by using them to produce other goods. In contrast, we do not consume money; we exchange it.

Such an exchange is necessary, as a pure barter economy is extremely cumbersome and impractical in a highly developed, specialized economy.

Let’s assume I am a farmer and you are a shoemaker. If I want to buy shoes from you, I could pay you the price in eggs all at once. However, 1000 eggs, with their limited shelf life, would hardly be an acceptable payment for you. So, you would either arrange installment payments with me or use the eggs as a medium of exchange and pay your suppliers with them.

In the latter case, the eggs obviously serve a money function for you, as you exchange them instead of consuming them. But even in the first case, the eggs serve a money function, albeit indirectly. Because if we agree on installment payments,one of us has to grant the other credit. Either I deliver the eggs to you first without receiving the shoes, or you deliver the shoes first without receiving the full number of eggs.

So, if you deliver the shoes first and then receive a daily breakfast egg for years, you have effectively granted me credit denominated in eggs.

We will delve deeper into the topic of credit later. At this point, we want to summarize the two functions of money we have identified so far.

Money is a medium of exchange. A medium of exchange is needed to trade with people who do not have a good that I need or do not want a good that I have to offer.

Money is a unit of account. If an exchange cannot be completed immediately, one side must grant credit, which is quantified in the thing used as money.

These two functions can be summarized by the fact that they enable a direct exchange in person, place, and time to be postponed.

Instead of exchanging eggs and shoes directly, we can agree that payment will not be made immediately (postponement in place and/or time). Alternatively, you can accept the eggs directly even though you don’t need them and exchange them further yourself (postponement in person). A combination of both is also possible. For example, if I pay you first, then you exchange the eggs for raw materials and deliver the shoes later.

Since, as we have seen, any good can function as money, Hayek also argues that money should be an adjective. So one should rather discuss how much “moneyness” a good has instead of money and non-money goods.

How high the moneyness of a good is at any given time depends on numerous factors. First, there are the physical properties of the good used as money. Six properties are usually mentioned:

1. Divisibility
2. Durability
3. Verifiability
4. Transportability
5. Fungibility
6. Scarcity

Eggs are bad money because they are not divisible without destruction and have a very short shelf life. Moreover, eggs usually have a low market value due to their generally low scarcity.

Thus, larger transactions are difficult on an egg standard.

In contrast, gold has been the preferred money for millennia, as it is almost infinitely durable, reasonably divisible, verifiable, and fairly transportable. Above all, it is quite scarce.

Why, then, is gold no longer the world reserve currency?

Is there better money now?

Until 2009, the answer to this question would have been a clear no.

Since at least 1971, no major world currency has been backed by gold or anything else of value. Today’s state-issued fiat money (from the Latin “fiat”, meaning “let it be done”) is not scarce. States, central banks, and commercial banks can create it in virtually unlimited quantities at will.

Of the six properties mentioned above, scarcity is the essential one for a sustainable money function because only scarcity can allow money to preserve value.

Here we have discovered the third function of money: money serves as a store of value. As mentioned above, we need a method to shift transactions over time in our daily interactions. Let’s assume we have agreed that I will deliver one egg to you daily for 1000 days. Only after that will you deliver the shoes to me.

As a good merchant, you make the shoes one day before I make the final payment, avoiding storage costs. However, it turns out that the cost of raw materials, measured in eggs, has risen significantly. Your suppliers now demand 2000 eggs, which means you effectively make a loss on the sale of the shoes. In this example, the eggs have failed in their monetary function. The value was not transported over time, so it would have been economically better for you to demand 1000 eggs immediately.

As absurd as this example with eggs may sound, it has happened in reality many times. Argentarius describes in his works how entrepreneurs in the Weimar Republic fell into this trap shortly before hyperinflation. They agreed on a price in Reichsmarks for a future delivery. However, by the delivery date, the Mark had lost so much value that either production could no longer take place, leading to bankruptcy, or the inventory could not be restocked with the paper profit made after the transaction. Some companies went under, even though their balance sheet showed a significant profit.

But how does such a loss of value occur?

So far, I have simply stated that this has to do with the scarcity of a good.

This can be proven in two ways. I will briefly explain both, as understanding them is essential for understanding other monetary phenomena.

The first approach comes from praxeology, the science concerned with the logic of human action, developed by Ludwig von Mises and other representatives of the Austrian School.

Let’s first ask ourselves why people act. No matter what we consciously do, even if we decide to do nothing, it is always an action. “Man acts” is a universally valid axiom. We always choose the action that is best suited to satisfy our most urgent needs.

When we see a burning house with cries coming from inside, we can decide to either run in or simply watch the house burn down. Which of the two actions we pick depends on our preferences.

What is more important to us? The life of the person in the house or our own life, which we would risk?

You are probably more willing to run into the house for your child than for a stranger. In short, your child’s life is more important to you than your own, while a stranger’s life is less important.

However, you likely wouldn’t just give your life for your child for fun, but only because the situation requires it. How you prioritize your actions depends on both your preferences and the circumstances.

If you have a ladder at hand, you will likely save the unknown person you can see through the window, even if you are not willing to risk your life. This is because, in this case, while there is still a risk for you, you consider it so small that the indirect guilt of the person’s death seems more pressing than the slight risk of dying.

The interesting thing is that this assessment occurs without a unit of measurement. You won’t create a formula to weigh how many strangers your life is worth, and then compare it to the amount of guilt you would feel if the person dies.

Your preference hierarchy is purely subjective, temporally variable, and relational, so it is not absolutely quantifiable. That’s why it also eludes mathematics.

Your life is probably one of the things high up in your preference hierarchy. Therefore, one could assume that everything that sustains your life also ranks high and is valuable to you.

Since you would die within a few minutes without oxygen, one might expect that you would be willing to pay many units of money for oxygen. Surprisingly, oxygen is available for free almost everywhere on this planet. You would probably even be outraged if you suddenly found a bill for breathed air in your mailbox.

However, things are different in the example where you want to save your child from a burning house. Breathable air is hard to come by within the inferno. A bottle of compressed air would be very useful there and would significantly improve both your and your offspring’s chances of survival.

How many units of money would you pay to be able to enter the building with a compressed air bottle? Ten units? One hundred? Even a million? You would probably give away everything you carry with you, and in doubt, you might even promise a multiple of your wealth if you could only take this precious air inside.

As you can see, the price you are willing to pay for a good or service depends not only on how much you want or need it, but also on how scarce the good is at the particular location where you want to acquire it.

Mises explains this with the diminishing marginal utility of a good as its availability increases.

You urgently need air, but it is usually abundant. Therefore, you can satisfy your need to breathe air without taking it from someone else. Having more air than you need has no value for you, as you can’t store it and have no use for it.

If air is scarce in a situation, it will quickly rise to the top of your priorities, and you will take any action to get air.

If you are deeply interested in this topic, I recommend the book “Human Action” by Ludwig von Mises.

Another way to reach the same conclusion is the so-called quantity theory. It is often criticized or even ridiculed by modern economists, but in my view, it has its value.

Irving Fisher formulated the quantity theory using the following equation:

M·V = P·Q

M stands for “money supply,” which refers to the circulating amount of money in the economic area under consideration.

V is the “velocity,” the speed at which money circulates.

P represents the “price,” describing the general price level.

Q for “quantity,” expresses the number of transactions.

Since this equation is difficult to understand at first glance and is frequently misrepresented or misinterpreted, we need to resort to examples again.

As a native Bavarian, I have been familiar with the interior of a beer tent since I was a child. The economically interesting thing about a beer fest

is that a separate currency is usually used there. Beer and chicken are typically unavailable for the legal tender, but for tokens.

You can obtain these tokens either by purchasing them, exchanging the country’s fiat currency for them, or by earning them. Sometimes, of course, friends also gift them to you.

If you help the innkeeper set up tables, you will quickly be given a handful of beer tokens as compensation.

Let’s take a closer look at this small festival economy.

Say the innkeeper orders 1,000 liters of beer, and one token corresponds to one liter. Thus, the innkeeper can distribute 1,000 tokens. Since the tokens are invalidated after use, each can only be used once, resulting in a maximum possible circulation speed of one.

Ideally, 1,000 tokens (M) circulate once (V) and allow exactly 1,000 liters of transaction volume (Q) at a price of one token per liter (P).

As you can see, the equation works perfectly in this case.

Unfortunately, the world is not perfect. Suppose the conductor of the brass band had one too many drinks, and a roll of 100 tokens falls out of his pocket and is lost forever.

In this case, the innkeeper has several options. He can give away the remaining 100 liters of beer, consume it himself, or generously reprint a roll of tokens and hand it to the conductor.

What happens if the innkeeper chooses the latter option, and the lost roll suddenly reappears? In this case, some festival-goers will inevitably miss out despite having legitimately acquired tokens.

Now the resourceful innkeeper comes up with the idea to balance this discrepancy elegantly. He simply promises his supplier that they and their employees will receive an extra 200 tokens next year for the quick delivery of an additional 100-liter barrel this year.

He has successfully postponed the problem until next year, and since he wanted to retire anyway, his son will take care of the matter.

The son, equipped with his father’s cunning, continues the game the following year. Since tokens are bound to be lost one day, he simply promises everyone who missed out this time two tokens in the following year.

This works well for several years. Unfortunately, the young innkeeper eventually succumbs to gambling. All the tokens are quickly gone, and he has nothing left to pay the suppliers. Therefore, he prints more and more tokens every day until, one day, a high multiple of the available beer’s nominal value is circulating in tokens. Knowing that his guests will hardly be satisfied with the promise of future beers this time, he escapes abroad. A scandal that shakes the honest village population to the core.

To resolve the drama as fairly as possible, the mayor determines how many tokens are in circulation. It turns out that 100 tokens correspond to a liter of beer. Therefore, the mayor decides that instead of laboriously collecting tokens and issuing new ones, a liter of beer will simply cost 100 tokens this year.

As you can see, also in this example, the quantity equation could not be violated. If the money supply increased, either the circulation speed had to fall proportionally (not all tokens could be redeemed), the quantity of goods had to be increased, or the price had to be raised.

When we switch from the festival to the national economy, the quantity equation becomes difficult to apply.

This is partly due to the question: What is the general price level P?

To stay with our example:
If one token buys one liter of beer, but five tokens buy a roasted chicken, today. And next year it’s still one token for a liter of beer but now ten tokens per chicken. Has the price level stayed the same or risen?

This question can only be answered individually. For the vegetarian, purchasing power has not changed. For the non-drinking alcoholic who enjoys eating grilled poultry, it has been halved.

So, when a central bank claims its goal is “price stability,” you should ask:

For whom?

Of course, this does not mean that the quantity equation is useless. Just because it is difficult to measure the price level of all products and derive individual purchasing power from the general price level, the mathematical consideration still has an essential application.

It allows us to estimate the possible effects of monetary changes and what cannot be affected. In addition, we can understand through Fisher’s equation under which conditions money can successfully fulfill its function as a store of value, that is, the postponement of a transaction into the future.

But what is this “value” that a saver seeks to store in money?

Bitcoin Nation – Introduction

October 31, 2023 / michaelantonfischer / 0 Comments

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

DOES BITCOIN FIX THIS?

Regardless which of our society’s problems, you mention, Bitcoin maximalists respond with: “Bitcoin fixes this.”

This statement is often ridiculed by so-called “pre-coiners” (people who are not yet convinced by Bitcoin), and every so often Bitcoin enthusiasts are dismissed as crackpots, or Bitcoin is referred to as a “religion.”

For several years now, I have considered myself part of the circle of Bitcoin maximalists (people who see Bitcoin as more than just a cryptocurrency). In this book, I want to defend the thesis “Bitcoin fixes this.” with solid arguments.

More precisely, I will attempt to show that there are only two categories for the pressing problems of our time:

Bitcoin fixes this.
Only through Bitcoin can one begin to fix this.

This book is aimed at people with little or no economic background. The first part focuses on didactic aspects, while the scientific character takes a back seat. In the second part of this book, after having established a solid foundation, I want to provide even other Bitcoin maximalists with some food for thought.

Without giving too much away, in the latter half of this work we will discuss how a state built on Bitcoin could look like and whether such a “state” truly still deserves to be called a state.

Taxation—The Founding Fathers’ Big Mistake

August 9, 2022 / michaelantonfischer / 0 Comments

The US revolution was one of the most significant turning points in history. From the day the Declaration of Independence was signed—July 4, 1776—the world would never be the same.

Republican democratic states had been tried before, but this was the first time that freedom and basic human rights were at the center of a nation’s constitution. Furthermore, the United States had proven that a determined rag tag army of armed volunteers, could beat even the strongest of empires. A lesson that the US themselves have had to be taught over and over again, be it in Vietnam, Korea, or Afghanistan.

The cause which lead the US of A to repeatedly endure that painful, costly lesson, without the nation’s leadership ever taking it to their hearts, was already enshrined on that fateful 4th of July.
No, I am not talking about the president having too much power and being too hard to remove from office or other mistakes. The real reason is the biggest error in the US Constitution. An error that was made already at the very beginning of the revolution.

“No taxation without representation.”

Under this slogan, North American people united to fight off the arbitrary rule by the English King and his devastating taxes.

The problem with this slogan was—and to this day is—that it legitimizes taxes. While the Americans could clearly see, how the British taxes hurt their economy and the development of their people and country, they didn’t dare question the concept of taxes itself.

To their defense, it should be said that they didn’t have the internet at the time, nor modern historical sciences. And even today, where the evidence is readily available to everybody who has a smartphone, many still deny that taxes historically were the worst form of funding public expenses. Many even deny that there are alternatives to taxes at all.

Since, many books have been written on historic and new concepts for a taxless society, I will for brevity’s sake not discuss these here. Rather, I will focus on, how taxes have directly lead to the erosion of US freedoms and human rights and the endless wars.

For the first century of US history, the tea party spirit was strong in the American citizens, so the government didn’t dare to abusively tax them. Especially, since a healthy skepticism against central banks, barred the sneaky option to do a hidden taxation via inflation.

This lead to a small government and the US citizens to become the freest and most prosperous in the world, creating the “American Dream”.

The first dent in this “Dream” came after the civil war.

As is always the case, the Northern, and Southern states couldn’t actually afford the war effort, so they needed to extort their citizens out of the money. This was done by taking on gigantic debts and by issuing the Fiat “Greenback” notes.

In a perfect world, the soldiers on both sides, would have understood the meaning of these actions, turned on their generals and united against the real enemy, the political and financial elites profiting from the war.

I dare not hope that humanity ever learns this lesson, still I need to try to spread the knowledge:
Fiat money printing and taxation always lead a nation into tyranny and economic, moral and technological decline.
These methods are never and under no circumstances to be tolerated by a free and just society.

With the precedent of the first major US war, and its monetary debauchery set, it took less than 60 years for the elites to gradually erode people’s resistance to taxes and central banks. In 1913, both the federal income tax and the FED were created.

It is no coincidence that these two events happened in the same year, neither is it that World War I started just the next year in 1914 and that a century of perpetual war followed.

You may think: “WWI started in Europe, it surely couldn’t have anything to do with the United States.”

This couldn’t be further from the truth. The European states had been in constant military squabbles for centuries. The only reason, this war could escalate to such a large scale and last so long was the US.
By staying out of the war at first and using their new powers to create money out of thin air, the US of A created a giant military industrial complex and a giant fractional reserve financial industry.
These two industries funded and supplied the war efforts (on both sides, at first), greatly enriching the US elites. Only, when both sides were already significantly weakened, did the US pitch in to decide the winner and the war.

This model proofed so successful that the US elites repeated it in WWII. First, they enabled Hitler Germany’s rise in power, with credit and raw materials. Then they supplied and funded the Allies as well. And finally, when Germany had spread itself too thin, by attacking Russia before they had defeated England, the US entered the war itself.

Unfortunately for the US elites, you can play that game only so often, before your opponents figure out your moves and don’t fall for the same ploy.
Thus, after WWII, the elites needed another way to abuse the financial and political system for their enrichment.

Their concept was simple. With the Bretton Woods system, they had forced the war-weakened nations of the world, to make the Dollar the world reserve currency. This gave them leverage to put an inflation tax on the whole world economy, impacting the US citizens least.

With this trick, they could indebt and plunder not only their own country, but all the countries in the Euro-Dollar system. Best of all, the armed and vigilant, freedom loving US citizens would not feel the pain for a long time. In fact, the flooding of the world with Dollars, would be paid for with cheap imported goods, which would raise the living standards for US citizens, sleepwalking them into tyranny.

With the US people appeased with cheap goods, the elites led the United States into their role as the world police and opposer of communism. Countless wars followed, most of which the US lost.

This was on purpose, however.

The longer any war lasted, the more money could be created and moved into the pockets of the wealthy and powerful elites. A game of money laundering and hidden taxation that goes on to this day.

Right now, as I am writing these lines, the US is preparing to send another couple billion dollars to the military industrial complex to “support Ukraine”.

Unfortunately for the elites, Abraham Lincoln was correct, when he said:
“You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.”

The corruption of the US political, financial and military systems has become so blatant that more and more people are waking up and opposing it.

The first blatant corruption was when Nixon took the US off the gold standard in 1971 and effectively declared bankruptcy.

From this point on, the US citizens were directly impacted by the money printing that the Bretton Woods system had previously shielded them from. So while the productivity increased, wages didn’t and people had to work longer and longer hours, just to keep their standard of living.

In 1970, a blue-collar worker could support his wife, half a dozen children, own a decent house and drive an indestructible car.
In 2020, just 50-years later, most families have only one or two children. Yet, even with both parents working two full-time jobs, the equivalent of the 70s blue-collar worker, can’t afford to purchase a house and the car is a shitty plastic thingy that breaks down after 5 or 6 years.

Another key moment in the wake-up process, was the 2008 financial crisis, when banks were bailed out—even though they caused the crisis—while innocent people were left homeless.

Afraid of the angry citizenry, the United States, like all other states before them, went berserk on the money printer, using it to build up a surveillance system and militarize the police, to keep the people in check.

Normally, the next step would be increasing authoritarianism, which would continue, until the people dispose of the elites in a bloody revolt.

Luckily, in 2009 the Bitcoin network was launched. Giving humanity for the first time a peaceful weapon against the tyrants.
With Bitcoin, we have a chance to dry out the money fountain that is used to fund the suppression. With a combination of Gandi’s peaceful resistance and Ayn Rand’s strike of John Galt, we likely can halt the motor of their unjust, exploitative system and build a new just society on the foundations of freedom and human rights.

And hopefully this time we will do it right. Without taxes.

Bitcoin—A New Kind of Money

June 14, 2022 / michaelantonfischer / 0 Comments

In the last articles, we discussed what money is and why money was invented. We found that there are different kinds of money. So, what kind of money is Bitcoin?
Is it commodity money? Is it unbacked token money? Or is it something entirely new?

Austrian economists are divided in their assessment of Bitcoin, some see it as the best money ever, while others see it as worthless fraud. As can be visualized by the below tweet from the Swedish Mises Institute.

The problem is there can be numerous bitcoin but only one gold.
— Ludwig von Mises-institutet 🇸🇪 (@mises_se) June 11, 2022

This goes back to the unfortunate and previously discussed errors/unclarities in Mises’s monetary theory. Which leads many to believe that the only way for sound money to emerge is by means of the regression theorem out of a valuable commodity.

While I agree that the regression theorem accurately describes, how a commodity can become money, it should not be seen as a law that ONLY through it can something become money. Especially since history clearly shows that ledger money is older than commodity money.

The reason for this error according to Argentarius is that most monetary theories only describe what money does and not what it is. He thus separates the concept of money, from the token that represents the money. To make the distinction a bit easier to see, I will call Argentarius’s concept of money “Meta-Money” from here on.

As I laid out in my article “The Evolution of Money”, the reason humans invented the various forms of money, was to represent the virtual Meta-Money. The concept of Meta-Money is brilliantly explained in “The Essence of Money”, I definitely recommend you to read the full book, still let me try to summarize it here:

Meta-Money is the virtual placeholder used when a trade cannot be made directly, but rather needs to be shifted in time, space or party.

A shift in time and place is easy to understand. You deliver 10 crates of beer to your friend’s house on Friday, and the friend pays you back in food and organizing the party at the beach on Saturday.

Meta-Money in this case is the virtual placeholder in your head that says, “I delivered beer, so I am owed food and party.”

Meta-Money is thus a virtual ledger that contains both debts and credits that result from a contract which is only partially fulfilled. One could say that Meta-Money represents the right to just compensation for a service delivered, but not yet paid for.

Tracking this Meta-Money is very difficult as soon as more than a few parties are involved. Especially, if the compensation does not come directly from the person you are trading with.

In the example with the party, this could look as follows:
You deliver 10-crates of beer to your friend’s house and every one of the other guests delivers some food, drink, or snack. The whole stash is then shared at the party. In this case, you deliver the beer to your friend, but the compensation comes not from your friend, but rather from everybody else who attends the party.

Now, how do you track this debt? What do you do, if you brought the beer, but some guests fail to bring the food they promised to bring?

This is the point where money tokens come into play.

The function of a money token is to represent the Meta-Money in a standardized, quantifiable way.

For our party, this could be done by simply issuing a set of vouchers. Everybody who brought his or her promised good, gets 10 vouchers and can thus take ten other food/drink items.

The problem with this approach for said party is obvious: Those who didn’t bring anything will have no fun at all. So, you need to give them a chance to compensate you and the other reliable party goers for your goods.

Conveniently, other monetary tokens already exist, so you can agree on one of the following options:

People who brought nothing can use Euro/Dollar/Bitcoin to purchase vouchers that can then be redeemed for food.
You skip the vouchers entirely and set a fixed fee everybody who brought nothing has to pay to get all-you-can-eat access to the buffet.

After the party, the currencies collected can be split equally between all those who brought food/drinks.

Now, what if people bring unequal amounts? You bring 10 crates of beer, somebody else just one. Another person brings an elaborate 3D modelled cake, vs. somebody else’s $1 store bought cake.

If everybody gets the same compensation, you will rightfully feel betrayed. For beers, this would be easy to resolve. If you brought 10 crates, you obviously get 10x as much, as the person who brought one. But how about the cakes? How many $1 cakes equal the labour-intensive 3D cake?

In the small-scale party situation, this conflict can be very difficult to resolve, since valuations are highly subjective. The creator of the 3D cake may feel it’s 1000x more valuable than the $1 cake, while the dollar cake bringer thinks it’s only 10x and others may call it at 100x.

In nationwide or global economies that use a common money token or currency, this conflict of subjective valuations is resolved by price discovery in the market.

If many people buy and sell goods, even though individual valuations differ, a market price emerges. Which means nothing more than that at the current supply, demand and cost levels, you will likely find a buyer for your goods at that price if you are a seller. And you will find a unit of the good to purchase at this price as a buyer.

The problem with these market prices is that they do not only depend on the demand, supply, and cost structures in the market, but also on the characteristics, of the money token used to express the prices.

In the case of the party, this can be easily seen. If every party goer gets 10 vouchers and there are 10 people at the party, every person can get 1% of the food and drinks.

If now suddenly 10 other persons come to the party and the reckless host just also hands everyone 10 vouchers, everybody suddenly can only get half of a percent of all food and drinks.

So one criterium to measure the accuracy of any money token or currency obviously is the total quantity of tokens. If people who have actually earned a token by a partially fulfilled contract, while other people get tokens without having rendered any service, the consequence is a redistribution from people who have delivered value, to people who have not.

But what is “accurate” money?

As we saw above in the cake example, value is subjective and prices need to be discovered via the market process. Market prices fluctuate over time, so at which point in time you look makes a big difference. So, what is the “just” price?

This may seem like an unresolvable riddle. After all, for the past 100 years, central banks have desperately tried to keep prices “stable” and failed miserably.

Luckily, Argentarius made a discovery that can help us get out of the dilemma. He observed that under a hard money (e.g. gold coins) where the overall supply of money tokens changes very slowly over time, the abstract “value” represented by one token remains extremely stable.

If historically, a pair of boots cost 1 gold coin, as long as the difficulty of making the shoes remained the same, the 1 gold coin price would stay the same for centuries.

Only if it gets significantly easier to produce the boots (automation) or significantly harder (natural disaster destroying leather supply), will the price change accordingly.

This may seem a very strange phenomenon, if you learned in school that price depends solely on supply and demand. The answer to the riddle is the velocity of money.

Unlike the vouchers in the party example, a gold coin does not get destroyed/devalued when it is used. So, 1 Gold coin can be used 100, 1000 or even a million times to buy one pair of boots. The velocity of money (i.e. how often the average coin is spent per year), thus, regulates the amount of Meta-Money represented by the tokens to a consistent level. One could say that the velocity of money automatically adjusts to offset fluctuations in the supply and demand for goods.

If you studied Keynesian economics, this probably will sound like an outrageous claim to you, even though it is not a claim at all, but rather an observation made by Argentarius.

Let me try to explain to you some of the factors that enable this kind of automatic price stability under hard money:

People have an uncanny ability to remember prices of common commodities. Here in Germany, even over two decades into the reign of the Euro, you will still hear people refer to the old, relatively stable Mark prices.
“What, this costs now €10? That’s 20 Marks, this used to cost only 5 Marks.”
This price memory is one factor that makes market prices for commodities slow to change under hard money.
Another factor is that, while the velocity of money changes, hard money means that the absolute number of tokens doesn’t change. And every transaction covered in the velocity of money is done by two parties agreeing on a price for a good or service.
While the subjective valuation, and thus agreed price, may be above or below market price, the “loss” of one party in any given trade means an equal amount of “gain” for the other party. Overall, the net results cancel out and the “value” represented by each money token remains stable.

In a nutshell, this means that hard money does not require a central bank to keep prices stable. Market processes and human psychology automatically regulate the money velocity, so each money token represents a relatively stable purchasing power or “value”.

If a hard money market price goes down long-term, this is not deflation, but rather an indication that the production of a good has gotten easier. Vice versa, if there are sustained price increases it means that it has gotten harder to satisfy the demand, harder to produce the good in question.

If a currency supply expands, the equilibrium is broken and the market will need some time to reprice all the goods in terms of the new total supply of tokens. If the monetary supply is expanding faster than the market can balance itself, the consequence is that the “value” represented, transferred and stored in each money token will be distorted.

The goods and services preferred by the ones closest to the source of tokens will get up first and higher than the goods and services preferred by those furthest from the source. This is known as the Cantillion Effect.

This mechanism is also the reason, why central banks were able to create outrageous amounts of money tokens over the past decades and yet, consumer prices remained relatively low.

The newly created money was parked in assets by the first receivers (banks and large corporations) and did not circulate. Thus, only asset prices exploded, and money velocity was artificially suppressed.

In a nutshell, this is the reason, hard money requires a stable supply to represent Meta-Money accurately:
According to Argentarius, if the supply of a money token is stable (in the ideal case, exactly constant), then that token will represent a constant “value” across the economy that uses that token. And this “value” will stay stable over time and space so that you can use the token as a universal coupon. A coupon that will give you the “just” compensation you are due for services rendered and goods delivered, no matter where, when or with whom you “redeem” it.

From Argentarius findings, it becomes clear that all the different kinds of money, be it Fiat paper money, Gold coins, Mesopotamian clay tablets or Bitcoin are only different money tokens, not different forms of Meta-Money.

The properties of a token only influence how accurately the token can represent the Meta-Money over time, space and party.

Ok, not so fast. Commodity moneys are a special case… While a Fiat money has no other value than the Meta-Money captured, commodities also have a non-monetary value.

This is a point that in my opinion has confused many economists. When you review commodity money, you need to carefully separate the uses and valuations.

If you receive a gold coin, melt it down and make electronic circuits, then you have not used it as money at all, but purely as a commodity. And your valuation of the coin will be based on how useful the commodity “gold” contained in it is to you.

If you receive a gold coin intending to spend it to get other goods, you value it according to the goods you hope to get for it and how valuable these are to you. In that case, it makes no difference (as long as the number of tokens in circulation doesn’t change) whether the coin is made of gold or paper. You value it based on the Meta-Money represented and use it purely as money, not as commodity.

When you use a commodity as money, the physical characteristics of the good do only indirectly influence the value of the money token, not directly as if consumed.

This happens in two ways:
Firstly, the commodity value of the token set’s upper and lower bounds to the amount of Meta-Money it can store.
If the commodity value of gold should get higher than its monetary value (negative monetary premium) than people will stop using it as money token and consume it instead.
If the production cost falls and availability of the commodity gets higher, then the value of the money tokens must fall because people will simply produce more tokens until equilibrium is restored.
Since a scarce good like gold can store much more Meta-Money than its value as commodity, the standard case for any commodity money is a positive and rather large monetary premium. Meaning that the use value is negligibly small compared to the monetary value.

This leads to misallocation of resources, since the monetary use forces commodity consumers to pay a significantly higher price than the “normal” market price of the commodity.
For this reason, among others, usually commodities like gold, silver, or seashells become money, since they are not a vital part of the economy. Times when food, real estate or other basic necessity gain a significant monetary premium are typically desperate times, accompanied by social unrest.

The second way the physical properties of a commodity influence its value as a money token is their usability. How scarce, how divisible, how durable, etc. is a good, determines how well it can be used as money.

Eggs are terrible monetary tokens, they are too readily available, not divisible and spoil fast.
Gold is a very good monetary token because it is scarce, lasts forever and is relatively easily divisible.
Still, gold is far from perfect. It is too valuable given its density, which is why historically small purchases were done in Silver, which is not quite as scarce as gold and almost as durable.
Furthermore, Gold is quite hard to ship globally and easily stolen, which makes it awful to carry for daily groceries or use in international trade.

A significant downside of all commodities is that the difficulty of production changes with time. Problematic are especially big technological breakthroughs that can make a formerly scarce token abundant and thus worthless (see Rai Stones, Cowrie Shells).

NOTE: Gold is not safe from this fate either, asteroid mining is probably just a few decades away and earth is not fully explored yet.

Did the total supply of Gold just multiply? @RonStoeferle pic.twitter.com/MoKoIOhDf7
— Niko Jilch ⚡️ (@NikoJilch) June 13, 2022

In comparison to commodities, Fiat, debt-based and ledger currencies have the advantage that the total supply is not dependent on any natural/industrial process, but in theory can be set to a fixed amount.

The problem with that however is that until Bitcoin came along, you always had to trust somebody to keep the ledger honest and not expand the amount of money tokens.
So far, every human organization in charge of the money supply has miserably failed in keeping the money honest and limited in the long run. Thus, Fiat currencies were almost always bad stores of value and extremely inaccurate in representing Meta-Money.

The best theoretical money would be a hypothetical god-money. A token, created by an incorruptible deity who ensures that a fixed number of tokens exist and smites anybody who dares try to forge new tokens.

Bitcoin is as close to god-money, as one can get, without having a trustable deity to control the money.

The great differentiator in Bitcoin is the difficulty adjustment. No matter, how efficient miners get or if countries ban mining. Every 2016 blocks, difficulty is adjusted based on the time between blocks in the last period, to keep the time at an average of 10 minutes per block.

This, combined with the overall incentive structure Bitcoin provides, makes it almost impossible to change the schedule of Bitcoin issuance or expand the total supply.

Bitcoin is an unprecedented, wholly new kind of money which has both the advantages of commodity money and Fiat money, without the individual downsides and many never before seen upsides.

This all makes Bitcoin the most accurate money token ever invented, maybe even the best token possible.

The more Bitcoin grows in usage, the more monetary premium it will absorb from commodities and other forms of money. Until hopefully in the future, we will have the whole Meta-Money of the global (or perhaps interplanetary) economy accurately represented by Bitcoin.

We will discuss this future and its implications in one of the upcoming articles. If you don’t want to miss any new articles, please subscribe to my newsletter below.

The problem with stablecoins

May 17, 2022 / michaelantonfischer / 1 Comment

Today I have to write an article I hoped to never need to write. An article, where I potentially slay my heroes…

The recent crash of UST (Terra / Luna), sparked the mainstream media to also attack other stablecoins, specifically Tether. This then forced Tether CTO Paolo Ardoino to come to defend his baby. Which was done in the form of a Twitter space and came to my attention as the following sound-bite.

@paoloardoino explains why #Tether 's peg was actually never broken. pic.twitter.com/R3wT17KPV3
— Tether (@Tether_to) May 16, 2022

If you know me, it probably is clear to you that I can’t stand it when my heroes shitcoin, so I snarkily asked whether Samson Mow and Adam Back are really ok, putting their names under this message.

@adam3us and @Excellion are you fine with them using you pictures to promote this BS?
— Michael Anton Fischer (@MichaelAntonF) May 16, 2022

Unfortunately, the answer from both seems to be “yes” (see here and here) and discussions about Tether ensued. Before we get any deeper into this, let me preface it, to keep misunderstandings to a minimum:

My personal opinion is that Tether is probably the best, least shady stablecoin out there. The reason I am picking on Tether is that it was the subject of the discussion and because my issues are with stablecoins in general, so best to pick the highest low-bar to attack.

In his response to me, Adam Back linked a thread, where he defends Tether and I highly encourage you to go read it in full, here. In this article, I will address the points I consider most important only.

Yes, Tether kept its promise to redeem all its coins 1-to-1 even though an impressive $7.6 Billion were withdrawn in the recent crypto panic, caused by the UST collapse.
On the other hand, it is also true that Tether trades significantly below 1 USD at the moment.

This raises the question: How?

How can Tether remain true to its promise to exchange 1 USDT for 1 USD, when the coin itself trades significantly below $1?

To understand this, we need to understand the different types of stablecoins out there. While I don’t know every little project, the majority of stablecoins seem to fall into one of two categories:

Fractional Reserve/Algorithmic Coins
Full Reserve Coins

UST (Terra), which recently collapsed, was part of the first category. While it was partly backed by hard assets, like Bitcoin, a large part of it’s backing was its own coin Luna.
The way Terra tried to keep its peg to the Dollar was with an “intelligent” algorithm that trades the backing assets and issues Luna tokens, to both maintain the peg and generate profit for the issuer.

I don’t think it is necessary to explain at this point, why and how this can go wrong, since we just witnessed the dumpster fire a few days ago.

Much more interesting is the second type of coin, which Tether falls into.

Fully backed coins promise to have low risk, very liquid assets fully (or in Tether’s case allegedly even over 100%) backing the issued number of Tokens.

For Tether the majority of this backing assets are “Cash & Cash Equivalents”, which essentially means treasury bills and money market securities.

So far, so good. Or maybe so far, so bad?

As a non-lawyer, I may be too stupid to understand correctly, but the only proof of this backing I have are periodic assurance letters , which in my layman’s understanding don’t actually give any basis for legal litigation whatsoever.

If I further look more into the legal terms on Tether’s homepage, it appears to me that there really is no legal recourse possible, should anything go wrong or should the assets listed be charts on a homepage only.

Furthermore, the terms seem to imply that the assets are not actually backing the USDT tokens directly. Rather, they appear to be the property of Tether Holdings Limited. So in case this corporation is liquidated, the shareholders will get the assets, not the USDT holders?

If any lawyer or Tether employee reads this, please reach out to me to help me understand this better and correct this article if necessary. Am I “concern trolling”?

IMO he's concern trolling, but their attestation report is on their website.
— Adam Back (@adam3us) May 17, 2022

Or are my concerns justified? Adam Back has my deepest respect for all that he has done for Bitcoin, but I am deeply worried that with Tether, he may be defending a shitcoin. Until he or anybody else can credibly answer my three questions below, we will not be able to settle this issue.

Hey bubble,

I am confused, after talking to @adam3us. Any lawyers here that can enlighten me?

Is there any legal recourse possible if Tether is lying about their assets in their attestations?

Who owns these assets?

Do USDT holders have any legal claim to the backing assets?
— Michael Anton Fischer (@MichaelAntonF) May 17, 2022

To get back into my depth, let’s assume for the rest of the article that the listed assets are actually real and Tether (or any other stablecoin), are honest.

Is a fully backed stablecoin an adequate alternative to a dollar?

Foremost, we need to talk about why we even need dollars or stablecoins in the first place, since Bitcoin is the best money token out there.

In an ideal world, we wouldn’t. Unfortunately, in the world we live in three major aspects make the US Dollar and other Fiat currencies a necessary evil, we will have to deal with for at least another decade.

Legal tender laws—governments force you to pay taxes and debts in Fiat.
Petrodollar—vital resources are still mostly traded in Dollars.
Market adoption—prices need a while to form, for a unit of account the market needs to discover and stabilize a valuation for every good out there, which can take years, decades, or even longer.

So, we need the Dollar. Why do we require a stablecoin to represent it? Adam explains it like this:

Which is unsatisfying to say the least. To Adam, Tether seems to be a tool for traders only. If this was the only use case, then I couldn’t care less about them.

There is another point that is always used in marketing of stablecoins however that I am more interested in, namely merchant adoption.
If you are a company or merchant who wants to use Bitcoin, you are facing many legal, technical and practical hurdles.

In the US for example, Bitcoin is not treated like the foreign currency that it should be according to El Salvador’s legal tender law, but rather as an asset.

So, any transaction in Bitcoin creates a taxable event, where the merchant needs to calculate as if he sold his good for Dollars, received bitcoin and sold them for Dollars as well.

A bureaucratic nightmare…

To make matters worse, Bitcoin on the balance sheet can be a real hassle, since it again is not treated as cash reserves, but as an asset.
If Bitcoin price falls below the purchasing price in any given quarter, a company needs to show a fictional loss on their earnings report.

In a nutshell, this means that while Bitcoin+Lightning as monetary networks have many benefits for merchants and corporate users, the actual BTC can be a tax and reporting nightmare.

Thus, it makes sense at this point in time, to receive payments not in Bitcoin, but just send and receive Dollars via Bitcoin and Lightning. And since—as Adam pointed out—banks are slow and cumbersome and incompatible with the digital world, stablecoins seem to make sense.

Well, kind of…

They really do not resolve the legal and tax issues Bitcoin currently has. In fact, stablecoins exist in a legal gray area that makes them even less suitable for corporate use, IMO.

The real killer argument seems to be that stable coins reduce the risk of price fluctuations. If you get paid in Bitcoin Friday afternoon, by the time banks open again Monday morning, BTC may have dropped 10%.

In my opinion, it is a weak argument.

For one, there is considerable risk that any stablecoin breaks and turns out to be redeemable not for $1, but rather $0.

Secondly, this argument holds water only if a merchant is interested in owning Dollars, not Bitcoin.
If a merchant understands Bitcoin, he will want to hold all or most of his profits in BTC and the argument is moot.

At this point, we have identified only one reason to use stablecoins, namely if for legal and tax reasons, you want to use Bitcoin the network, without BTC the token. This naturally raises the question:

Are stablecoins the best option to transfer Dollars via Bitcoin+Lightning?

The short answer is no.

The long answer is too extensive to fit into this article, so let me try to explain best I can in a few paragraphs.

A full reserve stablecoin is essentially like a pension fund with its own token. In a pension fund, you wire them money, they buy safe assets and give you a certificate that you can redeem later for money. Once you redeem your pension, the fund either pays you out of the yields the assets generated or sells some assets.

In theory, a stablecoin should be similar. You give them a Dollar, and they buy secure assets worth one dollar. When you come to redeem the token, the stablecoin issuer either has made enough ROI from the assets to pay you, or sells assets worth $1.

The difference is that the pension fund is very heavily regulated and audited and the stablecoins currently are not.
A pension fund is only allowed to invest in certain assets and needs to be extremely transparent about that.
A stablecoin can do whatever they want with the money you give them, and you have zero standardized procedures, let alone legal recourse on how they report their holdings.

For my German-speaking readers, here is an interesting article on how Tether has been avoiding getting audited for example.

But even if a stablecoin only buys so-called secure assets, like government bonds and cash equivalents, these have problems. There is a reason why pension funds are in trouble after all. Currently, some treasury bills yield negative nominal rates, all of them yield negative real rates.

So if a company sticks to these “secure” assets, it must operate at a loss against inflation. This means that necessarily any stablecoin operator needs to take enough risk to be able to make an average 15%+ return and beat inflation.

Another downside of the stablecoin approach is that essentially you are creating the same attack vector that killed gold-based currencies.

As Adam describes, the value of coins like Tether itself can be arbitrage traded vs the Dollar by exchanges. Creating the equivalent of upper and lower gold points, as described by Argentarius.

Since these points are only tiny fractions of a percent away from the 1-to-1 peg, the arbitrage opportunity is rather small. Thus, historically, banks used to fractional reserve their gold currencies to leverage the upper and lower gold points.

This unfortunately likely is being done both with Tether and Bitcoin by exchanges at the moment.

There is a significant difference between fractional reserve gold, fractional reserve Bitcoin on one side and fractional reserve stablecoins on the other, however:

In the past, if banks overdid the leverage, they would cause a bank run and go bust. This meant that a portion of those who thought they had a property right to gold, would find out they really only owned paper, the bank would be liquidated, and its asset sold. The proceeds would go to the bank’s creditors and customers.

The same would likely be the case for Bitcoin because even China admits that it is property and thus necessarily should be treated similar to gold. The big advantage of Bitcoin here is that it’s easy to withdraw from exchanges and self custody, thus reducing this counterparty risk to zero.

No matter if you hold physical gold or your own Bitcoin private keys. In both cases, the collapse of a bank or exchange has zero influence on the actual asset you hold.

Not so much with stablecoins.

Firstly, these coins are less legally mature than Bitcoin and often their mother company is based out of obscure jurisdictions, so you can’t be sure that you have any recourse at all. Should a company decide to stop honouring the redemption promise or go bust, you likely have no legal binding agreement with them at all.

Secondly, even if the company does nothing wrong and third parties leverage up with paper stablecoins, the ensuing crash may tear the issuing company to shreds.

In case that happens, it’s not clear that your token has any legal value at all. To my understanding, the issuer may simply stop the redemption, point to fraud by a third party they can’t be blamed for and walk away with the assets.

I hope I made it clear, why stablecoins are a very risky solution to the problem. The next question then is:

Are there better ways to transact in dollars via Bitcoin?

Certainly, no perfect solution exists. The dollar system is deeply flawed, after all, so how could there be flawless ways of using it?

I am convinced however that there are better ways to solve the problem, which we Bitcoiners should build.

The first thing that comes to mind is simply using a classical bank and just hooking it up to Bitcoin. If a bank offers to be the on and off ramp and operate 24/7, the problem disappears. If this bank were to do Bitcoin to Dollar and Dollar to Bitcoin conversion automatically for a fixed fee, say one percent, you would not need stable coins at all.

So, why has nobody done it yet? I assume that it’s similar to why Google, Twitter, Facebook and co. are “for free”. People are used to being the product of giant corporations and seem to be willing to pay the hidden price, as long the official price is zero.
Since, few want to pay for a service and the hidden business models are more profitable anyway, it’s no wonder that the “honest” solutions don’t thrive.

We can only hope that more people fall into the rabbit hole and create a growing market for honest business models.

What do think? Are stablecoins a good solution, for a real problem? How would you solve it? Let me know in the comments, please. If you liked this article, please consider subscribing to my newsletter below.

United States of Bitcoin—How the US can save their empire

May 9, 2022 / michaelantonfischer / 0 Comments

In my previous articles, I discussed how China is trying to bring down the Euro-Dollar system and how this may lead to the fall of the US empire.

Today, I invite you on a journey into a hypothetical scenario explaining how the USA can utilize Bitcoin to escape this fate.

Imagine that right now, the United States treasury is secretly putting Bitcoin on their balance sheet. In a few months, they will announce that they managed to acquire 5 Million BTC.
Soon after a law is passed, recognizing Bitcoin as legal tender and guaranteeing a fixed one-to-one peg of Dollar to Satoshi (One Bitcoin is 100,000,000 Satoshi or Sats for short).

This immediately sparks panic on the international money markets. Many creditors want to quickly have their debt paid off, before the Dollar inevitably loses value. The United States government offers every claimant that they will pay USD debts in coins with a million, a billion, or even a trillion denominations.

Some take the coins, many take the Sats.

Since the USA are still the biggest military power and the Dollar is still the world reserve currency, other nations face a tough choice. Should they keep their Dollar reserves and trade in USD? Or should they switch?

US adversaries that have over proportionally large holdings of gold or silver will switch to various gold and bi-metallic currencies. Most notably China and Russia.
Countries low in gold reserves will choose Bitcoin.

By this bold action, the United States would effectively get rid of their debt and at the same time establish the hardest currency imaginable as the world reserve asset.

Granted, this scenario is not very likely for many reasons. The US might already be too weak, the corruption in Washington too big and economic understanding too close to zero.

But let’s roll with it for now, to see where it could lead.

The United States effectively defaulted on their debt in 1971. Due to their enormous military might, no country dared challenge them to pay back the debt, and everybody accepted the worthless paper Dollars.

Unfortunately, the “exorbitant privilege” turned out to be an exorbitant curse eventually.

Every transaction ultimately gets settled in goods and services.

So, while the worthless paper Dollars lead to a massive influx of cheap goods into the States, creating the illusion of a privilege, the international circulation couldn’t contain all these Dollars forever.

It’s all nice and fun, having USD on your balance sheet, while the economy is hot and growing fast. When the music stops, however, no investor with more than two brain cells wants to be the one holding unbacked paper or even worse, unbacked ones and zeros in a computer, which can be deleted at any time.

How fast this can happen, could recently be seen, when Russian central bank assets were frozen.

This moment, in the Ukraine-Russia conflict, essentially marked the second default of the US. The US of A admitted that their Dollars are just empty promises that they never intended to actually fulfil when the going gets tough.

A wider occurrence of such freezes is just a matter of time. The reason for this is simply that the US have run out of assets.

For years, the Chinese and other nations have been expecting the music to stop and started exchanging their USD reserves for physical gold and other hard assets, like US companies and real estate.

Essentially, the price for cheap goods, paid for with unbacked FED dollars, was the capital stock of the United States.

The more exorbitant the valuations of US stocks and real estate got, the less powerful the United States became. This problem was exasperated by the fact that so much cheap money leads to malinvestment, corruption and a rotting of the capital stock.

Thus, the US military (the only thing actually backing the USD) got more and more expensive, while its combat power declined.
The military industrial price inflation, is probably the worst inflation for a Fiat nation imaginable because it chips away at the very foundations of the system.

So, for every clear eyed witness, it’s obvious that the US military hegemony is very close to falling apart and being replaced by the Chinese empire.

From my perspective, the US have only three options how to continue:

Yield to China → very undesirable
Break the East militarily → WWIII, likely nuclear, extremely undesirable
Rebuild their economic power → only possible with monetary reform

If history is any guide, the only viable option for the United States would be a monetary reform. Historically, this would be done by a fractional reserve gold peg, which was used in Weimar (albeit much too late) and ended the hyperinflation within one week.

The US do not have this option.

Remember, Nixon only suspended the gold standard. If the States wanted to return to a gold peg, at any level apart from the old ratio, they would essentially declare that they are not a trustable debtor.
Of course, you may say that implicitly that was already what Nixon did, but stating it explicitly, especially in a time of weakness, like the current geopolitical situation, this would likely result in WWIII, just like option 2.

The only other real alternative is Bitcoin.

If the US government had read Argentarius and thus understood money, it would be obvious, why Bitcoin is the one weapon that can overthrow China.
(Or overthrow the US, if China should be the first mover.)

In monetary history, there was seldom a second best. The hardest currency always drains the monetary premium from alternatives. The only reason that gold and silver bi-metallic standards existed is the limited practicality of gold for very small transactions.
If you tried to compete with a silver standard versus a gold or bimetallic standard, this would cost you dearly, as medieval China learned the hard way.

Bitcoin is for many reasons a better monetary token than gold. The most important advantages are the hard-coded, transparent supply, as well as it’s decentralized nature. Furthermore, Bitcoin can be transferred globally at almost zero cost (more on why Bitcoin is the ultimate currency, in my next article).

If no unforeseen calamity happens to wipe out Bitcoin, the 99% likely scenario for this century is that gold and silver will lose their monetary premium to BTC.
A trend, US adoption, would greatly accelerate.

Assuming that China has little to no Bitcoin reserves, an outsized US stack could easily tip the global power scales in favour of the Stars and Stripes banner.

Not only would such a bold move into a Bitcoin standard, essentially wipe out all the Chinese dollar reserves, it would also reverse the “exorbitant curse” dynamics of the Euro-Dollar system.
The world would still need to trade in the USA currency, be it Bitcoin backed USD or Bitcoin directly, but suddenly, they would find themselves in a situation, where there is more purchasing power in the US than current economic power.

This first mover advantage would allow the US to interest rate free finance the rebuilding of their broken economy and infrastructure.
Furthermore, it would likely topple the already cracking Chinese real estate market, leading to a monetary crisis in China.

In a nutshell, this means that a surprise Bitcoin standard has the best risk/reward profile, of all available options, from a United Stated perspective.

So, even though I am not a big fan of the US empire, I think the best chance to keep our freedom is if they win the currency war. Otherwise, a Bitcoin standard might be preceded by decades or even centuries of CCP style social credit dictatorship.

What are your thoughts?

The Evolution of Money

April 27, 2022 / michaelantonfischer / 1 Comment

How was money invented? Why do we need currencies? What is the best money?

In a previous article, I explained the differences in monetary theory between Mises (Austrian School) and Argentarius.
Recent discussions between me and proponents of Mises’s theory have shown me that there are several points that are not entirely clear. So today I would like to dive a bit deeper and show on practical examples, how and why money evolved and what good money is.
Furthermore, I will try to show exactly at which points the two theories diverge and where I see the problems with Mises’s explanation.

Throughout all our examples, we will use the four Persons A, B, C and D. You can see the goods they start out with, in the below picture.
The transaction we want to resolve is that Person B wishes to buy a pair of shoes from Person A.

Example 1

The First Example will be simple. Person A and B do a direct barter trade. So, A and B simply draft a contract. Since C and D are not involved in this trade, we will omit their balance sheets for now.

NOTE: Historically these types of trade were done verbally, so the contracts and balance sheets in Examples 1, 2 and 2a are only for visualization. Practically, they would usually be in memory only.

Once the contract is signed, the goods are exchanged. Once both have delivered, the debts from the contract are erased and the trade is done.

Example 2

In the next example, we increase difficulty. Person A now doesn’t want eggs, but rather grain, which only Person C can provide.
To facilitate this trade, Person A negotiates a three party barter contract.

To fulfil the contract, first A and B need to exchange goods, and then A and C exchange goods.

As you can see, arranging a three party barter trade is already rather difficult, and if not all goods are available at the same time, the Person facilitating the trade must take quite some risk, since they need to trust their partners and give them credit.

This method of trading gets impractical quickly once more than three parties are involved.

Example 2a

So, if Person A is not willing to set up a three-party contract, the other option for B is to acquire the goods A wants in a separate trade.

To reduce the risk of giving credit, the three parties meet at one place and goods are exchanged directly.

While this is a safer way to trade, it’s even less practical to arrange, the more parties and different types of goods are involved.

Example 3

To resolve this issue, humanity invented the balance sheet and the debt transfer.
Archaeologist have found clay tablets, showing such trades were done as much as 5000 years ago.

Let’s have a look how such a clay tablet trade works:

This is much more practical, but since clay tablets are not too easily edited, another trick needed to be invented.

Example 4

Instead of rewriting clay tablets to represent who owes who, we will now simply use a Coupon redeemable in grain, signed by Person C as medium of exchange.

To spice things up a little, we will assume now that A doesn’t want to redeem the grain coupon, but they rather want Gold, which is available from D who in turn wants grain.

Such a coupon system is already the beginning of a commodity money, slowly turning into a currency.

The main evolutionary step from coupons/commodities functioning as money to currency, is the market process by which a commodity—like gold—becomes so widely accepted that everybody accepts the commodity as payment, even without any intention to directly exchange it for a good they actually need.

Example 5

If we do the same exchange of goods like in Example 4, but with Gold as widely accepted medium of exchange, it will look like this:

As you can see, this is a way easier way to trade that does not require any balance sheets or tracking of debts.
With this system, it is also possible to have the commodity money—Gold—change hands thousands, even millions of times, before the commodity actually reaches somebody who wants the Gold as a commodity itself and not for the monetary function.

Up to this point, the theories of Argentarius and Mises agree. The differences begin, once there is a standard medium of exchange.

Mises would now argue that you can simply write the transaction from Example 1 as follows:

Argentarius however would argue we would still need to take the full chain into account as shown in Example 5. If this example was rewritten to just show Person A’s and B’s direct trades, it would look like this:

This way of looking at things may look like nitpicking to you, but it is crucial, once inflation and changing production methods come into play.
If you use the Mises style analysis in times of high inflation, you will be selling yourself poor.

As Argentarius records, during the Weimar inflation days, business owners accounted by simply adding a profit margin to their costs.
While this is quite a common practice and not necessarily harmful in times of low inflation, as soon as inflation becomes faster than your business cycle, it will lead to the “selling poor” effect.

What this effect means can be seen in the chart below. The grey line represents the material costs, which after 1 year of no inflation start to inflate at 10% per month.

The orange line is a merchant who has a 3-month production cycle and calculates his prices based on 30% margin on cost.

The yellow line is a merchant who calculates his prices after production by what he expects to be the next month material cost.

As you can see, at such high inflation rates, the orange merchant rapidly falls into the “selling poor” zone, where despite a 30% profit on paper, his stock dwindles, and he has to go out of business.

Of course, it is not always possible to accurately predict inflation and such high inflation rates are rare.

Nevertheless, this example highlights the differences between Mises and Argentarius.

Mises operates under the framework of Praxeology. While this is a great tool to evaluate economic processes, like any model it makes simplifications.
These simplifications are necessary to have any chance at analysis of complex systems.
In edge cases, such simplifications can lead to erroneous results, which is why you always need to stay aware of these assumptions.

As Rothbard explained, Praxeology, unlike Psychology, does only concern itself with how people act, not with why they act as they do.

This can be a problem, when it comes to analysing contractual relationships. A contract is nothing more than a declaration of what two parties want.
So, when judging the quality of a contract, it’s important to check whether all parties received the result desired from the contract.

Unfortunately, humans are not always fully aware of their intentions, so contracts can be written in a way that looks acceptable to all parties, but in fact turns out to have been contrary to the intent of the parties.

This can be clearly seen in the above example.

The merchant, who calculates 30% profit on cost, does so, not because he wanted to have the money, but because he wanted to restock, pay his bills and maybe save or invest a little.

Basically, he wanted to do a multi party barter trade. He intended not to have any money token or currency, but rather to exchange finished goods, for raw materials, factories, machine depreciation, etc.

He only used money as a placeholder, due to convenience. Since the money worked for a while, the merchant fell into the trap where he forgot that the money was not the good he actually desired and thus sold himself poor.

Conclusion
Money tokens were invented to facilitate multi party barter trades. Their function is just a placeholder. Thus, the best money token is the one that most accurately transports a barter “value” over time, space and party.

In the next article, we will discuss what this means for the engineering of sound money.

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