Saifedean Ammous is an Austrian economist and author of The Bitcoin Standard and The Fiat Standard. Please support this podcast by checking out our sponsors:
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EPISODE LINKS:
Saifedean's Twitter: https://twitter.com/saifedean
Saifedean's Website: https://saifedean.com
The Bitcoin Standard podcast: https://saifedean.com/podcast
Books & resources mentioned:
The Fiat Standard (book): https://amzn.to/3FmNfsy
The Bitcoin Standard (book): https://amzn.to/3LRrcwA
The Blocksize War (book): https://amzn.to/3LORQ9o
The Theory of Money and Credit (book): https://amzn.to/3ykreZT
Human Action (book): https://amzn.to/3w9LzP4

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Clips playlist: https://www.youtube.com/playlist?list=PLrAXtmErZgOeciFP3CBCIEElOJeitOr41

OUTLINE:
0:00 - Introduction
1:33 - Money
14:38 - Gold standard
27:49 - Collective hallucination
33:39 - Austrian vs Keynesian economics
1:06:00 - Free market
1:22:29 - Monarchy
1:28:03 - Fiat money
2:14:53 - SWIFT system
2:27:43 - Bitcoin
2:34:00 - Satoshi Nakamoto
2:41:44 - Criticisms of Bitcoin
2:56:56 - Football/soccer
3:00:38 - Criticisms of Bitcoin continued
3:10:57 - Bitcoin Maximalism
3:23:20 - Proof of stake
3:40:26 - Central bank digital currency
3:51:39 - Michael Malice
3:53:52 - Advice for young people
4:00:01 - Palestine
4:11:40 - Mortality

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Investment professionals fail at doing that.

So what hope does a doctor or an engineer or a scientist or an athlete have in doing those things?

Investment is hard and saving should be easy.

Saving is essential for us as a civilization.

And what fiat did is it took that away from us and then it forced everybody to become an investor or more accurately a gambler because you're not just even, because the money itself is broken, because the money itself is constantly changing in value, investing is becoming more of a crapshoot.

I mean, value investing is completely underperforming compared to market analysis.

You know, you listen to the Fed and you, that, you know, what matters to the price of individual companies is monetary policy much more than it is their own performance.

So basically you need to be a junkie watching the Fed and following all of the world's central banks and you need to learn macroeconomics and you need to learn what all the central banks are doing and you need to understand how commodity markets work and you need to understand how equity markets work and bond markets and real estate markets.

You need to do all of those things just in order to be able to save and earn and keep the money that you've already earned.

Like I've already earned that money being a doctor, being a dentist, being an athlete, being an engineer.

I built a house for somebody and I got that money.

And all I wanna do is just make sure that I can have it 10 years from now.

The only way to do so is to become a crappy engineer because you have to spend half your time not doing engineering and instead spend half of that time learning about Japanese central bank monetary policy and commodity markets and what's gonna happen to copper and what's gonna happen to oil and what's happening in the wars and what's happening with foreign policy and Russia and the US and all of those things.

Under the gold standard, you didn't care about any of that stuff.

Your gold coin worked regardless of all of those things.

So what this means is the future, so first of all, we have all of the problems I mentioned, but also it means that the future becomes much more uncertain.

So you're far less likely to provide for yourself 10 years from now, far less likely to find an easy way to give yourself value 10 years from now.

And that is reflected economically in a lower savings rate and we see savings rates decline, but it is also reflected in all manners of decision-making.

And I think if you really wanna see what it is, take a look at a society that goes through hyperinflation and look at what happens there.

You know, how do people change under hyperinflation and compare that to essentially what we see in the 20th century all over under not hyperinflation, but under low inflation, you know, 10, 15% that you see across the board most of the time is just slow motion hyperinflation.

Everybody gets their paychecks, they run straight to the supermarket, they spend all of their money.

Survival until the end of this month is highly uncertain.

How likely are you to be planning for what you're going to be doing 5 years from now?

But also it's reflected not just economically, it's also reflected in all aspects of morality and all the way in which we deal with each other as human beings.

When your survival is precarious, how much are you invested in the notion of being a good citizen, on caring about your reputation, on caring about not getting caught in a crime.

All of these things become harder to value.

So people start committing crime, people start caring less and less about the future.

And I argue, you see it reflected in architecture.

You know, we used to build houses in the 19th century that last until today.

And then in the 20th century, we build essentially disposable cardboard boxes that get scrapped in 20 years.

So what can you say about potential positive effects of lower time preferences?

Like, basically, you're talking about an average kind of time preference, but there's some things in life where low time preference could be a negative thing.

So if I want to take on risk, not for investment, or a kind of investment, but say I wanna start a business.

I wanna take something crazy, take a leap into the unknown, be an entrepreneur.

What can you say about that kind of leap?

What's the value of that within the current system?

What's the right approach to that within the current system, what's the right approach overall from an economics perspective?

So it's not saving for the future, it's doing something wild, taking the money from your mattress, taking on debt, and having a dream in your heart that you somehow just want to do.

Maybe it's not the wisest investment decision, but it's something, you know, it's being human.

It's taking a leap into the unknown because something in your heart says to do it.

I think you're more likely to be taking the leap in the unknown when you have a little bit of gold in the mattress than when you don't.

I think this is the thing, like if you look at the late 19th century, and I discussed this in the Bitcoin standard, that was the arguably the most innovative period in human history.

You know, there's qualitative evidence, you know, look at the world around you today, pretty much everything that we use was invented in that period.

The car, the airplane, the telegraph, the telephone, the camera, pretty much modern life as late 19th century.

You know, the period between 1870 and 1914, because the whole world was practically on a gold standard, the whole world was using the same money, and the whole world could save in the same currency.

That meant that a bicycle shop owner, 2 bicycle shop owning brothers in North Carolina could go and try and fly, even as all the scientific experts in 1903 were confirming that the possibility of flight has been debunked as unscientific.

Lord Kelvin said, not in a million years we're going to be flying.

Thomas Edison said it's never gonna happen.

No, I think it was Edison who said a million years, but Kelvin also said it's never gonna happen.

The New York Times said it's never gonna happen the same month in which the Wright brothers did it.

And they continued to deny that it was gonna happen even 2 years after they did it.

They had the security with something that you know is gonna be there.

And then you can take a risk with the stuff that is extra.

You know, I have say 3 years expenditures in gold under my mattress.

And I know that I could take a risk with everything else because whatever bad things happen with all of my dreams, like even flying, think about how insane that is, I still can go back to the 3 years of gold that I have saved.

It's still okay to take on debt, given the stuff, the gold under the mattress?

Well, this is the thing, under the gold standard, the way that people finance things was predominantly with capital, with equity.

So you would, because you had gold savings, I had gold savings, everybody had gold savings, when you wanted to start a business, you could use your own savings or somebody else's savings.

Well, you could get equity from others, and you could also get debt from others.

it's directly mapped to physical reality.

Yeah, it's directly mapped to economic reality in that there's a hard money out there, that what you're spending money, you wanna build your airplane factory, you need to get actual resources.

So you get actual gold, either yours or somebody else's, you borrow it or you give them equity, but there's real resources.

Now what happened with the fiat system, and this is the first part of the book where I'd look at it from an engineering kind of perspective is essentially, and I think this is like the breakthrough insight of the book, what fiat does is that it replaces gold mining with credit creation.

The way that we make fiat money, the way that fiat is mined into existence is through credit creation.

Most people think of fiat money as being something that happens when government prints money.

And we still use the term government's printing money, but the vast majority of fiat is not physical.

And in fact, Fiat is not created when it is printed physically, it's created when it is lent.

So when you go to a bank to get a $1 million loan to buy a house, that bank is not gonna give you a million dollars from their own money or from their depositors' money.

They're gonna make a fresh new million dollars.

When you walk out of that bank, the money supply has increased by $1 million to finance your home.

So what fiat does is, I mean, it was basically born out of government credit and the credit of banks that are backed by the central bank and the government.

So if you're part of the institutions that are allowed fiat privilege, where you can just issue loans backed by the central bank, backed by the currency, you are effectively creating new currency, new money every time you issue the loan.

That's fiat mining is credit creation, I love it.

So can you say something, I mean, you can't really have credit without a demand for credit.

You can't really have an increase in supply without a demand for it.

Is there any value you place in like the humans wanting it?

Basically, people wanting to do something with that credit, wanting to take big leaps, big risks, big entrepreneurial decisions.

No, I think what's bad is, you know, anything in my opinion, anything that is consensual, you know, I want to borrow money from you and we agree the terms, I can't object to that.

As long as you and I both agree, I can't object to that.

But in the case of the fiat system, it's not just you and the bank who come to an agreement.

Everybody who uses the currency is forced to be part of that agreement.

Because if you default, you know, effectively what's protecting the bank from you is the fact that the government can just print a bunch of money and make the bank whole.

So that little agreement between the bank and you is actually an agreement between the bank, you, and the entire populace that's using the currency.

They're forced to provide the safety net for you and me to go and make that loan.

And that safety net is the devaluation of the currency.

That's how the whole thing actually works.

So this is why, you know, I wrote the Bitcoin standard explaining Bitcoin and then basically the takeaway message of the Bitcoin standard is you need to stack as much Bitcoin as you can, because this is the best money that has ever been invented.

And we'll talk about that, why Bitcoin is a hard or the hardest money.

Yeah, but with fiat, the conclusion of the fiat standard, And again, this is not financial advice, I'm a lowly academic, you shouldn't listen to me on issues of money, but I think theoretically and intellectually, the conclusion of the fiat system is you need to be short fiat as much as you can.

So human wisdom over thousands of years is to save, try and not borrow as much as you can, try and accumulate as much savings as you can.

If you're saving money, you're just subsidizing everybody else taking on loans.

If you're taking on loans, you're benefiting from all the people that are borrowing.

So the winning move under the fiat system, and this is what rich people do, is you borrow.

Rich people under the fiat monetary system, they don't hold assets.

If you're worth a billion dollars today, You don't have a billion dollars in a checking account.

You've got maybe a hundred thousand, a million, 5000000 or something like that.

A tiny fraction of your money is held in cash.

The majority is going to be held in all kinds of other hard assets.

You know, the richest people in the world are the biggest borrowers in the world.

The most powerful entities in the world, the governments, are the biggest borrowers in the world.

And that's how they are the richest and the most powerful, because every time you're borrowing, you're giving the bank an excuse to print new money.

So you're devaluing everybody else's money and you're getting a bit of the cut.

If you were going to buy a house with your savings, you know, you're accumulating the savings and they're losing value.

And if I were to go to buy the same house with credit, I'm getting the bank to print money for me.

So obviously they can cut me in on that deal.

And that's why it's much cheaper for everybody to buy with credit.

That's why everybody buys everything on credit.

So when we look at the global monetary system, the thing you wanna do as a government is be the sexiest currency out there.

So the main currency, like the dollar currently is, is the 1 that has the most power in that kind of context.

So you have, if you were to try to summarize what is the global monetary system as it is today, is a bunch of fiat currencies battling for position, for use outside their nation, and in so doing trying to gain power in the geopolitical sense.

Is that, if we just zoom out, what is the global monetary system?

Like how, what is it currently, so outside of

Yeah, you could say that, but I think it's more realistic looking at how it has actually evolved over the past few decades.

It's not a system of currencies, of buying with 1 another.

It's a dollar system, and all other currencies are just basically, I like to call them dollar plus country risk.

There is no second best, as Michael Saylor would say.

You know, gold was a winner take all by the end of the 19th century.

The global monetary market is effectively a winner-take-all for the dollar.

And if we get it to Bitcoin, you'll know I also think digital currencies are also going to be a winner-take-all situation.

In fact, there is no such thing as multiple currencies.

Multiple currencies is just a step back to barter.

If you go back to a system of several currencies, you're just reinventing barter.

So in the case of the dollar system, the global dollar system is built around the dollar because all central banks have dollar reserves and because all central banks use the dollar's clearing mechanisms.

So that's why you're basically playing in the dollar system.

This seems to have changed over the last couple of months with the sanctions on Russia and the confiscation of Russian reserves.

It remains to be seen what that's going to do and how that's going to change.

But it is looking like, you know, this dollar system is clearly unsustainable.

It's not sustainable for the US, it's not sustainable for anybody.

Speaking of which, so you do an amazing podcast called the Bitcoin Standard Podcast.

So episode 108 of that podcast is about the very thing you just mentioned.

And allow me please to read the description of that and then ask you a couple questions about your thoughts in general.

The description reads, after the Russian invasion of Ukraine, the US confiscated the Russian central bank's significant monetary reserves and ban some Russian banks from the SWIFT network.

Serious questions are being asked about the survival of the post-war dollar-based world monetary order.

Will Russia, China, and other countries actually build an alternative international settlement system after years of threatening to do so?

Will global central banks stop accumulating US Treasury bonds and replace them with gold and commodities?

Will we witness the birth of a new commodity gold-based monetary order?

In this seminar, we use the insights from the Bitcoin standard and the fiat standard on temporal and spatial salability to explain why reports of the death of the dollar and the emergence of a new gold standard may be exaggerated.

So I would love to get your analysis on this situation.

What are the possible future evolutions of the global monetary system?

Yeah, so SWIFT is the network that the US Federal Reserve uses for moving money around the world.

So basically the US government can sanction you off of Swiss as they've done with Russian banks, as they've done with Iran, and as they've done with Afghanistan.

So effectively, I mean, this is really the catastrophe of the current monetary system is that in order to be able to trade as a member, as a citizen of your country, you need your monopoly local central bank to be on good terms with the US government so that they would let them operate it.

And this is really like on top of the aspect of the hardness of money, this is the other really powerful thing about Bitcoin, which is that it's just purely a technological thing.

It doesn't matter if you're Russian, if you're Iranian, if you're American, if you're Chinese, it's a technology.

And so it's like a spoon or a knife or a car, you operate it properly and it works.

And so with Bitcoin, it's the same thing.

If you have the private key, you click send and the money goes, well, it doesn't really go, but effectively it does go anywhere it wants and the money can move without having to abide by political situations.

And the point here is not to bash US foreign policy much as that might be deserved.

I'm just going to discuss it from a kind of technical perspective.

It has to be a political system with fiat because ultimately it relies on credit and then the government is the 1 that has the guns and the government is going to decide who gets to pay their loans anyway and the government's going to have to make its own rules about who gets to play and who doesn't.

And so it has to be political as this kind of fiat system.

And, you know, when I wrote the Bitcoin standard, initially I used to be much more of a gold bug.

And in my mind, you know, Gold bugs have spent the last 50 years saying the global monetary system is gonna collapse next week and we're gonna go back to a gold standard.

And writing the fiat standard gave me a very good appreciation for why this hasn't happened and why it's not very likely to happen.

I think the reason is, as I said earlier, just gold is very expensive to move around and perhaps more importantly, it's very expensive to verify.

It's very expensive to verify that the gold that you're receiving is original gold.

So The only way to do this properly is to melt the gold bars down and recast them, which is pretty expensive.

So we have this situation now where Russia, which is 1 of the biggest economies in the world, has been kicked off to varying degrees off the global monetary system.

And the US has confiscated their reserves.

I don't have political opinions about the war.

It's not something I'm very familiar with.

I'm just analyzing the monetary aspects of it.

It is, on the 1 hand, whether you think the war is justified or the sanctions are justified is not something I can opine on.

But the implication of this is that effectively the US might be shooting itself in the foot because it's telling everybody in the world, your money in our system is not really your money.

And any point in time, if you misbehave, we kick you away out of the arcade and we take your tokens.

And so, I mean, this is something that China, Russia, Iran, and many countries have made a lot of noise about over the past decades.

It got real this year, but it's been decades of China, Iran, and Russia to some extent saying that, you know, we wanna build an alternative to the US dollar-based system.

And I think there's very good reasons they haven't.

And the reason is, what do you do with based on?

So you can do a credit-based system based on, but then who's going to be the big boss?

None of these countries wants to be, they don't wanna jump out of the US-based system to get into somebody else's base system.

So China doesn't wanna use a Russian system, Russia doesn't wanna use a Chinese system.

And so therefore you can't use their own central banks currencies.

Don't you think they have enough leverage, India, China, Russia combined with several other nations have enough leverage and incentive to create their own system So any 1 player, yes, but if they collaborate.

Yeah, but then, okay, so what are you basing on?

Because China is becoming increasingly an economic power in the world

And it's the most likely scenario, perhaps, if we were to witness something like this, is going to be a Chinese-based system.

So is it possible to have like a split in what is the driving currency of the world?

It's possible, but I don't think it's sustainable.

And that's the kind of thing that I argue in that seminar.

So we could see this emerge based around the Yuan and likely, I mean, Russia is obviously going to hurt economically from what happened, from the confiscation of the reserves and from the sanctions.

So it's not going to be in a position, and of course, because it's outside of the US-based system, it's not in the strongest negotiating position with the Chinese.

So the Chinese might be able to get them to join their Yuan-based system.

But I don't think that's sustainable in the long run because these governments can issue their laws and make their designs and then make their monetary systems.

But ultimately, there are billions of Chinese people and billions of dollar-based people, and they're gonna wanna trade with 1 another.

And the power to want to trade with 1 another is too strong.

We can't just split the world economy into 2 monetary systems that don't trade with 1 another.

So then, they're gonna wanna trade with 1 another.

Or the dark possibility is it, the inability to trade as opposed to being a forcing function for trade, it become a forcing function for conflict in cyberspace and potentially hot war.

And this is basically how World War II happened, because there's an old historian who used to say when, oh, I think his name is Otto Mallory, and I quote him in the Bitcoin Standard, if goods don't cross borders, then bombs will.

If people trade with 1 another, they have an incentive for each other's wellbeing, and then they have less of an incentive to fight.

And it was the death of global trade in the 1930s because of the failure of the fiat system that brought about the rise of the populism and the rise of all those leaders that hated each other and helped finance the war and bring it about.

And of course, you can't discount that with all of the escalation that you see, that is a possibility that it could turn into a real war.

But then even so, I think ultimately, you can't fight wars forever.

That there's going to, it's gonna end at some point.

And we're gonna be back at square 1, or well, not square 1, we're gonna be back at the same dilemma of who's going to have the global monetary system.

And so 1 alternative is that what the Chinese and the Russians could do is they could base it on a commodity.

So a lot of people are now saying, well, they're gonna base it on copper and corn and agricultural commodities.

And that's the analysis of salability that we discuss in the Bitcoin standard and the fiat standard.

If you end up basing the monetary system on copper, as we said earlier, doesn't matter how many governments say that we're gonna make a new monetary system based on copper grains and nickel and iron and so on, doesn't matter, you're just gonna stockpile, you're gonna have to stockpile those things in order to make a market in them.

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Saifedean Ammous: Bitcoin, Anarchy, and Austrian Economics | Lex Fridman Podcast #284