June 05, 2023 | 4 min read
Crypto is an exciting new frontier but to understand it you first need to understand money.
This is how the world works:
FIRST, LOOK AROUND YOU:
Look at the crumbling brickwork, potholes, shuttered stores, brownfield sites, peeling wallpaper and threadbare carpets.
There’s no shortage of work.
But there’s no money.
WHERE HAS ALL THE MONEY GONE?
The financial district looks like it has plenty of money. The Forex markets swap $5.1tn worth of currencies every day.
But it’s a shell game.
To quote Peter Thiel:
“Finance is the only way to make money when you have no idea how to create wealth.”
We don’t lack money, we lack wealth.
Money is not wealth.
Wealth is peace, love; and yes, private jets, caviar, and pothole-free roads.
SO, WHAT IS MONEY?
Money is a measurement of wealth. Just like centimeters, kilograms, and mph.
Consider this thought experiment from Dan Robinson:
- Throw $1000 into a volcano.
- ➡️ Every remaining dollar measures fractionally more.
- Throw a cow into a volcano.
- ➡️ The world has lost a productive asset.
MONEY IS NOT A REAL ASSET
The value of wealth never changes: a cow is a cow; a house is a house.
USD, Euros, gold, and Bitcoin are all the same: not assets, just different ways to measure wealth.
Throwing $1000 into a volcano simply transfers their value to the remaining dollars.
No wealth is lost. Dan’s purchasing power is just transferred to other dollar holders.
THIS ALSO WORKS IN REVERSE!
If the Federal Reserve prints $1000, purchasing power is transferred away from other dollar holders.
If the Federal Reserve prints $1,000,000,000,000, purchasing power is transferred away from other dollar holders…
Printing money doesn’t increase real resources any more than printing theatre tickets increases the number of seats.
OK… ONE QUESTION:
“If money is like centimeters and kilograms, shouldn’t we all use the same measurement and make sure those dimensions don’t change?”
The obvious answer is “Yes!”
THE DIMENSIONS OF MONEY ARE ITS SUPPLY
Say a house measures $100,000.
Double the supply of dollars (i.e. halve the measurement size) and the house now measures $200,000.
HOW MUCH ARE THE DIMENSIONS CHANGING?
Since 1990, the dollars we use to measure wealth have increased 560%.
Commercial banks, moderated by the Federal Reserve, create new money whenever they issue loans.
WHAT DOES THIS MEAN?
Most people don’t know how to measure wealth accurately.
Those who do know can take advantage of those who don’t:
Step 1: Borrow money.
Step 2: Swap for real wealth (houses, etc) before the owners realize the new measurement.
IS THERE A NAME FOR THIS PROCESS?
Take your pick:
- Monetary Policy…
WHAT ABOUT THE POTHOLES?
Borrowing money to flip assets is just too darn easy.
Why study potholes when finance is rigged to win?
Interest rate and currency arbitrage are so lucrative that they have bewitched the brightest minds and drawn enormous amounts of capital away from the difficult task of making the world a better place; i.e. creating wealth.
A PATH FORWARD:
So, we've diagnosed the illness. But what's the cure?
1. ASK THE RIGHT QUESTION
“What causes poverty? Nothing. It’s the original state, the default and starting point. The real question is, What causes #prosperity?” - Per Bylund
2. FINANCIAL LITERACY:
Ignorance is the enemy. We can't change the game if we don't know the rules. Understand how money, finance, and economics work. Then share what you’ve learned!
"Knowledge itself is power." - Francis Bacon
3. INVEST IN REAL WEALTH:
Invest in health, education, sustainable technology, infrastructure, arts. These are real sources of wealth. They make our lives better and contribute to the long-term wellbeing of our planet.
What if we rethink money? New forms of money like Bitcoin, Ethereum and Radix are already challenging the status quo. They're not perfect yet, but they're a start. Let's experiment, innovate, and find better ways to measure and exchange wealth.
5. FAIR DISTRIBUTION:
Wealth isn't just about accumulation. It's about distribution. A society where wealth is concentrated in the hands of a few is a society on the brink. Let's strive for a broad distribution of wealth.
A FINAL THOUGHT:
Money isn't evil, but debasing it is.
Money is a tool. A tool we've created.
And if we've created it, we can make it better.