Governments do not have a good track record when it comes to delivering value for money to their citizens. Education is a good place to start. The quality of education over the past 50 years has declined steadily to the point that the average college degree does not provide you with the tools necessary to thrive in the job market. Many top employers in the United States no longer require a 4-year college degree. A large group of people has amassed extraordinary fortunes without graduating from university, namely Steve Jobs, Bill Gates, Michael Dell, Mark Zuckerberg, Larry Ellison, and Richard Branson. In addition, the cost has increased exponentially. According to data from the National Center for Education Statistics, the average tuition and fees for a public four-year degree in 1971 was $428 per year (in 2021 dollars). By 2021, that had increased to $9,687 which represents an increase of 2,163 percent.
According to data from the New York City Taxi and Limousine Commission, in 1970 the initial fare for a New York City taxi ride was 60 cents with an additional 10 cents charged for each quarter mile. By 2021, the initial fare had increased to $3.30 and an additional 50 cents for each fifth of a mile or minute of waiting time. This represents an increase of around 500 percent and does not account for fees or surcharges that may be added such as those for trips to and from airports or during certain times of the day. In addition, the quality of taxi rides has declined as standards have been lowered.
Governments and regulators do a fantastic job in two areas- increasing prices and lowering quality. The best example of this can be found in their management of money. To understand this, you need to understand inflation. Many people think that inflation is the rising of prices. That is a symptom of inflation - it is not inflation itself. Prices cannot be inflated - they can rise but that is not the same thing. Inflation is an expansion of the money supply which in turn leads to a reduction in the purchasing power of that money. Governments are masters of printing money and in the process destroying the value of that money. The reason why they are masters of money printing can be found in the heart of politics.
If you look at politicians, they are in the business of getting reelected. They look after themselves. They have no real interest in the country or the people that inhabit the country. Career politicians have great jobs. There are plenty of perks, there is a high degree of respect, and after a life of politics, they can go into consulting, lobbying, and numerous other lucrative activities. The most important skill of any politician is being popular. They need to do things that people like and try not to do things that piss off their electorate. So what do people like and what do they dislike? If you run for political office, and you offer to increase people's freedom, it is unlikely they will vote for you. Most people don't have an opinion and they like to be led - because it is easier. People like to get free stuff. They like to get something for nothing. That is why they love sales, coupons, and discounts. They don't like to have things taken away. They don't like an increase in taxes. Politicians know that and the only way they can keep giving stuff away for free without raising taxes is by printing money. Expansion of the money supply (or inflation) is a form of tax because the purchasing power of money is eroded. Most people don't see this as a tax because it happens slowly over time and most people are too lazy to do the mathematical exercise to understand this.
When money supply increases you have more money chasing a finite amount of goods and services. That can lead to higher prices, but not always. It is possible for prices to remain unchanged and even to go down when the money supply is increasing. Globalization has been a source of deflation. China's ability to produce cheaply should have resulted in the process of many goods declining. However, this decline has been avoided by inflating the money supply. If prices should have gone down by 5 percent, but remained the same, the consumer is still five percent poorer because he would have been five percent better off if the money supply had not increased and the price of the goods had declined. Consumers lost the benefit of lower prices. Pure capitalism without any government intervention has to be deflationary in nature. As more competitors enter the market, prices have to go down. The problem is that there is no pure capitalism. Governments always meddle in the economy. They pass laws to protect certain monopolies like big pharmaceutical companies and banks that are deemed too big to fail. They get into trade wars with other countries in an effort to protect local manufacturers. This intervention into the free functioning of capitalist markets leads to increased prices and lower quality that affects the average man in the street.
Politicians want prices to go up in moderation. They fixate on the notion that for there to be perceived prosperity, the general levels of prices must go up. This is known as economic growth. Gross domestic product is the total value of goods produced and services provided during a year. If prices are falling by five percent per year, the economy will need to produce 5 percent more in order to record zero percent growth. If prices rise by 2 percent, there needs to be no increase in order to record 2 percent growth in the economy. The higher the growth rate, the more likely politicians will be reelected. Can you see why they love inflation - they can give away free stuff and they can tell their voters that the slice of the economic pie is growing which means they will be wealthier. The problem is that they are not getting anything for free. Governments are printing more money, incurring more debt and the pain will be felt in the future. Sometimes this pain is only felt in 10 or 20 years which means our children will be left picking up the bill. Some people have no children so they don't give a damn.
Excessive money printing was not possible before 1971. Before this date, all currencies were linked to the US dollar, and the US dollar was linked to gold. This was honest money. If the US treasury wanted to print 1 billion dollars, they needed to acquire 1 billion dollars in gold. This was viable after World War 2. The United States was financially the strongest country in the world. They financed the war. Everyone owed them money, but they were smart - they demanded that their creditors pay them back in gold. The United States had a shitload of gold and they could print money against these reserves. The United States also ran a trade surplus - they exported more than they imported. Everything was made in the U.S.A. It was the factory of the world. Its reserves were high and debt levels were low. The dollar was the global reserve currency. This was both a blessing and a curse for the US. It was a blessing because the bulk of global trade was done in dollars which meant there was always high demand for its currency. The downside was that as global trade increased, and the United States started to import more and export less, the trade surplus turned into a trade deficit. The United States did not have enough dollars to finance the deficit and did not have enough gold to print more dollars.
In 1971, Nixon announced that they would be moving off the gold standard, and in typical doublespeak that would have made George Orwell proud, he blamed the rest of the world for speculating against the dollar. The truth was that the US had run out of money and needed to print money. It was at this moment that money became untethered and the 1970s and early 1980s provided us with the worst inflation since World War 1.
Let's now dig a little deeper into why politicians love inflation. They will tell you that deflation is bad for the economy. If prices are going down, they will say that people will not consume. They will hold off for the future when prices are lower. That goes against human nature. Delayed gratification is not a trait that is common to human beings. They lack patience. In a world where you can order a taxi off your phone, and Amazon provides same-day shopping, do you really think that humans will wait months before they buy the new iPhone? If it was true that no one would buy goods in a world of declining prices, no one would ever own a flatscreen TV - these prices have been in decline for over a decade, yet people keep buying them.
As far as essential goods are concerned, it is obvious that consumers will not hold off on buying groceries in anticipation of lower prices. If they wait too long, they will die. You need to question everything you hear and believe. The mainstream media sold its soul to governments and large corporations decades ago. We all believe that breakfast is the most important meal of the day. Do you know who coined that phrase and then rammed it down your throat through the media? It was Kellogg's because they wanted to sell you more sugary breakfast cereal. In the same way, politicians have demonized deflation, saying it leads to falling prices, recessions, and maybe even depressions. They say that inflation is good, and to confuse you even further, they invent technical names to confuse you. They talk of quantitative easing, monetary debasement, currency devaluation, and value erosion. In the same way that Kellogg's sugar coats their cereal, so too do politicians want to sugarcoat inflation and convince you that it is in your best interest that they keep printing money.
Half the money in circulation in the US at the moment was printed since the COVID pandemic. How many people complained when they received their stimulus checks in the mail? The biggest problem with inflation is that its nuggets of casualty are people that are financially vulnerable - the poor and the old. The poor work from paycheck to paycheck. Their wages do not keep pace with inflation and the quality of their lives slowly erodes. The old live off their savings - they are generating income but on account of their risk profile, they are not able to generate inflation-beating returns which means they need to eat away at their capital. They cannot take risks and invest in the stock market - the only place that historically has generated inflation-beating returns. They need to invest in low-income products that never pay above inflation. So, if inflation is at 6%, and their savings yield 3%, they have a shortfall of 3% per annum and need to eat away at their capital. This means that their income reduces and their quality of life declines.
Who benefits the most from inflation? The rich are able to borrow and invest that money in real income-producing assets that hold their value in inflationary times. For example, they have the capacity to buy real estate and rent it out at a yield in excess of the preferential interest they are able to secure on account of their stellar credit score (because they are rich and don't need the money). As the money supply increases, they are able to pay back the loan with devalued currency. The rentals they charge are indexed to inflation so their income continues to rise. Most people have debt - both rich and poor. The difference is that rich people have smart debt - it is used to buy assets that produce reliable cash flows. Poorer people use debt to buy consumer products - like a flat-screen TV or computer that does not generate income. For the rich, debt is an income-generating tool and inflation helps to devalue that debt. Inflation also devalues the debt of poorer people, but their debt is bad debt because it does nothing to improve their economic situation.
So how is the inflation rate calculated? The inflation rate is like a report card - if children were allowed to grade their own exams, how would they grade themselves? The fact that the government is responsible for calculating inflation, which is such an important metric to gauge their performance, is kinda nuts. The "perfect" economy is also known as the Goldilocks economy. The Goldilocks principle is named by analogy to the children's story The Three Bears in which a young girl named Goldilocks tastes three different bowls of porridge and finds she prefers the porridge that is neither too hot nor too cold. This principle is also known as the just right principle and aims to grow the economy in a way that balances the need for development and progress with sustainability and stability. Growth that is too fast can lead to a bubble while growth that is too slow can lead to unemployment. Inflation should be moderate and typically around 2 percent is desirable for a healthy economy. You will therefore notice that until recently inflation in the United States has trended very closely to that targeted number.
Over the last 50 years, the inflation calculation methodology has changed. The metric used is known as CPI pr Consumer Price Index. You will notice that it does not contain the word inflation for obvious reasons - this forms part of the government sugarcoating/doublespeak policy. It is used to measure the average cost of a standard basket of consumer goods. In the old days, the basket did not change. They selected the basket, it did not change and then measured the price changes of that basket. Now the basket changed and the politicians are the ones that choose what goes in and what is taken out of the basket. In order to achieve that Goldilocks number they are able to manipulate the contents of the basket. To make it even murkier, they make use of hedonic which is the method of calculating the value of a good or service based on the perceived level of pleasure or satisfaction that it provides to the customer. For example, hedonic pricing models might be used to determine the value of a product by analyzing consumer preferences and estimating the value of each of its individual characteristics such as quality, aesthetics, and functionality. Isn't that a big bunch of bullshit? A good example of a weakness in the calculation of CPI is airline prices. Prices, in general, have gone down, but airlines have found other ways to make up for this decline - such as charging extra for seating, boarding, blankets, food and drinks, baggage, etc. Airlines now make billions of dollars from these supplementary charges which are not reflected in the CPI calculation. There is a video on YouTube of a stockbroker who took 20 of the most widely circulated magazines and newspapers in the US and calculated how the price had changed between 2003 and 2013. He was able to do this because the price of these publications are printed on the covers/front pages and can be found with a simple Google. The CPI number was a 30 percent increase. The real number was 130 percent! Where did that extra 1000 percent go? The CPI number is rigged and engineered to mask the real degree to which prices are changing.
Another example of shit baffling brains in the CPI calculation is the role of shelter. That makes up approximately one-third of the basket and includes house prices and rents. The problem is that they don't use actual prices and rents - they use owners' equivalent of rent (OER). It is the amount that a homeowner would pay to rent or lease their own house if they were not living in it. So the Bureau of Labor Statistics will phone up a bunch of homeowners and ask them the question. This is ridiculous. Firstly, most homeowners have no idea what their rentals would be, let alone what their house is worth. This is like the blind leading the blind and is open to mega manipulation by the politicians. This is such a ridiculous way to measure the cost of shelter.
Inflation is like a tax. But it does not involve the government taking your money so it does not seem like a tax. Inflation is the government printing money, giving that money to someone else and when that person spends that money, he pushes prices up. If you have a fixed amount of money saved up, this inflation will reduce the real value of that money over time and reduce its purchasing power. They will be less well off as a result.
So what do we do in a world of unfettered global currencies? We need to find another currency, and many people are talking about returning to the gold standard. So what is money today? Yuval Noah Harari says money is the only trust system created by humans that can bridge almost any cultural gap and that does not discriminate on the basis of religion, gender, race, age, or sexual orientation. The key word in this definition is trust. When you presented your sea shell as a method of payment, you trusted that your counterparty would accept it. When you held that $100 bill before 1971, you trusted that the government would honor its commitment to exchange that bill for $100 of gold. Today, the need for trust has never been stronger because paper money is backed by nothing. You trust that in 5 years, the money you are saving will hold its value. With this, we come the most important part of money - it needs to be a store of value for the future
For an asset to qualify as a store of value, it needs to boast eight characteristics:
1) Durability - it must not be perishable or easily destroyed. This means that an agricultural commodity is not as good a store of value as a precious metal 2) Portability - it should be easy to transport and store. A diamond ring is therefore better than a herd of cattle. 3) Fungibility - one specimen should be interchangeable with another. This means that gold is better than diamonds. An ounce of gold is generally the same throughout the world. Diamonds, on the other hand, are all different and their value is based on size, clarity, cut, and colour. 4) Verifiability- it must be easy to verify the authenticity of the good. It is more difficult to verify a Picasso painting than a share in Amazon. 5) Divisibility - it must be easy to subdivide the good. In the old days, when trade was relatively infrequent, this did not really matter. Today, however, as trade has flourished it has become far more important. It is easier to divide a barrel of oil than it is to divide a house. 6) Scarcity - as Nick Szabo termed it, monetary goods must have "unforgeable costliness". In other words, the good must not be abundant or easy to obtain or produce in quantity. Scarcity is possibly the most important attribute of a store of value as it taps into the innate human desire to collect that which is rare. 7) Established history - the longer the good is perceived to have been valuable to society, the greater its appeal as a store of value. Gold has a longer history than oil.
8) Storability. How difficult is it to store it safely? It is easier to store $1 million worth of gold than $1 million worth of wheat.
Gold and the US Dollar versus Bitcoin Now that we understand the eight tenets of a store of value, let us see how two of the most established stores of value (the dollar and gold) stand up against the incumbent - the new young rebel on the block - Bitcoin. 1) Durability Gold is durable - it will not rust or corrode. It can literally last forever. It cannot be destroyed on a molecular level with any naturally occurring substance on earth. Not even fire can destroy it. Cash notes on the other hand are less durable. The Colombian drug lord Pablo Escobar stashed his billions of dollars in warehouses and buried it in the ground in farms surrounding Medellin. Rats gnawed into those dollar bills and the moisture from the soil destroyed the bills.
Let's now assess the durability of Bitcoin. What could happen to Bitcoin? Let's start with the most extreme threat. If all sources of electricity, internet, and data communications were shut down across the entire planet, Bitcoin nodes would not be able to contact each other. That would be the end of Bitcoin and the end of humanity. Another possibility is a critical bug. In September 2018, a bug rocked the Bitcoin world that could have shut down a chunk of the network, and could have been used to create new Bitcoin above the 21 million hard ceiling. Such a perversion of the rules would have destroyed the trust in Bitcoin. Due to the disastrous implications of the bug, developers decided to keep it a secret, buying themselves time to fix it and urge miners to upgrade their software. But what if the bug had already been exploited? Experts say they would have detected the suspicious activity. When downloaded for the first time, full nodes double-check every transaction made in Bitcoins history. A node running the new software would detect the problem immediately. Another possibility is a government crackdown. Governments cannot destroy Bitcoin itself because of its decentralized nature. They can however control and restrict its use in their jurisdiction. They can freeze the bank accounts of crypto companies. But all countries would need to do this in unison because businesses will simply move to friendlier jurisdictions. We are already seeing the emergence of crypto-friendly countries. El Salvador stands out as the global leader in crypto friendliness when it passed a law in 2021 that implemented Bitcoin as legal tender, and no income or capital gains tax is levied on Bitcoin. Singapore and Portugal apply similar tax treatment. Malta recognizes crypto as a unit of account, a medium of exchange, or a store of value. In Puerto Rico, there is no federal income tax and no capital gains for residents. Switzerland, Slovenia, and Germany round off the top ten friendliest crypto countries. The final threat to the durability of Bitcoin is the possibility of a major hack. A total of 51 percent of the network would need to band together with the common goal of destroying their own source of profit. As the size of the Bitcoin network grows, the probability of the majority joining in this self-destructive act is relatively low.
2) Portability
Try to move a billion dollars of gold or cash notes through an airport and you will quickly realize portability is not the strong suit of these two stores of value. Gold is heavy and bulky, and hundreds of suitcases with dollar bills will raise uncomfortable questions. I understand that 90 percent of money these days is in digital form. But even this does facilitate frictionless movement. There is an old joke in finance about the quickest way to send $10,000 from Singapore to Los Angeles. The answer is in an airplane. How is it possible that in this modern age where you can order a cab off your phone and connect hundreds of people from hundreds of countries into one video meeting it takes two to three days to move money across borders? The system used for cross-border money transfers is SWIFT and is fifty years old. It is owned by the banks and it makes them rich - they have had no incentive to improve this system until now. Crypto is set to eat SWIFT's lunch. Bitcoin is the most portable monetary asset in the world. In April 2020, $1.1 billion was moved in a Bitcoin transaction in a matter of minutes and cost 68 cents. This transaction was done cheaply and efficiently without having to ask the permission of a bank, reveal their identities, trust anyone with their information, or give anyone control over it. No other payment system in the world can move that amount of value, for that price, in that amount, in that amount of time, and completely anonymously.
3) Fungibility
Gold is generally fungible - an ounce of gold generally holds the same value as an ounce of pure gold anywhere. Money is also fungible as is Bitcoin so on this point it is a wash.
4) Verifiability
Not all gold is 100 percent pure. Alloy metals are added to gold to increase the hardness and durability of coins and jewelry made from it. The most common additive is copper. White gold is achieved by adding palladium or nickel. There is a long history of gold-selling shops that have misled buyers with less than 100 percent pure products. Wuhan, the Chinese city that was put on the map for being the center of the spread of the coronavirus, was also the epicenter of a gold counterfeit scandal in late 2020. Over 80 tons of gold pledged as collateral for a loan are now being investigated for counterfeiting. It is rumored that 4 percent of China's gold reserves could be fake.
When it comes to cash money, counterfeiting has been called the world's second-oldest profession after prostitution. The most common was mixing base metals like copper and gold and silver coins. In America, colonial paper money printed by Benjamin Franklin bore the phrase to counterfeit is death. It was believed that someone who had the ability to counterfeit money was a threat to state security - this shows just how important it is for governments to control the printing of money. Today you have the super dollar which is a very high-quality counterfeit of the US $100 bill. The US government believes that North Korean officials have passed off super dollars in various countries and accuses North Korea of printing them. There has been rapid growth in the counterfeiting of euro banknotes since the launch of the currency in 2002. Governments are wising up and making bills more difficult to counterfeit through the introduction of holograms, multi-coloured bills, embedded devices such as strips, raised printing, microprinting, watermarks, and colour shifting inks whose colour changes depending on the angle of the light.
Can Bitcoin be counterfeited? It is almost impossible to counterfeit Bitcoin. All transactions are validated collectively and coordinated by the miners. This is known as decentralized trust because trust is distributed amongst all the nodes of the network. Therefore, if you try to spend a fake Bitcoin, it will be verified that the previous entries in the chain do not contain this transaction, which would indicate a duplication or a fraudulent operation.
In 2010, Bitcoin experienced what became known as the "value overflow incident" when 187 billion Bitcoins were "created" out of thin air but were quickly destroyed. Again we need to go back to the 51 percent majority rule - it would require the consensus of the majority of the Bitcoin network to falsify or fraudulently manipulate a Bitcoin. It was easier to do that in its infancy. Today there are over 10,000 nodes. The bad actor would need to summon the power of millions of computers, which is practically impossible. In addition, if this were to happen, the network would know and would abandon the network because its decentralization would be compromised. The price would fall to zero and the bad actor would have spent billions of dollars to hijack an asset that was now worthless.
5) Divisibility
The smallest unit of gold is one gram. One troy ounce of gold is approximately 31 grams. At the time of writing this, 1 ounce of gold was trading at $1775 which means that one gram would have a street value of 57 dollars. That would be the smallest unit of gold you could use. Most vendors in the United States would require you to spend at least 10 dollars if you want change for 57 dollars. This means that paying for your 3-dollar latte at Starbucks with a 57 dollar piece of gold may not be well received. So gold is not infinitely divisible. The smallest coin in the United States is 1 cent which is pretty small. The smallest unit of Bitcoin is 1 Satoshi, which is approximately 1/20th of a United States cent. This means that Bitcoin is 20 times more divisible that the US dollar, and 114 thousand more times divisible than a gram of gold.
6) Scarcity
Let's start with gold. Approximately 190,000 tonnes of gold has been mined in total, although estimates do vary. Based on these rough figures, there is about 20% still to be mined. But this is a moving target. It is getting harder and more expensive to mine gold. Today, around 60% of the world's mining operations are surface mines, while the remainder is underground mines. There are relatively few unexplored regions left for gold mining, although possibly the most promising are in some of the more unstable parts of the world, such as West Africa. We can therefore come to the conclusion that gold is relatively scarce. Money on the other hand is many things, but scarce is not one of them. There is a rumor that one-third of all dollars in circulation in 2022 were printed in the past 12 months. Governments are printing money at unprecedented rates as they seek to prop up their fragile economies.
Bitcoin is exceptionally scarce. Its supply is capped at 21 million. You can find more information on its scarcity in Reason #7.
7) Established History
The earliest recorded metal employed by humans appears to be gold, which can be found free or "native". Small amounts of natural gold have been found in Spanish caves used during the late Paleolithic period, c. 40,000 BC. The United States dollar was established in 1792 with the Coinage Act. The first Bitcoin was mined on January 3rd, 2009 which means it is fourteen years old. Bitcoin is the clear loser on this store of value metric, which makes it an almost perfect (and not entirely perfect) store of value.
8) Storability
You have two options to store your gold. You can either take delivery of the bullion and look after it yourself, or you can entrust a professional to store or vault it for you. The former option is complicated. You can bury it at the bottom of the garden and run the risk that Rufus may dig it up. You can hide it under the bed, but then there is the risk of the cleaning lady finding it and disappearing to Monaco. You can buy a safe, but you need to find a way to attach it to the floor so that it cannot easily be spirited away by bad actors. You also need to consider whether your safe is waterproof, fireproof, and bombproof. Wherever you hide your stash of billion, you need to tell no one - not even friends and family, and you better not forget yourself. If you chose not to self custody your gold and place it in the hands of a third party, you need to trust they don't run off to Vegas with your gold and marry a stripper. The same is true with cash notes, You can self-custody in your garden, shoe box, or safe, or you can deposit in the bank. The same risks apply. With Bitcoin, you have the same two options - self-custody and third-party custody. The latter also requires trust and permission, but self-custody is inordinately less complicated. Bitcoin is a digital asset recorded on the blockchain. Your wallet does not hold the Bitcoins - it holds the private keys to your Bitcoins. You can store these in a cold hardware wallet which is completely offline, and if you lose that hardware wallet, all you need to recover your assets is the 12 or 24 recovery (or seed) phrase. At the end of the day, all you need to do is remember these words!
Conclusion
Civilization rises through channeling energy. We invented fire, then we build cities near rivers, and we used gravity to move water and create energy and electric systems. We then invented batteries as a means of storing energy. If we want to advance we need to be able to capture, store and channel energy. Money is energy. It is the store of value and also a technology that allows us to trade that energy over time and space. If we look at the history of money, we have gone from commodity money, to coinage, to notes to fiat currency and now we have cryptography as a basis for money. Sometimes it is said that gold is ideal money. If God came down from heaven to create ideal money it would be based on Luca Pacioli's system of double-entry system of accounting. He would create 21 million units that were infinitely divisible. There are 100 million Satoshis in one bitcoin which means that one Satoshi is worth less than 1/20th of a US cent which is about 1 South African cent - this shows how almost infinitely divisible Bitcoin is for commercial transactions. The perfect money would be able to settle transactions between parties located anywhere on the planet instantly. That would be good money and that could be called God coin because transactions are instant and never lose any information in the process. Bitcoin comes pretty close to this. Bitcoin is the most efficient monetary system we have ever seen. 21 quadrillion Satoshis, 350 thousand transactions per day, it costs about 10 basis points of the monetary network to clear those transactions and secure that network.
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