2. Fiat Balances are:
1- Unquantifiable:
● Nobody knows exactly how much fiat exists, and there is significant
disagreement over the correct method for calculating the fiat supply.
● M0, M1, M2, M3.
● There is no clear-cut answer on which measure actually constitutes
money, as the nature of fiat is to conflate future fiat with present fiat.
● We use M2 as World Bank data allows consistent measurement, and
growth rates are more important for us than aggregate quantities.
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3. 2- Irreconcilable
● You cannot run the numbers on fiat. There is no way of
keeping track of all liabilities, assets, and issuance. There
is no hard limit on how much debt is issued and no easy
way to track it in real time.
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4. 3- Tentative and revocable
● Your local node, and the master node can revoke any
balance at any time.
● There is no final clearance in the fiat monetary system.
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5. 4- Negative:
● Only monetary system where the sum of all balances at any point
in time is negative.
● This monetization of debt incentivizes the creation of more
monetary tokens. This means that the fiat economic system is
highly geared toward the creation of more debt, and fiat users
are incentivized to get into debt as much as possible.
● Because of the enormous incentive to accumulate debt, and the
fact that the native token is not physical or scarce in any real
sense, financial institutions constantly generate negative
balances for their clients.
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6. Fiat is a tiered system:
● Low tier users: physical paper money. Majority of users,
positive fiat balances.
● High level users: have digital fiat in bank accounts, and
can borrow fiat. Majority of global wealth and income:
usually negative balances. The better off you are, the more
debt you can secure.
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7. ● Holders of positive balances are constantly being robbed
through inflation.
● Holders of negative balances are always insecure, ~2
missed loan repayments away from devastating
bankruptcy and a loss of collateral.
● Financial security, in the sense of having a stable amount
of liquid wealth saved for the future, is no longer available
in the current system.
● Fiat has effectively destroyed savings as a financial
instrument, with enormously negative consequences.
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8. Fiat Savings
● Saving is the deferral of consumption from the present to the
future.
● Holding durable goods is the first form of saving.
● With the development of money, it became the most efficient
medium of saving. Liquid, fungible that can be exchanged for
other goods.
● The harder the money, the better it is for saving, the more it
incentivizes us to save
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9. ● Human progress is the ability to hold harder money. The
harder the money, the lower our time preference, the more
savings are available to invest, the higher our productivity.
● The pinnacle saving technology was the gold coin. Great
salability across space and time.
● Anyone could save what they earn, spend it anywhere and
know the value would be held across time.
● Gold only increases in supply by 1-2%.
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10. ● Then fiat came along and set back monetary technology
back millennia. Supply growth rate around 7% in the best
cases. Up to several hundred % in the worst cases?
● Now saving became much more complicated:
● Cash loses value.
● So investors turned to stock in the 1920s, which caused the
stock market crash.
● We can think of the stock market crash as the easy money
trap discussed in TBS.
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11. ● 1934 separation of commercial banking from investment
banking
● But you cannot offer riskless returns that exceed inflation
● It worked briefly, and exceptionally, after WW2, as the world
adopted the dollar causing its value to increase and
finance government deficits and inflation.
● But this broke down with inflation.
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12. ● After 1971, bonds became the saving vehicle: Easy money trap
again
● A common measure of the creditworthiness of any entity is the
ratio of its EBITDA (Earnings Before Interest, Taxes, Depreciation,
and Amortization) to its interest payments. Governments are rated
far higher than what this ratio would indicate for them had they
been operating in the free market. For example, a corporate
borrower with an EBITDA/interest ratio of 2.5 would be ranked BB−,
but the U.S. government has this ratio, and it is rated AAA. To justify
its AAA rating without fiat privilege, the U.S. government would
need to have an EBITDA twenty times larger than its interest
payment. Its income would need to be eight times higher than
what it currently is, or expenditures eight times smaller.
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13. ● Monetizing bonds just created a massive boon for
government and corporations to borrow, leading to an
increase in bonds, and returns that cannot beat inflation
by late 2000's, arguably much earlier.
● The stock index became the new savings account post-
2009.
● But saving is not investing!
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14. ● Investing is a cash outflow, while savings are held on a
balance sheet.
● Cash is acquired for salability, investments for cash flow.
● Investments involve risk
● People would keep a cash balance they would like to have
with certainty, and would risk their investment funds in
search of returns.
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15. ● The problem with fiat is that simply maintaining the wealth
you already own requires significant active management
and expert decision-making. You need to develop
expertise in portfolio allocation, risk management, stock
and bond valuation, real estate markets, credit markets,
global macro trends, national and international monetary
policy, commodity markets, geopolitics, and many other
arcane and highly specialized fields in order to make
informed investment decisions that allow you to maintain
the wealth you already earned.
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16. ● You effectively need to earn your money twice with fiat,
once when you work for it, and once when you invest it to
beat inflation. The simple gold coin saved you from all of
this before fiat. Why should a doctor, athlete, engineer,
entrepreneur, or accountant who is successful in their field
have to develop expertise in these many fields just to
maintain the wealth they already produced and earned
freely on the market?
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17. ● Given the rate of monetary inflation financing wasteful
government spending and the high fees charged by the
investment management industry, only a small minority of
investors can reliably beat monetary inflation.
The vast majority must continue to work harder and earn
more to not lose wealth.
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18. But fiaters often counter:
● Economic growth compensates for inflation. That is no
different from a thief stealing some of your cows and
telling you but that's not theft because the cows
reproduced and you still have more cows today. I have
more cows because I grew them.
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19. ● As interest rates drop to negative territory, it is very difficult
to find investments that can beat inflation. Even lending to
highly incompetent governments now comes with a
negative nominal return, effectively expropriating investors
while also subjecting them to serious risks.
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20. Fiat Debt
● The correct and successful financial strategy under the fiat standard
is to constantly take on as much debt as possible, be meticulous
about making all payments on time, and use the debt to buy hard
assets that generate future returns.
Doing this successively improves your credit score and allows you to
borrow at lower rates, while you store your wealth in goods that
cannot be inflated as easily as fiat. The fiat system thus taxes savers
and subsidizes borrowers.
The fiat standard encourages everyone to live fragile lives and take
substantial financial risks. The alternative is a slow, continuous
bleeding of wealth.
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21. ● Businesses that are more reckless in taking on debt are more likely to
fail than those that do not, but they are also far more likely to grow
and drive competitors out.
● In the fiat standard, those who choose to hold positive balances are
robbed as the purchasing power of their fiat is eroded by all the debt
others are creating. Those who are in debt, on the other hand, get to
benefit from some of the seigniorage. Not taking on debt is reckless
financial irresponsibility. Irish economist Richard Cantillon described
the redistributive impact of inflation as benefiting the people who
receive the newly created money first at the expense of those who
receive it later. In the modern fiat standard, the beneficiaries of the
Cantillon effect are the borrowers, and savers are the victims.
Spending less than you earn and keeping savings on hand are simply
no longer optimal financial strategies; they are expensive luxuries
most cannot afford.
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22. ● The path to financial success under the fiat standard lies
in acquiring hard assets. Financing these acquisitions with
debt is even more profitable. Not only is inflation likely to
devalue the loan for the asset more than it devalues the
asset, but as the lender and borrower are partaking in fiat
mining, there is enough benefit in the mining seigniorage
to make the purchase cheaper for the borrower. The most
profitable route, however, comes from being able to issue
fiat and get others into debt.
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23. ● Under the fiat standard, every business model degenerates
into interest rate arbitrage. The purpose behind setting up
business is increasingly less about making money from
serving customers but establishing a creditor relationship with
them.
● The consequence of fiat balances being negative is that
everyone is constantly in debt. Your homeownership is
contingent on you fulfilling your financial obligations for
decades. Your future depends on you and many others
fulfilling financial obligations in a timely manner. Your future
uncertainty is higher than what it would be if you could place
your wealth in a hard money, and that causes a rise in time
preference. Everyone is less peaceful and more insecure.
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24. ● The age-old wisdom of every grandmother has been
turned on its head. Instead of saving for the possibility of a
rainy day, fiat makes you borrow against all of your future
sunny days.
● The Narrow Bank shows us why the entire system relies on
depriving people of financial security
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