0:02

What are these things that no one

0:04

thought would be would be something significant

0:06

for Bitcoin's future that now suddenly look

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like super significant for for how everything

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IREN.com. Okay, Will, Josh, good

0:48

to see you both. Good

0:50

to be here. Yeah, good to see you. So Josh. You've

0:53

been on the show before it's been a little

0:55

while and it was over two years ago now

0:57

so we should do a bit of an introduction

0:59

but will this is the first time on the

1:01

show so. Do you want to give a bit

1:03

of a background who you are and what you do. Yeah

1:07

my name is William Luther I'm an

1:09

associate professor of economics at Florida Atlantic

1:11

University. I also direct the

1:13

sound money project at the American Institute

1:16

for Economic Research and I'm a

1:18

fellow or maybe a senior fellow

1:20

I don't know. at the

1:22

Bitcoin Policy Institute. All

1:25

right, perfect. And Josh? Yeah,

1:27

so I'm a professor of economics

1:29

and chair of the Department of

1:31

Economics at the University of Mississippi.

1:34

I am a senior fellow

1:37

at both the Sound Money Project

1:39

with Will and a senior fellow

1:41

at the Bitcoin Policy Institute. Love

1:44

it. So, two economics professors

1:46

here. I want to get into

1:49

some of the really, like, big hot button topics

1:51

in Bitcoin with you. But before we do,

1:53

I've got to ask you the question that you're probably

1:55

sick of hearing. So

1:57

there's a meme in Bitcoin, which is

1:59

Bitcoin is so simple, you have to have

2:01

an economics degree to not understand it. Now,

2:04

obviously, you two are exceptions to that rule.

2:06

But why do you think so many well

2:09

-known, well -respected economists have never quite got

2:11

their head around Bitcoin? I

2:13

think it's a couple of things. So

2:16

one is that we have to remember

2:18

that even among most economics

2:20

professors they're not monetary economists so they don't

2:22

actually spend a lot of time. You

2:25

know thinking about money thinking

2:27

about you know the monetary

2:29

system thinking about alternative. Monetary

2:33

regimes and things like that and so. For

2:36

many of them like sort of what they know

2:38

is kind of like whatever they learned in class

2:40

and they're not really thinking about it very much.

2:44

And in that respect, you know,

2:46

our profession really kind of actually does

2:48

a bad job of teaching people about

2:50

economic history and about alternative

2:53

regimes, how the gold standard worked, those

2:56

kinds of things. They tend

2:58

to do an okay job telling you

3:00

kind of like why those things no

3:02

longer exist or at least providing some

3:05

justification. But most

3:08

people just don't spend time really thinking about

3:10

it. I think the other thing is that

3:15

We're in the US and in the

3:17

US, I think there's just a bias

3:19

to not understand why this would be

3:21

a useful technology. Like we have the

3:23

dollar and the dollar is, you know,

3:25

very dominant, both, you

3:28

know, in the US and throughout the world. And so I

3:30

think to a large extent, there are people who just

3:32

look at this and go, well, why do we need this? Like what

3:34

is this? What is this for? What

3:36

is it actually accomplished? And they're not thinking

3:38

about the issues that people in other countries

3:40

face on a daily basis. Yeah,

3:42

I think I would second all of

3:45

that. And certainly,

3:47

if you see me out and you

3:49

buy me a beer, I will lament

3:52

about the state of the economics profession.

3:55

But I want to come to

3:57

at least a partial defense of

3:59

my monetary economist brethren.

4:03

I think there's also

4:06

a large group of monetary

4:08

economists who actually do

4:11

understand, certainly

4:13

monetary theory reasonably well. Some

4:17

subset of them also understand

4:19

monetary history reasonably well. And

4:23

with those

4:25

two tools,

4:28

monetary history and monetary theory, they actually have

4:30

a pretty good sense of what Bitcoin is

4:32

and how it works. They're

4:35

just not persuaded, right? And I

4:37

think that's okay. I

4:39

think they're not persuaded for a

4:41

few reasons. They may have some

4:43

different value judgments. Some

4:46

economists have more faith in governments

4:48

than I do and they want

4:50

to have a government that can

4:53

conduct monetary policy and can

4:55

monitor payments. And

4:59

so, all right, we have different value judgments there.

5:01

It's not that they don't understand how Bitcoin works,

5:03

it's just that they don't like it. Other

5:06

monetary economists, I think, they

5:09

see what are somewhat,

5:11

maybe somewhat being too generous,

5:15

but they see what are extreme, really

5:18

extreme views in the Bitcoin community. And

5:21

they think that that is, you

5:24

know, the position that they would

5:26

need to defend in order to

5:28

be a quote on quote supporter

5:30

of Bitcoin. And maybe

5:33

they're more inclined to think that

5:35

Bitcoin will serve a niche role

5:37

in payments or has some relatively

5:39

small use, but they don't see

5:42

it overtaking the world or replacing

5:44

the US dollar. And

5:46

rather than trying to explain that at

5:48

length, they just kind of brush this

5:51

aside. And so

5:53

I think that those are

5:55

reasonable positions to hold. We

5:57

might disagree with them, but it's not, those

6:00

views are not always held

6:03

out of complete ignorance, right?

6:05

They could be held out

6:07

of different preferences or different

6:09

assessments of the relevant factors,

6:11

not because someone necessarily doesn't

6:14

understand monetary theory or monetary

6:16

history. There's plenty of that

6:18

too, don't get me wrong,

6:20

but at least some of

6:23

them are... well

6:25

-informed opposers or at

6:27

least non -supporters of

6:29

Bitcoin. So you

6:31

think the Bitcoin community puts some people

6:34

off rather than necessarily Bitcoin the technology?

6:36

Sure, yeah. I think that's an easy

6:39

yes for me. I'm a fan of

6:41

Bitcoin and sometimes I'm put off by

6:43

the Bitcoin community. Yeah,

6:45

that's fair. So I want

6:47

to get a bit of a better

6:50

understanding about the economics that you two

6:52

teach. So I think people really readily

6:54

try and put people into two buckets

6:56

of either like Keynesian or Austrian, especially

6:59

in Bitcoin. So, but what is it that

7:01

you teach? What would be also a

7:03

brand of economics? You

7:05

know, Milton Friedman has this great quip

7:08

where he says there's only good economics

7:10

and bad economics, and I do good

7:12

economics. And I

7:14

would definitely put myself in the

7:16

good economics camp. I think these

7:18

terms, Keynesian economics, Austrian economics, they

7:20

get thrown a lot and they're

7:22

most useful in the context of

7:24

the history of economic thought. You

7:27

know, if we go back to the 1930s

7:29

or the 1940s, right, we can think about

7:31

whether someone was a Keynesian or an Austrian.

7:35

And it doesn't, to me

7:37

at least, it doesn't make too much sense to do

7:39

that in a modern context. A

7:41

lot of the good ideas

7:43

that Austrians have advanced, not

7:46

all of the good ideas that

7:48

Austrians have advanced, but a lot

7:51

of those good ideas, certainly things

7:53

like marginal analysis, have been incorporated

7:55

to some degree and to the

7:58

mainstream. And

8:00

likewise, some of the

8:02

bad ideas of Keynesian

8:05

economics, ideas like we

8:07

don't need to think about individuals

8:09

making decisions in our models, we

8:12

can just have these aggregates A

8:15

lot of those ideas have been

8:17

rejected by modern economists. And

8:20

so certainly there are still folks

8:22

that I think everyone would say

8:24

that person's an Austrian or that

8:26

person's a Keynesian, but most modern

8:28

economists wouldn't put themselves in either

8:30

of those categories. They would

8:32

just see themselves as economists. When

8:34

people ask me what sort of

8:37

group I fit into, I usually

8:39

just say I'm just not a

8:41

Keynesian. Because I guess that's the

8:43

only real objection that I have

8:45

is that Keynesian economics really just

8:47

kind of dispensed with what's actually

8:49

interesting about economics, which is understanding

8:51

how people make decisions and thinking

8:53

about how markets function, how prices

8:56

work to correct shortages and surpluses

8:58

and all these kinds of things.

9:00

And a lot of Keynesianism just

9:02

denies that those price effects. exist

9:04

or that we need to think

9:06

about those things at the individual

9:08

level or that we can just

9:10

think about macroeconomic phenomenon completely independent

9:12

of what's going on at the

9:14

micro level. And I think

9:17

that to the extent that anybody is doing

9:19

that where they're just focusing on the aggregate

9:21

at the expense of the individual and at

9:23

the expense of the price system, like you're

9:25

doing what we'll just call bad economics. That's

9:29

not what anybody should be doing. And

9:31

I don't think that you actually learn

9:33

much from that. potentially,

9:36

you know, identify some correlations

9:38

between aggregate data and maybe those are

9:41

reliable correlations. But at the end of

9:43

the day, do you really understand why

9:45

the data was generated the way that

9:47

it was and how the individual decision

9:49

-making process led to those outcomes? Like,

9:52

I think that's actually where economics is

9:54

really interesting and useful. And if you're

9:56

not doing that, then you're not doing

9:58

good economics. That actually

10:00

leads perfectly to my next question, which is,

10:03

do you think that Modern economics has lent

10:05

too heavily into kind of the stat side

10:07

of things rather than the human action side

10:09

of things. I guess it depends on what

10:12

you mean by modern economics. Sometimes

10:14

this term is used to describe,

10:17

you know, like post 1970s economics

10:19

and certainly in the macro side

10:22

of things, the big things that

10:24

happened in the 1970s and 1980s

10:26

was very theory driven, right? Theory

10:29

was king. You needed to specify

10:31

why it was that individuals were

10:33

making decisions. What were the ends

10:36

they were trying to achieve with

10:38

these means? You

10:41

know, we got things like the Lucas

10:43

critique, which said, you can't just do

10:45

empirical analysis and historical data and expect

10:48

those relationships to hold because those relationships

10:50

are the outcomes of choices that people

10:52

are making. And if you change the

10:54

rules of the game, people are going

10:57

to change the choices that they make,

10:59

and those relationships will break down. If

11:02

by modern economics, you mean in

11:05

the last decade or so, then

11:07

yeah, I think there has been

11:09

kind of a cycle back towards

11:12

what I would call naive empiricism,

11:14

where we're just gonna let the

11:16

data do the talking, whatever that

11:18

means. And we're

11:21

gonna try to identify very precisely

11:23

what the causal effect of this

11:25

or that is, even if we're

11:28

not particularly concerned with this or

11:30

that, just because, well, this is

11:32

something we can identify. And

11:35

so from that perspective, yeah,

11:38

I think there's been a

11:40

move towards naive empiricism. Yeah,

11:43

I mean, I think that we've kind

11:45

of, I mean, one of the main

11:47

issues is actually that we, yeah,

11:50

in like the last decade or two, as

11:53

a profession, things really have

11:55

moved in the direction of like

11:57

trying to demonstrate causal effects of

11:59

things. Like how do we prove

12:01

that this policy actually, you know,

12:04

resulted in this change or something

12:06

like that? And the issue is

12:08

that a lot of that stuff

12:10

has become completely detached from economic

12:12

theory. It's also become completely

12:14

detached from things that we know from

12:16

economic history or things that we know

12:18

from previous literatures. And I think one

12:20

of the major problems actually with this

12:22

approach is that, I

12:25

mean, as Will said, data do

12:27

not speak. So we can't just

12:29

estimate things and then just assume

12:32

that we understand why we got

12:34

those estimates. But

12:37

I think economics is fundamentally about

12:39

the study of human behavior,

12:41

right? That's really what we should

12:43

be focused on. And when you're

12:46

so focused on making sure

12:48

that you're identifying these causal effects,

12:50

you start to... You

12:53

start to lose curiosity, frankly, right? Because even

12:55

when they get surprising results, like they basically

12:58

just view that as a challenge to the

13:00

rest of the profession to figure out why

13:02

they got this challenging result rather than seeing

13:04

that challenging result themselves and going, well, what

13:06

would I have to believe about human behavior

13:08

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AnchorWatch.com. So Will, just

14:37

before you jumped on this call, I was speaking to Josh a

14:39

little bit and he was telling me that you've been in Bitcoin

14:41

for a very long time. I'd be

14:43

really curious to know when it was you first

14:46

kind of outed yourself to the people who

14:48

you work with, your colleagues. and how like that

14:50

opinion on Bitcoin has changed over the time. And

14:52

maybe you should give a bit of a

14:54

background on when you actually did get into Bitcoin.

14:57

Yeah, I guess I'll tell this embarrassing story.

15:01

So, my dissertation

15:03

advisor at George Mason

15:05

University was a guy

15:07

named Larry White, very

15:10

well -respected monetary historian, and

15:13

in many respects, a

15:16

proto -Bitcoiner. If you go

15:19

back to the 90s and

15:21

check out copies of Entropy

15:23

Magazine, you'll have a hard time

15:26

finding those, but if you email me, I will

15:28

send you copies because this is the kind of

15:30

thing nerdy academics keep. You

15:32

will see Larry and

15:35

his first student, George

15:37

Seljan, engaged in conversations

15:39

with folks like Hal

15:41

Finney and Nick Sabo.

15:43

because Larry and George

15:45

were really interested in

15:48

private monies from an

15:50

economic perspective. And

15:52

of course, folks like Hal Finney

15:54

and Nick Sabo were interested in private

15:56

monies from more of a computer science

15:58

perspective. And so they were

16:01

having these conversations before Bitcoin was

16:03

a thing. And so

16:05

in 2010, I was in

16:07

a research group at GMU.

16:10

And one of the graduate students

16:12

in our research group presented a

16:15

paper on Bitcoin. And

16:18

I said something to him

16:20

like, Chuck, you know, this is

16:22

very interesting, but I don't think this is ever going to catch

16:24

on. And so, you know,

16:27

you shouldn't waste too much time

16:29

on this. Just send it out,

16:31

get it published, and then move

16:33

on to something more productive. And

16:36

then... I hope you just listen to

16:38

you. I hope

16:40

he didn't as well. In

16:43

2012, I had finished

16:45

my PhD, I had

16:47

accepted a position at

16:49

Kenyon College. And

16:52

my friend Eli Dorado was working

16:54

at the Mercatus Center at the

16:56

time. And he reached out to

16:59

me and he asked me to

17:01

write a white paper for Mercatus

17:04

on Bitcoin. And it

17:06

just so happened that One

17:09

of my students was working on

17:11

a paper on Bitcoin for the

17:13

honors monetary economics seminar I was

17:16

teaching that semester. And

17:18

I had thought about this

17:20

other idea that might be

17:22

interesting to pursue in the

17:24

context of Bitcoin. And

17:26

so I agreed to write this

17:28

white paper for Mercatus and then

17:30

another paper with my student basically

17:32

because I thought it would be

17:34

weird. If I just had one

17:36

paper on my CV about Bitcoin

17:38

and then the rest of it

17:40

was on other monetary stuff, like,

17:42

why did he write this paper

17:44

on Bitcoin? And

17:47

so by the end of that year, the

17:49

price of Bitcoin, the end of 2013, the

17:51

price of Bitcoin hit $1 ,000. And

17:54

a bunch of journalists were trying to

17:56

figure out who they could talk to

17:59

about Bitcoin. And at the time, there

18:01

were only four papers on Bitcoin on

18:03

the social science research network. and just

18:05

by happenstance, two of them were mine.

18:09

So suddenly I was very interested

18:11

in Bitcoin because other people were

18:13

very interested in Bitcoin and I

18:15

had by chance spent a little

18:18

bit more time thinking about it

18:20

than most other economists had. And

18:22

so after that, Josh and I

18:24

began working on some papers together

18:27

about Bitcoin. We talked about it

18:29

previously, I believe, but we began

18:31

working more formally on how to

18:33

model the

18:36

competitive monetary environment.

18:39

So we put a couple of

18:41

papers out on that. And yeah,

18:43

I guess luck. That's how I

18:45

get into Bitcoin. I

18:47

think in Bitcoin, we have some

18:50

amazing economists, people like Pierre Rashard,

18:52

Saferdine, Alan Farrington. I think

18:54

Max Hillerbrand is an amazing Austrian. And

18:57

these are people that have thought about the

18:59

problems that Bitcoin potentially fixes very deeply and

19:01

they have like really sound reasoning as to

19:04

why they hold their ideas. But

19:06

I also think there's a lot of Bitcoiners and

19:08

I'd include myself in this because I had never

19:10

really read anything about economics before Bitcoin. That

19:13

hear or read what these people say and

19:15

then we'll say the same thing without necessarily

19:17

having the deep understanding of why they're saying

19:19

it. So I kind of wanted to go

19:21

through some of the really sort of hot

19:23

button topics in Bitcoin. and try and get

19:25

like a really holistic view from the two

19:27

of you on each of those topics. Does

19:29

that sound good? Yep. Sure.

19:31

All right, let's do it. So let's start with the

19:34

big one. Is fiat

19:36

currency a Ponzi? I

19:39

think actually in economics, there is

19:41

a little bit of a sense

19:43

of where we define fiat money

19:45

as sort of like what we

19:47

would call a bubble. in the

19:49

sense that it's just something that

19:51

has positive value even though there's

19:53

not really any other use for

19:55

it other than as money. I

19:59

mean, it characteristics that can

20:01

make it seem sort of

20:04

Ponzi -ish. But to me,

20:07

Ponzi is a different, it's a

20:10

different concept. But I

20:12

guess like where I would say

20:14

maybe I can describe the similarities

20:16

and then I can make I'll

20:18

be good cop and we'll be

20:20

bad cop. How about that? I'm

20:22

looking forward to it. So the

20:24

similarities are is that like in

20:26

every sort of monetary model that

20:28

you write down of fiat money,

20:30

there's generally two equilibria. There's one

20:32

equilibria where it has positive value

20:34

and everybody, you know, or at

20:36

least some fraction of people use it. And then there's

20:38

another equilibria where it's just worthless. And

20:41

so in and so in those

20:43

models, Essentially,

20:45

all that's necessary to get things

20:48

up and running is that you

20:50

have a big enough network effect

20:53

to get people to accept the

20:55

fiat money. And then if there's

20:57

a big enough network effect, then

21:00

it has positive value and people

21:02

use it. But at the

21:04

same time, that positive value

21:06

equilibrium tends to be unstable.

21:09

And what I mean by that is if

21:11

there's a big enough shock to the system,

21:13

you might end up in the other equilibrium

21:15

where it's zero. And, you know, to put

21:17

this differently, that would be what we would

21:19

call hyperinflation, right? So if you get some

21:21

sort of big enough shock that pushes you

21:23

out of that instance, you can get that.

21:25

And to some extent, that can even be

21:27

self -fulfilling where people think that the currency

21:29

isn't worth anything and so people stop using

21:32

it and then just sort of self -perpetuates.

21:34

So I would say like, that's the similarity

21:36

to a Ponzi and then maybe Will can

21:39

be the bad guy. Yeah, so let me

21:41

think about this a couple different ways. So

21:43

first, let's think about why people call fiat

21:45

monies a Ponzi. I think the idea there

21:48

is that you receive this thing and you

21:50

value it because you believe you're going to

21:52

be able to pass this off to someone

21:54

else and they will value it and they

21:57

accept it and give it and attribute value

21:59

to it because they believe they'll be able

22:01

to pass it off to someone else and

22:03

so on and so forth. And so it's

22:06

this. much like a

22:08

Ponzi scheme, this belief that you're

22:10

going to be able to pass

22:12

it on to someone else that

22:14

lets the system work. I

22:18

think that Bitcoiners should be very

22:20

careful calling fiat monies a Ponzi

22:22

on these grounds because the same

22:24

thing is true of Bitcoin, right?

22:28

That is, what's the alternative use

22:30

for Bitcoin? Now, I

22:32

don't mean the opportunity cost. There's often

22:34

some confusion about this. So some Bitcoiners

22:36

will say, well, Bitcoin is different because

22:38

it's costly to produce. Well,

22:41

that's true, but that cost

22:43

of production doesn't generate value.

22:47

Value is ultimately determined

22:49

by usefulness. And

22:51

traditionally, I'm sure when Josh teaches his

22:54

class, and certainly in my money and

22:56

financial markets class, when we make a

22:58

distinction between, say, a commodity money and

23:01

a fiat money, Commodity monies have some

23:03

alternative use. Some use apart from their

23:05

role as a medium of exchange. Some

23:08

non -money role. You

23:11

can use gold for

23:13

jewelry or to fill

23:15

cavities. Salt, historical money

23:18

can be used to preserve

23:20

food. These items

23:22

have alternative uses. Dollars

23:25

on the other hand, fiat monies,

23:27

no alternative use. And

23:29

so one big difference between commodities and

23:31

fiat monies is that alternative use that

23:33

commodities have in fiat lacks. In this

23:36

regard, Bitcoin looks a lot more like

23:38

fiat monies than commodity monies. Now,

23:41

another big difference between commodity

23:43

monies and fiat monies is

23:45

this limited supply, in the

23:48

case of commodity monies, because

23:50

of the cost of producing

23:52

those commodities, right? In

23:54

this case, Bitcoin looks much more

23:57

like commodity monies than fiat monies

23:59

because they're costly to produce and

24:01

there's a limited supply. But

24:04

on the value side, which is what

24:06

folks seem to be invoking when they're

24:08

calling fiat monies a Ponzi scheme, they're

24:11

opening themselves up for the same

24:13

criticism. So I would

24:16

say there are lots of

24:18

reasons to dislike fiat monies,

24:20

chief of which is that

24:22

their supplies might not be

24:24

managed very well. Right, but

24:26

we want to be careful

24:28

to you know, not to

24:30

not to throw the Use

24:32

value baby out with the

24:35

fiat money bath there Because

24:37

because Bitcoin has a very

24:39

similar use value which depends

24:41

on other people wanting to

24:43

use this item for what

24:45

are ultimately monetary purposes No,

24:48

I think that's a good point. I mean, one of

24:50

the ways that I kind of think about this and

24:52

talk about this with students is how does, I

24:54

think about this in terms of what you

24:57

would call like the last period problem. Like,

24:59

so suppose that there's a period, there's some

25:01

period in the future where nobody's willing to

25:03

accept this stuff. Like, you

25:07

know, then you wouldn't, then if they're not

25:09

willing to accept it then, then you shouldn't

25:11

accept it the period before that. But if

25:13

you shouldn't accept it the period before that,

25:15

then whoever was trying to give it to

25:17

you shouldn't have accepted it the period before

25:19

that. Right. And so like through backward induction,

25:21

like you just shouldn't accept the stuff today.

25:23

And that to me is like the real,

25:25

um, interesting question to try to explain when

25:27

it comes to fiat money is why, why

25:29

does fiat money actually, um,

25:33

persist given the fact that it really doesn't solve

25:35

that last period problem. Right. If we're all using

25:37

gold coins and then all a sudden nobody wants

25:39

to use gold coins anymore. Well, oh, well, like

25:42

if I have a bunch of gold coins, well,

25:44

I just have like this pile of gold. And

25:46

so I can sell that to somebody who wants

25:48

to use gold for industrial use, right? And so

25:50

I can still get something out of that. With

25:53

fiat money, there is nothing. I

25:55

think what people tend to appeal to is

25:57

they say, well, at the end of the

25:59

day, you can always pay your taxes with

26:01

the money. So the government will always take

26:03

the money. I mean, I

26:05

actually think a really interesting aspect of

26:08

Bitcoin is that There's

26:10

this old paper by a guy named

26:12

Ben Klein who asked if we could

26:14

ever have like a competitive fiat regime.

26:16

And so he was writing in the

26:18

1970s and he was really trying to

26:20

think about, okay,

26:23

our currency is no longer tied

26:26

to gold. Central banks are

26:28

in charge. Maybe we

26:30

need competition to limit things, but if it's

26:32

fiat, how can you trust people not to

26:34

just print up a bunch of money? And

26:36

kind of the main lesson from that paper

26:38

is, is that you could in theory have

26:40

like a competitive fiat system. But the issue

26:43

is, is like you would have to trust

26:45

the issuer not to just wake up one

26:47

morning and secretly print a bunch of the

26:49

money and then go out and spend it

26:51

before everybody else knows about it. And

26:55

so, and so that brings us

26:57

back to that last period problem, right? You're

26:59

always worried that there's going to be some

27:01

future period where Somebody just

27:03

prints up a bunch of money and transfers

27:05

a bunch of wealth to themselves by spending

27:07

it before everybody else knows about it. And

27:10

then the interesting thing about Bitcoin is that

27:12

Bitcoin sort of solves that trust problem with

27:14

its fixed supply. And not

27:16

just with its fixed supply, but the

27:18

way that Bitcoin works through consensus is

27:21

what matters, right? Because it's not just

27:23

that the supply is fixed, it's that

27:25

no one who's using Bitcoin actually has

27:28

an incentive to change that in the

27:30

way that the issuer of a competitive

27:32

fiat system would have. And

27:34

so when we think about all of these

27:36

issues, like I tend to think about it,

27:38

yeah, in terms of like the last period problem.

27:40

And so then the question is like, how

27:42

do you resolve that? And so with Bitcoin,

27:45

since there's no incentive to create more,

27:48

that's the thing that helps to generate

27:50

the network effect and the willingness of

27:52

people to accept it now, knowing

27:55

that, you know, the value in the future

27:57

could be uncertain. Yeah.

27:59

And also, back to your point, Will,

28:02

when comparing like Fiat and Bitcoin in

28:05

that sense, is there not a difference

28:07

because Fiat is propped up by this

28:09

debt, which is only sustainable with more

28:11

money printing or more money creation? Well,

28:14

I'm not, I'm not sure. I

28:17

mean, certainly when, you know, one

28:19

big reason why governments want to

28:21

control the issuance of money is

28:24

because they want to have access

28:26

to cheap credit, right? Central banks.

28:28

will directly or indirectly purchase government

28:31

bonds and bid the prices of

28:33

those bonds up and correspondingly the

28:35

rates on those bonds down. But

28:38

to say that all

28:41

of the debt is

28:43

only possible because we're

28:45

using fiat monies I

28:47

think is not so

28:49

clear. You

28:52

might argue that some of the

28:54

government debt wouldn't be issued in

28:56

the absence of fiat money because

28:59

the government would get worse, governments

29:01

would get worse terms for their

29:03

debt and maybe some of that

29:06

borrowing would no longer be worthwhile.

29:09

But even there, governments are

29:11

able to borrow not only

29:14

because they controlled the money

29:16

printer, in fact, In some

29:18

countries, like Argentina, the control of the

29:20

money printer makes it very difficult for

29:23

that government to borrow, at least in

29:25

their own currency, right? Because

29:27

people just expect that they're going to

29:29

run that money printer and the, you

29:32

know, peso -denominated debt is not actually

29:34

going to be worth all that much.

29:37

But the reason that

29:39

governments, I should say

29:41

one big reason that governments are able to take

29:43

on so much debt is because They

29:46

control armies, right? They can

29:48

confiscate property. Sometimes

29:50

we use euphemisms like taxes, right?

29:53

But ultimately, they are able to

29:55

extract wealth in one way or

29:57

another and that wealth to compensate

29:59

the folks holding their bonds should

30:02

they need to do that. And

30:04

just having the power to do

30:06

that often means that they don't

30:08

need to do that. I

30:12

think money printing contributes to that

30:14

power. It's one more tool of

30:16

extracting wealth, but it's

30:18

not the sum total of

30:21

that power. So even

30:23

if you got rid of fiat money,

30:25

you would still have government borrowing, right?

30:27

Governments were borrowing before we were using

30:30

fiat monies. Yeah, I

30:32

think the big issue

30:34

here is that... If

30:38

we think about how the

30:41

current monetary system works, there

30:43

are ways in which it's unique

30:45

in comparison to historical circumstances, but

30:47

there's also ways in which it's

30:49

actually just the same. And

30:52

so what I mean by that is if

30:54

you think about the current monetary system, yeah,

30:57

the US dollar is a global reserve

30:59

currency, the US Treasury security is the

31:02

global reserve asset, and because of those

31:04

things, You know,

31:06

the United States is able to do things

31:09

that it would never be able to do

31:11

in the absence of that system, right? So

31:13

one reason that the United States is able

31:15

to run up so much government debt is

31:17

that there are central banks around the world

31:20

who just passively, you know, buy and sit

31:22

on that debt. And so if

31:24

that's going to be the case, those

31:27

aren't exactly like price sensitive

31:29

buyers. And so when

31:31

you're running up debt, like you're not necessarily

31:33

paying the full cost that you would. without

31:36

those kinds of buyers. And

31:39

so, but I also think it's important

31:41

to understand like why this system exists.

31:43

I mean, like this system exists because

31:45

the United States wants this system to

31:47

exist, right? Like the United States wants

31:49

the ability to conduct emergency financing when

31:52

the United States wants to spend a

31:54

bunch of money. They don't want to

31:56

have to desperately search for creditors. What

31:58

they wanna do is they wanna be

32:00

able to issue more

32:02

debt without even necessarily incurring

32:04

higher borrowing costs. And

32:06

that's what this system allows them to do,

32:09

right? When the United States goes to war

32:11

or when the United States just supports somebody

32:13

else who's going to war by sending them

32:15

money, you know, they're just borrowing

32:17

that money and they're sending it, but their borrowing

32:19

costs really don't change all that much because wars

32:21

tend to be temporary and there's lots of passive

32:23

buyers for this debt. And so

32:26

prices don't really adjust all that much. And

32:29

so there are characteristics of this system

32:32

that are bizarre because never before in

32:34

world history have we ever had like

32:36

a sovereign debt instrument serve as like

32:38

the reserve asset of the world. And

32:41

so that's kind of a bizarre

32:43

set of circumstances. But the

32:45

reason that that that were in

32:47

that position is the same motivation

32:49

that states have always had, right?

32:52

So even under the gold standard,

32:54

you know, states, you know,

32:56

I mean, going back to ancient Greece, right, like

32:58

they're manipulating the value of

33:00

gold coins and things like that. And

33:02

not just manipulating the value, I mean,

33:04

one of the things when you look

33:07

at this historically is it's not just

33:09

like they're debasing the currency. I

33:11

mean, what they would do is

33:13

they would debase the currency during

33:16

wartime, and then at least in

33:18

the successful countries, then during peacetime,

33:20

like they would revalue the currency

33:22

as a commitment mechanism. And

33:24

so this tended to be really costly

33:26

because wars were inflationary and then the

33:28

aftermath of wars were deflationary. And none

33:30

of that was really, you know, market

33:32

factors that were driving those things. It

33:35

was government policy that was driving those

33:37

things. And so that tended to impose

33:39

costs on people. But

33:41

they were doing that because that gave

33:43

them access to the ability to finance

33:45

wars and emergencies and things like that.

33:48

Even the Bank of England, you know,

33:50

used to suspend the convertibility of gold.

33:52

during times of war, but then they

33:55

would resume convertibility after the war at

33:57

the previous parity of the pound. And

33:59

the reason for that was it was

34:02

creating a commitment device where basically they

34:04

could print a bunch of money during

34:06

the war to help finance things. They

34:09

could use the central bank as a

34:11

source of credit. And

34:13

then after the war, they knew that their

34:15

spending would decline and they wouldn't have as

34:17

much need for that anymore. And so they

34:19

could return. But like without that commitment mechanism,

34:22

you would destroy the value of your currency,

34:24

right? If you suspended convertibility into gold and

34:26

with no commitment and just were spending and

34:28

spending and spending like people would just give

34:30

up on the pound. And

34:33

so all of this is to say

34:35

that yes, there's like some characteristics of

34:37

the system that are kind of bizarre

34:39

and are kind of like debt based

34:41

and debt driven. But

34:43

there are, but there are also characteristics

34:45

of the system that are perfectly predictable

34:48

from just understanding what states do, right?

34:50

Like states want to finance war. And,

34:52

and even if we were to replace like

34:55

Fiat with, with Bitcoin, that's not going

34:57

to necessarily remove the state's desire to

34:59

do these things. And so one of

35:01

the things I mean, we can only

35:03

speculate about how they would try to

35:05

manipulate things, but I mean, they manipulated the

35:07

gold standard. So we would expect them

35:09

to try to manipulate, you know, a Bitcoin

35:11

standard. I mean, we don't know how

35:13

they would do it or precisely what

35:15

they would do, but we can imagine that

35:18

they would try. Right. And so

35:20

I think all of these things are important to

35:22

keep in mind when we're talking about these big

35:24

picture issues. Yeah, let me just

35:26

add one thing that one thing that

35:28

I think that would

35:31

serve Bitcoiners well, non -economist Bitcoiners,

35:33

is just to make a distinction

35:35

between private debt and public debt.

35:38

So in thinking about how

35:41

fiat money may enable the

35:43

government to issue more debt

35:46

than it otherwise would, we're

35:48

talking about the issuer of

35:50

that money issuing debt. But

35:53

think about what's happening in private debt

35:56

markets. Think about a long

35:58

-term contract. in dollars, right? One of the

36:00

things that you're very much concerned about is

36:02

the purchasing power of those dollars that you're

36:04

going to be paid back in the future

36:06

or the purchasing power of those dollars that

36:08

you're going to be repaying in the future.

36:10

You need to form some expectation about what

36:12

those dollars are going to be worth well

36:14

in the future. And you

36:16

can imagine if we have say

36:19

a commodity money like the classical

36:21

gold standard, right on the classical

36:23

gold standard, the supply of money

36:26

automatically adjusted to offset

36:29

changes in demand over the longer term.

36:31

And as a consequence, the purchasing power

36:33

of money on the classical gold standard

36:36

was relatively stable. So

36:39

when you entered into a long

36:41

-term contract or issued a long

36:43

-term bond, you had a very

36:45

good sense of what that money

36:48

would be worth when you're paying

36:50

it back in 10 years, 20

36:52

years, 30 years, 100 years. And

36:54

that makes that contract much less

36:57

risky than it is today. We

36:59

don't we don't see 100 year

37:01

bonds today, right? And the

37:03

reason we don't see 100 year

37:05

bonds today, except in in, you

37:07

know, marketing cases like a sleeping

37:09

beauty bond or something like that.

37:11

The reason we don't see that

37:14

today is because those long term

37:16

contracts are incredibly risky. It's much

37:18

harder to predict what the future

37:20

purchasing power of the dollar will

37:22

be in 20 years, 30 years,

37:24

40 years, 50 years, 100 years,

37:26

right? And so that contract that

37:28

otherwise would have been viable is

37:30

not viable in a world where

37:32

you have this unconstrained fiat money.

37:34

And as a consequence of that,

37:36

some of those long -term debt

37:38

contracts just don't take place. Now,

37:41

we're talking about private debt markets. The

37:44

uncertainty of the dollar eliminates

37:46

the prospect of some long

37:48

-term debt contracts, which means

37:51

we may be getting less

37:53

private sector debt than we otherwise

37:56

would. So we can quibble about

37:58

the aggregate level of debt, whether

38:01

it's greater or lower or more

38:03

or less unchanged. But

38:05

I think at a minimum, we want to

38:07

make a distinction between what's going on with

38:10

public debt issuance and what's going on with

38:12

private debt issuance. Okay, interesting. I do just

38:14

want to go back to something you said

38:16

earlier, Josh. You gave the

38:18

analogy of the Bank of England, Paul's inconversibility

38:20

during wartime, and then resuming that at the

38:22

previous rate. And you said if they didn't

38:25

do that, then people would lose all faith

38:27

in the pan that would fail. But is

38:29

that not the world we live in now?

38:33

Well, I mean, it's very similar

38:35

to the world that we live

38:37

in now. But I think that

38:39

the issue here is that the

38:41

question is, where do people go?

38:43

Right? Like, where do people go

38:45

to get away from that kind

38:47

of system? I mean, to some

38:50

extent, we do see that. We

38:53

don't see it necessarily completely because

38:56

what you have is, you know,

38:58

most central banks still have some

39:00

kind of inflation target. And whether

39:02

you believe that they're targeting the

39:04

right rate of inflation or whether

39:06

you believe that they are... measuring

39:09

it accurately or what have you,

39:11

like that does place an anchor,

39:14

right? Even if I have an

39:16

incredibly misleading measure of inflation, as

39:18

long as the degree to which

39:20

it's misleading isn't changing over time,

39:22

like if it's always wrong, like

39:24

by the same factor, right? Like

39:26

then they're still kind of committing

39:28

to some stability, even if they

39:30

might, you know, even

39:32

if we disagree about whether or not they're doing

39:34

what they say they're doing. I think that But

39:37

I think that that is actually

39:40

motivated by the same thing. I

39:42

mean, the reason why these central

39:44

banks commit to things like inflation

39:46

targeting is for the same reason

39:48

that the Bank of England would

39:50

commit to restore the previous parity

39:52

into gold is that it's providing

39:54

some kind of commitment mechanism. Now,

39:56

of course, they deviate from that

39:59

commitment at times. Like we just

40:01

saw like a pretty large deviation

40:03

from that commitment post pandemic. But

40:07

for the most part, they've

40:09

tried to replace that commitment

40:11

to gold with just the

40:13

vague commitment to price stability.

40:16

And so as long as

40:18

they maintain that commitment, it

40:20

provides at least some anchor

40:22

onto the system that wouldn't

40:24

exist if you didn't have

40:26

any kind of commitment. Jim

40:29

Grant has this nice quip where

40:31

he says that we've replaced the...

40:35

commodity standard, right? The gold

40:37

standard with the PhD standard.

40:39

Or we just rely on

40:41

PhD economists to advise central

40:44

bankers on how to conduct

40:46

monetary policy. And, you

40:48

know, Grant, of course, is saying this in the

40:50

context of look at the loss of constraint that

40:52

we're getting. But the flip

40:54

side of that is that there's

40:56

still some constraint, right? It's not

40:58

totally unconstrained, even if not constrained,

41:00

perhaps the way we would like

41:03

it or to the degree

41:05

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42:13

And well, that kind of leads on well to

42:15

the next question is that a lot of Bitcoiners

42:17

would have is, do you think all fiat currencies

42:19

are doomed to fail? I

42:25

guess in some abstract sense, everything

42:27

is doomed to fail, right? The

42:29

second law of thermodynamics or something

42:32

like that. I

42:34

think that with fiat monies

42:36

there, as Josh was mentioning

42:38

earlier, there is this difficulty

42:40

where you have both supply

42:42

side problems and demand side

42:44

problems, right? On the supply

42:46

side, a government

42:49

has to... be

42:52

in a position to commit

42:54

not to take advantage of

42:56

its position, right? Otherwise,

42:59

it just prints a bunch of

43:01

money and the value of that

43:04

money goes to zero and people

43:06

eventually abandon it. On

43:08

the demand side, right? It's

43:11

at least conceivable that people

43:13

abandon this money and that

43:16

would also cause its value

43:18

to fall to zero. So

43:21

there is this sort

43:23

of tenuous nature of

43:25

fiat money, both because

43:28

there's always this incentive

43:30

for a less than

43:32

benevolent government to exploit

43:35

its position, and also

43:37

because the introduction of

43:39

alternatives and people switching

43:42

to superior alternatives could

43:44

potentially cause that situation

43:46

to unravel and demand

43:48

to collapse. Bitcoin,

43:51

I think, is

43:54

interesting and

43:58

perhaps unique,

44:02

though at least now there

44:04

are alternatives that mimic this

44:06

to varying degrees. But it's

44:08

interesting because it removes that

44:10

supply side problem. But

44:13

it still faces a demand side

44:15

problem. People can suddenly decide that

44:18

They don't want this anymore. They

44:20

want something else. And

44:22

if that's the case, it goes

44:24

to zero. So

44:27

are fiat monies dooms

44:29

to failure? I think

44:31

that's a cumulative probability

44:33

approaches one. But over

44:35

what time horizon, I'm

44:37

not so confident. I

44:39

would rephrase your question.

44:44

One of my frustrations when people talk

44:46

about the monetary system, and this is

44:48

just in general, whether it's Bitcoiners, whether

44:51

it's people in our profession, whatever.

44:55

People in our profession, for example, seem

44:57

to just assume the status quo just

45:00

will kind of last forever. Whatever the

45:02

status quo is, that's just the way

45:04

the world works, and that's the way

45:06

it will work. Bitcoiners

45:09

have the opposite thing where they're like, no,

45:11

the status quo is unsustainable, so it won't

45:13

last. I mean, if I

45:15

had to choose, I mean,

45:17

I guess it would depend on which time horizon

45:20

that you're giving me. But I mean, the current

45:22

system will end. And

45:24

there's actually a good chance that the

45:26

current system, at least as it is

45:28

constructed with the US dollar being sort

45:30

of the dominant world currency, there is,

45:33

I would argue that there's probably

45:35

a decent likelihood that that doesn't

45:37

last my entire lifetime. I

45:40

mean, I think that, I mean, all

45:42

we have to do is actually just

45:44

look at monetary history, right?

45:46

The classical gold standard lasted for

45:49

about 40 years, right?

45:51

So the classical gold standard, which we think

45:53

is like this long period of price stability,

45:55

it was only 40 years. And then we

45:57

had this kind of weird interwar period. And

45:59

then we had the Bretton Woods system, but

46:01

you know, the Bretton Woods system only lasted,

46:03

you know, you know, the

46:06

Bretton Woods system lasted less than

46:08

40 years. Okay, and so the

46:10

current system that we are that we

46:12

are in has actually lasted longer than

46:14

both of those systems, right? So I

46:17

mean, we're now, you know, 50

46:19

years into Whatever we're calling this dollar

46:21

based system But the thing is is

46:23

to think that that is that that

46:26

we've just reached the end point

46:28

I think is extremely naive and when

46:30

you start to look at things I

46:32

mean you're starting to see policymakers recognize

46:35

this I mean, you know The

46:37

Trump administration very much thinks that

46:39

the international monetary system is unsustainable

46:42

without some kind of significant reform.

46:44

And yes, they want to continue to

46:46

have the dollar be the sort of

46:48

primary global currency, you know, because of

46:50

course they do. That's what states want,

46:53

as I just talked about. But,

46:55

but they clearly see that like the system

46:57

or they clearly believe that the system like

46:59

as it is now is just not sustainable.

47:02

It's leading to. you

47:04

know, persistent trade deficits that tend

47:06

to overvalue the dollar and deplete

47:08

your manufacturing capacity, which turns out

47:10

to be very important for a

47:12

variety of reasons, right? They

47:15

see that this system tends to

47:17

give politicians, you know, politicians

47:19

access to very cheap credit. And what

47:21

do politicians do with very cheap credit?

47:23

They borrow. So we

47:25

have these very, very high

47:27

levels of debt. We've seen

47:30

you know, the we've seen our industrial capacity

47:32

get hollowed out. And they're looking at this

47:35

and saying, hey, you know what, this system

47:37

doesn't really doesn't really work. We want to

47:39

keep the benefits and we want to get

47:41

rid of the costs. Now, that is what

47:43

most people want out of life is to

47:45

increase the benefits and reduce the cost. And

47:47

so it will it'll depend on how they

47:49

go about this and what they what they

47:51

try to do. But there's

47:54

at least certainly a sense that people

47:56

are recognizing that the system isn't

47:58

perfect, even though for the US,

48:00

it works to the US government's

48:02

advantage, even the US government, where

48:04

this is working primarily to their

48:06

advantage, seems to think that this is

48:08

becoming unsustainable. And so I think

48:10

that when we look at it

48:12

from that perspective, given

48:15

that broad sort of historical perspective, I

48:17

mean, I think it would be

48:19

naive to think that the status

48:21

quo was just gonna, inevitably

48:25

continue. Of course, you know, the

48:28

harder question though is what comes next, right? Because what comes

48:30

next might look a lot like the system that we're in,

48:32

or it might look very, very different. So

48:35

in that, what comes next? As

48:37

Bitcoiners, we like to bring up Gresham's law all the time

48:39

and say that good money is going to drive out the

48:41

bad. Do you think it's

48:43

realistic to think that we may end up on

48:45

a Bitcoin standard? And I mean that in sort

48:48

of the fullest sense of the word, where it's

48:50

not just the reserve currency, it's like a unit

48:52

of account and a medium of exchange. Well,

48:55

how about I take on the

48:57

Gresham's Law first and then I

48:59

make Josh answer the harder question.

49:01

Okay. I owe

49:04

him for sticking me with the hard

49:06

question earlier. So

49:08

first, let's, you know, we have

49:10

this like pithy phrase for Gresham's

49:12

Law that, you know, bad money

49:14

drives out good or what have

49:16

you. But

49:19

what we really mean is that legally

49:21

overvalued money drives out legally undervalued money,

49:23

right? And so that really only works

49:25

if we're talking. explain that a bit

49:27

more? I don't know if I fully

49:29

understand what that means. Yeah,

49:31

okay. So suppose that the government says

49:33

that, well, eggs are popular right now,

49:35

right? And so there are two coins,

49:38

right? There's a red coin and a

49:40

blue coin. And the red

49:42

coin will get you a dozen

49:44

eggs and the blue coin will

49:47

get you a dozen eggs, right?

49:50

If in the market, the purchasing

49:52

power of the blue coin is

49:54

actually lower than the purchasing power

49:56

of the red coin, right? So

49:59

red coins are very valuable. They're

50:01

legally overvalued. Blue coins are very

50:03

cheap. Well, we're gonna use the

50:05

blue coins to purchase the eggs, right?

50:08

Everyone wants to use the blue

50:10

coins to purchase the eggs because

50:12

there's this fixed exchange and you

50:15

get a better deal if you're

50:17

using the blue coins. And so

50:19

people... least in egg transactions, they

50:21

hoard those red coins and they

50:23

spend those blue coins, right?

50:26

Now, if you have some kind

50:28

of a fixed exchange rate more

50:31

broadly, right, this is what's gonna

50:33

happen. They're gonna hoard the red

50:35

coins and spend the blue coins

50:38

because the red coins are legally

50:40

overvalued and the blue coins are

50:42

legally undervalued. You saw this, for

50:45

example, a very good, modern example

50:47

of this in Zimbabwe. So Zimbabwe

50:49

was technically dollarized, and

50:51

yet they somehow still managed to

50:53

experience really high rates of inflation.

50:56

That's very odd, right? Because the

50:58

whole reason why a country adopts

51:00

the dollar is to constrain its

51:03

hands, basically to outsource monetary policy.

51:05

Inflation in Zimbabwe should be roughly

51:08

equal to inflation in the US,

51:10

right? They were using the dollar.

51:12

So what happened? Well, what happened

51:15

was that the Zimbabwean government issued

51:17

these bond notes, right? And those

51:19

bond notes were valued one for

51:22

one with the dollar. But one

51:24

of the ways that they issued

51:26

these bond notes was basically as

51:29

a subsidy. And so

51:31

the government would essentially give these

51:33

bond notes away and not get

51:35

anything in exchange for them. So

51:38

they've necessarily issued more bond notes

51:40

than they're in a position to

51:42

redeem one for one. with the

51:45

US dollar. And people

51:47

aren't stupid, right? They understand that the

51:49

Zimbabwean government has done this and these

51:51

bond notes are actually worth less than

51:53

one dollar. So what do they do?

51:55

Well, when they go to the market,

51:58

the law says that you cannot

52:00

discriminate between the bond notes and

52:02

the real McCoy, right? And so

52:05

people spend the bond notes and

52:07

they hoard the real dollars, right?

52:09

Because those bond notes are legally

52:12

undervalued, right? And

52:14

so you can cheaply pay

52:16

with the bond notes and

52:19

it would be expensive to

52:21

pay with the dollars. So

52:24

I think I'm gonna tie my answer back

52:26

to your previous question because one way that

52:28

you can talk about, you know, our fiat

52:31

money is going to die is actually to

52:33

cheat a little bit and point out that

52:35

there are probably way too many fiat currencies

52:37

that actually exist, right? Like there are just

52:39

certain countries that it's not actually clear why

52:41

they have their own currency, like you can't.

52:43

necessarily use it in trade, you

52:46

know, that's very poorly managed. Their

52:49

own citizens would clearly prefer other things.

52:51

You know, I mean, as much as

52:53

we complain about the Federal Reserve or

52:55

the Bank of England or the ECB,

52:58

there are many, many worse places in

53:00

the world and many, many worse central

53:02

banks. When we think about it that

53:04

way, it

53:07

seems almost inevitable that there would

53:09

have to be some consolidation here,

53:11

because yes, states desire this authority,

53:14

yes, states want to control their

53:16

currency, but some states, it doesn't

53:19

seem to make sense why their

53:21

currency exists anyway, right?

53:24

And when they're engaged in international

53:26

trade, they're not even using their

53:28

own currency, and they're mismanaging at

53:31

home. So I think that, if

53:35

you're going to get a Bitcoin standard,

53:38

I think that those places are ripe

53:40

for the change because something like Bitcoin

53:42

could come in and serve that role.

53:44

Now, of course, something like the euro

53:46

or the dollar or the pound or

53:48

something could also serve that role. We

53:50

don't know what they're going to adopt.

53:53

But I think that this is

53:56

actually one of the things that

53:58

we mentioned earlier is that I

54:00

don't think we spend enough time

54:03

thinking about how

54:05

much people are struggling in developing

54:07

countries with their central banks and

54:10

with their currencies and to the

54:12

extent that we recognize the costs

54:14

associated with fiat currencies, they're much,

54:16

much higher there. But

54:19

like I said, I mean, it's

54:22

really, really hard to predict what's

54:24

gonna happen in the future. I

54:26

mean, even if Bitcoin succeeds, however

54:28

we wanna define that, right? What

54:31

does that look like i mean it could

54:33

just be that you know you in the

54:36

u .s. people have dollars and they have

54:38

bitcoin and they can spend either one and

54:40

you know maybe. And so you

54:42

know maybe they hold some of one and some of

54:44

the other and it just depends like maybe it's just

54:46

kind of like you know there are certain places where

54:48

you go where they only take a cash they only

54:50

take cash or they only take. a

54:53

credit card or something like that. Maybe

54:55

there will be certain places that only take dollars

54:58

and then other places that only take Bitcoin and

55:00

other places that take both. I

55:03

think a separate question is then

55:05

whether or not somebody actually redefines

55:07

their unit of account in terms

55:09

of Bitcoin. So they already

55:11

have some existing unit of account,

55:13

but instead of that just being

55:16

some random name for their fiat

55:18

currency, it actually becomes some particular

55:20

amount of Bitcoin. because

55:22

then that's a very, very different scenario because

55:24

there, even if the

55:26

unit of account technically isn't Bitcoin,

55:29

Bitcoin is the medium of account.

55:31

And so at that point, all

55:33

the prices that you observe are

55:35

gonna be entirely determined by the

55:38

demand for Bitcoin. But

55:40

that's a very, very different system than if

55:42

people are kind of using both. But I

55:44

mean, we can imagine a variety of these

55:47

systems, but I also think that, you know,

55:50

I also think it's naive to think that

55:53

a lot of these fiat currencies in some

55:55

of these small developing countries should actually exist

55:57

at all. And even

55:59

beyond developing countries, right? And

56:02

so the question is, what

56:04

do they get replaced with? Do

56:07

they just get replaced with other

56:09

fiat currencies? Do they move back

56:11

towards something like gold or silver?

56:13

Do they move towards Bitcoin? These

56:15

are interesting questions, but I don't

56:18

think that those... currencies really need

56:20

to exist at all, even in

56:22

the current world, without Bitcoin, without

56:24

gold, without any alternative. I still

56:27

don't think that a lot of

56:29

those should exist. What do

56:31

you think Bitcoin is best suited for? What

56:33

role do you think it's best suited for?

56:35

Is it as just a reserve currency or

56:37

why do you think it fits? I

56:40

think that there are lots of

56:42

margins where this might be a

56:44

preferred money. Particularly if

56:47

you're in a place that doesn't have

56:49

a money that has a supply that's

56:51

managed very well. If

56:55

you're making say cross -border payments

56:57

and you don't have access to

56:59

the kind of banking system we

57:01

have here in the US that's

57:03

very well connected. Bitcoin

57:06

is perhaps much easier to get

57:09

for you and much easier to

57:11

transfer. Those

57:14

margins where Bitcoin looks the

57:17

most different from the available

57:19

alternatives are likely to be

57:22

the margins that matter for

57:24

their use case. And

57:27

so things like that

57:29

fixed supply, the

57:32

ease of transfer, the

57:34

not being confined by geographic

57:36

borders. Those are areas where

57:38

Bitcoin looks very different from

57:40

the kind of monies that

57:43

most people use. And

57:45

so I would expect that those are

57:47

the kind of things that are going

57:49

to drive use. It's

57:51

kind of hard to

57:53

predict where it's going

57:55

to go because I have

57:58

spent most of my

58:00

time thinking about how

58:02

governments would try to

58:04

stop Bitcoin. Right. Like, essentially

58:06

every early paper that

58:08

Will and I wrote

58:11

were the bad things governments

58:13

can do. Right. It was

58:15

governments are trying to do this, you know, can

58:17

it work? Governments are trying to do that. Can

58:20

it work? What other things can they do that

58:22

they would, you know, what other things might they

58:24

try? And so now, like,

58:26

you know, you we find ourselves in

58:28

a situation where you've got countries talking

58:30

about, you know, strategic Bitcoin reserves and

58:32

things like that, which is something that.

58:35

you know, we never would have thought

58:37

of. Super weird. You

58:39

know, several years ago, like you

58:41

would think that states would be

58:43

more opposed to this kind of

58:45

a thing. I

58:47

mean, I think in part this is

58:49

actually related to the conversation earlier. I

58:52

mean, I think one of the reasons

58:54

that maybe certain politicians in the US

58:56

have changed is that, you know, if

58:59

you're looking at the system and you're

59:01

seeing that it's unsustainable, you

59:04

get a lot of benefits from the

59:06

system even though there are also some

59:08

costs. And so what

59:11

the United States government really fears

59:13

is they fear that there's going

59:15

to be some other state that

59:17

will capture those benefits, right? That

59:19

somebody will start using a different

59:21

currency instead of the dollar and

59:23

that all of the benefits that

59:26

the US gets from the dollar

59:28

being the global reserve currency will

59:30

just transfer to this other

59:32

country that's issuing this alternative. And

59:35

I think that if you are concerned

59:38

about that thing, then one of the

59:40

things that you might want to do

59:42

is you might want to encourage countries

59:44

to buy more neutral assets, to buy

59:47

things like gold and to buy things

59:49

like Bitcoin to hold and reserve, because

59:51

you're not transferring any of the benefits

59:54

of the dollar system to those things,

59:56

at least not the benefits that go

59:58

to the United States government, right? by

1:00:01

shifting them towards neutral assets, yes, maybe you're

1:00:03

losing a little bit of power, but you're

1:00:06

not losing it at the, you know, relative

1:00:08

to some, you know, to someone else, like

1:00:10

someone else is gaining at your, yeah, they're

1:00:12

not, they're not gaining at your expense. And

1:00:15

so, and so I think

1:00:17

that partially explains these attitudes, but I also

1:00:19

think that that's important to think about because

1:00:21

I think when we're thinking about the path,

1:00:23

so many times like what we do is

1:00:26

we think about, okay, What are the possible

1:00:28

paths? How would we get there? What's this

1:00:30

going to look like? But we tend to

1:00:32

focus on the characteristics of Bitcoin in determining

1:00:35

these things. We tend to look at, OK,

1:00:38

is it going to be useful as

1:00:40

a medium of exchange? Is everybody going

1:00:42

to be able to transact on the

1:00:44

base layer? Those are

1:00:46

the things that we focus on and think

1:00:48

about. But I think that we ignore

1:00:51

all of these geopolitical concerns because

1:00:53

I think that the changing attitude

1:00:56

about Bitcoin is to a large

1:00:58

extent driven by, you know, um,

1:01:01

changes in geopolitical circumstances. And so those

1:01:03

changes force people to think about things

1:01:05

differently. And so now, um,

1:01:08

whatever you were predicting five years ago

1:01:10

about the future of Bitcoin, um,

1:01:12

it's almost certainly different than what you would predict

1:01:14

now because you've seen how that plays out. And

1:01:16

so I think it's important to us to. So

1:01:18

I guess what I'm saying is so many times

1:01:21

we just focus on Bitcoin itself and what it

1:01:23

does. and how it compares to

1:01:25

the alternatives and what that means about the

1:01:27

future. But one of the

1:01:29

things that we don't spend enough time

1:01:31

is like, what are the things like

1:01:34

completely detached from Bitcoin that somehow end

1:01:36

up relating to Bitcoin in the long

1:01:38

run, right? What are these things that

1:01:40

no one thought would be, would be

1:01:42

something significant for Bitcoin's future that now

1:01:45

suddenly look like super significant for how

1:01:47

everything plays out? And I think, that's

1:01:49

the big thing that we tend to

1:01:51

miss. And I think that's the thing

1:01:53

that actually makes it really, really hard.

1:01:56

All the technological stuff, like, my

1:01:58

basic view is all the technological

1:02:00

problems that people are worried about,

1:02:02

like, I tend

1:02:04

to think that, you know, those technological problems,

1:02:07

to the extent they can be solved, they'll

1:02:09

be solved. Like, because there's an incentive to

1:02:11

solve them in private markets, tend to figure

1:02:13

out things, right? When people want things, entrepreneurs

1:02:16

tend to figure out ways to

1:02:18

deliver them. It's those

1:02:20

external things. outside of Bitcoin that suddenly

1:02:22

are super important to Bitcoin that are

1:02:25

the hardest to predict. And that's what

1:02:27

makes it hardest to kind of forecast

1:02:29

like where is this going to be

1:02:32

in five years, let alone 50 years.

1:02:35

And that's like the game theory of Bitcoin

1:02:37

playing out, I guess, because if the push

1:02:39

is to move people to a neutral asset,

1:02:41

like the US already owns more gold than

1:02:43

anyone else. So the theory here

1:02:45

is that they then also have to own more Bitcoin

1:02:47

than anyone else if that's going to be. the

1:02:50

kind of neutral reserve asset. Well,

1:02:54

in part of what you're doing, if

1:02:56

you if you created a strategic Bitcoin

1:02:58

reserve, for example, is like what you

1:03:00

would be doing is yes, like potentially

1:03:03

if you if you bought Bitcoin now

1:03:05

and then Bitcoin became more, you know,

1:03:07

became incredibly successful and became, you know,

1:03:09

a significant part of our global financial

1:03:12

system, then yes, you would also then

1:03:14

the United States government would also profit

1:03:16

from that. But beyond that, I think

1:03:19

one like

1:03:21

overlooked aspect when it comes to that thing is

1:03:23

like, it just provides a signal, right? Like there

1:03:25

are lots of people out there who know what

1:03:27

Bitcoin is, but they don't understand it, they don't

1:03:29

look into it, they don't, they're certainly not gonna

1:03:32

buy it, right? Like, but they know what it

1:03:34

is, they just think maybe, okay, this thing is

1:03:36

like this weird internet money, maybe it's kind of

1:03:38

sketchy, like who are these people? Like, I don't

1:03:40

understand, what do you mean nobody's in charge, right?

1:03:42

Like this kind of stuff, but like, if somebody

1:03:44

like the United States government comes along and says,

1:03:46

hey, we're gonna buy this, well, suddenly there are

1:03:49

gonna be a lot of people that are just

1:03:51

kind of like, ah, well, it must not be

1:03:53

that bad, right? Like, oh, it must be okay

1:03:55

to use. And so it kind of creates a

1:03:57

permission structure for people to start adopting. And

1:04:00

that's true at both the individual

1:04:02

level, but then also other states,

1:04:04

right? And so if you're trying

1:04:06

to use this for geopolitical purposes,

1:04:08

sending that signal to other states

1:04:10

could potentially Um, you know,

1:04:13

it becomes a self -fulfilling prophecy, right? Like

1:04:15

we need people to do this other thing.

1:04:17

And so we're going to buy some to

1:04:19

signal that that they should buy it. And

1:04:22

so then they buy it because we bought

1:04:24

it, right? Like it becomes a sort of

1:04:26

self -fulfilling thing. And I think that, um,

1:04:28

all of these geopolitical, you know, considerations are

1:04:30

something that, um, you know, I

1:04:33

think maybe Bitcoiners would say, Hey, we always

1:04:35

predicted there would be the, you know, Bitcoin

1:04:37

would be, um, important

1:04:40

geopolitically. I don't know how many of them

1:04:42

had 2025 as the year when that would

1:04:44

happen, right? So, yeah. So

1:04:47

I think that that's probably

1:04:49

the most surprising and interesting

1:04:51

thing that's going on right

1:04:53

now is just how much

1:04:55

that narrative has changed. Definitely.

1:04:58

And there's a few other things I want to get into.

1:05:00

Will, are you okay for time or do you need to

1:05:02

run? Yeah, I

1:05:04

need to go in about six minutes. 5 minutes. Sorry,

1:05:07

Will. I didn't realize you had a hard stop there.

1:05:09

No, it's okay. Thank you very much for coming on

1:05:11

for this bit and we'll carry on without you. In

1:05:13

fact, before you go, Will, though, is there any way

1:05:15

you want to send anyone if they want to follow

1:05:17

your work or anything you're doing? I'm

1:05:20

on X at William J.

1:05:22

Luther. I

1:05:25

write pretty regularly at the American Institute

1:05:27

for Economic Research. So

1:05:29

feel free to follow along. Perfect.

1:05:32

Thank you, Will. And we can do this again. Yeah,

1:05:34

sounds good. All right. Sorry,

1:05:36

Josh. This is, there's too much in

1:05:39

this. But so the next

1:05:41

thing, we were just never going to get through

1:05:43

the next part in five minutes. So rather than

1:05:45

cut it short, the next

1:05:47

thing I wanted to talk about

1:05:50

was deflationary money. And

1:05:52

one of the things that a lot

1:05:54

of economists have sort of criticized Bitcoin

1:05:56

for is the fact that deflationary money

1:05:58

may not work in reality. So what's

1:06:00

your take on that? And I think

1:06:03

probably that perspective comes from thinking people

1:06:05

are going to hoard money rather than spend it and

1:06:07

what that does to the economy. Yeah,

1:06:10

so there's actually like this

1:06:12

is actually one thing that

1:06:14

economic historians and monetary economists

1:06:16

are I think are actually

1:06:18

good at, which is there's

1:06:20

a lot of stuff that

1:06:22

they've written about deflation because

1:06:24

the bad rap of deflation

1:06:26

seems to come from the

1:06:28

Great Depression. So we have

1:06:30

this horrible recession, which also

1:06:32

corresponds with this dramatic deflation.

1:06:34

And so it must be

1:06:36

that deflation is bad. But

1:06:40

that story is

1:06:42

at least partially

1:06:44

wrong. And

1:06:46

the reason for that is

1:06:49

we can really kind of

1:06:51

classify deflation as having two

1:06:53

causes. There's like supply side

1:06:55

causes and there's demand side

1:06:57

causes. But demand side causes

1:07:00

are actually really policy induced

1:07:02

causes, right? So demand side

1:07:04

causes tend to be like, if you get

1:07:06

deflation from the demand side, it's generally because

1:07:08

you have really, really bad policy. Okay,

1:07:11

so there's some kind of policy that's

1:07:14

being imposed on society by, you know,

1:07:16

the central bank that's causing this deflation.

1:07:18

And that's very, very different from a

1:07:20

supply driven deflation. So

1:07:23

supply driven deflations, first of

1:07:25

all, we've experienced them. you

1:07:27

know, historically actually quite a

1:07:29

bit. And they're not

1:07:32

associated with recessions. In fact, they're

1:07:34

associated with boom periods because periods

1:07:36

of periods of high productivity are

1:07:38

periods when things are going well,

1:07:40

right? But when when's the like

1:07:42

recent example of that? Well,

1:07:45

there are, I mean, recent examples,

1:07:47

we live in an inflationary world.

1:07:49

So I mean, But if you

1:07:51

go back to like the classical

1:07:54

gold standard era, like there are

1:07:56

prolonged periods where you have deflation

1:07:58

and where it's not costly. And

1:08:01

it makes sense because if you think about

1:08:03

it, right, what's

1:08:06

happening is that if

1:08:08

you have growing productivity

1:08:10

and that growing productivity

1:08:13

is driving down prices,

1:08:15

it's effectively increasing the real

1:08:18

value of wages for people,

1:08:20

right? And so that productivity

1:08:22

is reflected in your wage,

1:08:24

even though maybe your nominal

1:08:26

wage isn't changing, what

1:08:29

that wage buys you is changing, right?

1:08:31

So now you can afford a lot

1:08:33

more stuff. And so

1:08:35

kind of the idea here

1:08:37

is that these productivity changes,

1:08:40

the supply side, driven

1:08:43

deflations are actually very, very

1:08:45

positive. These are boom

1:08:48

periods. These are periods when things

1:08:50

are going well. And

1:08:52

there's no fundamental problem with

1:08:55

deflation, right? Because

1:08:57

since prices are falling, your real

1:09:00

wages are going up. In contrast,

1:09:02

when you have these demand -side

1:09:04

deflations where this is policy -induced,

1:09:08

The reason these tend to be so costly

1:09:10

is it's not based on real economic factors,

1:09:12

right? It's not that we just have a

1:09:14

bunch more stuff to sell with the same

1:09:16

amount of demand, right? It's that there is,

1:09:20

it's that these changes have

1:09:22

been caused by policymakers making

1:09:24

bad choices. And so

1:09:27

because of that, these events are

1:09:29

unexpected and unexpected deflation could be

1:09:31

really costly because we have nominal

1:09:34

debt contracts, right? So if I

1:09:36

agree, if I borrow $1 ,000

1:09:38

from you. And

1:09:41

so let's say my day job is as

1:09:43

a farmer and I borrow $1 ,000 from

1:09:45

you and then over the course of the

1:09:47

next year, unexpectedly, the prices of my crops

1:09:50

all start to fall. Well, it becomes a

1:09:52

lot harder for me to pay back that

1:09:54

$1 ,000. But if

1:09:56

that decline in... prices was caused

1:09:59

by productivity, it wouldn't be any

1:10:01

harder for me to pay you

1:10:03

back because the reason that the

1:10:05

price is down is because I'm

1:10:07

producing more stuff. Right.

1:10:09

And so, um, and so what really matters

1:10:11

is like what I am, how much I'm

1:10:13

selling, what I'm bringing in. And

1:10:15

so, um, and so

1:10:18

in other words, supply driven deflation

1:10:20

is very, very positive demand driven

1:10:22

deflation is policy driven deflation. And

1:10:24

yes, those do seem to be

1:10:26

costly, but that's the result of

1:10:28

policymakers making bad choices. That's not

1:10:30

like an inherent evil of deflation.

1:10:33

And so if we have a

1:10:35

productivity induced deflation, that's generally a

1:10:37

good thing. So deflation,

1:10:39

is deflation impossible in the fiat system

1:10:41

that we're in now in this positive

1:10:44

deflation? I mean, technically

1:10:46

no. I mean, if, but it would

1:10:48

take it would require central banks to

1:10:50

do something, you know, much, much different.

1:10:53

So I mean, you could You

1:10:55

can imagine this scenario. I mean, it's not ever

1:10:58

going to happen, but I can conjure it up

1:11:00

and I can tell you about it. I mean,

1:11:03

suppose the Federal Reserve came out tomorrow

1:11:05

and said, we're just going to make

1:11:07

sure that nominal spending in the United

1:11:09

States is just constant, right? So the

1:11:12

dollar value of spending is constant. And

1:11:14

we're just gonna, and because it's nominal,

1:11:16

we can adjust the money supply. to

1:11:19

keep it constant. So if it ever starts to rise,

1:11:21

we can pull money out of the system. If it ever

1:11:23

starts to fall, we can add money to the system.

1:11:26

Okay, so imagine they did that, and imagine they did

1:11:29

that well. Okay, well, if

1:11:31

you think about what would happen in that sort of a

1:11:33

system, if nominal spending

1:11:35

can never change, as

1:11:37

the economy grows, prices would have to

1:11:39

fall in conjunction with that growth in

1:11:41

the economy, right? Because real GDP would

1:11:43

be going up, even though nominal GDP

1:11:45

would be constant. And so the only

1:11:47

way that nominal GDP could be constant

1:11:49

is that that economic growth, those productivity

1:11:51

improvements would have to be passed on

1:11:53

through prices. The challenge

1:11:56

to doing something like that is

1:11:58

number one, like there's just this

1:12:00

kind of irrational hatred of deflation

1:12:02

that that we see. So, you

1:12:04

know, central bankers would not be

1:12:06

inclined to adopt that sort of

1:12:08

thing. But also

1:12:10

like central bankers don't They

1:12:12

don't tend to focus on

1:12:14

things like nominal spending or

1:12:16

nominal income or something like

1:12:18

that. They tend to try

1:12:21

to focus on inflation rates

1:12:23

and things like that. And

1:12:25

actually, Will mentioned George

1:12:27

Seljan. George Seljan had a lot

1:12:29

of work on this where he

1:12:31

basically had argued that, and this

1:12:33

is actually not original to George.

1:12:35

I mean, this was part of

1:12:38

an earlier tradition in economics that

1:12:40

kind of died with Keynesianism. which

1:12:42

was that, you know, actually maintaining stable

1:12:45

prices through monetary policy might actually be

1:12:47

distortionary because in order to do that,

1:12:49

you might be forcing prices that otherwise

1:12:51

would have gone down to go up,

1:12:54

right? In the same way that you're

1:12:56

forcing prices that would have gone up

1:12:58

to come down. And so you can

1:13:01

potentially end up distorting relative prices because

1:13:03

you're not allowing relative prices to reflect

1:13:05

relative scarcity of these goods. I see.

1:13:07

And George Sheldon was, he's a big

1:13:10

proponent of free banking, I think, isn't

1:13:12

he? Yes. So I assume he thinks

1:13:14

that central banks shouldn't exist. A lot

1:13:16

of Bitcoiners think that central banks shouldn't

1:13:19

exist. Do you think that is something

1:13:21

that's likely at any point in the

1:13:23

future, or like relatively near future, 10,

1:13:26

20, 30 years? I mean,

1:13:28

I think the biggest challenge to this, right,

1:13:30

is what we talked about with respect to...

1:13:33

You know why states want a monopoly

1:13:35

on money to begin with right like

1:13:37

they want the monopoly on money because

1:13:39

they want access to credit from the

1:13:42

central bank They want to be able

1:13:44

to pay for things They want to

1:13:46

be able to finance wars without worrying

1:13:48

about where the money is gonna come

1:13:50

from and things like that and so

1:13:52

I Think it would be really really

1:13:54

hard to To get rid of central

1:13:57

banks in that sense. I mean it

1:13:59

would take I'm

1:14:01

not saying that it's impossible,

1:14:03

it's just difficult, because it

1:14:06

would also take a substantial

1:14:08

rethinking and reeducation of a

1:14:11

lot of people, right? Because

1:14:13

typically, you know, when

1:14:15

I look at how a lot of

1:14:17

introductory textbooks, you know, to economics are

1:14:19

framed, especially sort of like the Keynesian

1:14:21

leaning textbooks, right? Like the... chapter on

1:14:24

central banking is kind of like, well,

1:14:26

of course, we have to have a

1:14:28

central bank because who's going to manage

1:14:30

the currency and we don't want another

1:14:32

great depression. You know, forgetting the fact

1:14:34

that like we all had central banks

1:14:36

other than Canada, we all had central

1:14:38

banks during the Great Depression. So, you

1:14:40

know, that that actually didn't seem to

1:14:42

help very much. If anything,

1:14:45

it actually seemed to make things worse. But

1:14:47

but the point is, is like those are

1:14:49

the kinds of arguments that you get is

1:14:51

like, well, of course, we have to have

1:14:53

somebody do this and, you know, and and.

1:14:55

You know, I mean,

1:14:57

I write about this actually all the

1:15:00

time is that to me, one

1:15:02

of the weirdest things about economics is

1:15:04

that when you take economics classes,

1:15:06

what gets drilled into your head is

1:15:08

that what's good is competition, right?

1:15:10

Competition is good. We like competition. Competition

1:15:13

leads to efficient outcomes. We're

1:15:15

not wasting resources, right? These

1:15:17

kinds of things. And what's bad? are

1:15:21

monopolies, right? Like monopolies don't

1:15:23

efficiently use resources. Monopolies, you

1:15:25

know, have this power that

1:15:27

this market power that allows them to

1:15:29

charge a price above marginal costs, you

1:15:31

know. And central

1:15:33

banking good. Yeah. And so

1:15:36

and then from that, then they immediately

1:15:38

jump to, well, of course, we need

1:15:40

a monopoly over currency, right? So and

1:15:42

so to me, it's kind of bizarre.

1:15:45

And I mean, and And

1:15:47

to me, I think that I understand why

1:15:49

I think it's actually all of these these

1:15:51

political concerns and geopolitical concerns that are the

1:15:53

reason that central banks actually exist. And I

1:15:55

think that's the thing that makes them hardest to

1:15:57

change or get rid of. But

1:16:00

those but that's often not how we teach

1:16:02

it. And in fact, arguably, I guess if

1:16:04

you taught if everybody taught it the way

1:16:06

that I teach it and everybody taught, you

1:16:08

know, the sort of political

1:16:11

and geopolitical aspects to this, then I don't

1:16:13

know, maybe that would actually arose support for

1:16:15

these things is like, well, wait a second,

1:16:17

if we just need this for geopolitical purposes,

1:16:20

surely there's some alternative here, right? But

1:16:23

yeah, I mean, a lot of it is

1:16:25

just the way it's presented. And then the

1:16:27

role that it plays for the state, that

1:16:30

makes it very, very hard to get rid

1:16:32

of. If you could just

1:16:34

click your fingers and have your perfectly

1:16:36

designed economic system, would the be central

1:16:38

banks? It's a

1:16:40

hard question for me to

1:16:43

answer because as an individual

1:16:45

the answer is obvious. It's

1:16:47

no but like my hesitancy

1:16:49

in just saying no completely

1:16:51

is that It's hard to

1:16:54

imagine what this world looks

1:16:56

looks like in geopolitical like

1:16:58

concerns right like so I

1:17:00

Don't like that. I personally

1:17:02

do not like the extent

1:17:05

to which the United States

1:17:07

involves itself in foreign conflicts

1:17:10

Okay. But I

1:17:12

do like the fact that the United States doesn't

1:17:14

have to worry about, you know, how much it's

1:17:16

spending in the event that we go to war.

1:17:18

I don't have to worry that, like, we're going

1:17:20

to lose because we run out of money. I

1:17:24

mean, this was a very, very

1:17:26

common thing, you know, in an

1:17:28

earlier era. I mean, people forget

1:17:30

that the Swedes had an entire

1:17:32

Baltic Empire. And, you

1:17:34

know, Sweden was a military power.

1:17:37

And the reason that they really lost

1:17:39

this military power is that they couldn't,

1:17:41

they couldn't finance their military, right?

1:17:44

Like they just, they actually just ran out of

1:17:46

funding to the point where there are stories

1:17:48

of soldiers out in the field, like picking up

1:17:50

the musket balls that have just been fired at

1:17:52

them and then loading them into their guns

1:17:54

so they can shoot back, right? And

1:17:57

so the thing is, is

1:18:00

like the question is, can

1:18:02

the place that you live

1:18:05

provide adequate defense? without

1:18:08

something like a central bank. And if the answer

1:18:10

is no, then this becomes a really hard question

1:18:12

to answer because on the one hand, if they

1:18:15

can't do it without it, well, then your safety

1:18:17

and security and wealth is under threat, right? But

1:18:20

at the same time, if they can, they,

1:18:22

you know, some of them do really bad

1:18:24

things with that, with that power and some

1:18:26

of them get involved in things that they

1:18:28

shouldn't get involved in. And so it's very

1:18:30

hard to assess that. But I mean, if

1:18:32

I'm just thinking about it purely in monetary

1:18:34

terms and not thinking about any of these

1:18:36

geopolitical concerns. I think the answer is obvious,

1:18:38

like, no, we don't want these things. To

1:18:41

the extent that we have to think

1:18:43

about these geopolitical concerns, we can possibly

1:18:46

get rid of central banks, but there's

1:18:48

probably going to be something else that

1:18:50

states would do as an alternative. And

1:18:52

the fact that they haven't done that

1:18:54

already suggests that maybe there's not an

1:18:56

obvious better alternative. So it needs,

1:18:59

it can't just be that the US gets rid of the Fed

1:19:01

is every central bank needs to go at the same time for

1:19:03

it to be sustainable. Yeah, because I

1:19:05

mean, like if you think about it, like if

1:19:08

they're really providing this source of funding, you

1:19:10

know, that was one, I mean, that

1:19:12

was one reason why you, you know,

1:19:14

but that was one reason to attack

1:19:16

like the neighboring Prince, right? In Europe,

1:19:18

you know, 400 years ago is like

1:19:20

he has no money. So like now's

1:19:23

the time I could take that land.

1:19:25

Yeah. And so, and so the thing

1:19:28

is, it's like, you know, we're

1:19:30

sort of stuck in

1:19:32

this particular equilibrium. where

1:19:35

if none of us had this stuff, then it wouldn't

1:19:37

matter. But because all of us have this stuff, nobody

1:19:39

has an incentive to go first. Yeah,

1:19:42

that makes sense. Okay, last big

1:19:44

question in this future Bitcoin world,

1:19:46

what do you think credit will

1:19:48

look like? So

1:19:51

I guess it kind of depends. I think

1:19:53

that you're asking me this because a lot

1:19:55

of people kind of argue like, oh, well,

1:19:57

nobody would want to borrow because you have

1:19:59

a deflationary currency. So why would you want

1:20:01

to borrow? But I think that that is

1:20:03

based on thinking about

1:20:05

borrowing and lending purely in

1:20:07

terms of nominal interest rates.

1:20:11

When we should be thinking about it in terms

1:20:13

of real interest rates. And so what I mean

1:20:15

is, is like, okay, if I

1:20:17

come to you and I say, hey, I

1:20:19

need to borrow a thousand dollars and you

1:20:22

say, okay, just pay me back, you know,

1:20:24

a thousand and fifty dollars a year from

1:20:26

now and we'll call it even. Well,

1:20:29

what really matters. is what

1:20:31

the purchasing power of $1 ,050 is

1:20:34

a year from now, right? So if

1:20:36

over the next year we have 5

1:20:38

% inflation, well, then

1:20:40

I got a really good deal because

1:20:42

all of the purchasing power that I'm

1:20:45

transferring to you has been, you know,

1:20:47

is gone, right? Like you, you're getting

1:20:49

no additional purchasing power relative to that

1:20:52

initial $1 ,000. And

1:20:54

so implicitly, we don't always think

1:20:56

about it this way, but implicitly,

1:20:58

we're always thinking about real interest

1:21:01

rates. So we're thinking about what

1:21:03

the interest rate is adjusted for

1:21:05

inflation on these loans. And

1:21:08

so that's the fundamental

1:21:11

thing that really matters.

1:21:15

Now, because we live in an inflationary

1:21:17

world, if I'm willing to pay you

1:21:19

5 % real interest and the inflation

1:21:21

rate is going to be like, and

1:21:24

we both expect the inflation rate to

1:21:26

say be 2 % over the next

1:21:28

year, Then the nominal interest

1:21:30

rate on that loan would be 7%.

1:21:32

But that's just a matter of we

1:21:34

agree that that's like the likely inflation

1:21:37

rate and I'm willing to borrow at

1:21:39

5%, you're willing to lend at 5

1:21:41

% in real terms. If

1:21:45

we move to a deflationary system, the

1:21:47

real interest rate is still the thing that

1:21:50

matters. And so because the real interest

1:21:52

rate is still the thing that matters, nominal interest rates

1:21:54

would be very, very different. So if

1:21:56

we're in a deflationary environment, And

1:21:58

maybe deflation is, you know, so

1:22:01

maybe, you know, the inflation rate

1:22:03

is negative 2 % a year.

1:22:05

Well, then now the nominal interest

1:22:07

rate instead of being 7 %

1:22:10

is going to be 3%. But

1:22:12

in real terms, it's costing me

1:22:14

5%. And so the deflation would

1:22:16

tend to drive nominal interest rates

1:22:18

down. And by driving nominal interest

1:22:21

rates down, the question is, does

1:22:23

anything about this actually change? the

1:22:25

real interest rate. Because if it

1:22:27

doesn't change the real interest rate,

1:22:29

then we're not going to see

1:22:32

any sort of change in borrowing

1:22:34

activity because nominal interest rates would

1:22:36

just change, but real interest rates

1:22:38

would all be the same. Now,

1:22:41

there is reason to believe that real interest

1:22:43

rates might change in that sort of environment.

1:22:45

And the reason is, is that in economics,

1:22:48

there's this thing called the Tobin effect. And

1:22:50

what the Tobin effect describes is that There

1:22:52

are certain things that we hold in our

1:22:54

portfolio that we also use for productive purposes,

1:22:57

right? And so, um, and

1:23:00

so what happens, like so, you know,

1:23:02

like an obvious example for an individual

1:23:04

will be their house, right? Like you're

1:23:06

not just investing in your house, you

1:23:08

live in it. Okay. But it's part

1:23:10

of your portfolio of assets. Well, if

1:23:12

you live in a world where inflation

1:23:14

starts rising, what do you do? Um,

1:23:16

well, you tend to by more housing,

1:23:18

right? So either you buy a second

1:23:21

home or you buy a bigger house

1:23:23

than you would have bought otherwise or

1:23:25

something like that. And what that tends

1:23:27

to do is that tends to raise

1:23:29

the real value of those assets, but

1:23:31

it tends to reduce the real rate

1:23:33

of return on those assets relative to

1:23:35

what they were before the inflation. So

1:23:38

what then happens is that in

1:23:40

that scenario, in an inflationary environment,

1:23:42

inflation is actually lowering real interest

1:23:45

rates. which makes borrowing more likely,

1:23:48

right? And so if you were to

1:23:50

eliminate inflation or actually move to a

1:23:52

deflationary system, then what would happen is

1:23:54

like these real asset values would decline,

1:23:56

but their real rates of return would

1:23:59

rise. And so then you would be

1:24:01

less likely to borrow because real interest

1:24:03

rates are going to be higher in

1:24:05

that in that world. But

1:24:07

it's not going to eliminate all borrowing.

1:24:09

But that's also because if your money

1:24:12

isn't constantly being eroded over time through

1:24:14

inflation, then you don't need to constantly

1:24:16

look for other investments. Right,

1:24:19

right. So, like an inflationary

1:24:21

system, you do tend

1:24:23

to drive real interest rates down to

1:24:26

some extent because people try to avoid

1:24:28

inflation by buying real assets, right? Things

1:24:30

that they think are going to appreciate

1:24:32

over the longer term and that or

1:24:34

at least maintain their purchasing power over

1:24:36

the longer term, right? Like, maybe you

1:24:38

buy a little bit bigger house because

1:24:40

you're like, well, I know that like,

1:24:42

you know, um, housing, um, is going

1:24:44

to be, you know, more stable than,

1:24:46

you know, um, the supply of

1:24:49

houses is not going to increase at the rate

1:24:51

of growth of the money supply. Right. So I,

1:24:53

so I have a little bit more confidence that,

1:24:55

that this is going to retain its value. And

1:24:58

to the extent that, and even to the

1:25:00

extent that, that it doesn't, like I get

1:25:03

to live in it. So I'm getting some

1:25:05

value out of it, even if I'm wrong

1:25:07

about that. Right. But in general, what, what

1:25:09

tends to happen is, yeah, people. in inflationary

1:25:11

environments, they move into real assets. And that

1:25:14

does tend to lower real interest rates. And

1:25:16

so, which does encourage more borrowing. And so

1:25:18

if you move to a deflationary system, yes,

1:25:20

you would have less, I think you would

1:25:22

have less borrowing because you, because you're going

1:25:25

to see the reversal of that effect, right?

1:25:27

So if your money is now appreciating every

1:25:29

year in real terms, well, then

1:25:31

you don't need to buy a bigger house.

1:25:33

You don't need to buy an extra house.

1:25:35

You don't need to invest in those real

1:25:38

assets because you're not trying to avoid the

1:25:40

the inflation. And so in that case, you

1:25:42

know, real interest rates would would rise and

1:25:44

we'd get and we'd get less borrowing. And

1:25:47

where does fractional reserve banking fit into this?

1:25:49

Do you think we'll still have fractional reserve

1:25:51

banking under a Bitcoin standard? I

1:25:53

mean, it it depends. I

1:25:56

mean, I think I mean, my attitude on

1:25:58

this is that in the short run, like

1:26:00

Bitcoiners should really resist this as much as

1:26:02

possible. because it

1:26:04

would be a source

1:26:07

of manipulation in the

1:26:09

market given Bitcoin's market

1:26:11

cap. Any

1:26:13

kind of like fractional reserve system

1:26:15

right now would just make it very,

1:26:17

very easy to manipulate the system.

1:26:20

Over the long run, I don't know

1:26:23

if you can necessarily prevent it. And

1:26:26

the reason that I say

1:26:28

that is that like a

1:26:30

fractional reserve system would be

1:26:32

the easiest way to scale

1:26:34

if it becomes too costly

1:26:36

to transact on the base

1:26:38

layer. Now,

1:26:42

the issue though

1:26:44

is that because

1:26:46

Bitcoin is programmable

1:26:49

money, as they

1:26:51

say, even

1:26:56

a fractional reserve system would probably

1:26:58

look much different than the fractional

1:27:00

reserve systems that we have experienced,

1:27:02

right? And

1:27:04

what I mean by that

1:27:07

is that, if you had

1:27:09

banks that were sort of

1:27:11

issuing more liabilities than what

1:27:13

they had in reserve as

1:27:16

Bitcoin, there could

1:27:18

be ways where you could actually,

1:27:20

you know, Where

1:27:22

you can actually verify like what their

1:27:24

issuance is what their you know how

1:27:27

much that they have in reserve and

1:27:29

also. You know

1:27:31

if you have. You

1:27:34

know if you have on demand redeem ability

1:27:36

anytime that you know you're uncomfortable with what

1:27:38

they do you can potentially do that or

1:27:40

you could just have instances where some people

1:27:42

just actually like agree not to use their

1:27:44

bitcoin for some certain amount of time in

1:27:46

exchange for. Paying a rate

1:27:48

of return or something on that so that

1:27:50

other people can can use it but so

1:27:52

there might be ways to avoid it But

1:27:54

I think like the issue is is the

1:27:57

the question of whether or not we'll get

1:27:59

fractional reserve on Bitcoin I think we should

1:28:01

resist that now like there's no need for

1:28:03

like Bitcoin banks that are issuing You know

1:28:05

pieces of paper that are redeemable for Bitcoin.

1:28:07

There's no there's no need for that now

1:28:09

People should resist that now But

1:28:13

then the question is is it's all

1:28:16

going to boil down to like how

1:28:18

things scale right so in terms of

1:28:20

like if if the base layer becomes

1:28:22

too expensive for Transactions to be going

1:28:25

on all the time the easiest way

1:28:27

to solve that is to figure out

1:28:29

how to make transactions outside of the

1:28:32

base layer and and then the question

1:28:34

is is then you know Does that

1:28:36

require you know issuing claims to Bitcoin?

1:28:41

that are redeemable for Bitcoin or something like

1:28:43

that. Or are there just

1:28:45

technological solutions that we can use that would

1:28:47

solve that problem? And so

1:28:49

history says it's gonna be hard to

1:28:52

avoid that kind of a system because

1:28:54

that's just what we've observed over time.

1:28:57

But at the same time, again,

1:28:59

it's very, very hard to predict

1:29:01

the future because this is very,

1:29:03

very different than other traditional forms

1:29:05

of money. gold

1:29:08

where it's literally just this

1:29:10

physical thing that you hold.

1:29:13

Conceivably, there are technological solutions that

1:29:15

could exist for Bitcoin that just

1:29:17

can't possibly exist for something like

1:29:19

gold or silver. Love

1:29:21

it. Well, this has been great. Thank

1:29:24

you very much, Josh. We've been through

1:29:26

most of the big topics there. But

1:29:28

we obviously, we started this conversation where

1:29:31

I kind of jokingly made fun of

1:29:33

economists for not understanding Bitcoin. But what

1:29:35

is it that you think Bitcoiners don't

1:29:37

understand about economics? I

1:29:40

would add, well, okay, there's a

1:29:42

line. There's

1:29:46

a line that one of my favorite

1:29:48

economists, a guy named Armin Alchin, there's

1:29:51

a line that he used to say,

1:29:53

which was don't listen to economists listen

1:29:55

to don't listen to what economists have

1:29:57

to say, listen to what economics has

1:29:59

to say. Okay. And I've

1:30:02

always really liked that line because the

1:30:04

thing is, is that economists are just

1:30:06

people, right? And they have lots of

1:30:08

opinions and those opinions might be informed

1:30:10

by economics. They might not be informed

1:30:12

by economics. It depends on the

1:30:14

context, but even if they are informed

1:30:16

by economics, like sometimes, you know, it's,

1:30:18

hey, I have this knowledge and given

1:30:20

my knowledge, this is my opinion, but

1:30:22

that doesn't mean that that's what economics

1:30:24

actually says. That's how they interpret things.

1:30:27

And so, I mean, my thing is, is

1:30:29

that, I

1:30:31

get like basically one of two responses

1:30:33

when I meet Bitcoiners, right? Bitcoiners are

1:30:36

either really super excited that an economist

1:30:38

is there to talk, you know, it

1:30:40

wants to talk about Bitcoin. Or

1:30:43

I get kind of dismissed like,

1:30:45

oh, well, you like economists. I

1:30:47

don't, you know, I don't want

1:30:50

to talk to you. But

1:30:52

I think, you know, in general, I

1:30:56

think there's a lot

1:30:58

of economics that that's

1:31:01

good economics, that's valuable to

1:31:04

learn. I

1:31:07

agree with Bitcoiners that Keynesianism is bad

1:31:09

and that it's not particularly valuable and

1:31:11

I wish that we could get rid

1:31:14

of a lot of these Keynesian aspects

1:31:16

of the way things are taught. But

1:31:20

at the same time, there is a lot

1:31:22

of value there, there is a lot of

1:31:24

stuff to learn. And essentially, I mean, a

1:31:26

lot of the ways that I have

1:31:29

been able to understand Bitcoin are based on

1:31:31

things that I've learned from monetary theory and

1:31:34

monetary history and just applying that to a

1:31:36

different context. And so, and to me, one

1:31:38

of the most fascinating things about Bitcoin, the

1:31:40

reason that I got interested in it in

1:31:42

the first place is my sense was, okay,

1:31:44

we have all these theories of how things

1:31:46

work. And a lot of these theories match

1:31:48

the data, but of course they match the

1:31:50

data, right? Because theory can never be completely

1:31:53

detached from like personal experience. So the fact

1:31:55

that we've experienced all of these things is

1:31:57

informing what we're writing down with our theory.

1:31:59

And the interesting thing to me was, okay,

1:32:01

here's Bitcoin. And so in

1:32:03

some ways it confirms certain

1:32:06

things about monetary theory and

1:32:08

some ways it challenges certain

1:32:10

things in monetary theory. But

1:32:12

this is fascinating because no

1:32:14

matter what happens with Bitcoin,

1:32:16

no matter how anything plays

1:32:18

out, it's a way to

1:32:20

take something that

1:32:22

didn't exist when a lot of

1:32:25

these theories were written down and

1:32:27

sort of test those theories with

1:32:29

something that the theorists who wrote

1:32:32

these things down never could have

1:32:34

thought about or predicted. And

1:32:36

to me, that's just a fascinating thing.

1:32:38

And I think that there's actually a

1:32:40

ton of interesting monetary theory, interesting monetary

1:32:43

history. that can be learned and that

1:32:45

can be valued. And I would also

1:32:47

point out that there are many people

1:32:49

in Bitcoin who have learned a lot

1:32:51

of this stuff, whether formally or on

1:32:53

their own. They might not be economics

1:32:55

professors, but a lot of them have

1:32:57

read a lot of monetary stuff just

1:32:59

because of their interest in Bitcoin. And

1:33:01

what I would say is if you've

1:33:03

read that stuff and you enjoy that

1:33:06

stuff, you should just know that there's

1:33:08

a lot more of that stuff that

1:33:10

exists. And it's really good.

1:33:13

And also, I would just say,

1:33:16

like, probably the last point is

1:33:18

that their interactions are going to

1:33:20

be biased, especially negative

1:33:22

interactions, right? Like, so if you're

1:33:24

if you're on, if you're on

1:33:27

the internet, if you're on social

1:33:29

media and you're arguing with somebody

1:33:31

about Bitcoin, that's because, you know,

1:33:33

like people, it attracts the internet

1:33:35

attracts people who like to argue

1:33:37

with each other, right? And so

1:33:39

if you If you're arguing with

1:33:42

somebody that doesn't mean that person

1:33:44

is representative of the profession or

1:33:46

representative of the views of economics,

1:33:49

actually like they are just probably one of

1:33:51

the loudest voices in economics and whether they

1:33:53

agree with you or not is just tangential

1:33:55

to the fact that they're kind of one

1:33:58

of the loudest voices. And

1:34:00

the loudest voices by definition are

1:34:02

the people with the strongest opinions,

1:34:04

but you shouldn't assume that they

1:34:06

speak for everybody or that... they're

1:34:08

even representative of what we believe.

1:34:12

Yeah, it's like the meme of the person stuck on

1:34:14

the computer saying, I can't come now, someone's wrong on

1:34:16

the internet. But so this has

1:34:18

been really great. If there was one kind of

1:34:20

piece of, if there was one book that you

1:34:22

would recommend to someone, what would it be? Well,

1:34:26

I mean, honestly, what

1:34:28

got me into this stuff

1:34:31

was studying, you know, alternative.

1:34:34

you know, monetary systems and the work of

1:34:36

people like Larry White and George Selgin. Like

1:34:38

these were guys that, you know, the cypher

1:34:41

punks were reading like these guys were on

1:34:43

the cypher punk mailing list. And so they've

1:34:45

written a lot about free banking. They've written

1:34:47

a lot about the gold standard. They've written

1:34:49

a lot about these things. And I think

1:34:51

that those people are, you can

1:34:53

read them and you can always gain

1:34:56

something. And even if you disagree with

1:34:58

certain things or even if you, you

1:35:00

know, or even if, you know, you,

1:35:02

you likes. you know, certain aspects of

1:35:04

what they're writing about and not others.

1:35:06

Like, I mean, you can read, you

1:35:09

can read their stuff and you can

1:35:11

learn a lot. And you can also,

1:35:13

and the other thing about their work

1:35:15

that I think is valuable is their

1:35:17

work, a lot of their work on

1:35:19

things like understanding current monetary policy is

1:35:22

done through the lens of, yeah, let's

1:35:24

think about current monetary policy, but let's

1:35:26

think about what a competitive system would

1:35:28

look like and then compare that to

1:35:30

how the actual system works and is

1:35:32

there any way that we can convince

1:35:35

monetary policymakers to move in the direction

1:35:37

that where they would at least behave.

1:35:39

Similar to how a competitive system would

1:35:41

work and I think like those are

1:35:43

actually really interesting thought experiment. Especially

1:35:47

because if you think we can't get rid of

1:35:49

central banks well you should at least want to

1:35:51

change their behavior to stop doing the bad things

1:35:54

and start doing you know start doing a better

1:35:56

job. I've always found it

1:35:58

weird that George Shaljin isn't Bitcoiner. Do

1:36:00

you, is that surprised you? I

1:36:03

think that, so you

1:36:06

asked me earlier sort of, you

1:36:08

know, what's the ideal system? Like

1:36:10

George, his work on free banking

1:36:12

really emphasizes that the reason that

1:36:15

competitive free banking works really well

1:36:17

is that the amount of money

1:36:19

supplied just matches money demand. When

1:36:21

you issue too much money, people

1:36:23

redeem those notes for gold. And

1:36:26

so there's a market -based constraint

1:36:28

on your ability to create money

1:36:30

and things like that. But the

1:36:32

thing is, is that because they

1:36:35

have the incentive to issue more

1:36:37

notes, they tend to issue the

1:36:39

amount that's demanded. And so that

1:36:41

tends to minimize a lot of

1:36:43

fluctuations that central banks cause because

1:36:46

central banks are moving around the

1:36:48

money supply. People's money demand

1:36:50

is changing. But they're

1:36:52

not necessarily related in any particular