Latest / What Bitcoin Did / The Biggest Lie in Economics | Allen Farrington & Sacha Meyers

Transcript

The Biggest Lie in Economics | Allen Farrington & Sacha Meyers · What Bitcoin Did

0:00
This 2% figure, it was literally completely made up.
0:06
It was in a TV interview.
0:07
You cannot have deflation unless your labor is worth more.
0:10
The current system is going to operate under these assumptions until it no longer works.
0:17
You're getting deflation because you're essentially just crumbling a very fragile house of cards
0:23
of debt.
0:24
You would indeed have a massive issue.
0:27
But if you think that you can improve the faults of human psychology by adding even more noise on the line, you're deluded.
0:37
Very successful economies have operated under conditions of deflation for thousands of years.
0:42
The most innovative periods of Western civilization, a money that is creating an environment whereby innovation manifests as deflation,
0:51
is going to be one that is maximally beneficial
0:54
and that people will therefore want to willingly adopt.
1:00
Alan, good to have you back on the show.
1:02
And Sasha, I've never met you.
1:04
This is the first time we've ever met.
1:06
I've told Alan this a bunch,
1:08
but Bitcoin is Venice is my favorite Bitcoin book.
1:11
He always says it's not a Bitcoin book,
1:13
but for me it is.
1:15
But it's really good to meet you.
1:16
Thank you for coming on the show.
1:17
Do you want to just tell everyone a bit about who you are?
1:19
because the audience doesn't know you as well.
1:22
No, I'm the elusive partner in the duo here.
1:26
That's how I like it.
1:28
No, so look, I used to work with Alan.
1:32
We met at an investment firm that we both worked for.
1:35
I still work there.
1:37
So by trade, I'm an investment manager
1:41
and I have a background in environmental sciences
1:44
and not studied economics either.
1:47
So, you know, that's what you were saying earlier
1:49
before you start recording perhaps.
1:50
And it's just an interesting area that I've developed.
1:54
And Alan and I have been sounding boards for each other
1:58
through the years.
2:00
And we now and again, over a couple of pints,
2:04
start developing an idea of it more than another.
2:06
And then that's when we start thinking,
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hey, maybe this is something we ought to develop.
2:11
So then it turns into busy afternoons and evenings and weekends
2:15
where we just try and get some drafts together.
2:17
And yeah, it's been a fun intellectual partnership.
2:22
One thing I'd add to that, just given Sasha isn't as kind of out there in the Bitcoin community,
2:28
that's presumably what most of your audience is, Danny.
2:31
I'm not sure how well known this is.
2:33
I don't know if I'll have said it publicly in exactly these words, but Bitcoin is Venice.
2:38
Just the book, the collection of essays is basically what we spent five years talking about
2:45
and then in lockdown had a good excuse to write for once like that's basically what where it came
2:52
from but uh and now the band is back together we've got a new chapter are you going to do a
2:57
new version of the book ah yeah yeah good question so it's this one number go down it's intended as
3:04
a standalone essay so it's you know you can read it without any other context but we intend as well
3:11
to probably modify it a little bit,
3:13
but to slip it in as a new chapter
3:15
for the second edition of Bitcoin is Venice.
3:17
So I'm not sure how much we're actually
3:18
allowed to say about this.
3:21
I mean, I tweeted some of this,
3:24
but the second edition will come out
3:26
sometime next year.
3:28
We're hoping that we can launch it
3:29
at next year's Bitcoin conference.
3:34
There's other fun details that we're hoping for
3:36
that Bitcoin magazine will probably get mad
3:38
if I say now.
3:39
I'm not sure they're entirely confirmed,
3:40
But yeah, so standalone essay, but will be slotted in.
3:47
Awesome.
3:48
Right.
3:48
Let's get into the essay then.
3:49
So number go down.
3:50
This is all about deflation.
3:52
Do you think we should start this conversation by talking about inflation, though?
3:55
Because like this is to me as someone who came into Bitcoin with really like never having
4:00
dug into economics at all, like the idea of inflation was always presented as a good thing.
4:06
You know, like a healthy economy would have 2% inflation.
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but like you start this by talking about that as obviously being one of the the big myths of like
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Keynesian economics so can we start there like what is the myth of inflation what is the myth
4:20
that you need it I guess this is and you kind of alluded to it there that it's just presented as
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common knowledge like kind of obvious I guess I mean it's sort of difficult for me to remember
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if I ever even believe this or what it is people typically believe but that it's just
4:36
You know, obviously you need a bit of inflation because otherwise we'd all starve and die.
4:41
I don't know, do you want to give a more serious answer?
4:43
You're still in TradFi.
4:45
What do they think?
4:46
So I'll answer your question in a slightly different way.
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I'll say that one reason we're addressing this is because it is one of the axioms of traditional economics.
4:58
So any school of thought is going to be based on a number of assumptions.
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And those are the core assumptions that then you build on to have all of your other workings.
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and when you come with a fundamentally different understanding of how things work you also need to
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sometimes go after the fundamental assumptions and knock them out so this is this is our attempt
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at doing that i would say that none of it individually is new it's just taking arguments
5:25
from bits here or there and then we are working through it with our own logic and then maybe
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building on some of this but look the idea that things need to inflate over time is based on a
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number of assumptions which we talk in the essay about how you derive that two percent nobody really
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knows it's very much a finger in the air sort of thing but the reason why you need it is also based
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on some assumptions such as paradox of thrift which is that you need people to feel almost
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coerced into spending otherwise they won't and then this has deleterious effects which feeds on
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itself and so these are the core bedrock assumptions and what we're saying is look
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you have a completely different way of thinking about it you don't need to make those and
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the economies very successful economies have operated under conditions of deflation for
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thousands of years really like hundreds of years the most innovative periods of western
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civilization have operated under gold standards where the natural order of things was to have
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a nominal deflation in price so this isn't something that is completely out of the ordinary
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out of what you can tangibly observe we're now operating in an environment where we just assume
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inflation is how things are and it's the is the water we swimming swim in and so we don't question
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it and well the essay we want to start questioning it a little bit but where did that assumption
6:57
initially come from? Because you talk about, I think it was a New Zealand banker who kind of
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made a throwaway comment. And that was that the start of this?
7:06
I don't think so. No, I think that's, that's entertaining in terms of this 2% figure that it
7:12
has this kind of odd lore behind it, because it's always presented as, you know, state of the art.
7:19
And I guess, again, it's difficult for me to remember if I ever even bought into this,
7:26
like how a normie would buy into it, but I'm pretty sure that it's understood, or at least it's
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mispresented as being in some way derived scientifically or mathematically. It's really
7:40
serious, right? It's very serious. People have thought about this and come up with the optimal
7:45
answer. That's the way it's generally understood. And when you dig into where this number, basically
7:50
when you do exactly what Sasha just said, okay, but why? Where does it actually come from? You find
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that it was literally completely made up.
7:58
It was in a TV interview by this,
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I forget the guy's name,
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New Zealand, was it?
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Finance minister or something.
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I wouldn't say though that that's the,
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there's a distinction between, you know,
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the 2% number and the broader, you know,
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base of knowledge and belief that gives rise to it.
8:16
I think at risk of maybe going a bit deeper
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than you want to right now,
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we're not just critiquing this one guy
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and, you know, everyone eating 2% mindlessly since then.
8:25
I think it's more that he was in a position to say that and it then became lower because of the much more widely accepted macroeconomic thought that's, I think it's basically fair to just call it Keynesianism, you used that word already, but that had been prevalent for most of the 20th century and particularly acute in practice since 1971.
8:46
one so i if anything is maybe it's like an interesting historical counterfactual if this
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hadn't happened and everyone hadn't latched on to this number how would it have been understood
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since like how would it be justified um so yeah so that guy and that number isn't really that
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important it's just like it's an amusing footnote in the development of this uh very poorly conceived
9:09
theory but does that signify something that like you say that's not super like him alone saying
9:15
that isn't super relevant, but does it signify something? Because like, it's the same thing as
9:18
when Jerome Powell goes out and talks about interest rates, which might like not have a
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meaningful impact in reality, but like the vibes of him saying that has a huge impact on markets.
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Is it the same kind of thing? No, I don't. I don't think it is quite the same. I mean,
9:32
that example with Jerome Powell or, you know, the Fed and the inflation expectations and whatever
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else that that's interesting to get into later. This is more. I think the reason we put this up
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front is precisely because of how silly it seems it's it it is just this it's lore like i think i've
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kind of landed on a nice way of of capturing it that again you you would think from the way it's
9:57
talked about that there's a much more serious source of this number and there just isn't at
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all it's literally just some guy thought of it on the spot and then it stuck um it's kind of again
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it's incident like that it could be any number right it doesn't have to be two it just happens
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to be too for this particularly silly reason. I think the stuff about, you know, comments from
10:17
the Fed chair, that's a bit, that's more insidious. That's kind of deeper in the rot of what we're
10:22
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12:47
Okay, so before we get more deeply into like deflation, can you kind of give me the
12:53
Keynesian argument as to why deflation is a terrible thing that must be avoided at all costs?
12:57
What is their reasoning for having that line of thinking?
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So as I mentioned before, Paradox of Thrift is the core one there. So look, even though,
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as Alan said, the 2% is something that is just selected in a slightly random way, we'll say,
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charitably the idea the more grounded idea is that it should be low and stable yeah so two is
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the conclusion on low and stable so why do they want low and stable why should you start inflating
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the money there is at the heart of this argument a belief that you need to spur people into action
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you need to spur people into spending money and it is through this initial impetus that you then
13:44
create a virtuous cycle whereby I'm, oh, I better spend now because the money is going to be worth
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less in the future. So I'm going to go out and buy a new laptop or buy a whatever. And then this
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is going to create demand, which is going to then feed into employment. And it's going to have this
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nice cycle. And the idea is to try and maximize the health of that cycle by finding a rate of
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inflation that is neither too high that it starts to mess up everything.
14:16
Cause I think even Keynesians will concede that if you put that number at a,
14:22
at a very high level if you start inflating your money too quickly you degrade price signals to a point that is completely unhelpful And but they still believe that there is this maximum almost like a quadratic function where you slowly improving the economy
14:37
as you increase inflation.
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And if you go past that point, it starts to degrade.
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Our point is just that you immediately degrade.
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So you're just making it bad from the start.
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And so that's their underlying assumption behind this.
14:52
Is there also like a conflation between the idea of like deflation being prices falling and deflationary bust and like credit collapse? Are those two things intertwined in their thinking?
15:03
Yeah, yeah, yeah.
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Yeah, I also think, so you need to understand how schools form.
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They often form around or after a crisis.
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And in the event of fiat, you need to look at the 29, 1929 crash,
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and also some of the failures of central banks in dealing with these periods of economic distress.
15:27
and through that crisis you then find solutions that maybe address this specific environment and
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then you think you have found now the answer the answer to everything instead of maybe something
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that either a completely misguided answer that worked for other reasons and then you establish
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that school around it and you will not want to challenge that unless or until there is another
15:52
crisis that emerges. So frankly, I think that the current system is going to operate under these
16:00
assumptions until it no longer works. Because I don't think you're going to convince people at
16:07
central banks to slowly get rid of these models and start adopting a different understanding of
16:11
the world. Look, we will have some thoughts on how that is spurred into action. But yeah,
16:17
the idea is to at least lay down some foundations before the prices such that after it's happened,
16:24
hey, you have a set of tools that you can now try and understand the world with.
16:30
So with the idea that if prices are falling, people are going to hold off spending.
16:36
Why is that not true? Because for me as a Bitcoiner, I know that my Bitcoin is going to
16:41
appreciate value over time. And so especially with bigger purchases, I do do that. I've wanted
16:47
to buy a house for a long time.
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And the thing that I always think is,
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well, it'll be less Bitcoin in a few years time.
16:52
So why do you think that wouldn't be the case?
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I'd be careful with that, Danny, though,
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because for one, Bitcoin,
17:00
we would argue is currently monetizing, right?
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It's not stable.
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It's likely to appreciate in value
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purely by sucking value from other currencies.
17:09
I guess narrowing in on our argument, though,
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the word Bitcoin doesn't actually appear
17:15
in this essay at all,
17:16
which is kind of a bit of a, I don't know,
17:19
like a nod to our overall approach in Bitcoin is Venice.
17:22
Obviously the word Bitcoin does appear
17:23
throughout Bitcoin is Venice,
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but this is why my joke about it
17:27
not really being a Bitcoin book,
17:28
that's just clickbait for Bitcoiners
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to instead learn about economics and capitalism
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and all our other random thoughts
17:35
of trying to tie all this together.
17:38
So yeah, without going too far off on that tangent,
17:42
I'd be careful about applying it
17:44
in a contemporary context
17:46
where you have Bitcoin as an alternative,
17:48
because I'm sure you would agree,
17:50
I'm sure most listeners would agree,
17:52
these circumstances are basically historically unprecedented.
17:57
Which I guess, I mean, in rounding off,
17:58
I'm kind of avoiding the question entirely.
18:00
You can maybe, you can probe again,
18:01
and we can go a bit further with it.
18:03
But that's a good reason to try to think about this
18:08
as clearly as possible.
18:09
Think about it as from first principles as possible,
18:12
because it's unprecedented,
18:13
and all the fiat nonsense won't work.
18:15
let me give you a different version then because um so for a long time people have been saying i
18:19
should translate or have someone translate the podcast and do it in spanish because there's a
18:23
massive audience that maybe benefit from getting bitcoin education that just don't speak english
18:27
and so we did look into this and we looked into getting like essentially voice actors to do it
18:32
this was years and years and years ago and then over the last few years it's like well i'll just
18:37
wait until ai can do it which it now can and it's something that i may potentially do in the future
18:41
And again, that is down to how much things like this will cost us.
18:47
So two things.
18:48
One, let me, by the way, just answer very quickly the previous question, which I'm now realizing I didn't really address properly.
18:55
Or I also didn't.
18:56
I just answered a different one.
18:58
Well, don't be afraid to just catch us on that.
19:00
So one, what I was saying previously is because the school is formed from a moment where there was a credit bust.
19:08
And so you got deflation.
19:10
And we talk about this in the essay.
19:11
you're getting deflation because you're essentially just crumbling a very fragile
19:16
house of cards of debt, right? And so that's creating deflation. And so the school is created
19:23
as a result of that. And so it's saying, hey, deflation is the reason we're here. Therefore,
19:29
no deflation, please. Inflation, good. So let's have inflation. And you at that point,
19:34
throw the baby with the bathwater because we say there's two types of deflation. There's a deflation
19:38
caused by a collapse in a credit crunch. And that's caused by fragility in a system. And the
19:43
other type of deflation is deflation caused by the innovation over time. Okay, so that's why you
19:47
need to be careful here. The school is here to look after one type and is inadvertently also
19:52
killing the other. And we think that actually by doing that, you're creating more harm than good.
19:57
On your second question, I'm delaying consumption for some things because it's going to be cheaper
20:02
in the future? Yes, absolutely. And we think that's also a good thing. We think it's a good
20:09
thing because when you're delaying consumption, what are you often doing with your money? You'll
20:14
be investing it, saving it, putting it in some form of, even if you're storing it as money,
20:20
you're actually creating liquidity to the monetary framework, which means you're creating
20:24
a more stable way for entrepreneurs to use the money system, to use deep pricing signals and be
20:30
able to understand how things are operating. So as deflation occurs, it unlocks things that you
20:38
wouldn't want to be doing before. Now you can get your podcast down, translate it. That's great.
20:44
The reason that's there, it's because there's a ton of money going into AI and data centers.
20:50
And guess what? When you build a data center, when you build AI, especially when you're building
20:53
models, you're training models, you're buying, let's say you're buying GPUs. To make a GPU,
20:57
First, you need to make a lithography machine.
21:00
To make that, you're going to need a factory.
21:02
And once you have these GPUs,
21:04
you're going to need to have a training cluster.
21:05
And then you're going to need to train that model for months
21:08
and have everything ready
21:11
before you can even start doing any of this translating.
21:15
And for that, you're going to need
21:17
literally hundreds of billions of dollars invested.
21:20
Where's that money going to come from?
21:22
It's going to come from people saying,
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hey, you know what?
21:25
I'm happy not spending today.
21:26
I'm happy not buying a car right now.
21:29
I'm happy instead investing this.
21:30
And then that way we can build this factory.
21:32
That way we can then create a model that can translate this thing that can now create a
21:36
higher standard of living for everybody.
21:39
That's the function.
21:40
It's not about if you're delaying anything, you're not just not doing it's not like there
21:46
is something versus nothing.
21:48
There's something today versus something tomorrow.
21:51
So you need to think about your opportunity cost, what else you're doing.
21:54
I think I'd add to that the paradox of thrift is seductive because it's not complete nonsense,
22:04
right?
22:04
It feels plausible, provided you're lazy in your assessment of causality.
22:13
So it does feel somewhat, I wouldn't say it feels right necessarily, but it feels plausible
22:18
that if you don't spend,
22:22
well, then how's anybody going to earn
22:24
to employ, to invest, blah, blah, blah, blah, blah.
22:27
But that's exactly the wrong order
22:30
in which things actually happen
22:32
in terms of how you arrive at a situation
22:34
in a remotely complex economy
22:36
where you can buy these things
22:38
that have gone through a production process.
22:41
They only exist to buy
22:43
because of enormous investment,
22:45
as Sasha just described.
22:46
and the enormous investment is only possible with savings.
22:50
And I think a good kind of heuristic,
22:53
almost like a mental hack that we use a couple of times,
22:56
and actually we use it a lot
22:57
just in the rest of Bitcoin is Venice too,
23:00
is to unwind the kind of,
23:05
the seductive trappings of the paradox of thrift
23:08
that arise in the first place
23:10
because of how complex our economic circumstances are.
23:13
And just think about, you know,
23:14
it could be like Desert Island economics
23:16
or what we like to use a lot, just a farmer with seats, right?
23:20
When you're saving, when you're investing,
23:24
all that really boils down to is you are choosing to use your time
23:29
to create more in the future rather than consume what you have now.
23:34
And the more complex an economic structure,
23:37
the more kind of obfuscated this becomes
23:40
in terms of what you see as a consumer.
23:42
You might just see, oh, I'm going to buy this,
23:44
you know well like ai examples are maybe a bit confusing but well that's it's actually good that
23:49
they're confusing right that makes the point it's like i'm gonna buy this or i'll use your example
23:53
i'm gonna buy this translation service now or i'm just gonna wait for like a clod subscription to
23:59
deflate in a couple years or whatever but that can only exist for the reasons sasha described
24:04
which are incredibly complicated and are ultimately rooted in saving as opposed to consuming it's and
24:11
And that's the crux of it, that it's,
24:13
maybe even, I'm not sure, I'm not disagreeing with you,
24:15
but reframing what Sasha said a little bit,
24:17
that it's not like these are sort of orthogonal.
24:21
It's that when you really drill down to it,
24:23
it might feel orthogonal in the moment as a consumer,
24:26
but when you really, really drill down to it,
24:28
you are either consuming now or saving for later, right?
24:34
There's not really any middle choice
24:36
and you certainly can't do both.
24:39
So that makes sense.
24:39
And like back to what Sasha was saying, I guess in that example I gave initially about the house and Bitcoin, it's like this is where investment and malinvestment get kind of murky because the idea of me feeling like I need if I was like living in Fiatland, feeling like I need to get rid of money now before the house, you know, price inflates away from my my sort of what I can afford.
25:00
like it becomes it potentially becomes malinvestment but the the question that i've
25:06
asked you before alan and i'd like your opinion on sasha is like how do you know what is investment
25:11
and what is malinvestment so this is the very pernicious heart of this issue in the moment
25:21
you do not know that's it that's why it's so bad because an investor is going to go off signals
25:30
given by prices, and you want these prices to not be corrupted. If they are corrupted,
25:36
you could be a completely rational investor who is incredibly thoughtful, forward-looking,
25:43
best-intentioned, and you're going to malinvest. And it's not your fault because you are investing
25:50
on the back of a faulty set of assumptions caused by a distortion in the price mechanism.
25:58
We see it through bubbles. We see it when you make the cost of money too low. You bring the interest rates down. You're creating essentially a longer duration investment than is justified by the amount of savings. But this is only recognized after the facts.
26:15
So we also talk a lot in our essays about how you need to run experiments, practical experiments to know things. You can't just theorize your way to an answer. And a bubble is only something that you have a diagnostic understanding of after it's burst. Before it's burst, it's not a bubble. It could be completely legitimate. It could be a completely legitimate allocation of capital to respond to needs brought about by consumers and innovation.
26:42
and even in an environment with no noise on the line,
26:49
there's no corruption, you will still get it wrong
26:52
because there's human fallibility, people are excited,
26:55
there's a boom and there's a bust,
26:57
and that's human psychology.
26:59
It will always be with us.
27:00
But if you think that you can improve the faults of human psychology
27:06
by adding even more noise on the line, you're deluded.
27:10
I would like to see a scenario where that's actually happened because I don't know of one.
27:16
So that's the trick here.
27:18
You don't know about malinvestment, but let's at least ensure that the amount of malinvestment we are likely to cause is as slow as possible.
27:26
I just want to build on that with, again, a tangible example that's kind of cutting through the complexity of assuming we're in this incredibly complex economic system that we are.
27:38
A rhetorical device that we use in the essay is this point about, if you knew that it would take you something 2% longer to do, just in terms of time, like, again, cutting through even money being part of it, just time.
27:58
If it would take you 2% longer next year, is that the only reason you would ever do it?
28:05
which sounds absurd, but it is pretty much logically equivalent to the fiat slash Keynesian
28:13
argument of we need the, as Sasha was saying a couple of answers ago, the stimulus of the
28:21
expectation of inflation to ever do anything now. This is a good way of trying to wrap your head
28:27
around just how insane it is to really, to not, what's the best way of putting this, to
28:35
not be as aware as it's perfectly, you know, you're perfectly capable of being on this point
28:43
of misinformation that Sasha's making, right? This idea that you can, you know, malinvestment
28:47
is effectively acting on false signals or noise, I guess, right? It's acting on noise in terms of
28:53
of your entrepreneurial decision making If that sounds a bit too abstract to imagine like okay well what would that mean and how would you even know This 2 thing with your time is basically the way you know It like would you ever do you do things basically
29:07
Do you do things now?
29:08
Or do you need somebody threatening you
29:11
with it taking a little bit longer next year?
29:13
If you'd rather just do them now,
29:14
then you can cut through all of this.
29:16
Huh.
29:18
Can we talk,
29:19
so you both brought up the paradox of thrift.
29:21
And one of the things that you were sort of hinting at
29:24
in the essay, which I didn't fully understand, is the idea that the sort of traditional economists
29:30
think that progress in the economy is potentially a threat to the system. And I don't exactly know
29:36
what you mean by that. I forget exactly where we mentioned this, but I think I know what you're
29:44
referring to, that they, because they are so insistent on this constant stimulus, like they
29:52
like they actually use the words that we're not even mocking them there they say the word stimulus
29:56
um if there is ever widespread enough deflation which is always in everywhere you know in reality
30:04
this is a micro phenomenon it's it's individual goods their prices deflate but if it's widespread
30:10
enough that it makes its way into macro statistics they get scared and they want more inflation i
30:17
think that's what we're referring to i don't know if you remember this in any more detail
30:20
There are other angles around how if you start to innovate, fundamentally, innovation is going to be doing more with the same amount or doing more with less or more efficiently or faster, these sorts of things.
30:34
There's also a fear of ending up with resources which are not used.
30:40
And so maybe now people are unemployed.
30:42
You've just made something much more efficiently.
30:45
You no longer need as many people in the factory.
30:48
You now no longer have this demand.
30:49
This demand is gone.
30:51
And as a result, the flywheel is no longer spinning.
30:55
And it's time to print.
30:57
It's always time to print.
30:58
That's a very important thing to understand.
31:02
The ultimate flow chart.
31:04
Yeah, exactly.
31:05
This all gets to the heart of it.
31:08
It's time to print is essentially the conclusion of every Powell interview.
31:16
It's just about how much, really.
31:17
this this might be a stupid question but like especially when you break these things down in
31:24
in the essay like it this the whole like the economy is a very complex thing there's loads
31:30
of like second third order consequence of any decision like can it actually be measured or is
31:35
the problem that they're trying to measure it too much i i very much think the latter yeah it's
31:42
Some things can be measured, but I don't think anything can really be measured perfectly.
31:49
And most things can only be measured poorly or not at all.
31:53
So the more they try to, what they typically do, or what they typically try to do, they don't really, it's impossible to succeed.
32:01
But what they're trying to do is use measurements that they're pretending are good or even make sense when in fact they're bad.
32:09
Things like CPI.
32:11
Sure, yeah.
32:11
I mean, basically any macro statistic is kind of false for the same trap I was mentioning before.
32:18
They want to use that as justification because it seems like real data, basically.
32:26
I mean, we use this expression here and many, many other times of physics envy.
32:30
They have pretty hardcore physics envy in that they think in these very kind of mechanistic terms.
32:38
They want to interpret, you know, quote, the economy as like a Newtonian classical system, such that if they have enough data about its initial conditions, they can then reason counterfactually about what it will do or what it would do if they intervene in a particular way.
32:58
And all of this is nonsense, but it's in terms of the way the methodology is presented, it's by their logic, it's dependent on having this data. And so to your question, yes, they have to pretend that this data exists and is meaningful, but it either isn't or doesn't.
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That's L-E-D-N dot I-O forward slash WBD. But when they say that deflation could be a threat
35:51
to the system, are they right in some ways? Because the thing that I struggle with is like,
35:55
let's say i just for easy math let's say i earn 100k a year and i have a 200k mortgage
36:00
um if my if we live in like a true free market deflation economy and my wages then are deflating
36:07
as well as the price of everything the debt remains at 200 000 and so like these things
36:13
get harder and harder to pay off over time it kind of completely flips that on its head
36:16
so so your wage so let's yeah so the the short answer to your question is yes
36:22
but we need them to dig into it.
36:25
This is a really good topic to explore.
36:28
So your wage, just to touch on that very quickly,
36:31
it might not deflate.
36:32
It might be nominally stable.
36:34
It might be the same amount as things become cheaper.
36:37
It might actually go up as things go lower
36:39
or it might come down but not as fast as other things.
36:42
So we don't know exactly but over time,
36:45
if you're in an environment where you have strong innovation,
36:49
you should still expect the price of things to fall faster than your wage would fall but your
36:54
wage might not fall it might be either static or going up so that's number one number two you're
37:00
then essentially putting this against a fixed number which is your mortgage and what happens
37:09
in an environment which is incredibly dynamic fluid where prices can move and then you increase
37:16
you introduce rigidity. You're getting fragility. You're getting a system that can break.
37:23
That is why debt is very dangerous. So the fiat will say, and this is where it's coming from,
37:30
that's what we were talking about in 1929. You're getting a system that's building a lot of debt,
37:37
creating fragility, breaks under the weight of that fragility, and then says, well, we broke
37:44
under the weight of the fragility. So instead of fixing the root cause, which is maybe don't
37:50
create a system which is incredibly fragile with a ton of debt and massively over-financialized,
37:57
instead of doing that, instead of fixing the root cause, you say, no, no, no, we'll just
38:00
essentially have the cheat code, which is going to be all of those nominal obligations,
38:07
we will slowly make them less and less relevant, which is what inflation is. Inflation is simply a
38:12
way of taking those nominal obligations and inflating them away okay that could be your
38:20
answer and it's it's very legitimate so for example if you today took the economy under whatever
38:25
currency you're operating under whether it's the british pound or the u.s dollar whatever the euro
38:31
if you took any of these and you flipped the framework from inflation to deflation
38:39
you would indeed have a massive issue because these nominal debts would not go away
38:46
but that's not a good reason to still operate under this system it's the same as saying if i
38:53
stop drinking i'll have a hangover here's the dog okay it's the classic thing right we all know this
38:59
this analogy but that's fundamentally what we're talking about here can i can i push back on the
39:05
the wage point just in a completely different direction to the way Sasha answered.
39:10
I would suggest that it's very sloppy to say, oh, my wages will also decrease.
39:18
And this is, knowing where I'm going with this, this is quite abstract.
39:21
Sasha's answer is a lot more tangible.
39:24
I also want to be wary that you can't be too definitive with this in the sense that
39:29
everything we're talking about is predicated on dynamism and innovation.
39:33
and it is of course possible that that will cause certain jobs to simply cease to exist.
39:39
So you can't say, oh, every wage will stay the same or even go up forever or anything to that effect.
39:45
But if you just think about the value added by labor,
39:49
if you treat it in like slightly more abstract terms like that,
39:52
there's really no reason to think that that will go down.
39:55
And if anything, there's very strong reason to think that it will go up if there is any deflation at all.
40:00
And I think this is back to being as clear, at least trying to be as clear as possible
40:05
about the causality in all of this, like how you unpack the paradox of thrift.
40:09
If there is any deflation, it's not, you know, this is another thing we say a couple of times
40:13
in this essay and we've said elsewhere, it's not a metaphysical abstraction, right?
40:18
It's not like the temperature.
40:20
It's not something that's out there in the universe that you can measure.
40:23
It's a causal process that is fundamentally rooted in innovation.
40:28
I mean, that's basically, that's a decent summary of this entire essay, right?
40:30
And we don't have time to go through all the details of this, that under the circumstances
40:35
that actually you would expect without monetary interference, if people are able to innovate,
40:41
you can trace what will happen and very reasonably expect deflation as a result of basically just
40:47
getting better at things, right?
40:48
And it's even back to the time thing.
40:50
It's the inverse of the, if it would take you 2% longer, it's actually reasonable to
40:53
expect it will take you 2% less or considerably less than that, you know, as we,
40:58
even just in the labor example, as you practice things, as you get better at it.
41:02
And that's, I mean, that's a decent way of thinking about what capital accumulation actually
41:05
amounts to. It's just not necessarily all in your head, right? It's like in the creation of tools,
41:12
the more tools you create, the more valuable your labor will be, the more stuff you can create with
41:18
your labor. And that's deflation, right? So you have to go through this process. You can't just
41:22
like sit your finger in the air and go, oh, it feels like 2% deflation today. I wonder what my
41:27
labor is worth you cannot have deflation unless your labor is worth more so again you got to be
41:33
careful it doesn't mean that you can therefore predict what everybody's wages are going to do
41:37
but in general it is very reasonable to expect that your wages will not deflate
41:43
can you explain that in more detail because like so jeff booth obviously talks about deflation all
41:48
the time more detailed no but like give a 10 minute answer this time no it's but the question
41:53
i have though is like jeff booth obviously always talks about like things dropping to the marginal
41:57
cost of production and so like over time as innovation's happening and things get more and
42:01
more efficient i understand that argument but like what if you take it to the nth degree and you're
42:06
like we we because if the consumer of a product that a company is selling is paying less and less
42:13
and less over time then the income for that company gets less and less over time so well no
42:18
not necessarily because it's very likely that they're creating more and more. So the price is
42:24
going down, but there's not, again, here you have to be careful for basically the same reason that
42:29
you can't say this will happen universally. But in general, there's no reason to expect that a
42:35
given company's revenue would go down with deflation. If anything, you could be very,
42:41
very careful here, but you might expect it to go up on the basis that it's innovative. This is
42:48
exactly again, this is the logic that we go through in much more meticulous detail than it
42:52
would be advisable to try to do now. But the extent to which it is successfully innovating
42:58
is in some sense captured by how much can it therefore afford to lower prices in order to
43:07
take more market share in order to boost its own returns. And that's ultimately what, you know,
43:13
the rationale of the individual entrepreneur, you know, the decision maker in the capital
43:18
allocation process is coming down to is trying to boost returns. And the essay is basically about
43:22
tracing that logic and how that ends up impacting prices But to the extent that they successful I mean I guess in particular if they disproportionately successful to their competitors the act of lowering prices will feed through to them making
43:40
more money okay that makes sense and that's kind of like the supermarket example that you you give
43:45
in the piece right yeah okay so if the question i have is like do we have any shot of of something
43:51
like this happening like if i put you two in charge of all all economies all over the world
43:57
you you get to now pick economic policy like this is i feel like this is a bit of a trick question
44:01
because if we're in charge we would just do nothing or we'd quit but but so what can like
44:07
can it actually go from the system that we live under today to a a more free market deflationary
44:12
system so i would say one thing about this is our approach is fundamentally even though we are
44:21
making quite strong arguments and i'm very willing to back them in discussion and argumentation we
44:28
are taking adopting a position of humility in the sense that neither of us wants to enforce this
44:37
we're not going to force people to adopt an environment that's driven or that manifests
44:44
deflation what we're simply saying is that a money that is structured such that it has minimal
44:50
noise on the line that's creating an environment whereby innovation manifests at the output as
45:00
deflation is going to be one that is maximally beneficial and that people will therefore want to
45:05
willingly adopt such a system so i will we're not here to if we were if we were to literally run the
45:14
economy we wouldn't run the economy we would we would just like say oh well you guys just figure
45:19
it out. And we think that that's where you'll end up. But let's be humble here. This is an,
45:25
as you mentioned, it's incredibly complex. A lot of what we're talking about is theoretical.
45:31
We're trying to be logical and make sense of these arguments, but we could have faulted in
45:39
any individual step or any individual core assumptions. And as a result, I don't want to
45:45
have billions of people operating under a very strict system that I am convinced is going to
45:51
be beneficial. That's totalitarianism. And no, that's not what we're about. But it should be
45:58
bottom-up adoption. And it should be bottom-up adoption of something that has been created that
46:04
meets these requirements and that can essentially escape any attempt at being either taken over,
46:11
coerced or put down. Oh, if only there were such a system, it would be fabulous. Yeah.
46:17
Danny, I know you're trying to trick us into saying Bitcoin, but again,
46:21
yeah, we have a swear jar for that. No, again, seriously, we don't use the word Bitcoin in the
46:29
essay very, very deliberately because our attitude to this is kind of, if you believe all of this,
46:36
Bitcoin will just come to you naturally.
46:39
And maybe this is kind of the inverse of like,
46:42
Sasha's saying in the argumentation,
46:43
we're humble, we think.
46:45
But in the marketing,
46:48
we're trying to be as obnoxious as possible
46:49
because we want as many normies as possible to read this.
46:52
Like your audience agrees with all of this, all right?
46:54
Like probably 99% of them agree with 99% of it,
46:57
realistically.
46:58
But we've written this in such a way
47:00
and we kind of have in the back of our minds
47:01
that we hope Bitcoin is Venice can work in this way.
47:05
I mean, you know, it's hard to read.
47:08
So it's not like a good introduction to Bitcoin.
47:09
But for certain people that are susceptible to these kinds of arguments,
47:15
we want them to realize they believe in Bitcoin
47:19
without even mentioning Bitcoin until like two thirds of the way into the book.
47:24
So and this essay will be chapter six, I believe.
47:28
So it's well before we start talking about Bitcoin.
47:30
When I brought up Bitcoin before,
47:32
you like rightly push back that it's in this kind of monetization phase like how far does
47:38
bitcoin have to go until it can actually sort of fulfill what you're talking about here
47:42
oh that's hard i don't know well a lot clearly we're obviously not there yet how far i mean
47:48
do you even have like what kind of answer would make sense here do you think because it's not
47:53
clear to me how to try to answer that that's why i asked it because i don't know the answer to it
47:57
the day you denominate the market cap in bitcoin that's yeah yeah that's a good answer actually
48:04
yeah i've had this thought before this like it's a bit too no one will ever actually do this i guess
48:09
until it happens and you know somewhere between 10 years and never that yeah you obviously have
48:15
to start talking about it yeah sorry you have to stop talking about it in dollar terms and i've
48:19
my idea was like in the interim is there a way of communicating its value as something like
48:26
the percentage of global m2 and gold or something like that but like no one's ever gonna you know me
48:33
and three other people will actually like that and no one will adopt it and um so yeah i get maybe
48:38
to sasha's point it's like you'll know it when you see it sense that you definitely need to stop
48:43
talking about it in dollars but i don't know what you start talking about it in either it's that's
48:49
that is pretty much the same answer you gave when i asked about investment and malinvestment on a
48:53
previous show. You were like, you'll pretty much know it when you see it. That's kind of the answer.
49:00
I feel like that captures a lot of our thinking, right? You go to experiment. You can't just
49:05
figure it out. Were you going to add something there, Sasha?
49:08
No, I was just going to say, you need to run the experiment. You need to run the experiment.
49:13
And you don't know. I think, realistically, there will be a few telltale signs. Okay, yes.
49:18
if legitimately when you ask someone how much is a bitcoin worth they say it's worth a bitcoin
49:25
like one bitcoin is worth one but they don't mean that they literally that's where their brain goes
49:31
to immediately we got a long way to go you know you're you're you're probably there at that point
49:36
or you're very close to it but how long does that take i i have no idea and you need to just
49:40
run the experiment and uh hopefully people recognize along the way there are signposts
49:46
that as we get closer to that,
49:48
we are benefiting from operating on this monetary system.
49:52
Okay, I'm going to use this as my personal education session now
49:55
because there was a bit in this that you...
49:57
I'm going to find the quote
49:59
because I got totally lost on one paragraph.
50:02
That probably just means we need to redraft it.
50:04
This will be good for the book.
50:06
It was when you talked about time
50:09
and there was the Valrasian auctioneer to Tomman
50:12
and I got fully lost
50:15
and I don't know what you were talking about.
50:16
That's...
50:18
All right, did you want, please, please, for the listeners, please read it.
50:23
No, no, do you have it? Do you have it?
50:25
It was one paragraph.
50:27
Okay, so I will just, I'll eat the air whilst you go and look for it.
50:33
But just prefacing this, the idea is not necessarily that we want you to understand exactly what's being said in that paragraph.
50:42
Because...
50:42
It's a summary of pretty much everything.
50:45
Even though we are, so we do want to say, we do want to show a couple of things.
50:49
One, we actually understand what the other side is saying.
50:52
So we are representing the argument in a way that is technically accurate, but also very clearly funny or satirical.
51:04
Yeah, we're mocking it because we understand it.
51:08
Yeah.
51:08
And the idea is not for you to read that and think, yeah, I completely get it.
51:13
The idea is it's kind of ridiculous.
51:14
but this is how it works so if you have it please go for it the quote let me i can find it it'll
51:22
take me a minute let me find it a few moments later i think this was it it was fiat economists
51:29
treat time as inconvenient friction in the hallowed halls of neoclassical theory time does not exist
51:33
there is only an equal room the market has achieved a pareto optimal stasis via the valrasian
51:38
auctioneers tatonman yielding a price vector of zero aggregate excess demand every autonomistic
51:44
utility maximizer has aligned his marginal rate of substitution with the price ratio
51:48
while firms reach a profit maximizing zenith where marginal cost is perfectly aligned with
51:52
marginal revenue perfection as my michael fastbank bender might say that
51:57
what let me just say something if you don't get that then i don't know what to tell you because
52:05
we really tried hard to explain the logic and internal consistency and just how approachable
52:14
FSC economics really is. So I don't know what to tell you. You don't have time to convince me.
52:20
I mean, I would say less sarcastically that if you don't get that, that's probably healthy. That
52:25
means you haven't wasted a decent amount of your time learning what these things allegedly mean in
52:29
the first place. This is like, do you remember when you did that tweet years and years and years
52:33
ago alex where it was like you were comparing bitcoin to the fiat system and you and you did
52:38
that diagram where there were just lines going everywhere oh a diagram yeah yeah i still have
52:41
that piece of paper i feel like i should get it framed yeah um so go on try try and explain what
52:47
what this section is about because i i don't know oh i mean it's well do you want to do it
52:52
not sarcastically you could go through everything single one of these things but fundamentally the
52:57
core idea is that you are you have you have equilibriums and you're trying to maximize things
53:03
So whether it's a firm, whether it's a consumer, you're feeling your way towards an optimal and then your vector is here.
53:10
So you're basically, it's about optimizing.
53:13
It's about having very complex models and maximize, yeah, maximizing things, which we fundamentally reject as a premise for how you operate in a system that is completely uncertain.
53:26
uncertain not risky uncertain that has radical uncertainty that is
53:30
unquantifiable in some ways and unpredictable and unmodelable so against that you're getting
53:37
all of the terminology from yeah from from that school which is very technical and frankly
53:42
look some of these models i think that individually they're making interesting descriptions which can
53:50
get you to so for example the tatanement which is really about price discovery we do talk about
53:54
price discovery. But the way in which the Walrussian auctioneer is operating is just not the same as
54:01
the way we would describe it. So it's almost an ontological difference between what we're doing.
54:05
Yeah. Well, I'm starting to feel a bit sorry for potentially very confused listeners just to try
54:11
to wrap all this up into a more direct answer to your question, Danny. That paragraph is us
54:17
invoking as much fiat economics jargon as possible accurately, but in such an over-the-top way as to
54:28
try to make the point about how ridiculous it is. So I wasn't kidding when I said before that if
54:34
not only you, Danny, but if one doesn't understand it, it's honestly a good thing. If you bother to
54:41
work through the meanings of all these terms, which are like not that ridiculous in isolation,
54:47
But when we cram them all together, the joke we're making is it is ridiculous.
54:52
If taken to an extreme that by their methodology ought to be allowed, it's actually revealed to just be ridiculous.
55:01
Well, I would take that as a compliment if I didn't go back and read that paragraph three times being like, what the fuck are they talking about?
55:07
OK, so but this you then like go on to explain like how they think about time as a part of the economy.
55:14
Well, they don't think about time. That's the point.
55:15
yeah and they get that wrong so can you explain why because like with time there's obviously
55:20
there's always cost of capital like what is it that they look about incorrectly you mentioned
55:25
causality so that's one causality is a really good one we even talked about the idea of delaying
55:32
things and doing something so i think there's both it's both time and space almost so one is
55:38
is what preceded this action what is causing what is happening right now what will this then cause
55:43
later on rather than just almost taking things in a very static static way um and then the the
55:50
other side is if you're not doing this what else are you going to be doing so it's also thinking
55:55
in counterfactuals opportunity costs and these sorts of things and and that's a that's a form
55:59
of causality because it's going to then lead you to understanding if there's then that then after
56:05
that this and then it's it's it's much more complex and dynamic and the issue is when you
56:10
start thinking dynamically, you can't think with many of these simplifying assumptions that they
56:16
make because there's no more equilibrium. Everything is constantly moving and all of those
56:19
things. So I think one reason why they have to abstract that away is because it just creates
56:25
complexity that they can no longer resolve. And so it's just an annoying factor, which
56:31
it's better to just get rid of in some ways. Well, I think, so I know you have got to go.
56:38
I think we should do a part two because I have like four other sections with a ton of
56:41
more questions that we get into.
56:42
I feel like we've covered like not even the first 40%, like the first 20% of this article.
56:46
Part two of seven.
56:48
Exactly.
56:48
But I am just very glad to see you guys back writing again.
56:52
As a last question, I know you don't mention Bitcoin.
56:56
I know you purposely don't mention Bitcoin, but is the real way out of this for anyone
57:00
that's listening to just move to a Bitcoin standard as fast as possible?
57:05
Yes.
57:06
Next.
57:06
Let's go.
57:07
All right.
57:07
Do you have a less facetious answer to that?
57:11
No.
57:12
Okay, good.
57:12
Well, we will be back with a part two, potentially.
57:16
I'm very glad you guys are writing again.
57:18
I'm looking forward to the second edition of the book.
57:20
Thank you, guys.
57:21
And I do think there's a lot more to unpack here,
57:23
so we should do it again.
57:24
Of course.
57:25
Hopefully sooner rather than later.
57:27
Sasha, everyone knows Alan,
57:29
you've not been on the show before.
57:30
Where do you want to send anyone
57:31
if you want to find out about your work?
57:33
I would like to send them to the nearest bookshop
57:36
and pick up a book that you think is interesting.
57:41
There you go.
57:43
All right.
57:43
Thank you, guys.
57:44
I appreciate the time.