#284 – Saifedean Ammous: Bitcoin, Anarchy, and Austrian Economics
May 11, 2022
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Saifedean Ammous, an Austrian economist and author of "The Bitcoin Standard," dives into captivating discussions about Bitcoin, the evolution of money, and critiques of Keynesian economics. He challenges the value of fiat currencies versus hard assets like gold and Bitcoin, emphasizing sound money principles. The conversation also touches on the mysterious Satoshi Nakamoto and explores the ethical dilemmas of diamond trade. Ammous advocates for free markets, examining how personal choices interact with broader economic systems, making this a thought-provoking listen.
Money facilitates trade and increases productivity through specialization.
Hard money, like gold, is more suitable as a stable medium of exchange than soft money.
Austrian economics emphasizes hard money, while Keynesian economics focuses on inflationary policies.
Fiat money was born during World War I when the government used credit money instead of gold, leading to inflation and economic problems.
Fiat money provides convenience and speed in transactions compared to using physical gold.
Fiat money encourages higher time preferences and immediate consumption, impacting savings rates and overall quality of life.
Deep dives
The Importance of Money as a Medium of Exchange
Money allows for the division of labor and the growth of markets. It is a market good that is acquired to be exchanged for other goods, facilitating trade and increasing productivity through specialization.
Hard Money versus Soft Money
Hard money refers to a currency that is difficult to produce and has a low supply growth rate, such as gold. Soft money, on the other hand, is easier to produce and has a higher supply growth rate, making it less suitable as a monetary medium.
Austrian Economics and Keynesian Economics
Austrian economics, founded by Karl Menger and developed by Ludwig von Mises, emphasizes marginal analysis and the importance of hard money as a stable medium of exchange. Keynesian economics, on the other hand, focuses on inflationary monetary policies to stimulate spending and economic growth, but is critiqued as propaganda for government intervention and inflation.
The Birth of Fiat Money
During World War I, the Bank of England printed money to buy government bonds and finance the war. This marked the birth of fiat money, as the government used credit money instead of gold. Prices began to rise due to inflation, and the economy suffered. To combat inflation, the government implemented price and wage controls, exacerbating the problem. Additionally, they confiscated physical gold and issued paper money instead. This incident led to the global adoption of fiat money and centralized banking systems.
The Benefits of Fiat Money
Fiat money provides convenience and speed in transactions as it eliminates the need to physically move and verify gold. It enables faster and cheaper transactions, facilitating economic exchanges on a larger scale. However, these benefits could also be achieved with gold-based systems by utilizing credit settlements and allowing banks to settle with one another. The major advantage of fiat money lies in its reduced cost and time involved in transactions.
The Pernicious Impact of Fiat Money
The most significant impact of fiat money is its influence on our time preference and valuation of the future. Under a gold standard, individuals could store their wealth and maintain confidence in its future value. This encouraged lower time preferences and prioritization of future well-being. In contrast, fiat money encourages higher time preferences and a focus on immediate consumption. This shift in time preference affects various aspects of life, including savings rates, ability to delay gratification, and overall quality of life.
Bitcoin's Hardness and Saleability
Bitcoin is considered the hardest money ever invented due to its limited supply of 21 million coins. Unlike fiat currencies, Bitcoin cannot be inflated or manipulated by any central authority. It also combines the saleability of gold across time, holding its value, with the saleability of fiat currencies across space, enabling fast and secure transactions worldwide.
The Decentralization of Bitcoin
Bitcoin's decentralization is a key aspect that sets it apart from other digital currencies. While some criticize the centralized mining power, the true sovereign power lies within the nodes. Nodes determine the consensus rules of the network, while miners simply provide a service. The ability to withstand attempts at centralization, as seen during the 2017 block size war, is a testament to Bitcoin's decentralized nature.
Criticism of Bitcoin's Energy Consumption
Bitcoin's energy consumption has been a topic of debate, but it is important to consider the cost-benefit analysis. While it does require substantial energy, the benefits it offers, such as a censorship-resistant and secure monetary system, outweigh the costs. Energy consumption is a natural aspect of technological progress, and the focus should be on the positive impact Bitcoin has on global financial freedom and the alleviation of suffering under authoritarian regimes.
Bitcoin's Energy Consumption
Bitcoin's energy consumption is often a topic of debate and criticism. However, the podcast argues that Bitcoin's energy consumption is not as detrimental as some may think. Unlike appliances like washing machines that rely on electricity from a specific geographical location, Bitcoin mining can be done anywhere using energy from diverse sources. This flexibility allows Bitcoin miners to access cheaper electricity by setting up facilities in areas with excess energy or renewable sources, such as hydroelectric dams. Additionally, Bitcoin's proof-of-work consensus mechanism, although energy-intensive, incentivizes miners to seek the most cost-effective energy sources, making it less competitive with consumer appliances.
Volatility and Bitcoin's Future
Another point discussed in the podcast is the volatility of Bitcoin and its long-term outlook. While Bitcoin's volatility is undeniable, the podcast suggests that it can be managed by adjusting one's position size based on their tolerance for volatility. It highlights that Bitcoin's short-term price fluctuations are outweighed by the potential long-term gains in a world where fiat currencies constantly lose value due to inflation. Moreover, as Bitcoin continues to grow and mature, the podcast predicts a decline in volatility, as its market size increases and it becomes less susceptible to large price swings caused by individual buyers or sellers. Ultimately, the podcast argues that Bitcoin's rising dominance could replace a significant portion of both equity markets and traditional bond investments.
The Tragedy of Palestine
The speaker shares their personal experience as a Palestinian Jordanian and the ongoing tragedy faced by Palestinians due to the occupation of their land. They highlight the issue of settlements expanding, forcing Palestinians to leave and the sense of displacement experienced by Palestinian refugees.
The Potential of Bitcoin for Peace and Financial Freedom
The speaker believes that Bitcoin could bring peace to the Middle East by providing an alternative to the traditional monetary system tied to war. They discuss how fiat money has enabled governments to finance conflicts and make decisions that impact the lives of people who are not directly involved. By embracing Bitcoin, individuals can regain control over their money and opt out of the inflationary system, potentially leading to a future where governments coexist with a decentralized currency like Bitcoin.
OUTLINE:
Here’s the timestamps for the episode. On some podcast players you should be able to click the timestamp to jump to that time.
(00:00) – Introduction
(07:53) – Money
(20:58) – Gold standard
(34:09) – Collective hallucination
(39:59) – Austrian vs Keynesian economics
(1:12:20) – Free market
(1:28:49) – Monarchy
(1:34:23) – Fiat money
(2:21:13) – SWIFT system
(2:34:03) – Bitcoin
(2:40:20) – Satoshi Nakamoto
(2:48:04) – Criticisms of Bitcoin
(3:03:16) – Football/soccer
(3:06:58) – Criticisms of Bitcoin continued
(3:17:17) – Bitcoin Maximalism
(3:29:40) – Proof of stake
(3:46:46) – Central bank digital currency
(3:57:59) – Michael Malice
(4:00:12) – Advice for young people
(4:06:21) – Palestine
(4:18:00) – Mortality
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