Pomp Podcast #233: An Open Letter to Ray Dalio re: Bitcoin (Livestream Pt. 1/2)

I have found the second person that makes an incredible argument and he's happens to be sitting here with me so thanks so much for coming to New York and doing this thanks mom appreciate you having me are you ready I'm ready now before we get started and getting to your background there are a few people who come in here prepared there is nobody who has ever come in here with what do you guys got 28 pages of notes and as I read this I think I learned more than I've heard in the last six months so we got a lot to get through what did you do before Bitcoin so I was an accountant by trade I actually have my master's degree in accounting and Finance I spent four years as a certified public accountant I then branched out on the entrepreneurial path as a CFO for a number of early-stage companies a few tech companies okay and then I actually began investing in crypto personally in 2014 but more heavily in 16 and actually didn't realize what bitcoin was when I first saw it and was drawn in more so by etherium and the concept of smart contracts and so I started making heavy investments into the space late 16 or li 17 where my money went my mind followed and then as I studied the space more and more closely I became more and more of a Bitcoin maximalist or rationalist and what was the thing that pulled you in with a theory my first of what caught your eye you know it was the the lightbulb moment was the realization that the entire finance industry is a smart contract with human beings on top of it and a lot of strip stands to be automated I think going forward all right let's get into kind of this ultimate argument for Bitcoin because I think the way that you think through the asset you come at it from a very first principles based thought process right and one of those first ideas is like what is trade and how we think of unit of account so maybe let's start there and we kind of work our way into like why Bitcoin actually matters perfect so yeah I think it's easiest to start from the beginning and the realization that everything we say do or make starts out as an idea like literally everything we touch thinking about is an idea before it's anything right and the purpose of the world economy is to generate and share useful ideas through trade as we trade our ideas become better giving everything we say do or make more specialized qualities an easy way to think about this is considering how like our transportation technologies have gone from wagons to automobiles to airplanes for sure dad and so in trade everything is valued at summary - of everything else meaning that you know this car might be worth 132 chairs or this house might be worth 11 cars and money is the medium through which we more easily calculate these exchange ratios it's basically a base unit or a common unit of account that we can always go back into 'but when we go to trade absolutely like a universal measurement system yeah the second or the meter or anything else right so like any other tool the purpose of money is to save as time and generating time savings itself is the purpose of all tools so for instance we can dig more holes per hour using a shovel then we can with our bare hands and in this sense money is just a tool that helps us negotiate and execute trades more quickly so it's a medium through which economic actors communicate their preferences which drives human action and what this means is it like by choosing to buy a car or sell your house the economy responds dynamically by producing more cars and less houses essentially so contrary to popular misconception money is not a government creation which I think most people are under that illusion okay you're going to explain that one absolutely and so the simplest way to think about this is that money arises naturally in any trading society it is simply the most tradable thing so as people seek to satisfy their wants through trade they steadily seek to trade their things for more tradable things to get closer to the thing they ultimately want so as this dynamic unfolds something necessarily becomes most tradable or more treatable than everything else whether it's salt cattle or gold and this most exchangeable thing is money as societies advance historically they coalesced around precious metals as money due to their superior monetary traits of durability divisibility portability recognizability and most importantly scarcity so gold which is the most scarce monetary metal came to dominate the world as its supply is the most inflation resistant or inelastic governments co-opted gold and over time they built a pyramid scheme on top of gold called fiat currency all right so let's stop for a second here where when you talk about these five superior monetary traits durability divisibility portability recognized ability and scarcity just give us a quick one second on each one of those what are those actually me absolutely so durability means it is it persists across time so you know it won't physically deteriorate which metal is really good at the visibility means it can be broken down and recombined into various amounts so you can easily calculate and trade things also which gold is good at and form of coins portability means it can be transported across space so you're moving value across space recognizability means it can be assayed or verified by someone that's trading so you can actually tell that it's actually gold or or cash and then scarcity is just limited supply which maybe is not you yes so scarcities of primary importance because anyone that can compromise that supply will do so to steal the value stored therein so which we do with fiat currency today for sure and so when you say that gold was co-opted by governments what does that mean so when I say it's co-opted and I call fiat currency a pyramid scheme it'll help to define a pyramid scheme so a pyramid scheme is essentially a business structure in which those in higher tiers still value from those in lower tiers so fiat currency is a pyramid scheme with central bank's at the top who hold the only real money today which is gold that generate profits by making loans two successive layers of banks below them with each layer profiting from the loans it makes to the subsequent layers of banks below them so the people at the top make the most the people under them make the second most the people under the third-most etc yeah and the people using the currency at the bottom of the scheme get stuck holding the bag so to speak and those are the everyday citizens in the bottom 50% everyone using fiat currency exactly so it's a leverage based business that requires steadily more debt accumulation to remain functional over time and it inevitably breaks down when the debt load becomes unserviceable which I would argue is happening in the world today so when governments commandeered the market for money it became unfree or centrally planned so we moved away from a free market which we call capitalism to a centrally planned market which is something more akin to socialism so in this sense you know free markets are natural organizing principles that encourage us to find better ways of doing things by making bets with one another so as we can prove others wrong in the marketplace by finding and selling better ways of doing things the productivity gains diffused into society through trade these gains come in the form of better ways of saying doing and making things set differently productivity gains come from more specialized ideas which come from trade so in this sense free markets are idea meritocracies which we're going to talk more about here in a minute free markets are essentially unhampered trade networks that encourage the cultivation and diffusion of the best ideas within society all regulations and limitations on free market dynamics reduce their efficacy the ultimate expression of regulation is a monopoly in which the free market in which all free market competition is suppressed through coercion or violence and in the world today the market for money is not a free market that is forcibly dominated by banking cartels and these are two things here right the first the free market dynamics is literally laws that prevent people from creating other fiat currencies except and then the banking cartels kind of an air quotes is both the government banking or so Federal Reserve central banks but also the financial organizations as well to have some hand in kind of how all this works absolutely I think to put it kindly they're all in bed together and the the the defining characteristic would be that they do not allow free market experimentation to compete with fiat currency so the market is unable to adapt or learn or evolve at all because it's centrally planned and controlled okay so in that sense fiat currency pyramid schemes are monopolies which as we learned in economics 101 come at a very heavy cost to society monopolies increased prices they decrease innovation and they've reduced trade so where as free markets make mankind become more productive which is an economic benefit monopolies or unfree markets make mankind become less productive which is anti economic so with all this sort of background in mind on money and markets we are here today to talk about one of the greatest capitalists in history mr. Ray Dalio all right before we get into Dalia one of the things that you and I have connected on and I think really kind of drove us to want to do this was Ray has written a number of really great pieces that basically highlights the entire Bitcoin argument - the conclusion of Bitcoin is the answer yes a lot of probe Bitcoin pieces without ever saying but so let's start with Ray and then we'll kind of get into the arguments etc but but just so for people at home that's essentially one of the main reasons why we wanted to do this yes because she's right there on the edge he he's there and he's you know he's long gold which if you understand gold and you really understand the valuation fundamentals then you should understand Bitcoin and its valuation fundamentals there shortly so ray is the most successful hedge fund manager in history and that's that's not hyperbole that's fact he started Bridgewater his firm from his apartment which today is valued at I think about a hundred and sixty billion dollars he incepted a cultural paradigm at his hedge fund called the idea meritocracy in the idea meritocratic culture candid reviews of colleagues are encouraged so in his book he wrote a book called principles he even shares a memo that a subordinate shared with the entire firm at Bridgewater grading ray addy for his performance at a meeting so the idea is that everyone can review everyone candidly you know even up to and including the CEO so this cultural style promotes the propagation of truth and minimizes office politics and in this spirit I decided to write an open letter to read a Leo regarding Bitcoin to review his assessment of Bitcoin so I started this essay by giving ray and f4 his assessment of Bitcoin for three reasons and he laid out basically three critiques of Bitcoin and I went through them in turn so first ray says that he is sold on blockchain technology but not Bitcoin despite Bitcoin being the only market proven use case today for blockchain I argue that blockchain today is a mostly unproven buzzword you know there are some potential use cases for it perhaps but none of them are market proven or as Bitcoin is more it is being market proven in real time and it is the hardest monetary technology in history so I don't think you can be long blockchain and short Bitcoin it just makes no sense it's kind of like saying hey I like the Internet but the largest Internet company I'm not into that one Hanabusa yeah I like the internet but not HTTP here so I don't know some analogy like that but so that was the first critique secondly and this one's a bit longer but I think this is really important and a lot of people struggle to get this one ray says that bitcoin could be disrupted by another cryptocurrency citing iPhone disrupting blackberry as a comparative example now this is extremely unlikely because bitcoin is a path dependent one-time invention it's critical breakthrough is the discovery of absolute scarcity a monetary property property never before and never again achievable by mankind that's a mouthful so this is probably one of the most important thing those that either are just learning about Bitcoin or are trying to understand why bitcoin is different than everything else so really explain what exactly you mean here absolutely so for instance with path dependence we'll start with that path dependence entails that the sequence of events matters as much as the events themselves for instance you get a dramatically different result if you shower then dry yourself off versus if you dry yourself off and then shower pretty clear example yeah pretty clear right so as a thought experiment if a new Bitcoin was launched today it would have extremely weak chain security early on as its minor network in hash Street would have to develop from scratch and today in a world where awareness of Bitcoin is more prevalent this new Bitcoin with comparatively weak chain security would inevitably be attacked by incumbents whether these were incumbent projects seeking to defend their head start international banking cartels or even nation-states path dependence protects Bitcoin from disruption as the organic sequence of events which led to its release and assimilation into the market place cannot be replicated further bitcoins money supply has absolutely scarce a totally unique and one-time discovery from money consider that if this new Bitcoin was released with an absolutely scarce money supply that its holders would be incentivized to hold the money with the greatest liquidity Network effects and chain security this would cause them to dump new Bitcoin for the original even if this new Bitcoin featured a diminishing money supply so negative scarcity if you will or in other words a deflationary monetary policy how would its rate and mechanism of money supply decay be determined as market participants jockey for position to maximize their economic benefit of the deflation deflationary monetary policy chain forks would ensue that would diminish the liquidity and chain security for new Bitcoin causing everyone to eventually pile back into original Bitcoin so essentially bitcoins terminal money supply growth rate of absolute zero is the ultimate monetary selling point and shelling point is a game theoretic focal point that people tend to choose by default in an adversarial game like money all right so the ultimate monetary shelling point and the terminal money supply growth rate of absolute zero first let's start with the terminal money supply growth rate what is that absolutely so bitcoin is issued on a perfectly predictable supply curve that terminates in the mid 22nd century so no more Bitcoin will ever be issued into existence after that and this is the thought process of starts at 50 Bitcoin every block word you get cut in half to 25 there open 1/2 6.5 you go all the way down and eventually you literally can't split in half anymore absolutely and it goes to 0 is basically exponential decay that approaches zero so I think today before the may having were like 1800 Bitcoin produced per day to give you an idea how quickly this contracts by the year 2100 I think we're below 1 the Senate tweet about that but it just contracts very quickly so mankind you know our biggest weakness is our inability to understand exponential growth or decay so this is it's a really big deal ok so back to game theory and the selling point piece in game theory a game is just any situation where they can be winners or losers a strategy is just a decision-making process and a shelling point is the default strategy for games and which players cannot fully trust one another like money so the absolute scarcity of Bitcoin in this sense is a really big deal and I like to compare it to the discovery actually of the number zero the discovery of zero was special as it represents absolute nothingness its role as a placeholder gives our numerical system its power to scale and cycle through other numbers giving them different meanings depending on its location consider the difference between twenty and twenty million each zero represents another order of magnitude of the integer to similarly the discovery of absolute scarce money is special gold became money because of the monetary metals it had the most inelastic or relatively scarce money supply this meant that no matter how much time was allocated towards gold production its supply increased the least meaning that no matter how hard or how many resources people threw at and to get more gold it was still the hardest to get exactly so it's kind of like this game theoretic backstop and that's what makes it become money and that's why people express things in that value because it's the most predictable supply okay keep going with golden in bold compared to Bitcoin absolutely so since its supply increased the most slowly and predictably gold was favored for pricing things and became the dominant money on the free market the absolute scarcity of Bitcoin makes it the ultimate pricing mechanism for the ceaseless changes in human productivity enabling societies to more effectively communicate their preferences through trade store their wealth securely and cooperate and compete at scale so when it comes to gold there's two components that you just described one is the difficulty at which to produce it the second is the predictability of the incoming supply right or the new supply yep both of those things are pretty proven over thousands of years it's really hard to make or or get and we've got a pretty good idea of how much we're digging up out of the ground every year finding etc when it comes to Bitcoin it is harder to get Bitcoin than it is to get gold in terms of the production and also it is verifiably true what that supply is at all times with an incredible amount of accuracy absolutely which is basically taking all of the properties of gold that we have put value on and now putting them in a much more scientific provable provable mathematic type mentality or mechanism and so it's actually improving on those mechanisms of gold or aspects of gold for bit that's exactly correct and so if you think if we could somehow miraculously press pause on everyone's job today until everyone to go mined gold we could produce a lot more gold right we get a lot more above-ground a lot more quickly you could not do that with Bitcoin Bitcoin has this ingenious invention called the difficulty adjustment that's basically like an ever receding horizon the more you chase it the further it runs away so we know with essentially perfect mathematical certainty exactly how many Bitcoin will be issued between now and the last Bitcoin being mined in the mid 22nd century again that's a property we've never had with any asset commodity or whatsoever and I think the part that is really important in that is this difficulty adjusting adjustment works both directions so if we put more resources towards mining right if you and I are partners and we want to produce Bitcoin know the more that we put overall it becomes harder for everyone on the network to get their share that they previously had because of that difficulty adjustment that's growing but also if we shut down our operations it can get easier as well and so the ability to increase or decrease a difficulty based on the production investment mm-hmm we've just never seen that before no never seen it it's like dynamic demand adjustment and you know with gold the the marginal revenue or the market price tends to converge with the marginal cost of production so as we see kind of Bitcoin hash rate growing which is how much operational and capital expenditure is being allocated towards its production we can use that as a proxy for what we think the value will go so I think the hash rate today is 13 times what it was at the December 2017 peak so that's kind of we look at it it's kind of a leading indicator and that positive feedback loop that is a Bitcoin for sure so let's go back to the number zero absolutely so in the same way that the number zero enables our numeric system to scale and more easily perform calculation so to does money give an economy and ability to socially scale and more easily perform economic calculation and social scalability is one of those terms from Nick Szabo that essentially means the more we can do with less effort or without thinking about it the more productive we are as a society so back to money simply scarcity is essential to the utility of money and a zero growth terminal money supply represents perfect scarcity which makes Bitcoin a perfect monetary technology from this perspective both the discovery of zero and absolute scarcity our ideas or tools that enable society to scale by saving us time and calculation and trade so that was a long run so I'll try to summarize it a little bit since the invention of Bitcoin represents the discovery of absolute scarcity or absolute ear reproducibility which occurred due due to a particular sequence of idiosyncratic events its emergence into the world cannot itself be reproduced absolute scarcity is a one-time discovery just like the heliocentric model of the solar system or any other major scientific paradigm shift alright so there's a lot of people who do not believe in Bitcoin or do not see the value and what they would basically say is there's a lot of big words but you made a claim that absolute scarcity is a one-time discovery can it be replicated but it's just the first time it's discovered there's value or is it absolute scarcity can only happen one time I think as a monetary property it can only be discovered once because money is valued based on its liquidity and network effects so if you try to reproduce Bitcoin 2.0 with absolute scarcity today the value of that just gets collapsed in a Bitcoin because it already has such a huge lead in terms of liquidity and network effects and I don't see how you can disrupt that okay a fair launch yeah so in short like a fair launch via a proof-of-work system is no longer possible due to path dependence yet another reason when cannot be replicated or disrupted by another crypto asset using this consensus mechanism so at this point it seems absolute scarcity for money is truly a one-time discovery that cannot be disrupted any more than the number zero can be disrupted a true Bitcoin killer would necessitate an entirely new consensus and distribution model and nothing to date has been conceived that could fulfill this requirement so in the same way that there's only ever been one analog gold it looks like there's only ever gonna be one digital gold so that was a long katika phrase second critique so part of this is the properties that make gold valuable have been supercharged or put on steroids when it comes to Bitcoin they're more provable they're more mathematically factual if you will and the argument you're making is that although we can identify what those properties are and we can assign value to them they cannot be replicated for a variety of different reasons and some of that is the actual feature itself cannot be replicated and then some of it is the features position in a sequential list or of events cannot be replicated you know depending on either one of those when you combine them you cannot reproduce Bitcoin in the form that it is and kind of the value that it is yeah yeah I guess since it's a game theoretic you can't replay the game so to speak of money right you can't just no one can decree gold is no longer valuable the free market determines that it has value the free market has determined that Bitcoin has value and these as money you know the more liquidity more network effects it has the more value it has so they call us to a single money so that's what we have one gold and for all all indications today our point is the one digital gold so to speak okay third third point that Ray had yeah so Ray's third critique of Bitcoin is he says that price stable central bank or corporate issued crypto currencies like Libre or a better alternative than Bitcoin as it is too unstable to be used as a medium of exchange so in one sense it's true because central banks are already announcing their attempts at this however the one thing they will never do is give up control of monetary policy which means that this is the means by the monetary policy control through which they enrich themselves and this goes by a lot of names the Cantillon effect confiscation via inflation the shadow tax or even taxation without representation so since bitcoin has an absolutely scarce money supply which is a monetary policy akin to absolute zero it will continue to appreciate on an exchange ratio basis against fiat currencies which are inevitably printed into worthlessness over time exchange ratio of volatility against fiat currency is a normal consequence of price discovery for an emergent asset like Bitcoin so a good kind of example for this is to consider Amazon which crashed 94 percent from eighty five dollars to five dollars in 1999 before growing over 33,000 percent since and its ascent to market dominance today and Amazon accomplished this historic feat by gaining control of the digital market for distribution networks this the space which Amazon conquered is driven by scarcity in the form of finite distribution channels and it is subject to winner-take-all dynamics due to network effects and economies of scale similarly the market for money is driven by scarcity and subject to winner-take-all dynamics as we saw with gold so in fact bitcoin is monetizing along the same path as gold today and that it's being used first as a store value then once it has accrued enough value to incentivize people to spend it it will become more widely adopted as a medium of exchange and when it finally is used widely enough it will become the primary denominator of prices worldwide making it a unit of account so this is like the same evolutionary path that gold followed we see Bitcoin following today ok so there's there's two pieces here that I want to cover so first is Amazon you describe this 94% drawdown that it has also many people don't know that every single year since it's been public it's drawn down double-digit percentage at least once and I think the average intra a year drawdown is like over 30 percent yeah right right and so when you start to look at it it's just that all equates to it's a highly volatile stock this but volatility works both ways you need volatility to go up you also need volatility to go down and so if you're going to have the best performing stock or stock that goes from non-existent to the dominant one in the world you have to have that volatility right but nothing's gonna go from zero to hero if you will without actually having the volatility in between of course you know the world is dominated by nonlinearities and when you're looking at a binary bit like Amazon that was either bust or you know the original just online bookstore we didn't see that it was gonna evolve and all this but it's it dominated that space right and Bitcoin sort of the same it's like it's either worth nothing or it's a global reserve asset so this volatility is the market trying to discover what it is is it zero or is it here oh so speak for sure and then the second thing you talk here about is this idea that bitcoins monetizing along the same path that's gold so gold essentially nobody used then people started to use it as hey this is valuable do you want to actually barter or use it then it became a more valuable asset over time as more and more people say hey well I want some of that and then at some point once it had this quote-unquote stable value right because people knew this is what it is worth people then started to use it as an actual currency and then eventually prices of the assets people sort of say hey well I will trade you Mike you know my camel for two gold coins absolutely bitcoins do the same thing absolutely and we think you know our unit of account today's dollars largely dollars used to be gold right dollars were deema before gold so he proclaim on gold yeah we were thinking in gold even though we we think we're thinking in dollars today which are no longer pegged to gold which we'll get to we were actually thinking in gold for that very reason so that that was that covers like my three responses to raise three critiques of his assessment of Bitcoin then after reading his book principles I realized that Bitcoin positively embodied many of the principles Rey lays out in his book so I decided to write my essay which is titled an open letter to Ray Dalio regarding Bitcoin to share my findings which brings us to the first principle alright so you saw it ray said you responded to Ray then you read the book he said wait a minute it's even more of a reason why he should actually be paying attention to this yes and you wrote about kind of breaking down Bitcoin in the framework of the principles in which he is sharing with the world absolutely so his explaining it to him through his own worldview if you will all right let's start with the first principle which is this idea of meritocracy yes so the pinnacle of Ray's worldview is the idea meritocracy which Ray describes as quote idea meritocratic decision-making is better than traditional autocratic or democratic decision-making in almost all cases so an idea meritocracy is a cultural paradigm it's a free market for ideas a way of subjecting ideas to a simulated form of natural selection it's a kind of Darwinism for ideas if you will and I see is an open environment for the proliferation and combination of the most meritorious ideas free from man-made impediments such as ego policy and hierarchy so again team member team members at Bridgewater review one another's work meeting contributions and attitude in real time using a suite of custom-made management tools which are software based tools used to gather real-time feedback an idea meritocracy is intended to be aligned with reason and impervious to politics it's kind of the gist of it and you know I think we see this in the world that the more objectively measurable and traceable the outcome of a job the less political it is by nature as competence is the primary determinant of who gets that job so an example here would be like consider how professional athletes are paid for points they put on the board or other stats which are objective metrics whereas a politician is paid based on his charisma or cunning which is clearly very subjective so you know jumping back to our original thesis that everything starts out as an idea since everything we say do or make starts out as an idea the idea meritocracy is a free market it's the same thing and this is really you know people who work in like a corporate job will understand this really well is if I have an idea the actual idea by itself doesn't matter who brought it up when they brought it up and how they brought it up I mean it's just the idea the actual merits of the idea the best ideas can withstand attacks from every direction salute they can withstand the attack of who brought it up why how where everything what we tend to see in organizations or and even larger in the world is not idea meritocracies we tend to see hierarchies and we tend to see the I'm the boss it's my idea to do it my way even if it's not the best idea and so I think that the technology world has done much better job of kind of encouraging some of these meritocracies and some of that is because to your point you know when I was at Facebook one of the phrases that they would use is code wins arguments hmm we can sit here all day long and debate things no like let's go build it it works or it doesn't huh that's right and so that was a form of a meritocracy in the sense of like if you build it and it works then like what are we arguing about like it works right and so I think that's what we're seeing kind of a very big division in the world of the people who previously weren't exposed to nor wanted idea meritocracies are doubling and tripling down on the prevention of them absolutely the people who like this world and and believe in the value of the idea of meritocracies they're doing everything they possibly can to double and triple down on the protection of them yeah and so you get this very diverse of diverse world or division in the world but it comes back to the idea of either you by ideas have merit on their own or they don't know or you buy into who says it when where how et cetera is almost more important than the ideas of which people share absolutely you know I think that the division you speak of is sort of between dominance and competence right where dominance being it goes because I said so because my desk is bigger than yours whereas competence is like this thing works in the real world and according to the market test or it doesn't right and I think if you just think about that it's clear which of the two outcompetes the other right of course this the the domination thing is just not sustainable like people that are dominated are resentful right they're gonna always find a way to kind of stab you on the back or not work as hard or whatever whereas competence hierarchies if you will reward ingenuity and and innovation things of that sort so I I agree I think the world is going going that way so getting back to kind of what markets are in that respect markets are necessary to disseminate knowledge because knowledge has a localized dimension to it meaning every person is most familiar with the prevailing economic circumstances specific to their place and space-time and Industry free markets are the best assimilators and disseminators of these localized pools of knowledge within an economy and a free market can be thought of in this sense as it kind of Nexus where many minds become one through the mechanism of price and that's you and in this sense free-market capitalism is directed by the collective decisions of all economic actors where essentially planned socialism is directed by the decisions of a handful of bureaucrats kind of what we're talking about here so you know free markets reward comp plan markets or reward dominance effectively and in that sense socialism is a top-down unnatural despotic organization and you can kind of think of the traditional org chart as you brought up whereas capitalism is bottom-up natural democratic which is much more like the idea meritocratic organization that Ray founded and one thing just to comment here because I've been fortunate of to spend enough time 3d type world and also this Silicon Valley technology world many of the largest organizations in the world today from the technology sector although they appear from the external to be very top-down kind of traditional org charts and when you get inside of them they are incredible meritocracy right there are much more flat organizations than you would traditionally see in large organizations and so I think that outside of something like you know Bitcoin versus a gold versus fiat currencies etc we see other applications of this in our world today and the people who are winning in those competitions there are the people who tend to have much more meritocracies in their organization absolutely and therefore it would be natural for us to see that seep into other aspects of our lives and continue to be the superior way or disappear frankly that's why I I agree completely and I guess sort of the backdrop to that is you know digital technology enables us to exchange things so much more fluidly that it just it dissolves these dominance hierarchies and rewards competence again and another like ray is a big fan of Steve Jobs and I remember Steve Jobs I'm coming paraphrasing but he said an apple we don't have committees or bored me like we just figure out the best way to do things and that's why we're the best that's a shocking strategy yeah so alright the elephant in the room yeah so the elephant in the room then is why in light of the overwhelming evidence favoring a free-market economic system do we still tolerate central planning in the largest market of all the market from money so to understand the differences in free and unfree markets a set of formulas will help us go a little further and Ray gives us the following formula for the idea meritocracy which equals radical truth plus radical transparency plus believability weighted decision-making so the the formula that he uses is radical truth added to radical transparency added to believability weighted decision-making equals this idea of meritocracy yes this three inputs yes radical truth radical transparency and believability weighted decision-making yes and again since idea meritocracies are free and free markets are the same thing we can translate this to a free markets version if you will and this is my sort of translation so I say free markets equal truthful price signals which we're going to talk more about here in a second plus transparent and reliable rule of law private property rights in heart plus skin in the game weighted decision-making okay so your three inputs are truthful price signals transparent and reliable rule of law private property rights and hard money and then the third is skin in the game weighted decision making that's exactly right okay and there's a lot of terms in there you may not be familiar with but we will go into them let's go so with these formulas in mind let's dive into each of their elements and consider their relationships with markets money and Bitcoin the first formulaic element of Ray's idea meritocracy is the principle of radical truth which ray describes as quote truth or more precisely an accurate understanding of reality is the essential foundation for any good outcome unquote I love that it's great right like forget Bitcoin forget anything just truth or more precisely an accurate understanding of reality is the essential foundation for any good outcome when you sit and think about that duh right well just like if you don't have an accurate understanding of reality how the hell can you do anything to make decisions you know evaluates to none that stuff so of course it is true but the fact that he has to clearly state it yeah to kind of put that in people's minds is actually a little scary in the world yeah I agree it's funny it's like we're constantly trying to redraw our map of reality and if you're not paying attention to the redrawing process reality is gonna run you over right absolutely all right so this is his principle of radical truth yes so this is the idea that gaining a clear perception of reality is paramount to facing it head-on and dealing with it so in markets it's commonly said that price is truth meaning that all known market realities are expressed in any particular assets price at any given moment you may remember from economics 101 that the market price is the intersection of supply which is an objective quality and demand which is an inner subjective or opinion based quality so put another way prices are like data packets that convey information about scarce city which is objective and value which is inter subjective each entrepreneurs decision to buy or sell is influenced by prevailing prices an intern communicates back into the market the state of economic conditions relevant to him which again in turn influences the same decision-making of all other entrepreneurs within his market that this is inter subjective value and all of those decisions are based on actual availability of time resources and know-how this is objective scarcity so really what you're describing here is the most important concept when it comes to Bitcoin supply and demand and that supply and demand leads to all sorts of things like price discovery etc but understanding fundamentally what is supply and demand if you don't have that belief that understanding etc you're gonna really struggle to understand Bitcoin absolutely so again back to truth which is price it exists at the intersection between objective reality and our subjective interpretations of it essentially and the objective reality for example when it comes to Bitcoin is 1800 Bitcoin are gonna get created today you're out of the 21 million that will ever be available that's correct that is provable with math no one can deny that yes the subjective element is how many people want those 21 million bitcoins that's right and that's where when those two things intersect kind of truth versus perceived truth that's where you get price discovery yes and they feed back into one another right so after the may twenty twenty having in a couple of months it's going to constrict by half to nine hundred Bitcoin per day and you know the Bitcoin feedback loop theory at least is it as you can constrict scarcity and money it actually drives demand for that money in addition to the other benefits Bitcoin provides like inflation resistance confiscation resistance etc so getting back the price signals price basically representing truth in the marketplace central bank's broke the truthfulness of money by centralizing gold and issuing depository receipts which are basically dollars that were redeemable for gold in excess of their gold reserves so if they had ten tons of gold they issued a hundred tons worth of dollars redeemable for gold so they're just making promises in excess of what they had and the thought process here was if I give out ten times the number of IOUs to what I actually have mathematically I'm going to take the risk that not everyone is going to come ask me for the gold at the same time that's exactly right which 99.9% of the time isn't was true no there have been very specific cases though these clinical bank runs where people panic and they say whoa timeout I want my gold right you ever seen what is the the viral video another viral video from Mobile Alabama where they said leprechauns are in the tree oh man a lot to play one day but there's basically these guys and there's a folklore in the neighborhood that there's a leprechaun and it cuts away at the end to a guy he goes I want the gold where to go that I'll get me a backhoe and dig up that tree I want my gold and so it's somewhere here right it was I want my gold but if you've promised more io u--'s than you have you obviously can't pay everybody absolutely that's the truth that's the breaking of the truthfulness is you just got yes and when the trust breaks down things go more free-market again right people want the gold they don't want your promises they want hard money so we gotta we gotta get that clip man I want to go where to go that high so when central banks did this they severed the skin in the game of money and gave central bank's a mechanism for perpetually privatizing profits from money production which is called senior edge and socializing government losses through inflation so skin in the game it's a really important concept for my favorite author Nassim Nicholas Taleb and that guy's was he's if you haven't read his books he's unbelievable read them all twice I draw in his wisdom a lot am i thinking about writing but so skin in the game is a concept based on symmetry it's a balance of incentives and disincentives that is necessary for most systems to function darling so with central banking it has essentially no disincentives in the fiat currency system as there is a near zero cost of money production central bankers are incentivized to print money into worthlessness acquiring scarce assets with these self annihilating currencies on their gradual than sudden way to zero so again if you go back to gold that the marginal costs of production tends to converge with its market price the marginal cost of production of fiat currency is zero for all intents and purposes it's know like it's intuitive where the values end up they converge to zero because of market dynamics and important to this point which I don't hear talked a lot about is there is a convergence of two components one is theoretical and one is reality or a historical reality the theoretical is what you just described well if it costs zero to produce and how could it have value right and kind of you can pull a lot of intellectual Olympics to unpack what that exactly means but we also know that every fiat currency in the world historically and also every currency other than the modern-day currencies that have been created at we're still living in their kind of average life cycles have all failed because of debasement or the devaluing of these currencies because ultimately no matter how valuable it starts if you devalue or debase it away over time will you trend toward zero yes right and then there's all kinds of implications of that but we just we have the theoretical frameworks of which simple things like supply and demand etc all apply and as long as we believe Eilidh concepts there's a theoretical argument but we also have the historical track record and the failures of that model of inflationary or devaluing of a currency that just leads to zero at some point absolutely and it's the best we've ever had like it's the best of the worst ideas yes and fiat currency is not a new thing like started I think 7th century China was the first one every one of them have ended hyperinflation this is not like it happens sometimes every time it happens and the only you know the best-performing one today is the British Pound 317 years old it's lost ninety nine and a half percent of its value right and as you said we're living - its kind of normal life cycle they all trend towards zero it's just it's an empirical fact so in this sense as a wise man once said inflation is the surest way to fertilize the rich man's filled with the sweat of the poor man's brow ow yeah I never heard that one before inflation is the surest way to fertilize the rich man's filled with the sweat of the poor man's brow yeah essentially saying the rich get richer the poor get poorer yeah and they're doing it by backstabbing them right you're surreptitiously taxing them by printing more money and people not understanding how the system works just think the whole prices go up every year and that's just the natural way of things and it's really kind of insidious in that sense so inflation the money supply and this is very important for capitalism it's a violation of private property rights as it reallocates wealth away from the its original owners who are the citizens into the hands of those closest to the governors of the monetary system who are typically the politically favored few inflation also distorts the price signals propagated by fiat currency which causes entrepreneurs to over borrow miss allocate capital and miss price risk and this is very pathological to an economy really and so we think of inflation it's kind of like I say like it's like a computer virus almost it corrupts these data packets on value and scarcity that we call price signals and for the same reason same economic principles and reasons that price-fixing led to the starvation of millions in Soviet Russia fixing the price of money which is the interest rate causes these recurrent economic calamities while we today call the business cycle and we think again is normal but it's not it's a consequence of centrally planned money and a key piece of this is not only that it happens but the lack of information and transparency in education of those that are at the bottom of that pyramid scheme that you described who don't understand it's happening and don't have the information necessary to to measure what is happening right I always go back to this idea of tell me how much money was printed today exactly you can now there's ways to triangulate right there's a smartass who says you know I can tell you what the bank asset balance sheet okay I get it but how many people understand that the dollar in their wallet actually is worth less money today than it was last year yeah if you go out on the street I'm willing to bet 50 plus percent of the 330 million Americans have no clue that concept is so foreign to they have no clue right and so what ends up happening is there's an education advantage or an information advantage that some portion of the population has over others but even those that know this happens they don't know how bad it is yes right and I think that's where you start to unpack some of this and realize wait a minute how what is the solution yeah I another thing interesting aspect of that is you know again we know anyone everyone knows how much Bitcoin was produced today and every day forever how many people these this army of macro economists and analysts and CNBC people there that pour over the details of Central Bank meetings they're their body language their wardrobes trying to figure out what they're going to do next like it's such a total drain of human ingenuity and and capability it's just it's really silly I think when you see it that way I'm trying to quickly look up and I may not be able to find it quick enough I believe it is the Federal Reserve's GDP forecast shout out to to mark usko he's the one who who told me this one I think that they have now made something like 220 right so somewhere around the number of forecasts what percentage of the time have they been right sub 5% zero zero they've gone zero for 220 or whatever yeah now again I believe that to be correct people we'll fact-check me online but if I remember the information correctly it's zero if it's not zero it's a very very small number less than 5% and so when that happens you have this centrally planned model but the people who are doing the planning aren't accurately forecasting what is going to happen a hundred because it's not a possible is it's kind of decisions exactly well it's just hard to make decisions that it's impossible an economy is a complex adaptive system like the weather right you cannot control or manage an economy any more than you can manage the weather frankly we got a president who thinks he's going he's got a new Couric ain't it yeah we won't go there go ahead that's how you know out of control things have gotten right so as with all well-functioning markets the price of money must emerge through and constantly reorient itself against the natural interactions of supply and demand attempts to centrally plan this market only distort truth in the form of distorted price signals and trigger over borrowing recessions and caused the boom and bust business cycle so on another way to look at fiat currency price signal distortion is with Witten Stein's ruler there's another thing I got from to lub this is really interesting to think about unless you have confidence in a rulers reliability if you use a ruler to measure a table you may also be using the table to measure the ruler god that's good the less you trust the rulers reliability the more information you are getting about the ruler and less about the table right so said differently the more you can trust the constancy of a unit of measurement the more signal it gives you in the less is you that is so good I've never heard that before that is so good so back to Bitcoin with an absolutely fixed supply Bitcoin will restore the clarity of these economic price signals that are so critical to proper capital allocation risk assessment and entrepreneurial coordination across space-time so kind of simply free market money like gold was a universal system of measurement everyone could trust it everyone could trust it and it was constant and reliable anywhere in the world right so other universal units of measurement like seconds meters or kilograms they're all immutable in value to maximize the coordination of human action upon these foundations of standardized measurement or the machinery of global commerce is constructed builders of skyscrapers electronics and all other goods rely on the constancy of these measurements of these measurement units when sourcing materials and coordinating labour efforts from around the world the immutable money supply of Bitcoin means that once it is used widely enough to function as a unit of account that it's price signals will carry more truth than any other money in history bitcoin is a monetary channel free from the noise of unexpected supply fluctuations which necessarily means it carries the clearest signals in this way bitcoin is the perfect conveyor of the data packets on value and scarcity known as price signals so I like to say the analogy I share as I say money's like economic water and when it comes to price signals fiat currency is inscrutably murky it's got lots of noise you can't tell whether a price change is real or its inflation driven right bitcoin is the opposite it is crystal clear it is pure signal and has absolutely zero unexpected inflation forever so an economy run on a Bitcoin standard would have fewer and less extreme booms and bust and the Bitcoin standard by the way as a book that everyone needs to reading safety give us give us our cut of books el faro that the Bitcoin standard is a fantastic book safe teen wrote it and you should definitely so yeah bitcoin is basically the most truthful money that's okay so I just wrote down this question but now's a good time to ask it if you hold the assumption that bitcoin is going to be the most provable true unit of measurement write it like seconds meters etc will not change it has that consistency why do so many intelligent people fear truth meaning there's a lot of really really smart people who have done various levels of work on Bitcoin most of them kind of surface-level drive by knowledge what I call it and they yet do not believe that it has value or do not believe that it will be valuable in the future how do we kind of figure out that contrast between these are very smart intelligent people who actually seek truth in most aspects of their life especially their investing or entrepreneurial careers yet when it comes to something that is provably true there's a disconnect yeah you're really digging into the seismic nests that's been a word of this shift like it truly is a once--in I when you and I think melt dim talked about the transition to double entry bookkeeping and Bitcoin being this transition to triple entry bookkeeping I think it's really hard for people to comprehend the magnitude of black swans like this and black swans don't necessarily doesn't mean something's negative per se it's just something that's very hard to predict that has a huge impact the Internet's a Black Swan event if you're a great internet looking and saying we did through this computer network what is yes and that is the best analogy for Bitcoin but you know Bitcoin really kind of is the Internet in a lot of ways it's just where the Internet is this open source free market set of protocols for moving information Bitcoin is the same thing for moving value so as far as smart people not grasping it I really think because Bitcoin takes a lot of hours to dig into and have the lightbulb moment I think a lot of people just haven't done the work and I that number I think varies between people but it's high alright it's between one and two three hundred hours probably of just studying Bitcoin and all this multi multi disciplinary domain to really grasp the significance of it all right the next principle yes full of radical transparency yes so the protocol principle of radical transparency ray describes as quote by radical transparency I mean giving most everyone the ability to see most everything on so in free-market capitalism we have three cornerstones which we mentioned earlier we have rule of law which gives us a means of nonviolent dispute resolution we have private property rights which gives us respect for the relationships between people and assets and we have hard money which gives us a free market selected money and an accurate conveyor of price signals so with strong and reliable rules in place entrepreneurs are then free to play the game so to speak accumulating capital for themselves and diffusing any innovations gleaned in the process into the whole of society through trade so an analogy here is like if you imagine a poker player sitting at a table or if and if the hand rankings changed every few hands at the whims of the casino without sound rules on which to build a strategy no player would remain engaged for long and they would quickly exit the game so we have kind of a similar problem today with centrally planned money the problem with the perceived safety of the u.s. dollar is the opacity of the rules which govern its existence including how many dollars are there in existence as US earlier how many will be issued in the years to come who gets to decide or are there criteria for deciding and most importantly who stands to profit from their production right so even though the US dollar today is really just an SQL database maintained at the Federal Reserve they could choose to open its records to audit they refuse right to counterbalance its opacity and we touched a little bit on this earlier there's an army of macro economist analysts and market commentators poring over ever every detail of the statements issued by central bankers including not only their words their tone delivery and even their wardrobes it's it's incredible it's unbelievable did they say dovish yes what's her tie yellow so to understand how absurd this is imagine if a semi governmental agency was put in charge of setting prices for automobiles ask any free-market capitalist if this seems like a good idea and he will spew vitriol at you for even suggesting such a socialistic method of managing prices for automobiles any true capitalist will tell you that only the market should determine prices at the intersection of supply and demand but then very smoothly point out to them that the Fed sets the pricing of the US dollar which is the interest rate which is the United States most valuable export market and does so based on undisclosed criteria in closed door discussions indeed fiat currency is antithetical to free-market capitalism it is monetary socialism explained very quickly the interest rate and how that is the pricing of the US dollar and this idea that it's the most valuable export market yeah so essentially there with money you have the supply of loanable funds if you will which would be the money supply you have demand for loans and wherever supply and demand crosses is the price which is the interest rate and that's just the interest rate you see on loans but the Fed sets this price like as if the Fed came out and said all cars or $20,000 are all 25,000 and as we know from you know studying Soviet Russia and whatever every time you try to interfere with free market dynamics you create surpluses or shortages it just causes damage to the economy the market has to clear at the price the market clears at and this is where you see the current President President Trump absolutely railing on the federal reserve publicly via tweets etc saying hey other economies are doing X or Y yes we're not they have an advantage we don't except some of that is he doesn't have control right his uh you know kind of executive branches never control to the opacity of the rules and criteria etcetera but also the optimization for different things right one of the one of the things that I forget I really wish I could remember who said this cuz I thought it was just incredibly you know clear in the way they described it they said central bank's job is not to manage money the central bank's job is to manage economies of which money is a tool to do and I thought that it was very interesting because again take the president take an entrepreneur take an investor take the Federal Reserve all four of those people exist in one single economy they all may be optimizing for different things and therefore want different things in a free market the market is the ultimate referee this in this world that's not the case absolutely yeah it's you know the Federal Reserve is central banking in general is intended to be politically agnostic right the presidents will have no say in it but you can just see you put people in charge of something it becomes politicized it's inevitable yeah and Trump's is taking it to the ultimate extreme where he's tweeting directly out these guys let's tweet the other day who's the worst enemy for the US you know the Chinese President or Jerome Powell oh he say something like that world are we living in so it's hard man is crazy it's truly crazy so I like to say that in markets sunlight is the best disinfectant when everyone can see the criteria and process behind a decision they are more likely to deem it trustworthy with Bitcoin the algorithm which sets its money supply is totally transparent meaning people can universally agree that the system is fair and unbiased as an open source monetary protocol Bitcoin is essentially the principle of radical transparency in perpetual action and bankers hate this because Bitcoin basically automates the functions of a central bank which are maintaining money supplies or monetary policy reaching consensus as to account balances and facilitating international value flows this transparency and money also gives us the restoration of strong property rights and money few people realize that monetary inflation is a direct violation of property rights crazily this is a legally enforced injustice right we're talking about the cornerstone of capitalism that's legally enforced that we're breaking it's it's legalized counterfeiting as what inflation is printing money is like amending the list of who owns what since money can be used to obtain anything in the market and a corruption of the private property rights intrinsic to capitalism itself so Bitcoin as an answer to this is an uninflated confiscation resistant free market based money this provides its users with stronger property rights than inflatable confiscated and deauthorize Abal fiat currencies so in this sense bitcoin is the purely transparent alternative to the opacity of central banking it is a beacon of light out competing an industry purposefully shrouded in darkness once properly understood bitcoins superior visibility and escape ibly enhances its believability explain that so bitcoins superior visibility inescapably enhances its believability it is an immutable unbreakable rule set whereas the rules and fiat currency and central banking are shifting all the time based on political agendas and twists and turns sweet coin is the ultimate meritocracy because it can withstand any attack exactly whereas the existing system is based on who says it when just say it where they say it how this subject of political capture it's not the merit of the idea that wins exactly so as and once you see that you know again once you have that light bulb moment with Bitcoin you can't unsee it I think clearly you've seen it it's like it is it's it's an epiphany I don't know what else to call it really and as you've said ray quote having nothing to hide relieves stress and builds trust unquote transparency and reliability are the essence of bitcoins utility as money so how do you not believe in Bitcoin and it's truly unique in that its supply is absolutely predictable and absolutely scarce so in this sense Bitcoin is the most credible monetary policy in human history now competing the least trustworthy monetary policies in human history so I recently have started to talk about this much more publicly which is going back to your point earlier about why can't a new black one get created everyone always thinks and talks about this from a technology standpoint well Fiats are all gonna get digitized right you know other people can create digital currencies true on a technology competition kind of horizontal playing field everything is going to be digital whether it is Bitcoin whether there's a fiat currency a new digital currency etc but that's not where the competition ends up right it's like saying hey there you should be Internet companies versus non internet companies now they're all internet colors right the competition is at the monetary policy lots of and what you said here is Bitcoin is the most credible monetary policy in history out competing the least trustworthy monetary policies in history this from a monetary policy competition standpoint this is a landslide you know in terms of which one is more transparent which one is more believable and which one is more predictable know if those three things end up being important I think we know who the winner ends up being if those three things for some reason end up not being important then other currencies have a choice I think you and I are in the camp of those three things are pretty damn important a quick study of history we have been and in theory always would be important right so long as people seek to store their wealth across time so as long as human self-interest is a thing this scarce as money wins right that's what gold is and now that's what bitcoin is so bitcoins rapidly gaining a track record superior to central banks across all dimensions reliability predictability auditability cost-effectiveness and resistance to censorship or manipulation it is thereby further eroding the believability of central bankers which is in shorter supply with every dollar printed which brings us to the third formulaic element of Ray's idea meritocracy the principle of believability weighted decision-making I don't even know what that is yeah this is a this one's a mouthful so ray describes it as quote when you're responsible for a decision compare the believability weighted decision-making of the crowd to what you believe unquote so the believability weighted decision-making okay yep so if we look at fiat currency in terms of believability the best-performing central bank fiat currency in history as we mentioned earlier was a British pound as lost ninety nine and a half percent of its value in three hundred and seventeen years and when it comes to maintaining purchasing power across time gold has a believable track record norse fiat currencies could barely be less believable an ounce of gold this is a popular one an ounce of gold is roughly equaled the value of fine man's suit for over a century whereas the cost of the same student dollars has skyrocketed further the implementation of fiat currency offers limited to no assurances to its users that their wealth will be protected from confiscation censorship inflation or counterfeit and even if you believe in central banking flat out and you're just committed to it you would still be really hard-pressed to defend the believability of central bankers themselves not only for their missed forecast as you alluded to earlier but a number of other things so as Ray says quote think about people's believability which is a function of their capabilities and their willingness to say what they think keep their track records in mind unquote in terms of capabilities central bankers have irrigated themselves virtually unlimited latitude to manipulate the supply and price of fiat currency in pursuit of politically determined ends they have exercised these privileges based on largely undisclosed criteria and are notorious for their veiled communication styles in other words central bankers seem quite unwilling to say what they think and their decision-making criteria are shrouded in falsehood and in regards to track records central bankers likely hold the wor the world record for the most abysmal performance in history they've caused multiple waves of currency devaluation and unemployment during their reign over money over about the past century and since reputation must be earned through honesty it is unsurprising that central banks have struggled in this respect as their business model is built on deception so one thing that I'm going to say here which I think is an important thing and I thought a lot about earlier you were talking about central bankers seem quite unwilling to say what they think some of that is because it is personally valuable or from a central banking same place valuable for them not to say what they think right the other part is the words they use are important because people nitpick over every single word so it's almost like you have this self-fulfilling prophecy of I'm gonna be careful what I say because that's what's good for central banks for dollar dominance etc and then oh by the way now you're gonna be super nitpicky so then I really can't say what I mean and you know it kind of just reinforces stuff over and over and over again and somebody once said to me they were like Jerome pausing at the hardest job in the world because literally if he says one wrong word you know all kinds of chaos can't win and so I'm actually of the belief that the job is near impossible right it's incredibly difficult at predicting GDP and all the sudden is just super super difficult and so the individual people are really just trying to do their job right yes now from a systemic macro standpoint huge issues it's no one single person who is responsible for that right it's overtime it's a lot of people different organizations etc but separating the people from the structure I think it's really important and it's very similar to like a lot of people go to work and just want to do their job I think most of them actually think they're doing what they're supposed to be doing I think you and I are talked about the macro system here which is very very flawed over a long period of time absolutely I mean the system for by virtually every measurement does not work and the job is impossible because trying to hold back free market dynamics is like trying to hold back the tide right these things they play out their natural organizing principles their intrinsic to nature you can't fight mother nature so I think we're just you know we saw Soviet Russia collapse when they tried to centrally plan everything in the economy we have competed them because we gave free market rein to everything except money but now we're just going to see central control over money fall for sure for the same reasons so another way to look at the the ability of money is by setting facts versus opinions opinions are like soft money and that they can easily be diluted and distorted which is very clear in politics for instance facts though are like hard money and that they are rooted in scientific realities in the case of gold these are chemistry and physical rarity and in the case of Bitcoin these are mathematics and thermodynamics so said simply do we believe the largest market in the world is best governed by opinion or fact and again this comes back to my question why do so many intelligent people fear facts fear Jeff yeah keep going yeah it's crazy so in this respect I could say buying bitcoin is like behind a put option on central banker malfeasance or going long facts and short opinions which is kind of like your long Bitcoin short the bankers I guess said differently long facts in short of pains is probably a more popular way one Bitcoin short the banks so the reason central bankers cannot be believed is because they lack skin in the game Taleb sums us up sums up skin in the game nicely by saying quote don't tell me what you think just show me what's in your portfolio unquote and regardless of what they say or think central bankers have been stuffing their portfolios with gold lately and that that is the indication of of gold as dominant free-market money so money which is the largest and most critical market in the world simply cannot evolve without practitioners who are subjected to real-world consequences and trade-offs in real time since central bankers don't face the consequences of their decisions they suffer from the agency problem which is a conflict of interest inherent to any organization where one party is expected to act on another party's best interest but is not exposed to the proper balance of incentives and disincentives to do so so said simply if you lack skin in the game then you lack believability right and just real quick I just quickly googled central bank gold buying so central bank's accumulated over 668 ton in gold purchases this year which is more than 2018 s record numbers so 18 set a record 19 surpassed it in fact the key drivers in gold demand this year stemmed from central bank purchases most of which were bought 390 tons during the first two quarters of 2019 and so the central bank gold purchases in 2019 surpassed last year's 50-year high exactly and so over the last 50 years central banks have never held more gold or menthe more gold going back to your believability that all came from Bitcoin comm and we you know the corollary is we've never printed this much money right so they're literally hedging against one another's counterparty risk holding each other's currency which again going back to individuals versus the macro system if you're an individual sitting in that seat you know you're printing a lot of money and also there's a hedge out there the rational thing is to buy a bunch of gold while you print absol right so they're doing what is rational from their seat yes we're talking about here's the more macro structure is flawed and that's why they're having to do it and I would say to make good economic decisions you could completely ignore everything they say and just watch that pattern yet alone so the skin in the game explains why ancient Roman architects were required to required by law to stand beneath their monolithic arches when the scaffolding was removed often with their families I love that so this this deadly disincentive to mal performance worked wonders as some of the oldest arches constructed in this way are still standing at over 2,000 years of age so what if central bankers were subjected to the devastation they inflict on economies should their decision-making not work out perhaps the world would be still be on a gold standard and the the dire need for Bitcoin today would be drastically lessened so without skin in the game your interests are inherently conflicted and you suffer from an agency problem anytime you're managing other people's money and this includes central bankers and this is why most asset allocators prefer to invest in hedge fund managers that have a substantial amounts of their own net worth tied up in their funds because that is skin in the game right and it's also why central planning always causes moral hazard because the overlords are not exposed to the gravity they inflict on their people so an important piece here is part of inflation that rarely gets talked about is that inflation actually causes wealth inequality yes and the reason this occurs is that as we print more money the currency it's also dollars become less and less valuable right just inflation is devaluing the dollar but the quote-unquote wealthy the elite the rich the the top really 25 to 50 percent of individuals they don't keep 100 percent of their wealth in the currency they keep it in real assets and so if the currency is being devalued away the asset prices actually Rises so what we get is we get this very specific separation in a population so take the United States for example at least the bottom 50% if not more cannot afford a four to five hundred dollar emergency payment though so what that means is they live their life paycheck to paycheck with near 100% if not a hundred percent of their wealth in cash though and every year that is being worth less and less this is the feeling of I can't get ahead I can't get ahead I can't get ahead so inflation is eating away at their wealth the remainder of the population whether that's 30 40 50 you know 50 percent they take a portion usually a majority portion of their wealth and they do not leave it in cash they buy stocks they buy real estate they buy all kinds of different assets or you know all stop as the dollar is deflate a devalued away you then get asset price rising so you're getting the quote-unquote poor or the people in cash are getting poorer and the quote-unquote wealthy those within real assets are actually getting richer the rich get richer the poor get poorer and this is exactly what you're talking about here is not only is this centrally planned model they don't have quote-unquote skin in the game from a well if you make bad decisions but on top of that their own personal wealth is protected from this inflation and devaluation because they actually own real assets they don't hold cash that's right that is why we're getting the wealth inequality guess we have and if we can remove that structural issue all of a sudden we have a much more fair equal world yes there's a lot of people don't want to see that happen absolutely I think one of the biggest consequences of that is you see real-estate prices soaring right it always goes up doesn't it this is residential this is corporate real estate it's everything and this has a really perverse effect because I would argue that people sort of near the top or in the middle put a lot of their wealth in their house right and because they're trying to protect it from inflation right it's there's ernesta gets their savings tool this has a perverse consequence of causing the market prices of homes to go to create a bubble and actually drives homelessness so consequences if you look at the money supply increase from 2008 to today and the increase in the homeless population in this country they're very highly correlated and I would argue that that's why all right you're pricing people out of homes and if you overlay that same chart with wealth and equality charts somehow it looks very similar and the S&P 500 right looks very similar and and part of this too is I what I find especially when it comes to Bitcoin you know you and I talked a lot of different types of people and they're all kind of trying to figure it out when I get behind closed doors with intelligent people in the finance industry they all know this happens no it's not fun to talk about it's not in favor to talk about it's not it doesn't make it easier to go to sleep at night etc but it is important to talk about oops and the more that we talk about it the more awareness that restores it and I think that awareness drives the the desire to fix this right and so if people don't talk about it I don't care how uncomfortable it is you can't fix the problem it goes back to the idea of transparency and truth absolutely again everything starts out as an idea right shock and it's almost like da Leo's on to something yeah and I forget who said it but someone said there's nothing in the world that can stop an idea whose time has come it's true and it feels like Bitcoin Stein was calm so we're gonna get into that all right yeah so talking about skin in the game you know central banks have none essentially and on the other hand all market participants in Bitcoin have skin in the game the note operators are incentivized to maintain the rules miners are incentivized to sanctify the Bitcoin Ledger efficiently developers expend their time supporting an open source project Bitcoin holder's expend real resources to acquire their Bitcoin all of these Bitcoin market participants are just like the ancient Roman architects standing beneath our newly unscaled at arches they all have skin in the game that's what makes the system work there's a lot of bitcoiners you just got super excited when you describe Roman architects standing beneath the unscaled arches alright go ahead so to pull it all back together going back to Ray's formula that we outline or the Ray gives us for the idea of meritocracy and it's free market equivalent we have the idea meritocracy equals radical truth plus radical transparency plus believability weighted decision-making which is equivalent to the free market format of free markets equal truthful price signals transparent and reliable rule of law private property rights and hard money plus skin in the game weighted decision-making based on what we have learned so far we can translate these equations once again into central banking and Bitcoin versions where we have central banking equals untruthful price signals because they broke the honesty of money there there is still transparent and reliable rule of law because central banking doesn't really affect the rule of laws so much but they have marginalized private property rights because they confiscate people's wealth via inflation and there they have soft money right it is not free market determined and it's used as a mechanism of control and they have the agency problem weighted decision-making they don't have skin in the game so they have an agency problem instead so central banking equals untruthful price signals Plus transparent reliable rule of law marginalized private property rights and soft money plus agency problem weighted decision-making yes how's that compare to Bitcoin and so Bitcoin on the other hand has absolutely truthful price signals this is something that is even it's even more scarce than gold right gold is relatively scarce bitcoin is absolutely scarce which makes it the perfect medium to move price signals through essentially it also has transparent and reliable rule of law it has private property rights which are restored in Bitcoin because it's uninflated all you can't steal people's Bitcoin via inflation or confiscation and it is an absolutely hard money meaning that it's free market determined and it can't be inflated at all plus it has skin in the game weighted this decision making as we just covered with its market participants so in this sense clearly bitcoin is 100% consistent with the equation for free markets whereas central banking is almost entirely inconsistent since this free market equation is equivalent to the idea meritocratic equation we may deduce bitcoin is completely consistent with Ray's formulation of the idea meritocracy and central banking is not so if we go all the way back to the beginning to raise original assessment of Bitcoin assuming raised principles are stated forthrightly how can he possibly be a non-believer in Bitcoin bitcoin is both an idea meritocracy and a free market and as you said ray quote when someone says I believe X ask them what data are you looking at what reasoning are using to draw your conclusion unquote so let me ask you Ray after bitcoins impeccable performance for over a decade it's had over ninety nine point nine eight percent uptime it's never been hacked its evolved into the most secure computing network in the world it's storing around 200 billion in market value depending on the day and it has cleared over one trillion dollars of USD value of transactions in total what data and reasoning are you using to draw your conclusion about Bitcoin ray my guess is it like many smart people you have disregarded Bitcoin at the outset in accordance with one of your favor principles I implore you to keep an open mind about Bitcoin and perhaps you'll come to see it as an embodiment of open-minded open-mindedness itself so let's stop there we've probably got another 15 or 20 minutes and I want to talk about a couple of things the first is I'm not gonna compare Ray Dalio and Warren Buffett they're two very separate types of people I think very separate thought processes etc I'm in the camp when it comes to Warren Buffett of let's not ask the person who openly states hey I'm not a technologist I don't really understand technology stuff I'm usually a little bit later than most they're probably at the best person dad would have his portfolio's banks of course write the whole thing that's you know I think most people understand that they listen to me raise different is it important for ready to believe in Bitcoin for aid to publicly come out in the state that he sees value in it or is he in the camp with many others where it doesn't really matter Bitcoin doesn't care I would say it doesn't matter what any of us individually think at all what's up to the market to decide right markets like mark a little referee that's right markets are free market is selecting Bitcoin currently but I do think because of the the violation of civil liberties that central banking represents that it would be encouraging to see a thought leader someone of race stature and the space to come out and speak positively about Bitcoin I think that would just be a good humanitarian effort if you will but it doesn't matter if the market will decide the Keene and so you've done a fantastic job of laying out what I'll called the structural reasons of not only one why the existing system has flaws and likely those flaws can be accelerated or exasperated to ultimate failure you've also laid out this argument for why structurally Bitcoin is a solution if not the solution how it can very quickly continue to double and triple down on its benefits and ultimately kind of have this ascension or rise in the world where do we go right and what I mean by that is can Bitcoin become the next global reserve currency can Bitcoin be used as a unit of account will it just how do you think about where we sit today in 2020 and kind of what happens over the next 10 to 20 years so there's an excellent book that's very popular goals called the sovereign individual this book was written in the mid 90s I believe and it was very prescient in the sense that it predicted it predicted anonymous cyber cash ie Bitcoin it predicted the digitization of securities which we I think is next and the thesis of this book is that society comes to reflect the technology on which it is built so in the industrial giant you know huge industrial complexes basically to move the earth and build the buildings and all the things so we developed around that a gigantic nation-state and the argument is that now that society is being facilitated by the microprocessor and digital technology that will actually shrink the role of government and we'll see a dramatic decentralization of government over the coming years and so I think we're moving into a world where the role of government and the nation-state and our lives as kind of this oppressive institution is going to be declining gradually and then you know suddenly at some point and it's really hard to see past that this thing you know the nation-state model is so fundamental to our identity all right we all I'm an American I'm this I'm that it's but at the end of the day we're all just people on the planet so I think it's as much of a cultural epiphany as it is a financial innovation as it is almost a religious change it's really it's really profound as that occurs governments central banks others kind of those in power they're not going to just say Oh show's over shut the lights closed let's go home let's let's go take our bow said then we're gonna go home right we're seeing some steps that we've seen before right so in past recessionary periods the two things that we've seen happen or on average we see interest rate cuts of about 500 basis points or more and then we see quantitative easing or the printing of more capital the interest rate cuts we've seen a little bit happening obviously where we said today we don't have 500 basis points to cut so it where's the likelihood we're going to zero or if not negative there are some areas in the world where we've got negative already - is the printing of cash in the United States you know there's a whole bunch of controversy should we do it now should it you know happen later whatever but one of the things that recently came out is a Hong Kong so they're dealing with two specific issues right now they've got the protests kind of the anti Beijing or anti China conversation a lot of was very peaceful and at times has become violent and then got back from he's full and kind of balancing back and forth protest and then they've got the coronavirus kind of this you know virology related thing that really to me the coronavirus is less about the virus is gonna go kill millions of people and it's more about creating fear which leads to economic slowdown yep right and so if you get protests which obviously shut down cities etc you get economic slowdown you kind of exasperate that with the virus so don't they've introduced a fifteen billion dollar economic stimulus plan recently and as part of that plan they are going to give 10,000 Hong Kong dollars which is the equivalent about 1,200 bucks u.s. to seven plus million citizens helicopter money so we're seeing it in action yeah it used to be we would print the money and go buy assets to inject the money into the financial system I saw multiple articles from what many would consider legitimate truthful mainstream media organizations so some would say that's an oxymoron some would not but these are these are well respected publications and and things that I read on a daily basis and we're in phrases give away used and as I sat there and I thought about this all I could say to myself was you don't give away something that has value right I've never done that in my life because even philanthropic etc you get back whether its moral yes rewards will you get back intellectual rewards right you get back kind of you're in a better mood like I'm like there's always some I give something I get something in our term helicopter money is coming and the reason I want to talk to you about this is Ray Dalio has pretty much said we've got modern monetary theory which is essentially helicopter money though whether you think it's good or not it is on the horizon and we're kind of speeding towards that yes what is that world look like so I guess a couple of things and I believe the figures are by the Year 2022 the US government will be generating tax revenue below its interest expense so if you can imagine trying to if you may so we're like a unit economic negative if you made a hundred thousand dollars a year but you paid a hundred and twenty thousand dollars of year of interest on your credit cards you can only imagine what direction you're going as far as widening loss you're going to bankruptcy like that's it's mathematically certain when it's not gonna happen I think it's 2022 when oh this is like two years a couple of years yeah and that's so let's say people are bad at math it happens in 2025 yes so you've got it going that direction and then I would say that and that's all the while tearing society apart at the center right driving this wealth disparity so you have this buildup of populism this potential of social revolt you know people are on the streets they're mad we've seen this all over the world and you really saw it after 2008 the Occupy Wall Street movement and it's almost like the fiscal and monetary policy tools just get more and more creative to try and fight those fires and I think helicopter money is probably just the last expression of that just really trying to give people money to make ends meet but at the same time you're driving hyperinflation of said money in the in the near term by printing that much money right so it's it better to give it to the people rather than to buy assets I guess in the short run perhaps but it at the end of the day when you're printing this much money value flows to scarcity right so we're talking about realist businesses gold and you know the scarcest liquid asset in human history absolutely scarce Bitcoin so I think you just have to watch the actions of central bank's again they're buying gold and then protect yourself with owning real things not storing your value in currency but in any case it ends a it's ugly the end is ugly right it's literally tearing apart the trust fabric the whole society together and it's painful for for everyone what's your biggest fear over the next decade when it comes to the relationship between Bitcoin central plain planned money and I'll just call it the economy in general the financial system you know I guess a lot of this has to do with how quickly it happens there's actually if hyper Bitcoin is Asian which is a term where Bitcoin becomes the dominant world reserve money a lot of people use if that happened today I actually think it would increase the wealth disparity a lot why because bitcoins not widely penetrated in the world right make less than 1% of the world hold it so if it happened today you'd have 1% all of a sudden holding the most valuable asset in the world and 99% excluded so I think if hyper Bitcoin ization happens too fast in the short run it could maybe exacerbate the problems now in the long run it's clearly better for all the reasons we outlined today but the transition is just hard to predict the timing of and you know transitions are inherently bloody so I guess it's earning one of our last questions for you is we talked a lot about this centrally-planned money and economies is it bad like having a centrally planned economy and money to some degree instills order right the free market can create chaos it can create volatility price discovery all stuff is it all bad or is it just macro level long term not good how do you think about that so to love would say you can suppress the volatility inherent to nature in the short run which central banks are designed to do right price stability target unemployment etc but all you're doing ultimately is delaying the nonlinear outcomes of this volatility into the future and making it worse you're amplifying it so I think any time you try to impose a regulation or central planning body on a free market system you're you may be better and that medium term that the system operates and functions well as it has for some time now but the ending gets worse and worse so if we're keeping the ends in mind know the free market is the ideal organizing principle for Humanity what's the best book you've ever read you know a long time ago I read a book called the Dow of the way off the beaten path but for me when I was a kid I was a very scientifically minded kid and didn't have much of a respect for the spiritual domain but this book bridged the to for me it drew I think the taught the subtitle of the book is the parallels between ancient Eastern mysticism and quantum physics and that book is incredible it's written 2530 years ago but it just made me a more whole person I guess what's the story behind the tattoo I have a Bitcoin tattoo you on the inside of my right arm and I got this it is the Bitcoin symbol with the circle it is the Bitcoin symbol oh he just flexed he flexed watch out get the police he just flexed he literally just flex his bicep I was

Channel: Anthony Pompliano

Views: 278,394

Rating: 4.8856497 out of 5

Keywords: bitcoin, btc, off the chain, podcast, pomp, anthony pompliano, crypto, cryptocurrency, blockchain, finance, investing, fintech, tech, technology, investing news, financial news, btc price, bitcoin price, markets, bitcoin news, media

Id: i0N9qj4gjmg

Length: 101min 8sec (6068 seconds)

Published: Fri Feb 28 2020