The Bitcoin Standard — Saifedean Ammous (Book Summary)
Government overreach is increasing.
This is partly because we’ve outsourced some of our critical thinking capabilities for the sake of convenience. It’s much easier for the government to control its population when it does the heavy lifting regarding thinking. One way the government perpetrates its overreach is through monetary and financial means. It’s convenient because it’s covert. It does not require the consensus of the governed to pursue programs that require extravagant spending. This book aims to show the reader just how pernicious this covert overreach could be. He offers a solution in the form of the digital currency, Bitcoin. This book summary highlights some of Saifedean’s salient points. He has many. This book is as much a primer on basic economics as it is about Bitcoin. I will limit this summary to three of points that have struck a chord with me.
The Author and His Incentives for Writing this Book.
The author, Saifedean Ammous, has written three books on economics in addition to this one- The Principles of Economics and most recently, The Fiat Standard. He runs economics courses through his website www.saifedean.com. He runs the “Bitcoin Standard” Podcast and has been interviewed by other big-name Podcasters, Lex Friedman significant among them.
“Dr. Ammous holds a PhD in Sustainable Development from Columbia University, where his doctoral thesis studied the economics of biofuels and alternative energy sources. He also holds an MSc in Development Management from the London School of Economics, and a Bachelor of Engineering from the American University of Beirut.” (source: saifedean.com)
The author does not explicitly state his reasons for writing this book so I’ll make some safe assumptions in this book summary. Dr. Ammous has benefitted greatly from Bitcoin’s existence. He was able to rise out of a tough situation in his native homeland, Israel (Palestinian Territory), achieve a great education in America, and rise to prominence as an outspoken critic of the government status quo. He credits this to Bitcoin. He explains the “how” of these accomplishments in this book. More accurately, he explains the existing government-sanctioned obstacles preventing one from succeeding. He was able to navigate around those obstacles through Bitcoin.
The “Stock-to-Flow” Ratio’s Importance in Currency.
Money, as a concept, comes in two forms- hard money and soft money. There are two factors that help determine whether a type of money is hard or soft. Those factors are: the existing stock of the money and the amount of new money flowing into the picture. A higher “stock-to-flow” ratio means the current stock of money is larger than the new money flowing into circulation. Gold, as an example, is the hardest form of money as it enjoys the highest stock-to-flow ratio. Because it is a scarce resource and it is relatively tough to mine, new gold placed into circulation will never outpace current inventory. This placed a real limit on government leaders spending exorbitant amounts of money on empire building. But, if there’s a will, there’s a way. They skirted around the annoying reality of scarcity by “debasing” the currency. They confiscated gold coins in circulation, stripped them of some gold, minted new coins, and sent them into circulation. This padded the government coffers enough to support the ever-increasing spending plans. The higher the “stock-to-flow” ratio, the better it is at reducing the negative effects of an increased money supply (inflation).
The political motivations of divorcing from the gold standard.
The problem with using hard money is that it places limits on spending. This is not ideal for any government leader trying to impress his constituents. This isn’t ideal for any government leader trying to expand his influence. Using hard money forced these leaders to make tough decisions about funding programs. They could not fully fund a pet project without also affecting another one. New money just wasn’t flowing into the existing supply fast enough to fund everything. Enter “soft money.” Soft money has a lower stock-to-flow ratio (the rate at which new money flows into the existing supply is higher). This created more flexibility for leaders. But it came at a cost to society- inflation. Technically speaking, “inflation” simply means that there is an increase in the quantity of money without a commensurate increase in goods or services. However, we associate “inflation” with higher prices across the board. This is a by-product of that increased supply.
Leaders past and present are guilty of moving from hard to soft money to fund their ambitious spending plans. The Roman Emperors debased their currency by stripping a portion of the gold from existing coins. As time progressed, coins had more gold stripped from it. In modern times, this “debasement” took the form of moving from the gold standard in 1914. From that point, the government could literally print more money to fund ambitious spending plans.
There are no plans to return to the gold standard. Today we have reserve currencies. On the gold standard, holders of the dollar could redeem their money for its equivalent in gold. This is no longer the case. Now, the dollar is not redeemable for gold. In the aftermath of World War II, the devastated Allied countries convened at a conference now known as the Bretton Woods conference. At the conference, the US offered to open its economy, without any stipulations, to its European allies wanted so that they could get their economies up and running again. The caveat was the the US wanted to be paid in gold. All the European gold started making the trek across the Atlantic Ocean ultimately to Fort Knox. The initial arrangement was that this gold was redeemable at any time. In the 1960’s, the French took the United States up on the offer and began redeeming scores of their gold. By 1971, President Nixon had enough. He issued a cease and desist order on gold redemption. Essentially, at that point, the US dollar became the world’s reserve currency. Any outstanding debt issued to the US would be back by nothing other than the “full faith and credit” of the US Government. We’ve been operating under this arrangement since.
Why you should buy Bitcoin.
Government overspending is an issue. The government receives money in two ways. It can raise taxes or it can borrow money. The former requires consent of the governed and we all know how that can unfold. Constituents don’t like taxes and they like tax hikes even less. The latter requires borrowing money from a willing lender- recently, that has been China. They love the US dollar. There is an annual outflow of Chinese capitol to the tune of $1 trillion. Borrowing more and more money is becoming the norm. A balanced budget is a thing of the past. The last time the budget balanced was during the Clinton administration. Hardly the goal, it was simply a by-product. Congress continues to raise the debt ceiling which means the government will never get its ridiculous spending under control.
The author talks about a concept called the “easy money trap.” This trap states that “anything used as a store of value will have its supply increased, and anything whose supply can be easily increased will destroy the wealth of those who used it as a store of value”(page 5). Our current form of money is easy to increase. And if there’s an increase in supply, those who have saved any money in this form would have seen a drastic drop in value.
Bitcoin offers a solution. Bitcoin is the hardest form of money ever invented. It is costly to produce which naturally means it isn’t easy. And if it isn’t easy to produce, there will never be a low stock-to-flow ratio (current inventory will always dwarf the rate at which new Bitcoins enter the inventory). The only obstacle facing Bitcoin is adoption. Governments have tried to ban Bitcoin, but have failed. Bitcoin’s demise would require something more drastic that government sanctions. Bitcoin’s demise would require the very extinction of the internet. At that point, we would have bigger things to worry about than currency.
Bitcoin fixes the problem of easy, unsound, money. It is difficult to create and requires a ton of computing power. Computing power that is taken on by miners across the globe. There are financial incentives for these miners to keep the network going as it has been since Bitcoin’s inception in 2008. Bitcoin’s issue is that although it can potentially become the world’s premier store of value, it is useless for smaller, speedier, transactions. With this limitation recognized, Bitcoin has the potential to overtake gold’s previous role as the reserve asset of choice. Making dollars redeemable for Bitcoin bring’s us back to the world pre-fiat. A world where there were defined limits to spending.
Conclusion
I am not totally convinced about Bitcoin’s future. There are events that have passed that I could not have seen coming. Bitcoin may be the reserve asset of the future, but then again it might not be. I believe in Bitcoin, but I am also skeptical of how future events may affect it. How does one reconcile these differences? I believe one should own some Bitcoin because of the reasons I’ve discussed. But I also believe there is a smart way to do it. The wrong way to do it is to take out a second mortgage and go all in with Bitcoin. The better way to do it is the same way I recommend buying any capital asset- little by little. Dollar cost averaging may be the best way to own this controversial asset. And only time will tell which side of the controversy the Bitcoin holders will be on. As with any other investment, the early adopters will be rewarded. When we know for sure that Bitcoin is here to stay, it will be too late to reap the rewards of holding. So accumulate little by little. I’ve written about sustainable investing here (link below).
