Money: The bubble that never pops
Or how I learned to shut up and love the rollercoaster
The idea that crypto is primarily about money has been somewhat challenged by NFT’s (tokenized culture) and the emergence of Uniswap, but in my opinion it probably
(a) has the highest TAM out of all the things Crypto could achieve
and
(b) is the most likely thing for Crypto to achieve
so it’s worth refreshing our fundamentals.
On the Origins of Money. Sorta.
The best academic account of money is Carl Menger’s 1892 “The Nature and Origin of Money”. Menger’s essential question is why certain commodities take on a persistent monetary premium, i.e. why certain commodities consistently have demand greater than their use value. Use value is like, the value you get out of using something. For example, clothing has some use value because it protects you from the cold. Food has use value because it keeps you from dying of starvation. I would go a step further than the Marxists (besides Marcuse and some of the other weirdos in the Frankfurt School) and say that use value doesn’t exist and is purely a social phenomenon,1 but you get the idea.
Menger discovered two things about money.
The primary reason why monetary premiums develop is because some goods are more saleable than others.
“If it is assumed that the conditions of the parties concerned are improved by every step that leads from direct exchange to indirect exchange and subsequently to giving preference for use as a medium of exchange to certain goods distinguished by their especially high marketability, it is difficult to conceive why one should, in dealing with the origin of indirect exchange, resort in addition to authoritarian decree or an explicit compact between citizens.”
Saleableness pretty much means what you think it would, but for the sake of appearing like a mighty intellect I’ll quote the relevant explanations from Menger himself.
If we call any goods or wares more or less saleable, according to the greater or less facility with which they can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same, we can see by what has been said, that an obvious difference exists in this connection between commodities. Nevertheless, and in spite of its great practical significance, it cannot be said that this phenomenon has been much taken into account in economic science. The reason of this is in part the circumstance, that investigation into the phenomena of price has been directed almost exclusively to the quantities of the commodities exchanged, and not as well to the greater or less facility with which wares may be disposed of at normal prices. In part also the reason is the thorough-going abstract method by which the saleableness of goods has been treated, without due regard to all the circumstances of the case.
Saleableness is extremely important because it results in what I call “ponziability” becoming a necessary condition what makes something a “store of value” or “money”. In the spirit of vulgar Marxism: if a medium of exchange is good because other people desire it, then it doesn’t matter what you think is good money but rather what you think other people think is good money. QED, money is by nature a ponzi/speculative bubble.
Some important caveats:
Firstly, money is different from most historical financial bubbles (e.g. Florida Land Boom) in that money is the bubble that doesn’t have to pop. But any bubble, no matter how well constructed, can pop.
Secondly, a word on the intracies of fiat.
But why isn’t the standard dollars? It is dollars. The problem is, there are more dollars every year. This is obvious—but it needs to be understood in a rather subtle way.
Most people say “fiat.” This is a copout: it fails to understand the relationship of forex (non-dollar fiat currencies) and securities (stonks, bonds, etc) to the dollar. We include all these instruments in “dollars”—which is short for “dollars and dollar derivatives.” These dollar derivatives are what Mises called “money substitutes.” (Foreign exchange is fundamentally a derivative of the dollar because it is linked by a balance of trade.)
Regarding the dollar as a coin, which it is, the coin market cap of the dollar is not M0—it is HNW, what the Fed calls “household net worth.” This is just the total market price of all financial assets held by the private sector—the sum of all portfolios. For their spending behavior, it does not much matter what stonks their money is in—or even whether their portfolio is stonks, or bonds, or cash, or even crypto.
Whatever backs those assets, we can assume it is not changing much—there are some concrete advances in technology, some physical improvements to real estate, etc, but… we can therefore regard the expansion of money substitutes as basically artificial.
Thus, whenever household net worth expands, the government is printing money—this is monetary dilution. When people have more to spend, they spend more. Duh. And when the stock market goes up, the government is printing money—even if it does it in some causally obscure but logically predictable way, such as by low interest rates.
Price inflation, such as you see at the gas pump (prediction: when gas prices pass $10, gas stations will post prices in dimes), is a consequence of monetary dilution. Sadly, it is only one such consequence—and it can be caused by many other forces, such as the beast from the east, that vile, nation-eating monster, Herod of the “Slav squat,” Putin. Of course, when any two such forces are pushing together, they push even harder.
Monetary dilution in the dollar—basically, stonks going up—is the cause of the pressure for monetary standardization. The problem is that our economies are addicted to monetary dilution—they are like money-losing companies which fund ongoing operations by issuing and selling more stock.
You are losing money if your liabilities keep increasing. Ever seen a balance sheet? Equity is a liability. For an inefficient firm to even break even, a lot has to happen. This will not happen. Ergo, the dollar will continue to be diluted.
So the dollar, as a coin, is a very leaky coin. It is so leaky that this leakage seriously endangers its status as a winning monetary standard. And this leak cannot be fixed.
Of course, by allocating assets properly, it is possible to keep up with the dilution. If the stock market goes up, own stocks! This leads to the absurd, yet logical, practice of “passive investing.” In a sane financial system with a stable monetary standard, there would be no such thing as “passive investing.” No beta, only alpha. “Beta” investing is just how you avoid the monetary-dilution tax.
But sadly, the stock market can also go down. Monetary contraction is also a thing. But monetary contraction is not sustainable—because the economy is addicted to dilution.
The Fed will just have to learn to live with price inflation—which may take a while. But the US cannot sustain an HNW, the true market cap of the dollar, which is declining or even just flat. It cannot get un-addicted to monetary dilution.
Unlike in the Volcker era, when it was much healthier, the US cannot go cold turkey. It will simply die. Less metaphorically, the USG cannot sustain this posture. If it has to, it will drop “helicopter money” to restart the dilution engine.
From now until the rest of its life, the dollar will leak—making it vulnerable to a much less leaky (mining is still leakage; even mining for fees is leakage, since miners of fees are still forced sellers) coin.
To keep outside of these contractions, and inside the expansions, is a full-time job. Someone has to get diluted—and someone has to get contracted. This is why you should save in crypto instead, where neither of these things happens.
Or at least, neither should happen…
Which brings me back to… oh yeah, states can’t create money. The market is the only one who can create money. I don’t feel like writing much about this at the moment, though it is interesting.
In brief:
In the entire western historical record, precious metals have been used as a form of money and clearly took on a monetary premium above their practical use value. However, no record exists of a state mandating the use of precious metals as money.
If it is assumed that the conditions of the parties concerned are improved by every step that leads from direct exchange to indirect exchange and subsequently to giving preference for use as a medium of exchange to certain goods distinguished by their especially high marketability, it is difficult to conceive why one should, in dealing with the origin of indirect exchange, resort in addition to authoritarian decree or an explicit compact between citizens. A man who finds it hard to obtain in direct barter what he wants to acquire renders better his chances to acquire what he is asking for in later acts of exchange by the procurement of a more marketable good. Under these circumstances there was no need of government interference or of a compact between the citizens. The happy idea of proceeding in this way could strike the shrewdest individuals, and the less resourceful could imitate the former's method. It is certainly more plausible to take for granted that the immediate advantages conferred by indirect exchange were recognized by the acting parties than to assume that the whole image of a society trading by means of money was conceived by a genius and, if we adopt the covenant doctrine, made obvious to the rest of the people by persuasion.
If, however, we do not assume that individuals discovered the fact that they fare better through indirect exchange than through waiting for an opportunity for direct exchange, and, for the sake of argument, admit that the authorities or a compact introduced money, further questions are raised. We must ask what kind of measures were applied in order to induce people to adopt a procedure the utility of which they did not comprehend and which was technically more complicated than direct exchange. We may assume that compulsion was practiced. But then we must ask, further, at what time and by what occurrences indirect exchange and the use of money later ceased to be procedures troublesome or at least indifferent to the individuals concerned and became advantageous to them.
The praxeological method traces all phenomena back to the actions of individuals. If conditions of interpersonal exchange are such that indirect exchange facilitates the transactions, and if and as far as people realize these advantages, indirect exchange and money come into being. Historical experience shows that these conditions were and are present. How, in the absence of these conditions, people could have adopted indirect exchange and money and clung to these modes of exchanging is inconceivable.
Faith in fiat money is, allegedly, faith in the government that guarantees it. That in turn requires faith in the future productive capacity of the economy. As the productive capacity of any economy ultimately comes from the work of people, we could therefore say that faith in money is faith in people, both those now on the earth and those who will inhabit it in future. The "magic money tree" of “fiat” is made of people, not banks.
Anyways, I hope crypto becomes money because then all our shitty DeFi tokens will do multiples like Gold miners in a gold boom. Most of the DeFi tokens exist to create futures contracts and primitive futures markets for Ether and BTC, which are commodities.
Also, the ponzi nature of money is extremely important because it helps you better understand the fundamental reasons behind crypto cycles and not lose as much hope during the bearish part of the market cycle.
Consider the following: Chinese people love to eat dog meat and Westerners will literally vomit once I tell them what they just put in their mouths.