An Open Letter to Ray Dalio re: Bitcoin (Part 6)
An open letter to hedge fund colossus Ray Dalio regarding his worldview, the forces of financial nature, and how Bitcoin is bound to reshape both.
In Part 5, we looked at Ray’s principles of evolution, timelessness, and meaningful work. Part 6 concludes the open letter to Ray with an exploration of the principle of meaningful relationships, followed by a stark look at the present socioeconomic circumstances faced by the global economy and the inevitable storm ahead…
(p.216) “The rewards of working together to make the pie bigger are greater than the rewards of self-interest, not only in terms of how much pie one gets but also in the psychic rewards wired into our brains that make us happier and healthier.”
The history of mankind has been marred by episodic violence — skirmishes between individuals, tribes, and, later, nation-states have been a consistent thread in the story of humanity. Like other animals, man seeks to maximize the odds his genes will be passed on to successive generations and will fight tooth and nail for his chance. Counterbalancing this self-seeking behavior are the benefits offered by a peaceful and cooperative society — the division of labor, rising standards of living, and more free time to spend as one sees fit. Between the 16th and 19th centuries, conflict-related deaths as a share of world population averaged less than 1%. In the 20th century, this figure more than quadrupled to over 4%:
This is no coincidence. Inflating fiat currency supplies gives governments a much cheaper and more surreptitious way to finance military operations as opposed to direct taxation or selling of war-time bonds. As Ron Paul said:
“It is no coincidence that the century of total war coincided with the century of central banking… If every American taxpayer had to submit an extra five or ten thousand dollars to the IRS this April to pay for the war, I’m quite certain it would end very quickly. The problem is that government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes. When the costs are obscured, the question of whether any war is worth it becomes distorted.”
As the enablers of inflation, this institutionalized system of time theft and financial subjugation, central banking is the mechanism through which government confiscates the resources necessary to fund its belligerent efforts. As Mises remarked in 1919:
“One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.”
Before the fiat currency experiment, it was a common refrain among warring nations that “the gold standard must be abandoned”. Clearly, it was in the best interest of these nations to sever the monetary anchor to time since debt-based money unlocked much more potential for borrowing against the future (via inflation) to finance current war efforts. Of the three ways governments can generate revenue — taxation, borrowing, and inflation — the latter is clearly more preferable for governments as its negative consequences are spread out over long periods of currency debasement and the shadowy, implicit tax imposed by inflation in the form of rising prices is less well understood by citizens (and rising asset prices helps paper over the perceived damage, although this is largely illusory).
Expansionary monetary policy was the key to financing the US military operations during the Vietnam War. Although the war-time economy seemed strong during the 1960s, US citizens would suffer economically in the echo of this economic intervention as the 1970s became mired in stagflation (low growth, high unemployment, and high inflation). Besides the death and destruction wrought during the war, there was economic devastation in the US and abroad. Between 1965 and 1984, the Dow index suffered a drawdown of 80% from its peak value on an inflation-adjusted basis in the wake of this soft-money-fueled-military-spending-spree. Unfortunately, this pattern of warfare funded through inflation would persist well into the new millennium.
After its great successes with its War on Poverty and War on Drugs, early in the 21st century, the US would launch its “War on Terror”. Over the course of the following 17 years, with the cumulative cost of the “war” (more accurately, an imperialistic military campaign) reaching over $2.1T in direct governmental expenses, we witnessed The Fed print money and purchase US government debt (US Treasuries or UST) almost exactly equal to the cost of the war:
Clearly, it is no exaggeration to say that the US central bank money machine and the US war machine are intimately connected. Central bank enabling of government war machines is a perpetual bane to humanity. Neither central banks nor military regimes are accountable to anything other than their own self-interests. In reckless pursuit of their own politicized ends, these institutions siphon away vast swathes of societal wealth to fund destructive military campaigns; this “twin demon” problem of wealth confiscation and capital destruction is the most anti-economic force in the world today. In the face of this diabolic menace, the world has but one hope: the separation of money and state.
As with all other critical commodities and industries, the free market is the best mechanism for allocating capital, promulgating innovation, and properly pricing risk. The singular purpose for the monopolization of the market for money by government is its unquenchable thirst for power; it imposes itself on citizens with hortatory messages from central banks and relies on the submissiveness of citizens. Fiat currency facilitates an exploitative relationship between governments and their citizens in which the former harvest the fruits of the latter’s labor in exchange for “protection”.
Wars do not protect the public, they tax it. Wars do not promote the public good, they destabilize it. Wars do not stimulate economies, they devastate them.
Throughout history, money has been both the means and ends of all war. People have always fought to control more resources or territory, and have wreaked havoc on each other in the process. Warfare is antithetical to meaningful relationships. If we want to build a world with more meaningful relationships, we must mitigate mankind’s ability to wage war against himself. An unmanipulable, uninflatable, and confiscation-resistant free market monetary alternative like Bitcoin is a good start: it holds within it the promise of starving the state of the virtually unlimited resources the fiat currency printing press feeds into it. When people have a choice to opt out of the inflationary economic order, governments lose the ability to tax them (both explicitly and implicitly through inflation) which mitigates state revenue and its ability to wage war.
Warfare, its attendant loss of life, and the destruction of capital it causes are mitigable outcomes of money market monopolies. As with the other negative consequences of monopolization — like food shortages, unemployment, price signal distortion, and exacerbated business cycles — war can be curtailed by open and free markets, which create incentives for cooperation and long-term relationship building. As an unstoppably free market, Bitcoin is rendering irrelevant the artifices which preserve monetary monopolies and returning the market for money to its naturally free state. It accomplishes this by virtue of its intrinsic truthfulness and transparency which are, interestingly, two of the key ingredients to Ray’s free market for ideas — the idea meritocracy. As you said Ray, “In my case, I wanted meaningful work and meaningful relationships, and I believed that being radically truthful and radically transparent were required to get those”. A money that embodies these free market qualities is likely to influence its users to behave accordingly; this would create cultural effects diametrically opposed to those spawned by fiat currencies today. Simply, hard money like Bitcoin lowers societal time preferences; it encourages people to invest in themselves, seek meaningful work aligned with their skills, forge meaningful relationships, and to collaborate over longer time horizons. Critically, in a world run on Bitcoin, funding perpetual warfare via inflation would be a relic of mankind’s barbaric past — making Bitcoin the ultimate boon to the meaningfulness of relationships. But to get there, we must face reality head on and deal with it as it is, which brings to the here and now.
(p.138) “Man’s most distinctive quality is our singular ability to look down on reality from a higher perspective and synthesize an understanding of it.”
Since 2008, central banks across the world have injected an unprecedented flow of fiat currency liquidity into the economic system. Expectantly, this has furthered wealth disparity and sewn new seeds of systemic risks. Although we remain in a historically long economic bull run, these hidden risks appear to be rousing from their dormancy. No matter what form the next crisis takes, central banks have only three options to try and mitigate its consequences: 1) cutting entitlement benefits, 2) raising taxes, and 3) printing money. All three of these options will hit those living on fixed-income — retirees, pensioners, and the working poor — the hardest. Of the three, printing money is historically most favored by central bankers as it can be done (and is being done) with little political fuss or muss.
These systemic risks are compounded by negatively yielding government bonds, which most retirees, who typically have lower risk appetites because of their age, depend on for fixed-income in their twilight years. Since many of these instruments now suffer from negative yields, this forces investors with low risk appetites, including retirees and pension funds, to keep their nest-eggs “at risk” in equities markets, lower quality bonds, or even riskier assets. This contradicts the standard American dream in which you spend your younger years earning and investing in higher risk assets, like equities, so that as you neared retirement you could gradually transition your exposure to lower risk investments that generate a relatively predictable and consistent return — like bonds. This approach gives you exposure to higher upside when you are young and reduces downside exposure as you age, so that your nest-egg doesn’t get crushed in a stock market crash.
Bitcoin can help those living on fixed-income protect themselves from the accumulation of hidden risks created by the optionality-theft central banks impose on citizens. A small allocation of less than 5% gives those vulnerable to economic contractions a kind of insurance policy — a put option on the idiocy inherent to a politically-charged, debt-based monetary system. Once again we find the wisdom of Taleb, as this is an expression of the barbell strategy: an approach to investing and other aspects of life in which assumes a large exposure to a low-risk, low-reward element and small exposure to a high-risk, high-reward element. In fact, a portfolio with 95% cash and 5% Bitcoin outperformed the S&P500 on risk and return every year over the past 6 years:
After decades of flooding the market with cheap money, central banks have distorted free market incentive systems and made economies dependent on this artificial liquidity to stay afloat. Even the indication of quantitative tightening sent markets tumbling in 2018, which was quickly reversed by The Fed’s now infamous “dovish pivot” back to a more accommodative monetary policy. As this soft money is continually injected into the economy, it is flowing to hard assets so that investors can protect their wealth against the inevitable inflation quantitative easing creates, thus further distorting soft-money-denominated prices and setting the stage for new bubbles in markets like real estate and equities. At the core of this perpetual monetary easing is the (perhaps well-intentioned but certainly misguided) attempts of central banks to “create price stability” and “smooth out the business cycle” — which, intentionality aside, is equivalent to an arsonist racing to extinguish the fire he started. To state the argument again succinctly: printing money does not create stability of any kind, it distorts price signals and exacerbates the severity of economic cycles.
Indeed, it is money printing that has created the deeply negative bond rates we are seeing in Europe. As the European central bank (ECB) keeps printing money, it must buy bonds to inject this cash into the economy, which drives up the price of bonds and depresses their yields. So, we get into this (familiar) fiat currency trap in which the attempts to keep the economy healthy by injecting artificial liquidity hurt the most vulnerable among us, those living on fixed-income, the most. Bitcoin fixes this: by taking monetary policy out of the hands of people, who are as incapable of “managing” a complex system like the economy as much as they are the weather, it eliminates the vector by which policymakers create these economic distortions that they then try to fight off using the same policy tools that created the problems in the first place. Since Bitcoin’s supply is absolutely scarce, whatever portion you own of the total supply, you can be 100% certain that you will always have at least that fraction; this is the crucial discovery of absolute scarcity that Bitcoin represents, a one-time event that can never be recreated.
Another way soft money is distorting markets is through “share buybacks”, in which corporations take out cheap loans and use the proceeds to buy back their own shares. This action is an expression of the belief that the company’s stock will outperform the cost of capital net of inflation over the loan term. Also, the agency problem rears its head again here, as the reduction of shares outstanding helps corporate executives hit their “earnings per share” targets on which their bonus packages are based. This “financialization” of the real economy is a product of the flawed incentives inherent to fiat currency. Unsurprisingly, in the wake of the past 10 years of reckless money printing, corporate share buybacks have become the dominant source of demand for equities:
A perverse configuration of dependencies arises as a result: low risk appetite investors have been driven out of “safe” investments like bonds because of their negative yields, thus pushing them further out along the risk curve into equities or worse. However, due to the soft money fueled share buybacks outlined above, the dominant source of demand for these equities are the corporations buying their own stock with artificially cheap money, making their share prices perversely dependent on the continued central bank provisioning of low interest rate loans. So now, in a twisted turn of fiat disease, entire retirement portfolios and pension funds have been forced into dependency on the continued accommodative monetary policy of central banks, which can only maintain their confiscation via inflation so long as the underlying society remains sufficiently productive and submissive to its authority.
Facing reality, we see that the fiat currency experiment is in the endgame now; if interest rates aren’t held down or if central banks stop injecting liquidity in steadily larger doses, the economy will crash cataclysmically. Even if they do, it is only a matter of time before society begins to come unglued, as it always does when its trust fabric, money, is sufficiently debased. So, the time is now to accept our reality, learn the lessons of history, and plan for a better future. Although it’s probably clear by now, fiat currency is not a viable monetary system. In any case, let’s “look down on the reality” of different monetary systems to glean some comparative insight as to their fundamental nature and what would best suit us from an organizing principle perspective. In a sense, each particular kind of money represents a liquid equity stake in its respective monetary system. Let’s compare:
Fiat Currency: Liquid equity in a central bank, a privately owned and operated monetary monopoly
- Only Class B Shares available, All Class A Shares owned by Central Bank Shareholders
- No voting rights
- Board observation rights limited to public central banker appearances
- Converts greed into monetary dilution, confiscation via inflation, and trade wars
- Liquid equity subject to unlimited dilution
- Liquid equity subject to deauthorization
- Liquid equity subject to censorship
- Liquid equity subject to confiscation
- Liquid equity has no claim on underlying assets of monetary network (gold)
Gold: Semi-liquid equity in the world’s original, physical, and free market money
- Class A Shares = Physical Gold, Class B Shares = Gold Certificates
- No voting
- Governed by nature, no board to observe (only for Class A)
- Converts greed into monetary value and unforgeable costliness
- Liquid equity subject to unlimited dilution, although historically this is low and predictable
- Liquid equity immune to deauthorization (only for Class A)
- Liquid equity immune to censorship (only for Class A)
- Liquid equity subject to confiscation
- Liquid equity is the underlying asset (gold, only for Class A)
Bitcoin: Liquid equity in the world’s only global, digital, final settlement monetary network
- Class A Shares = Private Key, Class B Shares = Bitcoin Exchange IOUs
- Pro-rata voting rights, option to fork network to new ruleset
- 100% transparent ruleset, no board to observe
- Converts greed into monetary value, unforgeable costliness, and network security
- Liquid equity immune to dilution
- Liquid equity immune to censorship (only for Class A)
- Liquid equity resistant to confiscation (only for Class A)
- Liquid equity is the underlying asset (Bitcoin, only for Class A)
Ultimately, none of our individual opinions matter about this; it is up to the free market to decide. Fortunately, Bitcoin exists as a free market alternative upon which society can stand and clean up the mess central banks and governments have created for the world. Only time will tell how this all plays out. Remember: the escalating stock-to-flow ratio of Bitcoin is relentless. At this point, it is fiducially irresponsible to ignore this asset completely, and the pain of having no exposure to it will likely only worsen with time.
With that, let me briefly summarize my arguments before closing:
Distorted price signals are the “nerve damage” inevitably suffered by an economic order based on central banking. As is true with all industrial monopolies, the profits for few are subsidized at the expense of many. Bitcoin fixes this by disintermediating the market for money and restoring its natural supply and demand dynamics. As Ray says, “An idea meritocracy requires people to do three things: 1) Put their honest thoughts on the table for everyone to see, 2) Have thoughtful disagreements where there are quality back-and-forths in which people evolve their thinking to come up with the best collective answers possible, and 3) Abide by idea-meritocratic ways of getting past the remaining disagreements.” These three requirements of the idea meritocracy, closely reflected in free markets, can be summarized as honesty, quality competition, and conflict-resolution. Bitcoin satisfies all three: it is completely transparent (honesty), secured by a free market for mining (quality competition), and governed by a community-determined ruleset that is algorithmically enforced (conflict-resolution protocol). Bitcoin embodies idea-meritocratic elements, and is one of the only sources of truth in modernity. As Einstein said: “The significant problems of our time cannot be solved by the same level of thinking that created them.” In the same way that we needed the breakthrough of double-entry bookkeeping to catalyze capitalism, as it enabled us to synchronize our economic efforts further across spacetime, we now need the triple-entry accounting system intrinsic to Bitcoin to break the central bank monopoly and more greatly amplify the synchrony of mankind’s economic efforts into futurity.
Bitcoin is an open-source protocol for exchanging value. Such openness ensures that Bitcoin’s code cannot be manipulated to benefit anyone at the expense of anyone else. The rules governing Bitcoin are founded in the (absolutely) uncompromising laws of mathematics — nature’s fundamental language. Bitcoin is the zero-marginal-cost-marketplace into which all available energy maybe sold; this means that every joule of energy which cannot find a more profitable employment flows into the “alchemization of digital gold” (the ultimate energy unemployment relief program, if you will). This realigns the race to the bottom associated with fiat currency, in which all monopolists are incentivized to devalue their currencies and secretly tax their people, to become a race to the bottom for the cheapest energy sources, thus spurring innovation in the realm of energy efficiency worldwide, forever. This perpetual bounty program for cheap energy becomes increasingly economically compelling as more monetary value accretes to Bitcoin—thus making ever-more currently untapped energy sources savable.
With central planning, any defectors from the single unitary plan become enemies of the state. This concentrates power in the hands of a progressively smaller few, which makes the intoxication of power more potent and attracts the most unscrupulous among us to seek its reigns. Bitcoin is the exit option, the plan B, for those enslaved by the prevailing monetary monopolies; it allows defectors a way out of the panopticon constructed by politicians and bankers by simply exercising their freedom of speech. It is a peaceful revolt against the institutionalized system of time-theft we call central banking. In the same way that Galileo’s new perspectives on the heavenly bodies shattered the political influence of the church over time, Bitcoin obliterates political control over money because it is the one-time discovery of absolute scarcity — a quintessential property of time that lives beyond the reach of man-made legal frameworks.
The idea meritocracy is the depoliticization of decision-making; Bitcoin is the depoliticization of money.
Bitcoin is an idea meritocracy and unstoppable free market for money, it is naturally outcompeting all monopoly-insulated monies by transcending the laws which protect them and forcing them into the competitive sphere in which only their merits matter. Bitcoin is a free-market-chosen-hard-money emancipating the monopoly-warrened economic fiefdoms all over the world. Bitcoin is an idea meritocracy consisting of: radical truth (true consensus, immutable records, carrier of truthful price signals) + radical transparency (open-source, inflation-immune, transparent and reliable money supply) + believability-weighted decision making (one hash equals one vote, skin in the game governance). In this way, it is a free market money that is subsuming all economies facilitated with fiat currencies (centrally planned monies) into itself. Bitcoin is unregulatable, unstoppable, perfectly transparent implementation of energy-based, absolutely scarce, hard money devouring all softer forms and infusing the value stored therein into itself, once and for all. Bitcoin is hard money bending monetary history back towards its free market point of origin.
In the grand arc of human history, Bitcoin represents a reversion to a free-market-chosen hard money system. Ray, Bitcoin is the paradigm shift you’ve seen coming; once again, nature’s pendulum is changing directions:
As Alexander the Great once said:
“Through every generation of the human race there has been a constant war, a war with fear. Those who have the courage to conquer it are made free and those who are conquered by it are made to suffer until they have the courage to defeat it, or death takes them.”
Courage can only exist in the face of fear. If you listen closely, you may hear the devil whispering “You can’t withstand the storm.” And if you listen closely to your heart, to the warrior within, you will hear him respond, “I am the storm.”
The Coming Storm
In the 19th century essay by Georgi V. Plekhanov titled The Role of the Individual in History, a strong case is made for the inevitability of the path which charts itself as an expression of the unpredictably free action of people. As a process, human history expresses laws (principles) by which to orient its constituents. As an actualization, human history is made by those who set and solve the problems of progress in accordance with the conditions of their respective epoch, regardless of its laws. In this sense, a great man is great because “he possesses qualities which make him most capable of serving the great social needs of his time”, and will carry out his sacred duties lawlessly whenever necessary.
Restoration of individual sovereignty is the chief aim of separating money and state. Free markets are idea meritocracies; minimized barriers to the interplay, recombination, and reproduction of knowledge are the defining characteristics of both. And knowledge growth is the key driver of innovation, evolution, and economic growth. Bitcoin is both a free market money and a free market in and unto itself, with entrepreneurs freely entering and exiting its mining network. Consistent with Ray’s definition of an idea meritocracy, Bitcoin is radical truth and radical transparency in action, governed with skin in the game. As the central pillar of every economy, it is critical that the market for money remain free and unobstructed by monopolists, else we witness the continued cartelization of those industries closest to its economic influence. Bitcoin is free market money born out of societal necessity; the absolutely inelastic fabric of trust necessary to save mankind from his own self-destructive greed.
Paradoxically, it is only when people are free to act on their own accord that they become conscious of economic necessity by virtue of having their own skin in the game. Those who are coerced by regulations or insulated from the consequences of their actions by government monopolies, guarantees, or other obstructions suffer from a disconnect with reality and atrophy over time. In this sense, freedom is the conscious awareness of necessity; acceptance of the opportunity costs to be incurred in action, awareness of the obstructions to be overcome, and an understanding of natural laws. Value is the bridge between the conscious awareness of life’s necessities and the freedom to choose; it is expressed in price: the intersection of (objective) supply with (intersubjective) demand. Without an objective touchstone for the value of things (hard money), market signals are distorted and capital allocations are manipulated, causing societies to trend towards centralized power concentrations (bigger government), nationalization of assets (less free enterprise), and marginalization of citizenries (inflation, taxation, and conscription). Entrepreneurs are elemental to free markets and antithetical to state control. Leaving each person free to pursue profits by whatever (honest and nonviolent) means necessary ensures that markets generate the lowest prices, highest satisfactions of wants, and continuous streams of innovations for all to enjoy.
Freedom allows people to self-actualize the actions they themselves deem necessary as they face the inherent scarcities of existence. Freedom, in a profound sense, is necessity transformed into action. A profound definition like this is fractal, in that it does not refute its superficial form, but is instead inclusive of it. Once an individual overcomes the restrictions imposed both within and without himself, he is born again; his “free actions become the conscious and free expression of necessity.” By transcending the government coercion of money production, Bitcoin facilitates a reversion to man’s natural, sovereign state of being—a state of existence characterized by greater freedom of expression and less oppression. By incinerating the opacity of central banking with the light of pure transparency, drowning the lies inherent to fiat currency in a ceaseless flow of indisputable truth (a new block roughly every 10 minutes), and like the free people whose sovereignty it is reinvigorating, Bitcoin is swelling into a great social force that is:
“Bursting on cunning falsehood
Like a storm of wrath divine…”
Bitcoin is the first social institution in history with the potential to subvert the greatest man-made scourge humanity has ever faced — the infamous wealth-extracting, disparity-driving, and warfare-financing duopoly of monopolists: governments and central banks.
Thank you for reading An Open Letter to Ray Dalio re: Bitcoin (Parts 1-6).