Wait, what IS money: Part 2 💸🤔 (Proof-of-Take #003)
Proof-of-Take: a dose of perspective and context in the noisy world of Crypto
|Alex Hardy||Jul 27, 2018|| 1|
Welcome to Proof-of-Take: a dose of perspective and context in the noisy world of Crypto. If you want to learn more about why I’m writing this, check out Issue #001.
Today, we conclude our discussion of Crypto’s foundational question: “What is Money?”
💵 To recap, the last issue ended with our discovery of an inconvenient truth about money:
“Money” is worthless pieces of green paper that represent promises for future stuff or services. These promises are part of an imaginary story that almost every human conveniently believes. If we all stopped believing the story, then “Money” would cease to exist. But since enough of us believe the imaginary story, “Money” is as real as a mountain.
Alright, now let’s all take a deep breath.
Once we accept this kind-of-mind-blowing idea, the next logical question is WHY?
Why do we collectively trust the promise that our US Dollars represent?
Even though I’m #ThatGuy writing a newsletter about cryptocurrency, I’ll try to provide the strongest arguments for believing the promises of the US Dollar. This approach is called making a “Steelman” argument 🤖.
When making a “Strawman” an argument, you misrepresent it in its weakest form, so it’s easier to knock down than the real argument. Like fighting a scarecrow instead of a real person. Making a Steelman is the opposite of making a Strawman. And it’s important. So I’ll try to do it often.
Here are my best reasons to believe in the myth of money.
🤷♂️ Everyone else believes in it
🛠 If it ain’t broke, don’t fix it
💣 The US Dollar has the US military behind it
🖨 The US can always print and borrow More
🕸🕸 Network Effects
🤦♂️ Other countries are even worse off than we are!
⛵️ It’s not always smooth sailing, but that’s why we have politicians who can to fix it.
😬 If you don’t believe, bad things will happen to you, so you might as well learn to love the Dollar!
I’ll elaborate on these below, but first, I’ll put a GIANT asterisk next to each of these arguments. If we buy into any of them, we risk becoming The Thanksgiving Turkey 🦃.
I first heard of the concept of being The Thanksgiving Turkey from Nassim Taleb, author of “The Black Swan.”*
Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it’s the rule of life to be fed every day by friendly members of the human race 'looking out for its best interests.’
On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey 🔪. And it will revise its belief ☠️.
Past performance does not indicate future results! Occasionally, “This time” is actually different. And when it is, it really, REALLY matters.
And now, here are my Steelman 🤖 arguments for why to believe in the US Dollar
🤷♂️ Everyone else believes in it: This is the most obvious, but least satisfying answer. Our parents, friends, co-workers, and anyone we meet believes the story of the US Dollar. There’s wisdom in “the crowd,” and the crowd seems to believe in the Dollar.
Counterargument: If everyone jumped off a bridge, would you? 🌉
🛠 If it ain’t broke, don’t fix it: For everyone currently alive today, believing in the myth of the US Dollar has actually been a pretty good deal! Ever since that long-forgotten thing called The Great Depression, and maybe earlier, the myth of the Dollar has pretty much “worked.” Yes, we’ve had rocky times, (Financial Crises, Stagflation, etc.), but over time, people have wasted a lot of breath predicting the impending collapse of the US and the Dollar. And they’ve been repeatedly wrong.
Counterargument: 🦃 Turkey Problem. Things change.
💣 The Dollar is backed by the power of the US Military, a global superpower! A bet on the Dollar is a bet on America staying a superpower. We have an elite military, powerful allies, and the most stable, permanent seat at the global decision-making table. Who would want to bet against that?!
Counterargument: 🦃 Turkey Problem — who’s to say we’ll stay a superpower? Also, there’s a big #WellActually here. Our Dollars aren’t really “backed” by anything. Once upon a time, they were. I could go to the bank, hand in my dollar, and get some precious metal.** However, those days are long gone. What are US Dollars backed by these days? Promises. The government promises it will always repay it’s debts. AND that Dollars will always be good to pay my taxes. AND that no one else is allowed to print this green paper.
What do we make of these promises? Well, as Stranger Things teaches us:
A “Promise” means something that you can’t break. Except people break promises all the time. And governments are just a bunch of people.
🖨 The US Can always Print and Borrow More. Debt, Schmet! Money is no longer “backed” by anything, so the Government can freely print or borrow dollars when it needs more cash.*** We’ve been spending more than we’ve been taking in for years, and things have been fine.
Counterargument: 🦃 Turkey Problem. Long-living empires eventually collapse, powerful nations eventually deteriorate. And we’ve seen countries that keep printing money have disastrous effects on their currency. The tweetstorm below lays out many reasons to be concerned****
4. Debt accumulation cannot go on ad finitum. At some point, all income goes towards interest rates and the credit needs to be paid back. This is called a deleveraging. The last time this long term debt cycle peaked was in 1929 as debt collapsed from 255% of GDP to under 150% pic.twitter.com/sD6yH6JofmApril 10, 2018
🕸 Domestic Network Effects: Dollars are really convenient for Americans, and switching to something else is a pain: Currently, if you want to pay taxes, use a bank account, use a credit card, or buy… anything, the US Dollars are the best way to go. Bitcoin & other cryptocurrencies aren’t widely adopted or very convenient to do any of the above. Even the most gung-ho Bitcoiners still, reluctantly, use government-issued (“fiat”) currency. Network effects are real, and tough to topple.
🕸 International Network Effects: In countries all over the world, things are “priced” in US Dollars. This includes everything from the international price of oil, to random chatchkis in Uzbekistan. This means the dollar is called the “Global Reserve Currency.” And that’s a big deal.
It means that the Dollar is so powerful, that not only do we crazy Americans believe it, but people EVERYWHERE do. It would be a huge pain to switch the “Reserve Currency”, and such changes don’t often happen.
Counterargument: 🦃 Turkey Problem — are we due for a change in reserve currency? In particular, Bitcoin and other cryptocurrencies can be great ways to transfer value across national borders quickly and cheaply.
🤦♂️ Other Countries are even worse off than we are! The US may have its issues, but we (and our Dollars) are the tallest mountain in Kansas — the best option of a bunch of really really bad ones. Every other fiat currency that could “compete” with the promises of the Dollar is even more flawed than the Dollar! The Dollar doesn’t have to be “great (again?)”, it just has to be better than all the other options.***** To paraphrase Winston Churchill: ‘The US Dollar is the worst form of currency except for all the others.’
Counterargument: This is the opportunity that cryptocurrency represents. The story of all technology and disruption is: We did things one way because it was literally impossible to do it any other way ➡️New enabling technology comes along ➡️ We switch and do things a new, better way.
⛵️ It’s not always smooth sailing, but that’s why we have politicians who can to fix it. Crises will arise—depressions, stagflations, panics, and everything else we can imagine. But the whole point of organizing as a country is to band together and solve the problems that arise. We have an effective mechanism for electing officials and appointing folks to run our central banking efforts. The adaptability of our monetary policy (print & borrow money when we need to) is a feature not a bug.
Counterargument: There are many:
People elected and appointed to solve these problems are ineffective at doing so and their incentives are misaligned with what’s best for the general welfare of the country. TheyFor instance, they pay no price for being wrong — they have no skin in the game)******
The temptation for government to print, borrow, and place the costs on the broader population or future generations is too great for any politician to resist
The prescription is worse than the disease— “loose” and ineffective monetary policies CAUSE these crises.
😬 If you don’t believe, bad things will happen to you, so you might as well learn to love the Dollar! Entertaining the idea of “not believing” in the dollar is a nice intellectual exercise. In reality: even though I am not literally forced by law to believe in dollars, it’s kind of crazy for me not to. For example. the only way that I can pay my federal taxes is in dollars, which I want to do, because if I don’t, I’ll go to jail. When the choice is between believing in this myth, or heading to the clink, which would you choose?
Counterargument: That soon may change. Cryptocurrencies may offer, for the first time, a viable alternative for all kinds of payments.
Some people define Money as: ‘the Bubble that never pops.’
That’s true, until it isn’t. Don’t be the Turkey y’all.
Until next time…
Thank you for reading! Like it? Hate it? Still processing it? Please share it with a friend or enemy, and tell me why I’m wrong. Let’s continue the conversation: the best way to reach me is on Twitter — I’m @CantHardyWait
*Nassim Taleb’s The Black Swan
***This is definitely an oversimplification, but directionally accurate
******Another great Taleb book — Skin in The Game