In my mind, that is a very limiting way to think about Bitcoin, just because gold was sound money in the past, does not limit Bitcoin to just being the digital incarnation of gold.
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Like CK just said, one of the genesis of this was my thinking about gold, and thinking about the whole digital gold narrative that was becoming a lot more pervasive last year.
That’s more involved in the credit industry and that’s how I’ve gotten speaking with guys like Greg Foss, and has gotten closer to him, because we have some shared experience there and shared experience in the insanity of the credit market where real yields, they’re now negative.
That has just disturbed me more and more, as I’ve started to see the consequences, both socially, economically from a market perspective, from the ability of prices to actually make sense in a coherent fashion and the ability to model.
I also have always had this little tinkering interest in physics and theoretical physics and quantum theory and all this stuff I can nerd out on as a lay person.
When I started thinking about, this is before really, you had guys like Saylor talking about Bitcoin as what do they call it? Digital electricity.
Basically, just to frame this whole article is it’s a amalgamation of the second law of thermodynamics, information theory, which was a theory that took thermodynamics in an entropy and applied it to networking and information and telecommunications in the 1950s-1960s.
I think, it really helps frame, as CK was getting to and alluding to at the beginning, it helps frame why this is so much more than just digital.
I’d like to do a brief run through of what I’m getting at and the basic concepts, and then some of the implications, which are things that I didn’t talk about in the article.
Basically, for those who aren’t familiar, the second law of thermodynamics is basically saying, hot things always cool down, unless you do something to stop them.
He wrote that in 1915, but I think that applies pretty well to a lot of things that are going on right now.
I don’t think it’s necessarily what the everyday person thinks about, but I think a lot of people probably in this room tend to have these kinds of big idea thoughts.
You end up with an equation where the more that you increase thermodynamic entropy, which is the more that you’re expending real-world physical energy, the more you can reduce informational entropy, which is another way of saying, the more you can create structured, utilizable data.
Before I move on away from information theory, just another side that I came across in my research was, since Claude Shannon’s original theory, in his original white paper, there have been a lot of subcategories of information theory, and they’ve been applied to many different fields.
There’s behavioral economics now that has become more invoked, since guys like Daniel Kahneman came about in the 1970s, 1980s, and started to popularize it then.
I’m bringing this back to the relevance of this conversation is that when I was reading about that, it turn on a light bulb for me when it comes to praxeology.
For those who aren’t, it’s essentially a term that was corn by Ludwig von Mises, or Misses, I never know how to pronounce it.
If the input to that belief system arise at goals that are flawed, because of the way our monetary system is structured, then the whole system devolves in error, because we are all making decisions based on what we believe to be rational, but the information that we’re using to come to those conclusions is wrong.
What’s scary about that is you can go a long time in such a manner without realizing how bad it is, because we’re all suffering from the same input problem.
Maybe you even want to just, the last part, maybe just to repeat that one more time.
Basically, a very fundamental concept in economics is to boil down like CK is saying, a fundamental concept in economics is that we base our decisions, whether or not to consume, whether or not to defer consumption, whether or not how and where to allocate resources based on a belief system.
I guess, you can go down a real deep rabbit hole and say then, what is reality? Reality is what we make of it or whatever.
Where does that leave us? I think, this is why this concept is only going to become more interesting actually, as we, I think, become more tuned to the interplay between energy, in real-world energy and money.
I do think as we become as a society, much more aware of the interplay here and how energy and money are just inextricably linked, because I don’t think that’s a given.
If the 21st century is really the century that we’re going to see information as the scarce resource, information is what we need to harness.
I’m going to get into some aspects of the equation, because we only partially defined some of it so far, but I’ll just give you the full equation first.
You have thermodynamic energy raised to the power of, in this case, you’ll see X, and X stands for human innovation, or productivity.
You take thermodynamic energy, you raise it to the power of innovation, and that equals the negative of informational entropy.
What are humans? Humans are just little pockets of reduced entropy within a world that’s constantly scaling up with greater entropy.
The only way you can actually determine time, other than just – as a human concept, is there’s an era of time that’s based on entropy going from a lower level to a higher level over time.
Now, there’s one little variable that I haven’t mentioned here, which is that when you raise thermodynamic entropy to the power of human and innovation, there’s another variable in that human innovation.
We will define just for simple purposes, and what I did in this article is defined monetary entropy as a long-term inflation rate of that money, of whatever money system in question that you’re talking with.
Just for simplicity purposes, just think of it as an inflation rate of money, whether that be the growth of a money supply, whether that be some aggregate inflation mechanism, but it’s some form of leakage to the system.
That’s something, guys like Jeff Booth are really amazing at articulating is how technology is deflationary, but monetary inflation is basically this hamster wheel that we’re on that’s basically, we ended up spinning our wheels, because we don’t allow that innovation to flourish.
A great example of that would be Moore’s law, reducing the cost curve of semiconductors, but simultaneously, healthcare costs and education costs have gone through the roof, and real estate and all sorts of other things that have completely negated the benefit to humanity that may have otherwise caused.
That’s why I think money that can scale in this way, and it can scale not just as a store of value, but as a medium of transmission and as a medium of specialization, which we can get into in a little bit what I mean by that.
I tend to believe that – I think, everyone in the system – Not everyone, but I think, there’s a lot of people in the system that generally genuinely think that the system we’re in is good, is righteous, that everyone’s just doing the best they can.
What happens is people don’t see the long-term compounding effect of that one little policy, right? Then that puts you in a path dependent system, Because that involves creating more debt.
You have all these well-meaning people who maybe made decisions along the way that were incremental, or incrementally detrimental, but they’re well-intentioned, but they put us down this path.
There certainly are negative actors involved, but I don’t think it’s purposeful.
What’s funny is that, when we debate, or talk about whether or not these actors are malicious, or if they’re just incompetent, or they’re just responding, they’re naïvely responding to the incentives without any judgment.
It’s more likely that will even create bad intention to actors, people who are simply there to abuse the system.
Otherwise, we just go down this whole path all over again, and we have enormous amounts of pain in the short-term, just to kick the can for a whole another century-long, or 70-year cycle or whatever it is.
You allowed people to have a high-time preference with that, because you can say, “Oh, that might all be well and good, but in the short run, we need to do this.
This cannot be overstated as it is imperative to the articles thesis, such a conclusion is reached despite money theoretically being a form of information that should reduce entropy when applied as intended.
I think, another thing that’s key about this too is, and this is something CK and I have talked about.
From a thermodynamic system, taking this back to the equation, of the article, there’s actually, I think it was a Robert Breedlove, Michael Saylor interview, where Saylor gets into – because he’s got his engineering background.
Basically, it needs a system that has volatility, right? It needs to be able to receive volatile responses in order to react and adapt to them and adjust.
Then the third variable that you need is a low error rate.
I thought that was just so perfect, and it’s so related to the whole crux of this article, which is so even if you don’t have hyperinflation, or some high level of inflation, if you’re losing even 1% of the system’s energy input per day, it’s just not going to last.
Not only will you not increase productivity, which by the way, just so the point on productivity and I talked about that scaling function, right? You need to raise thermodynamic energy to the power of something.
I remember having this debate in 2007 with people trying to figure out why is productivity declining? We’re in this golden era of the digital information technology, so why is productivity so weak? Productivity is weak because of the incentive structure that I was just talking about.
The bottom line here is that fiat money always has a monetary entropy above zero and Bitcoin always has a monetary entropy of zero, period.
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I feel like, we need to dig into that a little bit more.
This actually gets into what I was just about – the second little rabbit hole I was going to go into, which is that an implication from this equation is that the systems inputs, which are that thermodynamic energy on the left side of the equation, exhibit greater scarcity over time.
If there was no entropy, if the law of physics didn’t entail the second law of thermodynamics, we wouldn’t have a problem with resource scarcity.
Why does this matter? If the money is supposed to be a shock absorber to all of this, right? As we use more resources, in order to make ma make it so that humanity uses resources intelligently and applies them non-wasteful way, you need something to absorb the scarcity of all of that entropy.
What I mean by that is you start to lose the price of all of those inputs, the price of all that thermo – The Bloomberg commodity index is up 50%.
The point is that even when there’s innovation occurring, it’s done in a really centralized and lopsided way, where because – Yeah, please go ahead.
MG: I wanted to interject right here, because Saife talked about this and he’s got a whole section in his new book, Fiat Standard.
Yet, the appearance of it having a nominal return, where the number is going up, even though its real value return is not positive, leads to so much misallocation of resources and to stuff that is not innovative.
The sheer amount of capital time and labor that could go to an innovative purpose, to something that has real gain, that’s actually a productive company producing some positive good for humanity is completely being bastardized.
You’re actually not getting in the way of allocation of real resources and consumption goods that people desperately need to better their lives.
Stuff that in a matter of five years, allocated in the right direction could have huge societal benefit and is instead, is just buying up real estate.
It’s incredible the amount damage, that even a seemingly minor monetary entropy, or disincentive can cause, because there are second and third order effects that make things appear profitable that just aren’t, that have no actual value or use in society, because you’ve destroyed the function of money.
I’m going to have to shut down my phone, so that I have enough battery power to get an Uber out of here at the end of it.
I actually see someone wrote in here, they were shocked at my statistic that I gave about productivity being down.
It’s like, why is productivity problematic with a highly entropic money? Why is it so important for productivity to scale, to have a money where the ability to save it is pristine and why its transmission mechanism being completely transparent is so important.
There’s really only – when you really break it down to its bare bones, there’s only two sources of human prosperity.
We were just hunter gatherers living hand-to-mouth and going through in this cyclical process.
One of the conclusions they reached from this article, whether you believe it or not, I just found it to be interesting was that we thought that – I think there’s a pre-existing belief that agriculture was a result of societies that were struggling and that needed to innovate their way out of that problem.
The reason I’m bringing this back to specialization and savings is that when you have excess savings, when you have that cushion against uncertainty, which of course, we’ve take for granted now, but all societal collapse is previously were a result of lots of exogenous outcomes occurring that really blew up these the societies.
There’s that parable of the primordial fishing island, where you have this – just this tiny little economy of two fishermen fishing.
Actually, there’s a lot of great work from a lot of Austrian economists that talk about how a lot of new Keynesians and monetarists have really changed the narrative, that savings is usury, right? The saving is bad and consumption.
If you have a dollar in the system and you have money velocity of two, that means for every dollar you put in the system, it creates $2 worth of GDP, right? When you have declining money velocity, you need more and more dollars to create the same amount of GDP.
When you come across anyone who tells you that Bitcoin is going to decrease money velocity, because it’s just going to make everyone hoard and save as if that’s a bad thing, point to what’s going on.
Japan, in comparison, their money velocity is at 0.4 terms. That started at around 1.6 times back in the late 1960s, early 1970s.
The question to ask is, why would it not be the opposite? Wouldn’t it be more intuitive that the opposite of a debt trap would actually involve an increase in money velocity over the long run? Once Bitcoin is monetized, once we’re actually in a system where the Bitcoin is the unit of account.
Trying to take this back to what Guy was saying, and really bringing it into something that’s tangible, let’s talk about the current problem that we’re in and why productivity in this particular quarter was so bad.
Let’s just take it as a given for the moment, that at least we have a labor shortage right now, and that’s affecting our ability to be productive.
Saifedean, I heard a recent thing where he was talking about the history of avionics and the history of the airplane industry and how we saw so much innovation for so many years.
If you don’t have that, then you end up just using more and more debt, but more and more debt actually inhibits productivity in the long run.
This is what Guy was also talking about, is what I was talking about too, about how other stores of value, like utility goods starts to take over.
The problem with that, and not just from a risk perspective and a systemic perspective, the other problem with that is that’s time consuming.
If I don’t have time to do other things, right? If I want to go out the risk curve and save all of my money in more risky assets, that’s time that could be spent doing something else.
Healthcare is this weird thing where we’ve seen – Essentially, we’ve seen hyperinflation in healthcare and actually, in my business and my industry, this is all we invest.
No one’s going to go work in the healthcare system, unless they earn the better wage, even if they’re not actually being more productive.
What does this have to do with our ability to specialize further? If healthcare inflation is so dramatic, then everybody needs to attach themselves to an employer who can provide healthcare coverage for them.
What’s interesting is I think, working from home is creating along with a digitally scarce money that can scale and allow us to specialize.
If education is too expensive, people can’t learn new skills, new skills that they otherwise would learn to innovate and create new productive skill sets for society.
Because I know this is all – can sound academic, or can sound highfalutin or whatever, but there’s real world applications as to why this is a problem and why Bitcoin can actually fix it.
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M: Yeah, I just wanted to say, we had a spaces last night and Dina and Tina were talking about the being careful about tying inflationary or hyperinflationary, using these trigger words to talk about Bitcoin’s success and how it’s really not necessary.
Eventually, over the long run, when you have a declining fertility rate, when you have a decreasing population size in a declining labor force participation rate, you’re going to have – that’s deflationary, and deflationary, not in a good, innovative way, but deflationary in a bad way.
I think of it as if you think of a bell curve, as an investor, the reason equities did so well in the 2010 to the 2019 period, and from the last – and basically, our entire life.
My belief is that these imbalances still, even now, I think COVID accelerated them, but these imbalances still are not greater than for us to take our medicine.
In the interim, we’re in this weird, like I said, think of it like a bell curve and we were in this Goldilocks zone.
The misstep that will take us into either extreme inflation, or extreme deflation, and that’s why I love, I think I think it’s Luke Roman had a great little quip about the Fed, which is that they think they have a dial, but they just have an on and off switch.
When I think of hyperinflation, the way I like to define hyperinflation, especially for a reserve currency is inflation that once turned on cannot be turned off.
When that mentality starts to shift in people, that’s when real problems. I think, you’re absolutely right, which is that it’s not necessary for Bitcoin doesn’t need Y Maher, Germany for Bitcoin to work.
I agree with you that I hate it when some Bitcoiners tie the narrative too much to that scenario, because I’m not sure that’s the scenario that’s going to play out.
CK: I completely agree, especially because I just find it dubious that the inflation narrative is being embraced.
Yeah, I don’t know what our time level is, but there’s one last topic that we could end on, if we want to just go down and take this to its next logical conclusion.
Like you said, one of the things too, that is implicit by the problems that you’re talking about, or that we’re all sitting here talking about is, that as a result of all of these imbalances, we’re in a system that is required to keep the time value of money in this completely distorted state.
I actually found it a little interesting that when Valis was pushing him on this idea about deflation being on the other side of this, how when you had finally a unit of account that was in Bitcoin down the road, that basically, he wasn’t applying this, but this has been my theory all along, which is that when you’re in a Bitcoin denominated world, the risk-free rate is just the rate of productivity in the society.
Because otherwise, you’re better off saving, especially – this is why I don’t even like using the term risk-free rate when we’re talking about Bitcoin universal interest rate.
If we’re talking about the US government bonds, of course, we’re saying, okay the US government is perceived by the whole world to have virtually no counterparty risk, or at least up until recently.
If you take away inflation, getting back to the whole point of this conversation, if you have zero monetary entropy, and you have zero counterparty risk, then the only thing left in that equation to get your risk-free rate is productivity.
This gets into the whole crux of why this is how capitalism is supposed to work, because if you’re that person deciding, do I consume? Do I invest? Do I save? That minimum threshold is the information.
Then, you start to see money velocity increase, because as long as there are opportunities to invest in, and as long as there’s people who are discovering ways of doing things that are going to create more abundance beyond that preexisting 2% rate of productivity that I use in this example, then there’ll be people willing to invest in them.
They will provide that rate of return and people will want to invest in them, because they’re adding productivity beyond that 2% of society.
It’s so counterintuitive to imagine a system that’s actually deflationary, but that it’s actually adding productivity, but that’s exactly in my opinion, how capitalism is meant to work.
Where I disagree is that I do think there will be – I think, I don’t want to speak for you, Tina, but I believe you were saying that there only be equity rate of returns and there won’t be a risk-free rate.
I had a question and honestly, I don’t even know where the answer would go, or if it’d be good or bad, or anything like that.
Essentially, if there’s not enough savings in the system to accommodate that and make it sustainable, I think that’s all it is you need to solve for robustness.
Again, getting back to Saylor’s analogy from an engineering perspective, a system that can’t just be maintained in perpetuity is not a system worth having.
That’s the whole point is that the rate will actually just set to the point that innovation starts to go back to a more sustainable level.
Your rate of productivity will be so high, your implied rates will be way too high.
BT: Yeah.
I think that the questions the Preston had raised in another room when I made the statement and said, what about entrepreneurs who demand to borrow in Bitcoin? I think, people will come to learn that you don’t want to borrow in Bitcoin, even in that world.
I really enjoyed listening to you and I’m anxious to see the piece you produced for Bitcoin Magazine.
I think, you’re bringing up an interesting point that really ties into, I think Wicked asked that question too, about what happens when productivity reaches this really high cost of capital pace.
Because technology is creating so much deflation that we’re just never going to have high rates ever again, even in our current system.” I’m like, yeah, maybe in a 20-year horizon, 30-year horizon.
I do think incentives will be aligned so much better, that we will see so much more innovation, so much more productivity.
CK: I do want to give just a moment for a last word.
I’m really happy to hear you actually delve into a lot of this, in a way that I actually can’t explain it well, but you’ve done, I think, a really interesting job and I’m really actually interested in exploring it, because you’re touching on the issues that I think a lot of people don’t well understand.
Once you have that mental model in place, you can use that to ask all of these other questions.
Yes, when we start talking about a Bitcoin standard, then we were moving down maybe into the future a bit here, but it’s still an important conversation to have, because it informs why Bitcoin is so valuable.
We also recorded it and that should be on the Bitcoin Spaces Live on any podcast app that you go to, that should be live in the next probably two or three days here.