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Capital Misallocation: Bitcoin Fixes This

Fix the money, fix the world.

Steven Lubka
Steven Lubka
Oct 3, 2022October 3, 202234 min read34 minutes read

The Importance of Capital

Capital is how civilization happens. The development of capital, arduous and risky work, is the source of all societal progress.

What is capital?  It is the productive resources of humanity. However, it’s also a process which emerges from the intersection of money and physical resources.

Developing, maintaining and growing capital is not guaranteed. It can easily go awry, and money can both support or distort our ability to form and grow more capital.

The entire point of money (and finance) is to facilitate the tangible, real, growth of capital. Finance has no independent virtue apart from this.

You can think of finance as an entity attached to the flesh of the real economy. Is it a symbiotic organism? Or is it a horrible parasite?

In its best and most noble functions, finance and money accomplish an awe-inspiring increase in the growth of capital via a level of efficiency which would be impossible otherwise.

However, in its worst form, finance turns into a blood sucking parasite, siphoning wealth out of the system while convincing its host that it is actually wealthier than before! 

I’m sure an intelligent reader like yourself can guess which version we are currently dealing with….

Misallocation of Capital

Capital misallocation is one of the most fearsome challenges that an economy and its people can face. It is one of the major ways a broken system of money and finance can distort the real economy.

To understand how this happens, we will first discuss how the economy functions as an emergent machine that produces spontaneous order, and we will then discuss how money is a carrier of the condensed information that is necessary for this spontaneous order to arise.

But most of all, we will discuss how the process of capital formation can be impaired, impeded, and otherwise disrupted by privileged insiders capable of manipulating the natural market forces governing money. In other words, when money is made artificially cheap (whether via low interest rates or monetary expansion) it fundamentally impairs the formation of capital. 

Fools throughout history (for we have tried this before) figured that perhaps if we made money abundant, we could stimulate growth. This has failed whenever we have tried it (our illustrious central planners have been trying the “cheap money” approach for the last decade and more).  It always fails the same way: speculation, asset inflation, wealth inequality, the slowdown of actual productive growth, and the destruction and consumption of precious capital. 

Ludicrous nonsense starts to happen. In the 1800s exporters started shipping ice skates to the equator because of artificially low interest rates (if you don’t get the joke, think about how much ice there is at the equator!) Today, we have the Bored Ape Yacht Club! 

And yes, finally, we are going to talk about how Bitcoin actually fixes this.

Defining Capital

Capital is the productive assets of civilization. It is everything we possess, know, or even are that is capable of producing a “return”. Let’s define a return as “we get more out of the process than what we put in”. This can be either through the creation of a more complex finished product, it could be quite literally an EROI (energy return on investment), or it could be via the prevention of sufficiently costly adverse effects (hurricane shutters preventing windows from breaking).

When we use a tractor and fertilizer to grow a field of wheat, the total amount of human energy involved in that process is less than the total amount of energy contained in all of the wheat. 

We have yielded a return! Hallelujah!

So capital is everything that allows us to create more than what we already have. Let’s be perfectly clear:, this isn’t just fuel, machines, and factories. It is also knowledge, skilled workers, new inventions, cities, infrastructure, education, and much more — the list goes on and on.

Money is a reflection, a mirror twin, of capital itself and is a critical part of the emergent process via which “Capital” happens. Money contains the potential to direct economic outcomes and produce returns. It is a literal claim to society’s time and resources. It is the symbolic coordinator of capital, as well as an instrument that stores its unredeemed and future capacity for utilization. 

There is an important caveat to mention, and it is this: creating more money is not creating capital (it doesn’t matter how hard politicians wish this were true!). 

Money and the physical resources which form capital are like two sides of the same coin — which is itself the process of Capital. Money denominates, stores the “value”, organizes, and coordinates capital. 

Together, money plus the physical productive resources form the totality of the property of our economy which is the process of Capital.

It’s important to think of capital broadly in this manner. The bottom line is: we want MORE capital.

Money, Price and Spontaneous Order

The beauty of markets is the spontaneous order they create — the order that emerges in the absence of formal design and communication. While markets can exist in the absence of money, the extent to which an appropriate money facilitates emergent order is astonishing and truly awe-inspiring when you contemplate it.

This speaks to the practical reality of humanity’s social constructs. 

Yes, we create the concept of money and imbue it with reality. However, it results in a staggering growth in tangible, real-world, physical abundance. And not all forms and qualities of the money construct are equal in their ability to produce this outcome.

Just because something is socially constructed, doesn’t mean it doesn’t have a pivotal real world role, and one which can be better or worse depending on the qualities you imbue it with. (The “everything is a social construct so it doesn’t matter what we do with it” people are down bad).

Money plays a critical role in the emergence of spontaneous order mainly through the reduction of unnecessary information. In their book,"Bitcoin is Venice, ” Farrington and Meyers discuss how contrary to the common belief that price “contains the sum of information” that went into calculating it, price actually renders down the fat of copious information into a refined (seed oil free) ghee of “just what’s necessary”. Price discards and destroys everything which is unnecessary from itself.

Let’s use the example of a banana to illustrate this concept. When you see that a store is selling a banana for fifty cents, what information can you reconstruct from that price?

Do you know how much rainfall the farm it was grown on and competing ones received? What about the humidity? The proliferation of mold species? The price of labor at the factory that manufactured the refrigerated trucks which transported the bananas? 

Can you calculate what percentage of the farm’s balance sheet was YOLO’d into GameStop calls?

No, none of that information can be reconstructed from the price of a banana, even though that information was relevant to the final price. Even a hyper intelligent AI (something we are many decades away from — I know this because I asked an AI)  would not be able to deduce these factors based solely on the price of one banana. 

Yes, rainfall impacted the price and so did labor costs, and maybe even humidity too (I’m no banana expert).

But the final price of the banana discards that information, prioritizing instead what price market participants were willing to settle transactions at. The final price at which transactions were settled matters. It gives market participants everything they need, and nothing they don’t need.

Price provides a single, elegant point of information that synthesizes everything to a single piece of data, which is easily usable, while eliminating the need for every market participant to understand anything about banana production.

Price is alot like the public key used in cryptography, and indeed, in BItcoin, to create addresses. It’s a one way function. A private key is used to generate an address but an address cannot be used to generate a private key. Information is used to generate a price, but a price cannot be used to generate the specific information that was its input.

Money and the Formation of Capital

Money facilities a system — the economy — that is too complex, too unpredictable and too uncertain to be modeled or reduced to neat quantifiable units.

Expanding humanity’s productive resources — capital — requires the acceptance of complexity, uncertainty, unknowns and risk. It’s not a neat or tame process. It’s a wild one.

It’s a gang of risk takers spelunking the caverns of the unknown with nothing except their intuitions about future preferences and knowledge of current problems to guide their descent into the uncertainty and the unknowable.

The Goonies as a model of entrepreneurship and capital formation.

It’s common that people think society has disintermediated the inherent wildness and

unpredictability from the natural world. Nothing could be further from the truth. We have produced unimaginable order, yet the base conditions of all existence is uncertainty, incomplete information, risk and a healthy dose of that which is fundamentally unknowable. 

This exists at both the individual and collective level. A given individual in any economic system lacks access to all of the information that all other participants have but the entire system and the sum of all participants also deal with countless fundamental unknowns and uncertainties.

That’s where money comes in.

In this sense money is a “magical” coordination tool in a system where no one can formally understand the system in its totality. Money (and price) enables an utterly astonishing level of coordination across multiple chasms of uncertainty and unknowability.

The price of goods and the time value of money — interest — work together to coordinate vast quantities of capital and legions of people across vast durations of time.

But since money is so “magical” and so spontaneous (read: organic, emergent, and naturally set) the qualities of a given money can radically alter its ability to function as a vessel of information, coordination, and as an organizer of complexity out of uncertainty. 

Unfortunately, the qualities of money can be changed in such a way that interrupts and interferes with this process of spontaneous order.

Distortion of the natural functioning of money, interest, and price is how capital formation is impeded and how widespread capital misallocation emerges.

Capital misallocation driven by monetary distortion means that money is channeled to endeavors, investments, and assets which it would otherwise not be allocated to. Due to artificial pressures on price or availability of money (or political pressures), market participants start to take actions they would not otherwise take due to these altered monetary conditions. These endeavors, investments, and assets will be less productive and less sustainable in most instances since they are driven by such things as a race to avoid inflation, a lack of ability to earn meaningful yields, or a cheapness of credit that makes buying assets on credit the logical choice.

Capital misallocation, for example, occurs when I can borrow at 0% so I buy up a hundred houses on credit because, well, “Why not?”. At a higher interest rate, capital allocators would be forced to contend with all of the risk inherent in this decision, but at zero percent artificial interest  rates drive financial engineering and excessive speculation. 

Why wouldn’t you borrow a depreciating currency, for free, to buy up scarcer assets that almost always go up in value? This is especially problematic because this level of credit is easily extended to the wealthy and well-connected but not to the average hard working person.

Another way of putting this is, capital misallocation is when I can borrow money so cheaply I invest in Adam Neumann’s next company after WeWork.

Capital misallocation driven by monetary distortion can take various forms, such as funding speculative ventures, forced investment to escape inflation, converting reliable assets (such as homes) into Stores of Value, and the increasing concentration of capital into the hands of large companies and away from vigorous new participants.

All of this misallocation comes at the expense of the hard work of vetting and building productive ventures.

There are two main ways (excluding overt political forced investment) by which alterations in the natural behavior of money lead to capital misallocation: Artificially manipulated interest rates and exogenous monetary expansion.

Interest Rates

Interest is the Rent of Stock (capital), and is the same as the Rent of Land: The first, is the Rent of the Wrought or Artificial Stock; the Later, of the Unwrought, or Natural stock.

— 

Nicholas Barbon, late seventeenth century

What Barbon is saying is that there are two ways we interact with capital –, money and physical resources. Barbon cites land as the prime example of the rent of a physical resource, but today we would include factories, vehicles, and even potentially labor resources in this category.

It is self-evident that someone would charge interest to rent their factory. However, the exact same logic applies to loaning money. Money is the right to capital — it is unredeemed work. It is the ability to account for the opportunity cost of utilizing society’s physical resources. With money you can rent a factory, a car, and pay for people’s labor and time. It is obvious that those things are both scarce and valuable, and that therefore you should not have unlimited free access to them. It is money which both constrains and also provides access to these resources.

Money, as a right to dictate what is done with capital for a period of time, must require an interest rate to borrow it, by the same reasoning that one must pay to borrow physical capital. But what happens when that interest rate is artificially suppressed?

Does a 0% interest rate make any sense? What about a negative interest rate?

Would you ever pay me to borrow your car, barring extraordinary circumstances? That’s what a negative interest rate is.

Let me make a critical distinction here, if a market naturally arrived at an interest rate of 1% because capital was simply so abundant and society was filled with savant entrepreneurs — that would be a good thing and fine.

I question the likelihood of this outcome, but if it solely occurred as a function of the availability of capital and entrepreneurship there would be nothing to object to.

However, if interest rates are artificially lowered we run the risk of fundamentally distorting the pricing of capital and altering the behaviors of savers and investors.

If we view money and physical resources as the twin sides of capital, it becomes immediately apparent that distorting the market’s ability to naturally set interest rates interferes with and distorts the ever uncertain, crucial process of capital formation.

Capital is not simply formed, as if by magic, when a bank lends money. Our esteemed central planners only dream that it might be so!

Capital is only formed via the messy, unpredictable, uncertain, and risk-filled process of entrepreneurship. It is formed by risk-taking, by speculation on what the future might look like and what future humans might desire.

It is formed by the act of creation, the act of preservation, and even the act of destruction. New structures and formations of resources must be built, they must then be sustained by producing consistent profits, and old inefficient structures may even need to be disrupted or destroyed.

(The fact that this lines up with the Hindu Trinity (Trimurti) of Brahma the creator, Vishnu the preserver, and Shiva the destroyer is surely something I will spare you any further discussion of, for now.)

Capital formation is challenging, it takes place in reality (not in abstract models and theorizing), and relies on the intimate interactions of risk-taking entrepreneurs with the spontaneous manifest order of markets.

When we disrupt the proper functioning of money by distorting interest rates (the time value of money) we can fundamentally impair, distort, and even corrupt the noble endeavor of civilizational advancement via capital formation. 

One way to think of this: 

Imagine a world where due to the realities of capital, talent, and borrowers, the interest rate is 5% to borrow money.

This interest rate is not an arbitrary thing — it reflects the very real realities of the market. Now imagine a given borrower wants to build a new factory, but at an interest rate of 5% the realities of the market make his endeavor impossible. The numbers simply don’t work.

Luckily for our aspiring entrepreneur, the hedgemon smiles on his fortune and forces banks to lend at a maximum rate of 1% interest.

Suddenly, he can build his factory! By lowering the cost of borrowing money, we simulate a world where capital is more abundant.

However, capital is not more abundant than it was, capital still possesses the same constraints that caused the interest rate to naturally gravitate towards 5%. Yet, we have given our entrepreneur the signal that this is not the case.

In this way, a project is started which would not have happened without the interest rate intervention. The artificial modification of interest rates changes what is produced. 

And maybe this even works out for this individual factory, but looking across the entire system it is bound to result in projects (which could have afforded 5% interest) suddenly being unable to acquire the capital they need to finish because countless other endeavors consumed the capital they would have used. The artificially lowered interest rate transferred capital from prudent endeavors to ones who, like so many weeds, only spring up due to a low interest rate.

The market requires an accurate price of capital to produce spontaneous order. Robbed of an accurate price of capital, it misallocates it.

Bastiat’s debate with Proudhon is yet another perennial example of one more way that low interest rates drive capital misallocation:

In your system, the rich will indeed borrow gratis, while the poor will not be able to borrow at any price. When a rich man presents himself at the bank, he will be told: You are solvent, here is the capital, we lend it to you for nothing.

But let a worker dare to show his face. He will be asked: Where are your guarantees, your lands, your houses, your goods?

I have only my arms and my probity.

That does not reassure us, we must act with prudence and severity, we cannot lend to you gratis.

Well, then: lend to us, to my companions and myself, at rates of 4, 5, or 6 percent, this will be an insurance premium whose product will cover your risks. 

What are you thinking of? Our law is to lend gratis or not lend at all. We are too philanthropic to make anyone pay us for doing nothing; this applies to the poor man no less than to the rich one. That is why the rich man obtains gratuitous credit at our establishment, and why you will have none, whether you pay or not.”

In other words, when interest rates get too low, things can get weird.

Wealthy individuals and established corporations are able to borrow the value of society’s capital (indirectly from the savings pool) for (almost) free. However, the average person, the entrepreneur, and even more importantly the hungry young usurper startup is forbidden even a sip from the firehose of nearly free credit.

When savings and capital are artificially priced at a time value of 0%, we pull forward the abundance of the future to subsidize borrowers in the present.

The result is that “today’s” people pay nothing to borrow the money of “future” people. This is because the “price” of capital is its opportunity cost. By giving up your capital you surrender any economic gains you may have yielded from that capital. 

Interest is what must be paid to you in exchange for your withholding of your consumption until a future date.

Historical Failures of Artificially Low Interest Rates 

In “The Price of Time”, Edward Chancellor provides numerous examples of how artificially lowered interest rates (either via decree or a sudden exogenous oversupply of money) resulted in economically destructive outcomes. 

One example of the impact of artificially lowered interest rates was an export bubble which broke out in London in the summer of 1810. Interest rates at the time were artificially constrained by laws which limited the maximum interest which could be charged at 5%. 

In the mid 1760s mortgage rates fell to a shocking low 3.5% which immediately led to a construction bubble where builders furiously built new residences. Bricks were delivered as soon as they were set.

In 1825 London was struck by another banking crisis which was a result of low interest rates resulting from huge amounts of gold from abroad. 

As rates declined from 5% to 3%, investors removed their money from banks in order to invest in various corporations or to fund construction. Numerous newly created banks sprung up all over the country, shocking onlookers. As newly issued money flooded the system, capital was funneled from formerly secure investments into risky speculation in newly established countries in South America. 

The crisis culminated in the failure of a well-known banking firm Pole, Thornton & Company which due to the low interest rates, was forced into riskier investments than was suitable for a firm of its nature.

Britain saw a canal construction mania in the early 1790s as interest rates plunged below 3% which ended in a banking crisis in 1793.

In the early 1800s gold convertibility was suspended in response to a French invasion and Britain tasted their first experience of a true paper currency. 

Real yields on government debt turned negative for the first time ever, which produced a speculative mania as countless banks were established along with many speculative schemes in the stock market. Shares experienced substantial speculative increases.

As the easy access to money granted merchants excessive power to wield society’s capital, huge export schemes came into being. The most notable of these schemes resulted in ice skates being shipped south of the Equator, where they would hardly do any good.

Countless other examples abound, to say nothing of the post-2008 regime in the United States.

Low Interest Rates, Asset Speculation, and Zombie Companies

Low Interest Rates

It is a fact of experience, that when  the interest of money is two percent, capital habitually emigrates, or , what is here the same thing, is wasted on speculations, which never yield any adequate return.

— 

Walter Bagehot, 1848

When interest rates are set at 0%, or even 2%, it incentivizes the financial over the real. It also allows dysfunctional companies to live off debt, even though they naturally would have been consumed long before by the creative destruction of capitalism.

It is intuitively evident to any observer that if I must pay 10% to borrow money, I will only borrow that money (if my intention is to invest in an endeavor or asset) if my conviction is strong and I have spent due time vetting the investment. I will also pay 10% for the privilege of speculating with the savings of other people.

However, when I can acquire the savings of others at a rate of 0%, 1%, or 2.8% (my current 30y fixed mortgage rate), I will gladly borrow that capital to buy financial assets whose rate of appreciation will exceed that very low rate!

This has become such a fact of markets today that we actually value companies, not based on their qualities or what we truly think of the future, but based on how much their cash flows can exceed the “risk-free rate” of a Treasury bill.

If we decide to reduce the valuation of companies to a mere accounting trick, then by its very nature a 0% interest rate means you should absolutely shovel money into a company that can generate more than…. a zero percent return.

This inherently drives up the prices of equity (which, remember, is liability-esque in the sense that eventually valuations must be justified by actual cash flows if they are to be sustained) and creates a “bubble.” While it may not be a “bubble” if we assume the interest rate really is zero, when if we step back from what CNBC is saying and recognize a zero percent interest rate is a “scientific absurdity, involving antagonism to established interests, class hatred, and barbarity” (Bastiat) we can realize we have entered the dangerous territory of make-believe, bullshit nonsense.

So speculation is a certainty when it comes to low interest rates, and speculation competes with investment. Why would you take risk to fund a new generation nuclear reactor when you could buy the latest SPAC? Or even NFTs?

NFTs don’t even have cash flows so they are probably worth infinity, right?

If this wasn’t enough, the brilliant financial engineers that run our valuable pools of capital and corporations came up with another trick, buybacks.

Buybacks

One day people realized that if they ran a large corporation and the banks would lend them money at next to nothing due to their size, scale and reputation, then they could just issue cheap debt and use the proceeds to buy back their own shares.

The whole thinking behind low interest rates is always “We are going to incentivize investment into producing more capital”, but producing capital is HARD, while pumping cash into financial engineering schemes is so easy and fun!

So instead many CEOs start issuing low yielding corporate bonds to do share buybacks, which pumps the stock price, and ensures they get a big bonus — especially if they were paid in options — and the CEO leaves the mess of a balance sheet (and company) to the next guy and the shareholders.

A company could buy back its own shares using its profits, while this would signal the company has literally nothing better to do with the money (they don’t know how to create capital), it wouldn’t be inherently bad. However, when it is financed with debt, it’s an entirely different monster.

In 2016 and 2017 share buybacks as a percentage of total corporate debt issued reached thirty percent. This only represents part of the needless financialization going on which competes with capital to fund real investment and capital formation.

This is basically Anti-Capitalism. No, I don’t mean its people who are against Capitalism and trying to replace it with Socialism or something else.

I mean it is an inversion of Capitalism. If Capitalism is the pursuit of compounding and growing capital, this is the process of consuming and depleting capital. If Capitalism is growing capital, then Anti-Capitalism is consuming capital for a short term return.

Share buybacks, in many ways, are peak capital misallocation if we take the view that the goal of system is to generate more actual capital. Capital is borrowed and spent on financial engineering instead of investment. Share buybacks additionally only make sense when the interest rate is pushed down artificially low.

Zombie Companies

Free credit is socialism's final word, its final slogan, and its final effort. An inexhaustible paper money factory: that is your solution.

— 

Bastiat

Besides the giant diversion of investment capital into financial speculation and financialization, zombie companies are one of the most significant ways distortions in the price and availability of capital produce deleterious economic impacts.

A zombie company is a company which can only survive by continually issuing debt to stay alive, and due to the way debt spirals, each successive round of debt usually needs to be even cheaper, and bigger.

These companies are particularly bad because while they may produce a real product or service, they do so using a business model which is fundamentally broken. They don’t produce a profit — a return on capital invested. That is, they destroy capital.

You can think of this more concretely in that they use a MegaWatt of electricity to produce an energy equivalent of .8 MegaWatts on the other side.

More energy goes in than comes out, there is no return. It’s broken, it doesn’t work.

In a sane world these companies go under, and in the void left by their absence, hungry young usurpers swarm their corpses and feast on the abundant carrion. These newcomers hire the talent that was wasted at the failed company, they learn from its mistakes, and they win the business of its old customers.

They dance on its goddamn corpse in a orgy of creative destruction. The startup is the Goddess Kali, emerging from the corpse of the failed corporation, bestowing freedom and liberation to the market as it restructures and reorders the misused capital into a new form.

A startup hiring the talent and buying the capital from a failed corporation

You didn’t think I was going to try a Vedic metaphor again, did you? You clearly don’t follow me on Twitter (but you should).

The natural lifecycle from failed zombie corporation to hungry, young startup is absolutely frozen by the availability of cheap debt which keeps these corporations in purgatory for longer than they would ever be able to stay solvent.

The Fungibility of Money vs the Non-Fungibility of Capital

One of the ways contemporary economists and financial commentators get around this bleak reality of useless companies propped up by artificially subsidized capital is through the modern view of GDP as the primary measure of economic well-being and growth.

The proponents of modern finance might say “Well, all of that money that the zombie company borrows is still used to pay people’s salaries, contractors, and to buy goods and services, therefore it still contributes to economic growth because the money circulates through the economy.”

GDP measures revenue, it measures how many goods and services were sold, and it assumes more is better. However, what it entirely ignores is that the civilizational imperative is not revenue, but the growth of capital — of our total productive capacity. 

An example here would be that a company could easily generate more revenue by selling their product for 30% less than it cost them to produce it! All else equal, this would increase GDP assuming total sale volumes increased.

This quite clearly says nothing about whether this process was accretive, sustainable, or whether it generated more total energy output than inputs. It says nothing about whether the company overworked all of their employees to the point of exhaustion to sell those goods at a cheaper price and lost all of their skilled workers. 

In essence, it says nothing about whether capital was produced or if capital was consumed and destroyed in the pursuit of revenue.

As such, this traditional view of GDP also utterly fails to take into account that while money is completely fungible and circulates, people’s time is not. Neither are physical resources which are put to waste.

Essentially, productive capital is scarce, limited, non-fungible. If you hire the smartest guy in the world and his ten best friends (also geniuses) to design an intercontinental missile carried by bald eagles…. you just wasted our valuable resources.

That genius and his genius friends are doing nothing to advance human civilization. They wasted capital.

This is part of the reason capital misallocation is such a critical issue. Our precious time isn’t fungible, and people’s intellectual outputs aren’t equal.

Having a system which generally ensures our best talent, our best minds, and our capital gets allocated to the most significant and appropriate challenges for them is an enormous social good.

While the qualities of money don’t solely determine these outcomes, they play a critical role.

As Hazlitt often said, the true art of economics is looking beyond the immediate impacts and understanding the long-term and second order consequences of any decisions.

Money Printing and the Cantillon Effect

We have discussed how distorting the price of time, capital, and money (i.e. interest rates) produces negative effects and causes investors to do increasingly unproductive things with other peoples savings.

Another way you can distort the spontaneous order of markets is by arbitrarily creating more money, and then distributing it in a highly asymmetric way.

Let’s go back to the basic principle here. When markets and money are left to their own accord they produce this emergent, spontaneous order (emergent is the word people use when they have no idea how something happens but want to sound smart — Deus Ex Machina basically). This doesn’t just happen. It relies on accurate price signals and the free ability of market actors to make unencumbered decisions.

If we completely distort the natural rate of interest, we have observed how that negatively influences the decisions rational actors make.

Another way we can distort this emergent process of spontaneous order, is simply injecting huge sums of newly issued money into the system with reckless abandon. To make it even worse, we can give that money exclusively to a few insiders who get to spend it before everyone knows new money has entered the system.

The creation of new money by insiders debases the savings ability of the existing money. It is critically important for money to maintain value, as it reflects work which was performed but not redeemed for goods and services.

Is the value of your forty hour work week last month suddenly not worth as much because some feckless bureaucrat decided to fire up the money printer? Not in a system that has any integrity. It is important for work to be redeemable at the value that was assigned to it when it was performed.

So, arbitrary monetary expansion distorts the value of savings, and interferes with the ability for market participants to hold their value in money. This then incentivizes them to rush to invest their money in whatever assets might return in excess of the inflation rate.

This is by its very definition capital misallocation, at least insofar as we say this is not due to informed market participants lending capital because the terms and opportunities are fair and favorable. It’s just a race to avoid debasement.

Bitcoin Fixes This 

You’ve been patient. You clicked on this article because you like Bitcoin, and I have been rude to not even mention it yet. I will make it up to you here.

It’s commonly said in the Bitcoin community that “Bitcoin Fixes This.” Stemming the tide of excess financialization and wanton capital misallocation is something that, well, Bitcoin really does fix.

(Okay, I’m not FULLY sure that Bitcoin fixes modern architecture but I truly hope it does!)

Let’s start with the most obvious part: monetary expansion.

Bitcoin is fixed. Bitcoin is 21 million. Bitcoin is orange.

You can’t make more Bitcoin, I can’t make more Bitcoin, they can’t make more Bitcoin.

So this whole thing where they arbitrarily expand the money supply, debase your savings, force capital misallocation to speculative assets, and enrich Cantillon insiders — that thing goes away. It’s a bright orange future.

That part is easy, but what about interest rates? What about the cost of capital? What’s the borrowing cost of Bitcoin in a world where Bitcoin is widely used as money?

In short, I don’t know. It would depend on the actual economic conditions of the markets the Bitcoin lending and borrowing was happening in. Interest rates should be set in the free market based on the availability of capital, labor, and capable entrepreneurs with viable ideas.

What I can say for sure is they wouldn’t ever be ZERO and they would likely be significantly higher than our low rates regime of the last several years. No one is going to risk their money which holds its value for a 2% return on a risky venture.

It becomes significantly harder, or at least more expensive, to borrow capital. Both borrowers and lenders would become more selective.

This might not sound like a good thing to you. Why is it good if capital becomes harder and more expensive to come by? It’s a good thing because what we are talking about here is solely allowing natural market forces to set the interest rates.

The interest rates should reflect the actual economic realities of capital. Interest rates on money are not an abstract thing which has no connection to the actual world of goods, services, and production.

Money, and the time value of money, are an abstract representation of something real.

Not all formations of money are equally suitable to the formation of capital. A kindergartener can understand this. There is a reason you all don’t allow me to issue all of the money in the world. This money would not be nearly as good at being money.

Qualities matter and they determine outcomes.

Interfering in the market for money impedes capital formation. In order to believe that some central intervention in the supply, price or time value of money should be superior to allowing the emergent, self organizing, spontaneous order machine to continue its operation should be viewed with profound suspicion.

As a civilization, we fundamentally lack the ability to possess and compute enough information to remotely believe we can outperform the emergent, spontaneous, order machine of the free market when it comes to setting the price or time value of money. It’s not possible, and it’s not ever going to be possible.

The sheer level of computational omniscience required here is a disturbing fantasy. It’s a rejection of reality, and the very nature of being human.

Reality means we operate within the boundaries of what is knowable to us, which is always an infinitesimal subset of what information exists. This inherently implies that we must take risks, and that risk taking is what capital formation is really all about.

We don’t simply know what new forms of capital society would benefit from, because if we did know that those forms of capital would already have been created. We must stumble through the dark, taking risks and trying new combinations.

This is the way, the only way, the only reality.

We must reject the sheer arrogance of the councils of men who deign to set the price that an economy should assign to capital. It’s not just insulting and frankly, bad vibes, it’s suboptimal in terms of the functioning and performance of our precious economic machine.

You see, I love the economic machine. I think it’s a miracle, and I don’t like people who try to whack it with sticks and drop rocks into its engine. Bitcoin, when adopted, protects the machine from this sort of meddling.

I want to respect the machine, I want to honor the machine. I want to help the machine, which is far larger than myself, to operate in it’s unknowable machine-y ways.

Ending the undeniable distortion of money is the best thing we can do to promote the rise of spontaneous order.

Order is good, we all like order. Chaos is bad, more bad vibes bro. Stop supporting bad vibes.

Since the financial crisis in 2008, the economy has become overwhelmingly financialized. Speculation and asset inflation has become the cornerstone of the US economy. This is antithetical to actual growth, to actual capital formation.

The political economy meets the inflation economy meets Chimerica meets the subsidization of speculation.

This isn’t an economy.  This isn’t capitalism. It’s Anti-Capitalism and it’s why growth has disappeared. We aren’t producing new technologies and meaningful innovations at the same pace we did in the early 1900s, and while we can’t be certain why this is happening — I blame the distortion of the financial system and incessant monetary interventions discussed above for breaking the spontaneous order machine!

Bitcoin fixes the machine. When you remove the centrality of monetary interventions and alterations, you allow the machine to do what it does — manifest spontaneous order and economic functioning.

Bitcoin allows us to have honest money, honest capital pricing, honest interest rates, and honest savings yet again.

It is absolutely essential that we start to innovate and expand human productive knowledge and resources again following the post-1970 slowdown. We need new technologies to face new global problems, and the people deserve a dose of optimism again.

To get this growth and innovation, we need to get the spontaneous order machine working again. I truly believe Bitcoin makes this happen, because actually all that is required is that, once we have a good form of money, we step back and leave money alone.

There are arguments to be made for organized order, for centralization, but they don’t succeed in markets and pricing money.

Fixing the money will allow the machine to do what it does best, generate emergent spontaneous order.

Steven Lubka

Steven Lubka

Steven is the Managing Director of Swan’s Private Client department with concierge services for HNWI interested in buying >$100k in Bitcoin. His mission is to make Bitcoin easy for investors in the US and internationally, and enabling Bitcoin purchases in IRA, 401k, and Trust accounts.

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© 2022 Swan Bitcoin

Electric Solidus, Inc.
26565 Agoura Rd Ste 200
Calabasas, CA USA
hello@swanbitcoin.com
+1.218.379.7926

Swan Bitcoin does not provide any investment, financial, tax, legal or other professional advice. We recommend that you consult with financial and tax advisors to understand the risks and consequences of buying, selling and holding Bitcoin.