The Failures of Fiat | The Saylor Series | Episode 11 (WiM047)

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needs so

gold

fails

a globalizing

digitizing society

and then we have

fiat introduced

and where does that take us

so

if i can't use gold

i need i'd need money that's going to be

stronger and

faster and smarter so

what is an example of stronger money

well i'm in london i have a hundred

million dollars worth of money i need to

get it to roam

i need to get it

to roam on a telegram

or i need to move it to rome at the

speed of a single horse and i can't haul

that much gold

so

i use a letter of credit

right if i if i can project money

via some credit network whether it's the

rothschilds network

or it's an imperial network or something

else

then i've got stronger money and i've

got faster money

and

if i can

if i can offer you that money

in return for three percent interest it

becomes smarter money

the smarter meaning i created an

application that does something

complicated

like when i give you money for 30 days

and at the end of 30 days you have to

pay it back to me plus 4

i created a derivative right

of the base layer money

or a security of sorts

so the ability to create securities

and the ability to project them

distances with speed

enables a more sophisticated economy

and is good for economic productivity

so

hence the idea of a fiat

and i you know i think the earliest

fiats were yeah they could like

trading stations you know in french

in the french territories of canada

right

they had credits you know credit systems

on ships merchant credit systems

there's there have always been private

credit systems

and then eventually there became

municipal credit systems

like the mayor of the city state or

something or mayor of a hamlet and then

you get to statewide systems and federal

systems and

agency systems and

who knows whether or not churches didn't

generate their own credit systems

and we know when the military the

military generates credit systems

you know sometimes they you know they'll

credit vouchers or travel vouchers in

the military

or write

i remember um

you know

i remember the airlines used to give you

these uh these tickets where you could

fly space available

and they would give them to

um uh to their employees like flight

attendants

so the fight attendants are able to use

that and give one to their wife or

husband

and they sell those things there

actually became a secondary market and

travel vouchers yeah

and because they have monetary value

yeah and so you have um your private

monies and you have public monies and

then you have

quasi public monies for many you know

any kind of food stamp or institutional

voucher or military voucher that gives

you a right to something of value

becomes money

in and of its own in time

so the real question is

what

why does fiat

fail

we know why it works

the reason it works better than gold

is because you put on a piece of paper

and ultimately

the rise of databases along with the

ability to shuffle paper around meant

that you could

it's a lot easier to create an

application of fiat base layer money by

all i got to do is take a check every

time i write a check i created an

application right

hey

pay robert breedlove 797 dollars and 52

cents doing that

and a fiat standard takes about

20 seconds

creating

792 dollars and 27 cents of gold

is impossible for all but one and

a hundred thousand people yeah and would

take a day

yeah so it's pretty obvious why it works

because

you can create applications faster

you can create more

beautiful complicated applications

types of credit

you can move them around faster

and

and you can

travel with them further distances

also uh

they don't invite violence to the same

degree

um for exa you know very famous example

of a private money

uh that was created uh in my youth

was american express travelers checks

and i don't know if you remember

american express traverse checks they

actually became popular before the

credit

card if people were going to travel

internationally

and you were going to go to some

place they would say well you know

before you go you should convert your

money into american express travelers

checks

i mean literally this is a big business

and and the number one use case was that

way if you lose them

or they're stolen

you can get them replaced

[Music]

it was like i guess

the idea was you were less likely uh to

be robbed

if you're carrying the traveler's check

it's like

an analog multi-sig maybe something like

that

yeah like a multi-signature version of

money or wrapped money yeah

and american express made all their

money because people would buy a hundred

million dollars of travelers checks and

only redeemed 95 million

and there was the float and then there

was the unredeemed amount and that was

the that was the difference and so

people used to be very um

they were very excited about these sort

of things

i mean a traveler's check is almost like

a derivative of a derivative right right

i mean the paper money is on top of the

gold or or itself although now i guess

paper money is just base layer money and

the traveler's check was on top of that

and people like that idea and i suppose

credit card is just another example of a

fiat application

and the idea is you know you send your

kid

you would send your kid on vacation with

a credit card

feeling comfortable that you could

reload the credit card if they ran out

of money but if your kid said you know

dad i need 25 000

in cash

just in case i have an emergency and i

need a i need emergency appendectomy or

something like that

like there's no way you want them

traveling with that and of course they

couldn't even get across the border with

ten thousand dollars of cash right try

it right

so

so 99

of the world has more than 10 000

dollars that they could put on the

credit card

but nobody can take 10 000 in cash

so the fiat standard is appealing

because of the portability of the

purchasing power and because it doesn't

invite violence if someone

steals your credit card you could cancel

the credit card they stole your travels

checks you could cancel the traveler's

checks

things like that

and i was like make sure you write down

the serial numbers of your traveler's

checks right yeah yeah yeah all of these

things

so but why doesn't it work in the in the

modern era

i mean the fundamental problem is we

start with inflation again

the government can create more of it but

here the inflation problem is not a

minor problem like gold is a major

problem right instead of getting a

guaranteed two percent inflation with an

occasional 20 percent

you get a guaranteed

i think sephidine suggested the number

was more like 10 or 11 percent

guaranteed

seven percent guaranteed in the u.s

more in other countries so you're

getting a guaranteed inflation of

somewhere between seven and eleven

percent a year

and you're getting a occasional

inflation of 30 percent or 40 a year

yep

so the base layer protocol

doesn't work so well right it's uh it's

not conservative

right and and uh so if you have

a shared

ledger that's not conservative

right it's it's collapsing and

and that rates

you know the there's just nothing i i

you know i said to people there's no

engineered machine or structure that

works with that degree of error or

inflation

if if you had a two percent leak in your

gas tank

over what period

[Music]

right

if you're leaking two percent a day your

car won't work

and uh and so leakage of your swimming

pool or a balloon

or

or any kind of electrical system or any

thermodynamic system at all

just doesn't work without much leakage

so the inflation

ironically right inflation implies

you're getting more but really

it's uh dilution in a way

it's guaranteed pollution or depletion

so that number the first problem with

fiat is it's just depleting energy at

too rapid a rate

if we if we just said 10 a year on

average

then a system which is losing 10 percent

of its energy every single year almost

one percent a month

it's kind of a crippling first order

problem on the base layer right it's

almost like building on uh

if i'm building on sand and the sand was

sinking

10 feet a year

right what structure can you build

right

right when you when you're building on

something you want to build on granite

and you want the minimum deflection

granite doesn't deflect steel doesn't

deflect sand and clay def deflects

swampland deflects

so the problem that we start with is the

base layer is collapsing

the second problem of the fiat standard

is confiscation as the government can

sees

they can seize your currency or they can

seize the asset

um

and you know to a lesser extent other

people can seize it

i mean you can't

if you carry your cash around right

there's that the famous uh image of

pablo escobar you know sitting and

burning hundred dollar bills to stay

warm

if you can carry it around someone with

a gun can seize it so that's a problem

if you don't carry it around

then the counterparty that you trusted

it with generally the bank can seize it

and in all cases generally the

government can seize it

and so these are three

fundamental defects with the fiat

standard

your property rights

are weak

under the confiscation risk yeah and

your property is defective because of

the constant inflation you literally

bought swamp land in florida that's

sinking it's it's worse than that right

because swampland doesn't sink forever

you know it's pretty much as bad as it's

going to get

this is worse than that because it just

keeps getting worse and worse and worse

yeah yeah right

i mean the third

sorry just to insert one thing here this

there's like a conundrum of money here

where this is the the tool or the

economic medium that's intended to be

trust minimized

so you can put your wealth there and you

don't need to trust anyone else it's

like a safe place to park wealth

but to get that

it's you come with all these limitations

of gold historically so to pick up these

stronger faster smarter qualities of

money it comes with the cost of

counterparty risk

so it's like the conundrum is gold you

can you know trust nobody you don't need

to trust anyone but you can't really

trade with anyone because of all of its

limitations or you can use fiat

in which you need to trust a lot of

counterparties but you can trade with a

lot of people so there's this this kind

of

conundrum we've been stuck between

historically and bitcoin is like the

answer right it's the collapse of

counterparty risk yeah we go from

heavyweight

indestructible money that's a brick that

is too heavy to pick up off the floor

to

lightweight cotton candy

you know which is

which is

really easy to move around

but ultimately not satisfying and blows

with the win

with time yeah

and i mean and the counterparty risk you

know

is the explanation for inflation right

the government's inflating it and the

counterparty risk

is the root problem with confiscation

but you know again even if you had your

cash in your pocket

you don't have counterparty risk in the

near term but what you do have is an

invitation to violence

and and it's too difficult to move it

then then you've got

counterparty risk in the form of

hypothecation which is the third problem

which is you put your money in the bank

you know maybe they won't steal it

but they're making more of it right

because they're loaning it out with a

reserve ratio of 10 to 1 1 to 10 or 1 to

20 and so you put a million in the bank

and they create 10 million more which

dilutes your million

so the hypothecation is is the third

failing of a fiat standard

the fourth

is the authentication again

because remember we wanted to actually

be able to move it distances but you

can't authenticate it over a distance in

its bearer instrument form because you

can't pay for something with cash so the

way to authenticate it is through a

counterparty so i have to put my money

in a bank

the bank has to issue a credit card

then i have to input the credit card

into the website

then maybe the credit card gets approved

then i have to do the transaction then

maybe the transaction gets approved and

maybe it doesn't get approved and it

doesn't cross all borders

it would be impossible to do a

transaction via a credit card

you know with a vendor in cuba or

nigeria

or china or i mean all sorts of places

where

if you cross central banks the credit

cards don't cross those jurisdictions

so that that is another way of saying

it's an authentication and a

transportation problem

right how do i transfer

transport fiat currency well how do i

transform transport a million dollars

i do you know anyway that any private

individual that's ever moved a million

in cash

over a commercial airline

like

there's almost a presumption

that if you had a million dollars of

cash in your luggage that you're a

criminal right

isn't that interesting

there's a presumption that if you try to

do it yourself it's a bearer instrument

that you're a criminal and so it's that

what we have is we have a monopoly on

transportation

through the banks

yeah but the banks only can really move

within the central bank network

otherwise they have to cross central

banks

and so the monopoly is at the bank level

that the central bank level and then the

central banks answer to the government

state departments

so the central bank of the u.s won't do

business with the central bank of cuba

right

period

won't happen

so transportation

across jurisdiction

is difficult and dangerous

where it's possible it either works

you're either in the zone where it's

working like you're in the us moving

money between bank of america and group

at 3 p.m

on a tuesday

and then maybe it works although the

truth is like i get denied

i try to do little credit card

transactions between my credit card and

my

phone

i get denied like a third of the time

what type of transaction

if

like

try to move twenty five hundred dollars

to cash app

from your uh yeah

the bank you know from your bank and the

bank might actually stop it yeah or

anything like that

you know if it if it looks like it's a

it's a transfer

you get all sorts of all sorts of limits

on the rate at which you can move money

and if you want to go to higher volumes

if you wanted to move 50 000 or 100 000

invariably those are you have to have a

person a trusted banker a human being

that's calling you on the phone

to move those wires yeah

and so

the way that we move large sums of money

is between nine and five pm

with a trusted banker with a manual

authentication and

i mean it feels to me like that hasn't

changed in 30 years right right

yep

so you can't you can't move outside of

the nine to five

and you can't do it

without that trusted banker and you

can't

you can't cross any kind of technical

jurisdiction or any kind of any kind of

political jurisdiction

that's not in their

free-fly zone

right

and the result of that is that the

impedance to move

that money is extreme so on one side

yeah it might take you 72 hours

and the real cost is hundreds of dollars

on the other side if we go back to the

credit card network though

you have a monopoly in the credit card

network and the result is there's a two

and a half percent credit card fee right

so where the money does move

there's a two and a half percent fee

and uh

and that's under the best of cases right

but the remittance not where it gets up

to ten percent sometimes

so you've got you've got fees

that range from two and a half to ten

percent if you're lucky you get one

those cash back cards

and so the effective cash back is one

and a half percent or something so the

effective cost is only one percent

but it's 100 basis points

which is a huge amount of money insanely

large amount of money and the network

really isn't competitive and it hasn't

changed much in 30 years

you know and there's massive

fraud chargeback issues and all of these

impedances you're describing i would

argue too

are essentially an impairment of

property rights

where in a pure property right you

should be able to send express receive

move

move the asset however you choose but

when you have to then answer to a

counterparty or go jump through these

hoops

or wait all of these things impair your

property rights and money

yeah i would agree with you on that i

think that your property

your property is impaired it is taxed

and is either taxed

it's it's either explicitly taxed by a

government a municipality a state or a

federal government or it's uh privately

taxed by the money transfer network

that's charging you a fee to move it

around

and uh that's a challenge so

transportation

either difficult or dangerous or it's

impossible or it's expensive

those are the problems with that and

then that leads to two other real

deficiencies in the fiat standard one

you've got a lot of credit failures

because lots of complex debt is layered

on top of the base layer money and

that's complex debt and credit

instruments with counterparty risk

you know

check kiting right check fraud or any

anything like that where someone stood

in

to uh to pay lots of fraud

and lots of credit failure and then

you've got

securities fraud

and i guess with security fraud what i

mean by that is

there's too many complex applications

that are constructed based upon a

counterparty's representation to you

and there's no way for you to

transparently authenticate or or assure

yourself that

that the application is properly

constructed and properly backed right

right so and and you're destined to have

that someone says

oh we have two billion dollars in

reserves

but they don't

but you don't know they don't and then

there's a collapse of the securities

they issued or the credit or the

vouchers or whatever they issued

and so those things are inevitable and

the question is why

why do you have credit bubbles

and then why do you have securities

fraud on top of the fiat standard

and i think the answer if we come back

to our base

our our base first principles is

the base layer protocol

of fiat is defective the base layer

money is

defective

right

is it a shared immutable

correct

ledger

and the answer is no it's not shared

it's not immutable

it's not correct

yeah

right it's a it's a

quasi it's an imperfectly uh

heterogeneously shared

right uh mutable

incorrect ledger

so i guess what you could say is it's a

ledger

right yeah

it's a legend

yeah

but it's not shared

it's not immutable it's not correct you

know you don't have final settlement so

you have massive fraud on the credit

card network you have transfers that

didn't take place that are represented

to have taken place

you have balance sheets that don't exist

that are represented to exist yeah

you have you have um you have an issue

there with the base layer the second

problem you have

is the application layer protocol

it's random and manual so the protocol

by which i would create applications of

base layer money like a security is an

application a credit card is an

application

all of these things

are there's no there's no technical

protocol

or it's programmable there's no api

it's a manual protocol

so every single bank

creates their own

application like a bank loan is an

application of fiat and every bank

executes their own set of loans and

they're all expected to maintain a

certain degree of reserves right

yeah

but they're audited

and the fact that they have to be

audited uh is proof that they're all

just manually executed and heterogeneous

yeah so there's no transparent

uh

no transparent perfected application

protocol

and the result of that

or the implication of that is that the

applications in the fiat standard have

no integrity

right they haven't

they have no integrity in a mathematical

sense or a technical sense or an

engineering sense

uh you know a physical metaphor is

in the real world

it's i'm standing on solid ground

and in the fiat world

my eyes are closed

and someone told me i could take two

steps to the left and

i would be standing on solid ground

right

but i don't know that i'm standing on

solid ground

um

i don't know that i'm a hundred feet

from the cliff i might be one foot from

the cliff

someone told me

and i don't have a protocol

to ascertain whether it is true or not

true right and uh and so

you know you could generously say

people just make mistakes all the time i

thought you were ten feet from the cliff

and you only were nine and so that's why

you're dead

maybe it's just an honest mistake right

yeah but then again

maybe it was in my vested interest to

tell you you were

ten feet from a cliff

and you were really five feet from the

cliff and this gets straight to the

heart of bitcoin right where you it's

removing the need to trust it's you know

don't trust verify

and the the securities fraud you're

describing

i mean it culminates in the the weapons

of financial mass destruction with this

huge gigantic derivatives market

which is really

premised i would argue largely on this

this gap we have between trade and

settlement in the fiat system there's no

final settlement occurring which is the

verification mechanism

so in that gap

we have an accumulation of hidden risk

that ultimately becomes systemic and

lead to giant systemic blow ups

and you know to your point there being

no integrity it's like of course there's

no integrity these

i would say the lack of integrity is

synonymous with corruptability

and so not only does it not have

mathematical integrity or or financial

integrity but you could ultimately say

there's no moral integrity because these

systems they just don't hold up to

corruption

i can't take uh i can't take personal

custody of a billion dollars of gold

so therefore i trust it to the bank

and i take their gold derivative

and i assume that that is base layer

money and i can't take delivery of a

billion dollars of currency or fiat

so therefore i entrust it to the bank

and i take their credit instrument as my

base lawyer money

and

you could say that what you've got is

two fundamental shortcomings here

that uh that cause these two systems to

break

one is

the base layer protocol is defective

that you need a base layer protocol

where you can take final settlement

at any scale

yes can you take final settlement of 387

dollars can you take final settlement of

38 million dollars can you take final

settlement of 38 billion dollars

can you take final settlement every day

if you can take final settlement at any

scale at any frequency

then you then the underlying gold

standard or fiat standard would have

some integrity at least a modicum

the second problem is there's no

application protocol

so there's no way to create a security

or derivative or some layer two

application on top of the layer one

uh monetary token

we we need the we need the applications

right the world needs more than just

base layer money like you need credit or

you want yield

or you want to build an insurance

contract yes

or maybe you need to be able to post a

security deposit

and you need to be able to get the

security deposit back or maybe you want

to put something in trust with a

multi-signature arrangement for 37 years

there are lots of applications that make

the world work

but there's no application protocol

yeah so both in both cases with gold and

fiat

the base layer protocol is defective and

the application protocol

is

either non-existent or defective

and what what makes bitcoin special

and what makes it digital money

bitcoin

bitcoin uh gives you a base layer

protocol

to take final settlement and it gives

you an application level protocol too

either

we could debate back and forth right is

the application protocol on the base

chain the blockchain

if so it's a bitcoin transfer or is the

application protocol on the lightning

you know using a layer too yeah well

either of those

you know could be viewed as an

application protocol

yep

and uh

you're still maintaining the option for

final settlement even on lightning right

so i think the core and this is so

critical for if people can understand

this that the the anti-fragility of the

world economy even is dependent on this

simple fact

if we can have higher frequency final

settlement

we can have more verifiability

in the economic structure which means

less corruption and less blow ups

whereas the fiat system right now is the

complete reverse of that very low

frequency final settlement very low

verifiability tons of corruption lots of

blow-ups

yeah

final settlement

with high frequency

um

creates reality

yes

that's what the blockchain is right

it's reality

yes and um

you know you

every single second

gravity is testing your structure

and testing your orientation

you know there's that phrase can you

defy gravity

and you know and the answer is

maybe if you're a great athlete for a

second or two right

for for a very short period of time

can you defy gravity it requires

extraordinary strength

extraordinary agility

and it still comes at great peril

right i mean you could try to do a

backflip and you can land on your head

and you can break your back and you'll

be dead or paralyzed for life within a

couple of seconds

so there is there is a final settlement

you know it's

when you look at um

if you're considering a crypto asset

network like bitcoin and bitcoin is the

greatest

maybe the only successful example but

certainly the greatest example of a

crypto asset network

the uh

the frequency

parameter and the block size parameter

for a crypto asset network

is the equivalent to the space-time

constants

in our unit in a universe

so

the frequency

the 10-minute frequency that's how fast

the universe evolves

and the block size

is the gravitational content how does

how much mass or what is the

relationship between mass and energy and

and um

how tightly packed is

matter

and uh once you've established those two

constants you've you've defined the

constants that run the universe right

everything else evolves around those two

constants if this is why you would never

want to change them

because changing them is playing god

and you only get to play god

once

like when you start the universe

if you change the frequency and the

block size

of bitcoin

you invalidate all work that's come

before

right you uh

you imperil

all structures that have formed in the

universe since the beginning of time

you

you impair every mechanism that's been

created within that set of structures

you you impair them and maybe break them

and you throw the future into chaos

yeah right

all of those things it's i mean it

couldn't be clearer to me but if you

want the physical metaphors like what if

i triple

gravity

on the surface of the earth right now if

i could snap my fingers and triple gap

gravity how many pieces of furniture do

you have that crumple how many chairs

collapse right how many people's hearts

stop right

right

how many ships sink

how many planes fly

how many factories keep working

right stuff breaks not just not just

factories start breaking buildings start

collapsing

bridges collapse

tires deflate

right and and uh and so and the person

that worked for a hundred years to

create that great company or that the

rockefeller center and it just crumbles

yeah

okay so like and so you worked for a

hundred years and you did something and

it was beautiful until oh it's

everybody's dead yeah what what happened

while you changed the gravitational

constant you change the space-time

constant and therefore the structure

which had been carefully constructed

since all of eternity forward

the structure is now rendered null and

void and it collapses

it's um

ships are designed based on the reynolds

number there's something called a hall

speed

and um the hall speed is a function of

the shape of the hole and that's a

function of of the way that fluid flows

and and these are basic constants and no

matter how fast you push that hole it

won't go any faster because the water

pushes back right as hard as you push it

that's why a 150 foot vessel that's 30

foot wide will cruise at 12 and a half

or 13 knots and it doesn't matter the

horsepower of the engine in it yeah

it's just the way that the world works

another example of that is shock waves

and the speed of sound yeah there's a

reason for the speed of sound i mean

it's it's a fundamental constant

you go faster than the speed of sound

then you're moving faster than the air

can move out of the way

you get a shock wave

lots of devastation

what happens if you change the speed of

sound

but uh what happens if you what if you

change the speed of light well yeah

exactly this is that

so i love this because maybe we're

creating another meme here that bitcoin

is the e equals mc squared of money

and that to your point you only get to

play god once and satoshi did that

satoshi set the rules um

and this you know the strategies we

build based on those constants

they are dependent on the invariance of

those constants if you go and change

them that all the strategies that have

been built up around them collapse

yeah yeah like lots like all the the

entire bitcoin mining industry it's all

predicated upon bitcoin coming out at a

certain speed

and the protocol tapering off and the

value of all transaction fees are

predicated upon the block size if you

increase the block size the transaction

revenues collapse if the transaction

revenues collapse the bitcoin mining

profitability collapses if the bitcoin

mining collapses the energy usage

collapse the security collapses the

network collapses right

right like uh you you don't you don't

you know what's what's going on with

some of the proof of stakers is if you

flip from proof of work to proof of

stake you destroy your entire mining

industry right

if you destroy your entire mining

industry

all of the security all the social

political economic

thermodynamics security collapses

if it collapses you know the integrity

and the durability of the money

collapses

there are all sorts of second order

third order fourth order consequences

to this

and fund now the fundamental basis of

integrity

is

one has to know that

god is not going to change the rules on

you

if you spend your entire life working on

something right if you want to drive

people insane change the rules like if i

just

you know

you know i changed the speed of light

and the speed of sound and i quintuple

gravity before

you compete in the olympics and then

when your competitor starts competing i

turn i dial down gravity to the moon

gravity and they jump 180 feet in the

air and they beat you

right and then and then what happens

next you're like well that guy had moon

gravity and i had saturn gravity and my

knees are my legs are broken and my hips

are broken and i'm lying on a gurney

with an iv in my arm and my heart's

about to stop and the other dude is

bounding over the stadium

doesn't seem quite fair okay and at some

point when the when the gods toy with

you like that

then you say well i'm not going to play

this game anymore right right

exactly and and uh people withdraw from

the ecosystem it's like what would you

do other than run as hard as you could

away from

a random universe that wanted to kill

you right

we're back of course

sorry we're back to the original

introduction of

immutability how important that is for

money

i've said this before but i think what

the way you're articulating here really

unpacks it is it this is really what

bitcoin's doing it's radically changing

the world

by virtue of being unchangeable

it's like the first unchangeable set of

rules we've ever had so it's causing us

all to reorient our strategies

whereas fiat is a constant changing of

the rules so you talk about driving

people insane that's why we're going mad

in the world with every election cycle

yeah you could argue

with every political appointee yes

there i mean because i could even

appoint a different head of the fed

tomorrow right

and i would get whatever

the immutability

the immutability of bitcoin though is um

it's an emergent property

people would say there's nothing that's

absolutely immutable like short of being

god it's not absolutely immutable it's

an emergent property but as bitcoin

becomes more decentralized

the uh

i guess the thermodynamic inertia of the

thing increases and it becomes more

immutable yeah when there were a hundred

holders it was something when there was