Bitcoin is poised to solve the problem of fiat currencies hindering progress

Why hasn’t the physical world progressed as fast as the digital world?

Text | Rob Hamilton. WHY HAS THE PHYSICAL WORLD NOT PROGRESSED LIKE THE DIGITAL?. 2021/8/18.

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The year my grandfather was born, supersonic jet engines, synthetic rubber, and the modern microscope were invented. The year my father was born, lasers and halogen lamps were invented, and the first GPS satellite was launched into space. The year I was born, the modern Internet was invented through Tim Berners-Lee's proposal, "The World Wide Web: A Proposal for a Hypertext Project," and the first website.

I was walking my dog ​​early this weekend when a push notification popped up on my phone: Eric Weinstein was talking on Clubhouse. The room was titled “Why do scientists, the media, and politicians lie to us?” For those who don’t know Weinstein, he is a heretical thinker, managing director of Thiel Capital , and the coiner of the term “intellectual dark web.” He has engaged with the Bitcoin community at large over the past year, but that’s not the focus of this article.

I’ve been listening to Weinstein for years because of his ability to present mental models that help me see the world differently, or as he calls them, “portals”—a phenomenon he named his podcast after: “The Portal.” Weinstein attributes the decline of crossovers in academia, media, and politics to an idea that caught my attention: the “intrinsic growth obligation” (EGO). I’ve heard the term before, in his first podcast in 2019, where Peter Thiel labeled it: “an era of stagnation and pervasive institutional failure.”

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I went back and listened to that episode — the three-hour discussion that followed was the inspiration for this article. I hope to lay out some of the basic ideas that the two of them discussed, and how Bitcoin solves this problem, much to Eric’s chagrin.

Let’s set some terms. Institutions are a key part of the discussion, so an accurate definition will provide a solid foundation. An institution is a group of people who self-organize around a common purpose. The Catholic Church, the New York Times, and your local sports teams are all examples of institutions. Institutions play a vital role in healthy cultures because they enable individuals to operate as a group on agreed-upon terms. If you are on the board of your local PTA, all issues not related to educating your children are not part of the conversation. Institutions serve as organs of sense-making where individuals with a common purpose can dialogue to move something greater than themselves forward. That is, when institutions are healthy.

The intrinsic growth obligation (EGO) is how fast an institution must grow to maintain its legitimacy. It can also be conveniently thought of as the ego of a particular institution. A simple example that is easily recognizable is a university. A professor teaches a group of graduate students, many of whom wish to become professors themselves. When these students graduate, many may wish to continue to become professors to teach their own graduate students. Anyone familiar with Ponzi schemes can see that this quickly becomes unsustainable after a few cycles, as each new professor requires many new graduate students.

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Weinstein and Thiel posit that when growth stops, our institutions become parasitic and antisocial. They become unmoored and turn inward, striving for growth at all costs. Moreover, they insulate themselves from the rest of the world with a cadre of top experts who claim sole authority over what is really going on and even construct the means by which we measure reality. A classic example is inflation.

Our trusted economists tell you that inflation is not an increase in the money supply, but a series of calculations and weightings carefully calculated to assert that inflation is only 5.4% [1]. If you look at the M2 money supply—a metric that cannot be played with—30% of the money has been created since January 2020. Furthermore, 75% of the money has been created since the 2008 financial crisis [2], but if you use a government-provided calculator, $1 in January 2008 is equivalent to $1.24 in January 2021 “adjusted for inflation” [3]. If institutions are part of our collective sensemaking apparatus, and they function to obfuscate rather than seek truth, what does that say about society?

Institutional betrayal is a concept coined by Jennifer Freyd. In general, when an institution with a custodial duty cheats and violates its responsibilities, the personal trauma goes beyond the individual agent who made the mistake and affects the larger social structure.[4]

College students are taking on more and more debt, subsidized by the government. The economic data is clear: we are paying more for lower-quality services.[5] Student loans no longer serve college students, but rather the institutions that “educate.” Institutions have further consolidated their power by coordinating policies with the government to make it illegal to forgive (or refinance) student debt, but all other forms of debt can be refinanced or forgiven through the courts. The education system traps individuals in the service of maintaining the “education” system. Institutions have moved from being a means to becoming the primary end.

No organization is immune to the drive of the EGO. Take a large technology company like IBM. IBM has spent $201 billion on stock buybacks since 1995. IBM's market cap today is $127 billion, clearly showing malinvestment in the 12-digit range.

The prisoner's dilemma plays out in organizations like IBM. The primary compensation for executive boards of large public companies is stock. If increasing the value of the stock is how you get paid, you see two paths: Do employees direct their company to innovation by making capital allocations that earn excess returns on capital? Or do they use existing cash flows to buy their own stock, increasing the stock price without changing the underlying business unit economics? It's clear what the choice was for IBM management over decades. Equally striking is how all this was possible.

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Imagine telling your boss—seven levels up from the CEO—that it’s a terrible idea that capital should be invested in new ventures rather than buybacks. This would be an aggressive attack on the intrinsic growth obligation (EGO) of executive compensation. For these leaders, they are complicit in this common lie—and everyone who hopes to climb the corporate ladder at these organizations must play along.

One group mentioned earlier is not subject to the inherent obligation to grow: individuals. Individuals who do not rely on institutions to provide for their families have the freedom to speak the truth. This property makes Bitcoiners allies in the war to solve this problem. Before understanding how Bitcoin solves this problem, we have another “portal” to explore.

Thiel and Weinstein discuss a divergence in technological development in the late 1960s and early 1970s. The ensuing period, which continues to this day, they call the “Great Stagnation.”

In the world of atoms at the engineering frontier, the world of physics has made little progress in that time. In the world of bits, we have seen exponential growth in computers, the internet, mobile devices, and tech startups outside Silicon Valley. Moore’s Law, the historical trend of doubling the number of transistors on a microchip every two years, has been a significant source of growth.

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To use this as an example of what Bitcoiners might understand, look at mining equipment. Bitmain's S9 is a Bitcoin miner released in late 2017 that uses 90 watts of power to produce 1 TH/s (terahash/s). The S19j, released in August 2021, uses 30 watts to produce 1 TH/s. That's a 66% efficiency improvement on hardware 3.5 years apart. That's a growth rate that would make even the most ambitious institutions envious.

Thiel puts this in a metaphor that brings the point back down to earth. Silicon Valley has been actively pushing the boundaries of what’s possible with Star Trek computers to the point where we might even consider it somewhat old fashioned — given how familiar people are today with having a supercomputer in their pocket. You can imagine Captain Picard saying “Hey, Siri” — and knowing that we’re already living in that future world.

On the other hand, none of the accompanying technologies have been developed or seen meaningful progress. No warp drive, no holodeck, no replicator. The advances that can be seen in similar areas such as 3D printing are more technological innovations in the field of bits rather than breakthrough physical technologies.

Much of the stagnant growth (post-1970) wrestled with the fact that we had made the leap to Star Trek computers without having achieved anything else in the Star Trek universe. We landed on the moon in July 1969, using less computing power than a TI-84 calculator[6]. In 2021, the media is hyped because more than 50 years later billionaires have breached the atmospheric barrier—using a microchip with 5 million times more computing power[7]. And we haven’t landed on the moon since 1972; where is our ambition?

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Weinstein put it another way. If you walked into a room and removed all the screens, what has really changed in that room since the 1970s, other than style and taste? As a millennial, you probably don’t have personal experience of what a room looked like in the 1970s. But a glance through some family albums shows that Weinstein is right: Nothing has changed.

Yet the world of Bitcoin is not immune to stagnation. The first iPhone and the latest are functionally identical aside from a few cosmetic changes. Thanks to Moore’s Law, runtimes are faster and cameras are better, but there is no big leap in these innovations like the leap from the pre-smartphone era to the post-smartphone era. Anyone in the Bitcoin mining world will tell you that we are starting to get extra efficiency out of the next generation of miners. What if the parabolic growth of the world of Bitcoin that has driven the economy for the past 50 years is about to run out of fuel? How do we keep moving forward, and what happens to our obligations to those who were promised before we were born?

Here’s a summary of the two biggest takeaways from that conversation so far. The intrinsic growth obligation and the Great Stagnation of the atomic world. Yet, not once in that three-hour conversation did Bitcoin — or even money — come up. They’re so close! Thiel states that the Great Stagnation occurred between 1968 and 1973, and Weinstein places it between 1971 and 1973.

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What the hell happened in 1971?

Just a reminder to those readers who haven’t been paying attention, Nixon officially closed the gold window in 1971. Up to that point, the entire world operated under the Bretton Woods monetary system. The defining feature of that system was that sovereigns could still redeem dollars for gold. When Nixon closed the gold window, the dollar was fully converted to fiat currency. The guys from wtfhappenedin1971.com did a great job pointing out that socioeconomic data started to look a little strange after 1971. Currency is a key piece of the puzzle connecting the roots of the EGO to the Great Stagnation.

Let’s look at how this fits in with the world of Bitcoin.

In 1970, the US GDP was $1.073 trillion. In 2020, it is $20.93 trillion. That works out to a 50-year compound annual growth rate (CAGR) of 6%. That’s an impressive growth rate over more than half a century later! The source of this growth is controversial, though. By no means all growth is deceptive, and we can thank Moore’s Law for a lot of organic growth, but not all growth is created equal. We have to look beyond the revenue numbers to learn more.

The debt market is where the growth metric trick happens. When a person, company, or government borrows money, consumption and growth occur in the present, consuming resources that are owed to the future. If too much is taken from the future to pay for the present (i.e., if demand from bond issuers exceeds supply), interest rates rise to indicate whether the debt is really worth taking on. Debt means little without context to which interest rates can be applied, and this is where the second layer of manipulation comes in.

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Interest rates are a representation of the negotiation between the present and the future. As interest rates rise, economic misjudgments are more severely punished in the present, while delaying gratification into the future is more rewarded.

But when an institution becomes parasitic, what happens to the Fed as the lender of last resort? Since growth is achieved through borrowing, and the Fed is the backstop for financial markets, they are the country’s Chief Growth Officer. Understanding how this is done mechanistically is important to showing how Bitcoin can fix this parasitic cycle.

Today, when the government needs to spend money it doesn't have, it holds a Treasury auction. These bonds have maturities ranging from a few months to 30 years. Market participants will buy the outstanding bonds, and a variable "price" is determined as an interest rate. The higher the interest rate, the more the bondholder is compensated for locking their money in the bond. Conversely, this also means that as interest rates rise, the government will have to pay more to issue the bonds.

The Fed plays an integral role in this process to ensure that current growth takes precedence over sacrifice for the future. The Fed is entering the Treasury market at a rate of $80 billion per month. As the “demand” for bonds increases, the Treasury is able to keep interest rates artificially low. Lyn Alden aptly describes this as a restaurant where the biggest customer is the chef. It makes no economic sense.

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The Federal Reserve and the U.S. Treasury have participated in the ceremony, bowing at the altar of intrinsic growth. Higher interest rates hurt current growth because it is more expensive to take from the future and get it now. It is no surprise that interest rates have to bend to the will of our EGO.

All of this is on top of the national debt, the housing market is at an all-time high, and yet the Fed continues to pour $40 billion a month into buying mortgage-backed securities[8]. Not only are lower interest rates hurting your ability to save for the future, but the things you need to have a stable environment in life to raise a family, like a house, are being monetized with rising home prices and becoming out of your reach.

The first US 30-year bond was auctioned in 1977[9]. Between 1974 and 1977, 25-year bonds were issued. Prior to 1974, the 10-year bond was the main debt instrument in the US dating back to 1929. Long-term debt can play an honest role in society. For example, an insurance company has a long-term liability to pay policies in the future, so taking out a long-term debt instrument is a responsible hedge. The tricky part is combining long-term debt with the interest rate manipulation discussed earlier.

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There is an implicit agreement on the interest rate on a 30-year bond. Of those who are at the helm, how much are they willing to leave to future generations? We often evaluate our leaders based on generational divisions, from Baby Boomers to Gen Z and everything in between. The reality is more complicated than that. Those in power have the gun of the EGO pointed to their heads, an animal spirit that no one can control and will always hit the button on the printing press. The Fed and our elected officials continue to pass deficit bills, and they are slaves to the system they helped create.

As 30-year rates fall further, the future that serves today’s EGO is drying up. To the point where major countries are already experiencing negative growth, there is no growth left for the future. To put it more bluntly, our ruling class, overwhelmingly drawn from the Silent Generation and Baby Boomers, is financially sacrificing the future of Millennials and Gen Z to their only true god, the EGO.

So what do we as Bitcoiners do? We formed our institution based on a founding principle: there will only ever be 21 million Bitcoins. There is no EGO in Bitcoin’s monetary policy. As Bitcoiners, our goal is to increase our sovereignty and support individual values, not to bow to parasitic institutions.

Greg Foss describes Bitcoin as a credit default swap for central banks and money printing. A credit default swap (CDS) is a financial instrument that prices the risk of a given credit market. This is how Michael Burry shorted the US housing market, as described in The Big Short. Foss is right, but it goes even further. Bitcoin is a concept of a credit default swap based on EGO.

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Bitcoin is able to ride the asset inflation bubble that comes with the Fed’s easy money policy. Or as Bitcoiners describe it, NgU (Numbers Going Up) technology. We all agree that there will only ever be 21 million Bitcoins, and make decentralization and easy verification a founding principle. Bitcoiners, as a community, defy experts who tell us we are wrong, and NgU is our receipt. With a fixed money supply, growth can only be earned, not manipulated. This founding principle encourages delayed gratification and creative allocation of capital, not consumerism and debt.

How does this affect the world of atoms? Because of Moore’s Law, marginal efforts in the world of bits have greater financial and political advantages. The EGO rewards conquering the world of bits with low-hanging fruit. Additionally, the Fed enters the debt market and keeps interest rates artificially low to maintain growth, making riskier long-term investments in the world of atoms less attractive. As the world of bits grows parabolicly, there is less incentive to try to conquer the world of atoms. It’s hard to quantify the opportunity cost of a great thinker who could have been a physicist and chemist, but ends up being a software engineer at a FAANG company just to try to increase ad engagement by 0.1%. The prospects for solving such problems are bleak.

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Our institutions are failing us because they are in a Malthusian dilemma. If natural growth hits a plateau, all remaining assets are zero-sum conquests. You can only get more by taking from others. This is why so many institutions become short-sighted, focused on the politics of the day rather than their original purpose. Bitcoiners, however, see the world differently, and we live in a time of great innovation. Just look at the world of mining.

In the podcast, Weinstein correctly points out that growth requires increased energy consumption, and growth eliminates violence. Bitcoin, through its proof-of-work mining, provides an opportunity to graft the digital world of Bitcoin’s infinite scarcity onto the physical world. This drives the expansion of the energy grid, bringing more prosperity to the world.

To understand this in more detail, you need to understand a little bit about how energy works. Two recent interviews that go into the detailed mechanics of the energy network are Harry Suddok’s interview on “What Bitcoin Does” and Nic Carter’s talk at the B Word conference.

In short, the energy grid has several properties that Bitcoin can exploit. First, once energy is generated, it must be consumed immediately. Second, energy attenuates greatly when transmitted over large distances. Third, there are some wasteful methods of energy extraction that are associated with energy that is wasted today.

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The promise of Bitcoin mining is that it will always buy any surplus energy produced, anywhere in the world. Monetizing trapped energy, and more efficiently recovering and extracting energy that would otherwise be emitted or burned, can help finance previously unsustainable energy projects. This is all done through voluntary market interactions. No comprehensive legislation or inter-agency coordination is required.

As a parting thought, Thiel mentioned a line from the Portal episode: “One of the challenges — and we should not underestimate how important it is to reboot science and technology in the 21st century — is how do we tell a story that motivates sacrifice, incredible hard work, and delayed gratification toward an inherently nonviolent future?”

Bitcoin is integral to answering that question. This goes far beyond personal monetary gain. For Bitcoiners, there is a bright, warm future where we focus not on quarterly gains, but on developing intergenerational wealth. It is not enough for us to succeed, the great-great-grandchildren we may never meet must thrive. Bitcoiners will be tomorrow’s capital allocators whose projects may not pay off in our lifetimes. Bitcoiners will have a seat at the table to check the parasitic EGO and ensure that Bitcoin, as digital and physical truth, will stop the lies and build a better world for our future generations to live in.