Outcompeting the Fed

Parker Lewis, Marty Bent

PL: I think one of my first podcasts was with Marty Bent and we riffed about Ender's Game which is the piece I was writing as I was going down my bitcoin rabbit hole. I thought it would be good for Marty and I to talk about today revisiting that because a lot has happened in the past 4 or 5 years. Ron Paul- there were a lot of people in bitcoin from Ron Paul's movement to end the Federal Reserve. The movement to end the Fed.... we can do better: we can outcompete the Federal Reserve and provide a better solution. I wanted to talk today about what has happened post COVID becaues it's been extreme and probably pre-dated COVID by about 6 months.

MB: We had a slide quoting you from 2019 saying prepare yourself, the Fed is about to print like you never saw before. I think you were reacting to the repo numbers in September of 2019.

PL: Yeah, that's one thing, when I go around and talk with people about bitcoin. People think that the 4.9 trillion dollars that the Fed has created since COVID was because of COVID. In my descent down the bitcoin rabbit hole, it had nothing to do with COVID. Even though memories are short, people will remember that the Fed in the three months following the COVID lockdown which was really March 12, 2020, that the Federal Reserve printed $3 trillion in 3 months. In september 2019, the repo markets broke and the Federal Reserve printed $75 billion in a single day. There was a massive inbalance. People don't remember oil going to zero. That didn't just magically happen; that was there. People don't remember that. That inevitability of and even where we sit today, they are going to have to print even more money. The quote out on twitter, all we know at this point is that they are going to have to print money and they will have to print a lot of it. No matter where we are, they have to print more money now than they have in the last 4 years, due ot the degree of leverage in the system, nothing to do with COVID. Building a system that had such a degree of leverage would always dictate that the Fed would have ot print trillions and trillions more.

MB: Moving back to the repo spasm, why did that happen? We had one of the largest banks in the country actively rotating out of US treasuries and into cash, and this created a liquidity crisis. Some of the active players were not comfortable holding US treasuries so they began to notice that the writing was on the wall. I wrote about it last night and for bitdevs- if you look at the Fed funds rate chart for the last 40 years, it becomes glaringly obvious that the Fed is out of ammo. Volckner in the 80s doubled rates from 8% to 19%, that was an effective measure to contain inflation in that period of time. We did that same thing, we just doubled interest rates from 25 bps to 50 bps and it had no effect on inflation. It doesn't adjust opportunity costs or prevent people from taking out loans to buy scarce things which exacerbates inflation.

PL: If you look at the chart, it looks like a dying patient that has flatlined. What that means is that the Fed is at the end of the rope. During the financial crisis, I was working on Wall Street but I didn't know what was happening. It was only when I got interested in bitcoin and the Federal Reserve in 2016-2017 that we were just further out on the same ledge that we were on during the financial crisis of 2007-2008. We had too much debt, not just at the federal government level but system wide. The whole system was levered 150:1 but there was 52 trillion dollars of vanilla credit in 2007, and the way that QE works, we get pushed out further on to the ledge. We get an unsusttainable credit system. Right now there's $88 trillion of liabilities. That's how QE works. When you break the system with more creidt, it demands you put in more dollars into the system to keep it propped up. They can only reduce interest rates so much; people start figuring it out when they go to the grocery store and they find that beef isn't up 7% it's up 50% or more because of the doubling the money supply. It's not Ukraine or Russia. It hits them hard. People forget that beef was up 50% before there was any rumor of Russian invading Ukraine. They are going to have to keep printing money.

MB: When we talk about the mechanics of the actual printing, but here we're framing the Fed as in competition with bitcoin and it's important to hone in and that's why we met to have a podcast about Ender's Game. Parker highlighted what was Ben Bernanke saying in 2005 and 2007 and how was he thinking that the market was going to react to Fed policy? If you read the receipts, and try to amend them with what actually happened, they had no idea what their policies would have unleashed on the markets. They couldn't have predicted what the impact of manipulation of interest rate was going to have. The framing for this conversation comparing that to a system that competes with bitcoin, that's the beauty of bitcoin is that you can validate what will happen to the bitcoin supply because you know what's going to happen and when. That's why I like bitcoin. It's more predictable and it does exactly what it says it will do.

PL: I read all the old Fed transcripts... most people know that the Fed publishes minutes two weeks after, but they publish full transcripts 5 years after the fact. If you go back and read the old financial crisis transcripts, it's like reading a book where you know the ending but the people in the book don't know what's going to happen. You can read it with an objective review of history. People looked at, especially in the legacy financial industry whether hedge funds or investment bankers, they all said well the Fed wouldn't do x unless they knew. But if you go and honestly review it, that's just wrong. Whenever they make a forecast of what they expect some economic impact, and there is this instance where they did a roundtable and after quantiative easing they discussed what are we going to do first? Increase short-term interest rates? Increase QE? They went around the table, and 15 out of 16 said one thing, and 3 years later they did the opposite and it was their own actions. It was just highlighting the point that just looking at the score card, they are always wrong, they don't know what they're doing, and they can't know, and they don't have the temperment to be manging money. That's when we get into bitcoin where I think there's a fundamental truth that a central bank can control the supply but they can't make people value it. There are two kinds of people in the world of bitcoin: some people are trading crypto to make more money, and then other people that have figured out that bitcoin is competing with money as a better alternative. If you give people two alternatives, one where the government prints trillions of dollars which is a number too large to coneive, or the one where money can't be printed, then people will choose the second one because it's common sense. Central bankers might not be stupid but they are morons, and it's very easy to outcompete them in bitcoin.

MB: The audit the Fed end the Fed movements, that's the beauty of bitcoin, but Hayek said you're never going to change the money or fix the money until you find a roundabout way to take off the hands of the government which is what Satoshi has given us. We can literally go plug in nodes, ASICs, we don't have to ask permission. We have a roundabout way to do this, and it will end the Federal Reserve. Of course people would choose the option with the fixed supply. Once they understand it, they are going to choose bitcoin. For the last 50 or 70 years, we have lived in this fiat system where we're born into it and never had to question it until it was 1920... people just have this weird mental block where they take the American dollar for granted and they have never questioned what is money. With inflation ramping up, people are willing to say okay maybe my conception of money was wrong and we're at a period in history where people are going to be looking for alternatives. Bitcoin will be that for them.

PL: I go around and educate a lot about bitcoin. When I talk with people that run private businesses, they feel that the disruption to their every day by all of the consequences of money printing. When prices change, they don't just change radically like theoretical Federal Reserve economists think it might. It literally screws up the communication channels for all the businesses. When you talk to people in finance, people say the Fed would never let it happen. But entrerpreneurs and business owners are survivalists, and when I explain how money printing is inevitable, and the entrepreneurs understand how hard it is to create value. It's like lightbulbs going off and connecting dots. When they understand there's an alternative, and I think the most common thing I hear about is oh I just had my first $400 grocery bill. People are understanding that their basket of goods is not purchasing as much. There's really, some people say inflation is theft, but what it is in my view is it's worse than theft when you have money engineered to lose its value. Your savings is the net between what you have produced for others and what you have not consumed from them yet. When you earn a money degrading in value, it creates a disincentive to deliver value to other human beings because any value you deliver is going to purchase less from someone else in the future which doesn't make sense. When you force that on 320 million people, you're going to get some fucked up problems.

MB: Looking at these two competing monetary systems, structurally, what do you want? Economies are complex systems. Monetary systems are complex. Pricing goods in an economy takes very local information to accurately price supply and demand at that given location around the world. In the context of central banking vs bitcoin, you have a centralized system trying to granually control the economy which is a complex system. The Federal Reserve chairman, the board members, they are literally geographically far away from the granular information that should be deciding pricing on the ground and their monetary policy perturbs accurate pricing mechanisms. Bitcoin is the exact opposite. It's a distributed system that allows people to voluntarily plug into it. The grassroots distributed mechanism that bitcoin provides to the world, just looking at this from a pure systems architecture, makes sense.... we should have an organic free market monetary system that should allow individuals in this complex system to make decisions themselves.

PL: For me it was about understanding the impact of what the pricing mechanism was... in a presentation I gave a while back, this idea of distributed knowledge. When I say central bankers can't know what the consequences of what they are doing is, I visualize a million man march and then I visualize Jerome Powell talking to European bankers in Jackson Hole. The million people know their preferences and how to build things, and they definitionally have more knowledge than a few people sitting in DC or Brussels. When the market is communicating info via pricing mechanisms, and the Fed steps in to manipulate those prices, it disrupts the whole functioning. It creates imbalances and exacerbates imbalances. To that point, they can't know, or in certain instances, one of the quotes I had in Ender's Game was Ben Bernanke where this was 2011 post 2008 and there was a European debt crisis and US is going back into the 2008 crisis and Bernanke admits that monetary policy is not the solution and that there were fiscal problems. In my opinion, monetary policy was the problem. But even when Bernanke recognized that mony printing wasn't the solution, his comment was well we have to be palliative. But if you keep doing shit, and it doesn't work, and you recognize it doesn't work, and you do it again? That's the definition of insanity. With bitcoin, people can voluntarily opt out. People don't want to sell beef at the previous prices. Most people don't have a concept that the Fed is printing trillions of dollars. They only find out when they go to the grocery store. Bitcoin is apolitical and neutral; how many of you have seen the movie PCU? Not many people have seen it. PCU is this movie where it's a politically correct university and everyone hates everyone. It's so devisive, but then they figure out they just hate the man and the man is the dean and then they are all friends. Bitcoin will trascend politics. A lot of the symptoms and why bitcoin so easily outcompetes the Fed is because it's not just a number go up technology, it's that when people figure it out, that we have a system where you can understand- every bitcoiner shares my values, we might differ at some higher level, but people will figure out that this is a healing moment for a lot of people. The current system we're caught in a trap and there's a hamster wheel and you don't know where the problem is coming from, but you feel it in your every day.

MB: Bitcoin fixes this. Fix the money, fix the world. I argue this is all driven by wealth inequality between those who own assets and those who don't. They have been put into a debate framework by the media, saying it's red team vs blue team, but nobody is focusing on the money. If the money was fixed, then the basis of that conflict goes away and people won't have to go out and figure out reasons why their life sucks. They would be able to get a job, make some money, make an honest living and live a life of dignity. That's what fixing the money is going to do for society. Talking about the Fed chairman and the board members, they try to figure it out and huddle into a room. March 2020 is a good example. Okay, we have ot shutdown the economy, what do we do? Well, let's change the facilities and how we move money into the Fed window and who can access it... that's 13 people deciding something that effects billions of people. Bitcoin developers, they don't have to ask or meet in a secret room. They just make proposals. Socratic discussions about how this helps the system or will it help bitcoiners. What monetary system you want to live in? One where 13 people control, or one where anyone can contribute to if they want to?

tweet: Transcript: Outcompeting the Fed https://diyhpl.us/wiki/transcripts/bitcoin-takeover-austin/outcompeting-the-fed/ @parkeralewis @unchainedcap @MartyBent