This will be a two-part newsletter over two weeks. Lots to talk about here related to WHAT the problem is with today’s financial system and hence WHY Bitcoin is so important. Let’s dive in.
Have you ever seen this meme?
Money has always been just money to me – nothing more, nothing less. Just earn it, save it, and spend it. It’s ubiquitous, we use it daily, and I didn’t really ever think about it because it’s all I’ve ever known and there’s no other option…just like the “water” in this meme. When I started to learn about Bitcoin though, it suddenly made me question EVERYTHING I know (or thought I knew) about money. This awakening I had really fit with the ethos of medicine to challenge long-held dogmas and seek the truth, so I was instantly hooked. It caused me to question the monetary system I’ve been born into and accepted my whole life because there was no alternative until 2009. Seriously, have you ever asked yourself,
“What makes money, money? Could there be better money?”
This question Bitcoin posed led me on the path to finding my “why” in this space. If I was just here to try and make a buck, I sure as hell wouldn’t be writing this newsletter and sharing it with you all. But with a solid (not perfect) understanding now of this revolutionary technology, and concomitantly an appreciation for the complexity and flaws of the current financial system, I honestly believe Bitcoin is going to change the world for the better (including healthcare). That is something worth writing about and spreading the word if I can. I passionately believe if you fix the money, you can fix the world. Everything ties back to money in some way, and our current monetary system is deeply flawed and there are no viable alternatives. This belief in Bitcoin may sound corny to most, but it’s a deep conviction I have now and why I’m writing this. I’m not ashamed or afraid to state it publicly either. Much of medicine, and life in general, is about “spidey sense” and gut instincts (especially emergency medicine). My spidey sense is off the charts with this one, and that has served me very very well in life. I don’t ever go against it.
So what’s my “why” more specifically? This is important because without the “why”, no one cares. If the “why” isn’t rational, meaningful, inspirational, tangible, or relatable then the mission is dead on arrival. My “why” is threefold:
The current financial system is archaic, inefficient, corrupted, deeply flawed, and worsens inequality.
I benefit from this – I find this morally wrong
My time away from family and friends at work is being devalued through inflation. Inflation = a silent tax = theft.
Putting my life on the line during Covid was the breaking point
My daughter deserves a better world. Society is becoming increasingly fragile due to a broken monetary system.
Fix the money, fix the world
Notice there was nothing in there about getting rich. I came for the money, yield, and excitement that crypto offered. I stayed for the community, freedom, and equality that it will bring.
Why #1:
Like me, I’m betting all of you reading this have benefited from today’s current financial system. You own assets – a home, stocks (401K), land, etc. You went to college. You have a bank account. This has led to extraordinary privileges and wealth due to the inflationary aspect of our economy. The US monetary system is built on wanting and needing inflation. The target is 2% per year by the Federal Reserve.
Link: 2% inflation target
I repeat – the government states they will devalue your money and purchasing power by 2% per year on average.
You accept this because that’s how it’s always been and you know of no other way because there haven’t been any other options. Your Big Mac and fries cost more every year…no big deal, right? But why is that the case? Why is inflation needed? The story goes if the currency continues to be less valuable, people will spend money and not save it because it will buy less in the future, thus injecting money into the economy so that everyone can have a job and the government can collect taxes to pay for stuff. If the dollar went up in value (deflation), you’d hoard it and never spend it and everyone would die (or so they say)! Inflation is complicated and multifactorial (supply chains), but part of it is the US Treasury printing money out of thin air, which puts more dollars in the system, which makes your dollars worth less over time. In fact, 40% of all dollars EVER CREATED were printed since the start of the pandemic (for stimulus, quantitative easing, etc.). Let that sink in. 2008 was a blip on the radar in comparison.
Can’t grow money on trees, right? The government can. In fact….
Uhhh is right! Must be nice! Wish I could print money!
Put it another way:
The fact is, the USD is losing purchasing power at an astonishing pace. More dollars printed = your dollars worth less.
So what’s the problem? Who cares?! Well, this monetary theory has worked for a long time, but unfortunately the Titantic has struck an iceberg. The second-order effects of printing money are becoming increasingly problematic, and the system is trying to plug an increasing number of holes in the boat, which is unsustainable in the long term (timeline uncertain). Let’s talk about some of these issues which I find most troublesome.
One problem with the government printing money is the Cantillon effect. Basically, those that are closest to the “new money” created are at a distinct advantage, and this contributes to worsening wealth inequality.
Until recently, newly created money first goes to the banks (now with “stimmies” this has changed but we’ll talk about that more later). The banks then invest that money and purchase assets with it (stocks, houses, land, etc.) and give out loans to qualified customers (emphasis on qualified - not everyone). A small minority of it makes it down into the hands of the average Joe who owns minimal assets and lives paycheck to paycheck. Via supply and demand for assets, this new money drives prices higher, and those with pre-existing assets or those closest to the “new money” to buy assets first benefit the most. Thus, your house that you bought five years ago is up 30% in value, and you haven’t done anything to it but paint your bedroom! Woohoo! It actually has a roof leak now, but is worth more! Sweet! You own the house as an asset that can’t be easily duplicated/printed (like money), and there are more dollars in the system now for such a desirable asset, so the price goes up and everyone wins and is happy, right? Same thing applies to stocks. Banks love buying stocks with that newly printed money to outrun inflation and earn yield. Being IN the stock market is far better than TIMING the market because as long as the government keeps printing, the market is going up.
Coincidence?? I think not. Did you really think you were that good at picking stocks??
House price up. 401k/stocks up. Whoop whoop!
But what if you rent? What if you don’t own stocks or have an IRA? What if you own no assets like ~50-60% of Americans because they can’t, or are not educated as to the importance of it? Is that fair to them?
Suddenly the inflation the government is chasing is hurting the majority of Americans! The rich get richer (yes, you and I), and this creates social unrest. Those without assets get punished as inflation eats away at their purchasing power and they don’t get the benefit of asset price appreciation. It actually just gets harder and harder to buy those desired assets due to higher prices. Trying to buy a new home? Good luck coming up with the down payment for the loan given today’s prices! Renting it is I guess…but rent prices are skyrocketing too! Double ouch.
So you say, “Hey! Wait a minute, just put your money in the bank and earn interest, or buy a US bond. You’ll keep up with inflation, right? You don’t need to own assets in that case, and everyone can get a bank account! Just make your coffee at home and skip Starbucks and save!”
Keep dreaming. Not everyone can get a bank account, actually. In fact, ~1.7 billion people in the world are unbanked. But who cares if they don’t live in the US, right? Not our problem! Well, 14 million people in the US are unbanked. The other issue I have is that ~66 countries in the world are “dollarized” and have no native currency of their own. Thus, when the US prints money and hands it out to US citizens, these countries don’t get the benefit of that monetary stimulus, and thus their savings are worth less. It’s a moral compass I have in an increasingly global and connected world. It ain’t right.
Regarding bank savings account rates, in 1995 my father sat me down at the kitchen table to learn about the “rule of 72” and interest-bearing CDs (5-10% at the time). Back then I would have said, “yes, saving in a bank account will work to keep up and outpace inflation.” What’s your savings account interest rate today? If it’s over ~1% we need to talk so I can switch banks. It’s not, I guarantee it. Due to the great financial crisis in 2008 when governments spent YOUR tax dollars to bail out the big banks for THEIR mistakes, they had to cut interest rates to zero to stimulate the economy. Rates haven’t recovered since, and they won’t ever again (more later). Thus, your hard earned savings sitting in cash in the bank account is LOSING AT LEAST 1-2% a year (assuming .25% interest rate), and likely WAY MORE if inflation is really more like 5-10% (6.2% as of 11/2021). Think about that hypothetically…..
Maybe you don’t have much cash in the bank or hold many bonds, and the reason for that is you put it all in stocks and assets to outpace inflation and earn yield. GOOD. You’re doing it right. But not everyone is so lucky, and that sucks. It shouldn’t be like that. You should be able to play it safe and stick your money in the bank and earn 5-10% on it for THEM to lend it out to others and make money on YOUR money. Right? But now you’re being forced out on the risk curve to invest in stocks, which are risky, and other volatile assets because otherwise, inflation will rob you of the money you worked hard for. Hardly ANYONE invested in stocks back in the day, and if they did it was a small amount. Now low cost, diversified stock ETFs act as “savings accounts” for most people, which is really quite alarming.
This inflationary monetary policy exacerbates wealth inequality, highlighted beautifully during Covid-19 when loose monetary policy went into overdrive with trillions printed and the rich got richer because they held assets.
It didn’t just start in 2020 though. It really started with “fiat” money in 1971 when we went off the gold standard. Here’s a chart for perspective:
Finally, you say, “It’s all good. That’s why I get a raise every year to keep up with inflation.” Even though many people get a raise every year (but not everyone) to keep up with inflation, that number isn’t keeping up with the cost of living, making it harder for people to get by.
That’s why it feels like you’re working harder than ever and your money just doesn’t go as far as it used to. It ain’t right. Being on the hamster wheel sucks…
and it’s really hard to get off…but now you can, with Bitcoin.
To wrap up, we just talked about the most disturbing part of the monetary system and the problems it’s causing, but what about its basic infrastructure? Does that need an overhaul?
Have you ever tried to transfer money using a wire or the ACH system in the USA? It’s PAINFUL. Like ridiculously slow and painful. It takes days to clear, there are fees, and we live in an era where everything is digital and should be near instantaneous. Banking systems are built on technology that is older than my parents (love you Mom and Dad).
Take my Dad’s business for example. Small business called Palmer Industries and where I worked growing up. (My grandparents in pic below)
He had to order parts from China to build these vehicles and used the Swift payment rails that cost him a ton of money (fees) and time. Time for an upgrade. Bitcoin fixes this.
How about Western Union? They charge millions in annual fees for remittance payments to people outside the US. Really? It also takes 1-5 days to deliver the money. You could probably drive or fly to some places and deliver the money faster and cheaper if you wanted to. Time for an upgrade. Bitcoin fixes this.
Finally, corruption is a touchy subject. I’ll just say that banks aren’t perfect. Between unnecessary overdraft fees for folks that can’t pay them or the billions of dollars in fines for money laundering and other violations, let’s just say they aren’t Mother Teresa.
If you worry Bitcoin and crypto is for drug dealers and bad actors, just remember, every form of money, INCLUDING the US dollar and the banks that hold it, do some super shady stuff you wouldn’t want your mom to find out about.
The social contract between we the people and the government is broken. We tolerated inflationary policies until our savings could no longer keep up with them. Bailing out big banks with their greed was the final straw. Enter Bitcoin circa 2009.
Part 2 next week. Thanks for reading.
Be humble, stay hungry, stay foolish.
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