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Notes from "The Scandal of Money"

These are my notes from the book "The Scandal of Money" by George Gilder. The book explains what real money should be, and what money currently is. It shows how it can be manipulated by governments and central banks, how that impacts businesses and individuals, and offers a solution to root money in a fundamental constant of nature – time.

Knowledge and Power by George Gilder

“The source and root of all monetary evil is the government monopoly on the issue and control of money.” - Friedrich Hayek

“Humans don’t decide what to build from some cosmic catalog of options given in advance. Instead, by creating new technologies, we rewrite the plan of the world.” - Peter Thiel

When capitalism runs with deep knowledge into effective channels of enterprise, the opportunities of main street and the average family multiply.

Economic theorists, describe as greed any human drive, ambition, and entrepreneurial energy beyond what is necessary for bare subsistence.

The punitively rational economic agents turn out to harbor biases and habitual modes of thought, anchoring on previous inputs and prices, overprotecting from past experiences into the future, overreacting to losses, and succumbing to misleading contextual cues.

All these behaviors cause economic players to make bad decisions, undermining their utility for the great machine. The biases, fixations, overreactions, and manias skew markets and perpetuate perilous disequilibrium.

In an informational economy, growth springs not from power, but from knowledge, crucial to the growth of knowledge is learning conducted across an economy from the falsifiable entrepreneurial ideas in companies that can fail. The economy is a test an measurement system and requires reliable learning guided by an accurate meter of monetary value.

“If an expensive car crashes into a wall, all the expensive information and value disappears though all its atoms and molecules remain. Value is information. The car is knowledge.” - Caesar Hidalgo in “Why Information Grows”

Money is the central information utility of the world economy. As a medium of exchange, store of value, and unit of account money is the critical vessel of information about the conditions of markets around the globe in both time and space. Monetary systems thus can be judged as moral systems.

Wealth is knowledge, growth is learning, and both are governed by the rigorous science of information.

Knowledge expands through testable learning - learning curves proceeding through entrepreneurial experiments.

Learning curves ordain that the cost of producing any good or service drops by 20-30% with every doubling of total units sold.

Growth in wealth stems not from an efflorescence in self interest or greed, but from the progress of learning, accomplished by entrepreneurs conducting falsifiable experiments of enterprise, their outcomes measurable by reliable money. Rather than diverting profits to politicians, entrepreneurs who conduct successful experiments keep their winnings. Thus they can extend their success into the future. Resources gravitate towards those best able to use and expand them.

Pivotal to the investment process is interest rates. For entrepreneurs to control capital, interest rates must reflect its real cost rather than merely the cost of printing money. Otherwise the money printers will dominate investment.

We can sum up the new information theory of capitalism and money in 8 principles:

  1. The economy is not chiefly an incentive system, but an information system.

  2. Creativity always comes as a surprise.

  3. Information is the opposite of order.

  4. Money should be a standard of measure of the outcomes of entrepreneurial experiments.

  5. Interference between the conduit and the contents of a communication system is called noise. Noise in the currency makes it impossible to differentiate between the signal and the channel.

  6. A volatile market shrinks the time horizons of the economy. Gyrating governments grasping at currencies are deadly to long term enterprise.

  7. Analogous to entropy, profit or loss represents surprising or unexpected outcomes. The real interest rate represents the average returns.

  8. The velocity or turnover of money is not a constant. Therefore it’s not the central bank that controls the effective money supply but the free decisions of individuals as they accumulate knowledge and decide whether to spend or save their output.

In a just system of growth, business must be open to bankruptcy as well as to profit.

In entrepreneurial experiments, the governing constraint is the scarcity and irreversibility of time. With infinite time anything is possible. Finite time imposes the necessity of choice and prioritization. Time is embodied in interest rates, the money value of time. In economics, time is chiefly represented by money. In the deepest sense, money is time.

As an instrument for keeping accounts, setting priorities, and evaluating opportunities, money must be a measuring stick rather than a magic wand. It cannot be expanded or contracted at the will of the sovereign. In order to explain a willingness to exchange real goods and services for it money must be strictly limited in quantity. Paradoxically, to serve as a store of value money cannot be hoarded. A holder of funds can refrain from using or banking them, but if money is not invested or spent it eventually becomes worthless as no goods are produced that it can purchase. Time is the quintessential constant. It cannot be hoarded. Time is the basis for Say’s Law: supply creates its own demand. Savings are always invested or wasted. As an economy grows, with ever more abundance deriving from ever more learning, only one resource grows relatively scarce in proportion. That resource is time. Time is the most real and irreversible of all constituents of value. The expansion of per capita income in an economy means an increase in choices and possibilities – ways of using your time, claims on your attention. Although some new goods and services increase your efficiency and some extend your years of good health, the growth of an economy inexorably presses in on the residual resource – the hours in your day. These hours, and minutes and seconds, are what you actually spend or waste, invest or splurge, save or sleep away. Money offers an accurate measure of earnings and expenditures chiefly as it reflects these costs of time. These costs are tallies in two irreversible ledgers: physics and biology. The speed of light and the span of life. If it does not represent these fundamental scarcities of human life, our economics will diverge from reality.

Time remains irreversibly scarce and uninflatable. Money with roots in time, unlike our dollars today, forces real costs to go down in proportion to the learning curves across the economy. Declining prices are the natural condition of capitalism.

Time is remorselessly egalitarian, distributed with rough equality to rich and poor alike.

The lesson of information theory, the new system of the world, is that irreversible money cannot be the measure of itself defined by the values it gauges. It is part of a logical and moral system, and like all such systems it must be based on values outside itself. It must be rooted in the entropy of irreversible time.

Both government and financial institutions have transformed money from a neutral medium of exchange, a standard of value, a measure of learning and store of wealth into manipulable lever of power an privilege.

“The first and most important lesson about what money teaches us about what monetary policy can do is that monetary policy can prevent money itself from being a major source of economic disturbance.” - Milton Friedman, 1968

“The government’s solution to a problem is usually as bad as the problem.” - Milton Friedman,1975

MV = PT where, M is the quantity of money, V is the speed money flows round the economy (velocity), P is the level of prices, and T is the number of transactions.

Command the money supply, and you command a lever that can move the entire economy in any direction.

Under the prevailing theory, money becomes a self-referential system, ultimately controlled by each sovereign that issues currency. Sovereign monies compete with one another in markets around the globe. By assuming control over the money supply gives the government power to provide jobs and lower prices in each country, monetarism, like Keynesianism, not only invites but virtually requires a government monopoly on money. But because we don’t trust politicians with a weapon as powerful as monetary policy, we take that power from the voters and diffuse it among independent panels of experts and trusted third parties, such as the European Central Bank and the Board of Governors of the Federal Reserve System. Thus monetary theory not only denies free enterprise, it also impugns democracy. For “M” to rule however, money must have a inelastic element to multiply or push against. Velocity, or money turnover, must be reasonably stable and unaffected by changes in “M”. That is, people must spend their currency at a relatively predictable and even rate regardless of the supply of money, and banks must loan money chiefly as it is made available by the central bank rather than as it is demanded by entrepreneurs with promising ideas.

“Inflation consists of subsidizing expenditures that give no return with money that does not exist.” - Jaques Rueff

“In a free society only the money users, consumers and producers in the market, can determine the money they desire to hold, or vary the currency in bank deposits they wish to keep.” - Louis Lerman

Velocity is freedom. It expresses the public’s appraisal of economic opportunities and opportunity costs. Velocity comes in two forms: pro-growth and anti-growth rises. In anti-growth moves people flee from financial assets to consumables and collectibles, real estate and financial shuffles and zero sum inflationary surges, that are not technically measured as velocity, but certainly reflect monetary turnover. Positive accelerations of velocity come when investors plunge into actual companies and drive a rapid learning curve of opportunity and progress. In neither case does the central bank control money. We the people control it. If we control money, then money does not require a sovereign source.

While government power can increase the volume of money, it cannot increase the value of money.

Venture capital cannot function without liquidity events.

The innovative venture capital culture of Silicon Valley capped by IPOs has long been the prime source of growth in the US economy, providing 21% of GDP, 17% of jobs, and perhaps 60% of stock market capitalization.

“The government monopoly of money leads not just to the suppression of innovation and experiment, not just to inflation and debasement, not just to financial crises, but to inequality too." - Matt Ridley

Radical surgery becomes imperative when a nation adopts economic policies that disable its businesses in international competition. Rather than merely devaluing the currency so the nation could import more foreign goods and export more goods overseas, thus rebalancing its trade, a nation under a gold standard would have to change its most self defeating policies.

“Surprise is the beginning of wisdom.” - David Gelernter

To grasp the fallacy of the remaining monetarist creed requires seeing that its painful effects are not limited to inflation. The point about bad money is not that in converges with the worth of the paper it is printed on, it is worse than that. Falsifying the information basis of all prices, it stultifies entrepreneurs, deceived savers, and fosters tyranny. Interest rates, for example, register the average expected returns across the economy. With a near zero interest rate policy, the Fed falsely zeros out the cost of time by nullifying the yield of saving. The Fed tells you that the opportunity cost of spending today is zero, which is true only if you die tomorrow.

Irreversibility is a function of time. Government control over the distribution of money and credit gives rise to endless opportunities to rerun the race against time in a way that the government’s favorite children always win. The attraction to gold and recently digital money is that they give us money that is as irreversible as time itself.

The second law of thermodynamics ordains that entropy, as disorder, always increases and cannot be reversed. You cannot reconstruct an egg from an omelette or reuse the energy that heated your house. It is entropy that imposes an irreversible arrow of time on the physical world. Thermodynamics runs one way, irreversibly, and defines the essence of time.

Gold achieves irreversibility through its refractory chemistry and the time based entropy of extraction. Bitcoin offers similar irreversibility through complex mathematics and software using a time stamped public blockchain of transaction. Gold and Bitcoin both protect the measuring stick from the advance of physical capital or technology and even the learning curves of labor. A metric can not be part of what it measures.

The lesson of information theory is that irreversible money cannot be the measure of itself defined by the values I gauges.

Gold has served as a gauge of the time consumed extracting it.

Aligned with irreversible time, gold is the monetary element that holds value, rather than dissipates it. If gold’s price is constant, then all other prices can become variables around that constant.

Much of the value in an economy comes from what economists call consumer surplus – the difference between what we actually pay and what we might have been willing to pay.

A measuring stick cannot be part of what is measures. A currency generates value by measuring value. If what it is doing is already deemed valuable, money becomes just another self-referential loop where elites define what should be important.

The cryptocurrency paradox: in the attempt to get rid of any centralized monetary authority using the Bitcoin protocol, the bitcoin currency has inadvertently thrown away the flexibility of an elastic monetary policy.

A better, faster, truer replacement for the gold standard, we are to believe, is the high technology information standard. If you have an information economy with wealth as knowledge and growth as learning, you want a monetary system that rapidly conveys crucial information on prices in time and space.

Participating in international commerce, every company must pay a toll to elite international banking intermediaries. The bankers love it! Trading international currencies has become the chief generator of transaction volume at the giant banks and an important but far smaller source of profits. Just 10 banks totaled 21 billion dollars of currency trading profits in 2008, while the world economy tanked. 90-97% of all transactions are deemed to be speculative, devoted not to enabling trade in goods and services, but to harvest profits and fees in arbitrage and leverage. Transacting some 77% of the business are 10 leviathan banks in western countries. These tolls and fees are burdens on global trade and economic growth paid by the production sector of the economy to the financial sector.

If a large and increasing portion of profits of all the transactions in western economies is skewed to a tiny elite of governmentally favored financiers in 10 big banks, less income flows to enterprise. Currency trading is a hypertrophic manifestation of the financialization of the US economy.

The incursion of finance into every aspect of business and economic life changed the way consumers buy automobiles and the way US automakers run their businesses, the way students pay for school and the way universities fund their operations, the way homes are financed and consumer goods acquired. In short, credit became the biggest American business of all.

The purpose of currencies is to enable real and reliable outcomes that correspond to economic truth and justices.

Just as inflation bails out debtors and rewards creditors, unexpected deflation punished debtors who have to pay back their loans with for valuable dollars.

Under capitalism credit expansion is no substitute for real savings. To save is not a mere accounting trick. It means to forgo consumption, put off spending, and invest time in productive learning. It is a process of accumulating knowledge to create new value for the future.

In the US some 2/3 of stock market appreciation over the last 35 years came from companies supported by venture capital, what we call Silicon Valley.

Without real interest rates funds flow to influence and precedence.

The test of an entrepreneurial idea is its experimental and empirical truth, affirmed by profitability. In a knowledge economy, cash is valuable only if it is validated by real learning. That is the moral foundation of capitalist wealth and the only source of growth. Flooding the system with cash is bad for the economy because is falsifies price signals and demoralizes capitalists by misrepresenting the outcomes of entrepreneurial experiments. If capital is free, businesses substitute it for labor, which becomes relatively costly.

The new Wall Street delights in the spiral of guaranteed loans to college students which expand the ledgers of banks and the investable endowments of the universities while Main Street and Silicon Valley suffer from the debt driven flight from marriage and entrepreneurship of entire generations of debt burdened college graduates. Or worse, non-graduates.

What I call the “outsider trading scandal.” Hounded by government insider trading witch hunts and fair disclosure laws, investors must follow the government rule of “don’t invest in anything you know about.” The only thing the government wants the public to invest in is the state lottery where nobody knows more than you. Outside traders use market statistics and quarterly earnings correlations to guide ever more evanescent transactions. Since entrepreneurial learning comes from deep inside companies and required intimate special knowledge, a ban on trading by anyone with inside knowledge impels investors away from close company analysis and productive finance. Nearly anyone who understands a company is barred from investing in it.

Guided by deep inside knowledge, venture capital is the most valuable money in the economy. Launching learning curves across a wide span of innovations, venturers have seeded companies that now produce some 21% of America’s GDP, 65% of it’s market capitalization, and at least 17% of its jobs. But venture capital represents a tiny proportion, less than 0.2% of total capital.

Purchasing a sampling of stocks on the market (ETFs) without any research into individual companies, indexers get some exposure to the gains of the inside trading conglomerators. But they provide less than no benefit to the learning processes that create growth and wealth. Index funds are parasites on the research done by actual investors. Index funds are even worse than they look because they base allocation, not on the expected yield of the investment, but market capitalization. As companies grow overvalued, they become an ever larger share of the holdings of the funds. Momentum prevails, until it stops. With indexation, the higher the price, the higher the demand. This is insane.

Velocity is frequency in money – how many times a dollar turns over in a year. Money is a wave phenomenon. Since the power of a wave rises with the square of its amplitude, large and long investments would be exponentially more significant than a series of small trades. Thousands of small trades do not add up to a high impact investment to the economy.

Parsing of random patterns for transitory correlations fails to yield new knowledge. You cannot meaningfully study the ups and downs of the market with an oscilloscope. You need a microscope, exploring inside the cells of individual companies.

Merchants use their own capital rather than other people’s money. A key to the 2008 crash was some banker’s discovery of the temptation of other people’s money when insured by government.

“Time is the coin of your life. It is the only coin you have and only you can determine how it will be spent. Be careful, lest you let other people spend it for you.” - Carl Sandburg

Money as time might be a lumpy lemon to swallow. Surely money is many other things, from purchasing medium to standard of value to store of worth. Money specifies irreversible contracts and transactions, bonds and bids, and it transmits signals of conditions far beyond its locality.

As a paramount expression of our computational and networked economy, money is an information system.

We are moving toward what might be viewed as a new system of the world. At its heart is the development of a new monetary system based on a deeper reality than the minutes of the latest meaning of the eminent governors of the Federal Reserve Board. Bankers, academics, politicians, and bureaucrats alike, must stop treating money as a manipulable tool of policy.

Time is the one factor that is irrefutably objective and thus lends objective substance to the objectively driven movements of money. Bounding every human activity is the inexorable influence of time.

The alternative to money is barter – direct exchanges of goods without systems of storage and distribution. Imagine the valuation of bartered items in a primitive economy and you immediately confront the centrality of time. What determines the amount of each item for trade is available is the time it takes to produce an incremental unit. A house takes more time to make than a hammer, so very roughly considered, a house might be worth many hammers.

Every price is the worldwide expression of other prices, conveyed by money, rooted in time. If the roots are torn up by governments, pulling up the carrots to check if they are ripe, the price systems will convey false messages and stifle learning and discovery that constitute all economic growth and progress.

We use measuring cups because nobody thinks the best use of a measuring cup is to bake it into the cake.

In a global economy, the currencies cannot be integrated with the commerce. They must have their roots in an absolute grid of measurement outside the process of exchange.

Masses and energies, as Einstein taught us, are also expressions of the speed of light in the lordly latency of seconds. Money too, the key metric and information bearer in economics, is reliable only to the extent that its value is rooted in time. As the only irreversible element in the universe, with directionality imparted by thermodynamic entropy, time is the purest of reference points for all values.

We must abandon the idea that gushes of government funds can be converted into wealth.

Based on time, real money is scarce, valuable, irreversible, and governed by entropy. It can be used to prioritize all the trade offs and accounts of entrepreneurial life.

Money imposes time limits on enterprise and restrictions on government power. Real money brings reality to economic life. By mutilating the rigorous time relations of money politicians or central banks halt learning and shrink the time horizons of our lives.

Flash boys trading in milliseconds do not refine the market, they merely oscillate it. Meaningless oscillation may yield profits, but it does not produce learning.

2% inflation is effectively a 2% tax hike – an increase in the cost of living.

A first step in the United States would be removal of the capital gains tax on currencies. Since the appreciation of a gold or silver piece is, by reasonable definition, all inflation, the tax is simple confiscation, like all capital gains taxes on spurious inflationary profits. A key second step would be removal of the obstacles to alternative monies on the internet.

The internet today desperately needs a new payment method that conforms to the shape and reach of global networking and commerce. It should obviate the exchanges of floating currencies, more volatile than the global economy that they supposedly measure. The new system should be distributed as far as internet devices are distributed. A dispersed heterarchy based on links between peer to peer users rather than a centralized hierarchy based on financial institutions. It should provide an automated system that benefits from Moore’s and Metcalf’s learning curves to become more efficient with scale and capable of transactions of all sizes. It should partake of the same monetary sources of stable value that characterize gold. Fortunately such a payment system has already been invented. It is set to become a new facet of internet infrastructure. It is called, the Bitcoin blockchain. It is already in place. It functions peer to peer without outside trusted third parties, and it follows Nick Szabo’s precursor, Bitgold. Its value, like gold’s is ultimately based on the scarcity of time. With automation it will become capable of micro payments.

The success of a new standard of value on the internet entails a ban on taxation of internet currencies. If only government monies escape taxation, alternative currencies such as Bitcoin will always be relegated to niches. Anyone serious about the reform of money must start by eliminating government obstruction of actual money.

New systems based on gold and blockchain innovations can evolve into a new world monetary infrastructure. Rooting in time, governed by entropy, intrinsically scarce, and always reliable, the money of the future can provide for a true global economy of knowledge and learning. Springing from the same information theory that is the basis of American enterprise, the new global money can extend the American dream of stability and futurity.


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