What Bitcoin Did - BITCOIN & THE MONETARY REVOLUTION w/ Josh Hendrickson & William Luther

Episode Date: March 6, 2025

Josh Hendrickson is a professor of economics and Chair of the Department of Economics at the University of Mississippi, William Luther is an associate professor of economics at Florida Atlantic University and a senior fellow at the Bitcoin Policy Institute. In this episode, we discuss why many mainstream economists misunderstand Bitcoin and why monetary economists remain skeptical, the flaws of modern economics and the dominance of naive empiricism. We also get into Gresham’s Law, the potential for a Bitcoin standard, the sustainability of fiat money, and whether we need central banks. MASSIVE THANKS TO OUR SPONSORS: IREN: https://www.iren.com/ RIVER: https://river.com/wbd ANCHORWATCH: https://www.anchorwatch.com/ CASA: https://casa.io/ LEDGER: https://www.ledger.com/ FOLLOW: Danny Knowles: https://x.com/_DannyKnowles or https://primal.net/danny Josh Hendrickson: https://x.com/RebelEconProf William Luther: https://x.com/WilliamJLuther

What are these things that no one thought would be something significant for Bitcoin's future that now suddenly look like super significant for how everything plays out? And I think that's the big thing that we tend to miss. And I think that's the thing that actually makes it really, really hard. What Bitcoin did is brought to you by our lead sponsor and Massive Legends, Iron, the largest Nasdaq listed Bitcoin miner using 100% renewable energy. Iron are not just powering the Bitcoin network. they also provide cutting-edge computing resources for AI all backed by renewable energy.

So whether you're interested in mining Bitcoin or harnessing AI compute power, Iron is setting the standard. Visit iron.com to learn more, which is iri-r-en.com. Okay, Will, Josh, good to see you both. Good to be here. Yeah, good to see you. So Josh, you've been on the show before. It's been a little while.

It was over two years ago now. So we should do a bit of an introduction. But Will, this is the first time on the show. So do you want to give a bit of a background who you are and what you do? Yeah, my name is William Luther. I'm an associate professor of economics at Florida Atlantic University. I also direct the Sound Money Project at the American Institute for Economic Research. And I'm a fellow or maybe a senior fellow, I don't know, at the Bitcoin Policy Institute.

All right, perfect. And Josh? Yeah, so I'm a professor of economics. and chair of the Department of Economics at the University of Mississippi. I am a senior fellow at both the Sound Money Project with Will and a senior fellow at the Bitcoin Policy Institute. Love it. So two economics professors here, I want to get into some of the really big hot button topics in Bitcoin with you. But before we do, I've got to ask you the question that you're probably sick of hearing, which is why, so there's a meme in Bitcoin, which is

Bitcoin's so simple, you have to have an economics degree to not understand it. Now, obviously, you two are exceptions to that rule. But why do you think so many well-known, well-respected economists have never quite got their head around Bitcoin? I think it's a couple of things. So one is that we have to remember that even among most economics professors, they're not monetary economists. So they don't actually spend a lot of time, you know, thinking about money, thinking about, you know, the monetary system, thinking about alternative monetary regimes and things like that. And so for many of them, like sort of what they know is kind of like whatever they learned in class and they're not really thinking about it very much. And in that respect, you know, our profession

really kind of actually does a bad job of teaching people about economic history and about alternative regimes, how the gold standard worked, those kinds of things, they tend to do an okay job telling you kind of like why those things no longer exist or at least providing some justification. But most people just don't spend time really thinking about it. I think the other thing is that we're in the U.S. And in the U.S., I think there's just a bias to not understand why this would be a useful technology. Like, we have the dollar, and the dollar is, you know, very dominant,

both, you know, in the U.S. and throughout the world. And so I think to a large extent, there are people who just look at this and go, well, why do we need this? Like, what is this, what is this for? What does it actually accomplish? And they're not thinking about the issues that people in other countries face on a daily basis. Yeah, I think I would second all of that. And certainly, you know, if you see me out and you buy me a beer, I will, lament about the state of the economics profession. But I want to come to at least a partial defense of my monetary economist, brethren. I think there's also a large group of monetary economists who actually do understand,

certainly monetary theory reasonably well. Some subset of them also understand monetary history reasonably well. And with those two tools, right, monetary history and monetary theory, they actually have a pretty good sense of what Bitcoin is and how it works. They're just not persuaded, right? And I think that's okay. I think they're not persuaded for a few reasons. They may have some different value judgments. Some economists have more faith in governments than I do, and they want. to have a government that can conduct monetary policy and can monitor payments. And so, all right, we have different value judgments there. It's not that they don't understand how Bitcoin works.

It's just that they don't like it. Other monetary economists, I think, they see what are somewhat, maybe somewhat being too generous, but they see what are extreme, really extreme views in the Bitcoin community. And they think that that is, you know, the position that they would need to defend in order to be a quote-on-quote supporter of Bitcoin. And maybe they're more inclined to think that Bitcoin will serve a niche role in payments or has some relatively small use. But they don't see it overtaking the world or replacing the U.S. dollar.

And rather than trying to explain that at length, they just kind of brush this aside. And, you know, so I think that those are reasonable positions to hold, right? We might disagree with them, but it's not, those views are not always held out of complete ignorance, right? They could be held out of different preferences or different assessments of the relevant factors, not because someone necessarily doesn't understand monetary theory or monetary history. There's plenty of that, too. don't get me wrong. But at least some of them are well-informed opposers,

or at least non-supporters of Bitcoin. So you think the Bitcoin community puts some people off rather than necessarily Bitcoin the technology? Sure, yeah. I think that's an easy yes for me. I'm a fan of Bitcoin, and sometimes I'm put off by the Bitcoin community. Yeah, that's fair.

So I want to get a bit of a better understanding about the economics that you two teach. So I think people really readily try and put people into two buckets of either like Keynesian or Austrian, especially in Bitcoin. But what is it that you teach? What would be your sort of brand of economics? You know, Milton Friedman has this great quip where he says there's only good economics and bad economics, and I do good economics.

And I would definitely put myself in the good economics camp. I think these terms, Keynesian economics, Austrian economics, they get thrown around a lot, and they're most useful in the context of the history of economic thought. You know, if we go back to the 1930s or the 1940s, right, we can think about whether someone was a Keynesian or an Austrian. And it doesn't, to me at least, it doesn't make too much sense to do that in a modern context.

A lot of the good ideas that Austrians have advanced, not all of the good ideas that Austrians have advanced, but a lot of those good ideas, certainly things like marginal analysis, have been incorporated to some degree and to, you know, the mainstream. And likewise, some of the bad ideas of Keynesian economics, ideas like we don't need to think about individuals making decisions in our models. We can just have these aggregates. A lot of those ideas have been rejected by modern economists.

And so certainly there are still folks that I think everyone would say that person's in Austrian or that person's a Keynesian, but most modern economists wouldn't put themselves in either of those categories. They would just see themselves as economists. When people ask me what sort of group I fit into, I usually just say I'm just not a Keynesian. Because I guess that's the only real objection that I have is that Keynesian economics really just kind of dispense. with like what's actually interesting about economics, which is understanding how people make decisions and, you know, how, and thinking about how markets function,

how prices work to correct, you know, shortages and surpluses and all these kinds of things. And a lot of Keynesianism just denies that those price effects exist or that we need to think about those things at the individual level or that we can just think about macroeconomic phenomenon completely independent of what's going on at the micro level. And I think that, to the extent that anybody is doing that,

where they're just focusing on the aggregate at the expense of the individual and at the expense of the price system, like you're doing what we'll just call bad economics, right? That's not what anybody should be doing, and I don't think that you actually learn much from that. Like, you can potentially identify some correlations between aggregate data, and maybe those are reliable correlations,

but at the end of the day, do you really understand why the data was generated the way that it was, and how the individual decision-making process led to those outcomes. I think that's actually where economics is really interesting and useful. And if you're not doing that, then you're not doing good economics. That actually leads perfectly to my next question, which is, do you think that modern economics has lent too heavily into the stat side of things rather than the human action side of things?

I guess it depends on what you mean by modern economics. Sometimes this term is used to describe, you know, like post-1970s economics. And certainly in the macro side of things, the big things that happened in the 1970s and 1980s was very theory-driven, right? Theory was king. You needed to specify why it was that individuals were making decisions. What were the ends they were trying to achieve with these means? You know, we got things like the Lucas critique, which said,

You can't just do empirical analysis and historical data and expect those relationships to hold because those relationships are the outcomes of choices that people are making. And if you change the rules of the game, people are going to change the choices that they make, and those relationships will break down. If by modern economics you mean in the last decade or so,

then yeah, I think there has been kind of a cycle back towards what I would call naive empiricism, where we're just going to let the data do the talking, whatever that means. And we're going to try to identify very precisely what the causal effect of this or that is, even if we're not particularly concerned with this or that, just because, well, this is something we can identify. And so from that perspective, yeah, I think there's been a move towards that naive empiricism. Yeah, I mean, I think that we've kind of, I mean, one of the main issues is actually that we,

yeah, in like the last decade or two, as a profession, things really have moved in the direction of like trying to demonstrate causal effects of things. Like how do we prove that this policy actually, you know, resulted in this, in this change or something like that? And the issue is, is that a lot of that stuff has become completely detached from economic theory. It's also become completely detached from things that we know from economic history or things that we know from previous literatures. And I think one of the major problems actually with this approach is that, I mean, as Will said, you know, data do not speak. So, like, we can't, we can't just, like, estimate things and then just assume that we understand, you know, why we got those estimates.

But I think, you know, economics is fundamentally about the study of human behavior, right? Like, that's really what we should be focused on. And when you're so focused on making sure that you're identifying these causal effects, you start to lose curiosity, frankly, right? Because even when they get surprising results, like, they basically just view that as a challenge to the rest of the profession to figure out why they got this challenging result, rather than seeing that challenging result themselves and going, well, what would I have to believe about human behavior for this to be true?

This episode is brought to you by River, the best place for Bitcoiners and businesses to buy Bitcoin. With River, you can set up zero-fee recurring buys, making stacking sats effortless. And while you're waiting for the perfect buying opportunity, River lets you earn daily interest on your cash balance paid in Bitcoin, which outperforms most high-yield savings accounts. What really sets River apart is their unmatched dedication to security.

You have peace of mind knowing the River has monthly proof of reserves and holds all Bitcoin in multi-sig cold storage. And with US-based phone support, you'll always have someone ready to help. To open an account, go to river.com forward slash WBD and earn up to $100 in Bitcoin when you buy. That's r-I-V-E-R.com slash WBD. This episode is brought to you by Anchor Watch. The thing that keeps me up at night is the idea of a critical error with my Bitcoin called storage. This is where Anchor Watch comes in. With Anchor Watch, you're protected by their time-locked multisigvolve and with your own

A-plus rated Lloyds of London-backed insurance policy. You get to hold your keys, Anchor Watch holds the risk. Whether you're worried about inheritance planning, wrench attacks, natural disasters or your own mistakes, you're protected by Anchor Watch. Rates for fully insured custody start as low as 0.55% and are available for individual and commercial customers located in the US. Speak to Anchor Watch for a quote and for more details about your security options and coverage.

Visit anchorwatch.com today, which is anchorwatch.com. So, Will, just before you jumped on this call, I was speaking to Josh a little bit, and he was telling me that you've been in Bitcoin for a very long time. I'd be really curious to know when it was you first kind of outed yourself to the people who you work with your colleagues and how that opinion on Bitcoin has changed over the time. And maybe you should give a bit of a background on when you actually did get into Bitcoin. Yeah, I guess I'll tell this embarrassing story.

So my dissertation advisor at Larry, my dissertation advisor at George Mason University was a guy named Larry White, a very well-respected monetary historian. And in many respects, a proto-bitcoiner. If you go back to the 90s and check out copies of Intrappy Magazine, you'll have a hard time finding those,

but if you email me, I will send you copies because this is the kind of thing nerdy academics keep. You will see Larry and his first student, George Selgin, engaged in conversations with folks like Hal Finney and Nick Sabo, because Larry and George were really interested in private monies from an economic perspective. And, of course, folks like Hal Finney and Nick Sabo were interested in private monies from more of a computer science

perspective. And so they were having these conversations, you know, before Bitcoin was a thing. And so in 2010, I was in a research group at GMU. And one of the graduate students in our research group presented a paper on Bitcoin. And I said something to him like, Chuck, you know, this is very interesting, but I don't think this is ever going to catch on. And so, you know, you you shouldn't waste too much time on this. Just send it out, get it published, and then move on to something more productive. And then I hope he didn't listen to you. I hope he didn't as well.

In 2012, I had finished my PhD. I had accepted a position at Kenyon College. And my friend Eli Dorado was working at the Mercado Center at the Mercado Center at the the time. And he reached out to me and he asked me to write a white paper for Mercatus on Bitcoin. And it just so happened that one of my students was working on a paper on Bitcoin for the Honors Monetary Economics Seminar. I was teaching that semester. And I had thought about this other idea that might be interesting to pursue in the, be interesting to pursue in the context of Bitcoin.

And so I agreed to write this white paper for Mercatus and then another paper with my student, basically because I thought it would be weird if I just had one paper on my CV about Bitcoin and then the rest of it was on other monetary stuff. I wanted to write this paper on Bitcoin. And so by the end of that year, the price of Bitcoin, the end of 2013, the price of Bitcoin hit $1,000.

And a bunch of journalists were trying to figure out who they could talk to about Bitcoin. And at the time, there were only four papers on Bitcoin on the Social Science Research Network. And just by happenstance, two of them were mine. So suddenly, I was very interested in Bitcoin because other people were very interested in Bitcoin. And I had, you know, by chance, spent a little bit more time thinking about it than most other economists had. And so, you know, after that, Josh and I began working working on some papers together about Bitcoin.

We talked about it previously, I believe, but we began working more formally on how to model the competitive monetary environment. So we put a couple of papers out on that. And yeah, I guess luck. That's how I got into Bitcoin. I think in Bitcoin, we have some amazing economists, people like Pierre Ashard, Saferdeen, Alan Farrington.

I think Max Hillibrand's an amazing Austrian. And these are people that have thought about the problems that Bitcoin potentially fixes very deeply, and they have like really sound reasoning as to why they hold their ideas. But I also think there's a lot of Bitcoiners, and I'd include myself in this, because I had never really read anything about economics before Bitcoin, that hear or read what these people say, and then we'll say the same thing without necessarily having the deep understanding of why they're saying it. So I kind of wanted to go through some of the really sort of hot-buttoned topics in Bitcoin and try and get like a really holistic view from the two of you on each of

those topics. Does that sound good? Yep. Sure. All right, let's do it. So let's start with the big one. Is fiat currency a Ponzi? I think actually in economics, there is a little bit of a sense of where we define fiat money as sort of like what we would call a bubble in the sense that it's something that has positive value, even though there's not really any other use for it other than as money. I mean, it has characteristics that can make it seem sort of Ponzi-ish.

But to me, Ponzi is a different concept. But I guess, like, where I would say, maybe I can describe the similarities and then I can make, I'll be good cop and we'll be bad cop. I'm looking forward to it. So the similarities are, is that like in every sort of monetary model that you write down of fiat money, there's generally two equilibria. There's one equilibrium where it has positive value and everybody, you know, or at least some fraction of people use it.

And then there's another equilibrium where it's just worthless. And so in those models, essentially all that's necessary to get things up and running is that you is that you have a big enough network effect to get people to accept the Fiat money and then if there's a big enough network effect then it has positive value and people use it. But at the same time, like, you know, that positive value equilibrium tends to be unstable.

And what I mean by that is like if there's a big enough shock to the system, you might end up in the other equilibrium where it's zero. And, you know, to put this differently, that would be what we would call hyperinflation. right? So if you get some sort of big enough shock that pushes you out of that instance, you can get that. And to some extent, that can even be self-fulfilling where people think that the currency isn't worth anything. And so people stop using it and then it just sort of self-perpetuates. So I would say, like, that's the similarity to a Ponzi. And then maybe Will can be the bad guy.

Yeah. So let me think about this a couple different ways. So first, let's think about why people call Fiat money as a Ponzi. I think the idea there is that. that, you know, you receive this thing and you value it because you believe you're going to be able to pass this off to someone else and they will value it. And they accept it and give it, you know, and attribute value to it because they believe they'll be able to pass it off to someone else

and so on and so forth. And so it's this much like a Ponzi scheme, this belief that you're going to be able to pass it on to someone else that lets the system work. I think that Bitcoiners should be very careful, calling Fiat monies a Ponzi on these grounds, because the same thing is true of Bitcoin, right? That is, what's the alternative use for Bitcoin?

Now, I don't mean the opportunity cost. There's often some confusion about this. So some Bitcoiners will say, well, Bitcoin is different because it's costly to produce. Well, that's true, but that cost of production doesn't generate value, right? Value is ultimately determined by usefulness, right and traditionally i'm sure when josh teaches his class and certainly when my money and financial

markets class when we make a distinction between say a commodity money and a fiat money right commodity monies have some alternative use some use apart from their role as a medium of exchange right some non-money role you can use gold for jewelry or um to to to fill cavities right salt historical money can be used to preserve food, right? These items have alternative uses. Dollars, on the other hand, Fiat monies, no alternative use. And so one big difference between commodities and fiat monies is that alternative use that commodities have and fiat lacks.

In this regard, Bitcoin looks a lot more like fiat monies than commodity monies. Now, another big difference between commodity monies and fiat monies is this limited supply in the case of commodity monies because of the cost of producing those commodities, right? In this case, Bitcoin looks much more like commodity monies than fiat monies because they're costly to produce and there's a limited supply. But on the value side, which is what folks seem to be invoking

when they're calling fiat monies a Ponzi scheme, they're opening themselves up for the same criticism. So I would say, there are lots of reasons to dislike fiat monies, chief of which is that their supplies might not be managed very well, right? But we want to be careful to, you know, not to throw the use value baby

out with the Fiat money bath there, because Bitcoin has a very similar use value, which depends on other people wanting to use this item for what, are ultimately monetary purposes. No, I think that's a good point. I mean, one of the ways that I kind of think about this and talk about this with students is how does,

I think about this in terms of what you would call like the last period problem. Like, so suppose that there's a period, there's some period in the future where nobody's willing to accept this stuff. Like, you know, then you wouldn't, then if they're not willing to accept it then, then you shouldn't accept it the period before that.

But if you shouldn't accept it the period before that, then whoever was trying to, trying to give it to you shouldn't have accepted it the period before that, right? And so like through backward induction, like you just shouldn't accept the stuff today. And that to me is like the real, um, interesting question to try to explain when it comes to fiat money is why, why does fiat money actually, um, persist given the fact that it really doesn't solve that last period problem, right? If we're all using gold coins and then all of a sudden nobody wants to use gold coins anymore, well, oh well, like if I have a bunch of gold coins, well, I just have like this

pile of gold. And so I can sell that to somebody who wants to use gold for industrial use, right? And so I can still get something out of that. With fiat money, like, there's, there is nothing. I think, like, what people tend to appeal to is they say, well, at the end of the day, you can always pay your taxes with the money. So the government will always take, we'll always take the money. I mean, I actually think, like, a really interesting aspect of Bitcoin is that there's this old, there's this old paper by a guy named Ben Klein who asked if we could ever have like a competitive Fiat regime

and so he was writing in the 1970s and he was really trying to think about okay our currency is no longer tied to gold central banks are in charge maybe we need competition to limit things but if it's Fiat how can you trust people

not to just print up a bunch of money and kind of the main lesson from that paper is is that you could in theory have like a competitive fiat system, but the issue is, is like you would have to trust the issue or not to just wake up one morning and secretly print a bunch of the money

and then go out and spend it before everybody else knows about it. And so that brings us back to that last period problem, right? You're always worried that there's going to be some future period where somebody just prints up a bunch of money and transfers a bunch of wealth to themselves by spending it before everybody else knows about it. And then the interesting thing about Bitcoin,

is that Bitcoin sort of solves that trust problem with its fixed supply. And not just with its fixed supply, but the way that Bitcoin works through consensus is what matters, right? Because it's not just that the supply is fixed. It's that no one who's using Bitcoin actually has an incentive to change that in the way that the issuer of a competitive Fiat system would have. And so when we think about all of these issues, like I tend to think about it, yeah, in terms of like the last period problem.

And so then the question is like, how do you resolve that? And so with Bitcoin, since there's no incentive to create more, that's the thing that helps to generate the network effect and the willingness of people to accept it now, knowing that, you know, the value in the future could be uncertain. Yeah. And also, back to your point, Will, when comparing like Fiat and Bitcoin in that sense, is there not a difference because Fiat is propped up by this debt?

which is only sustainable with more money printing or money creation? Well, I'm not sure. I mean, certainly one big reason why governments want to control the issuances of money is because they want to have access to cheap credit, right? Central banks will directly or indirectly purchase government bonds and bid the prices of those bonds up and correspondingly the rates on those bonds down. But to say that all of the debt is only impossible because we're using fiat money, I think, is not so clear. You might argue that some of the government debt wouldn't be issued in the absence of fiat money because the government would get worse, governments would get worse terms for their debt, and maybe some of that borrowing would don't.

longer be worthwhile. But even there, governments are able to borrow not only because they control the money printer. In fact, in some countries like Argentina, the control of the money printer makes it very difficult for that government to borrow, at least in their own currency, right, because people just expect that they're going to run that money printer and the the, you know, peso-denominated debt is not actually going to be worth all that much. But the reason that governments, oh, I should say one big reason that governments are able to take on so much debt is because they control armies, right? They can confiscate property. Sometimes we use euphemisms like taxes, right?

But ultimately, they are able to extract wealth in one way or another and use that wealth to compensate. the folks holding their bonds should they need to do that. And just having the power to do that often means that they don't need to do that. I think money printing contributes to that power. It's one more tool of extracting wealth. But it's not the sum total of that power. So even if you got rid of fiat money, you would still have government borrowing, right? Governments were borrowing before we were using fiat monies. Yeah, I think the big issue here is that if we think about how the current monetary system works, there are ways in which it's unique in comparison to historical circumstances, but there's also

ways in which it's actually just the same. And so what I mean by that is, is if you think about the current monetary system, yeah, the, you know, the U.S. dollar is a global reserve currency, the U.S. Treasury security is the global reserve asset. And because of those things, you know, the United States is able to do things that it would never be able to do in the absence of that system, right? So one reason that the United States is able to run up so much government debt is that there are central banks around the world who just passively, you know, buy and sit on that debt. And so if that's going to be the case, those aren't exactly like price sensitive buyers. And so when you're running up debt,

like, you're not necessarily paying the full cost that you would without those kinds of buyers. And so, but I also think it's important to understand like why this system exists. I mean, like this system exists because the United States wants this system to exist, right? Like, the United States wants the ability to conduct emergency financing when the United States wants to spend a bunch of money, they don't want to have to desperately search for creditors. What they want to do is they want to be able to issue more debt without even necessarily incurring higher borrowing costs. And that's what this system allows them to do, right? When the United States goes to war or when the United States just supports somebody else who's going to war by sending them money, you know,

they're just borrowing that money and they're sending it, but their borrowing costs really don't change all that much because wars tend to be temporary and there's lots of passive buyers for this debt. And so prices don't really adjust all that much. And so there are characteristics of this system that are bizarre because never before in world history have we ever had like a sovereign debt instrument serve as like the reserve asset of the world. And so that's kind of a bizarre set of circumstances. But the reason that that were in that position is the same motivation that states have always had. Right. So even under the gold standard, you know, know, states, you know, I mean, going back to ancient Greece, right? Like, they're, um,

manipulating the value of, of gold coins and, and things like that. And, and not just manipulating the value. I mean, one of the things about, when you look at this historically is it's not just like they're debasing the currency. I mean, what they would do is they would debase the currency during wartime. And then, um, at least in the successful countries, then during, during peacetime, like, they would revalue the currency as a commitment mechanism. Um, and, and, um, And so this tended to be really costly because wars were inflationary and then the aftermath of wars were deflationary. And none of that was really, you know, market factors that were driving those things. It was government policy that was driving those things.

And so that tended to impose costs on people. But they were doing that because that gave them access to the ability to finance wars and emergencies and things like that. Even the Bank of England, you know, used to suspend the convertibility of gold during times of war. but then they would resume convertibility after the war at the previous parity of the pound. And the reason for that was it was creating a commitment device where basically they could print a bunch of money during the war to help finance things. They could use the central bank as a source of credit. And then after the war, they knew that their spending would decline and they wouldn't have

as much need for that anymore. And so they could return. But without that commitment mechanism, you would destroy the value of your currency, right? if you suspended convertibility into gold and with no commitment and just were spending and spending and spending, like people would just give up on the pound. And so all of this is to say that, yes, there's like some characteristics of the system that are kind of bizarre and are kind of like debt-based and debt-driven, but there are also characteristics of this system that are perfectly predictable from just understanding what states do, right?

like states want to finance war and and even if we were to replace like fiat with with bitcoin that's not going to necessarily remove the state's desire to do these things and so one of the things i mean we can only speculate about how they would try to manipulate things but i mean they manipulated the gold standard so we would expect them to try to manipulate you know a bitcoin standard i mean we don't know how they would do it or or precisely what they would do but we could imagine that they would try, right? And so I think all of these things are important to keep in mind when we're talking about these big picture issues. Yeah, let me just add. One thing that one thing that I think that would serve Bitcoiners well, non-economist Bitcoiners, is just to make a distinction between

private debt and public debt, right? So in thinking about how Fiat money may enable the government to issue more debt than it otherwise would, right? We're, we're talking about the issuer of that money issuing debt. But think about what's happening in private debt markets. Think about a long-term contract in dollars, right? One of the things that you're very much concerned about is the purchasing power of those dollars that you're going to be paid back in the future or the purchasing power of those dollars that you're going to be repaying in the future.

You need to form some expectation about what those dollars are going to be worth well in the future. And you can imagine if we have, say, a commodity money, like the classical gold standard, right on the classical gold standard, the supply of money automatically adjusted to offset changes in demand over the longer term. And as a consequence, the purchasing power of money on the classical gold standard was relatively stable. So when you entered into a long-term contract or issued a long-term bond, you had a very good sense of what that money would be worth when you're paying it back in 10 years, 20 years, 30 years, 100 years, and that makes that contract much less risky than it is today. We don't see 100-year bonds today, right? And the reason we don't see 100-year bonds today, except in marketing. cases like a sleeping beauty bond or something like that. The reason we don't see that today is because those long-term contracts are incredibly risky. It's much harder to predict what the future purchasing

power of the dollar will be in 20 years, 30 years, 40 years, 50 years, 50 years, 100 years, right? And so that contract that otherwise would have been viable is not viable in a world where you have this unconstrained fiat money. And as a consequence of that, some of those long-term debt contracts just don't take place. Right. Now, we're talking about private debt markets, right? The uncertainty of the dollar eliminates the prospect of some long-term debt contracts, which means we may be getting less private sector debt than we otherwise would. So we can quibble about the aggregate level of debt, whether it's greater or lower or more or less unchanged. But I think at a minimum, we want to make a distinction between what's going on with public debt issuance and what's going on with private debt issuance.

Okay, interesting. I do just want to go back to something you said a little earlier, Josh. You gave the analogy of the Bank of England pausing conversibility during wartime and then resuming that at the previous rate. And you said if they didn't do that, then people would lose all faith in the pound and it would fail. But is that not the world we live in now? Well, I mean, it's very similar to the world that we live in now. But I think that the issue here is that the question is where do people go, right? Like, where do people go to get away from that kind of system? I mean, to some extent, we do see that. We don't see it necessarily completely because what you have is, you know, most central banks still have some kind of inflation. target. And whether you believe that they're targeting the right rate of inflation or whether you believe that they are measuring it accurately or what have you, like, that does place an anchor,

right, even if I have an incredibly misleading measure of inflation, as long as the degree to which it's misleading isn't changing over time. Like if it's always wrong, like by the same factor, right, then they're still kind of committing to some stability, even if they might, you know, even if we disagree about whether or not they're doing what they say they're doing. I think that, but I think that that is actually motivated by the same thing. I mean, the reason why these central banks commit to things like inflation targeting is for the same reason that the Bank of England would commit to restore the previous parity into gold is that it's providing some kind of commitment.

mechanism. Now, of course, they deviate from that commitment at times. Like, we just saw, like, a pretty large deviation from that commitment, you know, post-pandemic. But for the most part, like, they've tried to replace that commitment to gold with, like, just a commitment, just the vague commitment to price stability. And so as long as, as long as they maintain that, that commitment, it provides at least some anchor onto the system that, that would, wouldn't exist if you didn't have any kind of commitment. Jim Grant has this nice quip where he says that we've replaced the commodity standard, right, the gold standard with the PhD standard.

Or we just rely on PhD economists to advise central bankers on how to conduct monetary policy. And, you know, Grant, of course, is saying this in the context of look at the loss of constraint that we're getting. But the flip side of that is that there's still some constraint, right? It's not totally unconstrained, even if not constrained perhaps the way we would like it or to the degree that we would like it. This episode is brought to you by CASA, the leading Bitcoin self-custody solution. I've been using CASA since 2019 and I can't recommend them enough. CASA have options for all Bitcoiners from a two of three multisig to a three of five and a private client option for absolute best in class security. CASA also do inheritance, which

I very recently set up and it really couldn't be easier. My inheritance plan has gone from a vague treasure map for my wife to a rock-solid security plan that I have total confidence in. To find out more about CASA, go to CASA.io, which is c-a-sa.io. This episode is also brought to you by Ledger. If you're serious about protecting your Bitcoin, Ledger has the solution you need. Their hardware wallets give you complete control over your private keys, ensuring that your Bitcoin stays safe from hacks, fishing and malware.

With Ledger's easy-to-use devices and the Ledger Live app, managing your Bitcoin, has never been more convenient. Whether you're a long-time holder or new to the world of Bitcoin, Ledger makes it simple to keep your assets protected. If you want to find out more, visit Ledger.com and secure your Bitcoin today. That's L-E-D-G-E-R.com. And, Will, that kind of leads on well to the next question that a lot of Bitcoiners would have is, is do you think all Fiat currencies are doomed to fail? I guess in some abstract sense, everything is doomed to fail, right?

The second law of thermodynamics or something like that. I think that with Fiat monies, as Josh was mentioning earlier, there is this difficulty where you have both supply-side problems and demand-side problems, right? On the supply side, a government has to be in a position to commit not to take advantage of its position, right?

Otherwise, it just prints a bunch of money and the value of that money goes to zero and people eventually abandon it. On the demand side, right, it's at least conceivable that people abandon this money and that would also cause its value to fall to zero. So there is this sort of tenuous nature of fiat money, both because there's always this incentive for a less than benevolent government to exploit its position, and also because

the introduction of alternatives and people switching to superior alternatives could potentially calls that situation to unravel and demand to collapse. Bitcoin, I think, is interesting and perhaps unique,

though, at least now there are alternatives that mimic this to varying degrees. But it's interesting because it removes that supply-side problem. But it's still faces a demand side problem, right? People can suddenly decide that they don't want this anymore. They want something else. And if that's the case, it goes to zero, right? So, you know, are

fiat monies doomed to failure? I think that's a, the cumulative probability approaches one, but over what time horizon? I'm not so confident. I would rephrase your question. So one of my frustrations when people talk about the monetary system, and this is just in general, whether it's Bitcoiners, whether it's people in our profession, whatever. People in our profession, for example, seem to just assume like the status quo just will kind of like last forever. Like whatever the status quo is, like that's just the way the world works and that's the way it will work.

Bitcoiners have the opposite thing where they're like, no, the status quo is unsustainable. so it won't last. I mean, if I had to choose, I mean, I guess it would depend on which time horizon that you're giving me. But, I mean, the current system will end. And there's actually a good chance that the current system, at least as it is constructed, with the U.S. dollar being sort of the dominant world currency, there is, I would argue that there's probably a decent likelihood that that doesn't last my entire lifetime.

I mean, I think that, I mean, all we have to do is actually just look at monetary history, right? The classical gold standard lasted for about 40 years, right? So the classical gold standard, which we think is like this long period of price stability, it was only 40 years. And then we had this kind of weird interwar period. And then we had the Bretton Woods system. But, you know, the Bretton Wood system only lasted, you know, the Bretton Wood system lasted less than 40 years. Okay. And so the current system that we are, that we are in has actually

lasted longer than both of those systems, right? So, I mean, we're now, you know, 50 years into whatever we're calling this dollar-based system. But the thing is, is to think that that is, that we've just reached the end point, I think is extremely naive. And when you start to look at things, I mean, you're starting to see policymakers recognize this. I mean, you know, the, you know, The Trump administration very much thinks that the international monetary system is unsustainable without some kind of significant reform. And yes, they want to continue to have the dollar be the sort of primary global currency, you know, because of course they do. That's what states want, as I just talked about. But they clearly see that like the system or they clearly believe that the system like as it is now is just not sustainable.

It's leading to, you know, persistent trade deficits that tend to over. value the dollar and deplete your manufacturing capacity, which turns out to be very important for a variety of reasons, right? They see that this system tends to give politicians, you know, politicians access to very cheap credit and what do politicians do with very cheap credit? They borrow. So we have these very, very high levels of debt. We've seen, you know, we've seen our industrial capacity, get hollowed out, and they're looking at this and saying, hey, you know what, this system doesn't really, doesn't really work. We want to keep the benefits and we want to get rid of the costs. Now, that is what most people want out of life is to increase the benefits and reduce the cost.

And so it will, it'll depend on how they go about this and what they try to do. But there's at least certainly a sense that people are recognizing that the system isn't perfect, even though for the U.S., it works to the U.S. government. advantage, even the U.S. government, where this is working primarily to their advantage, seems to think that this is becoming unsustainable. And so I think that when we look at it from that perspective, you know, given that broad sort of historical perspective, I mean, I think it would be naive to think that the status quo was just going to, you know, inevitably continue. Of course, you know, the harder question, though, is what comes next, right? Because what comes next might look a lot

like the system that we're in or it might look very, very different. So in that what comes next, as Bitcoiners, we like to bring up Gresham's law all the time and say that good money is going to drive out the bad. Do you think it's realistic to think that we may end up on a Bitcoin standard? And I mean that in sort of the fullest sense of the word, where it's not just the reserve currency, it's like a unit of account and a medium of exchange. Well, how about I take on the Gresham's law first and then I make Josh answer the harder question. Okay. I owe him for for sticking me with the hard question earlier. So first, let's, you know, we have this like pithy phrase for Gresham's law that, you know, bad money

drives out good or what have you. But what we really mean is that legally overvalued money drives out legally undervalued money, right? And so that really only works if we're talking. Can you explain that a bit more? I don't know if I fully understand what that means. Yeah, okay. So suppose that the government says that, well, eggs are popular right now, right? And so there are two coins, right? There's a red coin and a blue coin, and the red coin will get you a dozen eggs and the blue coin will get you a dozen eggs, right? If in the market, the purchasing power of the blue coin is actually lower than the purchasing power of the red coin, right? So red coins are very valuable. they're legally overvalued. Blue coins are very cheap. Well, we're going to use the blue coins to purchase the eggs, right? Everyone wants to use the blue coins to purchase the eggs,

because there's this fixed exchange, and you get a better deal, right, if you're using the blue coins. And so people, at least in egg transactions, they hoard those red coins, and they spend those blue coins. Now, if you have some kind of a fixed exchange rate more broadly, right, this is what's going to happen. They're going to hoard the red coins and spin the blue coins

because the red coins are legally overvalued and the blue coins are legally undervalued. You saw this, for example, a very good modern example of this in Zimbabwe. So Zimbabwe was technically dollarized and yet they somehow still managed to experience really high rates of inflation. That's very odd, right?

Because the whole reason why a country adopts the dollar is to constrain its hands, basically to outsource monetary policy. Inflation in Zimbabwe should be roughly equal to inflation in the U.S., right? They were using the dollar. So what happened? Well, what happened was that the Zimbabwean government

issued these bond notes, right? And those bond notes were valued, one for one with the dollar. But one of the ways that they issued these bond notes was basically as a subsidy. And so the government would essentially give these bond notes away and not get anything in exchange for them. So they've necessarily issued more bond notes than they're in a position to redeem one for one with the U.S. dollar. And people aren't stupid, right?

They understand that the government has done, that the Zimbabwean government has done this. And these bond notes are actually worth less than $1. So what do they do? Well, when they go to the market, the law says the U.S. you cannot discriminate between the bond notes and the real McCoy, right? And so people spend the bond notes and they hold, they hoard the real dollars, right? Because those bond notes are legally undervalued, right? And so you can, you can cheaply pay with the bond notes,

and it would be expensive to pay with the dollars. So I think I'm going to tie my answer back to your previous question, because one way that you can talk about, you know, our fiat money is going to die is actually to cheat a little bit and point out that there are probably way too many fiat currencies that actually exist, right? Like there are just certain countries that it's not actually clear why they have their own currency. Like you can't necessarily use it in trade, you know, that's very poorly managed. Their own citizens would clearly prefer other things. You know, I mean, as much as we complain about the Federal Reserve or the Bank of England or the ECB,

there are many, many worse places in the world and many, many worse central banks. When we think about it that way, it seems almost inevitable that there would have to be some consolidation here because, you know, yes, states desire this authority, yes, states want to control their currency. But, you know, some states, it just doesn't seem to make sense why their currency exists anyway, right? And when they're engaged in international trade, they're not even using their own currency. and so why, you know, and they're mismanaging at home.

So I think that, you know, if you're going to get a Bitcoin standard, like, I think that, you know, those places are ripe for the change because something like Bitcoin could come in and serve that role. Now, of course, something like the euro or the dollar or the pound or something could also serve that role. We don't know what they're going to adopt. But I think that this is actually one of the things that. you know, we mentioned earlier is that I don't think we spend enough time thinking about

how much people are struggling in developing countries with their central banks and with their and with their currencies and to the extent that we recognize the costs associated with fiat currencies, they're much, much higher there. You know, but like I said, I mean, it's really, really hard to predict what's going to happen in the future. I mean, even if Bitcoin, you know, succeeds however we want to define that, right? What does that look like? I mean, it could just be that, you know,

you in the U.S., people have dollars and they have Bitcoin and they can spend either one and, you know, maybe, and so, you know, maybe they hold some of one and some of the other and it just depends, like maybe it's just kind of like, you know, there are certain places where you go where they only take a cash, they only take cash or they only take, you know, a credit card or something like out, like, maybe there will be certain places that only take dollars and then other places that only take Bitcoin and other places that take both. I think a separate question is then,

like, whether or not somebody actually, like, redefines their unit of account in terms of Bitcoin, right? So they already have some existing unit of account, but instead of that just being some random name for their fiat currency, like, it actually becomes some particular amount of Bitcoin. Because then that's a very, very different scenario, because there, even if the unit of account technically isn't Bitcoin, Bitcoin is the medium of account. And so at that point, all the prices that you observe are going to be entirely determined by the demand for Bitcoin. But that's a very, very different system than if people are kind of using both. But I mean, we can imagine a variety of these systems. But I also think that,

you know, I also think it's naive to think that a lot of these fiat currencies in in some of these small developing countries should actually exist at all. And even beyond developing countries, right? And so the question is, you know, what do they get replaced with? Do they just get replaced with other fiat currencies? Do they, you know, move back towards something like gold or silver? Do they move towards Bitcoin? Like, these are, these are interesting questions, but I don't think that those fiat currencies really need to exist at all, even in the current world, without Bitcoin, without gold, without any, without any alternative. I still don't think that they, that a lot of those should exist. What do you think

Bitcoin is best suited for? What role do you think it's best suited for? Is it as just a reserve currency or where do you think it fits? I think that there are lots of margins where this might be a preferred, a preferred money, particularly if you're in a place that doesn't have a money that has a supply that's managed very well, right? You know, if you're making, say, cross-border payments and you don't have access to the kind of banking system we have here in the U.S. that's very well connected, right? Bitcoin is perhaps much easier to get for you

and much easier to transfer. And so those margins where Bitcoin looks the most different from the available alternative, are likely to be the margins that matter for their use case, right? And so, you know, things like that fixed supply, the ease of transfer, the not being confined by geographic borders, right? Those are things, those are areas where Bitcoin looks very different

from the kind of monies that most people use. And so I would expect that those are the kind of things that are going to drive use. It's kind of hard to predict where it's going to go because I have spent most of my time thinking about how governments would try to stop Bitcoin, right? Like essentially every early paper that Will and I wrote were the, you know. What are the bad things governments can do? Right. It was governments are trying to do this, you know, can it work? Governments are trying to do that can it work? What other things can they do that they would, you know, what other things might they try? And so now, like, you know, you, um, we find ourselves in a situation where you've got

countries talking about, you know, strategic Bitcoin reserves and things like that, which is something that, you know, we never would have thought of. Super weird. You know, several years ago. Like, you would think that, um, that states would be more opposed, uh, to this kind of a thing. I mean, I think in part, this is actually related to the conversation earlier. I mean, I think one of the reasons that maybe certain politicians in the U.S. have changed is that, you know, if you're looking at the system and you're seeing that it's unsustainable, you get a lot of benefits from the system even though there are also some costs. And so what the United States government really fears is they fear that. that there's going to be some other state that will capture those benefits, right? That somebody will start using a different currency instead of the dollar

and that all of the benefits that the U.S. gets from the dollar being the global reserve currency will just transfer to this other country that's issuing this alternative. And I think that if you are concerned about that thing, then one of the things that you might want to do is you might want to encourage countries to buy more neutral assets to buy things like gold and to buy things like Bitcoin to hold and reserve because you're not transferring any of the benefits of the dollar system to those things, at least not the benefits that go to the United States government, right? So you're by shifting them towards neutral assets, yes, maybe you're losing a little bit of power, but you're not losing it

at the, you know, relative to someone else. Like someone else is a gain at your, yeah, they're not, They're not gaining at your expense. And so I think that partially explains these attitudes. But I also think that that's important to think about because I think when we're thinking about the path, so many times what we do is we think about, okay, what are the possible paths, how would we get there? What's this going to look like? But we tend to focus on like the characteristics of Bitcoin, right, in determining these

things, right? We tend to look at like, okay, is it going to be useful as a medium of exchange? is everybody going to be able to transact on the base layer? Those are the things that we focus on and think about, but I think that we can't ignore all of these geopolitical concerns because I think that the changing attitude about Bitcoin is to a large extent driven by changes in geopolitical circumstances. And so those changes force people to think about things differently.

And so now whatever you were predicting five years ago, the future of Bitcoin. It's almost certainly different than what you would predict now because you've seen how that plays out. And so I think it's important to also to, so I guess what I'm saying is so many times we just focus on Bitcoin itself and what it does and how it compares to the alternatives and what that means about the future. But one of the things that we don't spend enough time is, like, what are the things like completely detached from Bitcoin that somehow end up relating to Bitcoin in the long run, right? What are these things that no one thought would be something significant for Bitcoin's future that now suddenly look like super significant for how everything plays out?

And I think that's the big thing that we tend to miss. And I think that's the thing that actually makes it really, really hard. All the technological stuff, like my basic view is all the technological problems that people are worried about. Like, I tend to think that, you know, those technological problems to the extent they can be solved, they'll be solved. Like, because there's an incentive to solve them in private markets tend to figure out things, right? When people want things, entrepreneurs tend to figure out ways to deliver them. It's those external things outside of Bitcoin that suddenly are super important to Bitcoin that are the hardest to predict. And that's the, and that's what makes it hardest to kind of forecast, like, where is this going to be in five

years, let alone 50 years? And that's like the game theory of Bitcoin, playing out, I guess, because if the push is to move people to a neutral asset, like the US already owns more gold than anyone else. So the theory here is that they then also have to own more Bitcoin than anyone else if that's going to be the kind of neutral reserve asset. Well, and part of what you're doing, if you created a strategic Bitcoin reserve, for example, is like what you would be doing is, yes, like potentially if you bought Bitcoin now and then Bitcoin became more, you know, became incredibly successful and became, you know, a significant part of our global financial system, then yes, you would also, then the United States government

would also profit from that. But beyond that, I think one, like, overlooked aspect when it comes to that thing is, like, it just provides a signal, right? Like, there are lots of people out there who know what Bitcoin is, but they don't understand it. They don't look into it. They don't, they're certainly not going to buy it, right? But they know what it is. They just, think maybe, okay, this thing is like this weird internet money. Maybe it's kind of sketchy. Like, who are these people? Like, I don't understand. What do you mean? Nobody's in charge, right? Like this kind of stuff. But like, if somebody like the United States government comes along and says, hey, we're going to buy this, well, suddenly there are going to be a lot of people that are just

kind of like, ah, well, it must not be that bad, right? Like, oh, it must be okay to use. And so it kind of creates a permission structure for people to start adopting. And that's true at like both the individual level, but then also other states, right? And so it's, if you're trying to use this for geopolitical purposes, sending that signal to other states could potentially, you know, it becomes a self-fulfilling prophecy, right? Like, we need people to do this other thing. And so we're going to buy some to signal that they should buy it. And so then they buy it because we bought it. Like, it becomes a sort of self-fulfilling thing. And I think that all of these geopolitical, you know, considerations are something that, you know, I think maybe

Bitcoiners would say, hey, we always predicted there would be the, you know, Bitcoin would be important geopolitically. I don't know how many of them had 20, 25 as the year when that would happen, right? So, yeah, so I think that that's probably the most surprising and interesting thing that's going on right now is just how much that narrative has changed. Definitely. And there's a few other things I want to get into. Will, are you okay for time or do you need to run? Yeah, I need to go in about six minutes, five minutes. Sorry, Will, I didn't realize you had a hard stop there. No, it's okay.

Thank you very much for coming on for this bit and we'll carry on without you. In fact, before you go, Will, though, is there any way you want to send anyone if they want to follow your work or anything you're doing? I'm on X at William J. Luther. I write pretty regularly at the American Institute for Economic Research, so feel free to follow along. Perfect. Thank you, Will. And we can do this again. Yeah, sounds good. All right. Sorry, Josh. This is a, there's too much in this.

But so the next thing, we were just never going to get through the next part in five minutes. So rather than cut it short. The next thing I wanted to talk about was deflationary money. And one of the things that a lot of economists have sort of criticized Bitcoin for is the fact that deflationary money may not work in reality. So what's your take on that? And I think probably that perspective comes from thinking people are going to hoard money rather than spend it and what that does to the economy. Yeah, so there's actually like this is actually one thing that economic historians and monetary economists are I think are actually good at, which is there's a lot of stuff that they've written about deflation because the bad rap of deflation seems to come from the Great Depression, right? So we have this horrible recession, which also, you know, corresponds with this dramatic deflation. And so it must, you know, it must be that deflation is bad. And, you know, but that story is at least partially wrong.

And the reason for that is we can really kind of classify deflation as having two causes, right? There's like supply-side causes and there's demand-side causes. But demand side causes are actually really policy-induced causes, right? So demand-side causes tend to be like if you get deflation from the demand side, it's generally because you have really, really bad policy. Okay, so there's some kind of policy that's being imposed on society by, you know, the central bank that's causing this deflation. And that's very, very different from a supply-driven deflation.

So supply-driven deflations, first of all, we've experienced them, you know, historically. actually quite a bit. And they're not associated with recessions. In fact, they're associated with boom periods because periods of high productivity are periods when things are going well, right? But when's the like recent example of that? Well, there are, I mean, recent examples. We live in an inflationary world. So, I mean, but if you go back to like the classical gold standard era, like there are prolonged periods where you have, where you have deflation. And you have, and where it's not costly, where, and it makes sense because if you think about it, right, what's happening is, is that if you, if you have growing productivity and that growing productivity

is driving down prices, it's effectively increasing the real value of wages for people, right? And so that productivity is reflected in your wage, even though maybe your nominal wage isn't changing, what that wage buys you is changing, right? So now you can afford a lot more stuff. And so the kind of the idea here is that these productivity changes, the supply-side-driven deflations are actually very, very positive. These are boom periods. These are periods when things are going well.

And there's no fundamental problem with deflation, right? because since prices are falling, your real wages are going up. In contrast, when you have these demand side deflations where this is policy-induced, the reason these tend to be so costly is it's not based on real economic factors, right? It's not that we just have a bunch more stuff to sell with the same amount of demand, right? It's that these changes have been caused by policymakers making bad choices. And so because of that, these events are unexpected. And unexpected deflation could be really costly because we have nominal debt contracts, right?

So if I agree, if I borrow $1,000 from you and, you know, so let's say my day job is as a farmer and I borrow $1,000 from you. And then, you know, over the course of the next year, unexpectedly, you know, the prices of my crops all start to fall. Well, it becomes a lot harder for me to pay back that $1,000. But if that decline in prices was caused by productivity, it wouldn't be any harder for me to pay you back because the reason that the price is down is because I'm producing more stuff. And so what really matters is like how much I'm selling, what I'm bringing in. And so in other words, supply-driven deflation is very, very positive. Demand-driven deflation is policy-driven deflation, and yes, those do seem to be costly, but that's the result of policymakers making bad choices. That's not like an inherent evil of

deflation. And so if we have a productivity-induced deflation, that's generally a good thing. So deflation, is deflation impossible in the Fiat system that we're in now, in this positive deflation? I mean, technically no. I mean, but it would require central banks to do something you know, much, much different. So, I mean, you could, you can imagine this scenario. I mean, it's not ever going to happen, but I can, I can conjure it up and I can tell you about it. I mean, suppose the Federal Reserve came out tomorrow and said, we're just going to make sure that nominal spending in the United States is just constant, right? So the dollar value of spending is constant, and we're just going to, and because it's nominal, we can adjust the money

supply to keep it constant. So if it ever starts to rise, you know, we can pull money out of the system. If it ever starts to fall, we can add money to the system. Okay, so imagine they did that, and imagine they did that well. Okay, well, if you think about what would happen in that sort of a system, if nominal spending can never change, as the economy grows, prices would have to fall in conjunction with that growth in the economy, right? Because real GDP would be going up, even though nominal GDP would be constant. And so the only way that nominal GDP could be constant is that that economic growth, those productivity improvements would have to be passed on through prices. The challenge to doing something like that is, number one, like there's just this kind of irrational hatred of

deflation that we see. So, you know, central bankers would not be inclined to adopt that sort of thing. but also like central bankers don't like they they they don't tend to to focus on things like nominal spending or nominal income or something like that they tend to try to focus on inflation rates and and things like that and actually you know will mention George Selgin George Selgin had a lot of work on this where he basically had argued that that and this is actually not original to George. I mean, this was part of an earlier tradition in economics that kind of died with Keynesianism, which was that, you know, actually maintaining stable prices through monetary policy might actually be distortionary because in order to do that, you might be forcing prices that otherwise would have

gone down to go up, right, in the same way that you're forcing prices that would have gone up to come down. And so you can potentially end up distorting relative prices because you're not allowing relative prices to reflect relative scarcity of these goods. I see. And George Sheldim was, he's a big proponent of free banking, I think, isn't they? Yes. So I assume he thinks that central bank shouldn't exist. A lot of Bitcoiners think that central bank shouldn't exist. Do you think that is something that's likely at any point in the future, or like relatively near future, 10, 20, 30 years? I mean, I think the biggest challenge to this, right, is what we talked about with respect to, you know, why states want to

monopoly on money to begin with, right? Like, they want the monopoly on money because they want access to credit from the central bank. They want to be able to pay for things. They want to be able to finance wars without worrying about where the money is going to come from and things like that. And so, I think it would be really, really hard to get rid of central banks in that sense. I mean, it would take, like, I'm not saying that it's impossible, it's just difficult, because it would also take a substantial rethinking and re-education of a lot of people, right? Because typically, you know, when I look at how a lot of introductory textbooks, you know, to economics are framed, especially sort of like the Keynesian-leaning textbooks, right? Like the chapter on central banking is kind of like, well, of course we have to have a central bank because who's going to manage the currency and we don't want to know.

other Great Depression, you know, forgetting the fact that like we all had central banks, other than Canada, we all had central banks during the Great Depression. So, you know, that's, that actually didn't seem to help very much. If anything, it actually seemed to make things worse. But, but the point is, is like, those are the kinds of arguments that you get. It's like, well, of course, we have to have somebody to do this and, you know, and, and, you know, I mean, I write about this actually all the time is that to me, one of the weirdest things about economics, is that when you take economics classes, what gets drilled into your head

is that what's good is competition, right? Competition is good. We like competition. Competition leads to efficient outcomes. We're not wasting resources, right? These kinds of things. And what's bad are monopolies, right? Like monopolies don't efficiently use resources.

Monoplies, you know, have this power, this market power that allows them to charge a price above marginal costs, you know, and central banking good. Yeah. And so, and then from that, then they immediately jump to, well, of course, we need a monopoly over currency, right? And so, and so to me, it's kind of bizarre. And I mean, and to me, I think that I understand why. I think it's actually all of these political concerns and geopolitical concerns that are to reason that central banks actually exist. And I think that's the thing that makes them hardest to change or get rid of. But those, but that's often not how we teach it. And in fact, arguably, I guess if you taught, if everybody taught it

the way that I teach it and everybody taught, you know, the sort of political and geopolitical aspects to this, then I don't know, maybe that would actually a row of support for these things because they're like, well, wait a second, if we just need this for geopolitical purposes, surely there's some alternative here, right? But yeah, I mean, a lot of it is just the way it's presented and then the role that it plays for the state, that makes it very, very hard to get rid of. If you could just like click your fingers and have your perfectly designed economic system, would the be central banks?

It's a hard question for me to answer because as an individual, the answer is obvious, it's no. But like my hesitancy in just saying no completely is that it's hard to imagine what this world looks like in geopolitical like concerns, right? Like, so I don't like that, I personally do not like the extent to which the United States involves itself in foreign conflicts, okay? But I do like the fact that the United States doesn't have to worry about, you know, how much it's spending in the event that we go to war.

I don't have to worry that like we're going to lose because we run out of money. I mean, this was a very, very common thing. in an earlier era. I mean, people forget that the Swedes had an entire Baltic empire. And, you know, Sweden was a military power. And the reason that they really lost this military power is that they couldn't finance their military, right? Like they just, they actually just ran out of funding to the point where there are stories of soldiers out in the field, like picking up the musket balls that have just been fired at them and then loading them into their guns. so they can shoot back, right?

Like, and so the thing is, it's like the question is, can the place that you live provide adequate defense without something like a central bank? And if the answer is no, then this becomes a really hard question to answer because on the one hand, if they can't do it without it, well, then your safety and security and wealth is under threat, right? But at the same time, if they can, they, you know, some of them do really bad things with that, with that power and some of them get involved in things that they shouldn't get involved in. And so it's very hard to assess that. But I mean, if I'm just thinking about it purely in monetary

terms and not thinking about any of these geopolitical concerns, I think the answer is obvious. Like, no, we don't want these things. To the extent that we have to think about these geopolitical concerns, we can possibly get rid of central banks, but there's probably going to be something else that states would do as an alternative. And the fact that they haven't done, that already suggests that maybe there's not an obvious better alternative. So it needs, it can't just be that the US gets rid of the Fed is every central bank needs to go at the same time for it to be sustainable. Yeah, because I mean, like if you think about it, like if they're really providing this source of funding, you know, that was one, I mean, that was one reason why you, you know, that was one reason to attack like the neighboring prince, right, in Europe, you know, 400 years ago is like he has no money. So, like, now is the time.

I can take that land. Let's go get it. Yeah. And so the thing is, is like, you know, we're sort of stuck in this particular equilibrium where if none of us had this stuff, then it wouldn't matter. But because all of us have this stuff, nobody has an incentive to go first. Yeah, that makes sense. Okay.

Last big question in this future Bitcoin world. What do you think credit will look like? So I guess it kind of depends. I think that you're asking me this because a lot of people kind of argued like, oh, well, nobody would want to borrow. Because you have a deflationary currency, so why would you want to borrow? But I think that that is based on thinking about borrowing and lending purely in terms of nominal interest rates when we should be thinking about it in terms of real interest rates. And so what I mean is, is like, okay, if I come to you and I say, hey, I need to borrow $1,000 and you say, okay, just pay me back, you know, $1,50 a year from now and we'll call it even.

Well, what really matters is what the purchasing power of $1,050 is a year from now, right? So if over the next year we have 5% inflation, well, then I got a really good deal because all of the purchasing power that I'm transferring to you has been, you know, is gone, right? Like you're getting no additional purchasing power relative to that initial $1,000. And so implicitly, we don't always think about it this way, but implicitly, we're always thinking about real interest rates, right? So we're thinking about what the interest rate is adjusted for inflation on these loans. And so that's the fundamental thing that really matters.

Now, because we live in an inflationary world, if I'm I'm willing to pay you 5% real interest and the inflation rate is going to be like, and we both expect the inflation rate to say be 2% over the next year, right, then the nominal interest rate on that loan would be 7%. But that's just a matter of we, like, we agree that that's like the likely inflation rate and I'm willing to borrow at 5% you're willing to lend at 5% in real terms. If we move to a deflationary system, the real interest rate is still the thing that matters. And so because the real interest rate is still the thing that matters, nominal interest rates would be very, very different. So if we're in a deflationary environment and maybe deflation is, you know, so maybe, you know, the inflation rate is

negative 2% a year. Well, then now the nominal interest rate instead of being 7% is going to be 3%. But in real terms, it's costing me 5%. And so the deflation would tend to drive. nominal interest rates down, and by driving nominal interest rates down, the question is, does anything about this actually change the real interest rate? Because if it doesn't change the real interest rate, then we're not going to see any sort of change in borrowing activity because nominal interest rates would just change, but real interest rates would all be the same. Now, there is reason to believe that real interest rates might change in that sort of environment. And the reason is, is that in economics, there's this thing called the Tobin effect.

And what the Tobin effect describes is that there are certain things that we hold in our portfolio that we also use for productive purposes, right? And so what happens, like, so, you know, like an obvious example for an individual will be their house, right? Like, you're not just investing in your house. You live in it. Okay. But it's part of your portfolio of assets.

Well, if you live in a world where inflation starts rising, what do you do? well, you tend to buy more housing, right? So either you buy a second home or you buy a bigger house than you would have bought otherwise or something like that. And what that tends to do is that tends to raise the real value of those assets, but it tends to reduce the real rate of return on those assets relative to what they were before the inflation. So what then happens is that in that scenario in an inflationary environment, inflation is actually lowering real interest rates, which makes borrowing more likely, right? And so if you were to eliminate inflation or actually move to a deflationary system, then what would happen is like these real asset values would

decline, but their real rates of return would rise. And so then you would be less likely to borrow because real interest rates are going to be higher in that world. But it's not going to eliminate all borrowing. But that's also because if your money isn't constantly being eroded over time through inflation, then you don't need to constantly look for other investments. Right, right. So, like an inflationary system, you do tend to drive real interest rates down to some extent because people try to avoid inflation by buying real assets, right? Things that they think are going to appreciate over the longer term or at least maintain their purchasing power over the longer term, right? Like maybe you buy a little bit bigger house because you're like, well, I know that like,

you know, housing is going to be, you know, more stable than, you know, the supply of houses is not going to increase at the rate of growth of the money supply, right? So I have a little bit more confidence that that this is going to retain its value. And to the extent that, and even to the extent that it doesn't, like, I get to live in it. So I'm getting some value out of it, even if I'm wrong about that, right? But in general, what tends to happen is, yeah, people in inflationary environments, they move into real assets, and that does tend to lower real interest rates, which does encourage more borrowing. And so if you move to a deflationary system, yes, you would have less, I think you would have less borrowing because you're going to see the reversal of that effect,

right? So if your money is now appreciating every year in real terms, well, then you don't need to buy a bigger house. You don't need to buy an extra house. You don't need to invest in those real assets because you're not trying to avoid the de-inflation. And so in that case, you know, real interest rates would rise and we'd get less borrowing. And where does fractional reserve banking fit into this? Do you think we'll still have fractional reserve banking under a Bitcoin standard? I mean, it depends. I mean, I think, I mean, my attitude on this is that in the short run, like, Bitcoiners should really resist this as much as possible. because it would be a source of manipulation in the market, given Bitcoin's market cap.

Any kind of like fractional reserve system right now would just make it very, very easy to manipulate the system. Over the long run, I don't know if you can necessarily prevent it. And the reason that I say that is that like a fractional reserve system would be the easiest way to scale. if like if it becomes too costly to to transact on the base layer, right? Now, the issue, though, is that because Bitcoin is, you know, programmable money, as they say, right, even a fractional reserve system would probably look much different than the fractional reserve systems that we have experienced, right? And what I mean by that is that, you know, there are, if you had banks that were that were sort of issuing more liabilities than what they had in reserve as Bitcoin, there could be ways where you could actually, you know, where you could actually verify like what their issuance is, what they're, you know, how much that they have in reserve. And also, you know, if you have,

you know, if you have on-demand redeemability, anytime that, you know, you're uncomfortable with what they do, you can potentially do that. Or you could just have instances where some people just actually, like, agree not to use their Bitcoin for some certain amount of time in exchange for paying a rate of return or something on that so that other people can use it. But so there there might be ways to avoid it. But I think, like, the issue is, is the question of whether or not we'll get fractional reserve on Bitcoin, I think we should resist that now. Like, there's no need for like Bitcoin banks that are issuing, you know, pieces of paper that are redeemable for Bitcoin. There's no need for that now. People should resist that now. But then the question

is, is it's all going to boil down to like how things scale, right? So in terms of like if the base layer becomes too expensive for transactions to be going on all the time, the easiest way to solve that is to figure out how to make transactions outside of the base layer. And, and, and then the question is, is then, you know, does that require, you know, issuing claims to Bitcoin that are redeemable for Bitcoin or something like that? Or are there just technological solutions that we can use that would solve that problem? And so, like, history says it's going to be hard to avoid that kind of a system because that's just what we've observed over time. But at the same time, you know, again, it's very, very hard to predict the future because this is very, very

different than, you know, other traditional forms of money. Like, it's not like gold where, you know, it's literally just this physical thing that you hold, you know, conceivably there are technological solutions that could exist for Bitcoin that just can't possibly exist for something like gold or silver. Love it. Well, this has been great. Thank you very much, Josh. We've been through most of the big topics there. But we obviously, we started this conversation. where I kind of jokingly made fun of economists for not understanding Bitcoin. But what is it that you think Bitcoiners don't understand about economics? I would ask, well, okay, there's a line.

There's a line that one of my favorite economists, a guy named Armin Alshin, there's a line that he used to say, which was, don't listen to economists, listen to, don't listen to what economists have to say, listen to what economics has to say. Okay. And I've always really like that line because the thing is, is that economists are just people, right? And they have lots of opinions and those opinions might be informed by economics. They might not be informed by economics. It depends on the context. But even if they are informed by economics, like sometimes, you know, it's, hey, I have this knowledge and given my knowledge, this is my opinion, but that doesn't mean that that's what economics actually says. That's how they interpret things. And so, I mean, my thing is, is that, um, I get like basically one of two responses when I meet Bitcoiners, right? Bitcoiners are either really super excited that an economist is there to, you know, it wants to talk about Bitcoin, or I get kind of dismissed like, oh, well, you like economists. I don't, you know, I don't want to talk to you.

But I think, you know, in general, I think there's a lot of economics that, that's good economics, that's valuable to learn. You know, I agree with Bitcoiners that Keynesianism is bad and that it's not particularly valuable, and I wish that we could get rid of a lot of these Keynesian aspects of the way things are taught. But at the same time, you know, there is a lot of value there. There is a lot of stuff to learn. And essentially, I mean, a lot of the ways that I have been able to understand Bitcoin are based on things that I've learned from monetary theory and monetary history and just applying that to a different context. And so, and to me, one of the most fascinating things about

Bitcoin, the reason that I got interested in it in the first place is my sense was, okay, we have all these theories of how things work. And a lot of these theories match the data, but of course they match the data, right? Because theory can never be completely detached from like personal experience. So the fact that we've experienced all of these things is informing what we're writing down with our theory. And so the interesting thing to me was, okay, here's Bitcoin. And so in some ways, it confirms certain things about monetary theory, in some ways it challenges certain things in monetary theory. But this is fascinating because no matter what happens with Bitcoin, no matter how anything plays out, it's a way to take something that didn't exist when a lot of

these theories were written down and sort of test those theories. with something that the theorists who wrote these things down never could have never could have thought about or predicted. And to me, that's just a fascinating thing. And I think that there's actually a ton of interesting monetary theory, interesting monetary history that can be learned and that can be valued. And I would also point out that, like, you know, there are many people in Bitcoin who have learned a lot of this stuff, whether formally or on their own, right?

They might not be economics professors, but like a lot of them have read, you know, a lot of monetary stuff just because of their interests in Bitcoin. And what I would say is like if you've read that stuff and you enjoy that stuff, you should just know that there's a lot more of that stuff that exists. And it's really good. And that and also I would just say like probably the last point is that their interactions are going to be biased, especially negative interactions. Right. Like, so if you're on, if you're on the internet, if you're on social media and you're arguing with somebody about Bitcoin, that's because, you know, like people, it attracts, the internet attracts people who like to argue with each other. Right. And so if you, if you're arguing with somebody, that doesn't mean that person is representative of the profession or representative of the views of, of economics. Actually, like, they are just probably one of the loudest voices in economics. And whether they agree with you or not is just tangential to, it's,

to the fact that they're kind of one of the loudest voices. And the loudest voices, by definition, are the people with the strongest opinions. But you shouldn't assume that they speak for everybody or that they're even representative of what we believe. Yeah, it's like the meme of the person's stuck on the computer saying, I can't come now. Someone's wrong on the internet. So this has been really great. If there was one kind of piece of, if there was one book that you would recommend to someone, what would it be? Well, I mean, honestly, what got me into this stuff was studying, you know,

alternative, you know, monetary systems and the work of people like Larry White and George Selgin, like these were guys that, you know, the cypherpunks were reading. Like, these guys were on the cypherpunk mailing list. And so they've written a lot about free banking. They've written a lot about the gold standard. They've written a lot about these things. And I think that those people are, you can read them. and you can always gain something.

And even if you disagree with certain things, or even if you, you know, or even if, you know, you like, you know, certain aspects of what they're writing about and not others. Like, I mean, you can read, you can read their stuff and you can learn a lot. And you can also, and the other thing about their work

that I think is valuable is their work, a lot of their work on things like understanding current monetary policy is done through the lens of, yeah, let's think about current monetary policy, but let's think about what a competitive system would look like and then compare that to how the actual system works. And is there any way that we can convince monetary policymakers to move in the direction where they would at least behave similar to how a competitive system would work? And I think, like, those are actually really interesting thought

experiment, especially because if you think we can't get rid of central banks, well, you should at least want to change their behavior to stop doing the bad things and start doing, you know, start doing a better job. I've always found it weird that George Selgin isn't a bit coiner. Does that surprise to you? I think that, so you asked me earlier sort of, you know, what's the ideal system? Like George, his work on free banking really emphasizes that the reason that competitive free banking works really well is that the amount of money supplied.

it just matches money demand. When you issue too much money, people redeem those notes for gold. And so there's a market-based constraint on your ability to create money and things like that. But the thing is, is that because they have the incentive to issue more notes, they tend to issue the amount that's demanded. And so that tends to minimize a lot of fluctuations that central banks cause because central banks are moving around the money supply. People's money. money, demand is changing, but they're not necessarily related in any particular way, right? And so I think, like, a key lesson from George's work is that what you would want a central bank to do or what you would ideally want out of a monetary system is to have a monetary

system where the supply, you know, moves to meet demand. And so I think that, so I think that, like, his concerns about the viability of Bitcoin, I think are related to the fixed supply. because I think like his concern is like that how do we know that the volatility will ever calm down to the point where people would be willing to you know use this in transactions on a regular basis right and so I think he would want an elastic to supply to some degree yeah and so I think like ideally he would prefer that you know demand was met with with increased supply and that that would lead to you know stable purchasing power

the issue is is that Like that perspective is by definition like an irreconcilable difference with Bitcoin, right? Because there's a reason why the fixed supply of Bitcoin is really important. The fixed supply is important because, first of all, we don't have any kind of technological mechanism that exists that could even implement like George's preferred system, right? Like there's no way that you could program a protocol that would just adjust the money supply in conjunction with money demand. And the other thing is, is that even if you did have that sort of system, it would be

susceptible to changes, right? People would constantly be tinkering with it or people would want to argue about, well, should it really match demand or should it be like slightly less than demand or should it be slightly more than demand or highly kind of, you know, and that would be a subject of debate. I think like Bitcoin's fixed supply is its strength precisely because. because Bitcoin's not redeemable for anything else, right? Like the reason why people are willing to accept it is because the supply is fixed.

They know that there will never be more. And so because there won't be anymore, like that's the thing that drives it. But also, that's the only thing you can't have a decentralized money without that characteristic, at least given what we know now, right? you, you, um, you can't, you can't have this decentralized system if the supply has to adjust to demand because it's going to require some real world adjustment. And then you're back in the same situation we're in now anyway. Right. Exactly. And so then you're just back into can you, you know, can you actually do

this well? Can you trust it? Yeah. And so the thing is, is like the fixed supply is actually one of the important components of, um, you know, the sort of decentralized nature of the, of the system. and it's one of the things that kind of anchors the system because nobody has an incentive to change that. I mean, even if Bitcoin just kind of, even if the supply, I would argue that if the supply wasn't fixed, it would actually make it, there would actually be another problem, which is that like, so suppose that Bitcoin just increased by like 1% a year forever or something like that. At some point, people would debate should it be 2%, should it be 0.9%? Right.

And these things would become issues that people would fight over. but the fact that it's fixed, nobody has an incentive to increase it, right? And so because nobody has an incentive to increase it, you know that the system is committed to that fixed supply. And so that's crucial to how the system actually works. But these are irreconcilable differences, right? If you want a system where supply is going to adjust to meet demand, that's, you know, Bitcoin obviously doesn't do that, but Bitcoin can't do that because it wouldn't be Bitcoin.

It would be something completely different and it would be much more similar to kind of what we have now. Yeah, the fig supply is something that trips Jeff Snyder up as well. He would like to see something that had an elastic supply. But I'm obviously completely with you on that. But thank you very much for this, Josh. Where do you want to send anyone to follow your work or anything that you're doing? You can follow me on Twitter or X, I guess it's now called. You know, I'm at Rebel Econ Prof.

and I write a newsletter with one of my friends, Brian Albrecht. I mean, I guess this is, if you're interested in economics, this is, you know, sometimes I write about monetary stuff. Sometimes I just write about, you know, ordinary stuff, but we, we write every week. The newsletter is called Economic Forces. It's a substack. There's an econ topic every single week. And the idea is that we're really trying to revive like this older kind of tradition, which is

kind of like this UCLA tradition of economics, which focuses on really simple models, but really focused on understanding human behavior with those really simple frameworks and seeing how far you can push those frameworks. And UCLA is also kind of this interesting place, because it's kind of like this mixture of sort of Chicago school people with like more like, but with Austrian tendencies. And so they were a very, very unique school that's kind of gone away, but we're trying to keep that tradition alive because it still exists, at least in classrooms, if not at UCLA. So that's a good place to kind of learn some economics and just general stuff like that. Love it. Well, I'm going to go subscribe to that. Well, I appreciate the time. Thank you, Josh.

Yep, no problem. Enjoyed being here.