Homo Economicus Non-Redux

We've become dependent on a universal debt-based system, and now it's time to break free from it. Doing so requires a departure from monetary ideologies.

Homo Economicus is a term coined to describe the ability of a human being to make a rational economic decision in their day-to-day life, fulfilling their wants, desires, and needs in an optimal manner.

The history of the term dates back to the 19th century when John Stuart Mill first proposed the definition. He defined the economic actor as one "who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labor and physical self-denial with which they can be obtained."

I am suggesting here that the definition is still quite salient, and, that our deference to the luxuries or conveniences of the things we don't necessarily need is a core issue of economic stagnation, and therefore, an affront to our civil liberties. So, I'm proposing that we don't need to repeat this phenomenon.

I've addressed this in a macroeconomic context here, and in a more geopolitical context here.

What I'd like to do now is address this in a monetary context.

MONETARY MECHANICS

When you deposit your currency in a bank it is no longer your currency - it's the bank’s legal tender in which you're an unsecured creditor with an IOU.

To be clear, the note you’re backing as the creditor is insured by the FDIC, but you’re not insured as the actual creditor. Without your full knowledge, notes are then fractioned from the bank you’re using out of the reserve notes supplied by the central bank.

This is known as fractional reserve lending. Fractional reserve lending at a local or regional bank bank is the by-product of central planning by central banks.

Most retail banks will lend at least 9 times the cash assets on ledger. Meaning, they will create 9 times the amount of IOUs with your depositor notes. Many of them are created as securities instead of loan-outs. It’s a fraud for many reasons, but mainly because you don’t have a stake in the interest on those notes, which you actually collateralize yourself with your own identity in the form of a social security number.

MODERN MONETARY MADNESS

Establishment economists have come up with all sorts of monetary philosophies to explain away the fraud that has been perpetrated on the public for ages. Their latest darling is Modern Monetary Theory.

Modern Monetary Theory (MMT) is an economic assumption suggesting that the government could simply create more money without consequence as it's the issuer of the currency.

"The government can essentially print as much money as it would like to fund essential services and programs and also stimulate the economy, and when inflation rises to an undesired level, you can increase taxes to bring inflation back down to your target rate," says Ryan Cullen, a large fund manager.

While Cullen forgets that the money is printed by a private entity (a central bank), and that inflation is transferable but not transitory (as in not short-lived), the idea of MMT sounds excellent, hypothetically speaking. However, debt used for non-productive investments such as social welfare and free college doesn’t produce the economic benefit promised. Why? Because if people don’t have jobs to produce more things of value in the economy, then productivity can’t outpace the level of debt, no matter how much money is created.

Instead, the resulting inflation from the influx of “free money” crimps economic growth. Furthermore, inflation “taxes” the bottom 50 percent of income earners the most - the very people struggling to find jobs to produce stuff are the ones borrowing, who also end up baring the cross of their own debt burden.

In other words, taxation is used to hide inflation, and to then redistribute it unevenly. This is an irrefutable truth.

MMT describes our current system as it is right now. Central banks still conjure FIAT out of thin air, and then give it to retail and signature banks to fractionally reserve lend.

MMT was always just a description, not a plan, for understanding what the US and governments around the world have been doing since the end of Bretton Woods.

In effect, the Treasury is issuing the money - called debt with longer duration - which the Fed exchanges for debt with zero duration called currency, reserves, or repo, otherwise known as structured FIAT.

BITFIAT & BITFLATION

Believe it or not, Bitcoin is another version of short duration FIAT. When Bitcoin is traded on exchanges in short intervals, it is demarcated and liquidated in zero duration debt notes (U.S. petrodollars).

While it is also true that you don’t need an exchange (an intermediary) to trade or transact with Bitcoin, the great misconception about Bitcoin, of course, is that it is a hedge against inflation. You can borrow against it and rehypothecate it, but it is not a true hedge against asset inflation (or deflation for that matter).

Why? Because in order to be a true hedge against any kind of flationary risk, the instrument used can neither be a medium of exchange nor a store of value - it must be a transfer of value. I’ve explained this in more detail in my essay on sound currencies, as well as this piece on a medium of transfer.

Bitcoin was actually designed to be a disinflationary instrument as a currency, but in reality, it is used as an inflationary instrument, specifically a speculative commodity.

As it inflates in value - with no clear reasons for investors or users as to why - it is spent less.

As Robert Breedlove points out, Bitcoin as a competitor to the central banks could be bought up by those central banks as an insurance policy against its own success. He calls this a critical aspect of “hyperbitcoinization”.

I would also suggest that this is the same or similar effect as attempting to hyperinflate any monetary asset out of its debt existence. Yes, a strange concept, but the equity markets as of late are about as bizarre as any in history; when you look at market mechanics, all you can think of is: How are these assets not being priced out of the market?

Even stranger is the idea that Bitcoin could inflate its value to zero, and yet it is mathematically designed in such a way.

Again, we are already living in strange days... So would this be such a big surprise?

To reinforce a theme here about our own human behavior: We seem to rely on debt , specifically inflation, to the extent that we will continually do things that go against our better judgment and our intuition.

CENTRALLY DIGITAL CURRENCIES

People are actually now comparing Bitcoin to CBDCs (central bank digital currencies) when they really shouldn’t - this is literally like comparing apples and oranges.

CBDCs will likely never happen, at least not in a timeframe that can outpace Web3 development. Remember, Ethereum has outperformed Bitcoin by 2.5x the last few years, despite the widening gap in price. This is primarily due to its market capitalization based on its actual utility in the form of various applications and payment rail protocols.

The point being that as CBDCs ironically endeavor to model themselves after Bitcoin, Ethereum is the clear winner in the decentralized game at present. It has the most robust infrastructure, and the best security of any protocol family in the Web3 space.

Meanwhile, the Biden administration has issued an Executive Order on cryptocurrencies, but did not say whether CBDCs were preferable compared to a U.S. digital dollar that exists on its own.

We do know that executive orders were already established under the previous administration to fold a USDD under Treasury, and that ISO-compliant coins and protocols like Ripple/XRP are now somewhat free from securities law scrutiny (for now, at least).

This is a big win for the blockchain/crypto space for the simple fact that XRP/XLM has an elegant payment rail, not to mention a protocol for transacting off-net (offline or off mainnet).

ACHIEVING MONETARY AUTONOMY

At the end of the day, proof-of-work is an already archaic cryptographic model, and its weaknesses are only magnified by the ASIC-exploitable BTC mining protocol, which encourages server farm centralization and "first-past-the-post" techniques, which ultimately results in a brittle network vulnerable to 50.1% attacks.

Just as anyone who believes that hard money printing can return to the same gold standard we had before is naive, anyone who thinks that the future of crypto is going to be defined by "hash rate" is already behind the times, especially when quantum computational methods are already capable of bypassing encryption altogether.

Which brings us full circle to beg the question: What will work in this mixed global economy of ours?

For starters, we need to reset the basics of finance, with a fundamental understanding that we are literally dealing with way too many 1s and 0s.

From a monetary perspective, I’ve said it before and I’ll say it yet again: Real asset-backed encrypted instruments, with real world utility, are the way forward.

As Web3 quickly moves towards - or more pointedly clashes with - quantum methods, we will see a much more honest approach in the design of all currencies and digital assets. This is perhaps the least discussed element in blockchain and crypto spaces, while being the most important.

I call a new approach to this the design of quantum tolerant currency.

There is no shortage of incredibly exciting work to be done. One of the main challenges now is breaking away from old mental models about money such that we can see brighter, more stable, pastures ahead.