When the money is broken, everything else becomes money.
People can no longer save their unspent economic output in the state-designated money, so they consciously or subconsciously save in other goods that are relatively more scarce than the broken money, and that have higher stock-to-flow ratios.
Today, people cannot save in their local fiat because they know that 2-15% of it will be eaten by debasement each year.
In the wealthiest nations, people turn to public equities, real estate, precious metals, rare art, and other rough approximations of sound money.
Ask yourself, why are these the assets that people seek out to preserve their purchasing power?
It is because they have higher stock-to-flow ratios than their local fiat. That is, they represent the characteristics of sound money better than their state sponsored form of money.
A money with a high stock-to-flow ratio makes it a more suitable store-of-value than a money with a low stock-to-flow ratio.
Let’s establish what is meant by stock-to-flow:
Where “stock” is the existing stockpile of the asset and “flow” is the amount of new units that will enter the stockpile in a given period of time, such as one year.
Stock-to-flow has long been a way to analyze commodities.
An asset with a high stock-to-flow ratio is one whose existing stockpile is not debased by a ton of new units entering its supply each year.
An asset with a low stock-to-flow ratio is one whose existing stockpile is watered down and saturated by a wave of new supply each year.
This is determined by scarcity and supply-demand dynamics. Here are a few examples:
Real estate
There is an existing stockpile of homes available for purchase. Hypothetically, there is a limited amount of new homes that can be built each year and become available for sale; after all, there is only so much land in desirable locations.
Therefore, the existing stockpile value of homes can only be debased so much by the influx of new homes that come onto the market.
This is why real estate has a relatively higher stock-to-flow ratio than most common assets, and why many individuals consciously or subconsciously save their purchasing power in it.
The flow (rate of debasement) is most notably restricted by physical atoms (available land, lumber, metal, etc.), technology (the methods used to build homes), and labor — all of which are dialed up or down based on unpredictable supply and demand forces related to housing.
Land in desirable locations being the predominant scarcity forcing-function here.
Apple stock
There is an existing stockpile of Apple stock available for purchase in the public market. Hypothetically, there is an infinite amount of Apple stock that can be created.
Its supply is not restricted by any physical forcing function. Its supply schedule is determined by the Apple board, who are supposed to act in the best interest of the company’s shareholders.
If the board were to dramatically increase the amount of new Apple stock available for purchase next year, the stock-to-flow ratio would decrease, and the existing shareholders would own a smaller percentage of the company.
The existing stockpile of shares expands due to more flow, but no new wealth is created, so the existing shares are diluted by the flow of new shares that have entered the stockpile.
While public equities like Apple have relatively higher stock-to-flow ratios than your average asset, their ratios are entirely determined by other humans making decision in a board room.
No physical work must be expended to increase the supply of Apple stock. Its supply is not restricted by the laws of physics; it is managed by the words of other humans.
Shareholders must place a significant amount of trust in the company’s executives and board members to act in their best interest.
Gold
For thousands of years, this rock was the best form of money. Why not copper? Or silver? Think about that, and ask yourself why gold always won out on the open market as the best monetary good.
Gold was the best form of sound money for 5,000 years because of its high stock-to-flow ratio.
Of any scarce asset, its supply was hardest to increase, so people who owned gold had relatively certainty that they owned a certain percentage of the stockpile for the foreseeable future.
The laws of nature made it so — not humans in a board room or hard hats on a construction site — physics and chemistry did.
However, the incentive to increase the supply of gold increases with its market value, and this is where human nature comes in.
As the market price of gold increases, entrepreneurs and engineers come up with new strategies for locating it and for extracting it. These new methods result in more gold extraction, thus increasing the supply of gold (increasing flow) to accommodate newfound demand until a new price equilibrium.
Copper, silver, platinum, and other metals were more abundant in supply, easier to find, extract, etc., so they were a less hard form of money than gold. These precious metals were more vulnerable to debasement than gold.
History shows that the above ground supply of gold increases at about 2% each year on average, i.e. the existing stockpile of gold is debased by 2% each year from new supply issuance — which is largely limited by the laws of physics — and probably why the Keynesians settled on their 2% fiat inflation target.
*Please note: By no means am I comparing the subjective value of real estate, Apple stock, and gold. I am evaluating them as candidates for money, which is how they are increasingly treated in the open markets.
Now do fiat
The flow of new fiat currency units each year completely debases the purchasing power of the units in the existing stockpile.
Fiat’s flow rate is unpredictable, but its direction is certain: up-and-to the right, forever.
In fact, about 40% of all circulating dollars ever created were created in the last three years alone.
The trend was worrisome prior to the pandy stimulus; it is now dire. As M2 goes up forever, the purchasing power of the dollar goes down forever:
The low stock-to-flow ratio of fiat prevents rational economic actors from being able to save their purchasing power in it, which is why they consciously or subconsciously turn to other assets with higher stock-to-flow ratios, such as the ones previously discussed.
The “money” does not do what it promised to do, which is be a reliable store of value over time.
The designated form of money is broken. This fiat money experiment — which began in 1971 with Richard Nixon breaking the gold standard — has failed.
This is not the money of the Founding Fathers. This 50 year experiment has run its course.
When the money breaks, everything else becomes money.
Bidding a monetary premium into assets that humans require for survival is detrimental to human flourishing.
The monetary premium bid into the housing market is a result of people being unable to save their purchasing power in the state-sponsored money.
People are desperate for a sound money, and they have knowing or unknowingly turned to crude approximations of it since money was first invented 5,000 years ago.
“Abundance in the money creates scarcity in everything else. Scarcity in the money creates abundance in everything else.” — Jeff Booth
Solutions
As more people in this era of fiat-abundance are forced to ask the question, “What is money?”, I expect more people to appreciate the solution that Satoshi created in 2009.
Satoshi created an engineering solution to this problem.
He created a commodity asset with a perfectly predictable stock-to-flow ratio that is impervious to the debasement cycle plagues all other monies.
His solution does not necessitate placing trust in other humans. It is non-coercive and open to every person in the world.
It cannot be co-opted to benefit the few at the cost of the many.
It is not a rough approximation of sound money; it is sound money, and only sound money.
It will suck the monetary premium out of the assets that humans require for survival, thus dramatically increasing human flourishing.
Humanity has been starving for this solution. It provides hope for a better tomorrow.
Recommendations:
The Creature from Jekyll Island: A Second Look at the Federal Reserve by G. Edward Griffin
“Where does money come from? The money magician’s secrets are unveiled. Here is a close look at their machines that create the illusion called money. A boring subject? Just wait.”
The New Confessions of an Economic Hit Man by John Perkins
NYT best-seller that reads like a spy novel
Hidden Repression: How the IMF and World Bank Sell Exploitation as Development by Alex Gladstein
A look into the weaponization of debt traps that benefit the West and exploit everyone else
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