PFP222 | Saifedean Ammous - Hard Money and Time Preference (PFS 2021)

Name: PFP222 | Saifedean Ammous - Hard Money and Time Preference (PFS 2021)
Uploaded: 2021-10-11T03:55:59.000Z
Duration: 1 h 14 min 17 s

The Link Between Time Preference and Money

In this section, the speaker discusses the link between time preference and money, with a focus on hard money. He uses Bitcoin as an example to illustrate his points.

Scarcity of Time Forces Choices

The scarcity of time forces individuals to choose between alternatives at all points in their lives.

Every decision has an opportunity cost, even with no restraint on the amount of resources available.

Economizing time is unique because it passes and cannot be stopped or reversed.

Man's life clock begins ticking when he is born and continues relentlessly until he dies.

Time Preference and Valuation

Time is not a normal market commodity like all others; you can't choose the quantity you would like to have.

The present is certain, but the future is uncertain and hypothetical.

Humans always prefer present goods over future goods; this is known as time preference.

A high time preference indicates heavy discounting of the future in favor of the present, while a low time preference implies less discounting of the future.

Property Rights and Time Preference

Acquiring durable goods initiates the decline of time preference for humanity.

Property rights provide individuals with an effective way to provide for their future by reducing uncertainty surrounding it.

As property rights become more widely accepted in society, there is a widespread decline in time preference as individuals increasingly value their secure future.

Money Solves Future Provision Problem

Providing for the future suffers from the problem of coincidence of wants usually discussed in trade contexts.

Money solves this problem by saving the most liquid good or generalized medium of exchange that can be exchanged for valuable goods available in the future.

The Importance of Money for the Future

This section discusses how money is a tool for providing for the future and how it can be easily converted into whatever goods are desired in the future. It also explains how money as a technology has improved over time, becoming more efficient at carrying out its task as a medium of exchange.

Money as a Tool for Providing for the Future

Money is the best tool for providing for the future because of its liquidity.

In an unpredictable world, money can be easily converted to whatever goods are desired in the future.

As human society develops, money becomes a very convenient and powerful tool for transferring value into the future.

The Evolution of Money as a Technology

As humans use money to conduct trade, the technology used for money improves and becomes more efficient at carrying out its task as a medium of exchange.

A preponderance of users leads to a preponderance of choices competing against each other. Better ideas and technologies win out and drive out inferior ones.

Monetary media that are easy to produce in excessive quantities will likely experience substantial increases in supply and reduction in economic value stored in it over time.

Monetary media that are difficult to produce in increasing quantities are likely to witness their supply expand only to a limited extent. They will be much better at preserving value.

The Demonetization Process

This section explains how monetary media that are harder to produce increase our ability to provide for our future by decreasing uncertainty about it. It also discusses how this process leads to demonetization of primitive monies like seashells, glass beads, iron, copper etc., favoring gold and silver instead.

Harder-to-Produce Monetary Media Increase Our Ability To Provide For Our Future

As humanity progresses into using monetary media that are harder to produce, our ability to provide for our future increases.

The efficiency of transacting with our future selves increases and the uncertainty of the future declines.

The security of money as a medium of saving has allowed countless people to escape their averages of war and disaster with wealth they could easily transport worldwide.

Demonetization Process

As the uncertainty of the future declines and the expected wealth we are able to transfer to it increases, the discounting of the future decreases and time preference declines.

This process explains how primitive monies like seashells, glass beads, iron, copper etc., were demonetized in favor of gold and silver all over the world.

It also explains how silver was demonetized in the 19th century due to its substantial increase in supply compared to gold. Gold became the undisputed winner of the global market for money at that time.

Saving and Investment

This section discusses how lowering time preference initiates civilization by allowing individuals to engage in activities that do not offer immediate rewards. It also explains how saving is a necessary prerequisite for investment.

Lowering Time Preference Initiates Civilization

Time preference can be understood as the driver of saving an investment or as Professor Hopper calls it, it initiates the process of civilization.

Once an individual is capable of lowering their time preference to engage in activities that do not offer immediate rewards, they are choosing to sacrifice present time and present resources in exchange for the future.

Once they decide to forego consumption of present goods in order to save them for the future, they're lowering their type preference further initiating this process.

Saving Is a Necessary Prerequisite For Investment

Conceptually and chronologically, saving can only be understood as a precedent for investment and its necessary prerequisite.

No matter the capital good, it can also be consumed or exchanged for goods that can be consumed in the present.

Before one can invest capital, one must first defer its consumption by saving it.

The Relationship Between Time Preference and Capital Accumulation

This section discusses the relationship between time preference and capital accumulation. It explains how lower time preference leads to more savings, investment, and capital accumulation.

Lower Time Preference Leads to More Savings and Investment

Individuals with lower time preferences tend to accumulate cash balances and invest in productive businesses.

Hard money standards such as gold are held as saving because of their relative scarcity, which makes them appreciate slightly every year.

People hold the equivalent of their savings in government bonds or low-risk investment stocks and take more risks with the rest of their portfolio.

Capital Accumulation Leads to Higher Living Standards

The abundance of loanable funds allows for the financing of an increasing number of productive enterprises, leading to a rise in income and living standards.

As individuals lower their time preference and accumulate more capital, their productivity increases, incentivizing them to further lower their time preference.

The history of interest rates shows a 5,000-year process of decline in interest rates intertwined with significant increases during periods of war, diseases, and catastrophes.

Institutional Factors Affecting Time Preference

Natural disasters destroy property and capital, lowering living standards and raising time preference.

Violations of property rights through theft, vandalism, or other forms of crime have a similar effect on reducing the stock of capital available to an individual.

Government violations of property rights are systemic and recurring, making them much more difficult to defend against than individual crime.

The Importance of Having a Good Money

Having money allows individuals to delay consumption in exchange for something that can hold value well and be exchanged easily.

Historically, various items such as salt, cattle, glass beads, limestones, seashells, iron, copper, and silver have been used as money.

The Importance of Hard Money

In this section, the speaker discusses how access to hard money that can hold its value well into the future is important for saving and lowering time preference.

Access to Hard Money

Access to a form of money that could hold its value well into the future while also increasingly easy to transfer across space became reliable for more and more of the world's population.

With the ability to save in hard money, everyone is constantly entitled to save lower their time preference and reap future rewards.

The 20th century's shift to an easier monetary medium has reversed this millennium-old process of progressively lowering time preference.

Fiat Currency

The 20th century gave us a hodgepodge of government-provided abominations of currencies growing at six or seven percent per year in only the best examples usually achieving double-digit percentage growth and occasionally triple-triple digit.

We moved from a world in which everybody had access to a money that appreciated whose supply increased by two percent (gold), to a world in which everybody's money is increasing at an average of about 14 percent (fiat currency).

Fiat returned humans of the 20th century to a far more primitive time when retaining value into the future was far less certain.

Hyperinflation

A look at modern economies during hyperinflationary episodes provides a good case study as do dozens of examples of hyperinflation in the 20th century.

In each of these hyperinflationary scenarios, as the value of money was destroyed, along with it went concerned for the future.

With the future so heavily discounted, there is less incentive to be civil prudent or law-abiding and more incentive to be reckless criminal or dangerous.

The Impact of Fiat Money on Society

In this section, the speaker discusses how fiat money affects society's culture of consumption and time preference.

Culture of Conspicuous Consumption

In countries experiencing hyperinflation, people rush to spend their money at the beginning of the month because they know it will be worth less by the end of the month.

Fiat money creates distorted incentives around consumption, making deferring consumption and saving have a negative expected value.

With hard money that appreciates over time, individuals are more discerning about what they spend their money on. However, with fiat money losing its value over time, consumers become less picky about quality.

Time Preference and Artistic Expression

When money is hard and can appreciate, individuals are likely to be very discerning about what they spend it on as the opportunity cost appreciates over time.

The uncertainty of fiat extends to all property. Government emboldened by its ability to create money from thin air grows increasingly omnipotent over all citizens' property.

Under a gold standard, artists had patrons who had the time preference to want to create things that survived for many generations. By contrast, easy money leads to art that lacks quality and longevity.

Destructive Impact of Inflation on Capital Accumulation

The threat of inflation encourages savers to invest in anything that offers a better return than holding cash.

Savers have a strong impetus to avoid devaluation by investing in anything that offers a positive nominal return. This can lead them to become frantic and less discriminating in their investments.

Business activities that destroy economic value and consume capital appear economical when measured against the debasing monetary unit and can continue to subsist, find investors, and destroy capital because they're better.

The Role of Bitcoin in Time Preference

In this section, the speaker discusses how the rise of interpersonal conflict and degradation of manners and mores can be attributed to the preference for heavy discounting of the future. He explains how religion, civic and social norms encourage people to moderate their immediate impulses in exchange for long-term benefits. However, when these benefits seem far away, individuals may question the utility of living in a society and respecting its moors.

The Emergence of Bitcoin

Bitcoin represents an opportunity to understand the role of money on time preference.

Two important features of bitcoin are that its native currency has a strictly fixed supply that is completely irresponsive to demand, making it thus the hardest money ever invented.

Bitcoin allows for cross-border payments without needing any political authority to supervise the transaction.

The total supply of bitcoin across time currently stands at around 18.9 million bitcoins with an annual rate of increase in supply around 1.8% to 2% per year for next three years.

Scarcity and Sellability Across Time and Space

Bitcoin's scarcity means that its supply cannot be diluted unexpectedly ensuring it is likely to hold on to its value into the future.

We've never had a monetary asset like this where the supply is completely independent of demand.

The operation of bitcoin is completely orthogonal to demand because there's no mechanism for anybody to make more bitcoin.

No Single Point Of Failure

Bitcoin has no single point of failure, no single piece of critical infrastructure or hardware, and no single critical individual or organization for its operation.

It's a software protocol open to anyone anywhere who has a device that can receive around one or two megabytes of data every 10 minutes.

Bitcoin as Sound Money

In this section, the speaker discusses how Bitcoin fits into the Austrian definition of sound money and its value cannot be dictated by any authority. The most prevalent use case for Bitcoin has been its use as a store of value or as a savings account.

Bitcoin's Supply and Value

Bitcoin is the only currency whose supply is fixed and cannot expand in response to increasing demand.

Holding onto Bitcoin for more than four years implies a return of more than tenfold over the past five years.

The average return on holding Bitcoin for four years was around 22 fold.

Unlike government money, which loses value over time due to inflation, Bitcoin's value goes up over time.

Using Bitcoin as a Savings Account

Millions of people worldwide have used Bitcoin as a savings account and have profited immensely from it.

Dollar-cost averaging is becoming increasingly popular where people buy a specific quantity of bitcoin regularly.

Small amounts of recurring purchases can lead to significant returns in the future.

Time Preference and Money

Money is important for time preference, and we would expect to see people who differentiate themselves from their fiat peers.

For a small growing minority of people around the world, bitcoin represents an escape hatch from monetary inflation.

People who hold onto bitcoin tend to save or invest more than they did before getting into bitcoin.

Bitcoin and Time Preference

In this section, the speaker discusses how Bitcoin has changed people's time preference and savings habits.

Changes in Savings Habits

Before Bitcoin, the average savings rate was around 10%, but after Bitcoin, it increased to around 20-30%.

The speaker published an academic book called "The Bitcoin Standard" which had a chapter on time preference and money. It became the best-selling book on Bitcoin and has been translated into 25 languages worldwide.

Many people have personally thanked the speaker for helping them explain changes in their life after moving to Bitcoin. Common stories include cutting down on expenses drastically and starting to save everything in Bitcoin.

With saving in Bitcoin came a market change in future orientation across all manners of personal behavior. People started making positive changes such as starting a family, quitting dead-end careers, finding meaning to life, and quitting bad habits.

Impact on Drug Use

In the early days of Bitcoin, it was used for buying drugs online. However, many people who got into Bitcoin because of drugs ended up quitting drugs because they found a better drug in holding onto their Bitcoins.

Many people have quit alcohol and drugs because of their involvement with Bitcoin.

Changes in Time Preference

Before Bitcoin, most people had no conception of saving or delayed gratification due to inflation destroying wealth. This demotivated people from investing or saving passively while earning money from a job.

After discovering the magic of rapidly increasing value due to limited supply, millions of people worldwide now work their day jobs while spending as little as possible and stacking as much Bitcoin as possible. This has become extremely common, and people are now obsessed with "stacking sats" (satoshi, the smallest unit of Bitcoin).

Bitcoin is the free market solution to the problem of rising time preference. It allows anyone to rejoin the process of lowering time preference, saving capital accumulation, and civilization.

Encouraging Future-Oriented Behavior

In this section, the speaker discusses how hard money, such as gold and Bitcoin, encourages future-oriented behavior by increasing the potential payoff from savings and delaying gratification.

Hard Money vs Fiat Standard

Hard money increases the potential payoff from savings and delaying gratification.

The gold standard encouraged more saving and future-oriented behavior.

The nascent Bitcoin standard also encourages future-oriented behavior.

Resources for Learning More

In this section, the speaker provides information about where to learn more about these topics.

Resources

The speaker's book "The Bitcoin Standard" provides more information on these topics.

A sequel to "The Bitcoin Standard," called "The Fiat Standard," is coming in the next couple of months.

An introductory textbook of economics called "Principles of Economics" will be available in early 2022.

Visit safedean.com to learn more about all of these resources.