This Bitcoin Study Sessions podcast episode features a discussion between the host and Lucas on chapters 14-19 of "Broken Money" by Lyn Alden, focusing on the entropy of fiat ledgers and its implications. Key Topics: What is Money? Birth of Banking Rise and Fall of Global Monetary Orders Modern Financial System Fiat Currency Creation and Destruction Pricing as a Mechanism for Organization Financialization of Everything Cantillon Effect Long-Term Debt Cycle Summary: The episode begins with a summary of the book "Broken Money" up to part four, which includes the nature of money as a ledger, the birth of banking to facilitate gold-based systems, and the rise and fall of global monetary orders based on fiat currencies, particularly the U.S. dollar. Part four delves into how the fiat ledger's flexibility leads to abuse and wealth concentration, driven by the "Chancellor on the Brink of Second Bank Bailout" mentality. The discussion covers the operations of the modern financial system, highlighting five key points: continual inflation of the money supply, wealth transfer from savers to those close to money creation, rewarding large and politically connected entities, shifting liabilities to the public sphere, and volatility suppression. The Federal Reserve's role in controlling the base ledger is explained, along with the layered stack of IOUs that characterizes the system. Fiat currency is created and destroyed through the distinction between base money (direct liability of the Federal Reserve) and broad money (claims on commercial banks). The Federal Reserve manages base money and influences broad money through interest rates and quantitative easing/tightening. The conversation delves into the tension between stable prices and prices as coordinating signals, with central bankers favoring gradual inflation and Austrian economists emphasizing price changes for information. The setting of interest rates by a centralized committee, like the Federal Open Market Committee, is criticized for not utilizing the information from price as a coordinating mechanism. Furthermore, the 2% inflation target favored by central bankers is questioned, with the hosts arguing that prices should naturally deflate over time due to technological advancements. Chapter 17, "The Financialization of Everything" is then discussed. Due to money not being stable in value over time, people have a strong incentive to hold other things with greater scarcity like gold, equities or real estate, which has a lot of negative effects. This incentivizes people to short the dollar by taking out loans to buy harder assets, and the system rewards those who have access to low-interest debt and can use it judiciously, while savers are diluted and over-leveraged entities regularly default. This dynamic leads to the Cantillon Effect, where the first recipients of newly created money benefit before prices rise. The long-term debt cycle reveals how wealth compounds upward and poverty downward. Fiat systems have locked us into these cycles. The conversation shifts to historical wealth concentration and poverty consolidation, with the modern fiat system exacerbating these tendencies. The short-term business cycles and long-term debt cycle are discussed, including how the Federal Reserve stimulates the economy, selectively bails out well-connected entities, and shifts debt from the private to the public sector. The episode concludes with Alden's summation that the entropy of the fiat ledger is a natural, inevitable occurrence once fiat is adopted, unconstrained by scarce resources, and enabled by telecommunications which created a speed gap between commerce and settlement. The hosts analyze the implications of these concepts, emphasizing the exponential increase in the money supply and the corresponding decrease in the dollar's buying power. They also talk about never before in an inflation event, has there been the ability for a central bank to offer digital money. The digital ledger can change entries much faster and people have faster access to withdraw the money to escape capital controls. The conversation moves into the concentration of wealth at the top and poverty at the bottom. This incentivizes the poor to exit this system to escape what is essentially currency debasement and theft. They also discussed the impact of the removal of volatility to the system and how it will cause it to be less resilient and cause a more significant loss when it eventually breaks.
