Is Inflation Good For The Poor?

The Intercept story “Inflation is Good For You” argues that “Inflation is bad for the 1 percent but helps out almost everyone else.”

After denying the threat of inflation, then claiming that it is transitory and that it would fade away, the mainstream is finally admitting a wave of unprecedented inflation for the foreseeable future. So now the story is that inflation is good for the poor. President Biden claims that a massive expansion of government spending will actually reverse inflation.

The Intercept story has more holes than swiss cheese, but I want to rebut the central thesis of the article. Is inflation bad? Spoiler: the worst aspect of inflation is not rising prices or eroding savings, but the censorship of price signals required for a thriving economy.

Demand-Pull Theory Doesn’t Explain Inflation

The unstated theory of the author and the mainstream economic model that guides the monetary policy of the world’s central banks is Keynes’ model of Demand-Pull Inflation. The theory goes like this: when aggregate demand exceeds the value of aggregate supply, producers raise prices. In response, governments can raise interest rates to reduce demand, slow economic growth, and end inflation. Problem solved!

If the master planners at the Federal Reserve simply need to pull a few levers to fix the economy, why has the global economy had a series of boom-bust cycles ever since the Fed was founded in 1913? The usual excuse is that the government simply hasn’t imposed enough regulations to stop the pesky capitalists from screwing up their central planning.

The Austrian economic school provides a comprehensive response to Keynes’ economics.  Say’s law (Jean-Baptiste Say, 1803) provides a simple refutation of Keyne’s demand-pull theory. In order for someone to buy goods, he must first produce something of value to obtain the money needed to pay for those goods. Production is the source of all economic growth, not consumption. Economic growth is an increase in supply, not an increase in consumers demanding more. To consume the product of others’ labor, you must first produce something they find valuable. Government edict can change what goods are produced, but it cannot magically command new workers, factories, and materials into existence.

What Is Inflation?

Milton Friedman famously said, “inflation is always and everywhere a monetary phenomenon.“ Inflation is a broad decrease in the purchasing power of money caused by governments creating new money. And boy have they been creating it.

Just look at the money being printed by the Fed:

Since Covid 19 began, the M2 supply has jumped from $15 trillion to almost 20 trillion dollars. Quick quiz: if the same amount of economic activity is served by 40% more dollar bills, what will happen to prices? It’s not a question of if but when.

The question of why the government had to print so much money is a long and shameful tale, but the ultimate result is inevitable: massive inflation.  

Inflation is much worse than the official numbers suggest:

First, in an economy with a hard (fixed) money supply, we should have deflation proportional to the rate of economic growth

Second, the United States has been able to hide away most inflation, mostly by exporting dollars as a global reserve currency. 

Third, the official deficit numbers are misleading because much government spending (like government-backed student loans and mortgages and quantitative easing) doesn’t end up on the books.  

What we are seeing now is not the beginning of a period of higher inflation, but an unprecedented expansion of the money supply causing the Fed to lose control of the narrative and have to admit it in official indexes.

So Why Is Inflation Bad?

The problem is not that prices are going up. If prices merely increased by some steady amount each year, we could adapt to them, just as employees expect a 3-4% base salary raise every year to match inflation. Likewise, producers and lenders would have no problem adapting to a universal increase in the price level.

The problem with inflation is that it’s not a universal increase in price. Inflation is what happens when politicians print new money to hand it out to their constituents instead of raising taxes. Raising taxes is hard but running printing presses (physical or digital) is easy.  

To understand why inflation is harmful, we need to understand what prices are: prices are signals about which activities are valuable to people. When the price of a good goes up, producers direct more resources into the production of that good. When the wage of a job goes up, more workers are directed to that industry. This “invisible hand” of the market continually optimizes human activity to direct human effort to the most valuable activity.

The main evil of inflation is that it corrupts this information flow. Inflation begins when governments give new money to favored groups. The recipients of new money spend it at the current price, whereas the downstream users of that money spend it at a higher, inflated price. Instead of prices signaling which activities are socially valuable, they signal activities supported by the government’s printing presses. Inflation corrupts the economic harmony that directs resources to their most valuable use.

If you remember one thing, it should be this: 

“Fiat” is another word for “decree” or “edict.” It’s called “fiat money” because governments force people to use their money by decree. Through inflation, fiat money forces people to allocate their lives to the causes the government’s money benefits instead of those they would voluntarily choose for themselves.

Inflation Is A Hidden Tax

All taxes are signals which force people to produce goods they would not voluntarily produce. But taxes are different from inflation in that both the tax burden and the recipients of tax income are generally auditable by the electorate. Inflation is a hidden tax that subtly changes the incentives throughout an economy to erode its ability to produce wealth.  

Because it’s hidden, inflation is highly addictive to the political system. Government programs depend on printing money to a far larger extent than official deficit numbers suggest. Even if there was suddenly a broad awareness of the harms of inflation and a political movement to curtail it, moving to a sound money system absent a complete collapse of the dollar regime would still be outside the realm of possibility.

Inflation Wrecks The Structure Of Production

Why is the economy suffering from shortages of seemingly everything? It has nothing to do with a “chip shortage,” or the Suez canal blockage, or just-in-time manufacturing. These are only the symptoms. The root cause of the “everything shortage” is the government’s manipulation of the money supply.  

One of the main disagreements of the Austrian school with Keynesian economics is the emphasis it places on the structure of capital. Capital is not a monolithic blob of “aggregate supply”, but a hierarchy of lower and higher-order goods. In order to produce consumer goods, capital must be employed. To make your Venti Frappuccino (first-order good), a barista uses an espresso grinder (second-order good). The grinder requires steel and microchips (third-order goods).

When the government created new money for the stimulus programs, that money first went to consumers, who voted with their wallets to shift the structure of capital from the production of higher-order (production) goods to lower-order (consumption) goods. Inflation robbed producers with low time preference and redistributed the loot to consumers with a higher time preference. The shortages were a result of inflation eating the “seed corn” of capital needed to maintain and expand production.

So what should happen when an external shock (such as pandemics and lockdown policies) constrains production and changes demand patterns? The economy needs to re-structure to rebuild the structure of production to reflect the new reality. Uncertainty causes consumers to save more, which frees up higher-order capital to shift to new demand trends. Capital can focus on producing PPE, webcams, home exercise equipment, and consumer groceries rather than restaurant supplies, office buildings, airliners, etc.

The inflation-powered stimulus packages attempted to “freeze” the economy in pre-pandemic spending levels and thus crippled the adjustment to the new reality. The rest was inevitable.

The Myth of Idle Capital

President Biden claims that the “Build Back Better” stimulus package will reverse inflation by “reducing bottlenecks” in the economy. This thinking is straight of out Keynes’s General Theory (1936). Keynes believed that government spending is needed to put “idle” resources to work and stimulus the economy.  

William H. Hutt refuted this idea in “The Theory of Idle Resources” (1939). Politicians cannot create new capital and labor. They can only force people to do the government’s bidding rather than what individuals believe is in their best interest. If some capital is idle, it’s because it currently provides no economic value to people. “Build Back Better” is just the latest version of the belief that the government’s central planning is more efficient than the price mechanism of the free market. Though Mises, Hutt, and many others refuted these ideas in the 1930s, the backdoor of fiat money allows politicians to try the same failed policies without consequences.

Does Inflation Help The Poor?

The Intercept claims that inflation is good for the poor because it will make debts easier to pay off. Supposedly, rich lenders will suffer while the poor are granted a reprieve.  

Do you really believe the elites suffer more under any economic policy? While banks may lose some money, they are also the first recipients of new government money!  

There are many reasons why the poor always suffer the most from inflation:

* A far larger percentage of poor households’ income is used for basic needs. 

* The wealthy get most of their income from inflation-protected assets like real estate, business interest, and stocks.

* The prices of basic goods increase faster than luxury goods.

* Families with low incomes will be pushed into poverty, while the middle and upper classes can cut down on luxuries.

* Debt is a wealth-maximizing strategy for the wealthy, while it’s a survival strategy for the poor. 

* Although existing mortgages and student debt will depreciate, interest rates on new debt will go up dramatically!

Though the very idea that inflation helps the poor is absurd on its face, it’s not the fundamental error of the article. The central problem is the idea that high inflation is just the price we pay for economic growth. If you have understood the above description of inflation, you should understand that this is another way of saying that government central planning of the economy is more efficient than the market. If you believe that, look up the thriving economies of the USSR, North Korea, Venezuela, or Cuba.

How to Avoid Buying Trash Crypto That Wastes Your Money

Original posted at The Bitcoin Consultancy

If you can imagine a way to lose money in crypto, I’ve heard it. Since 2017, I’ve heard from thousands of victims of every crypto scam imaginable.  

But for every crypto scheme which is outright theft, there are ten trash crypto-assets created mainly to take your money and run. Each project has a story of why they are a great investment. But dig deeper and the business model is a mirage. What the founders really want to do is create as much momentum as possible and sell at the top before the illusion of value vanishes.

Sometimes you don’t have to dig very deep. For example, “BabyCake” is an explicit Ponzi scheme, if you look beyond their promises of “bringing passive income into people’s lives.” It’s one of the first tokens to have a Ponzi scheme built right into the smart contract. I count 63 other “baby” named pyramid schemes.

Usually, though, the catch is buried deeper and requires understanding the crypto ecosystem. Let’s review why there are so many scams and trash coins in crypto and how to avoid them.

Why are there so many crypto scams?

Anonymity

Cryptocurrencies are only pseudo-anonymous. It’s impossible to know who owns some coins from an address alone. But if you interact with the legacy financial system, for example, by cashing out your gains for fiat, your identity can sometimes be found. If you commingle your funds by moving them together, it’s possible for a chainanalysis algorithm to link activity to an identity. When I try to help victims of fraud, I can often follow the transaction trail to the cold-wallet of some exchange where the crooks traded Bitcoin for a local currency. 

I think the bigger problem is that our legal systems aren’t adapted to deal with crypto fraud. Our legal institutions don’t take small-scale crypto fraud as seriously as fraud with “real” money. Lack of international cooperation means that even if I know which exchange was used to cash out stolen crypto loot, they are unlikely to cooperate with local law enforcement.

Bleeding Edge Technology

Bitcoin and cryptocurrencies are still very new. The tools needed to secure Bitcoins are still evolving and rough around the edges. I predict that in a few years, we will carry credit-card-sized devices with biometric readers that make storing and using Bitcoin both safe and foolproof. Until then, the tools for storing and transacting cryptocurrencies are rapidly evolving. There are safe methods to keeping your crypto safe (like hardware wallets, multi-sig, and steel seed backups), but many people aren’t aware of the proper techniques. Accidental and malicious loss of funds is, unfortunately still common.  

Transaction Finality

A bigger reason for fraud in crypto is that crypto transactions are irreversible for almost all coins. In the legacy financial system, a fraudulent credit card charge, bad check, or unauthorized wire transfer can usually be reversed. If the theft is big enough and your lawyers are good, the legal system will tend to intervene on the victim’s side. In the crypto space, however, no matter how unjust the theft, there is nothing that can be done.  

(Keep in mind though that government theft of savings through inflation and taxes is a far bigger problem than theft of crypto. While this is unfortunate for victims of theft, transaction finality is one of the primary reasons why Bitcoin is so revolutionary: it is impossible to conduct legal plunder of people’s wealth.)

A Free-Market Alternative to Wall Street

“Wall Street” (i.e. traditional securities markets) is often portrayed as the epitome of capitalism. The reality is that the government has regulated most of the profits out of securities available to the non-elite. Crypto-assets and exchanges allow novice investors access to venture capitalism for the first time since the Securities Act of 1933 limited investments in unregistered securities to “accredited” investors. Initial Coin Offerings offer normal people the ability to invest in startups without having to be worth or put up millions of dollars. DeFi (decentralized finance) exchanges operate using smart contracts, without any centralized entity to regulate. With DeFi, anyone to mint and create a market for a new token, outside the ability of any government to regulate.

The flip side is that just because everyone can create and sell their token does not mean they have a viable business model or any technical skills. All you need to be able to do is market your coin, not do anything useful with it. The vast majority of crypto projects trend back to a value of zero.

Bitcoin’s Success Inspires Copycats

Most crypto scams are not outright theft but an attempt to make a quick buck by riding on Bitcoin’s coattails. Profiting from Bitcoin’s rise requires an initial buy-in and patience. Want to make billions with an investment of zero? Too impatient for a mere doubling of your money each year? Just copy Bitcoin’s code, change a few parameters (invent some justification why they are needed) and launch your own altcoin. Repeat the scheme a few more times and get 12,881 crypto-assets tracked by CoinMarketCap.

Many projects start out well-intentioned. The founders may want to be revolutionaries just like Satoshi Nakamoto or they might have some justifiable disagreements with the team that maintains Bitcoin. However, the decentralized nature of crypto assets means that once a coin is out there, speculators will run with it. Quite often, the founder exits early with a small fortune and the project evolves in a completely different direction. The founder of Dogecoin sold everything to buy a used Honda Civic. His coin now has a $32 billion market cap.

Today, the crypto-asset market has a market cap of $2.5 trillion, 48% of which is Bitcoin. Many beginner crypto investors are branching out into altcoins hoping to see the same astronomic returns as Bitcoin in the early days. Let’s explore why they are wrong and why you should focus on Bitcoin.

How to Avoid Trash Cryptos

I’ve already written how to avoid having your crypto stolen by scams and how to safely store your Bitcoin. Unlike outright theft, “trash cryptos” are schemes where you might not realize that you’re the victim.

Buy And Hold Your Entire Crypto Portfolio In Bitcoin

The only guaranteed way to avoid falling for a crypto scam is to keep 100% of your crypto portfolio in Bitcoin. Investors fall for crypto scams when they try to beat the returns of Bitcoin through a variety of other coins and schemes.

Let’s analyze objections to a 100% Bitcoin portfolio and how it gets investors in trouble:

Objection #1: Bitcoin’s returns are not good enough

Over the last ten years, Bitcoin has consistently earned almost a 200% return. In other words, if you just kept your money in Bitcoin, you would have tripled your investment every year.  

No other cryptocurrency can match Bitcoin’s track record. Consider Ethereum, which has beaten Bitcoin over the last 4 years. But this assumes you had the foresight to participate in Ethereum’s ICO. Ethereum is up 2.7x since its 2017 high, whereas Bitcoin is up 3.3x. The point is that you’re not missing out by not buying the latest hot altcoin. By the time you hear about it, any potential for astronomical returns is long gone. If you had bet on Ripple when it was #2 In 2017, you would only have 1/3rd of your portfolio left.

The only way to become a successful long-term investor is to study the fundamentals of an asset, not its price. Bitcoin is the future of money. No other altcoin comes close to Bitcoin as money. Bitcoin’s top competitors are smart contract platforms of various kinds. Their usefulness for real-world business models is currently unproven.  

Objection #2: You heard some altcoin is better than Bitcoin

Novice Bitcoin traders want to be above-average investors. Of course, we can’t all be above average. But many nonetheless try to add some extra alpha to their portfolio by buying a hot new coin or timing the market. 

Those familiar with the efficient market hypothesis understand the difficulty of consistently beating the market. The prices of assets reflect all current information known by participants. Unless you can consistently evaluate the fundamental value of assets more accurately than others, you won’t beat the average. When you try to time the market, your emotions work against you, urging you to buy after an asset goes up, and sell when the asset is low.

Of course, if you invest in Bitcoin, you’re already disagreeing with the vast majority of investors who have little or no exposure to it. Why not disagree a little more and buy some altcoins? Here is the difference:

Bitcoin has a simple business model (“Hard Money You Can’t F*ck With”) and a 12-year track record. Altcoins are all either a technical variation on Bitcoin (fba vs proof of work, or dag vs blockchain) or an entirely different business model (smart contracts). It’s much more difficult to understand the technical merit and value proposition of these assets. None have Bitcoin’s track record.

As a managing partner of a cryptocurrency hedge fund, it is my full-time job to research and write about cryptocurrencies. Yet the vast majority of my crypto portfolio is in Bitcoin because I do not feel qualified to judge the technical merits of various projects. I have a background of 17 years in software development and architecture. I personally designed a Bitcoin exchange. Do you think you can do better based on YouTube and Twitter personalities?

For example, even if Dash is technically better than Bitcoin, is it going to beat Bitcoin’s network effects? What’s to stop Bitcoin from adding whatever killer feature Dash offers? Are you qualified to make these judgments, or are you buying based on the rumor mill?

If you are personally involved in a crypto project, I understand your decision to invest. But don’t expect to beat Bitcoin based on scrolling crypto news sites.

Objection #3: You want to be a crypto trader

It’s an awesome experience to sit down in front of an exchange trading screen full time. For many of us, crypto exchanges were our first introduction to the power interfaces of marketplaces, with their continuous order books, market depth & candlestick charts, and advanced orders. 

Once you master the advanced trading screen, you feel like you have the key to mastering the markets. By taking a few online courses, you can develop a unique system that consistently earns you profits. During a bull run, when everything is going up, it’s easy to conclude that you are in fact a pro.

It is possible to earn a consistent edge in crypto – just not by you. Crypto markets are manipulated by whales (big traders) with powerful marketing machines. There is no way to predict their actions, but they will use your emotions against you. They also pay lower trading fees than you, while your profits are eaten up by fees.

Objection #4: You want to diversify your crypto portfolio

One of the main reasons people hold a basket of crypto assets is that they don’t know which will be successful in the long run. This is a reasonable concern. In practice, however, choosing which assets should go into your portfolio is very difficult.

The principle behind diversification is that by holding uncorrelated assets, you can reduce the volatility of your portfolio while maintaining the rate of return. Diversification works great for the stock market because the profit margin tends to be the same across different sectors. Also, the stock market has 120+ years of precedent to predict future trends.

The same isn’t true of the cryptocurrency market. The price of crypto is based almost entirely on anticipation of future demand, not current demand. Bitcoin’s price depends much more on speculation than current demand as money. Furthermore, money is a natural monopoly, so it’s likely that only a single coin will emerge dominant. (Likewise for smart contract platforms.)

If we assume that a single asset will emerge dominant, which one do we choose? One option is to look at the total market capitalization of each coin (hence CoinMarketCap.com being the #1 crypto site). But this is misleading. If I create a token called “Veksler Coin” with a supply of 1 billion and sell a single coin to my friend for $1, I instantly have a $1 billion dollar market cap with a $1 inflow. MarketCap rankings are key for adoption, so there is extremely strong pressure to manipulate them. Even though Bitcoin has less than a 50% market cap, the vast majority of fiat inflows go to Bitcoin. In short, there is no reliable metric for market capitalization.

Some organizations advocate automatically rebalancing your portfolio in response to market cap changes. My fund does that to an extent, though we only trade coins that our research has vetted. However, if you are managing your own portfolio, are you prepared to continually rebalance your portfolio — and pay the capital gains tax on any profits?

Objection #5: You want to earn passive income from staking/yield-farming/crypto lending

Many Bitcoin investors believe that it isn’t enough to hold Bitcoin. You don’t just sit on your cash, right? You invest it in a productive enterprise to earn a return. Just holding an asset is speculation, and that’s bad, right?

There are two problems with this reasoning:

First, Bitcoin is fundamentally different from fiat money. The problem with fiat money is that it’s an inflationary asset. You have to put your money to work just to preserve your wealth. By contrast, when the quantity of money is fixed (as with hard money like gold or Bitcoin), a growing economy means that the share of wealth represented by each unit keeps increasing. Furthermore, the adoption and therefore demand for Bitcoin is rapidly increasing. Bitcoin is not just a static asset like cash or gold. It is also a money transmission network that provides ongoing value to people. Simply holding Bitcoin is an investment into the future of money.

Is a few extra percent return on top of Bitcoin’s 200% average worth risking your principal?

The second issue with many “crypto-investments” is their inflationary design. Consider staking. Cardano staking returns a 5.x% APY reward rate. Cardano also has a 5.7% inflation rate. You must stake to preserve your wealth. This is Cardano’s way of motivating users to delegate their ada to trustworthy stake pools. Staking may be a legitimate way to secure a crypto asset, but it isn’t a legitimate income stream.

More egregiously, consider coins like CAKE, which has a 73% APR (previously 450%+) in the Auto CAKE Syrup Pool. How is PancakeSwap able to offer those returns? There is a handy chart here. Clear as mud? The supply of CAKE is completely arbitrary and the reward rate is a combination of investor subsidies, high growth rate, and high inflation that changes day by day completely at the whim of the CAKE governance process. It’s fun to gamble with, but should you trust your life savings with this scheme?

Objection #7: You want to trust an expert (or algorithm) to trade your crypto

Never expect other people to be smarter with your money than you.

Many people will give you advice on how to invest your money. But just because someone made a lot of money managing other people’s money, doesn’t mean they did their customers a favor. Extensive research shows that index funds perform better than actively managed funds. Crypto isn’t any different.

Keep in mind that the volume numbers of many exchanges on CoinMarketCap are fake. It is much easier to manipulate the prices of crypto assets than you would think. Twitter, Telegram, and YouTube are filled with pump and dump schemes. If an investor finds a consistent advantage in the market, he will not give it up by publicly sharing it. Only those who can’t make a living by trading run YouTube channels about it.

The only reputable actively traded crypto funds are crypto hedge funds. They are open to accredited investors and have minimums of $50K and up. Be very clear on the value they are providing over you just holding Bitcoin before you decide to invest in one.

Conclusion: to avoid buying trash crypto that wastes your money, stick with Bitcoin

The crypto space moves fast. Dozens of new coins go live daily. The top 10 coins today look very different than five years ago. I can’t promise you who the leaders in this space will be in the future. What I do believe in is that fundamental value is what drives long-term trends. The asset that has the most universal business model, can scale to meet consumer demand, has the biggest real-world network, and the most robust community is Bitcoin. If that changes, I’ll be the first to let you know.

How Fiat Money Corrupted Savings & Made Us All Market Speculators

Originally posted at The Bitcoin Consultancy

Before the world switched to a fiat monetary system, people who wanted to build wealth kept their savings in a bank. Interest rates tended to equal the average rate of profit, which was enough for all but a small minority of professional investors and entrepreneurs. 

This all changed with the move to a fiat monetary system and the devaluation of money. Today, the majority of households own stocks — not because they wish to be investors, but because it is the simplest means of protecting savings. As a result, the political system has become highly involved in market outcomes. The real return of securities markets has been greatly diluted, created perverse incentives, and global risks for the economy.

Historical context

Before the creation of the Federal Reserve Banking System, the class of investors was small and limited to finance professionals. Everyone else earned income on their savings by keeping their savings in a bank. For example, the interest rate was 8.1% in 1798.

This changed in the 1920s, the Federal Reserve System fueled a huge credit expansion that caused the stock market bubble. Easy credit drove the return of the stock market to dramatically exceed the return on savings. We know what happened next

By 1952, 4.2% of the U.S. population owned stocks. The 2008-9 financial crisis had a dramatic impact on interest rates when the government injected massive amounts of money into the banking system. Rates have remained low ever since. Today, over 50% of households own stocks, rising to 88% of $100K households.

Savings in a pre-fiat, gold-backed monetary system

In a market economy, the rate of business profit tends to equal the interest rate. The rate of profit tends to even out across all sectors since money flows to more profitable sectors until the rate equalizes. Capitalists borrow money in proportion to the rate of return on investment. When investments are more lucrative, the interest rate increases until the cost of borrowing money equals the potential return — and vice versa. In this manner, savers in a pre-fiat monetary system needed to keep their money in a bank to reap the rewards of a growing economy.

Savings in a fiat monetary system

In a fiat monetary system, the government artificially lowers the interest rate by expanding the money supply. Savers have to shelter their wealth in inflation-protected assets because the fiat system devalues savings through inflation. 

Wealthy families have other channels to protect their wealth – such as real estate and business interest, but for the middle class, their main means of protecting savings are their 401k and their primary home. 

The corruption of the joint-stock company by fiat money

Passively managed index funds now account for the majority of U.S. equity funds. While they are great for investors, they only exist because the fiat monetary system has forced savers into the securities market. 

The publicly traded company exists to allow investors to pool funds together in a common enterprise, without incurring unlimited liability for its debts. Participation in a public company ought to come with high risks — offset by high rewards. 

When a company needs funds, it used to raise them through bonds and other forms of debt — with debtors being paid before investors.

This model is very different from the current system. By the time a publicly traded goes public, most of the risk and therefore return has already been taken by venture capital, which only a small group of private equity investors have access to. 

Because so many savers participate in the market, politicians are strongly motivated to intervene in market outcomes. The 2001 and 2008 financial crises led to the 2002 Sarbanes-Oxley and the 2010 Dodd-Frank Act. These regulations made it much more expensive to go public, which has led to an over 50% decline in the number of publicly traded companies. 

There are now just 3,530 publicly traded companies in the U.S. Anyone can buy a stock on their phone today, but by the time the government lets the company sell you shares, most of the profit potential has already been captured by wealthy venture capitalists and private equity investors.

Dividend yield has decreased from 5.49% in 1871 to 1.33%. Because government debt outcompetes private debt, companies issue stocks to raise money instead of bonds. 

Likewise, the price to earnings rate over double historical rates, as savers flock to the stock market — not seeking high returns, but trying to preserve wealth.

Furthermore, the political system is highly motivated to avoid downturns in the market. Politicians cannot prevent economic destruction (that mostly comes from the economic miss-allocation they cause), but they do inflate market prices through inflation.  Easy credit transfers wealth from dollar users to investors, while at the same time, capital gains taxes transfer much of those gains to welfare recipients.  (By “welfare” I mean all recipients of government benefits, individual and corporate.) All this activity accelerates the inflationary death spiral caused by our unstainable welfare system. 

Stock ownership in a free market should be high-risk, high-reward

Stock ownership should be a high-risk, high-reward endeavor for professionals. By contrast, savers should earn the rewards for their thrift by keeping their savings in a bank. A savings account is the original “index fund ETF.”

Bitcoin as a return to sanity

Bitcoin has a limited supply and cannot be manipulated by politicians. In a growing economy, Bitcoin is a deflationary currency. This makes it ideal as a means of saving money. 

Bitcoin savings accounts (such as currently exist in crypto-lending platforms) offer investors a higher return at a higher risk. Their stablecoin interest rate is around 9%. I would guess that this reflects a 6-7% rate of profit plus a 3% adjustment for inflation.

There is no easy way out of the current mess. The same forces driving more and more of the public to become market speculators also make those markets ever more unstable and unprofitable. Loan-bearing crypto deposit accounts (whether they hold stablecoins or cryptocurrencies) are rapidly growing in popularity and may become the high-yield savings accounts of old for savers everywhere.

The shortages were unevitable

What did you think would happen?

1: Lockdowns and unemployment subsidies constrain production

2: Print trillions of dollars and throw it out of helicopters

3: Consumers start spending stimulus money

4: Manufacturing shifts to the production of consumption goods

5: Producers bid up prices of production goods and labor

6: Price increases, shortages, and unfilled jobs everywhere.

It has nothing to do with a “chip shortage,” or the Suez canal blockage, or just-in-time manufacturing. These are only the symptoms. The root cause of the “everything shortage” is the government’s manipulation of the money supply.

One of the most important concepts I learned from Austrian Economics is capital has structure.

In order to produce consumer goods, capital must be employed. To make your Venti Frappuccino (first-order good), a barista uses an espresso grinder (second-order good). The grinder requires steel and microchips (third-order goods).

The stimulus money went to consumers, who voted with their wallets to shift the structure of capital from the production of higher-order (production) goods to lower-order (consumption) goods. In other words, the government robbed producers with low time preference and redistributed the loot to consumers with high time preference. The rest is inevitable.

What should happen when an external shock (such as pandemics and lockdown policies) constrains production? The economy needs to re-structure to rebuild the structure of production to reflect the new reality. Uncertainty causes consumers to save more, which frees up higher-order capital to shift to new demand trends. Capital can focus on producing PPE, webcams, home exercise equipment, and consumer groceries rather than restaurant supplies, office buildings, airliners, etc.

By attempting to “freeze” the economy in pre-pandemic spending levels, the government crippled the adjustment to the new reality. The rest will be inevitable.

Why aren’t all economists rich?

Why aren’t all economists rich? Some are. Economics is the most common degree amongst the world’s top 100 billionaires. Some famous economists such as David Ricardo and John Maynard Keynes were very wealthy indeed. However, for the most part, economists will give you a list of excuses why understanding economics won’t make you rich.

They are wrong.

How do I know this? I used my understanding of economics to become wealthy.

I won’t go into the (lame) excuses economists give. Instead, I will tell you how I used my understanding of economics to build my fortune.

Some of these topics could fill a book, so I’ll just cover the basics. I’ve already written articles about most of these topics.

Compounding returns:

The returns from re-investing profits from an investment are the single most important principle of personal finance.

This taught me a few things: (1) maximize my savings rate (2) invest while I’m young (3) time in the market is more important than timing the market.

Efficient market hypothesis:

The efficient market hypothesis (introduced by F.A. Hayek in 1945) is the idea that prices incorporate all public information about markets. This means that “buy low, sell high” is impossible using only public information.

This taught me:

  • (1) Technical analysis/day trading is stupid
  • (2) Don’t pick stocks (unless you can dedicate your career to it). Invest in broad-based index funds
  • (3) Keep costs low. You can’t consistently generate superior returns, but you can maximize the return from the market by buying cheap ETF’s.
  • (4) Maximize time in the market because you can’t time the market.
  • (5) Consistent alpha generation requires non-public information
  • (6) Don’t trust your money to an “expert.” They are unlikely to do any better than random.

Austrian business cycle theory (ABCT):

The Austrian business cycle theory (Ludwig von Mises, Theory of Money and Credit, 1912) explains how expansionary monetary policy leads to unsustainable investments (the boom), followed by a necessary correction (the bust). This has huge policy implications, but it’s also important for investors.

It taught me:

(1) Bull markets are headed for a correction when investments become unsustainable.

Signs of an upcoming correction may be:

high P/E ratios,

dumb projects getting funded, etc.

(2) Credit expansion (and associated inflationary policies) cannot be reversed. Don’t bet on fixed-return investments.

(3) All fiat regimes end lead to hyperinflation — so protect your assets from inflation. Stocks, precious metals, and Bitcoin provide protection from hyperinflation.

Modern portfolio theory (MPT):

MPT ( Harry Markowitz, “Portfolio Selection”, 1952) is a model to understand the relationship between investment risk and performance. Given a set of investment categories with a given risk and rate of return, you can graph all possible allocations of a set of investments on an efficient frontier: a hyperbola that represents a combination of investments that has the least risk for a given level of return.

It taught me:

(1) While you need to take more risks to get superior returns, you can get a free lunch if your risky investments are uncorrelated. Diversify your portfolio with non-correlated assets to maximize returns given a certain level of risk

(2) Lower your risk with a small allocation into safer assets with minimal impact on returns.

Entrepreneurship:

The capitalist-entrepreneur organizes capital and labor in new ways to make a profit. More generally, entrepreneurship is the activity of creatively organizing these elements to create value. (Ludwig von Mises, Human Action, 1949)

The reward for entrepreneurship is the profit the entrepreneur collects from the value he generates.

Everyone faces the decision to become a wage worker (employee) or entrepreneur. The upper end of the wages an employee collects is the value he creates for the business. The lower end is whatever another potential employee will offer for the same service — in other words, “what the market will bear.”

What this taught me:

No matter how much value I create for the business, my salary will always be limited to the market rates.

There are two ways to raise one’s income:

1: Redefine your job so that the pool of competitors is more exclusive.

2: Become an entrepreneur, so that your income is limited only by the value you create, not the prevailing wage.

In practice, I have done both in my life.

As an employee:

For example, I started my career as a software engineer. I then became a software architect, technology lead, director of marketing, then Chief Technology Architect. My strategy was guided by two questions:

1: how can I create more profit for the business and thus increase my value and

2: how can I limit the pool of competitors by working in a more exclusive role?

As an entrepreneur:

In contrast to employees, entrepreneurs can collect all the additional value they create (after expenses). Aside from a few exceptional careers (CEO, movie star, athlete, etc), entrepreneurship is the primary way to real wealth.

Ever since I discovered the role of entrepreneurship from the Austrian School of Economics, I’ve strived to engage in entrepreneurship even while I pursued my career. Currently, I do this as Managing Partner of Vellum Capital, a hedge fund specializing in cryptocurrencies.

Last word on Abundance:

Economics is all about the study of scarcity. Human beings have unlimited needs in a world with limited resources. The field of economics studies how to best allocate these limited resources to maximize human satisfaction.

But this focus on scarcity can lead us to miss another important lesson of economics. Value does not exist in nature but human beings. Human beings create value for themselves and others when they re-arrange capital and labor to produce goods and services.

While the elements of nature are finite, the potential value that humans can create is infinite. For example, some sand on the beach can provide momentary value when kids play with it. It can provide more lasting value when it is used to mix concrete for a building, or even more if the silicon is made into solar panels, or even more if the silicon is made into a million-dollar supercomputer. The combinations of labor and capital are infinite, and so is the value that they can create.

Economics is all about managing scarcity, but it teaches that the economy is not a fixed pie. Economic activity creates value rather than distributing it. The universe is full of opportunity, and we need only to develop an entrepreneurial eye for our small part of it, to learn how to profit from it.

McAllen, Texas is consistently the fattest city in America, and they are not happy about it. They can’t figure out why, as they have plenty of parks and organize 5K runs nearly every weekend.

What they don’t realize is that for non-athletes, exercise has very little to do with bodyweight.
The obesity epidemic is caused almost entirely by the consumption of processed carbohydrates, which the U.S. government and the medical establishment still encourages despite many decades of evidence to the contrary.

My city of Denver is the healthiest in mainland America, but walking around town, the obesity epidemic is still evident.

What’s interesting is the comparative rate of obesity in different grocery stores. Whole Foods shoppers have 1/10th the rate of obesity than mainstream grocery store shoppers. (According to researchers at the University of Washington.)

Yes, Whole Foods is about 15% more expensive, but what are the shoppers buying? A 15% markup on food for a 90% decrease in obesity rates would be a great trade-off. Is simply switching to Whole Foods a viable diet plan?

Most of the price difference is the much higher price of meat, dairy, and seafood (30% more) at Whole Foods. The prices of most other products are comparable to mainstream stores.

The difference between Whole Foods and Kroger shoppers is all in the name: Whole Foods customers prefer whole foods, not endless derivations of processed corn syrup.

5 strategies I used to reach financial independence

My portfolio growth rate over the last 6 years has averaged 130% of my salary. In other words, my portfolio increased by 100% of my salary plus 30%. My actual saving rate was between 60 and 70%.

More importantly, over this period my portfolio* grew from about 4x my burn rate to 22x my burn rate. This metric is key because 25x is the standard retirement escape velocity, according to the 4% rule. The 4% withdrawal rule is the rule of thumb used by most financial analysts to predict the percentage of a portfolio a retiree can safely withdraw without drawing down his principal.

Here are five ways I accomplished my financial goals:

My portfolio growth rate over the last 6 years has averaged 130% of my salary. In other words, my portfolio increased by 100% of my salary plus 30%. My actual saving rate was between 60 and 70%.

More importantly, over this period my portfolio* grew from about 4x my burn rate to 22x my burn rate. This metric is key because 25x is the standard retirement escape velocity, according to the 4% rule. The 4% withdrawal rule is the rule of thumb used by most financial analysts to predict the percentage of a portfolio a retiree can safely withdraw without drawing down his principal.

Here are five ways I accomplished my financial goals:

1 Rent instead of buy:

I held out buying my first home as long as I could until covid-19 forced my hand. While homeownership is great for a growing family, renting for nearly the first 20 years of my career was crucial.

The financial tradeoff of rent vs buy is complicated. In short, over the long run, home prices merely keep up with inflation, while the stock market provides a 7% return. On average, it takes about 5 years to break even on the buy vs rent decision.

More importantly, renting allowed me to focus on my career. I could quit my work and move across the country or the world without worrying about a home full of material possessions to drag me down. And I did – moving from Dallas to New York City to Shanghai to Atlanta to Denver within 10 years. I never had to worry about mowing lawns, broken washes, or leaky roofs. It’s possible to throw money at these problems, but avoiding the distraction allowed me to focus on growing my income instead.

2 Track your spending:

You can’t improve what you can’t measure. It’s essential to track your cash flow (both in and out) to improve your situation. I’ve tried dozens of apps to do this, but the key was tracking my finances in Personal Capital – a free tool that tracks your cash flow and investments. The results speak for themselves – it took the first 15 years of my career to save 4x my burn rate. After installing Personal Capital, it took me 6 years to save 22x my burn rate.

Personal Capital can do budgets, but I’ve never kept a budget. Budgeting is a terrible way to think about money.

Let me repeat that: a monthly budget is a terrible way to manage your money.
If something delivers more value to you than it’s worth, you should pay for it. Who cares what you paid for it last month? Every few years, I will go out and spend a fortune on new work clothes, or a computer, or a new car, or (recently) a home improvement project. Who cares how much I spent on it the previous month?

What matters is not how your spending compares to a previous period, but how it compares to the next-best use. For example, before I spent $1000 on a new suit, I will calculate the total return if I saved the money instead. For example, $1000 invested over 30 years will be worth about $8000. Will I value spending $8000 when I’m 70 more than $1000 today?
Your timeline will be different of course – it depends on what percentage of your income is saved for retirement vs upcoming major purchases. The point is that you should balance each potential purchase against the time-discounted value of the next-best purchase, whether that is an iPhone next month or a yacht 40 years from now. It takes time and data to make this calculation automatic and intuitive, which is why a personal finance platform like Personal Capital is key.

3 Single-income household:

My family is a single-income, two-child family – my wife has been a parent and/or a student since we got married. While many see this as a disadvantage, I’ve come to see the benefits of a stay-at-home parent.

The cash flow of a second income is easy to see, but the costs are not so obvious. Aside from higher taxes, work-related expenses, running a household with kids has a lot of overhead, and working parents usually have to throw money at problems to stay afloat.
It’s virtually impossible for both parents to fully dedicate themselves to a career without neglecting their children. Something has to give – either one parent will sacrifice their career, or both will have mediocre career progress. By focusing on parenting, my wife can let me focus on my career during the day, so I can support her needs as a student at night.
Second, because we homeschool, we have very low childcare costs. We took our daughter out of an expensive Montessori school because we found that she learned better at home. Our kids will probably go back to school at some point, but for now, homeschooling is efficient both financially, time-wise, and particularly in giving me the necessary mental break to focus on work each day.

4 Choose side hustles that further your career:

I encourage developing a “side hustle,” but many people get hustles that do more harm than good. The proper function of a side hustle is not to earn a few extra dollars — it’s to grow your value proposition and train for a life of financial independence and entrepreneurship.
Many people get a side hustle that distracts rather than enhances their career. Driving Uber at night or hosting Airbnb guests every night is not going to enhance your career unless your dream is to be a chauffeur or enter the hospitality industry. Same with being a jack-of-all-trades who takes whatever job he comes across.

Is your side hustle causing you to sleepwalk through the workday or work on your gigs from the office? Are you spending more money on tools and supplies for each new gig that you bring in? Are you growing as a professional and building a sustainable, revenue stream with customers that come back to you, or are you doing random, one-off jobs, often for free? Are you giving up new projects at work, a promotion or a demanding new job for your side hustle? If so, it’s holding you back rather than helping you. You don’t need more spending money: you need to create opportunities for you to grow.

A good side hustle should help you to grow in your career or to explore a new one. You should come to the office excited to try out new ideas, not just tired from staying up all night working in an unrelated field. Side projects in your current field often allow you to be in charge of a small project and use the latest technology or techniques that are too risky or difficult to approve with your boss. I’ve used this trick to qualify for jobs that I couldn’t dream of otherwise.

5 Invest aggressively:

After maximizing the spread between your income and your expenses, you need to leverage the magic of compound returns by investing it in the market.

There are as many opinions on investment strategies as there are investors, but unless investing in the market is your full-time job, you will probably not beat the market. You may get lucky, but chances are that if you try timing the market, you will be guided by your emotions, and buy high and sell low. Even the best money managers in the world can’t beat the market.
So my suggestion is: just invest in the market. The whole market, not just the S&P 500. You can either invest in an index fund like VTI (USA) + VEU (not USA) or use a robo-trader that buys individual stocks (this can lower costs and save on taxes).

I use Personal Capital. I can’t speak for other robo-traders, but Personal Capital re-balances my portfolio not only by asset class, but also by market sector, so I’m positioned to benefit from growth in any industry.

  • By portfolio, I am referring to liquid securities and some real estate. I have other assets like business interests, but I’m trying to keep this advice universal.

Restore deleted rides from your Wahoo bike computer

How to restore accidentally deleted rides from your Wahoo Bolt/Roam/etc bike computer:

  1. Get the Android SDK platform
  2. Connect your Element Bolt, Roam, etc via USB
  3. In a command line window, run ./adb devices. This is just to check that adb can see your Wahoo device.
  4. Run ./adb pull /data/media/0/exports ~/Desktop/wahoo_exports with the last part being the folder you want to save to. This will export every single ride to your PC. Your deleted ride(s) will be there. Look by the date.
  5. You can now sync the deleted ride. I airdropped the deleted ride to the ELEMNT app. That was enough for it to sync.

Adding complexity to a system does not make it more valuable

Every month, my company spends about $50K on software development. We’ve been doing this for 10 years. We think that we’re building something valuable well into the future.
Yet if the company went bankrupt, our work will instantly become worthless. Our business system serves our unique needs and would be useless in any other context. Likewise, if enough senior developers left at the same time, the business might be OK, but without in-depth knowledge, we would have to start over with the code.
Our code only has value when it makes money for the business. Like a living being, it only has value when it contributes to a common purpose (profit) and begins to disintegrate the moment that purpose is gone.
One difference between living and constructed things is that all of the parts of a living being are usually necessary for its function. If you remove any part of it, you will kill it, or at least imperil its ability to survive.
A complex codebase on the other hand usually serves multiple goals, and these goals change over time. Inevitably, some parts of the system become irrelevant to the system’s well-being.
98.5% percent of human DNA does not code for any proteins. It’s “junk” DNA. While not entirely useless, it’s a relic of evolutionary history. Given enough time, the same happens with any codebase.
This month, I tried to remove a feature from the codebase. It’s a small and simple feature, but one of the oldest. I found that I couldn’t get rid of it. Various parts of our system made certain assumptions that broke when the feature was removed. Subtle interactions caused things to break in unpredictable ways. This feature had wormed itself into the deepest layers of the logic engines and removing it broke dozens of unit tests.
I gave up and put the feature back in the backlog. I considered paving over the complexity by hiding it from the user, while letting it run in the background, like a vestigial organ. In fact, the feature had never been useful, but it took years for the business to admit that the tens of thousands spent on it were wasted. If we had recognized this earlier, stripping it out would have been much easier.
Adding complexity to a system does not make it more valuable — it makes it more costly to maintain. Humans have high-calorie needs because our brains require a lot of energy to run. Nature didn’t give us the largest brains it could, but the smallest brains that we could survive with. Human brains are mostly full of heuristics that provide shortcuts to perceiving and simulating reality just well enough to keep us alive long enough to reproduce. Likewise, software systems should have the minimum complexity needed to satisfy business requirements.

Three problems with the science of The Tomorrow War

Here are three problems I have with the science of The Tomorrow War:

1: On the proper use of time travel

Time travel requires the creation of a closed timelike curve (CTC): a closed loop in which spacetime returns to the starting point.

Let’s assume that a CTC is possible (an open question in physics), and it allows a single signal (yes=signal, no=no message) to be sent to a time machine that’s already operating, after which the connection ends. What can be done with this low bandwidth connection?

Say your goal is to win the lottery. You start your chrono-receiver and buy a lottery ticket. If you win, you send a yes. If you don’t get a signal, you increment the lottery number and try again. Even if your chance of winning is 1 in a billion, you will eventually get to the correct number.

What do you do after winning the lottery? Solve the next problem. Anything that is physically possible for you to becomes trivial given enough attempts. You just need to build an Ideal Solution Database (ISD) to keep track of successes and ensure each attempt is unique. You are using the CTC to perform computation on an infinitely powerful computer. You can’t go back to before the time machine was invented (that’s how a CTC works), but you can optimize your action post-creation to achieve any and all outcomes that are physically possible. (If this is confusing, watch the Rick and Morty episode “Edge of Tomorty: Rick Die Rickpeat”)

Where does the energy for this process come from? Where does the entropy go? From a thermodynamic perspective, time travel is problematic, whether you want one trip to make sure your parents have that first date, or a quintillion trips to become God-Emperor of Earth.

So this is the basic problem with all time travel in fiction. Even if you don’t set out to create the ISD, the temptation of optimizing any action leads toward the creation of an ISD. As each goal is achieved, the next goal is brought forward in time. The only limitation is the time to record each goal in the ISD, and the process can be used to optimize the ISD too. History compresses into a singularity and the flow of time as we know it ends.

While the time loops may be infinite, the ISD calculations and actions still generate entropy, so the ISD civilization has an expiration date. Assuming the civilization remains in a particular area of space (such as a solar system), it will perform all work possible until reaching heat death. From the perspective of an outside observer, the ISD civilization accelerates to a singularity, then vanishes.

If a CTC is impossible, what’s the point of this speculation? All intelligence tries to approximate a CTC+ISD. When you try to throw a basketball into a hoop, you first create a simple model universe in your mind that simulates the trajectory of the ball, then test the hypothesis by shooting the ball. You repeat the process, using simulation and testing to perfect the ISD in your mind. All intelligence works by running simulations, testing them, then creating a solutions database from the results. Unlike a CTC, each iteration has takes time and uses energy. To minimize this cost of simulation, civilizations are likely to trend to ever more efficient computing, bound only by Landauer limit, the theoretical lower bound on energy consumption.

Currently, we recognize a big difference between simulations (whether in our mind, computer software, or a physical system, such as a wind tunnel) and reality. However, a future civilization which exist entirely as software, and may convert the fabric of reality into computational substrate (aka comptutronium) may not recognize such a distinction. If the Landauer limit is somehow overcome, future civilizations will achieve what is effectively a CTC+ISD.

#2: On the threat of invasive species

Earth already experienced a great extinction from an invasive species 2.4 billion years ago that killed 99% of all life on earth. It produces a chemical that was highly toxic to nearly all other lifeforms. That phylum is still the most plentiful lifeform on earth. (That chemical is oxygen and the lifeform is cyanobacteria.)

Today, we are still dealing with lifeforms that are constantly trying to convert the entire biomass of the planet to copies of themselves.

Can you guess what that lifeform is? It’s every single living organism, from the smallest bacterium to us humans. Every organism has evolved over billions of years to optimize the conversion of inorganic matter and other living organisms into copies of itself. The introduction of a new, alien species that dramatically outcompetes other lifeforms in every ecosystem on a purely evolutionary basis would be a quite difficult problem.

To take a small flaw as an example: the “White Claw” invaders in the film can take down top predators – and they can also glide. But flight requires light, hollow bones, whereas brute power to take down large animals and throw military vehicles like matchsticks requires massively strong bones and bulky muscles. The laws of physics constrain all life to specific ecosystems because all life faces all sorts of compromises.

#3 On the proper use of intelligence

In The Tomorrow War, the invaders compete with humans by a non-intelligent (or at least low-intelligence), non-tool using species. Whatever consciousness they have, the White Claws presumably do not adapt strategy or technology to the human responses.

This summer, I’ve been trying to get rid of weeds in my backyard. At first, I tried pulling them by hand, but they grow back. Then I tried an edger, but it does not destroy the roots, so they grow back quickly. Then I tried 30% concentrated vinegar, and it works because it’s absorbed by the roots and kills the plant. While the weeds might eventually adapt to vinegar, the point is that I can change technology much faster than the weeds can evolve new defenses.

Humans have been dealing with invasive species for as long as agriculture has existed. Our key weapon in the fight is our technology. We determine which strategy works and then scale it up. We don’t keep using the same failed methods (small arms fire), like the protagonists of The Tomorrow War.

What should we have done to deal with the White Stripes? Well, wasting resources to firebomb them when they already dominate an ecosystem is stupid. Instead, all initial resources should have been spent to identify a viable defense method, then scale it up. Even within the movie, it only took a day to find a toxin — why did they only think of that in the last gasp of the war? If not a toxin, then what about armored vehicles? Here’s another problematic aspect of big dumb animal invader science fiction: living beings are still made of blood and guts. Physics puts upper limits on density and power so that a tank will always be able to take out a biological being — and do it beyond line of sight.

A small, hidden invader is much more difficult to defend against. A virus, bacterium, or even something mosquito-sized is a much scarier threat than a big dumb animal. Mosquitos have been around for over 200 million years, and their victims still haven’t been able to mount an effective defense.