Broken Money by Lyn Alden
Date read: 4/2/24. Recommendation: 9/10.
Alden arms readers with an understanding of the evolution of money—where it came from, where it’s going, and what’s at its foundation. She digs into the modern financial system, financialization, the long-term debt cycle, currency debasement, and digital currency. It’s particularly relevant to today’s economic environment—in order to understand where we’re heading, we must understand how we got here and how things have transpired in the past. Similar to Ray Dalio’s The Principles for Dealing with the Changing World Order, in that regard, but far more detailed. A great read for those interested in finance, economics, and wealth preservation.
Check out my notes below or Amazon for details and reviews.
My Notes:
Primary question:
“Who controls the ledger?”
“The answer, geopolitically, is that in the telecommunication age, whichever country has the most economic and military prowess is likely to have the primary control over the world’s ledger, unless or until there is a better solution, or until no single nation is large enough to force its will onto the rest of the world.” Lyn Alden
Currency debasement:
“Problems inevitably arise in every realm, and time and time again authorities inevitably turn to the creation of more currency to soften those problems and devalue various debts in a non-transparent way.” Lyn Alden
“When the government establishes a central bank, and especially if it outlaws gold ownership, it takes monetary power away from the people and gives it almost entirely to the banks and government authorities. People at that point have limited ability to custody their own scarce and liquid assets, and instead must rely on the central banking ledger; they must therefore submit to the risks of currency debasement and must give up most of their privacy. Government officials can now more easily take purchasing power away from savers—not just through transparent taxation but also through non-transparent inflation of the money supply—and channel it toward their goals.” Lyn Alden
Governments learned taxes were too transparent, people could see what they were paying for. Whereas printing more money over time was less obvious and allowed them to achieve the same outcome. “…this new capability represented a tremendous power shift from those who use the ledger to those who control the ledger.” Lyn Alden
“Rather than blaming individual politicians for handling the budget of countries poorly or blaming individual central bankers for handling private sector credit poorly, I instead point mainly toward sound money principles being nearly impossible to implement with the current level of monetary technology that we’ve had over the past century and a half. With the ability for central banks to print fiat currency as needed, and the speed of hard physical monies (e.g., gold) being too slow to present a realistic alternative payment system compared to fiat currency ledgers, it inevitably shifted political incentives toward constant fiscal deficits, constant credit growth, and constant currency devaluation, with little or no resource for those who disliked this situation.” Lyn Alden
Gold vs. fiat:
20th century was the only time in history, on a global scale, where weaker money (fiat) won adoption over harder money (gold). “And it occurred because telecommunication systems introduced speed as a new variable into the competition. Gold, with its inherently slow speed of transport and authentication, couldn’t compete with the pound, the dollar, and other top fiat currencies with their combination of speed and convenience, despite gold being in scarcer supply.” Lyn Alden
Speed: “This mismatch or gap in speed had been a foundational reason for the greater and greater levels of financialization that the world has seen over the past century and a half.” Lyn Alden
World reserve currency:
Many people think there must be a world reserve currency…”The world is instead shifting toward a multipolar, neutral reserve currency system, rather than a system where one country issues far-and-away the most dominant world reserve currency. No country, whether the United States or China or anyone else, is big enough to issue a fiat currency that the whole world can use and would want to use. The only thing that can be big enough is a form of supranational money; one that has natural scarcity and is not issued by a government.” Lyn Alden
“No structure, even an artificial one, enjoys the process of entropy. It is the ultimate fate of everything, and everything resists it.” Philip K. Dick
Qualitative easing vs. qualitative tightening:
QE: The Federal Reserve can create new base money through QE. Creates new bank reserves out of thin air, buys existing assets like Treasuries or mortgage-backed securities with new reserves.
QT: The Federal Reserve can also decrease the amount of existing base money by performing QT. Sell Treasuries or mortgage-backed securities for reserves and therefore delete those reserves.
Inflation:
2% inflation target = prices double every 35 years
Price deflation is a good thing: “Ongoing productivity gains should make prices lower over time, not higher. Central bankers do everything in their power to make sure prices keep going up. To put this another way, central bankers do everything in their power to ensure that deflationary productivity gains are continually offset by a greater amount of currency debasement, so that nominal prices of goods and service keep marching higher at a slow and steady pace despite becoming more efficient to produce.” Lyn Alden
But deflation is bad for highly leveraged financial systems. That’s why policymakers and economists fear it.
“There is little or no political incentive to run a surplus in any near term, and so it is rarely ever done.” Lyn Alden
Bitcoin:
Volatility due to how new it is as an asset class. Monetized from zero to more than a trillion-dollar market cap in its first 12 years. Only held by small fraction of global population. “Only once it is closer to its total addressable market, with extremely high levels of liquidity and user adoption, can its notorious price volatility realistically diminish.” Lyn Alden
Guaranteed to be cyclical (higher-highs, higher-lows): “A new type of emerging money cannot be widely adopted quickly This is because if too many people adopt it at once, it drives up the price and incentivizes leveraged buyers to enter it. This leverage eventually causes a bubble to form and to pop, which sets the price back and disillusions people for a while until it builds the next base and grows from there. Due to the attachment of leverage, Bitcoin cannot realistically have a fast and smooth adoption curve like non-monetary technologies can.” Lyn Alden