Notes on Ray Dalio’s November 5th 2019 Thesis

A Bitcoiners Guide To the Galaxy of Worth-less Fiat

These are just some thoughts I had as a Bitcoiner to go along with Ray Dalio’s thesis “The World Has Gone Mad and the System Is Broken.”

None of what is said should be news to anyone, but could resonate for those who understand. He who has ears to hear etc.

My comments are in standard text, while Ray Dalio’s Thesis is in italics.

I say these things because:

Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give.

Free fiat money is abundant and infinitely producible. Free money eats itself alive in the long run, making itself worth-less. In the short run it distorts markets, as no one can properly value what is and isn’t. It’s a horrible grey area slowly turning black. Thus, scarce monies are needed and turned too as stores of value and arbiters of truth.

More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up.

If the goal is economic activity, if the goal is people at work working, then what is needed is a money whose value can stand the test of time. Free money is not a money that can stand the test of time. Thus, working people find little incentive in accepting ever depreciating money as a form of exchange for their labor. Therefore, they convert their earned depreciating monies to better monies, earn their wages in old or new monies (Gold or Bitcoin), or stop working altogether. After all, why work and/or save for wages that will be inflated away in the years to come. And so, free money incentives non-work, thereby decreasing productivity.

The assumption that free money will incentive work or productivity is flawed as it assumes we do not see the trick of ever depreciating value in fiat wages. It is seen. It is noticed every day at the grocery store around the country. Government published GDP and inflation statistics paint a prettier distorted picture. Unfortunately, you can’t eat a painting, and those that try get lead poisoning. In this vain, those that see the trick and can afford to not work will instead speculate, rent-seek, and/or turn to addictive habits. After all, why labor for a soon to be worth-less money.

The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises. As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish.

Economic growth remains sluggish, YES. But, no one living in the real world believes inflation remains sluggish. Admittedly however, inflation as measured by the government does not mean the same thing as inflation as felt by the people living in the real world.

Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital, though these assets’ low expected returns are not as apparent as they are for bond investments because these equity-like investments don’t have stated returns the way bonds do. As a result, their expected returns are left to investors’ imaginations. Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power. There is now so much money wanting to buy these dreams that in some cases venture capital investors are pushing money onto startups that don’t want more money because they already have more than enough; but the investors are threatening to harm these companies by providing enormous support to their startup competitors if they don’t take the money. This pushing of money onto investors is understandable because these investment managers, especially venture capital and private equity investment managers, now have large piles of committed and uninvested cash that they need to invest in order to meet their promises to their clients and collect their fees.

Enter Bitcoin. It ticks so many of the above desired boxes for free money to flow into. It’s a new technology, it has a huge network effect with hundreds if not thousands of startup like companies waiting on the wings. Jack Dorseys Square Inc, and their popular CashApp allowing for the purchase of Bitcoin is one such example. The Bitcoin space is filled and built upon dreams. Oh, and it just so happens to be the hardest money in human existence (aliens probably have a longer chain though, luckily, they haven’t figured out how to broadcast a block solution across several million light years within ten minutes).

At the same time, large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments — amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long. Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money. This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies — i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen.

long. Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money. This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies — i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen. At the same time, pension and healthcare liability payments will increasingly be coming due while many of those who are obligated to pay them don’t have enough money to meet their obligations. Right now many pension funds that have investments that are intended to meet their pension obligations use assumed returns that are agreed to with their regulators. They are typically much higher (around 7%) than the market returns that are built into the pricing and that are likely to be produced. As a result, many of those who have the obligations to deliver the money to pay these pensions are unlikely to have enough money to meet their obligations. Those who are recipients of these benefits and expecting these commitments to be adhered to are typically teachers and other government employees who are also being squeezed by budget cuts. They are unlikely to quietly accept having their benefits cut. While pension obligations at least have some funding, most healthcare obligations are funded on a pay-as-you-go basis, and because of the shifting demographics in which fewer earners are having to support a larger population of baby boomers needing healthcare, there isn’t enough money to fund these obligations either. Since there isn’t enough money to fund these pension and healthcare obligations, there will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money (which would have to be done at the federal level and pass to those at the state level who need it). This will exacerbate the wealth gap battle. While none of these three paths are good, printing money is the easiest path because it is the most hidden way of creating a wealth transfer and it tends to make asset prices rise.

I’m not sure I really buy the argument that inflation is a hidden tax anymore. Maybe in the 30’s when financial and educational attainment was low it was possible for this hidden wealth transfer to go unnoticed. But with higher education being the norm, and a little thing called the internet, the masses are increasingly aware of the free money game being played. Especially among the young who are cynical beyond their years. Access to the world’s knowledge at their fingertips has had a roll to play in this. Immediate access to the worlds wealth of information has never happened before, and this is the first generation to be born with it in the palm of their hands. Do not underestimate this.

As pensions beg to be bailed out by the very system that set them up to fail, central banks will meekly acquiesce to their demands. But the young and working will not consent to participate in such a farce. And the discerning old will be wise to this shift. They will, currently are and/or are preparing to exit the current government backed fiat system on which these debt-backed lying obligations parasitically fester.

Bitcoin will be one exit answer, Gold another. Bitcoin will act as a life raft for the informed and rebel young, while Gold as a life raft for the informed wiser old. Both have a role to play in the world after fiats finale. A third answer could emerge as one country will submit these two havens as the basis for something old, and something new. In the long term however, Gold will be outdone by Bitcoin, as the nature of Gold is one of vaulting and anti-self-custody. Thus, gold enables fractional reserve systems of money as it is difficult to self-custody within a reasonable time. In contrast, Bitcoin is quite possibly the most secure immediate self-custodial asset in the world (if you know what you are doing), thereby discouraging fractional reserve finance. More to come on this point soon.

After all, debt and other financial obligations that are denominated in the amount of money owed only require the debtors to deliver money; because there are no limitations made on the amounts of money that can be printed or the value of that money, it is the easiest path. The big risk of this path is that it threatens the viability of the three major world reserve currencies as viable storeholds of wealth. At the same time, if policy makers can’t monetize these obligations, then the rich/poor battle over how much expenses should be cut and how much taxes should be raised will be much worse. As a result rich capitalists will increasingly move to places in which the wealth gaps and conflicts are less severe and government officials in those losing these big tax payers will increasingly try to find ways to trap them.

Again, enter Bitcoin, the best way to store, transfer and move wealth across borders since 2009. Memorize 12 words, and you’re suddenly smuggling 21 tonnes worth of gold across the border in your head. Such is the power of Satoshi’s invention. Capital flight? Easy. Capital controls? Obsolete. Wealth confiscation? Now requires kidnapping & torture to be extracted and may be ineffective as decoy Bitcoin accounts and duress passwords are freely available.

Taxes? Optional.

At the same time as money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps. Also contributing to these gaps are the technological advances that investors and the entrepreneurs that I previously mentioned are excited by in the ways I described, and that also replace workers with machines. Because the “trickle-down” process of having money at the top trickle down to workers and others by improving their earnings and creditworthiness is not working, the system of making capitalism work well for most people is broken.

To those who have everything more is given. To those who have nothing, more is taken. This system is not capitalism. It’s corporate communism. And many will not consent to or participate in such monetary or self debasement.

This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.

It is. Sell Fiat, Buy Bitcoin.