Public and Private Credit Creation
The myth of the private market economy -- a review of trends in money printing, implications for bitcoinization, and what to do in the meantime
This newsletter seldom publishes due to an attempt to share primarily novel content as opposed to entertainment style or news pieces (I published nothing here for 26 years). The majority of the content related to bitcoin is a generic rehashing of the same statements, and since bitcoin is such a simple thing at its core, the mimetic narratives become incestuous and tired. As bitcoiners say, people are no better than their incentive, and the incentive when you are winning so much and know how much you will continue to win is to relax, and go after the easy dopamine opportunities such as mocking shitcoiners or nocoiners. While it may be fun, and I cannot say that I do not partake as well, it is more satisfying to highlight how other bitcoiners are wrong. It is also far more useful for it is the people holding bitcoin who are economically relevant. The fiat world is wrong enough so I really cannot stand the degree of disregard for the nature of reality that has become commonplace amongst many bitcoiners. It is intellectual laziness.
After a brief rant, I will show through a simple compilation of historical data on credit creation, taxation, and federal deficit spending in the United States that many statements and claims popular among bitcoiners are fundamentally flawed. There are three practical, possibly actionable considerations I will cover: 1) a hypothetical (albeit, unlikely) scenario by which bitcoinization could be slowed for decades somehere around the $2m mark; 2) a mechanism to counter such a scenario that might not be possible if the prior scenario occurs; 3) my plan going forward to build a new type of research institution that can proceed with a high degree of invariance and irreverence toward the particular path fiat takes on its way to zero, which I think will garner the interest of a handful of whales who wish to see certain things happen now rather than only commencing at some unknown time in the future.
[Note: part way through writing this I noticed there were some flaws in the math. Tried to address those to the degree possible. I think the essence of the piece is still valid so I didn’t want to throw the whole thing away halfway through.]
How much is there to fix?
My entry into bitcoin stemmed from my actions as an entrepreneur advancing certain frontiers in aerospace & defense, a market that is quite closely tied to reality. Unlike medicine where insurers are paid irrespective of the worsening outcomes decade over decade, there is an arguement to be made that the defense industry may in fact be the closest approximation of a free market out of any by virtue of the fact that you cannot lie about it by decree — if your machines our not truly the pinnacle, you may be destroyed. You either have a missile that is good enough to hit a target, an interceptor that is good enough to stop your enemy’s missile, or you do not, and they are perpetually operating under the same framework. This requires a lot of caveats and I might not even make the argument at all, but there is a sort of purity in competition that is not present elsewhere.
Of course, the tempo of aerospace and defense may seem much slower than in software where the feedback as to whether a piece of code compiles or not is nearly instantaneous. However, a piece of software running does not tell you anything about whether the business that required it will be successful in a decade so perhaps the slow tempo of aerospace and defense is not a problem. There is the reality of whatever is happening in each moment, regardless of whether it takes some decades to know all the details of what already happened.
That being said, it is not entirely opaque and it is natural to attempt to predict what is happening and ask, “am I operating within a free market or some sort of top-down controlled market?” It is a hard question to answer from the perspective of a naive agent attempting to infer the environment they are in simply by their direct bids and offers in relation to their enterprise. However, there are a very narrow range of developments that can be undertaken at a small scale that have the possibility to yield an extraordinarily large signal about the macro environment. One must stumble one’s way into an extremely large magnitude error such that Wittgenstein’s ruler may apply: if you are not sure about the accuracy of a ruler with which you measure a table, you may actually be using the table to measure the ruler. I do not want to get to far into why it is that thing I was working on was such a table that allowed me to see the true depths of fiat retardation or defend that point here as it is sort of tangential, just know that I am convinced of it, and that makes destroying fiat personal for me in an idiosyncratic way. It is different to have a global theory about free markets, noticing universal trends applying to you, than to be the tip of the spear itself of those theories.
This brings us back to the original question: how much is there to fix? My answer would generally be more than most bitcoiners think. There are many ways to specify the hallmark of what it means to be a Government, and some would point to the monopolization of violence as the central element, but this does not truly capture the essence of what it means to be a State-like entity or State-like activity. To say that Governments are simply some sort of tier 1 violent cartels is a reductivist description based on operations that fails to capture central doctrinal elements. A person or group that takes some violence into their own hands for instance does not usually seem to be acting like a State. There is a deeper essence, which is that of collectivism in contrast to individualism.
Many people in refuting collectivism point first to the moral principles of non-aggression or non-violence, or the 100% failure rate and enormity of every communist regime, but a simpler explanation can be found from a perspective of control/information theory and the curse of dimensionality. Overall, a complex system cannot be effectively modulated in a top-down fashion because the nature of complex systems is that they are chaotic and unpredictable, even if their initial conditions were perfectly legible and they are not. Only when information is processed locally at a small scale with simple rules does proper order emerge, as is well known in computer science and biology, in contrast to the normie meme that anarchy equates to chaotic disorder. The smallest scale localized information processing unit is the individual and as soon as the scale is increased from this, even when done freely, there is an efficiency loss as per Coase’s theory of the firm, and not unlike the fact that machine learning models must be trained in datacenters that ideally have low interconnect latency between chips — the correct ideas of morality around non-aggression in fact follow directly from the basic laws of physics that govern everything.
Therefore, we can think about statism as something that can be emulated in this capacity of collectivist action even by non-state actors, not differently than violence is categorized as being carried out by “legitimate” state actors or “illegitimate” non-state actors. The principle element is the removal of the individual from a decision-making process and the transferrance of control to a committee or collective of actors, each of which is entangled by some sort of structural bureacracy that prohibits them from effectively exercising power as if it had been delegated to them. It is tempting to think that the architects of these bureacracies might be able to control the outcomes, but as we have mentioned, complex systems inherently elude control and are plagued with “unintended” consequences.
Bank credit as the real “deep state” / shadow government
It is not necessarily in the interest of State-like actors to reveal themselves as such, and one of the best methods of obfuscation is when the pseudo-individuals within the bureacracy are themselves oblivious to the fact that they are State employees. It is very cognitively simple to speak out against the centralized and highly legible Governments that self-identify as such, but it is harder to rally against State-like entities, and most people are so bad at it, these attempts devolve into conspiracy theories, which ironically, are deeply in support of the central premise of statism, which is that collectivist control of complex systems is actually attainable.
When banks are able to print money, they are able to control human action, and as private entities, they are inherently dictatorship State-like entities as opposed to democratic republics that have a semblance of representation in the taxation. The banks have the ability to effectively collect taxes in the form of money printing, and they are able to tax people that are not their shareholders. This allows them to seize control of assets, and run industries via their representatives. What this amounts to is a deeply communist Government, that has externalized the communist control to officially non-state actors that behave no differently from a state bureacracy. The communist rulers seek to consolidate their power and further erode capitalism by scapegoating the formal governments, a setup that ensures bipartisan support.
We can then consider that the bitcoiners that pretend the legible governments are far worse than these illegible state-like actors are likely simply those that barely became bitcoiners, and still have their ego or social life wrapped up in their delusions that free markets are the standard. There are many clues that the markets are not really free, such as the fact that almost as a rule, companies that grow to IPO have founder ownership around 10% and the same funds are always at the top of the list of ownership — of course, someone defending the statism would point to the fact that those funds represent millions of Americans, but the reality is that by passing through those funds, the individuals become collectivized, and their individual agency obliterated… and there is only the “need” for such ridiculous funds in the first place due to the absence of a sound savings instrument. These funds ultimately own the voting rights with a small committee that become the de facto rulers of this Western communist regime.
One might also ask, “if this is really communism, why do we not see the deaths of millions of people as in all prior communist regimes?” Not a bad question, actually, and the answer is we do have millions of people being killed, simply through mechanisms such as cancer and heart disease skyrocketing. Or consider, when a person transes themselves because Obamacare enabled insurance companies to turn that into a money maker, and then that person later commits suicide, that was a death carried out primarily by the state, and the operators are principally the insurance companies, banks, and private equity companies running the hospitals. In the anarcho-tyranny of Western communism, the formal government does run the protection, but the tyranny is carried out by state-like corporations that are fundamentally anti-capitalist. Even down to the venture capitalists, they can be seen as government employees for they operate a portion of state-pension-funds, and the university endowments, the latter of which are funded via student loans, and those being entities that have become primarily propaganda centers rather than actual education or research institutions.
tl;dr if you fixate on the formal governments and disregard or even defend the informal ones, you are a communist, and fuck you. You are not actually retarded, just intellectually lazy. Elon Musk for instance has repeated this lie in its most extreme form claiming that 100% of inflation is from Government spending, and perhaps I should thank him for being such a retarded, disengneous shitcoiner, as it makes my job of becoming the Schelling point for advanced bitcoin industrialism easier, as there are only so many people competing for that, but I digress. Let’s get to the actual numbers so we can refute this nonsense once and for all!
Money printing by US Gov vs US banks over a few decades
There are 4 numbers we need to compare the public vs “private” money printing.
Total receipts of US Government (taxation)
Total outlays of US Government (spending, from which we get deficit)
Total private bank “liquidity creation”
US GDP, since we want to normalize percentages to look at trends over time since neither “inflation-adjusted dollars” or nominal ones are a good measuring stick.
One might think it would be tricky to get the private bank credit creation, but luckily for us, the Philadelphia Fed released a report in 2023 detailing exactly this. The abstract immediately gives us a very good idea of what is going on:
Relying on theories in which bank loans create deposits—a process we call “funding liquidity creation”… During the 2001–2020 period, 92 percent of bank deposits were due to funding liquidity creation, and during 2011–2020 funding liquidity creation averaged $10.7 trillion per year, or 57 percent of GDP.
Before going into the exact numbers, we can already get an excellent sense of the current state of affairs from this. With GDP having risen sharply over the past 4-5 years to around $27 trillion, we would estimate funding liquidity creation of $15 trillion. Government spending is around $6 trillion, with around $1.5 trillion (actually a bit less) being deficit spending. This is a 10x difference indicating 90% of the money printing is privately controlled. Not only that, but the shadow government of banking is about 2.5x larger than the official Government i.e. about 70% of the government is the fiat bureacracy that is not officially part of the Government. Another way to look at it as that the Government plus this state-like collectivist bureacracy together control around 80% of the GDP, answering the question as to how much of the market is actually free. Though this number of 20% free market is misleadingly high due to scale non-linearity and the non-ergodicity of markets, which will drive individuals away from exerting whatever agency they do have. Perhaps the 92% number from the Fed is more meaningful as an estimate, the realization that the overwhelming majority of the float is money that was printed out of thin air should make it abundantly obvious just how communist and Cantillionaire the world really is, somewhere around 80-90%.
This means that without fiat, there is a free 5-10x jump as individuals will be free. This would lead one to potentially take original inflation adjusted price estimate from Hal Fanney of $10m and now $20m per coin to really mean $100-200m per coin in today’s purchasing power after an extremely rapid period of efficiency gains with this 5-10x. It is actually incredibly bullish on human civilization to assert that the Western world is 80-90% communist. Frankly, the number hasn’t changed that much, and I know I said I would do a more detailed analysis, but it really is a bit tedious to get all the numbers together and wrangle them in R and I don’t think it actually adds all that much value here, especially because I am realizing everything up to now is technically wrong because the fiat dollar system actually cannot be audited accurately, largely due to the delays between credit creation and spending, from which there is the notion of being able to spend the new dollars before the inflation hits the market (seigniorage / Cantillon effect). For instance, in the $10.7t number, much of that is balanced out with debt repayments that delete dollars or the supply would inflate far faster.
We can try to look at the problem another way, which is debt expansion in all sectors as compared to federal deficit. Assuming federal liabilities are included in this, then private money printing is only about 55%, much lower than our previous estimate. However, looking at the past couple years, the private money printing jumps to around 70%. If anyone has feedback on a better way to calculate the public:private printing ratio, I’d be interested to hear it. One thing to note about the chart below is that from what I could find, it does not seem to include financial corporation debt, so I think it is likely underestimating the total.
Another relevant consideration:
Thought experiment of an “attack” to slow bitcoinization
Original tweeted this scenario here
Everyone has been asking "what if Governments make Bitcoin illegal?" ...but what if, as convertible bond market speculative attacks drive price upward, repricing equities down 3x to a P/E near 7x, and similar for RE, the Government makes private dollar credit creation illegal?
Abolishing the Fed and having the US Treasury run a single node where only the US Government can issue more monetary units. Additionally, in such a scenario, the IRS might be abolished with taxation switching to tariffs, VAT, and a 3% B&O tax on business revenue.
Without private money printing, an exactly 2% inflation on the dollar could be added, and 100% of inflation could be owned by the Government, meeting their implicit objective of 51% GDP control, while still sounding like a free market pro business set of policies.
With bitcoin at a mere $2-3m per coin, everyone would have a bit of exposure, but the entirety of contracts being specified in dollars, would suddenly not seem so bad to businesses since the removal of private money printing could allow actual 2% inflation rather than 8%. Bitcoin's growth could temporarily look similar to the SPY, which nominally might would be lower with less inflation, and people did not feel the need to write contracts in SPY rather than dollars.
As most of the relevant economic actors in the world are corporations that have already bent the knee to Governments, they would keep using this dollar, a Central Government Digital Currency that would enable total surveillance. With the volatility of fiat then effectively damped, there would be less inability to preserve one's savings through equities as market exposure would be more ergodic, and misallocation of capital would be limited only to Government activity.
So in this thought experiment, there are two considerations: 1) What gets bitcoin to breakout of the $1-3m range within a 4 year cycle given mining is already de minimis to the float; 2) What gets bitcoin to breakout of that price if that becomes a 10 year crab market -- of course, by reflexivity, the mere consideration of a 10 year crab market means it might have several years of going down -- how do you know $3m to $2m won't be a 5 year process in my scenario?
This economic scenario would be massively superior to the present one and nations would not want to shift because it allows them to retain that 2% inflation AND "emergency" powers to increase that number. So that gives us two mechanisms of breaking out, the first being that Government violation of "trust" means sooner or later, inflation rates will rise, and flows into bitcoin will be net positive.
The other approach is 3rd tier nations, not having sufficient CGDC access as being deemed too insignificant to be a prime vassal state like Australia or EU, will operate independently, on a bitcoin standard, with Government percent of GDP spend being much lower. Now the tricky thing about this situation is that value compounds so America, etc will be growing much faster in nominal terms, but in exponential growth, it is the exponent that matters most. It may seem hard to imagine and take a while, but even in this stable fiat thought experiment, the nations on a bitcoin standard eventually eat everything, along with corporations that decide to go 100% bitcoin.
This is an alternative to the Stock2FOMO model, a dollar nominal hyperbolic price model, a concept I first stated afaik. Can anyone refute that such a scenario of a 10-100 year $2-3m crab market is possible? And I think it only is possible under the condition I described of Government outlawing private credit creation. I think that is the only way to stop repeated violent upward movements in price. And btw, I have not seen any of the digital gold FUDsters actually present a scenario anywhere near as coherent as this, so you're welcome. After tweets from @brian_trollz and @L0laL33tz, along with the nonsense from people who claim fiat will be around forever, I figured I should steelman my take.
Avoiding the possible $1-3m prolonged sideways market
To reiterate, I think this is an extraordinarily unlikely scenario. Though it not happening and seeming improbable indicates we could very easily be at $5-10m per coin far faster than people think with nothing to slow down speculative attacks from corporations or nation state buying e.g. within a few years.
Even if my thinking here around the Government banning private printing scenario is correct and it is viable, I don’t think there is enough of ability to proactively do anything against the inertia of things continuing the way they are. However, I want to keep playing out the scenario a bit across two possible forks.
Privacy and sovereignty considerations: first, we can note that a centralized government currency would be horrendous for privacy, though in the prolonged sideways market, it would be easy to write and settle contracts in bitcoin. Perhaps there would then be a smooth, simple, gradual transition to a bitcoin standard where both dollars and bitcoin are simultaneously fairly stable. Anyone who wants the privacy and sovereignty of bitcoin would be able to access it.
Dethroning the dollar as the Schelling point: as I have repeatedly pointed out, the dominance of the dollar is largely due to its dominance as the currency of contract of choice, both in debt agreements, and long term trade agreements, which leads to everyone in the world needing to hold dollars, not because they see the dollar as a savings vehicle, but because a dollar is perfectly neutral (exactly zero volatility) with respect to a future dollar-denominated payment obligation. It is not clear to me what bitcoin’s volatility would be like in my hypothetical scenario, and perhaps even with a stable dollar, we cannot assume businesses will prefer to switch to it all of a sudden — this is almost a tautology as a world in which businesses switch suddenly inherently means there must be volatility, limiting the speed with which they want to switch. This paradox is why it is possible to envision the move from $1-3m to the final 10x being dragged out, potentially, with sudden price jumps occuring in any fiat spending spikes such as a large scale war.
There is a unique window now that may be closing to introduce a new competing currency, a transitionary currency that can go between the dollar and bitcoin standard, analogously to the individual gradually shifting their savings, the currency of contract need not switch over in an abrupt, discrete fashion. A hardened dollar could be made as a composite currency that is mostly USD (for the low USD volatility), combined with some bitcoin and possibly even some SPY to give it better purchasing power stability over time. The properties of such a composite currency work quite well now that bitcoin is only $100k or so, and the SPY also does well nominally with high fiat, and with fiat being increasingly dysfunctional, there is a compelling reason now for businesses to switch to an HD (hardened dollar), and attain a Schelling point status as an acceptable currency of contract. In my hypothetical, the dollar would be stable enough that it might not be compelling, for a 50:50 composite currency of USD+BTC might not seem all that much better than USD if BTC is going sideways i.e. what is the Sharpe ratio, though normalized to downside volatility rather than ordinary volatility.
If an HD emerges and gains tractions, it then starts the slippery slope for the shift away from the US dollar, after which it is far more natural to switch to a fully bitcoin-denominated long term contract. Moreover, it starts that slipperty slope before bitcoin is seen as far more of a threat to the US dollar than how it is seen today. Making bitcoin “digital gold” that never becomes a unit of account could be seen as what will be the final objective of the fiat system before they lose, so here I am presenting what I think their strongest move would be. I don’t think they will take it, but it wouldn’t hurt to pre-emptively counter it.
Avoiding the bitcoinization anti-agency trap
Across the various paths to bitcoinization, a topic I think most bitcoiners simply handwaive and sort of make a quantum jump in their minds from “going up a lot” to “well wasn’t that whole fiat thing a funny part of history, glad it is only bitcoin now.” Until coming up with this scenario, I was practically certain that bitcoinization would require composite currencies (and I was thinking about it within the context of a relational labor contract, where a salary is made to fluctuate, and implementing this with forward contracts rather than naively for a few different reasons).
I tried to get involved, no one wanted to help me, and because I was focused on actually building advanced technologies (and living under a highly artificial environment e.g. a student being brainwashed), and I did not notice I need to focus on the money itself for a number of years, I was out of position to be trying to bootstrap a fairly complex derivatives as a service platform. Perhaps something will come out of it with some of the people I am chatting with now, but despite bitcoin being the most central bottleneck to human civilization, there is also something that feels ephermal about working on bitcoinization. Though the path it takes and how quickly it happens will ripple throughout eternity, there if a definiteness to it that is not found in other domains. Moreover, adoption related technologies, as clever as one might think they are, are all ultimately related to subjective belief and unpredictable human behavior.
A non-profit advanced research institution
One thing I like about defense, and especially the way I went about it is that there are certain things you can build and present to people such that once it is understood what one has (and you do need to make sure you get there, which is itself a challenge), adoption of the technology is not a choice, not really at least. And even that is only possible within a narrow sliver of defense. That is the nature of true critical path technological advancements in hardware, not simply products that offer a set of user features. Such advancements become part of the tapestry of human civilization in a different way, irrespective of human foolishness. If you build a software tool no one uses, then it was nothing, but if you build the correct hardware, it is intrinsically real almost regardless of external reaction. Even bitcoin itself, being software, does not exist as a technology that can be decoupled from its symbiotic planetary lifeforms the way physical objects can.
Hence, I am shifting my focus. Company building has been successfully 51% attacked — it is now more about the monetary premium than the thing itself, and really, every intelligent company must simply pull an MSTR, making it very difficult to do just about anything. This is related to the problem for bitcoiners in which it is not really possible to do much now since every investment is a short position against bitcoin, which cannot ever match the risk-adjusted returns of bitcoin. However, a non-profit can solve for that by risklessly guaranteeing all contributions will result in negative 100% on one’s bitcoin contribution!
In all seriousness, there’s quite a bit more to it than that. I want to buid certain technological foundations in a way that can move forward irrespective of the path bitcoinization takes, and with a focus on the tip of the spear of advancing certain capabilities, rather than having to focus 80% on fiat financial nonsense. I will let others handle the fiat nonsense from separate entities. I have determined this organization will be the best way for me to get back to my work, and I have high confidence bitcoiners will fund it — I ran the numbers, and there seem to be far more whales than there are people like me. To the best of my knowledge, there are roughly 0 other people with a background anywhere remotely close to mine, whereas the bitcoin rich list shows about 2000 addresses with >1000 bitcoin. I like those odds.
I’m not entirely settled on what the name should be, but I’m thinking maybe MARC1.
Michael’s Advanced Research Center #1, or
Machine Architecturs, Robotics, and Composites #1, or
Slogan: Pursuing the Machines & Materials Architectures After Next
I have around 11k words drafted of the treatise that will explain everything. Will probably end up being somewhere close to 25k words when it’s done, and I have a handful of people I will be reaching out to who I think might be interested. One quirk about the minimum funding amount — it will be denominated in bitcoin, and it will not budge or I invite the temptation to delay action. Anyway, not sure who reads this, but in case this seems relevant to you or people you know, feel free to reach out.