Equity v. Debt Innovation

I’ve been thinking a lot about the Global South lately. For years, I’ve had the sense inside that there’s something seriously wrong with the present monetary system. Namely, I remember driving 40 mins to the nearest bank which would offer a free checking account for minors in high school.

I just think there’s something so fundamentally wrong with charging people to use their own fucking money. Like it makes absolutely no sense whatsoever. It’s just absolutely hearsay at best.

I don’t know how I can express to you how important this is to me. It’s very challenging for me to capture my emotions in black and white without hrefs. But I just don’t have time lately for this context in a micro.

Challenges

Debt is not sustainable. It introduces negative compounding growth. Negative compounding growth leads to inflation (since you need to increase the total supply of money available to everyone in an effort to make it possible for borrowers to repay their loans).

I guess one way to think about it is if we’re on the gold standard but say for argument’s sake we mine all gold in the universe. If you lend someone gold at [Insert Any Number Here] percent interest, where are they going to get that “new money” from? They can’t get it without taking more money from their neighbor than they borrow.

But where does the neighbor get the money to pay the borrower? It comes from the global supply of money. And so on some other end of the world, someone else needs to borrow money.

They need to borrow money because they have to buy things to survive. But if we have N+1 “money units” in the world, then the supply of what you can pay from introduces problems once you get to N “money units” of demand.

In a global economy, this presents material challenges if we all use the same money unit. While I fucking love forex trading, it seems like a common money would best serve an increasingly interdependent global consortium. Namely, this makes it much easier to price consumer products, wage rates, and investment assets.

This is a good thing because now you don’t have to worry about which “money” to save in/use/share. Instead, you can live worry-free of how your money might change in value to all other monies. Indeed, organizations may have entire arms of employees tied up in the needless arbitrage between different money options.

This is a good thing because poor people can’t justify the time it takes to analyze, arbitrage, and invest in different markets for money in any specialized way. It would basically need to be an entire side gig, and for most people that would be a complete waste of time to save small amounts of “money”/wealth, assuming one fiat doesn’t become massively more valuable. But in this edge case, then you would just only save/use/give that currency, which is the same argument for having one money unit.

Interest¹

So, we have compounding negative money. This, as we said, is because it takes more money to pay back money borrowed. But where does this “new” money wind up? 💭

If you guessed banks, you’d be right. And the challenge with banks is they are (increasingly) centralized “houses” for capital. If we can presume that money is power, then this means the centralization of the world’s power in the long run. And of course, absolute power corrupts absolutely.

So how do we stop the next financial crisis, a plutocracy, and unwarranted impoverishment? Of course, everything ties back to the Bitcoin argument that we “need to fix the money.” But Bitcoin is fucking challenged materially.

I think this is because Sassaman died so early on, so there was no empowering leader into the war. Heard an interview with his wife today (only a few minutes) where she said “she didn’t know if it could be him” or something since he was good at keeping secrets. Will be interesting to see what the host finds if they go through with analyzing the old laptop drives.

Anyway, the conundrum here is that you can’t localize money if we assume that we might use Bitcoin as the new money unit. What I mean is that, since it’s about the same speed as Fedwire, it’s damn near impossible for you and me to ever use it. If this is the case, then we can’t self-custody our assets.

This is an extremely bad thing because now we still need to rely on these centralized institutions to hold our assets. And what have these centralized institutions done over and over again for centuries? They fucking loan those assets out at interest.

If the institutions When the institutions loan out Bitcoin, they set up the borrowers with a Pascal’s Wager. Basically, we’re assuming that the number of people who borrow BTC stays low. This is so you can always have more BTC not lent available to pay.

But remember that debts compound, and so even a small number of borrowers of a trivial amount of BTC will eventually lead to more BTC owed than 21 million. And of course now the problem is that we basically need to crash the economy by defaulting on the world’s debt, or something along those lines. This could get violent.

Equity

Equity is probably how people invested before fiat money and the relative exhaustion of the world’s gold supply. Loans of gold are fine if there’s an entire other continent with massive unknown reserves. But it just doesn’t work if we only increase the supply by 2% a year.

It (gold loans) would basically force banks to only charge up to the inflation rate of that amount of gold in existence. Of course, they’re not going to fucking do this because of the localized self-interest of shareholders. And so whoever can play the lending game best will ultimately become the only bank.

This is paralleled in the centralization of American banks, difficulties of establishing a new US bank, and of course the monopolization of Fed region banks. So, in the long term, that leaves us with one bank.

However, the process by which that bank came to central power has created more money unit entitlements than exist (in BTC case) or can be repaid sustainably without uncovering new magic asteroid resources (in gold’s case).

I don’t think it’s responsible to base a monetary supply on mining asteroids. See Don’t Look Up. Accordingly, it’s irresponsible to lend something with a fixed or rate-limited supply growth.

Indeed, the only way to support such a system is to inflate the money unit into oblivion, as we see in fiat. Or let everything continually crumble down in repeated “business cycles” which are just fucking bank notes coming due and credit tightening. Over and over again this perpetuates.

But equity investments work! They finally give us the answer to capital allocation. And indeed, this is precisely why the best equity investments (in terms of deal for the issuer) come from decentralized raising efforts.

Proposition

When a startup (or even a small private company) needs capital, they presently must turn to a centralized fund, assuming they need any material amounts not available from a select few local people or communities or grants. There are not as many capital-distribution organizations as there are investors. Therefore, it becomes impossible for the issuer to raise at the valuation which would be paid by the most bullish members of a society.

If you think we should prop up the returns of the 1% who have access to these VC funds, then this is a good thing. It gatekeeps stellar investment opportunities to a select few bureaucracies given the power dynamics implicit in the LP/GP structure. This is a very bad thing for who “controls” which startups succeed, which fail, and which have their ideas stolen by early investors (that were pitched but not bound to an NDA or investment deal).

The NDA implications are extremely interesting and a little outside the scope of my main reflection today. Anyway, the point is that we need everyone to have access to the equity side in an effort to make the system actually work for everyone. Otherwise, we’re just centralizing the risks again and again in the hands of a select few middlemen.

These people are separating you from your money. They are an unnecessary transaction cost imposed on every human being. And they only serve the money masters.