October 25th 2021.
In this episode, Saifedean talks to London School of Economics Professor Paul Frijters about his book The Great Covid Panic. They talk about the role played by epidemiologists like Neil Fergusson in encouraging governments to pursue extreme lockdowns, and why mainstream economists failed to properly evaluate the opportunity costs of this policy. They discuss the damage lockdowns have caused and how societies were driven by crowd mentality to engage in largely ineffectual “Covid theatre” such as mask wearing and hand sanitising. At the end of the episode, Paul takes questions from seminar attendees about Sweden’s Covid response, vaccine mandates and what lessons can be learned from the Covid panic.
- Paul’s book The Great Covid Panic on Amazon.
- List of Neil Fergusson’s failed predictions.
- Saifedean’s Twitter thread on Belarus.
- BBC article on the environmental impact of disposable masks.
- Article on the psychological impact of social isolation caused by lockdowns.
- Julian Simon’s book The Ultimate Resource 2.
- Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay.
- Paul’s article on historical analogies for Covid-mania
- Paul’s article on why empirical sciences failed in times of Covid.
Saifedean Ammous: [00:05:10] Hello and welcome to another episode of The Bitcoin Standard Podcast seminar. Our guest today is Professor Paul Frijters, who is the professor of wellbeing economics at the London School of Economics. He specializes in applied micro econometrics, including labor, happiness and health economics. His main area of interest is analyzing how socioeconomic variables affect human life experience and the unanswerable economic mysteries in life.
Professor Frijters is a prominent research economist and has published over 150 papers in fields including unemployment policy, discrimination, and economic development. But he joins us today to talk about his latest book The Great Covid Panic. I think Professor Frijters has provided an absolutely outstanding analysis of the topic of [00:06:00] the great COVID panic at a time when very few economists have asked the tough questions about the effectiveness, and the economic consequences of the measures that have been carried out across the world.
Professor Frijters has done some very important, and I think interesting work on these economic impacts and we’re delighted to have him join us today. Professor Paul, thank you for joining us!
Paul Frijters: It’s great to be on the show Saifedean. I hope I pronounced that correctly.
Saifedean Ammous: Yeah, close enough – Saifedean. I’m easy on pronunciation, doesn’t matter much. Okay, you could just give us a little bit of an overview of the main thesis of your latest book, The Great Covid Panic.
Paul Frijters: Thanks Saifedean! Yes, together with two co-authors, one is in America and the other one is in [00:07:00] Australia, we sort of wrote this booklet in order to bring together all the sort of social science forwards on the great COVID panic, on what’s happened the last 20 months, and to look at it from various angles. We document what’s happened, the virus starting in Wuhan, origins unknown, how it then fanned out over the world, and how the policies sort of fanned out over the world.
Namely these kinds of draconian lockdowns as a somewhat futile effort to control the virus, and how the whole world population got into a panic. So that was February, March last year, and that’s why we call it the great COVID panic. Called en mass for hundreds of draconian policies to supposedly stop the virus from spreading. Lots of governments did that, although some governments bravely, like an asterix, refuse to be overwhelmed by the forces of panic and those countries have done markedly better we find, even in terms of COVID outcomes.
So the dire predictions were shown to be [00:08:00] nonsense. And then we document how the panic started to be abused more and more. As draconian policies came in, politicians saw a chance for more power. So we saw increases in autocratic government all over the world, including in many Western countries where we never fought so that the human rights would be, as it were, set aside to this degree.
And we also document, as it were, the huge cost of human life of these policies. Particularly lockdown policies and social distancing policies, which of course makes lots of people lonely, it makes them less healthy. Both the economy and the health system stopped functioning so well. So in fact, the number of victims grew a lot larger as a result of these policies rather than reduce them.
And we document how there was a coalition of politicians businessmen who happened to benefit from this, who fanned the flames of the the panic on and on. And how that gave rise to national crowds, who are totally obsessed with these policies and with this disease. And that that [00:09:00] was almost like a stampede, which could go anywhere.
And then we analyze where things may go. We’re economists, so we’d like to think constructively, not just complain about what happened, but also think about, okay can we now do. Given the stampede, given the enormous damage that’s being done, and still ongoing right now, what can well-thinking people do and how can they prepare for the future?
And one of the things is, like what you offer yourself, to offer alternative media, we definitely think that is one way to go, to break the monopolies that are there with the major networks in order to get more independent thinking in the bloodstream of our societies, and to set up real alternative structures of science and civilization,
Saifedean Ammous: Fantastic. I think some of the conclusions that you have arrived at are beyond the pale for the majority of academics. What for me was extremely remarkable [00:10:00] over the last few months, well last 18 months, is the almost complete lack of debate on these issues. If you had asked anybody in December 2019, what do you think of a scenario in which a disease breaks out and then governments do those things?
I think 90% of people would have said, that’s insane, we would not do that. You could not imagine the U. S. and the UK and France and Holland and Norway and Australia. Maybe China might do this, maybe some African death spots might try things like this, but obviously Western democracies would not do something like this.
And yet by March and April, it was 99% of people who were just acting as if this is just basic common sense. Yeah, of course we’re gonna lock everybody up in their home indefinitely because otherwise people will die. Do you want people to die then? No. We have to lock people up. [00:11:00] I found it absolutely amazing how little debate there has been.
And I think in particular academics are extremely guilty of this. I’ll kick off with a little bit of an admission, I consider myself an Austrian economist. And you know, we are skeptical of empirical economics. Empirical economists might joke about Austrians and say, there are three types of Austrian economists, those we can count and those who can’t.
There’s a counterpoint to this joke, which is that empirical economics ultimately is only as useful as your a priori assumptions, and as your ability to analyze the data. The data on its own doesn’t tell you anything, you have to look at it. And so generally I’m skeptical of the ability of empirical economics on its own to tell us things.
And I think this episode [00:12:00] over the last 18 months has only strengthened my skepticism and validated it because what we found was that what you would expect to be the kind of empirical economists that asks critical and tough questions about what’s going on, there’s an enormous number of empirical economists around the world and they do extremely sophisticated mathematical and statistical studies, extremely sophisticated questions and arrive at extremely sophisticated conclusions.
Think of the Freakonomics people and, it’s done within development economics, and it’s done in all kinds of fields. And you know, you could make a great case for why those things happen.
Think in my mind, and I haven’t studied a lot of empirical economics in graduate school, I’ve come to the skeptical conclusion, which is that most of the time, either these numbers [00:13:00] show us what we already know, or they’re basically manipulated in order to arrive at the conclusions that help the authors get funding. And I think the last 18 months have made me think that this is too generous of an assessment.
Because you look at, for instance, somebody like Nate Silver or the Freakonomics guys, when this happened, it’s amazing, all of their statistical techniques, all of the math, all the sophisticated math was just deployed for one purpose all the time. Which is rationalizing and justifying the dictates of power. It’s astonishing, no matter how absurd the World Health Organization recommendations were, you had an empirical economist come up and say, oh actually, here we run a bunch of numbers and yep, the World Health Organization is right. Everybody should take off their masks and never wear a mask ever again. And then two [00:14:00] weeks later, oh no actually we’ve run the numbers and everybody needs to wear three masks forever, this is the new normal. You know, maybe I’m exaggerating a little bit, but maybe not a lot.
Paul Frijters: I just wanted to agree very much in broad lines. That economists, particularly empirical economists have not merely been missing an action, they’ve been egging on. And early on they sort banded together, particularly in the U. S. with all kinds of petitions in which they called for draconian lockdowns, which they said they were totally convinced we are going to be very good with no negative effects.
And this is a total abrogation of duty. Instead of being calm and rational and sitting back and looking at this like normal economists, like costs and benefits, which did happen by the way, but more outside of academia, more in central banks you saw the calm economists. They came up with reasonable [00:15:00] scenarios, but now nearly all of the famous economists, empirical ones, seem to have lost their heads and immediately wanted to egg on the stampede.
And then as you say, justify what happened in power. But I think it’s important to put this in perspective, that is not merely empirical economists, but also economists have done this in the past. So we document that they did exactly the same thing with the great prohibition in the U. S. they also en mass mass lost their heads and just went along with what power was pushing.
So I think it’s more fair to say, particularly for the American economists, that as soon as great political power pushes something, there’s great popularity, they just fall in line. They’re just not capable of independent thought. And in that sense they’re not scientists, they just cannot resist that social and political power and then they don’t. And then they just try to be the clever boy in the room who gives a reason for why the decision that was made by truly powerful people was correct, all [00:16:00] along, as you say.
I’m basically just ex-post rationalization, which is neither here nor there. But this happened all over science. There were masters of science calling for these lockdowns in February, March as well. with no real expertise, with no real look at what was likely to happen in terms of damage.
It was a mass aggregation of scientific duty and we’ve not re-established science in that sense, there’s been a real parting of the ways.
Saifedean Ammous: Oh, absolutely. I agree entirely. I think for me the most startling and the first thing to kick off the madness mathematically was our friend Neil Ferguson’s extraordinary attempt at modeling the virus.
So you discuss Neil Ferguson, I’ve had a few tweet threads about him that went a little bit viral because I found it absolutely fascinating. And you discussed him in your book, can you tell us a little bit more about your perspective on his work?
Paul Frijters: He is very much [00:17:00] one of these scientists who was close to governments and of course has a history of exaggerating what a new disease will do.
So he did this with swine flu and from other things that sort of happened. And then and they were seen to be wrong, but that didn’t cost him anything in his positions. But he found himself close to the UK government at the start of the pandemic and interestingly enough, gave the advice, which was the standard advice at that time, which was based on 50 years of immunology and viral studies that you don’t lock down, that’ll just have huge effects, and by the way, it will only postpone the moment at best in which these waves come.
So there’s no real point to doing that whatsoever. So in that sense, he did the right thing, but when it became clear that politically there were going to be lockdowns anyway, he in absolute record time, sort of produce a novel argument, a model to rationalize why we should be having lockdowns. Namely, this notion that we should flatten the curve in two weeks and after 18 months here we are, the curve’s not flat yet, is [00:18:00] it?
But this is a novel argument, but it’s a total slight of hand of course, because it sort doesn’t make the cost benefit analysis. How much benefit is it actually, if hospitals are not overwhelmed? Because they are regularly overwhelmed, as are all services of the state, they now then have moments of being overwhelmed.
That’s not the end of the world. And so it was taken as gospel, but that would be the end of the world. And so we had to avoid that and that is not economic reasoning at all. And then of course he plugged in these absurd numbers on the lethality of the virus. Sort of saying armageddon will come soon unless we flattened Armageddon over, chunkable sizes over time.
So it’s still Armageddon, but now in sizes and as a result of that, of course, he kept his position in the middle of the UK advisory leadership. And then when he flaunted some of the rules himself, he was kicked out of that advisory group, but then later on, he got back into [00:19:00] it by shouting more apocalyptic predictions, despite the fact that his previous predictions of course were falsifiably wrong.
He nevertheless got in again by just shouting more predictions of doom. And so he’s sort of the UK’s Dr. Doom who has found a great business model. And I think I just heard him last week again, saying, ah, we might have to do this forever. And this was basically going very well for him.
He must be very pleased.
Saifedean Ammous: Yeah. I’m sure he’s done very well for himself in terms of the career that he’s carved out for himself. Now interestingly enough, looking into this guy this isn’t his first rodeo. Seemingly since the day that he was born, he’s been writing [00:20:00] all these crazy doomsday models about what is going to happen with diseases.
And so back as early as 2000, or even in the 90s, he was making apocalyptic predictions about what swine flu was going to do and what MERS is going to do and what SARS was going to do. And every single time he was off by approximately 100%. The actual death rate is within a 0.01% of the number that he predicted.
And it’s absolutely astonishing how such a character can continue to be taken seriously. I think in a sane society, I don’t believe people should be put in mental asylum houses, but you know, it would be the intellectual equivalent of it.
Why would anybody ever listen to this person or have him published, and yet there he is.
Paul Frijters: There he is indeed. And it is a sign of our times and a little bit of a Western thing, [00:21:00] but we are in apocalyptic prediction times. Apocalyptic predictions also about the climate of course, and apocalyptic predictions about what may happen in wars in China.
So there was a new weapon launched last week and immediately the newspapers were full of apocalyptic predictions on that kind of arms race. And hence in a way it’s a sign of the times that people are able to get attention for shouting apocalypses. But I wanted to say something in agreement with your statement, that rational debate has gone out.
And I thought that was most interesting sort of last May, June when we were in the early stages of lockdowns and pandemics and what the interesting thing was in Europe, was that there was no real interest in analyzing the experiments of other countries. There was no real interest in, Sweden is doing it differently, Denmark is doing it differently, Serbia is doing it differently, Estonia. What are they doing? Let’s see if we can learn of that. Oh, [00:22:00] what damage is being done? What are the benefits? There was none of the acts. It was just mindless shouting, often by supposed social scientists, often by supposed empirical economists as to, oh no they obviously are doing the wrong thing.
They’re showing how incredibly stupid it is not to do exactly what we have just done. And in that sense, that lack of interest also among the general population, among social scientists, as to these other experiments, in order to learn from what would work and what would not, shows you that something very weird was going on. This was more than just a couple of people making a career out of shouting apocalypse.
There was also a group phenomenon going in. There was a desire to believe that everybody else is stupid, and that whatever we had done was the right thing, and no wish to analyze that. It was like we’re in the herd, where we’re stampeding very nicely, very much. Don’t bother us with actual facts.
And many countries are still not out of that. We’re still in this kind of, some people have described as the [00:23:00] psychosis, I think it more of crowd behavior, but it is a very odd phenomenon whereby there’s this deliberate I don’t want to know. I don’t want to truly think widely and have my position, at least put in perspective.
Saifedean Ammous: Yeah, absolutely. I’ve dug up this guy’s track record, in 2001, 6 million farm animals were slaughtered based on his predictions. In 2002, he said 50,000 people would die from BSE, 177 died. In 2005, he went up three orders of magnitude and he said bird flu would kill 200 million people, it killed 282 people, so he was off by a million fold.
And in 2090 estimated the swine flu would kill 60,000 people in the UK, it killed 457. And yet, as you say, he continues to get a job and he continues to get heard. I think what’s truly astonishing is, you [00:24:00] mentioned this period in June, when you would have thought supposedly this whole thing was two weeks to flatten the curve.
You’d think, two weeks later all right, let’s look at the countries that did this and the countries that didn’t, and we could draw some conclusions. In fact, I remember I saw a paper and I’m ashamed to say that one of the co-authors of the paper was my colleague in my post-graduate studies at Columbia.
And this paper said argued that lockdowns had saved 200 million lives. This was published in June, and it was empirical work.
Paul Frijters: That’s not empirical work. That’s something very smelly, baked up.
Saifedean Ammous: I think you can’t argue with the methodology because what they did was they looked at the actual number of people who died over those couple of weeks or months, and then they compared it to Neil Ferguson’s models. And so they found out [00:25:00]
Paul Frijters: We’ve saved them!
Saifedean Ammous: We’ve saved the town from the Wolf!
Paul Frijters: I know. It’s exactly from the non-existent wolf in that sense.
Yeah, certainly not a Wolf that big, but it’s been a real shame of top science in general. And particularly the medical journals. The Lancet has behaved just horrendously and publishing study after study which exactly pulls that trick, which basically says, oh, let’s look at what would have happened hadn’t we’ve done what we did, and compare that with you know, who actually died and comparing these outlandish prediction numbers, which they keep on putting in their models. First, what happened is, oh that’s how much we saved. And they do that trick in many different ways.
We could have had as low as New Zealand if only would have done exactly as New Zealand did, which was you’re sort of siphoned off the country, go to the middle of the ocean somewhere and then wreck your own economy, wreck your own health service. [00:26:00] Not count all the deaths from direct health service, not look at all the miserableness and all the problems coming in the future.
Let’s just only look at a tiny bit, hundredth of all the damage that’s done and then say that tiny bit is what we could have had, and none of the rest. And it’s insane. It’s like science has left the door, right? There are always green shoots of recovery. I couldn’t believe it when this was happening, but it has opened my eyes and many of my colleagues as well.
Wow! This is apparently the age we now live in, it’s like a dark age in some sense.
Saifedean Ammous: It really is. I think we grow up listening to stories about how people used to go mad in crowds before, and a town would go crazy and they’d burn a witch because she prescribed a herb to someone that didn’t quite work.
And we think, those are, those people are crazy, burning witches isn’t going to work. [00:27:00] Yeah, it’s just a global witch burning, it’s amazing! On a global scale, it’s the first mass hysteria that was happening on a global scale. I’d never imagined we could see it, but there it is. Twitter and social media allowed this hysteria to scale in an absolutely insane way.
Paul Frijters: I think that’s very true, that we’re seeing the effect of the connectedness of the world. Also it shows many other things. One of the things it shows is implicitly, the respect that the west has got for China. Because a country that you truly don’t respect, you truly laugh at their policies. But what happened in Italy, what happened in Denmark, which was also an early adopter of these lockdowns, was that they looked at China and Wuhan and thought hey, yeah, we could do that.
You don’t say that if the beggar at the streets say you lockdown. You do that if somebody you actually respect locks down. It also in a strange way showed that China is part of the League of Nations. It is now part of the countries taken seriously. If China [00:28:00] does something, the rest does pay attention.
And it might not have seemed that way before, but it was clear then.
Saifedean Ammous: Yeah, absolutely. I think the the angle of China idolization was absolutely astounding. And of course let’s not forget. I think in retrospect, if I were to identify two things that were particularly the most driving of hysteria, it was Neil Ferguson’s models, and I think those videos from Wuhan of people dropping dead in the street.
I think that made a lot of people I know lose their minds. I saw those people and after they saw those videos, they were just completely batshit crazy. They’d lost their minds. I knew a person, you could talk to them, and now they saw that video and you were talking to a complete moron.
Now this is just an absolute idiot who cannot think, cannot use their brain, and all they see is, oh my God, death is staring us at the door. [00:29:00] There’s never been anything like this. There’s never been a respiratory diseases that just hits people in the street, drops them dead.
Paul Frijters: It’s very fishy. One has to presume that those things are manufactured in some sense, fake news to a certain degree, definitely. And I agree, we’ve never seen something like this on a worldwide scale. But of course we’ve seen whole countries going nuts. History is documented hundreds and hundreds of cases of that.
So we’ve seen it, but not at this scale. This is, all the adults have left the building basically.
Saifedean Ammous: Yeah. And in your book, you discuss the madness of crowds. You have a long section on the madness of crowds. So can you tell us a little bit more about what you think of this phenomenon of madness of crowds? What defines a crowd and why they’re crazy?
Paul Frijters: Yeah. So in our book, we agonized in terms of understanding what had happened, and understanding it in some sense of, what happened to the [00:30:00] herd of humanity? Particularly then, what happened within countries? And we know to the couple of things that happened in almost each of those countries, which you’ve already sketched some, which is an unwillingness to look at what actually might be good for health, and then willingness to even see what has been damaged close by.
An extreme focus on something very small, a willingness to engage in group crimes. Lock up the elderly, destroy the livelihoods of young people by not allowing them to go to school and socializing them. Making most of the people lonely by just making it impossible for them to meet other people.
Closing down businesses, and hence destroying their whole careers, all the things that they’ve worked for in life. And so then we came to the conclusion okay, some sort of strange group phenomenon is going on here. And then we went back into the sociological literature of a while back, with Gustave Le Bon, with sort of Elias Canetti, Adorno is one of the big names.
And there were many people who wrote on these kinds of [00:31:00] phenomenon, 50, a hundred years ago. Of course, partly after the second world war, but also you know, 18th, 19th century people like Charles Mackay who just saw whole villages going mad, as you said. But also werewolves, they were afraid of vampires, which is as you said, or trolls in the mountains, or doomsday was coming. And they analyze those places as if indeed they went mad and when we read those descriptions, it was oh, that’s exactly how it looks like.
And so then we distilled that for the modern age. And one of the things is that, a quintessential aspect of the crowd is this obsession with something small, right? And in that obsession with something small, all the other stuff loses its significance. It’s as if the small thing to the group becomes enlarged as this hugely important thing.
And it crowds out care for their kids, crowds out care for their own career. You know, it crowds out care for for jobs, for [00:32:00] longterm health and futures. It becomes this all consuming obsession of a group, and that’s one of the things. The second thing that then happens is that group, it loses its empathy.
It loses a fixed moral compass and becomes totally fluid, both in terms of truth because everything starts to come together in terms of what can we do about this obsession? How can we get what we obsess about? But that also filters through to morality. So good and bad start to lose its meaning over time and start to be about, oh good is controlling this virus or solving this obsession in some sense and bad is not doing that.
So everything else that used to be good all that before, or that will be good or bad again in 10 years time, fade away almost as moral constructs and then people sort of then start to look weirdly.
And with that hence comes this willingness to as a group become criminals. Truly cause the deaths of millions of people. And of course we’ve seen this during the COVID [00:33:00] panic as well. Inside countries, what we’ve done to our own children, what we’ve done to lonely people, what we’ve done to people in nursing homes, what we’ve done to people in hospitals is awful.
The destruction has been on a totally different magnitude than anything to do with COVID itself. But we’ve also been willing to do this in other countries. So one of the things I say to my fellow economists is well, look at what the disruption of trade, what the disruption of normal social interaction has done in poor parts of the world, where they don’t have all the extras that we have.
If we impoverish ourselves and become only half as rich as we were, we’ll still be fine. But that’s not true in India. That’s not true in the slums there. You lock up people there for three weeks, they’ve got no food, they’re just going to die out of hunger. And of course that happened, but then it’s called COVID after the fact.
It’s tragic, but the big thing is they don’t want to know, they don’t want to see. It’s kind [00:34:00] like it’s not my problem. Oh yeah, but if they weren’t obsessing with COVID, then you know, hundreds of millions would’ve died, they instantly fantasize a bigger number to do of their own obsession, which then justifies it.
And that’s like becoming a genocidal criminal in some sense. They just don’t care at that moment. And that is fascinating. That they could have been development economists working their whole lives on that and suddenly it’s all jettisoned overboard. Their desire to be with the herd is such that they just pretend not to see.
Saifedean Ammous: Yeah, this was absolutely fascinating for me because I did development economics in LSE. I did my master’s degree in development, economics in LSE, and then my PhD was in sustainable development. So I’m very familiar with the literature, I spent many years reading this stuff, and I remember the economists would very meticulously, particularly the empirical economists, would very meticulously study for many years the impact of tiny little obscure policies.
When [00:35:00] Senegal passed the law that changed say something about the school meals, what was the impact? They’ll study the impact five years later, what it did to brain development, what it did to RQ scores, what it did to incomes, they’ll study these not just five years, they’ll study these kids 20 years later, and they’ll get massive amounts of funding to look at the impact of such tiny little obscure policies on one village or one country.
And somehow locking down the entire country just was, yeah, common sense, obviously. It has to happen, it has to be done, and therefore everybody just goes along with it. It’s absolutely amazing.
Paul Frijters: It is absolutely stunning. And I’ve been very disappointed in many of my colleagues, particularly at sort of the top universities. But I will say the LSE relative to many other universities has been reasonably good at this.
So [00:36:00] the wellbeing economists, at least in UK have almost unanimously been against lockdowns or at least suggested important alternatives and have spoken out. Paul Dolan is now part of Collateral Global and he speaks out against this. Richard Layard is a big wellbeing guy, he wrote against this also in the British Medical Journal, he was standing up to be countered.
They wrote piece saying you know, shouldn’t we actually just give people information about the risks and then they would make their own choices rather than imposing things? So in a way the wellbeing economists and particularly as were some of the LSE crowd, have been relatively good. But as an institution or even the majority of economists, oh my God have we failed, right? There’s just, it’s a massive failure.
Saifedean Ammous: The international institutions, the aid organizations and the world bank and all of these. That’s absolutely astounding what a dereliction of duty it was. But to go back, I want to discuss the [00:37:00] career stuff, the career impacts of that and like the professional aspect, but I want to go back to the madness of crowds.
From your studies, how do people snap out of this? Like how does the village eventually, or does the village eventually ever come to terms with the fact that this old lady we burned was just an old lady and maybe we should stop burning old ladies or do the people who burned there die and their kids forget about it, and then two generations later they burn another one.
Paul Frijters: Well, it’s more the latter one. So there’s are various ways in which a crowd comes to an end, right? So one is that if the crowd misbehaves too much and makes too much of a nuisance to other people, so that could be a neighboring village, it could be a neighboring country who they invade, but in some ways, start a large war, which means there’s a huge counter reaction and they get conquered.
Then the conqueror sorts it out. The conqueror basically takes the leaders, shoots them, hangs them, or in some way makes an example of them, and they just floods the media of the conquered [00:38:00] country with counter propaganda. That’s a reasonable happy ending, but after a devastating war. So that was Nazi Germany, but that was also Japan.
And that’s many instances also of villages which were snapped out of it by authorities coming into the village and say you guys have gone so mad on this vampire stuff, you’ve created so much trouble in the neighborhood, we’re just going to go in here, we’re going to hang the head man of the office.
And we are going to bombard you every week with sermons as to how there are no vampires, right? And so that’s one way, basically the group makes such damage and damages the interest of others that they come in sort it out. Now that of course only happens if you really make a nuisance of things because you are then forcing others to go and fight you and conquer you and then try and sort you out. So another way in which the madness of crowds comes to an end is that the crowd gradually loses interest. Because you can obsess about vampires, but come on, you also want a [00:39:00] career, you want to get married, you might want to travel, there are other things to worry about than these bloody vampires in the neighborhood and the same thing, of course, for the prohibition, the same thing for the people that were Puritans or socialist.
People don’t just care about one thing, so that obsession starts to fizzle out at the edges crowd. But it doesn’t happen in the big bang. There’s no sort of moment of revelation of, oh we were wrong. It doesn’t usually happen that way unless someone forces them into that. It fades, that’s what happens, but fading can take a long time, it could take years.
Saifedean Ammous: I think we’re beginning to see some of that happen with the vaccination.
I think for a lot of the crazies, the vaccine served as the kind of, this is the ending point. This is it. They sacrificed a year of their life waiting for the vaccine, and then when they took the second dose, they just basically snapped out of it. They were ready to go back to attend concerts.
They were ready to start [00:40:00] living normally. And so you started seeing many of the people that I saw on Twitter completely losing their mind in March, 2020, by say, June, 2021, you started, with the summer coming in, and with the second vaccine shot, a lot of them started acting a little bit more reasonable and started being more critical of these authorities and these measures.
So I guess perhaps that might be the case.
Paul Frijters: Look, I totally agree that you do see people with a zest for life snapping out of the bit, but the beast is not dead yet, right? There’s this kind of coalition of interests, which wants to keep it going will find ways to keep it going.
They still control the airwave. COVID flares up again, we need a boost, a shot, and that makes billions and everybody needs to be tested, that makes other people billions. Keep people at home, that makes whole industry billions at the expense of more hands-on shops.
And so there is a huge commercial [00:41:00] drive to keep the madness going and that does not fade fast. And we’re not done with that yet. So what more than likely kills it off quicker is partially this realization of booster and then another booster, and we’re still not done with this so that people get tired of this.
But also jealousy of other places which are living normally and living happily. I see the beaches of Florida and I want to live in Florida. It’s that kind of almost animalistic, look life is good there, they’re not dying in hordes, and I want to be there, I want my kids to live there.
I want to live life unencumbered again. I think that force will be as it were the strongest opponent of this madness, because of course you can’t really keep people from migrating to places where life is better. So I think more people will want to go and live in Sweden, Denmark. The whole of Scandinavia is now seen sense.
Estonia might see more people coming in, Serbia, of course, within [00:42:00] the states, the Southern states are more sensible. In every continent, there are places which are more sensible and you’ll just see people migrating there, you’ll see them staying there for long holidays, businesses moving there.
You see that quite a bit already, and that kind of competition and jealousy that snaps us out of it slowly. Because there’s nothing that convinces people more than sheer jealousy. They won’t understand the science, they won’t mind the propaganda, but seeing other people have a good time and not having a good time yourself, that’s horrible, that hurts.
And so that makes you snap out of it, I think.
Saifedean Ammous: That’s very good. I think those of us who are living our lives don’t need to start flaunting it more.
Paul Frijters: Absolutely! You’re doing a service, post the pictures.
Saifedean Ammous: Yeah, it’s astounding. I remember when this whole thing started, I know nothing about Belarus, I’ve never followed Belarus as a country, I know one person from Belarus, I have a friend who was married to a Belorussian woman, I’ve met her two times. I have no connection with [00:43:00] the country, but I remember that the president said, yeah we’re not doing any of this bullshit, go to the sauna and drink vodka, that’s how we handle it here in Belarus.
And in my mind, this was absolutely fascinating. There is the control group. I thought all of the world’s economist would jump on Belarus to see what’s going to happen. I thought this was fascinating and I have a thread on Twitter which I’ve been following for a year and a half and I keep updating the thread every time there’s notable news on Belarus.
When it first happened, I posted, I said, all right, there we go, we’ve got the control group. And, they were even more stark than Sweden because Sweden still banned the crowds and they still did a bunch of restrictions. But yeah the dictator said, we’re not doing any of this stuff.
The churches were still going, marketplaces were still open. Football games were still open and I follow football. So I was following the Belarussian league because there was no for football anywhere in the world.
Paul Frijters: Desperate for [00:44:00] a game!
Saifedean Ammous: Yeah, I started following the Belarussian league, and you could see, there were people in the stands and the players were turning up every week, and next week, the same players turn up, they didn’t die.
There was no plague that was coming all the players and the whole league went through and they played the whole league. They had like a couple of games that were postponed because a couple of players tested positive, but they played their whole season regularly.
They had their military parades. Then during the summer they had an attempt at an overthrow of Lukashenko. So you had the biggest crowd in the history of Belarus, there was something like a million people in the streets of Minsk. All of that was happening all throughout the summer, March and then June and all of that going on.
And it was astounding how few people wanted to even look at it. Everybody’s just saying you know, it’s Belarus, it’s a dictatorship, you can’t believe anything. No, you can’t not believe the fact that the football league is still going on. If this is [00:45:00] as deadly as you say it is, those players would be dead by now.
The thousands of people turning up to watch the cup final would have died. They wouldn’t be back again next week to watch their team in the league. And yet absolutely nobody had any interest in it.
Paul Frijters: Which is fascinating, that unwillingness to even expose oneself to information which would take you out of the mass, out of the crowd, is amazing.
But I don’t know much about Belarus as you, but one of my favorites was in Tanzania where the president was also saying, look, this is all bollocks. We shouldn’t be afraid of this. And he had a papaya and a goat test positive for COVID. I thought that was fantastic. I don’t care if it’s a marketing stump, it’s kind of like wow, that’s amazing.
Saifedean Ammous: Yeah, and it absolutely is. And I want to get to the PCR test and the science aspect of it, but I wanted to just, on the jealousy aspect of it, this thing you’d think, all right Belarus, you can dismiss Belarus. And then South Dakota started being [00:46:00] normal and people continue to dismiss South Dakota because, most people think don’t really believe South Dakota exists, it’s just a hole in the middle of the U. S. for many people, it doesn’t exist.
And then Sweden just went completely, almost completely back to normal, and then people continued to dismiss it. And then Florida went normal and then Texas went normal. And it’s absolutely amazing, for the average citizen of you know, blue states in the U. S. these are all non-existent facts.
These are facts that exist outside the Overton window, to the extent that they are processed at all, it’s that Lukashenko’s a dictator who’s murdering his people. DeSantis is a dictator. Who’s murdering his people, abbott is a dictator who’s murdering the people of Texas.
With complete disregard to the numbers, you can very easily come up with these rationalization while obviously they’re cooking the numbers and they’re hiding the bodies, [00:47:00] and DeSantis is feeding the bodies to the alligators of Florida.
Paul Frijters: Yeah, too many Bond films mate. Now I agree, the stories people tell themselves are amazing, but the U. S. Is an interesting place.
It’s a place where people say to their opponents that they’re mad and that they’re cooking the books and this and that, but you know what, they do look at the success of other places. And the success of South Dakota was at least copied by the other Republican states, and quite a few of them. Because the Republican governors were of course, fully on board with the COVID manners at the start as well. I mean, Trump also gave free range to the CDC to go and lock down things so that they were on board or this stuff. But at least they switched when they saw one of their own do something different and that worked out.
So there is learning from each other’s experiments. And the thing about Florida and Texas is that yes, they’re derided more in the democratic states, but you know what the businesses are moving. And when people want to have a good time, they want to go and marry, have a [00:48:00] party, they congregate where in Miami, so the beaches are full.
And so in a way, watch the feet, don’t watch the rhetoric because America, in that sense, the airwaves are always full of superlatives. Just watch the flow, watch the money, watch the people go.
Yeah, people are starting to suss out that, you know what, new York is not working. New York is emptying. Another place is another place to be, and that does not get unnoticed in the U. S. no amount of bullshit can hide that.
Saifedean Ammous: Yes. Although I guess the downside to that is that some of these people, they will move to Texas and to Florida, but they will take their politics with them and they will vote in the next election to bring their politics. Because this has just become an identity, and ideology in an absolutely astounding way that I never imagined.
I could see, we have to lock down because otherwise [00:49:00] trump would have been right at some point in his presidency.
Paul Frijters: I know. I’ve had friends make that argument. Is that what matters to you? Whether some politicians is right or wrong? Isn’t what matters to you, your kids, the health of your nation and the answer seems to be, no, I want Trump to be wrong no matter what, but I’ll tell you what I do think COVID is the remaking of the Republicans, right?
I have no skin in the game. I don’t vote in America. I don’t particularly like any of the politicians there, but I do think that this is really rejuvenating the Republican party. It also almost makes them the party of the workers. It’s like they flipped positions, left wing and right wing have flipped positions in the U. S. as a result of this pandemic.
And so you now see even coming out of their think tanks, pieces which would be unheard of years ago, coming out of these Republican think tanks about wages and inequality, and we must tackle the big firms. I’m [00:50:00] sorry, have the Republicans gone left wing all of a sudden? But it is just the reversal of politics.
The Democrats have taken over the big tech agenda and are suppressing the workers, and the Republicans are shifted there because that’s where the votes now are. And it’s amazing to see.
Saifedean Ammous: Yeah, it absolutely is. Of course, one underlying theme of this podcast. And in my first book, The Bitcoin Standard, in my forthcoming book, The Fiat Standard which is going to be out in a few weeks, is the idea that with Fiat money, the concept of opportunity costs is obliterated.
And I think this whole COVID panic was a great illustration of this because when you have a government that can print money, then you simply destroy the concept of opportunity cost in most people’s minds. People just don’t think of things as having a cost because if the government passes a law that says everybody stays home and gets a check for a thousand dollars a week, then there’s [00:51:00] no cost to this, then we can do it.
We have a responsibility, we have a printer, we can use it and we can save lives. And so if you decide that you don’t want to use the printer, which basically runs for free, you make a thousand dollars for free, then for no good reason, you’re deciding that you just want to kill people.
And I think this is, in my mind, why I find this such a fascinating topic from the perspective of Bitcoiner and somebody who was interested in how fiat money works, this is the fruits of fiat. The idea that we have this fake money that the government can just create, which turns money from an accounting system for value creation, for subjective value, for people, what they value and exchange with one another into a government brownie point system. Into a system of allocating favors based on the government’s goodwill basically.
And that’s allowed these governments [00:52:00] to just carry out all of these insane policies with little regard for the cost. And I think now, in economics, things don’t just play out over a week or two. We had a lot of people declare victory saying, oh look, we’ve stopped the world economy for a few months and we didn’t have hyperinflation.
We didn’t have mass starvation in rich countries. And therefore you see we’ve saved lives and now things are fine. But now we’re beginning to see, inflation is rising, unemployment is still very high, the labor market is not really recovering as it would have, and a lot of people are still living off of government paychecks.
And I think, we’re only beginning to see the reckoning come right now. By the time it comes about, fiat politicians will print a whole bunch of money and will also find other new scapegoats to blame this on.
Paul Frijters: Oh, definitely. There will be, as it were, a new story as to why the the problems that were really created [00:53:00] by all this extra borrowing, and as you say, effectively money printing will be the fault of something else. That’s how politics always works. They will always find an additional reason rather than the wrong mismanagement, definitely. But there are many things to say about what you just said.
One is of course, that there have been huge damage inside Western countries, which have been well-documented even inside bureaucracies, but both politicians and a large part of the population just haven’t wanted to see. But you cannot disrupt the schooling of a whole generation of kids and not have enormous consequences immediately on their mental health, immediately on their ability to socialize, the long run human capital, long run taxation possibilities, but even you their sense of humanity their relationships with their grandparents who now suddenly are in this fearful relationship whereby they see each other as potential killers of each other, rather than the warm relationship they should have been enjoying.
And meanwhile, of course, many of the grandparents have gone demented. But there is something else to be said about this. It has been an amazing [00:54:00] experiment in the sense of, how much money can we print and get away with it. But I don’t think they will get away with it because money in a certain sense, and particularly when it’s printed, it’s like a call on people’s time. So it is a little bit of the least understood of economics tricks, right? It is as a means of exchange, it’s a means of exchanging time, and so it’s also grabbing time of people. Now time remains totally fixed resource. You know, one way or another, you cannot just, as it were print more time.
And if you print the intermediary of time, then basically you’re putting pressure on the trust of that intermediary. And particularly in an open system, which our economies still are. There’s still trade with other countries, you are effectively abusing the trust that people put in that currency and invested in for decades.
And yeah, sure we’re going to see inflation, but we’re also going to see all kinds of other things, which is people, corporations are going to look for other kinds of money and see okay. Yeah, I want to [00:55:00] safeguard the value of the money that I have and hence not have something in the currency. The governments can just print shitloads more off.
And I think in that sense, we’re in for a wild monetary ride. Of course you being on the Bitcoin side, hoping that Bitcoin will take that over. But I think that there’ll be a whole conga line of competitors coming, whereby it is kinda whoa, if it’s this easy to take time of other people, which is really what has happened with this money printing, I want in too!, it’ll be the wild west.
Saifedean Ammous: Yeah, absolutely. You’re describing one of the central thesis of The Bitcoin Standard, which is the idea that thought that Bitcoin, the only thing that is truly scarce is human time. All other resources as Julian Simon used to say time, human time is the ultimate resource.
Because with human time we can make more of everything. We can dig for more gold, more oil, more zinc, more copper. We’re never gonna run out of those things. Earth contains far too [00:56:00] much for us to ever exploit, it’s only a matter of time, how much time can we dedicate to them versus other things.
So the really the only scarcity is the scarcity of time. And that’s why people look for a money that is scarce because that’s how you store the fruits of your time. Bitcoin is in my mind the natural winner of this race, the inevitable winner, because it’s the only one whose supply cannot be expanded.
There will never be more than 21 million Bitcoins. With all other forms of money, whoever has a way of making that money will always find a way of making more of it. Whether it’s a government printing it’s money, whether it’s gold miners looking for gold or silver miners, looking for silver or other digital currencies the people behind them being able to create more of them.
There’s always a way to make more, but with Bitcoin, the mold has been broken. We can’t make more.
Paul Frijters: I’m not so convinced of that. But are you [00:57:00] sure we want to have a fight on Bitcoin in this program? Like I said, I want to remain friends on this.
Saifedean Ammous: It’s okay. Here’s the thing, like we had discussed before this we’d discussed Paul and I, having half of this on a COVID and then one half on Bitcoin, but I think there’s so much to cover on COVID, we’ll do the Bitcoin discussion some other time. We’ll have you over maybe next week and we’ll discuss Bitcoin at length.
Paul Frijters: That would be a good thing, exactly. I asked them difficult questions for you too, as part of the Bitcoin community.
Saifedean Ammous: Sounds great! I think it’ll make, it’ll make for a very good discussion, we have an empirical economist who’s skeptical.
And then you know, I’m going to try and see if I can win you over by the end of it. But I want to go back to COVID for now, about the lockdown before we get to the scientific stuff. What is [00:58:00] the, evidence for the effectiveness of lockdown?
You look into that in the book, and what do you come up with?
Paul Frijters: Definitely. So the key thing to say is that pre March 22, There was effectively no evidence for lockdowns at all when it came to endemic diseases. Endemic diseases are those which are so broad in the human stream that you’re never going to get rid of them.
And so then the thinking was that you might be able to suppress it and keep it out of CT. For instance, if you block all roads in and out you will be able to keep it out to some degree for some time, but you’re never going to keep it out indefinitely. It’s going to walk in by animals eventually, even if you stop all humans.
And so the evidence from before March, 2020 was that they’re nonsense, right? When it comes to a sort of a highly infectious endemic disease, it’s too late basically. The horse has bolted.
Saifedean Ammous: By the time you’ve figured out that it’s there, then it’s already in transmission. And if you lock [00:59:00] people up, then you’re just letting it fester at homes.
Paul Frijters: Yes. So with the SARS epidemic was slightly different because it was less infectious, it was more easy to see who had it. And so there was still a chance to nip it in the bud. And that sent SARS, MERS were kind like the showcases of how, if it’s not yet, spread widely over the world, you have a charge, fires were localized lockdowns as they had in in Hong Kong to stop it from spreading and you know, contain it.
But for COVID, that was way too late, already in February. Because it was way too infectious, and of course, lots of people were running around who had it, who didn’t know they had it. And there was a huge multiple that didn’t know they had it and were running all over the world versus those who were very symptomatic, and so you could see that they have it.
But when it then came to whether or not the lockdowns work, I was an empirical scientist, I was on the fence. It was okay, well, if these [01:00:00] epidemiologists and biologics say this would have a chance, I initially went along with that. I was immediately against lockdowns because I knew of the collateral damage, that’s sort of my expertise and the wellbeing of economists.
I knew how damaging this would be to wellbeing, to mental health, to the children. I knew what this would do to our human rights. I knew what this would do to developing countries. And I could quickly calculate that it was going to be way worse from a cost benefit point of view.
Hands down this is stupid anyway, but I was on the fence as to whether or not lockdowns with work. And then if you look purely empirically at the countries, which have had the greatest number of COVID deaths, let’s say in Europe where the virus have effectively gone round totally, nobody’s stopped getting in their borders, then all the top countries, with maybe one or two exceptions in the top 30, they’re all heavy lockdown places.
And they have neighbors which are not heavy lockdown places. So you can compare Denmark to Germany, or you can compare Serbia to Hungary. And it still was the no [01:01:00] lockdown places which have less deaths than their heavy lockdown neighbors.
And so just from that, you should think, well, okay how can lockdowns kill, right? What is going wrong with the lockdown? They even kill more people with COVID, and one thing is of course, that they reduce your immune system. Locking people inside their homes so that they don’t have a social relationship is bad for their immune systems.
They then also don’t exercise much. They don’t get out and have vitamin D via the sun. They’re not motivated to look after themselves, so their diet deteriorates their drink, more alcohol, more chocolate, and they basically become less healthy. Then they become more susceptible.
So we’ve seen this in many countries, and the UK is a great example of this. It’s several months after initial lockdowns, particularly in the winter of 2021, you see this huge increase, right? It’s almost as if the population been softened up by the lockdowns to be more susceptible to this. And so empirically, particularly in [01:02:00] regions where you know it’s sort of gone round totally, it’s the lockdown places which have done worse.
If you look over the world as a whole and divide the countries into heavy lockdowns in 2020 versus no lockdowns or more pragmatic kind of policies, then you say that as we’re the less restrictive to the groups of countries, the less average numbers of COVID deaths. We don’t even need to look at excess deaths or other things because on those metrics, it’s way worse still because of course lockdowns disrupt the health system as a whole.
And so people start dying a little bit later, but things that weren’t picked up like cancers, like of course diabetes, which is then not addressed. All kinds of other illnesses, which you need to monitor and be on top of lest they start to kill off members of the population. Sure empirically, if you compare the high lockdown countries or regions in the world with the low lockdown countries, particularly in the neighborhood, you either see nothing or you see perversely that the greater the lockdown, the worse the outcomes in terms of COVID deaths.[01:03:00]
Saifedean Ammous: Yeah, it seems like an inescapable conclusion when I look at it. I said this as I was mentioning earlier with Belarus, I said this March of 2020, I said, all right. We’ll compare Belarus with its five neighboring countries. It was Poland, Ukraine, Russia, Lithuania, and a couple more.
And I think there’s one more, it was five I think. I don’t have them in front of me right now, but one year later I ran the numbers on this and Belarus had the lowest mortality and the lowest number of COVID deaths and the lowest number of excess mortality. If you looked at the numbers.
And in fact, I think the most interesting fact of it is that even if it were a little bit lower, the most indisputable thing is that it’s indistinguishable from previous years everywhere else. That’s the thing.
Paul Frijters: [01:04:00] Exactly. It’s not this Armageddon. It’s not the Neil Ferguson Armageddon.
And that should be the killer argument, which is look it’s impossible to deny all the negative effects, you close schools, you’re going to be creating problems for a whole generation of kids. Some are able to keep on learning but many don’t because they don’t have laptops.
You’re going to lock up the elderly in old age homes without them getting visited, they’re going to get demented quicker. We know this. You’re going to close the hospitals for regular visits, then you’re going to get more and more cancers over time. You’re going to get all kinds of other disease.
So that is not really in dispute. And then if you don’t get this, we’ve solved Armageddon because of lockdowns, that should be it. It was sorf of like the intellectual argument was done in sort of June of last year when we didn’t see Armageddon going up in Sweden and a few other countries, which didn’t lock down. That was okay, well they didn’t get the nightmare scenario, why are we still doing this?
It wasn’t even interesting anymore scientifically speaking, [01:05:00] what we should be doing, then it became a question of what the hell is going on. Why are we still locked into this?
Saifedean Ammous: Yeah, that’s an excellent question. And it’s very difficult to come up with satisfactory answers for it.
What do you think, why are we still locked into this insanity?
Paul Frijters: Well that’s what the crowd chapter is all about, right? Is that partially we’ve got this coalition of people who are now making money out of it, who have grabbed more power as a result of this. So good old fashioned self interest, and I am an economist in that sense, follow the money is always good advice when it comes to a strange phenomenon, who is making money out of it?
Well the people who make the masks, the people who make the test the people who sell the vaccines but also of course, lots of internet companies who sell everything via online rather than actual stores. You know, the online companies are more in favor of that, the ones who do business via the online regulations like Uber’s, they’re in [01:06:00] favor of this, the Amazon’s are in favor of this.
Governments like this because it’s a control thing, right? So their span of control in that sense has increased in the sense that they just have more control mechanisms. The medical establishment like this, they’ve become virtual gods. And so that is a beast which has got hold of it. And they’ve managed to whip the population up into these kinds of maniacal crowds.
But here’s the problem for these profiteers, maniacal crowds are very fickle beasts. They are wild things. We’ve seen in history that that can lead to wars or concentration camps or civil wars and tremendous violence towards the own leaders, if they are not seen to come up with the goods.
So they’re on a wild ride now and that can, of course, go on all kinds of directions. Now we do think it will fade, but leaders in that sense and this coalition of profiteers which are whipping this up for their own [01:07:00] private gains, they’re playing with fire. I mean there’s this huge anger that may come for them.
So I’m certain, I don’t think so, but it’s definitely a possibility.
Saifedean Ammous: Yeah. It’ll be fascinating to see what ends up happening in this regard. I imagine there would be a lot more backlash by now, but we haven’t had any yet. I don’t know man, people just like their TVs.
It’s amazing. In 2019, I thought TV was dead and 2020 was, it’s amazing, it’s just like the 1990s,
Paul Frijters: It is crazy. So in our book The Great Covid Panic, we make a couple of historical analogies. We talk about the French Revolution. We also talk about the first World War, how that ended, then how finally the war industries got wound down. But the best analogy we’ve come up with, the best example of something [01:08:00] like this was the prohibition in the U. S. whereby the U. S. authorities and all they moralized is that we should make it difficult for people to drink alcohol, so to forbade the production and transportation and sale of alcohol. And this took 13 years before it was reversed, it led to of course, huge criminality, just lots of illegal drinking, a lot more problems basically in society, but it took 13 years and it didn’t end with a bang.
It ended slowly, people became more and more hypocrite. How it eventually ended is that the great depression came and there was something else to worry about. And then almost on the sly everybody agreed, okay we shouldn’t have had this prohibition and we’ll reverse the laws.
And that’s what happened but there was no comeuppance. There was no punishment for people who destroyed hold industries or the lives hundreds of thousands of people. There was just no revenge. Revenge is a rare thing in history. Usually speaking, the damage is [01:09:00] done and people dust themselves off and get on with it and worry about something else.
Saifedean Ammous: Yeah, it’s sad.
Paul Frijters: Are you sure? Think of it the other way. Do you really want to fight people so that you can have justice? Justice is an expensive commodity, right?
Saifedean Ammous: There is an animalistic aspect at one’s vindictiveness, but I think that’s not really the issue here. The issue is we’re never going to be done with this. There’s always going to be respiratory illnesses and there’s always going to be mania. And there’s always going to be a bunch of pathetic cowards who don’t want to admit they were wrong in 2020.
And so they’re going to double down forever. Look at a place like Australia or New Zealand, you look at the sociopath leaders that they have in those countries, they’ve gotten so much power. When you see them talking, and you know, people in Australia and New Zealand, many of [01:10:00] them, they think their countries are normal.
And I just got an invitation to go visit Australia and give a talk a few days ago, and I thought there’s more chance of getting me to go to Afghanistan at this point than getting me to go to Australia. But you know, you listen to their leaders telling people, you must do this and you must do that, and you watch the police taking it out on people because they went out and exercised, and they’re never going to snap out of this. As long as there’s ever going to be anybody coughing in the country, there will be totalitarianism.
Paul Frijters: I mean, I love Australians. I lived there for many years and I’ve many Australian friends, and I hate to give up on them in such a hurry, as it were. They make good friends, but they have gone totalitarian to the max within the Western world, and they don’t want to see that they’ve basically done all the wrong things and they don’t want to hear about it. They want to hear we’ve been vaccinated, the problem is solved.
But look, they are also a pragmatic people. When they have their [01:11:00] 15th booster shop in three years time and they found out, okay now I have half the money I had before, my kids have no education. They can also get rather angry. Watch this space with Australia. Australia might well be one of those Western countries, which sort of has a near civil war in a couple of years time.
I would not be totally surprised because yes, they are followers, they’re meek, but they also can get really riled up if they feel they’ve been screwed over. They have been screwed over royally and they don’t want to see it, but they’re going to keep being screwed over. And so watch this space on Australia.
I think we might see fireworks there.
Saifedean Ammous: Could be and we’ll see. Okay so the next topic I wanted to discuss was your study of the scientific substance of the disease and the PCR tests and the [01:12:00] the effect of the lockdowns, well we’ve already discussed the lockdowns. But one interesting point you mentioned is the issue of cross immunity in your book.
Tell us why you think that’s a big deal and why you think the panic didn’t help there.
Paul Frijters: Yes. So cross immunity is important because of course, cross immunity applies to lots and lots of viruses, which go around in the human stream. So one of the reasons why we don’t die of influenza is because many times in our lives we’ve had diseases like the influenza, which goes round, and we get some immunity even of our mother, of her immune system when we’re very young. The fact that people around us have had influenza protects us a little bit from further waves as well. So we’re going to get hit by several of them. So cross immunity is a normal thing. It’s sort of like viruses that look like the ones we’re having now have protected us [01:13:00] because we went ill from them in the past.
And of course the latest coronavirus is the fifth major version of it. There are four other versions which go around and they’re more prevalent in some parts of the world than other parts of the world. And they basically by and large seem to have originated from the Chinese region. So the closer you are to that region, probably the more exposed you’ve been to various coronaviruses in the past.
And so probably there’s more prior levels of immunity there to this later coronavirus, you at least can see pretty clearly in the data that whole area has a much lower lethality of this disease than a region which is very far from the Chinese centered world, if you like.
And also has very few people of Chinese migration in the last couple of generations, like Latin America, where the number of deaths is much, much higher of this disease than it is in Africa or almost anywhere in Asia. And so I was very interested early [01:14:00] on, already in April, May. Well, let’s measure this crossing and see, let’s see where it’s bigger and let’s see what effect that has.
And again, this huge surprise that very little of the scientific community was interested in this. You did have people writing about it and talking about and saying, this must be important, look at these regional differences, but there has been very little money flowing into research on this. It’s been basically downplayed, but there have been researchers looking into it and they are now trying to go systematically sample populations everywhere.
See what were the previous disease going round? What can we at least see in test tubes? How heavy is the reaction that people haven’t had this before relative to other people who look like them in other places? So it’s coming, but it’ll be delayed. But by and large, it means that we still have to guess a little bit, the hard date is not there as to how important the cross immunity is, but the story is like the one I sketch, which is effectively the closer you get to China, the more cross immunity is likely.
Which explains why, even in places like Australia and New Zealand, which have huge Chinese [01:15:00] diaspora, so lots of Chinese students, the lethality of this virus seems to be much less than in other places further away from the Chinese epicenter of these coronaviruses. And there was one particular study we found, which is fascinating, which was a study in Africa, which studied the dispersion of bats, which had other coronaviruses.
And they linked that to how heavily affected local communities were of these Corona viruses and others. And they indeed found that kind of pattern, if there were lots of bats close by which carried other Corona viruses, the community there was less affected by this particular virus. And they sort surmised that that would be an explanatory in many Asian regions as well.
And they wanted to research that further, so they were looking for money to help do that. So this is an ongoing hypothesis. It’s likely to be a big factor, but we’re not certain.
Saifedean Ammous: Yeah. Do you think this really explains what’s been going on [01:16:00] in China?
Paul Frijters: Yes, because I think in that sense, the Chinese data has been, the salient aspects of the Chinese data have not been discussed widely at all.
Think of what happened to Wuhan. This is a city of 10 million people and the final Def count of the Corona virus is 5,000 on 10 million. So that’s 0.05, which is just one fourth of what it was, for instance, in the UK. One 10th of what it was in Peru. Well that was in the city where this virus is unnoticed or at least unstopped by any means then available for maybe two months.
So it would have been widely circulated, everybody would have had it, full exposure. No measures, two months, this thing goes round and only 5,000 out of 10 million. That tells you that okay, this thing really is much less lethal than the Neil Ferguson models would have you believe, but also this is much [01:17:00] lower than we see in Europe, than we see in U. S. in Latin America.
If it’s that non-lethal in a place without any restrictions, it must be true that basically in China the lethality of this virus is much, much less than it is in at least most parts of Europe and most parts of the Americas. The obvious explanator for that is, yeah they already had prior immunity.
Winter’s badly affected, that must be the front running.
Saifedean Ammous: Yeah, I guess this does make sense. Although, there is something astounding about looking at the curves for China and the rest of the world. For China it was a couple of months and then it went down to zero on this flat line.
And interestingly enough, China only implemented the lockdown in Wuhan and I think two other provinces and it was only for a couple of weeks, maybe even months, but that was it. It’s truly [01:18:00] fascinating that Australia’s still doing this insanity 19 months later, whereas China could get away with it and eliminate the whole thing.
You combine that with the videos of people keeling over.
Paul Frijters: Yeah, yeah. I can see the suspicion coming in you, but there are other things to say about China. One is, as you say that the data on how many people died and how much COVID there’s been, it’s hard to trust for China.
And of course the country has a history of hiding the gravity of what’s happened there. In Wuhan this would have been difficult with the eyes of the world on it. But for instance, in the Great Leap Forward when 30 million people died, the authorities hid it. The authorities hid it from the party elders and they hid it from the whole population.
And that was 30 million deaths. So they have form when it comes to hiding statistics, if you like. But there is a statistic which is important to bear in mind, the [01:19:00] Chinese cities, Shanghai, and some of the other big ones, they saw a huge drop in fertility in 2020. And that drop in fertility is effectively related to the lockdowns of the walls in those major cities.
And so that tells you that was a huge effect on the social system. Within China that is big, right? It’s almost a halving of the number of kids. That is just huge. You can’t just halve the number of kids. You keep that up for a couple of generations, there’s none of you left. And so it had hugely negative effects on the social system of China itself.
So don’t think of the Chinese as having gotten off with no damage, they’ve done huge damage to themselves. And I think they’ve realized that and they’re trying to do countermeasures on the fertility aspect, but don’t think of China as the shining story which had no deaths and then pushed the rest of the world in order to destroy the rest of the world.
I think a) the Chinese leaders are not that [01:20:00] smart, and b) it didn’t really work out that way.
Saifedean Ammous: Yeah. Perhaps playing a little bit of a devil’s advocate here, in terms of thinking about just the degree of totalitarian control that has been installed in the rest of the world, and then when you take into account the amount of Chinese influence on a lot of these global institutions that were at the forefront of this hysteria, perhaps there was some kind of interest in pushing this in order to facilitate more and more the Chinese social credit system and you know, the vaccine pass and all of that stuff.
It is the Chinification of the rest of the world in a sense.
Paul Frijters: There is an element of Chinification, but it works in a way that is, as it were not [01:21:00] as planned as one might think. And so the Chinese leaders are definitely interested in looking good, but particularly looking good towards the own population.
So yes, there has clearly been Chinese propaganda inside whatever leavers of power they had, including their financial muscle in the WHO, that’s well documented, there is basically no doubt that happened. And they also pushed the idea to the rest of the world, be like that, the Chinese reaction locked down, that’s a smart thing to do.
But the core reason for that is not to you know, destroy the west. They had no idea what lockdowns would do in the west. The core idea was if we get other people to do this, that’ll make the Chinese population think we did the right thing, this is all for domestic consumption.
This is in order to make the Chinese population think good about the Chinese leaders. And so it’s much more internal politics. It’s not evil sculpting of some sort of clever stratagem in order to destroy [01:22:00] competition, no, nobody’s that smart and it’s not in their interest. That’s not what they think about because of course that can backfire very spectacularly.
You can set up a next world war if you’re seen to cause trouble for other countries. This is to look good for their own population, that’s the story there. They’ve done that, they’ve pushed the propaganda to the rest of the world in order to convince their own population they did the right thing.
Saifedean Ammous: Yeah, but you know, you look at GDP growth in China. Basically it was the only country last year that didn’t suffer massive. They shut down three provinces for a couple of months, but the rest of the country, more or less operated normally. People wore masks, but internal travel was normal.
I remember there was in June where they had that big holiday in June, 2020. This was the time when we only had Belarus and Sweden to push the case. And then you got these videos of [01:23:00] the, can’t remember the name of the holiday, but everybody was traveling all over China.
Paul Frijters: Chinese New Year and this and that.
Saifedean Ammous: Whereas you look everywhere else, the economic damage has been devastating.
Paul Frijters: But it’s not that much different. So the Chinese GDP growth of last year were I think 2% to 3%, but they normally have 6% to 7%. And so there was a 4% drop in GDP growth. That’s not too dissimilar from many places in Europe.
That’s roughly the drop we saw in, I think the Netherlands, I think Germany. So I think the GDP dropped there, that they were the only major country to grow, but that’s because they have a very high initial growth rate. They did experience a big drop in the growth rate relative to expected and relative to the whole Scandinavian region.
Because Sweden was the only one which didn’t lock down, but relatively quickly, all the other Scandinavian countries also started to stop lock downs. And now they’re like the same region in Europe. They as a whole also didn’t see much more than, three, [01:24:00] 4% maybe of dropping GDP growth relative to what was expected.
The Chinese did see economic losses, but they’re on this spectacular growth trajectory, and so it was a dip in the growth, but not yet reduction.
Saifedean Ammous: Okay and then a few more issues. The PCR tests, what do you think of them?
Paul Frijters: I think the PCR tests, the world as a whole would have been better off without it.
I mean it is very inaccurate, it picks up pieces of the virus whether dead or alive. So it could be picking up previous infections. But also it’s fed this obsession, right? I just can’t watch the newspapers anymore. It’s always about how many tests and this and that. And these tests can be manipulated because you can make them more sensitive or less sensitive. They are a huge industry.
So I also always think I’m looking at a form of corruption when testing is being made compulsory somewhere. I always think you know, [01:25:00] who’s paid a politician to to ensure that? And I think in effect it’s been a disaster that we’ve gone to a test society, which feeds this obsession.
And I think one of the many lessons is that we should stop testing. We should not do this. We should be much more frugal with this continuous obsession with testing every aspect of our health, and so that’s in a nutshell.
Saifedean Ammous: Yeah, I think in general, this is a big, insane problem with modern medicine in general. I recently discovered this is something I intuitively had, and I recently discovered this is basically the difference between all traditional medicines and modern medicine. Traditional medicine looks at the patient and tries to see what is wrong with the patient. Modern medicine looks at the lab results. There’s all these tests, so the doctor doesn’t even look at you.
So you tell them, all right, I have these symptoms and he doesn’t need, he doesn’t care to look at you, he functions as a bot basically. You give the [01:26:00] symptoms and he orders the tests, and then he looks at the test and then he issues the diagnosis. And then based on the diagnosis, he issues the medicine, which is I think extremely problematic because most of these tests, if you really start digging into them, there’s a lot of problems with them.
The biggest scam test in my mind is the cholesterol, which is a huge, huge industry. The biggest drug in the world, the biggest grossing drug for the pharmaceutical industry in the world. This was before coronavirus. So maybe the new vaccines might meet that. But Statins used to be the biggest industry or might still be.
And that’s all built on the idea that your cholesterol has to be within a certain range. And you dig into that and realize this is complete nonsense. And then these examples are many, in many cases if you’re healthy, the best thing you can do is just avoid these medical tests because you go to the doctor, they’ll order enough tests [01:27:00] to find one that’s wrong.
And then they’ll put you on a medicine and that medicine will mess you up. And then he’s guaranteed a lifelong customer because you just keep creating more problems, more iatrogenics. And I think that this with the PCR, the notion that you had healthy people forced to isolate from society like athletes, it’s amazing.
You have all these professional athletes who are able to on Saturday he was scoring, Cristiano Ronaldo was scoring three goals for Juventus in Serie A, and then on Sunday he tests positive, and then he has to miss the Champions League game, and they asked to isolate for a week or whatever.
And then he comes back from his isolation and he scores another two goals. The fact that people think, this man went through this illness and came back and was able to score five goals on either side of the illness is mind-boggling. Clearly he wasn’t ill, and if the test says he’s ill, the test is [01:28:00] broken.
Paul Frijters: I agree with nearly all of that. It’s also an insane conception of society, right? Whereby we’re on the basis of tests, which are going to try and pick up all kinds of outlandish disease. No person running around is totally bug free. We got millions of viruses and bacteria in our body and on us at any moment in time.
We have lots of very free time and lots of small problems at any moment in time. You test too much, then you’re going to pick up a thousand things, 900 of which you won’t have, and a hundred things which won’t be a problem, but you’ve got them. And as you say, that feeds then a medical industry, but now it’s gone to the level whereby society then starts to react on that.
You’ve had the test, you’re not excluded from society until the new test says that you’re fine. It really is like the Catholic middle ages. It’s oh no, you’re of the devil, the devil is [01:29:00] invaded you and you should sit in the corner over there until the priestess come and you know, woven her magic wand over you and says you’re fine to go now, you’ve done your penance.
And it is not a sustainable society. It’s very costly. It’s very disruptive and it’s stupid. We should not be like this. It’s it’s not a healthy way to live. And so in that sense, it is amazing how dysfunctional empirical science has become, as you said at the start, right?
We now see these reductions in life expectancy and Australia is a great case in point whereby you see these excess deaths going up and it’s basically got nothing to do with COVID. It’s because of this kind of mindless health obsession, which is in fact very unhealthy for us, but kaching, it’s making money, but it’s reducing our health.
It’s making us die younger, lonelier, without worrying more about, are we having fun in life? Are we doing good things for the rest of humanity, for our kids? It’s derailing, [01:30:00] we should get rid of it. But it’s hard to see because this is a big beast, this is a huge industry.
We’re not done with this in a hurry.
Saifedean Ammous: No, you’re absolutely correct in the analogy to the church. All of these con artists who play doctors on the internet wearing lab coats when their job is to sit and basically crunch numbers and talk to the media, it’s amazing, it’s the priestly cult where they have to wear these costumes so that they appear like they are the priestly class, that they are above us and they get on TV and they tell you that today you can go shopping for one hour, but only if you do this and you do that.
Paul Frijters: Yeah. We’ve read the signs, the doves have flown in the right direction. Shopping mall in the east of town is okay, but on the west no, they haven’t paid their bribes.
It is a totally dysfunctional [01:31:00] society that is turning into, but therein also lies my hope. We talk about this at length in the book, we say, look this is so impoverishing, this is so bad for productivity, so bad for people’s mental health that this cannot win. It’s like this huge, extra weight on society.
And fortunately, Western societies are roofless winners in the long run. We jettison what drags us down. And this is just a huge amount of bullshit, which drags us down. It makes us poorer, less happy, dumber, and I think at a certain moment, we are just going to jettison it, but I’m afraid it might take a couple of years. But it is just dysfunctional stuff.
Saifedean Ammous: Yeah. I hope you’re right. A couple of rituals from the cult of the hygiene theater. So masks, what’s your empirical take on the effectiveness of masks?
Paul Frijters: So I’ve looked [01:32:00] at the evidence for masks, and I was initially on the fence What do i know, maybe, and then I read a couple of studies where it said they don’t work all that well in the clinical setting.
And furthermore, these virus particles are so small that they are to masks what the gates at the garden offer mosquitoes. You might argue that a mosquito might bang up against part of the gate, it’s not going to stop the mosquitoes. It’s not going to help at all.
So my take was very early on that look, I don’t believe that they’re going to have any beneficial effect but God knows, let’s see if the studies come in. And so there’ve been a couple of big studies come in. There’s of course, the famous Danish one, then there’s the one in, is it Shri Lanka or Bangladesh, which I went through with a fine tooth comb.
My take from that study as well, if they help at all, it’s not the mask you think may help. So not the cloth ones and to a minute degree in villages where [01:33:00] almost nobody has COVID and none of them seem to wear the mask correctly anyway, or at least very few. This is what you’ve got going for it after one and a half years.
If you look at the empirical studies, have they helped regions to any degree? I haven’t seen good evidence and I’ve seen plenty of regions with mask mandates and things have only gotten worse. So my reading of the empirical evidence is if they help, it’s a very tiny amount, but from a long run position, again not as soon as it’s endemic, it’s going to keep coming back until nearly everybody’s had it, mask or no mask.
And of course, I look at all the negative things about masks, they’re a waste mountain. They’re very costly. They impede speech. They basically make people feel like second class citizens. They’re used to shut up, and what we now also see, particularly in the U. S. is that they’ve become the symbol class.
It’s the lower class who have to wear the mask. It’s the servants who wear the mask and the masters are maskless. [01:34:00] And so it’s becoming a symbol of subjugation. It’s like the star of David, it’s now the mask, who’s the mask class? Yeah, it’s the people not important enough to go around without the masks.
So I find them horrible and I find the evidence for them very uncompelling that they do more than a very tiny amount, which in an endemic situation, is not very sensible either.
Saifedean Ammous: There’s quite some evidence to suggest that they might actually be counterproductive. If it’s a respiratory illness, obstructing your breathing has to be the dumbest thing you could do.
You spend all day breathing through dirty cloth. That’s what ultimately it comes down to. And ultimately if you can breathe in and out, then air comes in and out then the virus is going to come in and out.
Paul Frijters: Exactly. And there was this French study, which made the observation, look people where these masks for days on end, they cough in it and they spit in it and it’s full of [01:35:00] viruses, bacteria.
Then they put this warm, moist thing into their pockets, keeping it nice and warm and letting all the viruses breed, and then they put it back again. This is supposed to be a healthy thing to do, so in the way that people actually use these masks, as you say, they’re health risks.
Saifedean Ammous: There might perhaps, if you want it to be open-minded about it, I can’t completely dismiss the idea that if you had a surgical mask installed correctly and you wore it and the way that surgeons put it on correctly at the right tightness closing, and all of that stuff, perhaps it might help to reduce.
In some of the studies where they do it in the lab setting where they put dummies and they put the masks on the dummies and then they spray. Then they look at it, then you see them. But of course that’s not real life. In real life you have kids who have, they make masks out of their favorite sports theme and they just wear the same mask for weeks.
And [01:36:00] it’s disgusting. This child has been breathing their own dirty snots for weeks on end. You can’t wash this every day and you wear the medical mask maybe for an hour during a surgery, or you wear it for something like that, and then you take it off, but people are just wearing the same dirty piece of cloth all day everyday, breathing in and out through it.
It can’t be good.
Paul Frijters: Yeah, and that big, was it Shri Lankan or Bangladeshi study, they found the cloth masks didn’t help at all relative to no masks in villages. And so it was like why do we hear that loud on the news? Cloth masks are useless. And again, this disinterest in actual news.
Saifedean Ammous: Yeah, it’s amazing. And then finally the scrubbing and spraying all that insanity.
Paul Frijters: I know. I’ve just been to Wales this weekend, everywhere is sort of squirt squirt, and I just refuse, and people look at me and say, don’t you [01:37:00] want to have clean hands? I said, look, I want to have healthy hands.
I don’t want to have this alcohol taking away my peptides and making my skin dry and hence making you more susceptible to be invaded by all kinds of things. I’m choosing the healthy option, none of this shit on my hands, thank you very much. It’s amazing, it’s a ritual.
Saifedean Ammous: And it has absolutely nothing to do with respiratory illnesses.
Paul Frijters: No, exactly. Shouldn’t that be up your nose? Exactly. But don’t give them ideas.
Saifedean Ammous: I think there’s a key point here, which is that there is a minority of people that likes to think of things in terms of consequences.
And the majority, particularly when they get scared, they don’t think of them in terms of the effects of the consequences. They think of them in terms of the feelings that they give you. And so people are dying and we have to do something. And these kinds of rituals are [01:38:00] just like, self-flagellation to show solidarity.
It’s like all of these people, like when there’s bad things happening in the world and people change their Facebook profile pics to show solidarity. You’re not doing anything, it’s not changing anything. It’s not going to help, people have died in a flood. Go help or send money or do something, but changing your Facebook profile picture, or lashing out at people that say who are carrying on with their life, having a birthday party and you lash out at them.
People in Indonesia are dying, how could you have a birthday? There is that impulse to just, you have to punish yourself in order to show that you’re a good person, that you’re not letting these things happen. And I think this insanity with the masks and the scrubbing and the hand spraying, all of that stuff, I think it’s the triumph of these kinds of afraid, simple minds.
It doesn’t matter if it works or [01:39:00] not, you just have to do something. They get offended when you try and start a conversation about whether this is effective or not. How dare you? There’s that image of Gretta just shouting at you, how dare you. This is the mental capacity that we’re dealing with of just children who are obsessed with performing those rituals. We could go on and on!
Paul Frijters: I know, and I totally agree with that, but exactly what you said is one of the big things we say in this, which is that it’s like a sacrificial event and it is medieval, it is prehistoric. It is this notion of oh there is a problem, I’m going to solve it by hurting myself.
I’m going to solve it by hurting everybody I love, my kids, my elderly and my whole society, and that’s going to solve the problem. The harvest was bad, I’m going to kill my own son in the hope that next year the harvest will be good. It is like that, and we had hoped that we’d had institutions and education, which would [01:40:00] stop us from doing that kind of thing.
But we’ve been shown to be wrong. Underlying, we’re still prone to believe that sacrifice will get us out of problems. We’re supposed to have institutions and governments which go against this, laws which go against this, but apparently not.
They’ve not been strong enough to stop this kind of panic, drag us back into that kind of, medieval mentality of there’s a problem, we need to do something, it doesn’t matter what. And of course our societies, like you said, have always had elements of that. I mean, my favorite one is run a marathon for Africa. It’s like yeah, that’ll really cheer them up in Africa.
If you’re dying of hunger, the fact that somebody in Brisbane is running a marathon for them, that’s going to do wonders. But people lap it up, they say aw, you’re so caring. What do you mean? Why [01:41:00] don’t you send all the money you spend on your trainers directly somewhere, or go and actually help the people you say you care about.
But they don’t want to do that. Oh, no, that’s getting their hands dirty.
Saifedean Ammous: Yeah. All right, we have a bunch of questions for you from the other attendees here. Peter, you want to go ahead.
Peter Young: Thanks, Saif, and hi Paul! Thanks for all of that information. I just wanted to pick you up on something that you mentioned regarding Sweden about the comparison with the neighbors, because being based in the UK, a lot of people were talking about the situation in Europe during the start of a pandemic.
And they were saying that Sweden is actually not a case that supports the anti-lockdown side, the number of deaths from COVID were much higher than all of its neighbors, and that was basically the central argument that people were using to justify why lockdowns were effective at fighting COVID. So I wondered if you could just expand a bit more on that and explain why you think that’s wrong.
Paul Frijters: Yeah, and it definitely is wrong. That’s [01:42:00] sort of outdated information. So one of the things to look at is for Scandinavia as a whole, we have these restriction index which is used to try and measure the degree of lockdowns of people and Sweden did some of that.
As as we said before, they banned large gatherings, there were also travel restrictions, but the big things that hurts an economy and particularly hurt the social systems they didn’t do. So they never closed the schools, they didn’t make it mandatory that you couldn’t go and visit your family and your friends.
They didn’t close businesses. And so the economy and the social system function much better. So in our definition, they never had a lockdown. But the key thing to know about their neighbors, and so this is Denmark, Norway, Finland and Iceland is that on average, they had even less restrictions than Sweden.
So if you go back to sort of January, 2020, and you go up to right now, on average, there’s almost no difference between the degree of restrictions between all those countries. They all count in our book as pragmatic countries. Meaning that [01:43:00] yes, some of the neighbors had a lockdown for a short amount of time, but then they even more radically switched away from the lockdowns.
And they’ve now almost promised they’re not going to go into lockdown unless something really weird happens and they’ve done that as a region. So a hence the difference between Sweden and the neighbors in terms of policy is much less, it’s small degrees of difference.
In terms of outcomes, the outcomes have been as it were relatively good in that entire region. So Sweden has had to have something like that, half the number of COVID deaths of the UK per million, but of course, by not disrupting their own health system, they then had negative excess deaths following that. Whereas of course the UK has had more problems.
And there’s something else to say about Sweden and these other countries in a way, which is that they’ve learned from each other, right? So the Norwegian health authorities who did go in for lockdown, they sort saw the light and they apologized to their population and asked sorry, we’ve [01:44:00] been draconian, and we shouldn’t have, that’s created problems. And seemingly for the Swedish health authority, they sort decided that okay, what they did with their nursing homes wasn’t the smartest thing. And they apologized for that bit. It’s not that they apologize for not going into lockdowns. In their whole health policies they had some winners, they had some losers, they apologize for the losers, but they were still proud of how they did on average.
And that is an adult conversation they had with their own populations. Where have we had this in the UK? When have the health authorities said, oh we got that bit right, that bit wrong, we’re now learning this from our neighbors. It’s been totally absent. And you know, Scandinavia as a whole for me is the shining light within Europe.
This is what we can be. It works! It works much better. All the indicators that they’re better for all their countries than they are in the Southern part of Europe.
Saifedean Ammous: I think that’s fair. Stefano, you also have a question.
Stefano: Yes, thank you Saif. Thank you Paul for coming on, this has [01:45:00] been fascinating. It’s great to see that there are academics that actually have an open mind, and look at things the way you do.
So my question is the following two of the elements that you mentioned that could be motivating what happened with the last couple of years are economic or financial incentive and then scarier control motives from politicians, right? What I still don’t quite understand, and I’m curious to know what your opinion is, is if there were the case, then why are they pushing so hard vaccine mandates that make absolutely no science in terms of ignoring natural immunity, pushing vaccine on healthy kids.
To me, this seems counter productive because in a way it’s planting the seeds of their own demise. So how do you see vaccine mandates and what do you think is actually behind that?
Paul Frijters: I agree vaccine mandates are an interesting case study, right? I’m against vaccine mandates, I think you should be allowed to make your own choices, particularly since it’s become clear with the Delta variants, that is where the infectiousness of people with [01:46:00] COVID is almost the same, whether they’re vaccinated or unvaccinated.
And so there’s no arguments for forcing anybody into vaccination then. The externality, how much of a threat one is to others is almost the same. So what’s the point of forcing vaccine mandates on people? It should be a personal choice. If the risk is personal, then also the choice should be personal.
And particularly for kids of course, it’s not clear at all that the side effects are not much worse than than what you possibly gain. Kids are hardly affected by this COVID staff, they’re hardly infectious probably, but some of the side effects, particularly for teenage boys are looking to be worse than worse with the data coming in.
So I have asked myself why the hell these vaccine mandates? It’s partially driven by the pharmaceuticals who make money of this, and like the idea that the whole population gets this. You also destroy the control group, I buy that argument a little bit, which is there’s no part of the population which doesn’t have them and then shows that you were wrong to vaccinate everybody.
It is also I think, easy. So in a [01:47:00] controlled situation, if you don’t want to measure who’s vaccinated, who’s not, who’s had the disease, had natural immunity, then you don’t need to measure that. You’ve no need to have special rules. And so it’s also part of the control fantasy, which is the little baby dictator just doesn’t want to deal with these difficulties, not everybody needs to vaccinate.
And if you’re not doing what I say, then you’re bad because you’re not doing what I say. So there’s also the control fantasy that God is always right, and hence governments is now always right. And it doesn’t matter if they’re wrong, people should treat them as if they’re right anyway.
They become so arrogant that they no longer even think they need to take the population seriously on this.
Saifedean Ammous: Nasr, fresh from the 5:0 defeat of Manchester United.
Nasr: [01:48:00] I agree with you. Thank you for everything, Paul, you’ve said. I agree with almost everything, maybe everything you said. I just had a discussion with a friend a couple of days ago, and we were talking about what positive thing that Covid made that wasn’t meant to be, he was like more about like remote work and it’s the best thing that ever happened.
Do you agree with that statement or is there anything else positive that you would say happened without meaning to happen or could potentially be something good for humanity?
Paul Frijters: Well, I don’t think working at home has shown us anything beneficial so far because it’s been bad for social relationship, it’s not reduced as it were fossil fuel usage because [01:49:00] the trains have been running and people have been going in cars more.
And of course, computers and houses need air conditioning, so it’s not helped with that either. So I’ve not seen the benefits of all this working at home. It just made people less empathic because they don’t get out and about and see us with the damage of the policy so much. So it’s made the whole society less social.
So I don’t see that as a positive, although in my class if you like, the laptop class, the academics, lots of people love it. But I think that’s a bit selfish that they love it, for reasons which are not sustainable. But if I were to say what’s positive, I see two positive things.
One is that we’ve learned how corrupt our societies really were and how huge the influence of big money is on our society. I didn’t realize how bad it already was in my own countries. And so there’s a bit of an eye opener. Oh my God, it’s this bad. And so with that, one of the positive things is outgrowth of citizen journalism, of sort of alternative media [01:50:00] channels, a true challenging if you like of these monopolies which we have in so many industries, including the media industry, including the internet industries.
A counter movement has started. And I’ve wanted the counter movement to start, but this has really forced it out. Because it’s so obviously negative what’s happening now to so many people. Another good thing I think, and we’ll see how this goes is that always in a crisis, you try out new weapons, you try new toys and you never know, some of those new toys may be very positive.
And so for instance, the vaccines on malaria they may have been sped up because of this or people were more prepared to try them out. And so the willingness to try out different types of vaccines, I wasn’t against that. That would have sped up their development, and that means that maybe in the future when other nasty things come around or we try to tackle disease, which humanity have had for a long time, but have not tackled so far, we will be more successful.
And so [01:51:00] I think in some sense, part of the medical technology breakthroughs might count for me at least, as a long run positive. But of course on innovation in general, we’ve probably lost net innovation because we’ve shut down so many industries. You know, a lot of our best sciences have been spending their time doing bollocks or doing nothing and whole countries have reduced so much in economic activity, that’s also less innovation. But in that particular area where we might have sped up innovation, that might turn out to be a good thing.
Saifedean Ammous: Marquita, did you want to comment about that?
Marquita: Yeah, I think one of the things, particularly for this group, this whole lockdown thing and COVID, it really helped us to accelerate, more how to navigate this information age and particularly the mobile wave with the mobile [01:52:00] information, or even the fact that we’re all connected now, I’m making the assumption that maybe Saifedean wouldn’t have been able to carry out The Bitcoin Standard education as effectively or as efficiently, if we all weren’t home wanting to connect and learn more about ways to navigate things like this. I think for those of us that needed to learn how to navigate the internet, in the event that these crazy hysteria happened, now we know that the internet is the saving grace of when these things happen because they can happen anytime.
Paul Frijters: I find it a very interesting perspective and very difficult to give a good answer to that because yes, I do think that this has sped up the degree to which, a lot of humanity has been plugged into the internet, which hasn’t before and hence has discovered some of the benefits of the internet, some of the benefits of mobile phone technology, [01:53:00] and that is learning about things that otherwise we wouldn’t be exposed to.
But I think for a while I’ve been on the fence, whether I think that increasing digitization is a good thing for humanity. Because there are a couple of developments in the last five to 25 years, which are associated with that digitization, with the rise of the internet mobile phone technology, which are negative.
And so I’m close to starting to say that those negatives are starting to outweigh the positive. So one of the negatives is that we are getting distracted by our mobile phone and the internet all the time. And that’s the nature of, as it were the deal. You get programs for free, but you get distracted all the time.
And that distraction is costing us intelligence. So I think that’s one of the major reasons why IQ are dropping quite fast in quite a lot of Western countries. So I think that’s a major problem coming there, right? The distraction aspect. The other aspect is that it is also empowering governments and governments are [01:54:00] empowered with a lag, but then they do take full advantage of it.
So it is also allowing the surveillance society to emerge. And we’re seeing that in spades during COVID times. And that is something that doesn’t just go away. That kind of technology will stick around, and so I worry about that. I’m on the fence, I see some of the great benefits of the internet and mobile phones, it definitely I think helps economic growth in Africa and risen up a lot of people out of poverty. So I do see its benefits, but I’m starting to see negatives. I’m wondering when the moment is that the negatives outweigh the positives.
Saifedean Ammous: Yeah. I guess if we were going to say, then maybe the biggest positive from our perspective is probably Bitcoin. Although we could argue about whether this was all pre-programmed and all of the Covid stuff was maybe a rounding error in Bitcoin’s trajectory, who knows, but Peter has a follow-up question.
Peter Young: Yeah, me again. So I just had a question [01:55:00] about something you said regarding narratives on the COVID pandemic. When you were talking about the consequences of spending all of this money and printing all of this money in order to pay for furloughs and things like that during the COVID pandemic.
And you said that you think that afterwards people will have moved on and they’ll start blaming the consequences of those decisions on other things. I wanted to ask whether you see that happening in other areas of economic life? Being a fellow Brit, one area that comes to mind is Brexit. And as soon as the Brexit vote happened, I knew that everyone would be blaming everything bad that happened on Brexit.
And I just wondered if you could speak a bit about this kind of economic, this tendency when people think about economics, because it’s such a sort of nebulous subject, there’s so many different factors that influenced the microscopic [01:56:00] outcomes. I wonder whether you think that there is a general tendency for people to kind of miss-diagnose what happens based on a pre-existing narrative they have.
Paul Frijters: I think there’s definitely such tendencies. I think there are a couple of ingredients that are important there. One is that people forget to hurt. So as a stylized rule of thumb, they get over hurt. Actual physical hurt but also many mental health problems. The death of loved ones, they get over that within about a year.
So if you, as a politician, inflict huge pain on your population, but the election is more than 12 months out, it won’t affect the election much. So they get over it and then they don’t want to remember the pain because it’s gone. And it’s an interesting evolutionary question why people don’t remember pain, maybe that’s the reason why women have more than one child for instance.
But it is there, right? So one ingredient is in time [01:57:00] people forget pain and forget hurt and don’t want to be reminded. So they don’t actively want to know, that has nothing to do with manipulation, that is human.
The second thing is that, of course you can manipulate people if you control the airwaves, if you can spin stories to them. And of course, anybody who’s in charge will want to say anything good is due to them. And anything bad is due to either their predecessor or something that they truly can’t control or some enemy.
And so that dynamic works in all times. Any politician up for election or even a dictator who just wants to keep support will point to the good things and say that’s me, and the bad things either they didn’t happen or that somebody else’s mistake or they are now an excuse for something else to happen.
And I think Brexit is a great case in point whereby you know, it was very clear Brexit was going to lead to lots and lots of troubles. And now that the troubles are here, you see the politicians blame all kinds of people, the French fishermen are to blame or the Polish truck drivers are [01:58:00] to blame, or why won’t Brussels have different rules to Northern Ireland, to the ones we just agreed with Brussels.
I see that as normal politics. I say that is almost inevitable, I mean, politicians in any system will work that way, and that hence is a matter of how mature is the population, have you got good media that can be trusted, that sort of gives you perspectives.
And so there, I would point more to the distortion in the whole media system we have now, that there’s just such poor information to the majority of the population. And that combined with the incentives which have always been there to misdirect people’s anger and unhappiness. Yeah, of course. Any negatives of the great COVID panic are going to be misdirected than abused.
As they have been many times, right? That’s the story of wars, that’s the story of previous recessions. It was always depending on the persons with the [01:59:00] airwaves who got blamed. You want to look for examples over history, think of all the Jews who were killed in the plague pandemics of Europe, that was the scapegoat, whereas they had nothing to do with him.
Saifedean Ammous: Yeah, it’s a terrifying idea.
Peter Young: That’s an interesting point about remembering pain. I think that’s true, yeah. Thinking back at history, thinking about wars and how societies adapt frequently. Thank you for you answer!.
Paul Frijters: We get over pain, it’s very interesting. And also it’s interesting if we remember jealousy, we are jealous, but if you remember physical pain, you don’t remember the actual pain, you don’t actually feel an echo of the pain.
So we’re also wired not to remember pain. And God knows why, but one of my favorite explanation is that this helps women have more than one pregnancy. Forget the pain. You can remember the pain, but you don’t feel the pain again [02:00:00] when you remember it and that’s the thing. Whereas for many negative things emotionally, we re-feel it.
If we remember anger, we’re angry again, but if we remember pain, we don’t feel pain again.
Saifedean Ammous: Marquita is saying we remember the pain of childbirth, by the way. I’m going to take her word over yours Paul, on that one.
Paul Frijters: I have a wife, three kids.
Saifedean Ammous: Paul this has been absolutely fascinating. Thank you so much for joining us, and I really look forward to our next conversation on Bitcoin. I think this has laid the groundwork very well because we agree on pretty much everything when it comes, maybe not everything, but we have a lot of agreement on here.
So I think we’ll have some fertile ground in our discussion on Bitcoin. I’m quite optimistic, we’ll get you orange pilled as the term [02:01:00] goes.
Paul Frijters: Maybe I have the same optimism for the opposite reason. You never know, but we should enjoy ourselves, definitely.
Saifedean Ammous: Absolutely. Absolutely. I’ll be in touch about scheduling another discussion.
Paul Frijters: Thank you very much for putting me on the show. It was grand and thank you all for thoughtful comments. Great to see that there was a club which so obviously looks at this whole stuff reasonably, you have each other.
Saifedean Ammous: Yeah, absolutely. It’s what’s kept us sane.
Paul Frijters: You all live in different countries as well, right? So you can’t go to the pub afterwards, that’s a pity.
Saifedean Ammous: Yeah. This is basically our pub. Nobody can go to the pub anyway, these days!
Paul Frijters: That’s the advantage of having a family that’s skeptical, we can drink together.
Saifedean Ammous: That’s true. Okay, thank you so much.
Paul Frijters: Thank you for having me, it was a pleasure to talk to all of you!
Saifedean Ammous: Cheers, [02:02:00] take care!
He currently also writes a research publication on Substack called The Bitcoin Layer. I’m very happy to have Nick with us today to discuss his book which is quite substantiative and very educational, very enlightening book about Bitcoin and about the history of money and how money works and really gets into the details and the technical aspects of how monetary systems function and how Bitcoin fits in within those monetary arrangements.[00:06:00] Nick, thank you very much for joining us.
Nik Bhatia: Thank you so much for having me Saif!
Saifedean Ammous: So first of all, I wanted to begin a little bit by discussing your background, how you got into Bitcoin, how you found out about it. I know you used to work in bond trading before, so how did you go from bonds to Bitcoin?
Nik Bhatia: So I admit that for probably three years, I would see headlines about Bitcoin in my general newsfeed and ignored them. That was from 2013 to 2016, because 2013 was the first time it rose above a thousand dollars and people in my world started to, at least at the periphery pay attention to it and things were starting to be written about it.
And those that were curious at the time were able to fall down the rabbit hole. And I just didn’t do that. I was at an early stage in my bond trading career and just trying to [00:07:00] focus on that. Now in 2016 I started to see the word blockchain come across my desk in terms of research reports from investment banks.
And in particular, there was one Wells Fargo equity research report about all these blockchain and Bitcoin affiliated companies doing exciting things in emerging markets. And I read the whole report and my takeaway was I should learn what Bitcoin is.
Because I didn’t know what the word blockchain meant, I didn’t know what Bitcoin was. So 2016 is when I started that learning process. I was still fully in the middle of my bond trading career and trying to gain more responsibility, trade more volume, more instruments. But I fell down the Bitcoin rabbithole. I [00:08:00] think millions and millions of people, once it pulls you in you cannot unsee it.
And I had the Austrian background already. I had already learned about sound money, I was an advocate for gold. I was long gold at the time and so I really instantly understood what Bitcoin could be from that gold perspective. And I read Nathaniel Popper’s book, which, was a good history of the early days and made it exciting and interesting, and then started listening to Dr. Adam Back because I knew that if there was anybody to trust in this whole thing, Adam Back would be a good place to start.
He was one of the first people that I listened to every podcast appearance and I think just like the rest of us, it was a lot of [00:09:00] podcasts and Reddit and other things at the time, just trying to learn everything I could.
And eventually I wrote my first essay on Bitcoin in 2018, The Time Value of Bitcoin and the feedback was overwhelming. And I just knew that this is where I should be, I should be writing about Bitcoin and trying to advance Bitcoin because I believe in it. And I believe that it’s a force for good, and I wanted to be all in.
Saifedean Ammous: It just draws you in, you do the first thing about Bitcoin and then all the other stuff starts taking a back seat in your life. That’s why it’s called the rabbit hole so often for so many people, isn’t it?
Nik Bhatia: That’s right. And it just started to dominate my intellectual capacity and it never reversed course.[00:10:00]
Saifedean Ammous: Yeah. You can’t really see yourself going back to writing and working on just purely fiat matters anymore, can you?
Nik Bhatia: No, you have to include Bitcoin at the center of everything. It’s not even just something that you include. It has to be, for me at least, it’s the anchor of everything.
Saifedean Ammous: Yeah. So before we get to your book, tell us a little bit more about that fascinating article you wrote about the time value of Bitcoin.
Nik Bhatia: While I was falling down the Bitcoin rabbithole, there was the SegWit debate going on. Just learning about what SegWit was, why were people talking about it so much?
They were talking about it because of this thing called the Lightning Network. I was learning about that, and when I was learning about Lightning Network and how it would be constructed, I envisioned this scenario in which [00:11:00] people would be posting their Bitcoin to these channels as a collateral sort of agreement, from my lingo perspective, it’s posting Bitcoin as collateral for the facilitation of payments and you earn a yield off of that and nobody had really articulated this.
Nobody had written about it. It was talked about, I remember Andreas Antonopoulos had mentioned that this type of routing activity could earn you income. And that by itself just completely grabbed my attention. I introduced this concept of the Lightning Network reference rate, which would be a reference rate, somewhat of an average of the yield that big nodes in the network are earning through their routing activity.
It was completely [00:12:00] theoretical and speculative at the time, but people are doing the same thing that I wrote about three years ago. They’re earning Satoshis from their Bitcoin channels on the Lightning Network. Those channels are open to route economic activity, which is happening. I use the Lightning Network all the time for commerce and it works.
People that I know are doing their routing activity and earning small yield, but there’s yield there. And the paper was basically saying that the fact that there will be yield, we can reference it in a risk spectrum, and the Lightning Network rate can be somewhat of a baseline for the rest of the Bitcoin yield universe.
Saifedean Ammous: Yeah. Under the current stage of Bitcoin’s growth, there’s probably more yield to be made by lending [00:13:00] Bitcoin to exchanges, which is where a lot of people get their yield, and a lot of Bitcoin interest rate businesses get their yield from, which obviously involves a bit of risk, but as Bitcoin and the Lightning Network grows, you would expect that these kinds of use cases would disappear because there’s not going to be much exchange trading of Bitcoin against fiat if there is no more fiat left.
On the other hand, you’re going to have a lot of activity taking place on Lightning because I can’t really see Bitcoin taking over without a lot of activity on lightning. So if that were the case, then yeah, the activity on Lightning will become the reference rate.
It’ll become basically the risk-free rate. This is what you can do by putting your Bitcoin on the Lightning Network, it’s the baseline for earning Bitcoin. So every investment will have to beat [00:14:00] putting your money in Lightning in order to round payments.
For the listeners who are not very familiar with the way that lightening works is, it’s a way for processing transactions very quickly, but the way that works is that you have to put up some money in a channel and you open a channel between you and another party on the network, and then you put some coins in and they put some coins in that channel. And the more coins there are, the more payments you can process through this channel.
And the way that it works is individuals need to find the route between the sender and the receiver. And so if you find the route, you go through these people who have channels with one another, who all have their Bitcoin placed on the network. The bigger the network, the more nodes there are, the more interconnectedness, the more people can pay one another.
And the more coins you have, the more you’ll be able to earn. So it’s a fascinating concept that you presented there, which [00:15:00] is that that will become basically the risk-free rate. I’m wondering, do you really think that it’s apt to say that putting money on Lightning is risk free? Doesn’t it involve the risk of something bad happening to Lightning?
Nik Bhatia: Absolutely. And it is more of the reference rate, right? Treasury yields as you know are not explicitly risk-free either. There’s a risk to owning them, it’s just called risk-free because,
Saifedean Ammous: everything else is more risky.
Nik Bhatia: Right, exactly. Everything else is more risky. And it’s also the terminology that’s used to describe reference rates, like the reference rate is the risk-free rate. LIBOR is also considered a risk-free rate in interest rate calculations as well. And we know that LIBOR comes with full counterparty risk, it’s basically an average of lending to banks, it’s an interbank rate. Risk-free is also, it’s just another way of [00:16:00] saying reference.
And I do believe that there’s plenty of risk in running a Lightning node and doing routing activity because you can mismanage your node or your channels and potentially lose your Bitcoin if you’re doing any activity in Bitcoin. The most important nuance here is that you don’t have explicit counterparty risk.
You’re not sending your Bitcoin away to somebody like exchange lending is, you don’t have the Bitcoin, it’s not yours, it’s not even in your exchange wallet. And so with Lightning, all of your channels that are open, it’s a smart contract. So if you close the contract you get to, it’s basically a call on your own funds.
And so in that way, because you have this call option on your funds at all times, [00:17:00] The Bitcoin is yours. The risk is unique because Bitcoin is unique and Lightning Network is unique, but it doesn’t have that explicit counterparty risk nature to it, and I think that’s very important. Now, I will also say that I use a custodial Lightning wallet for my transactions and I withdraw my Bitcoin, close my channels, whatnot, periodically when I feel like I need to use the blockchain and create my own final settlement.
But the act of running a lightning node and processing those payments and managing your collateral, managing your channels, it’s something that I would want to do really well. It’s not something that I would wanna half-ass or even just experiment with and not really pay too much attention to it.
I have to focus on writing as you know, so I’m writing, I’m not running a Lightning node and engaging in that type of [00:18:00] activity. But I do see this expanding, Lightning universe in which I will be able to post Bitcoin to a Lightning node operator that has disclosed their statistics, their routing statistics, and basically are offering me a counterparty situation where I sent them my Bitcoin, they use it to facilitate payments and I split the yield with them in some way, based on whatever the agreement is.
I’m excited to see that play out. It’s already starting to happen. Lightning Labs is doing terrific work with their allowing people to do all this type of channel management, in a more automated way.
So I looked for this kind of decentralized banking layer on top of Lightning to develop where everybody can be a Lightning Network node operator, route payments. [00:19:00] The people who do it best will attract the most capital, making a hobbyist maybe relegated to a very small yield.
And so this whole risk spectrum within Lightning network, something that I’m looking forward to seeing develop.
Saifedean Ammous: Yeah. In The Fiat Standard, I discuss the Lightning Network on the chapter on scaling Bitcoin, The Fiat Standard is going to be out next month. The way that I see it as not putting up money for Lightning is likely to develop into a professional activity more than a hobbyist activity over time, because I think there’s a very distinct difference between money that you hold as cash, because you want it to be available for you. People hold cash balances because of uncertainty about the future. You don’t want to have your money tied up in investments.
Ideally, you would [00:20:00] rather have your money earning a yield by being tied up in an investment, but then you choose to hold some cash because you you want to have some parts of your money not having investment risks, not having the risk of default because you don’t know what’s going to happen tomorrow. And because you want money that has a lot of liquidity and little uncertainty. Providing money for payment clearance is a distinct function from that.
Think about it this way, your checking account is money that’s the cash effectively, that you have, and it’s money that you’re using for your day-to-day expenses, it’s money that you don’t want to have to risk, it’s money that, in case of whatever happens in the world, you’ll still have that, or obviously not whatever, but it’s the money that has the least risk involved with it.
I can’t see that functioning also as that same sum working for clearing other [00:21:00] people’s payments. So my friend wants to buy a car, if they need to buy a car and they have to rely on my checking account being able to clear their payments so that I could, three hops away, get it to the guy who’s selling him the car, that’s a separate function.
That’s a function that’s going to require giving up on liquidity in order to facilitate payment processing. So that’s a little bit like investing in a bank in the analog world. And I think that’s just going to be an investment that’s going to have a a yield and that’s going to likely over time, the people that are going to do this best are going to be the people who do it most efficiently.
So it’s not going to be very efficient for you to put a lot of your money in a Lightning channel. Putting in the equivalent of, let’s say in today’s terms, something like $50,000. So that one day when one of your 20 friends wants to [00:22:00] buy a car, they can use your Lightning node in order to route the $50,000 for the car through that. I think is going to be more likely that financial institutions will develop that have large sums and are connected to many more people.
Then your friend will just go through that financial institution, which puts up a large sum of money because it is processing a lot of transactions. It’s not going to make sense for you because maybe one of your friends every year is going to need to use your balance in order to settle the price of a car. But for a financial institution, it makes sense when they’re using it regularly because they have a large number of clients connected to them.
So I would imagine it’s going to become more of a professional activity, liquidity provision on Lightning, distinct from the kind of image which many people seem to have about Lightning as it’s going to be peer to peer. And so when you buy the cars, just everybody’s going to be connected to everybody and everybody’s nose is going to be routing payments.
I don’t really see that being [00:23:00] the case. I think it’s going to be more of a professional thing, what do you think?
Nik Bhatia: I generally agree with that. I think we are progressing toward Lightning banks and bigger nodes and it’s already there. There is already some concentration on the Lightning Network in terms of those who route the most payments and are earning the most Satoshis in the network and that’s natural.
The most important thing is that it is open and so anybody can compete and it will become a professional activity, but it is completely open to competition. All you need is capital and routing expertise. You might even be able to use your own personal networking skills to your advantage in, meeting somebody and saying, Hey, let’s do some channel, balanced thing where I can help you route payments.
And you’re making that connection in real life and then you go and you open a channel with that person. So yeah, it’s definitely going to be professional activity, but any hobbyist, any person [00:24:00] that wants to participate in the network, wants to build a route around the central operators, even if it means paying a higher fee.
Because the routers that are professional will become big because they undercut everyone on fees and use their muscle in terms of capital. But if you want to pay a premium to avoid doing business with those people, you can make that happen in the lightning network. It’s all open and extremely cheap to do so anyway, we’re talking about Satoshis here and there. It’s not even in the realm of being expensive, like the Bitcoin blockchain sometimes gets expensive to use when it’s quite busy. The Lightning Network itself is a very empowering technology, but it definitely will follow that professional type of route.
Saifedean Ammous: Yeah, absolutely. I think this is the key distinction here, which is that in the fiat system, you can’t [00:25:00] compete because the market is closed and you need to be registered. You need to basically get a license from the oligopoly that is the existing banks. Whereas in Bitcoin Lightning, anybody can set up a node.
We’re going to get a degree of centralization, I think inevitably in Lightning, which can make a lot of Bitcoiners feel uncomfortable about it. But I think that it’s going to be incomparable, that level of centralization to what we have in fiat because in fiat it’s imposed by law and It’s difficult to break these monopolies and these monopolies are also protected through the government being able to print money and hand them out, which can’t happen in the case of Bitcoin.
So if a Lightning operator starts doing shady things, there’s nobody to bail them out, whereas in fiat there is. And if you don’t want to deal with them, you can always route around them. So I think what’s going to be driving the centralization of [00:26:00] Lightning is going to be the efficiency of it rather than political violence essentially.
And I think the possibility of exit is what’s going to ensure that members of that network will likely behave much better. Which I think brings us nicely to your book, Layered Money. First of all, tell us what inspired you to write this book and why Layered Money?
Nik Bhatia: So I wanted to write a book about Bitcoin for a long time. I read your book and I read Mastering Bitcoin by Andreas Antonopoulos. And I knew that there was an opportunity for me to write, because if I’m going to write a book, let’s be honest, it has to be different than The Bitcoin Standard, because your book is still you know, this whole time preference [00:27:00] illumination that you’ve given all of us is so fundamental in imagining why Bitcoin is powerful for the future.
So that’s that’s what your book did. I wanted to explain Bitcoin from a market’s guy perspective. I’m a trader and I’m a bond market person. And so I wanted to, in my mind when I had came up with the idea, the title was Bitcoin Through the Lens of a Bond Trader, that’s what I titled it in my mind, that’s how I would write this. I’m going to explain Bitcoin, but I trade treasuries so I want to explain treasuries why they’re so important, why Bitcoin is like treasuries of the future.
And that idea was there from the beginning. Then I read a paper called The Inherent Hierarchy of Money. I read that [00:28:00] paper in 2019, and I was preparing for my curriculum for my USC Marshall School of Business students. And I wanted to find papers that explained the monetary system and how it worked and just combing through papers, I found this hierarchy paper, and it articulated the difference between gold, currency and deposits in a three layer hierarchy where gold is the top and currency promises to pay gold and deposits promised to pay currency, in this three layered model.
And the light bulbs went off, I said this is just a theoretical model but it can be applied, and it was applied by the same professor and [00:29:00] other people that worked with him to the current financial system and the whole hierarchy concept is applied to the modern financial system. Very complex multi counterparty, multi-bank monetary system. I wanted to tell the whole story of money hierarchy from the origins of it, to the gold era, which you do.
You talk about the gold era in your book and then bring it to the modern era and then introduce Bitcoin within the hierarchy framework and explain why Bitcoin is a first layer money like gold was and resembles nothing else in the whole system. Including central bank liabilities, which are dollars other [00:30:00] currencies and then banking deposits, which is your checking account.
The most obscene one is that people compare Bitcoin to Venmo, which I tried to show that we’re talking about a fourth layer money, or a first layer money, and trying to compare them. It’s such an obscene comparison that I had to nip that in the bud.
That’s why I wrote Layered Money, the motivation was to explain why Bitcoin really stands on its own in monetary history, other than gold. Which you articulate very well in the book and it’s also one of the conclusions of my book as [00:31:00] well, because that’s what Bitcoin is.
That’s why it’s so powerful. Nothing else in history resembles Bitcoin other than gold, and look what gold has done. And Bitcoin is only 12 years old, so what can Bitcoin do for our society? It’s unimaginable. The Time Value of Bitcoin motivated me to write about Bitcoin.
And then I just wanted to give my best essay that I could ever write on why Bitcoin matters for this planet. And I found at an angle through the hierarchy approach and my wife helped me name it Layered Money. And I’m very proud of the work and thank you for your inspiration and help along the way and congrats on your second book too. I can’t even imagine [00:32:00] going back into the trenches, so congrats to you!
Saifedean Ammous: Thank you, sir. I gotta say the point of your book, Layered Money is something that I tried to get to in The Bitcoin Standard. And it was perhaps one of the main, well the main motivation was the aspect of the hardness of the money and time preference and all of those things.
But another similar point was the idea that Bitcoin is a settlement network, it’s not a consumer payments network. And that’s something that I expressed in kind of intuitive, simple to understand terms, but I have nowhere near the kind of sophisticated understanding of financial markets to express it in the way that you do in Layered Money, which is why I think it’s such a great compliment.
The two books compliment each other very well because I intuitively try and explain the idea that look, there’s a limit on how many transactions take place, so Bitcoin will grow, but the [00:33:00] demand for holding Bitcoin is going to exceed the capacity of the chain to handle everybody’s coffee and lunch on chain.
And you know, I use the example of the gold standard as a way to illustrate this, but I think you do a terrific job of looking through the history of how money gold has evolved and how these layered systems have developed. I highly recommend people who have read The Bitcoin Standard to compliment it by reading this because I think they both arrive at similar conclusions, but through different analytical tools and yours is much more of, someone who’s in the trenches of how markets work.
So let’s dig into the substance of layered money. You begin first of all, by [00:34:00] discussing it in terms of the, you begin by talking about the history and you talk about the Bourse of Antwerp in 1531 and it birthed the money market and it gave us money market. So what is the relevance of that and for Bitcoin today?
Nik Bhatia: So in Antwerp, the thing that was most interesting was that you had all these bills of exchange, which were basically these debt instruments, and they were never traded, they only matured. They were a 90 day instrument and you give money on day one, and then on day 90 you get your money back.
There was no liquidity to these bills, they were just a promise to pay. In Antwerp for the first time, [00:35:00] these bills found a liquidity. So people would trade bills for notes and notes were invented during this time. And a note was just, I promise to pay you in what we think of cash today. Where a note is just the cash value that it says it is, it has no expiration.
And the counterparty that is written on it, is guaranteeing your money. So notes were invented during this time to provide liquidity for bills, other debt instruments. And this was really significant because what we think of as the money market today, which is you having checking account dollars or money market funds in a brokerage account, all these different types of cash, even treasury bills themselves people call cash, all these different types of [00:36:00] cash instruments, monetary instruments, really can trace their origin to the Antwerp Bourse.
Saifedean Ammous: Yeah. And you discuss how this evolved over time and then with the Dutch East India Company becoming the first average joint stock company, how did that add to the pyramid of layered money?
Nik Bhatia: So in Amsterdam, when the Dutch East India Company issued their first stock, because of their successes in Asia, the shares themselves started to appreciate in value.
And then of course, people that were early investors wanted to cash out. So when they cashed out, what were they cashing out into? The city of Amsterdam wanted to take advantage of this situation, and so they invented their own currency. The bank of [00:37:00] Amsterdam was created and they issued bank of Amsterdam deposits.
And the city of Amsterdam basically mandated everybody that was a cashier, basically people that dealt in paper promises and coins, had to surrender all their coins to the bank of Amsterdam. So it wasn’t a seizure, but it was a forfeit, a fiat mandate of paper. The idea of the central bank comes out of the Dutch East India shares appreciating and needing a market for liquidity.
The government swooped in and said, we will provide that cash instrument, and by the way, you have to use it and everything else is illegal. They funneled everybody [00:38:00] into the bank of Amsterdam deposit, which was a second layer money, right? Because the bank held the gold and silver coins physically in their vault. And that’s when really people just started accepting second layer money as the highest form of money that they were ever going to get.
And so this idea that you weren’t going to have gold and silver anymore, you were just going to have paper and deposits and you were going to be fine with it. It started then, in 1609, 1602 was when those shares started trading and 1609 was when the bank was created.
And The Bank of England, which followed, I know that it’s the next chapter there, the next part of the book, The Bank of England basically copied The Bank of Amsterdam, in terms of its motivation and how it [00:39:00] acted, how it was able to capitalize on the demand for money, right? Because if you boil it down to what The Bank of Amsterdam provided, they provided a tool that satisfied the demand for money, for cash at that time.
And so The Bank of England also said, we are going to satisfy that demand for money, and it’s our money that you’re going to use. Banks in England can operate via charter, but they have to use bank of England money in this layered system where gold is not really, it’s just starting to get tucked away, tucked away.
Saifedean Ammous: Yeah, and that basically took over the world. The entire planet copied The Bank of England’s model. Why do you think that is the case?
Nik Bhatia: Well, because gold is a powerful tool and if you own it, it gives you great power. And [00:40:00] so that’s basically what it is, governments wanted to replicate that power.
Saifedean Ammous: Yeah. The rest of the rest of the world was pretty much already on gold or at least silver, but The Bank of England provided basically the most efficient way of scaling gold, right?
Nik Bhatia: Yes they did. And yeah, United States copied that because the banks only make money when they create credit.
Gold is a restriction upon that. The way to make money as bankers is you lend and lend, and the more that you can leverage, the more profits you can gain. If you are restricted by gold and gold reserve ratios and all that, your profits aren’t going to be kept. It’s banks trying to find their way around that restriction and get off the gold standard, even [00:41:00] though they’re pretending to still be on it, for the last kind of 50 years of the gold standard. We were off of it by probably the 1930s, but it wasn’t until 71′ when everyone finally acknowledged that actually we don’t have one anymore.
Saifedean Ammous: Yeah. I’d say earlier, I think 1914, and I’ve discussed this in detail in The Fiat Standard. In 1914, in England, this isn’t talked about much, but The Bank of England effectively confiscated British people’s gold in 1914. It’s amazing, this is just something that is not really mentioned in history books, but recently there was a study that was released in 2019 and it was conducted by a guy called John Osborne, who was the secretary of Montagu Norman, who was the [00:42:00] chief of The Bank of England during World War I.
And it goes through all of the policies that The Bank of England carried out in World War I in order to finance the war. Two very interesting parts to this story. One was uncovered only in 2017 and one was uncovered in 2019, and I get into the details and the references in The Fiat Standard. The first thing was that the British government tried to finance the war effort by raising money by selling bonds.
And they only sold about a third of the bond. So they offered something, I think it was 400 million pounds at 4.1% 10 year maturity. And they thought, well is the British army and it’s the British people, they’re going to buy them, they’re going to lap them up. But the British people turned out to be smarter than their central bankers give them credit for.
And they realized investing in a war is not such a great [00:43:00] idea. Only a third of the bonds were sold. And then the bank of England, what they did in order to finance the war was, and this is astonishing, they got some high-ranking official in the bank of England and his assistant.
They got them to buy the two thirds of the bonds, which is an enormous amount. You’re talking about something like 216 million pounds back in 1914, which is an enormous amount of money. You maybe want to multiply by 300 in order to get to today’s quantities or maybe much more. But they got them to buy it under their own name, even though the money had come from The Bank of England.
And that’s how they financed the war effort. Of course, the implication of that was that the bank had a precarious liquidity position because it didn’t have enough gold to satisfy all of its demands. And so the next step, which was in [00:44:00] 1915, I call it in The Fiat Standard, I call this the fiat white paper. In Bitcoin, we had Satoshi send an email to the mailing list with the software and the specifications in the white paper.
In fiat, the way it worked is that The Bank of England told told all banks and all post offices, and post offices were a big deal back then, that they should take payment in gold and only make payment in notes. And over the next five years, The Bank of England collected hundreds of millions of pounds in gold coin and gave only paper and notes instead of it. It was effectively sovereign default, but it’s not discussed like that because it was the war and it was to support the war effort.
So nobody really likes to talk about it this way, but of course it did lead to inflation. By the end of World War I, there was enormous price inflation in England. [00:45:00] When you study the history of that, you see how, effectively they went off the gold standard, and then all of the problems of the 1920s and thirties, which later led to World War II came from the fact that Britain and many other governments also were in the same position, they could not go back to the gold standard at the old rate.
Because at the old rate, they’d already made so much more liabilities and so many more pound papers than they should have if they wanted to go back at the old rate.
And so they could have gone back to the gold standard by dropping the value of the pound, devaluing the pound effectively, but they did not want to do that. And so they tried to square the circle of continuing to print more money, maintaining the old gold exchange ratio and hoping that they could somehow restore [00:46:00] redemption.
And then they kept on kicking the can down the line throughout the 1920s with that, with a lot of inflation, which then led to the 1930s Great Depression. So this was really the root of the Great Depression all over the world, was the inflation that was used to pay for World War I, and I get into this in detail in The Fiat Standard.
But yeah, this system, the point I’m trying to make is that this system is great because it’s efficient and it allows for the scaling of gold, but it can also be abused, and allows banks some degree of freedom because yes they’re restricted by gold, but at the same time, they have a monopoly on the clearance of gold.
And they’re the only ones who can send your gold across borders, and so if you’re stuck with them, they can rug pull.
Nik Bhatia: Yeah, and they can leverage without anybody stopping them because you can’t call your gold from [00:47:00] them, and you can’t go up in layers in the gold system, they restrict you from doing it.
It’s closed doors, oligopoly, like you said. That was the huge problem. And in the end, they couldn’t end up getting away with it. They had to abandon the gold standard and admit that, yeah the first layer of our system is gone and there’s nothing you can do about it.
Saifedean Ammous: Yep. And so you think, in your book you say that it was the crash of 1929 that basically led to the abandonment of the gold standard, right?
Nik Bhatia: Yeah, it’s the actions by the federal government during the thirties, including the FDIC insurance I think doesn’t get as much play, but FDI insurance basically convinced everybody in America that they never would need gold again for their day to day transactions, because [00:48:00] their deposits were insured by the federal government. And the amount increased through time still to the point today where Americans think of their checking account as gold. It is as safe as gold when in reality, It’s a banking liability.
And yes, the banking liability is insured by the federal government, but it doesn’t change the fact that it is a lower layer instrument in the monetary hierarchy. You are far removed from the highest form of liquidity, which is like a treasury bill or a treasury note for example, or even a money market fund that owns treasuries.
In your checking account, you’re very far removed from that, but FDIC changed the psychology of Americans to convince them that banking deposits were absolutely fine and the highest form of [00:49:00] money that they would ever need. And really it made obsolete the idea that people would try to ascend the money hierarchy into higher forms of money, higher layer forms of money.
And then it disappeared from the consciousness of Americans, where they just think of the bank as the safest, keep it at the bank, that’s the safest place.
Saifedean Ammous: You can take it to the bank.
Nik Bhatia: Exactly, exactly.
Saifedean Ammous: Yeah. I guess now it would be a good time to just tell us what is it that in your mind constitutes the difference between those layers? What happens is you go up the hierarchy and down the hierarchy? The liquidity increases.
Nik Bhatia: Yeah, the liquidity definitely increases and the counterparty risk decreases.
Because if you have a checking account deposit [00:50:00] insured by the FDIC and the bank goes bankrupt, the bank has to appeal to the FDIC insurance fund to get the money back to the bank to get it to you. So you’re removed from the money itself, and the way to analyze these hierarchies is to really start at the top. What is the highest form of money in the system, and then see where the deposit or the fund that you might own falls into that multi-layered structure.
So the fact that the federal reserve owns U.S. treasuries as their asset means that U.S. treasuries are the first layer of money in the U. S. dollar system. Everything else that’s not a U.S. treasury security is a lower form of money. So your banking deposit or even your federal reserve note, because that’s issued by the FED, it’s on the FED’s liability side.
[00:51:00] And people don’t really have federal reserve money, right? Most people don’t have cash, they just have checking account deposits. Checking account deposits are backed by the assets at the bank, which to some small degree include reserve balances issued by the FED. And so that’s why checking account deposits are a third layer money in this framework because the bank only owns federal reserve liabilities, the FED owns the treasuries.
Banks might own treasuries, but they’re not really the backing of those deposits. And as we know, most bank deposits are only backed by loans marked on the balance sheet, which is another way of saying, we know we’ll get money back in the future and we’ll strike it as an asset today.
So this accounting system allows them to [00:52:00] create money out of thin air, issue deposits and then mark alone on their asset type.
Saifedean Ammous: Yeah, and as long as you’ve got some kind of mechanism of preventing people from cashing out their lower tiered money for higher money, then you can knock yourself out and other people will have to suffer from the consequences of your actions.
Nik Bhatia: That’s right. And you know if there’s a default because you’ve over leveraged, the losses get socialized. That’s been the case for quite some time now in the U. S. and it’s now the federal reserve’s official policy, is to socialize every banking loss that can be imaginable and not just in the United States, it’s worldwide.
The U. S. has prevented banking crises in Europe and elsewhere over the last 14 [00:53:00] years now. So all bank losses are now socialized at the federal reserve.
Saifedean Ammous: Yeah, absolutely. I guess we could summarize the business model as restrict the exchange between the top player money and lower layer monies, issue more lower layer monies, and then when the music stops, there’s not enough chairs, get the people who have the lower layer money to basically subsidize the people who made that money. So the victims end up paying for the perpetrators. It sounds like a scam, but it’s been quite sustainable unfortunately, for quite a while, hasn’t it?
Nik Bhatia: It has and I hope that layered money, apart from hopefully educating people about Bitcoin that have never heard of it, I hope it really gives people an idea of how the system currently works in the U. S. dollar spectrum and how these losses [00:54:00] are socialized in a very big way, and the FED just creates more lower layer forms of money and at their will.
Saifedean Ammous: Absolutely. All right, going back to the history lesson, so then we go off the gold standard and then we move on to the Bretton Woods system. And why do you think that was destined to fail from the beginning?
Nik Bhatia: Because if the world is going to use dollars for commerce, for economic activity, how is that related to a country’s currency that needs to be issued to make the country operate? Making the dollar an international standard for payments brought about an issue that there weren’t enough dollars to facilitate all that activity.
Because dollars were issued in the United [00:55:00] States, how are European countries supposed to use the dollar to trade with each other? And how were countries around the world supposed to engage in international commerce without dollars? And so banks outside of the United States started to fulfill that need completely outside of the U. S. financial system.
So you had this dual dollar system where you have onshore dollars, offshore dollars, and the meaning of a dollar really lost its place during that timeframe. That’s why Bretton Woods was destined to fail because it assumed the dollar would keep a fixed exchange rate with gold and convertability.
Half the dollars around the world weren’t even real onshore dollars that could be converted, so the meaning of a dollar disappeared completely. And that’s I think the most important [00:56:00] takeaway from Bretton Woods, it was destined to fail because you were trying to fix a problem abroad with a tool that was supposed to be a domestic tool.
It was the wrong solution from the beginning. Robert Triffin articulated that in the Triffin paradox and that’s exactly what happened.
Saifedean Ammous: Yeah, absolutely. It seems almost obvious in hindsight, but you can see why particularly in the U. S. people didn’t have much of an incentive to grasp the problem because ultimately it meant the U. S. had a lot of leeway in printing a lot of money, financing its own operations through the expansion of the money supply.
Cynics could argue [00:57:00] that has caused the United States economy to shift over the past 70 years into the current state where its main productive activity is the production of dollars, digital and physical dollars, which are sold off to the rest of the world because the rest of the world needs them.
So the whole world needs to use dollars and the U. S. can benefit enormously from the seniorage. It’s not like, as you explained in the book, it’s not like the money is just physical pieces of paper that they print out, it’s credit. And so more and more credit is generated in the U. S. and the U. S. just has an enormous amount of capability to generate more credit all the time because the world is always insatiably demanding more and more dollars.
Nik Bhatia: Absolutely, yeah. Credit is the instrument that brings the dollar and brings the power, keeps the power in the United States and in the [00:58:00] dollar system, because all the credit is issued in dollars. So it just perpetuates the dollar, and it’s also a big part of why the dollar itself will be the last currency standing.
It’s not going to be the first currency that Bitcoin knocks off per se. Bitcoin is going to take out all the little currencies first. The dollar is the most entrenched, has the deepest network effect, has this whole system of never ending credit rolling facilities that the FED is essentially backstopping because whenever they start to fall from par, the FED comes in and says, we have a facility that will buy these things at par, keep the whole system afloat.
You can’t expect that to go away, you can only expect it to continue. It’s the reason why people are in Bitcoin, [00:59:00] they understand this, that the fed will never be able to stop defending the dollar credit bubble. It’s going to last forever.
And so Bitcoin is the exit from that.
Saifedean Ammous: Yeah, absolutely. And I think another thing to add is that as other currencies fail, that strengthens the dollar because these people are right, some of them will move to Bitcoin, sure. But a lot of them still need to operate in the fiat system and knock off a fiat currency, and the people will dollarize.
We’ve seen it happen all over the world over the past 50, 60, 70 years. The fallback option for your local fiat is the dollar. It’s the global currency. In fact, the way that I like to say it, I [01:00:00] said this in The Fiat Standard, is that national currencies are effectively the U.S. dollar plus country risk.
The value of your currency, whatever country you are, we don’t see any national currency appreciate next to the dollar. We don’t see that happen over the longterm. It might happen for a year or two here and there, but you look over a 20 year timeframe and you don’t see a single fiat currency appreciating significantly over the dollar. So they’re all either pegged to the dollar or declining next to the dollar and the degree to which they decline is essentially country risk.
Nik Bhatia: Absolutely. And it’s not only country risk, but leveraging the banking system and how much the central bank is going to have to print, which is part of the country risk there, but leverage within the country can ruin the country’s currency because they’ll just have to print it.
And you’re right about people seeking the dollar as the exit, what do you think [01:01:00] people in Turkey are doing right now? They’re trying to get their hands on dollars, even though there will be people that end up in Bitcoin and it does increase Bitcoin adoption, and the people that choose Bitcoin over the dollar will be happier in the long term, the dollar will still win relative to the rest of the world in terms of the way that I think that the currency world will continue to play out.
Saifedean Ammous: Absolutely. I think that’s the case. The dollar is the final boss that Bitcoin needs to take out. And the more small bosses Bitcoin takes out, the bigger the final boss gets. But it’s okay because Bitcoin is ready for it.
Nik Bhatia: Absolutely. And I just think it’s going to last for my lifetime or for the foreseeable future, this coexistence of the Bitcoin system and the dollar system, the dollar system is deeply entrenched. But I [01:02:00] think that Bitcoin is rising up to that challenge and is a worthy competitor and we’ll continue to just grow and grow in relation to the dollar.
Saifedean Ammous: Yeah. Bitcoin needs to grow a lot and I guess that’s the kind of, in a sense people might interpret this as being bearish Bitcoin, that you’re saying that the dollar is going to be around for a long time, but in a sense, it’s also quite bullish Bitcoin because it’s saying that Bitcoin still has an enormously long race to run.
And the only way that it runs that race is Bitcoin’s number go up. The price keeps going up, then the size of the Bitcoin market the size of the Bitcoin network increases.
So what is the eurodollar system, exactly? Could you explain that?
Nik Bhatia: Yeah, so the eurodollar system is that system of offshore dollars that banks abroad used to [01:03:00] finance the economic activity of countries and companies outside of the United States.
The word eurodollar basically comes from dollars that are issued in Europe, not within the federal reserves hierarchy. These are dollars that are only backed by the loans that are marked on the asset side of those European banks. They’re just time deposits that are issued, at the beginning, in Europe.
And eurodollars are not real dollars, if a European bank fails and you have dollars with them on deposit, those are not FDIC insured dollars. So in that way, they are a different type of dollar, but the character on your screen says USD no matter where you are.
And so the eurodollar system itself is still alive and well [01:04:00] today. I think the last reading was 12 or $13 trillion of USD issued by banks outside of the United States. And by definition, banks outside of the United States are not regulated by the federal reserve system. And so they are not officially onshore U.S. dollars. They are simply liabilities of banks that promised to pay dollars in the future.
And so the eurodollar system itself kept building up from essentially the minute World War II was over, 44′,45′ Bretton woods was 44′ until 2007. During that period, it got so big that it was about to fail entirely December 2007. The warning signs were in August, 2007, when [01:05:00] LIBOR, which is an interest rate to value risk in the eurodollar market, when LIBOR started to widen in relation to onshore dollars in August 2007, ended up in what would have been a collapse of a European banking system starting in December, 2007. As the subprime mortgage crisis made certain banks over there have to strike losses on their balance sheet and send worry into those banks.
The whole system would have collapsed if the FED had not opened a foreign exchange swap line with the ECB and the Swiss National Bank as well, December 2007. It’s a moment that’s not talked about enough in history, but basically this implicit bailout of eurodollars around the world started in [01:06:00] December, 2007 and has never been lifted.
The mistake, call it what you will, but the events from 1944 to 2007 in the eurodollar system, which could have easily blown up every bank that exists because of over leverage, is more or less disappeared from history because of the FED swift action in December of 2007.
The eurodollar system is now backed implicitly by the FED because European banks can go to the ECB, the ECB can go to the FED, they can print euros, post them as collateral to the FED, borrow dollars, and then lend real dollars mind you, FED dollars and lend those dollars to European banks to paper over their [01:07:00] losses, and extend and pretend, kick the can down the road, yada yada. That system is still in full effect and it’s a story that’s not told.
And it’s why the FED will always keep having to print, print, print, create, create, create second layer money. And, foreign exchange swap lines are another form of second layer of money because they’re basically using euros as collateral to create that money, euros that were printed also out of thin air.
So it’s like this hocus pocus game, and Bitcoiners understand this. They know that the bailout is never ending. So the only way to avoid the depreciation in the dollar long-term is to own something else. And that’s honestly is why a lot of people are long stocks, because they know they have to own something.
They can’t just have dollars. The dollar doesn’t mean anything anymore.
If they [01:08:00] own a part of a company that can earn in dollars or any other currency, they’ll protect the depreciation. And to an extent, that is absolutely correct. People that have been long stocks since 2007, 2008 have done very well for themselves relative to a cash position or a government bond position.
So those people that are in stocks for that reason are correct. It’s just that they’re underperforming Bitcoin overall time horizons because Bitcoin is a new phenomenon. And so people are late into it. I feel like I was late in 2016, people in 2021 might feel that they’re late, but they’re not. They’re still early because the story has a long time to play out.
Saifedean Ammous: Yeah. So I guess what happened in 2007, 2008, 2009? A lot of people think of it as essentially the U. S. nationalizing the banking [01:09:00] system in the U. S. but I think perhaps the less known part of the story is that it was also nationalizing the banking system pretty much all over the world, because everywhere had to rely on the U. S. dollars federal reserve swap lines in order to survive.
And so this continues today. It’s just been going on, and as we said, they just need to keep the money printer running, because there’s an enormous amount of dollar destruction taking place because of all the malinvestments that are encouraged by the inflation in the first place.
And so then you need to create more and more inflation to counteract that. And how do you see this playing out with Bitcoin? First of all, before we get to Bitcoin, why wouldn’t gold be a good solution to this? 2007, 2008, 2009, when I was first getting to start to understand [01:10:00] what was going on back then, in my mind it seemed like a no brainer.
They’re just going to keep printing more and more money. And the only thing that was going to hold onto this value is gold. And so stocks, bonds, everything else is going to be, everything that is denominated in fiat is going to go down in value, whereas gold because nobody can print it, will go up. Why was this wrong?
Nik Bhatia: Because I think stocks were the correct answer. We live in a corporate dominated world where gold sitting in a vault isn’t going to perform in the same way as productive companies with cutting edge technology, psychological expertise on the consumer and all these things, our attention being attacked nonstop, by advertisements in every corner of the globe.
That type of environment is conducive to stocks outperforming gold in this scenario. And [01:11:00] empirically it’s easy to say that’s the reason cause we’re in a corporate dominated world. So stocks outperformed gold because gold just sits in a vault somewhere.
Looking back on it in hindsight, that is how I would characterize it. It’s not that gold is bad. Gold has still appreciated in terms of the dollar since this crisis began in 07′ to 09′. But it’s performance versus stocks is poor, even versus bonds as interest rates decline because the FED is printing more money and buying the bonds and removing them from supply.
They’re lowering volatility by doing that, and that increases bond prices. I just think that gold is done as a monetary tool, Bitcoin confirms that. But stocks we’re also telling [01:12:00] somewhat of that story early in the years post financial crisis. That stocks were the correct thing to own to hedge against the unlimited bailouts from the FED, the nationalizing of the international banking system, that equity in productive companies was the way to go. That’s my theory.
Saifedean Ammous: Yeah. I think writing The Fiat Standard gave me a similar kind of answer, perhaps slightly different, I think on a first pass, you’d say yeah hold gold, but I think the fact that gold is just immobile and there’s no gold banking system means that you’re effectively, to some extent buying an industrial metal and not an alternative financial asset because there are no gold banks.
If there was a free market in which you could set up a gold bank, I think 2007, 2008, you would have had a [01:13:00] resurrection of a gold standard. But of course, there are laws that stopped that. In fact, 2010, 11′ and 12′ and 13′, instead of getting into Bitcoin, I wasted a big chunk of my life on some enormously expensive mistake of trying to build something similar to Bitcoin, but based on gold.
This was before I had heard about Bitcoin. I had this idea that what the world needed was essentially, online banking. An app on your phone where you could send money, something similar to PayPal or Venmo, but instead of it being linked to dollars, which are linked to the federal reserve and the banking system, the dollar based backing system, you want to do it with gold.
It was an expensive lesson in trying to figure out why that won’t be built and a very powerful lesson on understanding Bitcoin’s value [01:14:00] proposition. You can’t build a financial system around gold just simply because governments won’t let you, there are a million ways to do that.
And I came to know them quite intimately over time. And in the U. S. and Canada, there was a company that tried to do something like this, it was called BitGold at some point, and then they switched to Goldmoney and effectively it didn’t work out for them because every transaction has to have capital gains. It was not easy for them to get all the banking clearances that would allow merchants to accept and receive gold. So that gave me an understanding of why gold won’t work and why we need Bitcoin.
Now, I think the better way of hedging yourself against this kind of monetary system is not to hold gold, but to be short fiat. The reason that [01:15:00] stocks outperformed, the reason the stocks turned out to be the winning bet and not gold is that stocks are a great way of shorting fiat because companies issue a lot of debt. Companies have bonds and they take on debt and the bigger the company, the more debt it can take on.
So buying stocks is effectively a way for you to take ownership of an entity that shorts fiat. And this really only became clear to me after Michael Saylor came into the scene and after writing The Fiat Standard, and thinking very hard about how this thing works. Yeah, the system is closed and there’s no way out of it, but there is one, and goldbugs understand this, this is the frustrating part which is that gold bugs understand that there is inflation, and yet most of them have the mental hangup that the world is going to have to fall apart, that all of this stuff is going to have to collapse. And that’s [01:16:00] what stops them from thinking, not all of them, but stops many of them from realizing that, stop trying to fight this and get on the winning side.
And the winning side is not to hold the dollars, it’s to short dollars. The people running the dollars, instead of the people benefiting from dollars, the investors are able to win in this game are the people who are able to short dollars the most. As Saylor said, that you want to have your assets be in Bitcoin and you want to have your liabilities in dollars.
Shorting dollars is the way to win this game.
Nik Bhatia: Yeah. You articulated that perfectly about companies using their ability to issue bonds, to short the dollar essentially, being in a short position. If you own stocks, you are synthetically issuing credit [01:17:00] and leveraging your position and empowering yourself through that.
So that’s absolutely right. That is a big part of why stocks have won, is because they just issue debt and buy back their shares, make the earnings look better in addition to growing their profits naturally as well. They are financial engineering machines.
And the correct position is to be short dollars from that engineering standpoint. So if you’re in stocks, you’re able to capitalize on this trend.
Saifedean Ammous: Absolutely, yeah. I think that’s the kind of expensive lesson that a lot of goldbugs should learn quickly. So now we get to Bitcoin.
So why is Bitcoin different from gold? And in my mind as I would say, is because Bitcoin’s clearance is [01:18:00] unstoppable. And so you can actually build an alternative financial system on Bitcoin. It’s not just a shiny rock that you keep in your basement to look at. It can actually be sent halfway around the world.
And if you need to leave because there is a problem, if you want to trade with somebody else when your local banking system is messed up, your gold is useless, but your Bitcoin is not.
Nik Bhatia: Yeah. Bitcoin being digital in it’s nature, it’s numerical nature, you just go back to Satoshi’s original writings and we knew exactly what he was doing. He was trying to replicate this idea that gold is the correct way to build a monetary system, cause it’s sound money and it’s scarce. But we have to make it digital and we have to make the settlement [01:19:00] decentralized and instantly verifiable that Bitcoin is real.
It’s so powerful. In this internet era, Jack Dorsey says it’s the native currency of the internet, we need that. Gold can’t even come close to doing that, and e-gold doesn’t fix the problem because it’s just a second layer of money. We can move this first layer of money around the planet really quickly, that’s never been possible.
Saifedean Ammous: Yeah. I guess the kind of punchline to all of this is how is Bitcoin going to be layered?
Nik Bhatia: And it already is Saif. You know, people listening to this have exchange deposits. Those are second layer Bitcoin, because you just have a balance, it’s issued by the counterparty.
You have the ability to withdraw your Bitcoin, go from the second to the first layer in 10 [01:20:00] minutes, 30 minutes. And that’s very empowering, but it doesn’t change the fact that what you have is a deposit. What you have is a second layer. What you have is counterparty risk. And so that’s the case for every single person that owns Bitcoin through an investment vehicle, they own second layer Bitcoin.
Using, let’s say an exchange deposit. Let’s say I have a company, the idea is to do a Bitcoin bank, and I use a qualified custodian for the Bitcoin that I hold or that I claim to hold, and I issue liabilities based off of that, that’s going to now be a three layered system through counterparty risks where the bank has Bitcoin, but it’s just deposits, and the custodian has the Bitcoin itself.
So the custodian is the one with the first layer money. And the person who [01:21:00] owns, or has a deposit with the bank and stuff, third layer of Bitcoin, that’s the counterparty relationship that is already unfolding today, and already exists today. Then you have the Lightning Network, which is a unique second layer in that you don’t have counterparty risks, but you have this channel. The Bitcoin is suspended in these channels.
You have 10 minutes or so until you can get final settlement of that, but it is some sort of layered situation. And do I see leverage bitcoin banking with leverage and all that kind of stuff happening? Sure. That’s why we use Bitcoin and the blockchain and our nodes to verify that the Bitcoin is ours.
But if you’re not doing that and you have some sort of counterparty risk, you’re always going to have that risk that the money isn’t yours. And so that I expect to more or less follow history [01:22:00] in that you will have banks, you will have defaults, you will have bank runs, you will have people ascend the hierarchy of money and try to get their hands on real Bitcoin in a crisis by withdrawing, just like a bank run.
And that triggers exchanges going out in Bitcoins, knock on wood, we haven’t had a big exchange hack in a while, but I’m sure there’s going to be another one. There’s going to be a default, that default might trigger something in another exchange. It’s going to happen.
There are bad actors that will always try to over leverage. There are good actors that will also try to over leverage, but just get caught. And so it would be naive to think that these problems are not going to come to Bitcoin. But [01:23:00] the behavior that it triggers is that people should own their own Bitcoin so they don’t have any of these problems.
And that is something that is widely understood. People that own Bitcoin widely understand the risk in even keeping their Bitcoin on an exchange. Let alone at some bank offering some yield that is separated by layers of counterparties and things like that. Hold your own keys so that you don’t have these issues.
That’s the only takeaway here, and learn from history that banks and exchanges and counterparties will default. So do your due diligence when you’re choosing your Bitcoin investment vehicles or counterparties or custodians.
Saifedean Ammous: Yeah. What do you think of the idea, and I tend to lean toward this, which is that in fiat because of the [01:24:00] presence of a lender of last resort, then your layers can grow in a pyramid shape.
Say you have a certain amount of gold, but then the gold backed money is going to be larger than the quantity of gold, and then the deposits and the banking layers and the second and third and fourth layers, with each level, because there’s a lender of last resort out there to bail out the bank, they can create more and more liabilities.
So as the layers grow in the fiat system, it takes the shape of the pyramid because each new layer adds more to the supply. In Bitcoin, because of the absence of a lender of last resort, you would expect that the layers would go in more of a rectangular shape in that yes, there will be these bank runs that you talk about.
There will be shenanigans, there will be people doing all of those [01:25:00] things, but that’s self-correcting. You try and do something like this, you lose your Bitcoin and problem solved, and then there’s nobody to bail you out by devaluing everybody else’s Bitcoins. The shape of the pyramid is going to look much more like a rectangle in that there’s limited capacity for bankers and financial institutions to effectively make more Bitcoin, increase the supply of Bitcoin.
Because a) there’s nobody to bail anybody out, and b), and I think this is perhaps the most important fact is that Bitcoin still offers, say half a million transaction capacity for payment clearance every day, and so half a million people everyday can take part in a bank run. It’s expensive to go on-chain, transactions off-chain and second and third layer transactions are going to be cheaper, but if you are worried, if you think that your bank is being dishonest about [01:26:00] the amount of Bitcoin that they keep, then it’s easy for you to take out your money and withdraw it, much easier than it is with fiat.
Still, I think Bitcoin on-chain transaction fees are going to rise enormously with time, but still it’s going to be a price well worth paying if you suspect your bank is engaged in fractioning off your Bitcoins, and therefore inflating the Bitcoin supply and putting you at risk. So then we’d expect that the layers of the banking system would look a little bit more like a rectangle in that it’s more about just simply scaling through allowing a larger number of transactions than it is about making more Bitcoin, which is what the fiat financial system does.
Nik Bhatia: Yeah, I would strongly agree with that. Because we have the power to do the bank run, essentially instantly, it will keep people in check. It will reduce leverage in the system [01:27:00] and price always sniffs out problems. And so if some bank is issuing a Bitcoin deposit with leverage, obviously that’s not going to be something that you can hold in your Bitcoin wallet because it’s not real Bitcoin.
And if that deposit has any price discovery on any exchange and it slips from it’s one-to-one Bitcoin ratio, a bank run could happen very quickly. And I think the threat of that is part of the game theory that banks that are even attempting to leverage Bitcoin, it’ll cause them to stay away from that type of activity.
Your rectangular description of the layered system is something that I would agree with.
Saifedean Ammous: Fantastic. Sadly we agree so much. [01:28:00] There’s not much room for a more vigorous discussion, but then the final point is the central bank digital currencies.
What do you think of that?
Nik Bhatia: Yeah, it’s an inevitability for sure. I think it’s going to be extremely utilized as a political tool. I think that the U.S. government will use the CBDC FED coin to issue welfare payments, UBI, universal basic income to citizens of the United States and take some monetary policy power away from the FED in that regard. Where Congress is issuing stimulus through the FED’s instrument.[01:29:00]
That’s a scenario I see playing out over the next five plus years in the U. S. A highly political tool for governments and central banks to team up to continue keeping their system going. The U.S. has already engaged in forms of UBI since the pandemic and that’s something that is starting to stick as just accepted policy, that people just get money in their checking accounts every month from the government.
So I’m definitely watching CBDCs from the UBI perspective from that side. I do think that CBDCs will be used to try to make [01:30:00] cash obsolete, paper money, that privacy tool that people still use, I think they’ll try to get rid of that. This will drive more people into Bitcoin for sure. But I think that also CBDCs will be used to modernize the financial system.
The traditional financial system that still uses these ancient wire systems and messaging systems and fax machines. CBDCs will be used to modernize all of that archaic technology that are still used by banks today and central banks. So CBDCs, in my opinion are guaranteed to happen. They will come with a lot of political baggage.
They’ll come with modernized technology, and they’ll [01:31:00] come with violations of privacy, financial surveillance, tax, implications just in terms of tax privacy implications, things of that nature. So there’s so much that’s coming with CBDCs and they’re definitely happening. It’s just a matter of time.
And you know, it’s something that people should watch out for. They should own Bitcoin because it’s outside of that system. If they start to see things that they don’t like about that system it should motivate you to keep your money in Bitcoin or outside of that system. It’s also my goal to opine on what some of the things the CBDC should be, because I know that it’s coming.
You know, advocating for the [01:32:00] exchangeability factor of it. Making it freely tradeable I think is the most important thing that we can ask for as people. Let me send it to and from anybody, including Bitcoin exchanges for example. If I want to send it to a Bitcoin exchange, I should be able to do that, because it’s my money. So I don’t know if that’s just me doing wishful thinking, but I have a voice and I’m going to be trying to write about this type of stuff going forward.
Saifedean Ammous: What do you think of the idea that a central bank digital currencies are going to essentially flatten the layers of money in that it’s going to be similar to what the Soviet Union’s monetary system had in which there are no financial, maybe not entirely, but when everybody’s money is an app that is run by the central bank, you’ve disintermediated banks out of [01:33:00] the business.
And then everybody has an app that is linked to the central bank and the central bank decides how much money you get every month. They give you your UBI, they decide what you can spend your money on.
They decide to take away your money when you say mean things on Twitter and they stop you from buying meat and fossil fuel because those things cause boiling oceans or whatever is the latest science. But of course, realistically this is this is the way that they’ve been fighting inflation for 50 years, which is to try and get people to stay away from the things that are rising in price and substitute them away and use cheaper substitutes that are not price sensitive.
So if this were to be the case, and this is kind of the discussion that I have in the final chapter of The Fiat Standard, I [01:34:00] tend to agree with you, I think there is likely to be a long period of time in which Bitcoin and the dollar co-exist. And I explained this in The Fiat Standard as a result of the fact that the fiat system is not as inflationary as the money printers might suggest.
You see the headlines and they’ve printed a trillion here and a trillion there, but there is the credit system where money is constantly being destroyed because people are defaulting and businesses are going out of business, and so credit is being destroyed and that leads to the money supply declining.
It’s not exactly easy to get to the stage of being a Venezuela in a modern economy, because you have a banking system on the higher layers where the more you print, the more you create a business cycle, the more you create the booms and then the more you have busts. So it’s self-correcting in a sense, [01:35:00] the recessions are what protects the dollar from hyperinflation, what protects fiat currencies from hyperinflation.
When you look at examples of hyperinflations, you see that there’s always a point where the central bank just goes batshit crazy and starts printing like crazy. So Lebanon, this started happening in July 2019, the physical notes, the supply of the physical notes just shot through the roof. And so far it’s gone up something like eight fold in just two years, two years and a few months, the total supply of physical bills has gone up enormously.
So before that the banking Ponzi scheme had been running for almost 30 years, and it was self-correcting because when you issue too much credit, businesses go out and then the credit collapses. But once you start printing a lot of money directly and handing it out to people, that’s when you get the Venezuelas and Lebanons and the hyperinflationary systems.[01:36:00]
Do you think central bank digital currencies take us closer to that world? And then what does that mean for banks? Are we just gonna get rid of banks and replace them all with one big central bank?
Nik Bhatia: I have a bias here as an American, but I really see Europe going more of the way of China. Highly restrictive on the way that you use the currency, displacing commercial banking to some degree. Advocating that a lot of people basically don’t fire their bank, but still protecting banks and saying that we’ll start, the ECB has said this already, that’s on their website, that they’re going to charge negative interest rates on digital Euro balances above X amount, so as to not [01:37:00] make people just flee their bank in entirety.
So banks will offer a more attractive interest rate relative to central bank digital currencies. And that’ll keep the banking system alive where people will be attracted by that higher yield and choose one currency over the other.
But I think that in the U.S. you’re not going to see that type of attack on the banks. First of all, banks have a huge power position in the United States. The American banks, JP Morgan, Citi, bank of America, Wells Fargo, and then the investment banks themselves, huge influencers on the United States government.
So when a central bank digital currency is being designed, it’s going to be done with the idea that the layered money system will be kept in tact. [01:38:00] Banks will be able to use the FED coin to leverage and issue their own deposits and create credit. The credit culture in the United States is still very strong.
The federal reserve can not be the source of credit for the country, nor do they want to in my opinion. They don’t want to be looking at your credit score and determining whether you get a mortgage or not. All that activity I think will still be done at the banking level. So in the United States, no, I don’t think banks are going by the wayside.
In China, I think commercial banking might be officially on watch, it might be destroyed by the central bank digital currency. I think Europe will be somewhere in the middle, especially on that fossil fuels comment that you said where they won’t let you buy this or that in digital Euro, because it didn’t pass some ESG score.
I think that’s very possible [01:39:00] in countries from banks like the ECB. I’m not making that express prediction, but that type of activity, restrictive activity is definitely possible and likely from some central banks. And others I think will just have more of a free market approach to them.
And again, that might be me being optimistic as an American and with my bias, but that’s what I’ll be watching for.
Saifedean Ammous: Okay. Well we have Stefano, he has a question for you. Stefano, do you want, go ahead?
Stefano: Yes, of course. Hello, Nick! So my question is about your teaching. You are a university professor of traditional finance, right?
So I’m curious to hear if your interest in Bitcoin has changed how you teach traditional finance, if at all. And then secondly, how do your colleagues in traditional finance view your [01:40:00] positions in Bitcoin and your positive views of that?
Nik Bhatia: I’ll speak quickly about my colleagues. There are a few professors at USC that are very supportive of what I’m doing and love reading my material and that kind of thing.
I haven’t made a ton of inroads at the department level. I am a fixed income professor. So to answer the other part of your question, my course does cover now central bank digital currencies at the end of the course because CBDCs are a fixed income instrument, they will be. So they do fall within my domain. And because of that, I do introduce the idea that Bitcoin triggered this response that central banks tend to respond with their own digital currencies.
And my students also know that I am a Bitcoin professional in that I write for a living about Bitcoin and all that kind of stuff. So I do though take my role as a [01:41:00] fixed income professor very seriously. They did not ask me to teach Bitcoin in that role. They hired me to teach fixed income, to be a bond market guy, to give my experience as a bond market professional.
And I do take that seriously. So that is the experience that I deliver to my students. In the Q&A before and after class, and people want to ask me about Bitcoin, of course I’m there for the students and there to educate them, but I try to say it early and often that this is not a Bitcoin course.
We’re here to learn about rates and the market, and I’m here to entertain all geopolitical conversations, which now more and more do involve Bitcoin, as part of that market’s discussion. But we’re here to focus on rates. So I haven’t pushed let’s just say, the Bitcoin agenda at USC because it’s not [01:42:00] why they brought me in.
I do try to bring my hierarchy of money expertise to the department and be that resource and propagate these papers in financial academia that I strongly agree with and set up people’s understanding for Bitcoin in the future. You know, just in terms of understanding how the monetary system works and its hierarchy.
But I hope that I answered your questions Stefano.
Stefano: Yes, your perspective is very balanced.
Nik Bhatia: Thank you so much!
Saifedean Ammous: All right, Theo you have a question?
Theo: Yeah, thank you Nick for coming! A very interesting discussion. At the beginning, you spoke about how we can earn a passive income by collateralizing Bitcoin in Lightning channels, and now you can also earn passive income by [01:43:00] basically opening covershot position on the real market with Bitcoin.
And we have seen in the past months that the interest rates you can generate by doing that. Basically range between 10 and 40%, depending on the market sentiment and stuff like that. And the ways those contracts are built, basically you have to borrow one currency and then another.
So these rates basically represent an interest rate differential between fiats and Bitcoin. And do you think we are witnessing the emergence of a kind of yield curve that is less distorted, that more faithfully represents the real cost of [01:44:00] opportunity of immobilizing capital because it can not be printed on paper, you have to collateralize the Bitcoin for a certain duration.
So if you look at the different rates for the different duration, you can see some kind of a curve, but what micro significance would you give to that?
Nik Bhatia: The yield curve on Bitcoin is something that is alive and well, let’s just say. The rates that you’re describing are capturable by people that have the market sophistication in the derivatives markets. Yields are being captured in Lightning network, albeit they might be a lot lower, by people that have that sort of expertise. Yields are being captured with exchange lending. Yields are being [01:45:00] captured in the cash and carry trade between CME futures and spot Bitcoin.
There are so many ways to make yield with your Bitcoin today, most of them requiring counterparty risk and exchange risk and all these different individual risks. And the macro significance of this is enormous because it continues to shift, and it’s part of what I wrote about in 2018, we have to propagate this idea of Bitcoin is not just gold that sits in a vault.
It is actually digital collateral that you can move around to capitalize on your ability to move it from point A to point B at the right time or at the right interest rates or the right borrowing rates. And so it [01:46:00] modernizes Bitcoin. The yield curve modernizes Bitcoin, takes it away from a commodity, makes it into an asset class.
The Bitcoin ETF just got approved. People are going to start getting Bitcoin exposure for the first time. They’re going to have a negative performance versus Bitcoin, they’re going to realize that somebody is capturing the difference between Bitcoin’s return and the ETF return, and that somebody is hedge funds engaging in a cash and carry trade where they sell futures and buy spot capture the difference.
Then that idea will popularize, people will be like how can I make Bitcoin yield for me? And it really grows into an asset class. So I hope Theo that answers your question. I think it’s a big deal.
Theo: Yeah, perfectly. And just a quick follow-up, do you think for example in some years we would go to hedge fund and use those kinds of rates as a benchmark?[01:47:00]
Nik Bhatia: It’s yet to be seen what benchmark people will use. But I’m looking forward to, and if someone doesn’t do it soon enough, I’m going to have to launch this yield curve monitor of all these products in Bitcoin, differentiate between the types of risks.
Here’s a lending risk, here’s a derivatives risk, here’s a lightening risk, here are the yields, here are the timeframes, the maturities, the bullet structures, all these types of things. I’m looking forward to that type of thing being out there for people to see sooner than later, hopefully.
Theo: Please do, seems fascinating! Thanks for your answer!
Saifedean Ammous: Yeah, I think it’s necessary and consequently it’s also I think a great business idea. I think building a product that standardizes measurements of risk and [01:48:00] yield across the Bitcoin space is likely going to be extremely valuable over time. All right, we have another question from Flavio.
Flavio, you want to ask you a question?
Flavio: Hey there, hey Nick. Thanks Saif for the interview and the discussion, very interesting! I wanted to ask, what are your thoughts on the ETF that’s coming up launching tomorrow? I’m hearing a lot of comments that it’s just a play for the establishment to try to stabilize through market manipulation, but we know Bitcoin’s anti-fragile so they’re not going to succeed at it, but what are your thoughts?
Nik Bhatia: Yeah, I would agree with you. It’s naive to think that one vehicle is going to affect the price. Bitcoin has so many different prices that are arbitraged all over the world. There are studies that say that the CME futures price itself is the leading price. So this vehicle will be one of the participants in that market.
One day it might turn out that one ETF is the dominant [01:49:00] influence on prices around the world, but the way that Bitcoin settles, I think arbitrage and arbitragers around the world are always acting on differences in Bitcoin price, and people physically wanting to withdraw Bitcoin to their own wallets is still gonna be the most powerful force over any medium term time horizon.
You might be able to manipulate, any whale might be able to manipulate the price for a little while in any vehicle, but over the medium term and by medium term I mean like after a few days or even a few weeks, when certain contracts expire and all that, in the end the market will win.
Bitcoin is the purest market we’ve ever had because there is no one Bitcoin price. There will never be one Bitcoin price. That is something very beautiful and [01:50:00] rare. And so the fact that there’s never, ever going to be one Bitcoin price, how can you think that one entity is going to be able to manipulate it?
There’s just too much decentralized settlement of it. So again, I’m an optimist, but it’s something I’ll definitely be watching for, especially this lead lag analysis between Bitcoin futures and other spot prices. It’s I just wrote about it for my publication, The Bitcoin Layer sent it out to subscribers yesterday, talked a little bit about this dynamic.
Flavio: Thank you.
Saifedean Ammous: Alright, William?
William: Yes, I got a question about potential damage caused by exponential printing of the U. S. dollar and the impact on emerging economies since they have no ability to print. If you look at the case of El Salvador, which has now taken up the [01:51:00] position of legal tender as a potential solution, but El Salvador has no ability to clear dollars or print dollars, and therefore the exponential growth of U.S. dollars is fine for the U. S. because they get the benefit of the stimulus, and also the majority of global commodities are priced in dollars. So for emerging economies, it is a huge headwind which could cause major destabilization and clearly the Bitcoin potential standard could be a refuge for a lot of these economies.
So, do you think that the glue could be coming unstuck in the global financial system as a result of huge creation of U.S. dollars?
Nik Bhatia: Yes. What you’re describing is part of the currency war that we’ve been experiencing for over a decade now and in this [01:52:00] currency war, when the FED prints dollars, that money, which is called hot money, finds its way into emerging markets.
It ends up strengthening the currency locally, and a stronger local currency is a net negative on financial conditions for these countries. So then they end up struggling, they have to deal with all their domestic issues, they end up printing money as a result, to try to weaken their currency back and get it more into an equilibrium.
That type of dynamic is something that we’ve seen frequently, and I think we’ll continue to see going forward. It’s this musical chairs of who’s going to do the next round of printing, and usually it’s the ECB, and the FED, and The Bank of Japan [01:53:00] taking turns. All these other emerging market economies have to also stimulate by printing money and doing bond purchases or doing bank programs.
It does destabilize these emerging markets and then they have to themselves weaken their own currencies by printing money to respond. And it just drives an overall inflation level around the planet and just an increase of the money supply that ends up in asset prices.
Saifedean Ammous: Yeah, Nathan has a question.
Nathan: Nick, you referenced the central bank currencies, kind of a two-part question. First of all, when you say central bank digital currency, are you suggesting a total wipe out of cash? In other words, is a hundred dollar bill gone? And then following up on that, does that create some kind of [01:54:00] a black market role for gold, silver?
Nik Bhatia: Okay, so the first question, does it replace cash. Potentially yes, and potentially not. The ECB and the FED have both said that while this will be on par with cash, we might not be eliminating cash right away. But I do think cash paper cash will go away in the longer term.
But let’s just say I don’t think when the FED introduces their CBDC over the next few years, that dollar bills will go away right away. Maybe over a longer term. And then does it increase the black market usage of gold and silver? Unlikely honestly, in the age of Bitcoin and all this other digital currencies that are floating around the world. Like people that want to use shitcoins are using them here and there [01:55:00] for their own purpose, but young people are not carrying around gold and silver coins and using that as their exit from the fiat system.
I really just see the next generation just going into digital money of any sort, they should be doing their own education and learning about Bitcoin. But I can see that a lot of young people are not, they’re getting into shitcoins because they’re scared of you know, Bitcoin being at $60,000.
They think they’ve missed it, and there’s a lot of misinformation out there, but people are just going into digital currencies.
Nathan: That speaks to buying digital products and stuff that may be someone considers illegal. And I see that, I see the crapcoins working in that environment for various reasons, but I’m looking more at buying an unregistered gun.
The hundred dollar bill is the king [01:56:00] of the world. If you try tearing into that, you’re tearing into a fabric that really runs pretty deep, and that market isn’t going to just go away, it’s going to react somehow. I’m just kinda trying to think through what might that be.
Nik Bhatia: Yeah. And that’s exactly the reason I don’t think they can just eliminate the paper dollar anytime soon. There’s a huge use for the paper dollars outside of the United States. Most of the hundred dollars bills in existence are outside of the United States. They’re outside of the U. S. banking system, the FED has published research on this.
So if you eliminate paper cash at the U. S. level, you can cause a lot of problems. It’s a big part of the reason I don’t think that’s something they’ll do right away, but again, [01:57:00] more likely to happen in Europe where they eliminate cash. I do think that is possible in the next five years let’s say.
Nathan: Thanks Nick!
Student: Hi nick! What do you see as risks or attack vectors for the bitcoin network? What would keep you up at night?
Nik Bhatia: Over the medium to longterm, I don’t see a lot of risks to Bitcoin, I think it will grow as a network.
And I think it’ll grow to be used by over a billion people over the next few years. We’re at somewhere between one and 200 million today, so a 5 to 10 X increase in the adoption rate of Bitcoin, I think is absolutely inevitable. And in that way, I don’t see any longer-term risks for Bitcoin.
In the short-term, there’s so many, if you’re talking about price for example, the number of things that could take Bitcoin from [01:58:00] $61,000 today down to $30,000, there’s so many things, exchanges going down, things like that. But the protocol is sound, it has a hundred percent uptime and it’s just, it’s very boring, right?
People just describe Bitcoin is very boring. It’s this time chain, it’s just a clock and it’s ticking. Bitcoin itself I think is doing great and has established itself as this impervious technology. Of course headlines regulation risk, there are all these things that can drive Bitcoin down in the short term if you’re talking about price there.
Student: I was talking more about the adoption of Bitcoin itself. Any sort of falsifiable statement that if it comes through, then you’re concerned about Bitcoin’s future.
Nik Bhatia: Yeah, look at the American [01:59:00] regulatory landscape, that’s one of people’s, they were worried about it as one of the biggest risks.
We have legalized ETFs now, Coinbase IPO in this country. It’s just a regulatory green light from the United States, and I think the rest of the world will see that and follow suit. Politicians that try to go against Bitcoin, I do not think they’re going to do very well. And so there’s this incentive, there’s this game theory involved. From the Bitcoin protocol’s perspective, and the risks to Bitcoin as a network I just, I just don’t see them.
Student: Thank you.
Saifedean Ammous: All right. We’ve been going for about two hours now which is what we try to keep as the longer limit. Thank you so much Nick for joining us. This was absolutely fascinating, and I hope that people will enjoy [02:00:00] listening to it. It’s it’s a fascinating book and I highly recommend people read it, and thanks again!
Nik Bhatia: Thank you Saif for having me so much. Congrats on your second book and hope to see you soon in person!
Saifedean Ammous: Cheers, likewise! Take care.
Nik Bhatia: Take care.