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What is money? Will crypto change money?

Some controversial opinions:

World has more types of money than any point in history— 164 government currencies plus gold, silver, CDs, repos, treasuries & numerous other quasi-money. If we count crypto tokens, types of money are literally exploding.

Money is going through some serious change. B/f we talk abt where it’s headed, let’s 1st look at how it became what it is today.

3 perspectives on what money is that I find esp helpful:

1. Money as a technology for mass economic collaboration

In case not obvious, money is a tool for transacting among strangers. When you lived in a Mesopotamian village where all 50 people in village were related, money was useless.

Exchanges in micro economies typically operate as gift systems— you gift your cousin 5 apples today, he gifts you 5 peaches tomorrow. Your shared social graph keeps gifting reciprocal & fair through mutual trust.

Money becomes useful when you venture to trade w/ folks from far-away villages whom you may never see again & trust runs thin. Money or currency operates as a neutral, real-time database of values to be exchanged.

(sidenote: ’Tis why your sister thanks you for gifting her microwavable slippers that she doesn’t need at X’mas, but will feel insulted if you ‘gift’ her a $50 bill instead. Subconsciously our ancestral tribal part of brain still tells us ‘money = treated like strangers’.)

Money solves the problem of transacting w/o trust, as long as you & strangers both agree to use the same money— e.g. gold, copper rods, clothes, seashells— to track values.

From this lens it’s easy to see money is both a result & an enabler of commerce expansion— the more we trade w/ strangers, the more we need money. It’s no wonder that post-war period of sweeping globalization in production & commerce also saw max expansion in broad money.

World money supply— which mirrors demand for money— grew from 50% of GDP to over 140% since 1960s. If you count in various forms of quasi-money, the number at least doubles.

Still, scope of cooperation among strangers is limited by scope of social agreement on a particular money— if you & your counterpart don’t agree on which money should be used or amount of value it represents, collaboration fails.

Traditionally, getting different “villages” to agree on using same type of money is a near-impossible political challenge. Just look at how hard it was to get Euro off ground & troubles that followed.

But borderless blockchain tokens seem to achieve this feat effortlessly. More on this in a sec.

2. Money as an efficient credit tracking system

In modern economy, relationship btw money & credit has become like air & wind— credit creation *IS* money creation. It wasn’t always the case.

End of day, credit is just a mechanism to allow time delay in value exchanges. In simple economies credits don’t need money to exist. Members of a small society can keep tabs on—i.e. extend credit to—one another. You have tabs open w/ your local bakery, bar, & butcher shop, etc.

Those are original forms of credits, which we now call supplier financing.

Problem w/ credit system like that is it can’t scale— each producer/vendor has to run their own IOU databases that don’t talk to one another. Credits are segmented & kept small.

Money puts credits on steroids. Not only does it make credits from different sources share common units & thus interchangeable, it also gets rid of need for borrowers to deal w/ numerous creditors & pools lendable resources of society together at entities called banks.

The result is bigger, faster credit creation at lower transaction cost.

From this lens it’s easy to see that entities who’re most in need of credits would also be the biggest proponents of the “adoption” of money, esp when they also are the ones controlling the supply of said money.

Who’re those entities? You guessed it, governments.

Modern paper money as we know it began 300 yrs ago w/ birth of Bank of England, as a way to finance—i.e. extend credit to—British gov’s war vs France. (Now every crypto project runs that same playbook that used to be a government privilege. Talk abt democratization of finance!)

Government is usually biggest borrower in any economy. It’s no wonder that fast growth of broad money in past decades is accompanied by large increase in gov borrowing…

(And if you think lines in above chart have gone up a lot, adding countries like Japan into the mix puts things in perspective:)

…meanwhile credits to private sector has increased a lot, too, but arguably less, esp since the 90s.

How sustainable is the global run-up of credit, i.e. debt, is a debate for another day. My point here is money is the key enabler of credit creation at scale, w/o which we wouldn’t have a global mkt economy of the size it is today.

W/ private crypto tokens & other digital assets becoming increasingly money-like, global money supply is only going to further grow. What it means for credit growth seems obvious. More on this in a sec.

3. Money as unexercised claim on economic output

“Unexercised” is keyword here. Most of us think “money = purchasing power”, i.e. it allows you to claim a slice of economic pie of society. But on aggregate level it doesn’t quite hold up.

As we talked abt, world broad money stock is over 140% of world GDP. That means hypothetically if all holders of money globally are to “cash out” at once to exchange for goods & services, we don’t have enough GDP to go ‘round to fulfill all claims.

To put another way, purchasing power the world *thinks* it has is 40% higher than what it actually has. We’ve been collectively over-imagining our purchasing power since 2008, when world money/GDP ratio crossed 100%.

Before you shout “Ponzi scheme!” or “Evil governments printing too much!”, it’s more likely that we’re actually witnessing a shift in the nature of money & credit, which will only be accelerated w/ crypto & tokenization.

W/ these 3 perspectives on money in mind, how should we think abt ways crypto/blockchain may change money, credit & economy?

(BTW, like this so far? I write about ideas on investment, macro and human potential. Subscribe to my newsletter.)

A few possibilities to note:

1. Much, much higher money supply

Assets become quasi-money when they’re liquid & easy to transact. Blockchain is making a great number of assets more liquid—> candidates for quasi-money grow a lot—> de-facto money supply explodes.

A friend from Philippines sent me this pic. You can now pay taxi drivers w/ BTC, ETH, SLP, etc. It’s only getting started.

2. Higher credit & debt, but more distributed

Money to credit is like air to wind, remember? We already live in a world where everyone’s both a debtor & a creditor & everyone owes everyone something.

W/ blockchain you can take out a loan in seconds + collaterals are easily managed on-chain —> Credit & debt levels will go to new heights.

Distribution will also change. Rich people take on more debt rn b/c poor people don’t have collaterals. W/ tokenization of everything, everyone will have something on-chain to use as collateral—> massive democratization of credit & debt are in the cards.

We’ll see gross claims on economic output in accounting sense far exceeding actual economic output. Credit cycle boom/bust will be more often & more violent. But hopefully since it’s all managed on-chain, things will clean up quickly, too.

3. Less stable inflation

W/ influx of private quasi-money, governments will have harder time managing total money supply & inflation.

It may be true that demographic change & productivity gain from exponential tech are deflationary in long run. But large & growing de-facto money supply would be a powerful countervailing force to that.

4. Borderless money—> economic collaboration on global scale

Money allows trust-less collaboration among strangers—> if money goes borderless, so will be the scope of collaboration in production activities.

Globalization in physical economy may well be shrinking in next 2 decades b/c of re-shoring of supply chain & geopolitics. But opposite will happen in digital economy. Crypto reduces cost of cross-border exchanges to nothing. Metaverse means max globalization.

5. More synchronized global business cycles

’Tis a direct result of #4. A digital economy w/o border means you share same business cycle no matter where you are. And as digital’s share in total economy grows, biz cycles across physical countries will be more in sync as well.

There’s so much more we need to talk about, but gotta start packing for Avalanche Barcelona as plane leaves in a few. Bye now!

12 Comments

  1. Just some feedback as I love your material. I personally prefer to consume information via audio, but with you I tend to read your postings. When it comes to your podcasts/YouTube material I find myself switching off. I asked my self why the other day as your thinking is so insightful. It’s down to structure, clarity and being brief. On your videos you tend to repeat and be overly verbose. Please take this the right way as I would love you to continue and succeeded. I say this as someone who is in his mid 50s and also had to learn to be brief and concise. Wish you all the best in your career. Happy to share my techniques if it’s of interest.

    • This is an entitled take. Some people prefer the video format. Just consume the one you like.

  2. Prefer you to write vs audio!

    Audio requires me to watch but reading is much more easily consumable anytime anywhere.

    Keep up your content. One of the best macro level sources out there! Don’t stop!

  3. Amazing! Loved the part where you mention money is 140% of gdp.

    One little suggestion – when talking about money as a technology, you can mention how individuals’ specialization required there to be a common medium of exchange to trade their products.

  4. Haha I love the unsolicited feedback at play here. I think the important thing commenters need to realise is: Tascha doesn’t need to do any of this. I personally wish for it to remain fun and enjoyable for her, so that we might all benefit from her perspective for longer. So, in other words, keep up the wondrous work Tascha, in whatever way works for you.

  5. Hey, Money printing, Ponzi schemes…both will always be part of our world economics. I actually am ok with Ponzi as long as I am part of the first part…ugh. We may have the makings with this thing called bean. What do you think?

  6. Super interesting… I had a feeling credit was higher than GDP but this is the first time I’ve seen it so clearly stated. I wonder how this will affect the stock market (says a millennial who wants to start to invest but is creeped out about stocks going up so much during Covid and is thinking defi is probably the most responsible choice).

    I love your podcasts as well because I can listen to them when I’m walking etc (time when I can’t read).

  7. There is some stuff going around on social media saying: “That if one doesn’t know Bitcoins one doesn’t know money!” And vice versa. But because of this article I think is better to say “If one doesn’t know Crypto one doesn’t know money!” And vice versa.

    Do you agree or am I crazy for saying this?

    P.S. Haters will hate no matter what you will do. You are doing an amazing job on Twitter, this website, YouTube and podcast! Tascha, Thank You! 💪🏽

  8. David Meyers Reply

    Does cryptocurrency reduce the effectiveness of sanctions? If so, what non-combat but effective means of punishment would governments have over a misbehaving country? I think this is the downside to decentralized commerce.

  9. What is your opinion on massive amounts of money (whatever form), hoards of liquidity through credit, versus the fact very few countries control food supply? And example being the incoming wheat shortage.

  10. Its a bit like communications, we use to send a letter, call on a land line to now flicking off an email to sending a text.
    Nothings really changed overtime, its just going to be easier. maybe more accountability, (doubt it)
    All the crapola with money (soft and hard copies) and its political propaganda will always remain, there’s still going to be a middle man, wholesaler and a merchant. Online money is not the magic bean to anything other than evolving the bartering system.
    Oh look, inflation! lets make a new coin for that but we’ll put on layer 2 and pretend its a game.

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