Matthew Mezinskis of Porkopolis / Crypto Voices joins me on the show to help explain the structure of the fiat fractional reserve system. Listen to this episode to get an understanding of the different monetary metrics and more: 

  • Monetary metrics, monetary base and more
  • Fractional reserve in the fiat system
  • Eurodollars and ‘crypto’ eurodollars
  • How the bitcoin system may evolve in future
  • Why focusing on bottom up is key



Stephan Livera links:

Podcast Transcript:

Matthew – 00:02:58:

Matthew, welcome to the show.

Thanks, Stephan. Appreciate it. Happy to be on.

Stephan – 00:03:00:

Yeah, it’s been a while. Actually, this is the first time I’ve had you on my show, but I’ve known you for a while and we kind of wanted to make it happen. But we just never made it happen until now. But, yeah, I’m a fan of your work. I think you’re doing some interesting stuff, the stuff you’re writing about and speaking about. And yeah, I guess you’re most known, I guess, for being able to speak intelligently about this concept of monetary base and where does Bitcoin fit into this? And I know you also host what was called Crypto Voices, and now I believe it’s called Porkopolis Economics. And so, yeah, do you want to just tell us a little bit about what you’re focusing on at the moment, focusing on these days, and we can go from there?

Matthew – 00:03:44:

Yeah, thanks again. Crypto Voices actually is about six years old. I still do call it that for guests, still do regular shows, doing video now, like you, but I’m doing these dailies as well, which focus a little bit more on the macro money and kind of trying to break down different money supplies, whether it be narrow money or broad money or base money, as you mentioned. And I put together a little API. It’s local, it’s a lot of data intensive stuff, but that I just film, basically. And I’m doing dailies now and I’m having fun with that. It’s pretty good. So using Highcharts for that, it’s good open source software and yeah, just trying to educate people on money supply, macroecon, things like that. You mentioned base money. My former cohost, who’s a YouTube star now in Brazil, Fernando Ulrich, him and I, we were I don’t know if we were like the first. I mean, you can say Hal Finney was the first, but people didn’t really focus on it as much until we did, was basically just trying to clarify that if we’re talking about money, banking, credit, these things are often intertwined, but they’re often also sometimes not used very precisely or rigorously. We can talk about the terms. And so Bitcoin, if you want to talk about what it actually is every ten minutes, final settlement, ultimate settlement on the Bitcoin network. And then you have other interesting things of Bitcoin, too, like Lightning or Fediment, we could talk about as well. But if you’re talking about the actual on chain UTXOs of Bitcoin, that’s most analogous both in the ancient world to like, gold, gold and silver, or to the fiat world, which is central banking for about 400 years, roughly, from the Bank of England being the first kind of modern central bank. It’s analogous to the fiat monetary base or fiat-based money. So that’s just the general thing that we try to orient around when we talk about Bitcoin and try to remind people that that’s what it is. That’s why it’s different than something in your bank account. And there’s a lot of interesting things that usually come from those discussions.

Stephan – 00:05:55:

Yeah, for sure. So just with the narrow money, base money, broad money, for the layman, could you just give a bit of an overview? What are these different terms? What do they mean?

Matthew – 00:06:09:

So central banks came up with them. Paul Volcker was one of the main people in the 50s and 60s in the US to kind of really start defining these things. Before that you had terms like deposit, bank deposit, bank account, of course, but you didn’t really have these monetary aggregates. So that’s what they’re called, they’re monetary aggregates and they are indeed often some of them used incorrectly. So it’s hard to keep in mind unless you really sort of go through the different central banks. And it is also true that some central banks define them a little bit differently as well. So there’s no consistency across the central banks as we would expect. Right? I have 50 of these on my website tracking every quarter. And other than the Fed, the ECB, Swiss Bank, maybe Bank of Canada, Bank of England, other than just a few banks, even if you go to Bank of India, a lot of these banks are just the websites. I mean, the paper is bad enough, right? But the websites are so bad. It’s amazing that these are like underpinning the entire financial system. Anyway, the central bank, as is Kundrina and the lender of last resort, that is the monetary regulator, that is the institution that is supposed to regulate the money supply. So one of the things that they tried to do over the last 50 years basically was define money in different tranches, in different ways, as you mentioned. So the main one that we always talk about, you can basically think of it as the central bank’s balance sheet. Everything that the central bank does, it creates money ex nihilo buys assets with that money. They just created ex nihilo and that money goes out into the economy. They have paper and they have also a ledger based money or digital money, you can call it. Basically it’s called the bank reserve. That’s the bank account for each bank. So basically the bank reserve, you can basically think about it’s a bank account that each bank has with the central bank. There’s bank reserves, but they also do the paper and some banks do coins, some central banks only do paper. It’s another little thing, it’s not a big deal. But usually, like in the United States, the UK, because of their old history, the mint, the treasury still controls the coins, the central bank just does the notes. In any event, when you talk about the balance sheet of the central bank, you’re basically talking about the monetary base, but it’s on the liability side of the central bank balance sheet. So that’s the monetary base. Notes and coins, as I always try to put coins in, regardless where it is, notes and coins plus the bank reserves. And then once banks have those reserves, traditionally they’re not so anymore. Since the crisis, we can get to that. But before the crisis they used to be quite scarce things. They’re actually a very small part of the balance sheet and you didn’t earn any interest on them. So banks would try to lend them out. And I’m not defending central banks, I’m not a fan of central banks in the least. I know you aren’t either. But that’s just the theory at least of central banking, as long of other crazy theories is that they can be the lender of last resort and then banks can, if they need, go to the central bank, but if not otherwise they have these reserves that they can lend out further. And so once you get into the banking system, basically anything that is outside of central bank, then you’re in the either you call it narrow money is typically referred to as M1, or broad money can go up to M3, M4, some countries even have like M4+ and whatnot. But basically I’ll try to keep my answer short here. The differences between these things is basically M1 is the only money supply that includes a little base money. This is also, people make mistakes in this. So M1 includes M0, which is that physical cash and coin that is outside of banks, and it also includes demand deposits. So that’s M1. So that’s the only money supply that has a mixture of the two, like a direct mixture. Actually they all do because they’re all a subset of M1 and M0. But I don’t want to get too long there. So you can think of those as like the most on-demand retail type accounts. And then as you move up to M2, it’s typically savings or retail, less regulated. Sometimes people say less liquid, but it’s really less regulated type of accounts. So savings accounts, time deposit accounts, money market funds, typically for retail, then you move to M3, which the US hasn’t calculated since 2006, really. M3 is less regulated, sometimes you can say less liquid institutional money. So institutional accounts, institutional time deposits, institutional money, market funds. Also euro dollars are included in that. Also repurchase agreements. I’m using US nomenclature now, but a euro dollar also exists in the UK. Or there’s no such thing as euro euros, because that just sounds dumb. But it’s when the currency is outside of the home country, they have traditionally tried to track that and put it in the broadest money supply as well. So there’s such things like euro sterling, this is sterling that exists outside the UK. They try to track it and throw it in M3 and M4. So that’s basically it. You have these bank money, all of these M’s, M1, M2, M3, M4, and then you have the base money, and that is the central bank. And Bitcoin is fully analogous with base money. As we know, it has no characteristics that represent a bank account.

Stephan – 00:11:47:

Yeah, fantastic. Yeah. So let me just walk through some of that as I understand it, and just kind of paraphrase for listeners as well. So as obviously setting Bitcoin to the side for obviously you and I are big fans of Bitcoin, but just for the sake of this discussion, we’re trying to understand this is “know your enemy,” right? It’s Defense Against the Dark Arts, right? We’re just trying to understand the system, the fiat currency system as it exists today. So, as most people are probably aware, most money that exists today is not physical cash and coins. It’s numbers on a database somewhere. But as you point out, there are different metrics and there are different kinds and different ways of sorting them and counting them. So, as we said, we start with this base money concept, this concept of how much does the central bank have in reserves? And this may be, for example, where they purchase mortgage-backed securities or assets from a bank and create new money ex nihilo, right? Just from nothing, as you said. And then we sort of get out into the broader economy, right? Like you and I, retail individuals, we might have money that we have in our bank account in what is held as a demand deposit, i.e., it’s, we believe it’s accessible to you or me at any time that we choose. Right. And that’s kind of one of I guess that would be inside the M1, as you said, narrow money. And then maybe another layer up from that is, let’s say time deposits. So let’s say you take $1,000 or $10,000 to the bank and you say, yes, Mr. Banker, I would like to put this in your term deposit. What interest are you going to pay me? And then the banker gives you a certain level and you’ve put that money away, right? It’s not accessible to you because the bank is holding it in their term deposit or time deposit. And so this kind of figure is calculated and included as part of metrics like M2 and M3. Correct?

Matthew – 00:13:39:


Stephan – 00:13:40:

Yeah. And so then, as you said, then there’s like another level of this which M3 and broader money. And as you said, euro dollars. So another way to understand euro dollars is maybe to think of it like euro just means offshore, right? It just means kind of offshore dollars. That’s not, in this case, not part of the US banking system per se, but we can sort of think of it like a synthetic or it’s kind of like banks outside of the US wanted to try to offer a dollar denominated account for those customers outside the US. And so that’s kind of where this kind of euro dollar dynamic comes. And interestingly, it might also be that we eventually are in a world where there’s crypto euro dollars, right? Like Tether as an example, like maybe some of those could potentially like synthetic positions that are designed to replicate a value of the US dollar. So as an example, Stablesats might be like an example where maybe it’s kind of trying to represent a kind of crypto euro dollar in a sense, right? So I’m curious, where would you place that kind of thing? Whether it’s, let’s say, Stablesats or let’s say people using the likes of one of those derivative exchanges like a BitMEX and things like this, where they’re trying to represent US dollars, but actually there’s no dollars. It was just Bitcoin in and Bitcoin out all the time.

Matthew – 00:15:02:

Yeah, well that’s actually precisely what a euro dollar is, is actually precisely a stablecoin. It’s actually a combination of, say, two traditional instruments. So a stablecoin is like a money market fund, which money market funds started in the 80s always because of bad government regulation. They actually limited the amount of interest that banks could pay on their deposits. And interest rates were sky high in the 80s because Paul Volcker was trying to cut off inflation. So people went into these less regulated, as I said, up the stack types of accounts to try to get more yield because they were actually restricted in the bank deposits. I think regulation Q only limited to like five or five and a quarter percent when interest rates were 15% higher in the it’s actually bad regulation that caused people to go away from banks, interestingly, into the money market fund. And a lot of these money market funds blew up in 2008 because they invested in risky, excessively financially engineered mortgage backed securities, which is another interesting thing, another interesting byproduct of bad regulation, basically. So a money market fund has always existed, well, I say always existed in the United States, for example, large markets for a long time, 40, 50 years. And that works precisely like a stablecoin product. So it’s always another thing about all this stuff, it’s another word to say is fiduciary media. It’s basically money that is at the control of someone else. It’s not at the control of the central bank and it’s certainly not in control of you if you were holding gold or you’re holding Bitcoin, it’s at the control of someone else, a fiduciary. So this Fiduciary, whether it be Tether Corp. or Bitfinex or whoever, might be connected in certain levels with this stuff, they have assets and they have liabilities and on the asset side so again, always assets and liabilities with the fiduciary. On the asset side, they hold dollar based securities that will earn them an interest. So bonds typically, although they of course have a lot of commercial paper that they’re very secretive about, which might not be so stable. But nonetheless, these are dollar-based assets, that they are the asset holder, they are the creditor to whoever owes them money, might be the US taxpayer, might be someone else, and they receive interest from that. And then on the flip side, with that interest, with that expense, they work out this stablecoin product. People collect the stablecoins, they trade the stablecoins, and that’s just how it goes. They collect the spread. Stablecoins are zero coupon thing. But sometimes money market funds pay a little bit of interest, maybe stablecoins. We know that they pay interest, but that’s not directly connected to Tether. Anyway. Tether pays for its operations from the interest it collects from people’s money, basically buying those stablecoins. When it issues, they take that money, invest it into assets, and then people trade around the stablecoin like cash. So it’s precisely a broad money thing, an M2, M3 thing. But it’s actually even more than that because Tether’s not so much USDCs because they’re kind of regulated inside the US. But for sure tether is outside of the United States. So it’s a combination of a money market fund and offshore dollar, as you mentioned, a euro dollar. So that’s precisely what it is. Tether is around a lot longer than I thought it would be around. Turns out people like it, which is okay. But you need to understand that Tether also has a history of being very secretive. Apparently they might have bailed out. I don’t have to go too much into the history. They might have bailed out Bitfinex might have not so much, and then apparently that got paid back. But regardless, we don’t know for sure their balance sheet. And again, I’m not making a claim that regulation is better. I’m just saying they’re just an entity that’s offshore and they’re engaging in these euro dollar type things, and that’s what they do. And those things that they create, that fiduciary media that they create, those tethers can go around and trade like cash. So that’s precisely what a money market fund is, or precisely what if a foreign bank was doing that outside the United States, precisely what a euro dollar account was. And those started as well after World War II, the Marshall fund, a lot of Americans were coming in to help rebuild western Europe, and there was a demand for dollars. So that’s kind of where the term euro dollar came. But as you correctly posit, it’s an offshore dollar. It’s a dollar based account that is outside of the Federal Reserve. So it’s all assets and liabilities way different than Bitcoin, which is asset first, nobody else’s liability.

Stephan – 00:19:42:

Yeah, that’s a great way to put it. And I think what’s interesting, and some of this gets into the whole full reserve and fractional reserve sort of debates as well. So as I see it. It’s also part of the problem is that governments have legal tender laws that force us to treat them all the same. Do you know what I mean? For example, it would be like saying you must treat a dollar at Wells Fargo the same as a dollar at Chase Bank, the same as a dollar at pick another big bank. And in reality there might be different risks associated with those banks. And I think maybe that’s where perhaps the full reserve camp style people and probably, I mean, obviously I’m more in the full reserve camp. I’m seeing it more like what people should be doing is treating them as different things, right? We should be saying and maybe in the Bitcoin world even this could be applied, right? We could say, well, a Kraken IOU is different to a Coinbase IOU, which is different to a Binance IOU and they should be treated differently. But in practice what’s happened is with the government because of all these regulations and I think you are also critical of some of those, right? So for example, legal tender laws, capital gains tax laws, implicit or explicit bailout guarantees, things like the FDIC, all of these things sort of push people into a system where they are fractional without even having a real choice to opt out, unless they’re opting out with Bitcoin, right? They’re just kind of stuck in this fractional reserve system that there’s no way out. That even if you took out, even if I go to the bank and I pull out all my US dollars in physical cash and coin, I’m still being inflated away over time. And so that’s kind of how I’m seeing that aspect of it. But I also see it in a way and this is where I’m curious to hear what you think. Do you believe we will be moving to a full reserve system in a Bitcoin world, right? Because if you and I transact using the Lightning Network or just on chain, it’s all full reserve, isn’t it?

Matthew – 00:21:36:

Well, it’s interesting. Two questions there. Firstly, your first part about legal tender. I fully agree 100%. That is my view as well. I was just on with Peter McCormick last week, it was Good Friday and I was thinking of analogies. I said in my view it’s legal tender in the central bank itself. That’s like the depths, that’s the 7th circle of Dante’s Inferno. That’s the worst thing that they do to us is that we have to use their money, there’s no competition, and we have to bank on their credit, basically. So legal tender is the money and the central bank is controlling the credit primarily the rate of interest. So that’s, in my view, is the worst of it all. Things like FDIC, the implicit bailouts, as you mentioned, guarantees, those are absolutely bad. But I think that they are a few levels up. A few circles up.

Stephan – 00:22:27:

Got you. You don’t see them being as bad.

Matthew – 00:22:29:

They’re definitely bad. I mean, I just don’t see them as the core of the problem. I think the core of the problem is the central bank and the legal tender. That’s basically it. So that’s my point there. Sorry, my daughter has just come in. I don’t know if you can hear her crying in the background. And then the second point regarding the full reserve thing, I think that’s Fernando likes to say it’s like quicksand. People always encircle this debate. I don’t think the debate is that interesting. I think if you stick to the legal tender and the central bank stuff, that’s more like we all agree on that for sure. And that’s why Bitcoin is a great escape hatch. But regarding the full reserve under a Bitcoin standard, first of all, I wouldn’t be disappointed. I’m not advocate of fractional reserve banking. I’m more of an advocate for free banking. And history has kind of showed us that even in free banking, without a central bank, banks had very low reserves. Like there was never 100% reserve standard. That’s just a fact of history. I’m not saying it has to be that way, but it’s also a fact of history, by the way, that free banking has failed and succumbed to central bank, to central banking, to the central bank state. There is no country in the world that has a free banking system. Even though we had many in the past with no central bank. Now we don’t have that. So that’s why we need Bitcoin again. Another reason why it’s this nature that we seem to have of getting caught up in other people’s problems, regulating and socializing the losses. That’s the big problem. So anyway, I think that’s still regarding your first point my first point regarding though what could happen in a Bitcoin standard. First of all, I think Lightning is extremely interesting. I think it’s great. I think there really isn’t an economic comparison of historical nature because we talked about before, when you go to the bank, when you go into that fiduciary system, you’re in the world of assets and liabilities. All right? So for every if you want to count up all that money, it’s on the liability side of all these institutions balance sheets. Doesn’t matter if it’s a euro dollar repo money market fund, all of the stuff that trades stablecoin, all the stuff that’s trading around, it’s a liability for the issuer. They have assets on the other side, they have loans, they have securities, they have bonds, they have investments. But those maturities might not be matched correctly, which is I think a lot of the full reservists problem. The maturities might not be matched in the right way. And also it’s just the nature of it. It’s assets and liabilities. But with Lightning, with Lightning it’s kind of like locked. I think it is like it it’s locked base money. So where you still it’s not an on chain UTXO everybody is clear on that, right? It’s not an on chain UTXO. It’s not final settlement when you have a Lightning balance trading around. Peter Todd used an example, which I’ve used for years. He said it on a Tweet, like from 2018 or something, where he said it’s not quite a claim. A claim would be again, these assets and liabilities, but it’s also not fully under your control, and I don’t know if you’d revisit that. Now, I know Lightning gets better every day, more usage, safer, but there are a lot of custodial Lightning wallets. If you’re not running a Lightning node, it is a fundamentally different thing than Bitcoin. But it also is locked Bitcoin. So it’s great. I think it’s great. It’s fantastic. But then I think finally addressing your question about the full reserve nature of that, I don’t think there is a way to manage people’s issuance of credit on an asset, even on Lightning or on Bitcoin. So, for example, we don’t know how many balances on the Lightning Network or UTXOs on Bitcoin have been lent out to third parties with a private loan agreement that we can’t see. I mean, in some respect, that is fiduciary media like, yeah, we’re not trading those loans around like claims. But it is the case with all the Bitcoin that is on Coinbase and Kraken and Gemini and everywhere, every other exchange, there is an asset and liability relationship, right? It’s like not your keys, not your coins. Once you deposit, this is why I think Bitcoin makes everything easy too. It’s like once you deposit that Bitcoin onto Coinbase, you don’t have it anymore. It’s not yours. You don’t have nothing. You don’t have nothing. But everybody knows, right? Not your keys, not your coins. You just have a claim. You have something that’s just not Bitcoin, it’s a claim. So there’s a lot of different ways to talk about the full reserve stuff. But I think that I have a hard time seeing that credit would just go away. Right? I could lend one Bitcoin to you, you could lend it to someone else. Someone else could lend that Bitcoin to a third person. We may have all different needs. I have a very short term need. You have a midterm need. Someone’s a long term need, whatever. I mean, I’m not saying we should do that. I’m not saying that’s the point. But when people want to go for interest, they do go for interest. That is a fact of history. So I don’t necessarily see a problem with that. But I also kind of see it as a moot point. At the end of the day, I don’t really even care about those arguments much. I do think that the main point is that as I go back, circle it back from the beginning, Bitcoin is an escape hatch from the legal tender and from the central banking and going back to when we originally talked about doing the show in Riga, this was a lot of the point of my presentation there in September is I’ll stop because I know I’m going along with my answers, as I tend to do. That’s exactly what happened with gold. Gold got centralized and that was problematic and we do not want that to happen with Bitcoin. So I’m certainly not a fan of people loading up with Bitcoin on exchanges and all that. I don’t think that’s the ethos of Bitcoin.

Stephan – 00:28:08:

Yeah, interesting. So, yeah, I think that’s interesting explanations and I think I kind of agree with a lot of it. And maybe there’s parts of it where I’m kind of like I think it’s sort of like a different view of where things go and hey, let’s see what happens. Right. The way I’m seeing it is we’ll probably be moving more to a full reserve world in the sense that we would only have commodity credit and not circulation credit. So I think here’s maybe the interesting point to discuss, I think, which is that it might well be true that people issue loans and things like this, but it comes to that question of is it money? And I think maybe that’s where if somebody creates a loan, it’s not that people are going to trade those loans around like they were Bitcoins. Does that make sense to you?

Matthew – 00:28:58:

It does, but again, let’s just look at what’s happened in the last ten years of Bitcoin, which is fully unregulated system. Regulation is coming, unfortunately, but even in the unregulated system, 14 years, but 13 years of pricing data, so on and so forth, a lot of Bitcoin has made its way onto exchanges. I don’t necessarily see the catalyst that’s going to take that off. And I made this point on Marty’s show as well, a while back. For example, what Caitlin Long is doing with Custodia, and she’s actually just like the narrow bank idea. This is a thing where it’s almost like it’s too safe for this risky central banking system, right? So they don’t allow it and she’s going to pursue her rights. And I think that she should. I think it’s great. Absolutely, I think it’s great. But at the end of the day, you got to pay for a type of account that she’s offering that’s a Bailman account. That’s something very different than a typical bank account, where usually you’re using the media, using the online service, whatever it is, you’re using the fiduciary media for your own convenience to make payments to scale, and you don’t really pay and people don’t want to pay. That’s the point. So, look, I think she should do it. I think it’s great. But you got to ask yourself an example like Custodia. The only example I can think of that really is kind of successful, that people really care about as far as a fiduciary holding stuff that’s fully backed is like gold money. Jim Turk’s company, Peter Schiff, our good friend, right he’s invested, unfortunately, in that. But those guys are hardcore, right? Like, you got to pay. They audit it twice a quarter. They got big doors. I remember when the Hong Kong protests were going on, they were sending I got an account with them. I don’t have any problem with gold, by the way. Of course Bitcoin is much better. But they were sending emails, like saying, look, we’re going to work. If you want to get your money out of Hong Kong, you get your money out of Hong Kong. These are the kind of security things you got work with a fully custody bank. And that wouldn’t be no different if it was a Bitcoin custody bank, like Custodia. It’s just whoever’s controlling the keys. So, again, my point of all this is just saying we’ve had a pretty free and open market. I don’t necessarily think it’s a win for Bitcoiners if, like, Custodia gets their full reserve bailment master account with the Fed. I think it’s great. She should pursue her legal rights to do it absolutely, 100%. And I would welcome more bailment services for Bitcoin for people to get involved. I think it’s a short term gain for sure with Bitcoin. But this goes back to the presentation that I made in Riga. We’ve seen this story before with gold. The danger of all of this, of centralizing this around a bank or any fiduciary at all, is that they can eventually control it and they can eventually take it over. And that’s what they did with gold. Central banks control one fifth of the world’s gold. Whereas if you were in the 1980s or 1970s, as I talked about in my presentation, gold was starting to soar from $35 an ounce going to $850 an ounce by the end of the decade. Like if you were a gold bug sitting in a gold conference, analogous to us sitting at a Bitcoin conference, and inflation was running hot, the Vietnam War was closing because it was so bad, fiscal deficits stagflation in the 70s, all this stuff, and gold is on its way to $850 an ounce, you are thinking like, hey, we’re winning, we are winning, this is it. Yeah. So I think those are the more important concerns to worry about. And I don’t think any there’s no salvation there from a regulator, from Bitcoin being accepted and whatnot. But here’s the paradox, is that this is what people want. This is what people want to use. And so I think if we can get to that world, which maybe you’re saying, where everybody’s on a Lightning, but then again, we can go now, talk about Fedimint, we could talk about there are different levels of that still, who’s really in control of the keys and control of the money. Yeah, it might not be an asset liability relationship like we have now, and I certainly prefer it to now, but there’s still this sort of abstraction away from the on-chain UTXO. So I don’t know as you’re alluding to, I don’t have a strong heart towards full reserve banking. It hasn’t happened in the free market before. Also, we see it with Bitcoin. It’s not happening now. But I certainly agree, and I think everyone should agree that if it’s centralized, if you view your success in Bitcoin as, say, just for example, Caitlin Long getting her master account with the Federal Reserve, that’s like a short term success for adoption. But I don’t see that as a long term hopeful thing for Bitcoin at all. So I certainly think that we need every single decentralized scaling solution that we can possibly find.

Stephan – 00:33:39:

Great. So let me add a few things there. I think let’s hearken back to the old days, right? The promise in the old days of Bitcoin was be your own bank, right? That if you can hold your own keys, that more and more people can be their own bank. And I think of it in that sense, but like you said, it’s going to get interesting with things like, let’s say, Fedimint or even today with something like Wallet of Satoshi, right? It’s a custodial Lightning account, I guess, even though it’s called Wallet of Satoshi, you can think of it like an account, right? It’s like a Lightning account. And it’s very slick and very nice user experience. I don’t personally use it, but obviously I prefer to try to get noncustodial usage or self custodial usage. But nevertheless, there are many customers using Wallet of Satoshi. The number of transactions is going up a lot, especially now in this age of Nostr, people are zapping each other and all this. And maybe other examples could be things like Bitcoin Beach wallet or recently renamed to Blink wallet. Now I’m an investor in Galloy, so disclosure, but nevertheless, these are like these layers operating above Bitcoin. And so to some extent they’re operating like, you could argue, like a full reserve banking system. And they are just your payment provider for, let’s say, if you are not an individual who can run their own Bitcoin node or Lightning node or have their own self custodial wallet, you’re a user now. Yes, you are beholden to them. There is a risk that you could get rugged, but in a sense it’s kind of like a full reserve banking system, but they’re using Lightning as the payment rails or on-chain in certain cases, but mostly Lightning. And so I’m sort of seeing it evolving as a banking system in that sense, right? So it’s not as much about, okay, it’s great, Caitlin Long gets custodial and it’s a good thing, but I’m obviously more focused on getting individuals to be their own bank.

Matthew – 00:35:27:


Stephan – 00:35:27:

So I guess that’s kind of the view I’m seeing. I’m curious if you have any thoughts on that.

Matthew – 00:35:31:

No, I agree with you, man. I’m totally with that. I don’t see anything wrong with that view. I think that’s fantastic. That’s absolutely where we should be going. This is what we’re trying to do, right? Educate as much as we can and get people this is real tangible ways to escape from, as I said before, from those legal tender laws and from their manipulation, of course, of the credit markets. So I certainly wouldn’t have any objection, and I certainly wouldn’t think that it’s not a noble goal to have the full Bitcoin system on these sort of Layer 2 locked Bitcoin, and we could just stop there. You don’t have to worry about the assets liabilities or if it’s fully custodial or if you get rugged, like you said, it’s still locked. It’s still locked Bitcoin. So it’s great. That’s a different type of monetary classification than we’ve ever had. We’ve just never had that before. Like a stablecoin is absolutely a traditional monetary classification. This thing that’s supposed to peg the value to a dollar is the United States Treasury bond or some other US-based treasury assets. Now, could we have Bitcoin-based assets that circulate like that and also might circulate as fiduciary media? Maybe? I don’t know. I wouldn’t rule it out. But I also wouldn’t be opposed if it just stays, like you’re saying, on the locked like the locked system that we have now.

Stephan – 00:37:00:

Yeah, it’ll be interesting to see, because I think my conception of it, or the way I’m thinking about it, is it would just be too difficult to enforce this kind of claim on Bitcoin, but to also make it treated the same across everything. Right. To say 1000 sats on Wallet of Satoshi should be the same as 1000 stats on Blink wallet. I think what we’re likely to see is it’s more like a full reserve system. And bank failures in this sense are maybe okay, maybe there’s a risk of theft or there’s a risk of getting rugged or there’s a risk of some technical error, but it seems to me like it’s still fundamentally a full reserve system. So I think that’s the interesting thing to me about that kind of idea. Now, we don’t know where it all goes, but it does seem like we’re creating this alternative system and it just has these fundamental differences to the fiat system as it is today. Now, yesterday, there’s a lot of people who use stablecoin and things like this, and maybe that’s a transitional thing, like eventually people are using those because maybe they have a need in, let’s say, dollar denominated liabilities, because maybe they need to pay their rent or whatever their living expenses. But I see it sort of like fundamentally we’re moving towards a Bitcoin denominated system and in that world there’ll still be some credit. But I just see it like it’ll be commodity credit, like full reserve style credit, as opposed to this kind of ex nihilo credit creation. But I’m also curious to kind of get your view on if we were to look at these different monetary aggregates, as we said, like M0, M1, m2, et cetera. I’m curious, how would you think about it if we’re thinking about valuations for Bitcoin, right? Like, let’s say Bitcoin someday becomes widely traded around the world. Now, as you said, it’s probably in the base money category. But when we’re thinking about, like, what would a valuation look like, let’s say 20 years from now? Let’s say there’s massive adoption of Bitcoin 20 years from now, what kind of monetary metrics do you think would be comparable today versus Bitcoin?

Matthew – 00:39:10:

Yeah, it’s a fun question to ponder, for sure. Well, the only point that I make with the base money stuff is that’s, like, that’s still the economic nature of it right now. It’s like, with gold, I think you can compare Bitcoin to anything, right? Like, we can compare it to real estate. We can compare it to bonds, stocks. We can compare it to other liquid type deposits or less liquid type deposits as well. But fundamentally, the nature of it is not like, any of those things. The nature of it is like gold or silver that you would hold personally as an asset or it’s like, at least the way that the financial system, as we said, is now the monetary base, where that’s the core of the system, and no one could settle any any deeper. So if you want to put numbers on that, it’s roughly 30 trillion. It’s actually like, 27 trillion. But the US. Has a huge non-bank reverse repo facility, which is for basically, money market funds that they’re now providing liquidity for. So basically, round it back up to 30 trillion, $30 trillion equivalent. That’s the base money stock of the world. And then 10 trillion is the number you hear a lot for gold. That’s correct. It’s actually a little bit higher if you count the industrial gold, which I’m taking away from that figure at the moment. So 40 trillion. So 40 trillion. So you can do the math on how 40 trillion…

Stephan – 00:40:28:

And that would be the M1, or we’re talking, no, that’s base. M0. That’s kind of adding up all the M0 across the world gets you something in the ballpark of 40 trillion.

Matthew – 00:40:39:

But again, remember, M0 is just physical cash. M0 is physical cash outside of banks. There’s actually, to get back to the monetary base, you’d have M0 plus vault cash, plus bank reserves.

Stephan – 00:40:51:

Oh, sorry. Got you those three things. What we’re talking about here is monetary base, not M0.

Matthew – 00:40:55:

Exactly. Got you the base. The central bank money basically decides the central bank balance sheets, plus a little bit of non bank money. This reverse repo facility that the US has, which is gigantic right now, two and a half trillion. So you’re back to about 30 trillion at the moment, plus 10 of gold. So it’s 40 trillion. Again, that’s the nature of it. Again, Bitcoin could go up in value. Those other things could go up in value. Bitcoin could go up in value. Those other things could go down in value as Bitcoin takes away. It’s hard to know exactly how that will work. And again, like you said, I think regardless if we’re going to get to a sat standard or whatever, it’s going to take decades. We’re talking decades where it’s a generational thing. Obviously you have very well known economists that are just completely doltish to Bitcoin. It’s a generational thing, right? And anything could happen in the meantime, too. Like maybe there is some sort of an intermediate layer of sort of bank money type of a thing that could come up. But it’s bank money based on the Bitcoin network, a decentralized bank money. It’s hard to really know how all that goes. So that’s why I just stick with the base to say that if you really want to understand what this is, that’s the nature of it. Bank money is something else. Gift cards as well, that’s something else. Credit cards is something else entirely. Here’s an interesting question for you. Do you know which monetary aggregate credit card balances fit in?

Stephan – 00:42:18:

It’s got to be like M3 or M4 or something like even M5 or something crazy like this, right?

Matthew – 00:42:24:

It’s a trick question because it’s none of them. Can you imagine that? Can you imagine that credit cards aren’t part of the broader money supply?

Stephan – 00:42:32:

Yeah. So to be clear, are we talking about credit, like an outstanding credit balance or like the credit limit?

Matthew – 00:42:39:

The payment. The payment, okay, the payments. It doesn’t matter. I mean the balance of the payment, but any of it. Again, it’s a pure fiduciary. It’s very monopolized one. But anytime that you make a payment, your Apple card or whatever, Venmo, whatever credit card you have, they make credit cards, too. They also do direct debits. But Chase, Bank of America, whatever, European Bank, you have a credit card with AmEx, those credit cards, Visa, AmEx, Mastercard, it’s just a purely abstraction. It’s a spreadsheet that exists within their networks, right? So when you make a payment, the merchant gets credited from AmEx, you get debited from AmEx. Nothing happened at all. In the banking system, the only time credit card payments hit the money supply is when you would pay off your credit card statement from your checking account, from your deposit account. Then the credit card value gets hit on the money supply. Or when AmEx or Visa makes a direct deposit from AmEx or Visa, not from the 1001 different transactions that they had in their network, but they make one direct deposit into their merchant’s bank account, then the banking system gets hit. So this is just a good example, in my opinion, of how creative banking is, how different things scale. But again, it’s not that I am obsessed with fractional reserve banking or even think that it’s necessarily the future. It’s just that that is kind of how the history has developed. But then I fully admit, and I fully will agree that this system has become completely centralized, right? I think we should have many more credit card companies. We should be able to pay with gift card points in many more places than we do. We should have way more freedom in our finance than we do. So that’s why we need Bitcoin, because we need to break that system of centralization, which we all trend toward. Basically. I got on a little tangent there with the credit cards, but my view is to not go crazy thinking about real estate or stocks or bonds or even broader based money or gift cards or credit cards. It’s just that the nature of Bitcoin, when you finally settle with someone every ten minutes, final settlement, it’s just like base money at the central bank or just like if I gave you a gold coin.

Stephan – 00:45:00:

Yeah, interesting. And I think that makes a lot of sense, right? It’s to compare to that monetary base. I think, as you said, it’s the nature of the thing. I think in terms of what the nominal value of Bitcoin ends up being in 20 or 30 years may end up being much, much higher than that, because it may be that. And this is where people kind of throw out crazy numbers and whatever on Twitter or something. People just kind of throw out big numbers because obviously it looks nice, and you get lots of engagement and, well, you’re bullish on Bitcoin, and you’re throwing out whatever, 30 million Bitcoin or whatever. But, yeah, as you said, it’s kind of like at least comparing the nature, like, for like right? Like, for like, it’s probably something in that 30 or 40 trillion range.

Matthew – 00:45:44:

And the math is 2 there, obviously 2 million per Bitcoin. So if it’s 40, 40 trillion USD, roughly 20 trillion right on the denominator, that would be 2 million. But again, that actually only means that it meets it, right? Like I said, in that time, the base money could go up or it could go down. It’s hard to know how that will take off. And I think, yeah, that’s where it’s the tricky thing with money. This is why Satoshi remained anonymous, right? Because they really want to come after it. I think we’re really in the they fight you stage right now, don’t you? I mean, this Operation Chokepoint 2.0.

Stephan – 00:46:21:

Yeah, this New York Times disinformation piece, obviously. I just did an episode with Pierre about that, but it’s garbage, right? But of course, I think that it’s just too valuable to not be eventually accepted. Right? It’s just like our governments, at one time, they fought VoIP, and now everyone uses VoIP technology, right? Like, it’s the same kind of thing. At first, they saw it like, oh, it’s a competitive threat to telecommunications companies, or even similar arguments have been made about the container, the sea container, just the container used. That’s a big problem or whatever. But then eventually they realized, wait, no, it actually makes sense to be part of the overall system. It’s too valuable to not use this technology, especially when it’s being adopted in a bottom up way. And that’s why I think as Bitcoiners focusing on the bottom up is really the best way to go. Like if you can focus on the bottom up, whether that’s a merchant on the day to day level, or just individual everyday people who are learning to use Bitcoin for payments or savings over the longer term, the more people who are getting in on board in the bottom up way, it’s just a stronger system. And I just think they’re not going to be able to stop it over time. I guess one other comment around the valuation stuff is that it’s just so difficult to understand because today dollars are being valued, but there’s like all these other systems, as you said, right? There’s these kind of other things that kind of float above, like credit cards, as you said, or like derivative markets and all these other things where the dollars are being treated equal. So maybe there is a case for Bitcoin to be valued at some of these really high valuations, but it’s just too difficult to predict because in two decades time, a million dollars now is not like, in the 90s, a million dollars is awesome. Right? But nowadays a million dollars, sadly, is not even that much. So it’s the same kind of thing. Like in two decades, three decades time, these numbers might not really be that meaningful. So I guess at the end of the day, I kind of bring it back to, well, it’s going to be something like millions of dollars in today’s terms on the low end, right? That’s on the low end. So that’s kind of how I’m seeing that aspect of it. But one other area I’m curious, you mentioned about how monetary bases can shrink. So what would that scenario look like if monetary bases were to shrink? Or how would it come about?

Matthew – 00:48:49:

Well, I just mean that it would basically die. There would be no more usage, no more demand for the thing. And so the value again, let’s presume it’s not the US dollar first, Michael Saylor likes to make this case that the dollar is going to be so strong with Bitcoin. I’m not really a fan of that argument, presumably. And again, the price of money, that’s the exchange rate. It’s not the interest rate. A lot of economists make that mistake, even Australian economists, but it’s the exchange rate. So presumably it’s talking about the yuan or Russian ruble. They’re making waves with gold. Whatever other currency you’re talking about, at some point the people will give up, as they have done thousands of times throughout history, and they will go to a stronger currency or a stronger money, let’s say. And eventually that money, I think, will be Bitcoin. And then those monetary bases, the demand for them will just collapse. It’s typically how it goes, right? It’s a power curve. It’s never a gradual, linear thing, which is also a hard thing for a lot of, I think, casual writers to understand, right? It’s like the casual writer who, after one of the first Bitcoin busts in 2013 and 2014, these writers are just saying, oh, you’re picking on taking such a risky asset without understanding anything about the underlying fundamentals of the system. So the point is, yeah, I think this can come on a lot faster than people understand. We have history of that, that it can come on a lot faster. The lack of confidence at a currency. And if, let’s say, the dollar is the best looking horse in the glue factory, if the dollar is the last currency standing, I don’t know, I don’t even necessarily believe it’s going to be like that. I just think that Bitcoin is going to be valued so much higher on the margin that again, it’s just like what happened when gold was again freely tradable in the United States at the end of the Vietnam War, in the start of the 70s, that finally some property rights and some people were allowed to trade real value and real money. And then you start that most economists thought that the value of gold was going to fall at this point against the dollar, but precisely the opposite happened. Now, again, of course, it goes too far and then the central banks continue to monopolize the gold. That’s why this can never happen with Bitcoin. And this is where I think the real lesson is. This is where I think this is why I keep talking about it and I’ve talked about this a lot, is I don’t see any hope for a government sort of backed Bitcoin standard. It’s got to be something like you said, from the ground up, grassroots, where everybody is using it. And we have just this explosion, right, the Cambrian explosion of from the ground swell up, not from the top down. Because if it’s like that, if it’s like this top down and we have some economists arguing at Yale about how much Bitcoin the Federal Reserve or the ECB should hold at any one time and how the gold backed Chinese yuan versus the BRICS bucks or whatever how that’s doing, versus, say, a Bitcoin-based dollar or something, that’s a bad place to be. We know where that is. We know where that’s been. Like, anytime you’re talking about excessive regulation, econometrics economists thinking that they know that they can model an economy on a spreadsheet, all of these things that’s just always ended in tears and they never admit it. They’ll never admit it. So that’s what we’re going to have to fight. And that’s why I don’t really see any salvation in sort of like a central bank adopting Bitcoin. I think it’s nice on the short term, in the short end of people like kind of getting exposure and understanding it and whatnot, but we’ve just never had a banking system that can withstand the State coming in. So that’s why we really, really need to have this sort of decentralized groundswell from the ground up type of type of a market.

Stephan – 00:52:57:

Yeah. And as you say, historically what we have seen with government-managed gold standards is they would centrally set the price of gold. They would say, oh, we’re going to revalue it from twenty dollars to thirty five dollars or whatever, right.

Matthew – 00:53:10:

Roosevelt from his bed in the Oval Office, right.

Stephan – 00:53:16:

If things played out the wrong way, let’s say. Now I don’t think they’re going to play out that way, but hypothetically you might end up with this crazy scenario where it might be like the Argentina blue dollar thing, right? Like there’s like a government rate for what they think Bitcoin should be, but actually the street rate is very different. It might be kind of like that where some government bureaucrats who think they know how to manage and they’re some technocrat person who thinks they can calculate the value or in reality they’re just sort of court economists or people trying to give power to their own state or king or whoever. But in practice, really, there’s going to be like this bottom up market of users of Bitcoin and there’ll be, let’s say the street rate, which is like the real rate.

Matthew – 00:54:02:

Totally. I think that’s a totally legitimate possibility. I hope not. And I think that’s part of the generational trend, right? Like I think in the United States and Europe you’re starting to get younger people in, even though the top down, the really, the FUD about the environmentalism, all that stuff, it’s just every few years there’s going to be more of this. It’s not private enough, it’s too private. You’re going to get a lot of this to keep coming. And the best thing would be if they just let it happen. But we know with history they will try to not let it happen, probably until they’re dying breath. But I think the fact that it’s a generational thing is really important. I think that the younger politicians that are coming in, they’re just going to be more amenable to letting this thing go. And I just don’t think a law. I think it’s great in El Salvador that they’re trying it, but I don’t think that a Bitcoin law makes any sense. Or it’s got to be a free market type of a thing where it’s either allowed or if it’s not allowed, then it’s still going to go anyway and it’s going to be black market money. So that’s probably…

Stephan – 00:55:07:

Yeah, interesting you say that because I actually was going to ask your views about, I guess your take on what’s happening with El Salvador, but there are other countries where as an example, they don’t have capital gains tax laws. Singapore, Switzerland, UAE, just a few examples, or Panama, I believe, has kind of a law where I think you can use different things as legal tender. But I guess in some cases you get maybe people coming from a more status mindset where they don’t want to do something unless the government has explicitly given a tick of approval. They don’t want to operate in a gray zone, right. They don’t want to feel like, oh, it’s not illegal, but it’s not legal, and it’s kind of in this gray zone. And maybe from their perspective, they think, I’d rather stick to fiat, right. Like that’s in their mind, obviously, of course, as we were focusing on bottom up, really, is to get more people to just learn and understand how money can arise from the bottom up, as Austrian economists have been saying for over 100 years. And so I think that’s really where the rubber meets the road. But it might be interesting to see in some examples like El Salvador, where it’s explicitly permitted and maybe that is sort of enough to get people to start and maybe it’s enough to actually attract investment and tourism and capital and talent. Maybe that is enough to have a good example, right. And it’s kind of interesting as well, right? Because I guess, knock on wood or whatever, are we entering a bull cycle now? And it’s going to be interesting to see that after all this time, people are saying, oh look, Michael Saylor, you are underwater. Well, now he’s not. And maybe El Salvador will not be underwater. And then over time, it just kind of looks like a good example. And then maybe other people look to that. They look at MicroStrategy, they look at El Salvador and think, hey, why don’t I do that?

Matthew – 00:57:00:

Yeah, good point. I mean, there are plenty of different ways to skin a cat. And I think that I’m certainly not saying that it has to be like only bottom up, not any mainstream sort of a thing. It’s just, I think the strict that’s the strict lesson from gold, particularly because these free banking systems were all based on a gold backed standard, right, or a silver standard or even a trimetal standard, some sort of a copper or bronze standard. So there’s many different ways to do banking, but at the end of the day, this is the theme that I’m recurring here on your show today. It’s just that government gets too greedy and they want to spend more than they tax and then they can’t borrow enough either. So the only other option is to borrow from the central bank, i.e., the printing of money ex nihilo. That’s a powerful tool. That’s what they’re going to try to do for a long time. And I have a hard time seeing how maybe it’s a gradual way of how that changes if we get to a full Bitcoin standard.

Stephan – 00:58:06:

Apologies, listeners. We unfortunately had an audio error with the last four minutes of Matt’s audio. So that’s where this episode ends off. Of course, make sure you follow Matt and check out his work over at Porkopolis Economics and find the show nodes for my show at Thanks for listening, and I’ll see you in the citadels.

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