The Theory of Money

You will often find me talking about money, prices, inflation and market efficiency.

The current setup of Central Banks trying to plan the economy is fundamentally flawed as they lack all the data points needed to operate efficiently.

There is only one player that has all the knowledge and information necessary to properly allocate capital: the free market system.

All that information is processed and expressed via PRICES.

If prices are relied upon by buyers and sellers in order to make decisions, and their decisions (information) flow back to the system as a feedback mechanism and affect those very prices once again, price setting will cause by definition a misallocation of capital.

Money is the information system of the economy

Let's look at a real life example: a slice of Pizza. There are most likely millions of data points that determine how much should a slice of pizza cost in Midtown Manhattan on a cold night in February 2021. Input costs, rent expenses, foot traffic, taxes, PPE loans, input costs inflation and the list can go on and on for days if we want to.

The bottom line is that businesses everywhere in the world are trying to analyze the local information at their disposal and translate it into a service or a product which represents an efficient capital allocation able to generate profit.

This very simple concept highlights a crucial flaw of Central Economic Planning. Information is decentralized, therefore a single entity (say the FED) cannot ever match the efficiency of the market since it has only access to a fraction of the information that exist.

If a business fails, it means that it was misallocating capital. The lack of money flowing into the business coffers was the signal of that inefficiency and it was the result of all the decisions buyers and sellers were making at that time. It is a fascinating concept to say the least. This brings us to discuss a little further why a central organization managing money is fundamentally problematic. Not having all the data points at its disposal, it is bound to make wrong or at the very least not optimal decisions.

And here I come pounding the table about inflation once again. There is no correct inflation target for Money. Determining an inflation target is equivalent to manipulating money.

This is one of the fundamental reasons why I am a strong believer that Bitcoin is the soundest money ever created

With Bitcoin supply being capped at 21M, there is no risk of inflation. The 21M number might be arbitrary however it doesn't change the fact that the unit of measure is fixed.

Without inflation, the value of money is no longer a moving target and all the actors of the economic system can have a fixed unit of value to guide them in their buying and selling decisions.

Ultimately, to quote the pseudonymous inventor of Bitcoin known as Satoshi Nakamoto:

"If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that. In this sense, it's more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes."