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Bitcoin 2021: Patrick Byrne On The End of Fiat

Patrick Byrne spoke at Bitcoin Magazine’s Bitcoin Conference 2021 on the End of Fiat stage in what he termed a “rare, rare appearance.”  After the crowd warmly welcomed the founder of Overstock, he pointed out that eight weeks prior the Federal Reserve ceased reporting on the money supply, M2, on a weekly basis.

“When I first got to college in the early 80s, the first thing in economics they talked about was M1 and M2,” Byrne recalled. “The whole world waited for the weekly money supply to be announced.” They’re no longer reporting it. 

“And that’s because our M2 is going parabolic,” said Byrne. “The wheels are coming off the financial system.” Byrne evoked the repo facility, 

“It’s an overnight facility that basically if banks end up really stressed out or with some mismatch in their book…they can borrow what they need to from the government. There was all this concern back in the fall when it spiked to $90 billion one night in an overnight repo.” Byrne says banks try to stay away from this facility because it indicates weakness, yet it had gone from $5 billion to $90 billion overnight. 

When Byrne spoke it was at $500, while at the time of publication it was at a record $756 million with anticipation that it would hit $1 trillion. 

“So, the wheels are coming off the system,” says Byrne. And the question is what system is going to replace it?”

Byrne As Village Elder

Byrne sees himself somewhat as the old man in the tribe who remembers the old tribe lore, sitting around the campfire explaining to the youngens what the tribe is all about. “That somewhere evolved into my role,” said Byrne.

In 2013, the largest company in the world dealing in Bitcoin was a diner in Western Australia of $800,000 a year in annual turnover, according to Byrne. The Bitcoin community was growing excited about the day that they would have a million dollar business accepting Bitcoin, then a $10 million business, and how many years before a $100 million business? Five or six years? 

Byrne was running Overstock.com. On January 1, 2014, the company began accepting Bitcoin at $1.4 billion. “Old timers used to tell us we saved five or six years of adoption,” said Byrne. “The largest business in the world taking Bitcoin was an $800,000 a year diner in Australia, and a company in $1.4 billion took it and that’s that was January 1, 2014. So, that was me.”

Byrne recalls being invited to be the opening keynote of the world’s first global conference on Bitcoin. It was in Amsterdam, and it was really nice. “It was the first global conference,” he said. “Thousands of people showed up: criminals and Feds and spooks and every kind of person you can imagine. It was the first time something like this has ever happened in the world.” 

Byrne earned a PhD in political philosophy; particularly the history of the intellectual origins of the US Constitution. I explained the philosophy—now with some this is a divisive word—the correct word is liberalism. There’s a political philosophy called liberalism; political liberalism. It has its roots in the ancient Hebrews, and the Athenians and the Romans and the English and the Dutch, and it reaches its apotheosis in the US Constitution. And I saw at the time Bitcoin as the fulfillment, as the completion of that tradition.”

Byrne believes the weakness—the Achilles heel of our tradition—was understood by the US Founding Fathers. “It was corruption,” says Byrne. “…You’re only as good as your institutions, and when they are corrupt, you get the worst of both worlds.” Byrne mentions Federalist Number 10 by Madison, which continues on the theme from Federalist No 9, and is titled “The Utility of the Union as a Safeguard Against Domestic Faction and Insurrection.” 

Madison’s main fear about factions was the unequal distribution of property in society. Ultimately, “the most common and durable source of factions has been the various and unequal distribution of property,” Madison stated. Because certain people owned property and others none, Madison foresaw a day when people formed different factions with disparate interests. 

“Those who hold and those who are without property have ever formed distinct interests in society,” he notes. Madison believed the factions would pursue their own interests, and not those of the public good. Madison cited landed interest, manufacturing interest, a mercantile interest, a moneyed interest, and “many lesser interests.” Madison saw them as “different classes “ that were “actuated by different sentiments and views.” 

“In designing this constitution, we looked at all the previous attempts at democracies, ancient and modern, and looked at what made them implode, and we designed this constitution to address those problems,” said Byrne. “Unfortunately, there’s one problem we didn’t figure out how to solve. And it’s the biggest problem of all, in all the history of democracy, and it’s the problem of what they called factions, what we would call special interests.”

Byrne, however, would go further, citing corruption and regulatory capture. “I was a one man Occupy Wall Street starting in 2005,” said Byrne. “I figured out a bunch of the stuff that was going on on Wall Street.” 

Byrne was asked to participate in shenanigans. “I’ve heard various conversations around Greenwich, Connecticut, with hedge fund bosses, after they had gotten to know me—probably doesn’t speak well of me. I was the CEO of a public company. And as we got to know these hedge fund guys, I’ve had various conversations on the form, ‘We can make a lot of money together if you want to play ball.’”

And there’s a lot of ways the CEO of a public company can help hedge funds make money and get a cut. So, Byrne mapped out the scheme, and took it to all the parts of Washington DC you would think would care. Byrne brought up Harry Markopolos, an American former securities industry executive and forensic accounting and financial fraud investigator, who figured out the way in which Bernie Madoff was defrauding investors.

Markopolos delivered a 21-page memo sent during November 2005 to SEC regulators, entitled “The World’s Largest Hedge Fund is a Fraud.” It outlined Markopolos’ suspicions in more detail, including 30 red flags based on over 14 years of Madoff return numbers, that proved Madoff’s returns could not be legitimate. Markopolos states in the document: 

Bernie Madoff is running the world’s largest unregistered hedge fund. He’s organized this business as [a] hedge fund of funds privately labeling their own hedge funds, which Bernie Madoff secretly runs for them using a split-strike conversion strategy, getting paid only trading commissions, which are not disclosed.

“Six years in a row he went to the SEC and explained to them exactly what Bernie Madoff was doing,” said Byrne. “They just shut the doors.” 

Byrne says he had the same experience in Washington, DC. The SEC seemed to be in bed with Wall Street. He became aware that Washington DC is almost completely captured by powerful interests. “It’s really a Marxist idea,” said Byrne. “We think we’re living under a neutral rule of law, but behind the scenes, powerful players have their hands on the controls and really dictate outcomes.”

He recalls how the press ran photos of him with UFOs coming out of his head to paint him as a conspiracy theorist. “So, the central problem of our tradition is capture,” said Byrne, highlighting  George J. Stigler’s “The Theory of Economic Regulation.” In the paper, Stigler wrote:

… as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit… We propose the general hypothesis: every industry or occupation that has enough political power to utilize the state will seek to control entry. In addition, the regulatory policy will often be so fashioned as to retard the rate of growth of new firms.

“Its argument was that society creates these regulators to protect us from certain industries,” said Byrne. “And we don’t understand how those industries capture the regulator and turn them back against society.”

Byrne Saw Blockchain As The Perfection Of Our Liberal Tradition

“We don’t say liberal anymore, because 90 years ago, the left picked the word socialism. You couldn’t say socialist anymore after the USSR, so they started calling it liberalism.” By liberalism, Byrne is not referring to the platform of the Democratic party, but what people today call classical liberalism or Libertarian. 

“I saw Bitcoin and blockchain as the fulfillment of that, because I thought what we were going to be doing as a community was building what in computer language they would call a warm standby; an alternative system that we could get built, as long as the current system all held together. And we would get these blockchain based systems built and start to supplant the conventional systems.”

Byrne focused on what he called the “tech stack for humanity.” He asked what the future would look like and examined the most foundational elements of civilization and how to apply blockchain to them. “I figured they were identity and land governance (because that’s where capital really comes from), central banking, capital markets, supply chain, and voting. That’s the basic tech stack. Seven years ago, I went around either founding companies or investing in startups that were doing those things.” 

Byrne, however, is afraid that strategy may not work out. “I think we’re coming up a little bit short,” said Byrne. “I think that we need about five more years. We’re really just getting our systems into production. I’m afraid the wheels are coming off the current system before the standby. We’re not ready to do a hot swap into a blockchain based world. Sadly.” 

Byrne knew the six types of companies he wanted to own a piece of that would be fundamental to the future. If none such company existed, he would write a term paper, find the right people, and get them going. “I left all of this behind a few years ago for other reasons people may have followed in the news. I disappeared and laid low. I wish I still were on some days.”

The S&L Crisis 

Byrne brought up the S&L Crisis of 1980s and 1990s, which was the failure of 1,043 out of 3,234 savings and loans associations (S&Ls) in the United States from 1986 to 1995. An S&L or is a financial institution that accepts savings deposits and makes mortgage, car and other personal loans to individual members.

“The US did something pretty interesting,” said Byrne. “It was probably the last great bipartisan act that I can ever remember. A democratic congress and George HW Bush worked together. They created a law that basically used the power of eminent domain to step in and to fix this financial crisis.” 

They ripped up the banks, Byrne said. “All kinds of things that governments have never done, and we’re going to cram it down the throats of people.”

Byrne noted that every banker in the world had senators on speed dial.  There was Charles Keating, an American lawyer, real estate developer, banker, financier and activist best known for his role in the savings and loan scandal of the late 1980s. He made financial contributions to five sitting U.S. senators—dubbed the Keating Five—and made requests for regulatory intervention from them.   

“He had five senators on speed dial,” says Byrne. “One of them was named John McCain. That was going on all over the country.” The President and Congress “steamrolled over the industry, and they fixed everything. And we got 20 years of growth.”

The Japanese, on the other hand, reacted differently at the time. “The Japanese were more corrupt.” Particularly, their parliament, the diet. Powerful business interests called Parliament and nothing changed.

“And, as a result, for 30 years, Japan has lived under the weight of a zombie financial system,” said Byrne. “And it’s because the elites of Japan could not be defeated. They couldn’t do what they did in this country, and crunch up that system so things could start moving again. And so for 30 years, Japan has labored under that mistake. After a decade of it, they started referring to the lost decade of Japan. That was in 2000. They are now 30 years into the lost decade. And it all really comes back to the fact that they could not deal with their corruption  to do the things they needed to do.”

Byrne adds: “We’ve reached the same place in our society in terms of decadence and corruption.”

Seven years ago, China hadn’t awoken to the potential of blockchain, says Byrne, who had by that time explained blockchain to people in government, and how the infrastructure must be built. “And the problem was that in building a new blockchain based set of systems, it’s going to hurt some powerful people in the United States, some powerful entrenched interests. If you let those people call up their senators and stop this, we’re going to fall behind, and China is going to get this prize.”

Byrne has followed Xi’s public statements on blockchain. “Three or four years ago, they named blockchain one of the five technologies they want to dominate by 2025. A year later the President of China came out and said he saw blockchain as the most important of the five. 

“And, because of that, China has done beautiful work in blockchain,” said Byrne. “On our side, I can tell you, everything I feared was going to happen has happened. Wall Street has done everything they can to prevent a blockchain based settlement.” 

Byrne said blockchain-based systems for the west were ready six years ago. “Central bank digital currencies, we had stuff built five years ago,” said Byrne. “China has now been experimenting for about 18 months, and they’re doing wonderful things. They’re doing this very interesting thing where they’re issuing money—-it’s helicopter money—-But it decays, so you have like 60 days to spend it.” 

Byrne says all of this was built out four or five years ago in the West. “All of it was ready to go into implementation,” said Byrne. “All of it got stopped by governments, and our progress has been impeded by our governments; in particular, the United States government. Anyway, my point is all of this really was built four or five years ago in the West, all of it was ready to go into implementation. All of it got stopped by governments, and our progress has been impeded by our governments, in particular, the United States government. Meanwhile, China, their president got it, and they’re building out everything we’re building.”

Byrne compares what is happening in the United States to what took down Japan. “At the end of the day it was the corruption of Japan that prevented their government from fixing their financial system, and they’ve lost 30 years. The same thing is going on here. However, it’s going to come out of their hands.”

The Cantillon Principle 

In Essai, Richard Cantillon provides an advanced version of John Locke’s quantity theory of money with a focus on relative inflation and the velocity of money. 

Cantillon suggested that inflation occurs gradually. The new supply of money had a localized effect on inflation, originating the concept of non-neutral money. He also suggested that the original recipients of new money enjoy higher standards of living at the expense of later recipients. The Cantillon Effect essentially refers to the concept of relative inflation or a disproportionate rise in prices among different goods in an economy. 

“Think of the economy as a central bank, with a bunch of rings around it concentrically as different layers of the economy,” said Byrne. “The Cantillon Effect is when you inflate the economy by pumping money into the central bank, the people who get the benefit are the ones directly wired into the central bank. In our case, the great big Wall Street banks, then the next ring is the other New York banks, then the regionals, and at the very edge is the consumer. So, by its nature, what we’ve been doing for 13 years trying to prop up the economy with free money is really a huge wealth transfer to the elites.” 

The wheels are falling off their system, Byrne says. “And I don’t celebrate that because on the one hand, it could create a lot of human carnage. I just want us to understand that out of the rubble, there’s going to be a question of what world do we build? Do we build an authoritarian world that they want? Or do we build a world based on blockchain, which incorporates certain cypherpunk values about freedom and individual autonomy. That big decision is going to be coming to us.”

Byrne says that a form of money in which people can communicate without going through the elites could be the best way to ensure the latter world gets built. 

“[Money is] a medium through which we communicate prices,” said Byrne. “A price is a combination of two pieces of information, value and scarcity. So we humans want to communicate to each other all kinds of information about value and scarcity. A market plays a coordinating function, and gets the right people making supply to the people why they want the value and so on and so forth. That so value and scarcity get conveyed at a price. They want to control the medium in which we send that information so they can distort it and get us to do things we would not do otherwise. They want to distort that. They view themselves like some workmen up in front of the Grand Machine with a screwdriver, and they think they can fine tune it and get us all to behave correctly. That’s why we need a form of money that no government mandarin can just invent, like gold—or how about a gold you can flash across the universe, Bitcoin. No government mandarin can sign a piece of paper and create a rule of Bitcoin or gold, like they can with the dollar.” 

Byrne says the elites will attempt to introduce a new fiat based on the IMF Special Drawing Right. The SDR has been an international reserve asset of the IMF since 1969, designed to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five currencies—the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.  

“I want to see a new financial system get introduced without a central banker behind it, who thinks he can fine tune it,” said Byrne. “…And I want to see the international financial system rebuilt on blockchain or Bitcoin rather than reinvent another system based on the IMF…40% of all the dollars in the world have been printed since last summer. We need a way to communicate to each other in a medium that the government can’t manipulate.”