Layered Money by @timevalueofbtc walks us through the key moments in monetary history that have come to define how our global financial system is structured.
Key Lesson: Not all forms of money are created equal and you’d best understand the concept of counterparty risk.
📘🧵
“This book frames money as a layered system because it’s a clearer way to conceptualize the changes coming to our financial system, a system that temporarily erupts in chaos every few years only to be calmed by increasing amounts of government and central bank intervention.”
“There is a path to a more stable future; this book prescribes one that relies heavily on technological innovations that have merged monetary science with another previously unrelated science: cryptography.”
“Cryptography is forcing the financial world to abandon old systems for new ones, much like the Internet has done to countless industries since the turn of this millennium.”
“The most basic example of this new terminology can be done by examining the relationship between a gold coin and a gold certificate from 1928 in the United States of America.”
“First-layer money, a gold coin, is held in a vault. Second-layer money, a gold certificate, is printed and circulated in place of the gold coin. The paper has value to whoever is holding the piece of paper itself, called the bearer.“
“All second-layer monies are IOUs or promises to pay first-layer money. They all have something called counterparty risk..
Layers of money came to exist because people trusted forms of money that carried counterparty risk of the issuer.”
“Layers become a way to think about money’s natural hierarchy whereupon monetary instruments are ranked in order of superiority from top to bottom, instead of placed next to each other on accounting tables.”
“Readers should..understand on which layer of money their assets are located..
In a future world of currency choice, being able to navigate the monetary map will be empowering.”
“First-layer money emerged as a better way to store value over longer periods of time, and second-layer money emerged as a better way to transact because it was more flexible to use than coinage.”
“Cash is defined as anything we use as a form of money that others accept at face value..people have to trust the issuer, or whoever made the promise to pay.
Second-layer money is therefore inherently unstable, as the power to create it will always be subject to human abuse..”
“The hierarchy of money is dynamic, meaning that it’s a set of relationships in constant flux. When credit is expanding, the money pyramid expands as the second layer grows in size.
When confidence runs high, a gold coin and a gold deposit have almost no observable difference.”
“This reverses when the pyramid enters contraction and the objective difference between money and money-like instruments is suddenly pronounced.
Contractions can result in redemptions..as holders of lower-layer money scramble to secure a superior, higher-layer form of money.”
“The Fed was founded to combat financial crises..with second-layer money called reserves.
mandate[d] to provide..money for the banking system, when the instability of credit stoked financial unrest.
Initially, the Fed did not own or intend to own US Treasuries..”
“Only two years after the launch..the Federal Reserve Act was amended to effectively help the US govt finance its war effort..
US Treasuries joined gold on the first layer of money.. It was the first indication that US Treasuries would eventually replace gold altogether..”
“In 1944, world leaders gathered at a hotel in Bretton Woods..and formalized that all currencies besides the dollar were forms of third-layer money.
Currencies would have fixed exchange rates with the dollar and wouldn't themselves be redeemable for gold.”
“Unfortunately for the international monetary system, the Bretton Woods agreement was doomed.
Triffin predicted that these nations would eventually deplete the US gold stock, making a fixed price of $35/oz impossible to maintain.”
“..he identified that being the world reserve currency was a burden, not a blessing.
Foreign countries would accumulate dollars because of its reserve status. This would strengthen the dollar and cause trade imbalances that would otherwise not exist..”
“Foreign nations accumulated dollars..and eventually began converting them into gold. Redemption requests were beginning to build pressure on gold’s fixed dollar price.
In 1971, the US suspended gold convertibility for the dollar..”
“Without gold, US Treasuries stood alone atop the dollar pyramid as the only first-layer money. Treasuries themselves are a form of credit, and their creditworthiness comes from the assets of the US government and the power to collect taxes from its citizens.”
“Newly issued Treasury securities range from one month to thirty years in maturity, leading to a range of risk between Treasuries.
The Fed is the largest holder of Treasuries in the world.”
Global Financial Crisis, 2008:
“Amidst a wave of American mortgage defaults in 2008, the intricate web of failing mortgage derivatives started causing lower layers of the dollar pyramid to crumble..
All forms of bank liabilities list liquidity, and the financial system froze.”
“The Fed fulfilled its role as lender of only resort by launching a slew of consecutive rescues..
It was an all-out capitulation..to avoid systemic collapse.
Despite the Fed backstopping..the ongoing liquidation of inferior assets and ascent up the dollar pyramid persisted.”
“On Nov 25th, the Federal Reserve had no other choice than to flood the system with reserves by purchasing US Treasuries, many of which had been newly issued in order to finance enormous deficits resulting from economic recession..
The Fed called it Quantitative Easing..”
“The Fed had slashed the price of money and targeted interest rates of 0%..
The Fed had removed price discovery from the system by disallowing so many third-layer money-types from realizing their ultimate fate.”
“In the digital age, money and state don’t necessarily mix anymore. To many, the entire concept of government money is becoming obsolete as the rise of Bitcoin bellows in antithesis.”
“Because Bitcoin is software, mathematics, and speech, it should be considered a human right.
[It] gives people around the world the first genuine alternative to their national currencies, a trend which is impossible to reverse now that over 100 million people own it globally.”
“The underlying thesis of this book is that BTC will stand alone on the first-layer of money in the future. If only one word about Bitcoin could be used to describe why…𝘢𝘯𝘵𝘪𝘧𝘳𝘢𝘨𝘪𝘭𝘦”
“Bitcoin is antifragile because it thrives off global monetary disorder within the dollar pyramid and is resilient to the threats, slander, and legislation from dismissive bureaucratic entities.”
“..all currencies in the purely digital realm will face price discovery in BTC terms. This means that all digital currencies, from cryptocurrencies to CBDCs, will be measured in BTC, just like the Bretton Woods agreement in 1944 mandated all currencies be measured in USD.”
“The emerging world of digital assets is anchored by BTC in a similar way that the international monetary system was anchored by gold..
But Bitcoin has some advantages to gold in the modern age.”
“It exists on computers anywhere and everywhere. It doesn’t need to be transported around the world on armored trucks, ships, and airplanes. It also doesn’t call for purity testing that enlists expensive equipment, only a Bitcoin node.”
“The last piece of the puzzle on the path to BTC becoming world reserve currency will be the atomic swap.
It’s a smart contract that allows for the trade between digital currencies without using a third-party exchange.“
“Govts and corporations around the world will purchase BTC and hold it as a cash reserve because it reduces reliance on the current dollar system..
Bitcoin will likely replace gold as the most desired neutral money and exceed it in total market value.”
Table: @BTCtreasuries
“Bitcoin is where the Internet collides with money to bring about change in the same transformative way it did with communication and commerce.
In the future, the currency you use will not merely reflect your birthplace or country of residence, but your preferences.”
/END
🙏Thanks to Nik for permission to make this thread.
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