- Hi, Andreas.
You often claim that the banking system is a Ponzi scheme.
Could you elaborate on that and explain how Bitcoin
hopes to solve this atrociousness?
I love how passionate you are about asking this question.
Atrociousness indeed.
Well, here's the thing.
Here's why I have in the past said that banking
not only encourages Ponzi schemes,
and allows them to be licensed by the State
and covered up for a very long time
by complicit and captured regulatory systems,
but it is itself a Ponzi scheme.
Why do I say that?
I say that because of a particular feature
of commercial banking called fractional reserve banking.
And so what is the characteristic of a Ponzi scheme?
The characteristic of a Ponzi scheme is that
current investors are being paid from new investors
that are being brought in rather than the profits being made
by an investment.
And fractional reserve has characteristics
that are very, very similar.
For every dollar that you deposit into a bank,
the bank then issues nine additional dollars
of commercial loans backed by that one dollar
that you put into deposit.
So that at any moment in time,
there is very little money in the bank
that can be returned to depositors.
And as long as they don't all ask for their money it's okay,
and the rest is lent out.
And it's lent out at interest,
money that was created at zero interest,
for free, essentially,
and riding on top of this scheme,
I think it's appropriate to call it a scheme,
bankers make vast amounts of money.
And then of course, you know, that's fair, right?
They should make money because, after all,
they're taking risk making these loans
because when these loans fail,
they go bankrupt and all of the investors lose,
oh wait, no, that's not what happens.
Wait, hang on a second, let me check my notes.
Bail out, bail out, bail out, bail out,
bail out, okay.
So they don't actually take any risk,
because if the loans fail,
they just get bailed out by the government
and given more free money so they can do
more fractional reserve and stimulus.
And so they're not taking any risk,
but they are earning interest.
So essentially what they're doing is a practice
that in economics is called rent seeking.
That's when you use a preferential position in
a stream of money to extract money that has not been earned,
that is not the result of risk,
but effectively is just rents that you get for something
that doesn't even belong to you,
from a monopoly practice, or cartel, or oligopoly practice.
And in this particular case,
that's exactly what commercial
fractional reserve banking is.
Banks through the Cantillon effect,
by being close to the sources of money,
get 0% interest or near that from the Federal Reserve,
which they then multiply with deposits
and produce loans that they charge extravagant amounts
of interest, and taking very little risk,
because if those loans fails, they just get a bailout.
Because they're systemically important.
They are too big to fail.
And so what this has led to is
the financialization of everything,
because if without taking risk and by investing free money
that's given to you by the Fed, you can make more money,
then what's the point in investing in productive businesses,
in any form of risky investments or not risky investments?
You just throw money at everything.
And that creates some perverse incentives in the market.
Banking is a Ponzi scheme.
How does Bitcoin solve this atrociousness?
Well, one of the ways it solves this atrociousness
is not by changing that system,
that system on itself becomes a very fragile system
that has these massive boom bust cycles.
And every time there's a boom or bust,
these companies get bailed out through inflation.
They get bailed out through massive stimulus that basically
destroys the savings of anybody
who is saving in U.S. dollars.
So the way Bitcoin and other systems
that may have similar characteristics, okay,
maximalists, sure, no other systems ever have similar car--
I think there are some other systems
that have some similar characteristics.
But especially Bitcoin,
especially because of its monetary policy,
solves this because it provides people with an exit.
It provides people with a way to save
outside of that system of the dollar,
or whatever other currency is being inflated with bailouts,
in a system that preserves its value,
or even because it's dis-inflationary
as is the case in Bitcoin,
it actually gains in purchasing power
just as the national currency declines slowly,
or sometimes quickly, first slowly then quickly,
then all at once, you gain, you protect your savings.
So inflation is a mechanism of hidden taxation.
When the Federal Reserve injects money into the economy,
what they're doing is they're taking that from the
purchasing power of savers.
They're making the purchasing power of savers close to zero.
Their interest rate that they're earning
is zero or near abouts.
And the inflation further erodes
the purchasing power of their money.
The asset bubbles enrich the investor class,
especially if they're really,
really close to the source of stimulus
through the Cantillon effect.
And essentially it's a massive,
massive wealth transfer from the working class,
from savers, from the middle class,
into a very, very, very small upper echelon of investors,
financiers, bankers.
So Bitcoin solves this by giving you an exit,
by saying, you know what?
I'm not going to put my money
in a currency that's doing that.
I'm going to take my savings,
at least some of my savings,
maybe a small part of my savings at least,
and put it in something else.
Take it out of the reach of your inflation game.
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