Bitcoin is Venice
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This is a massive, magnificent, learned contrarian work and, like that other massive, magnificent, learned contrarian work David Graeber’s Debt: The First 5,000 Years, few practitioners in modern financial services would not benefit from reading it, just for the challenge it presents.
Like any communal activity in which there are things to be gained and lost — i.e., any communal activity — “financial services” is a paradigm: an intellectual structure with its own rules, hierarchies, defeat devices and articles of faith, usually encrusted in so much obscurant detail that it is impossible for non-initiates to get near it without being swatted away on ground of detail — insufficient grasp of buried, esoteric intellectual constructs that only the truly learned can know.
This is an evolutionary design feature of any power structure. It is in equal parts benign and malign: without some commitment to the cause — some unconditional faith in the wisdom of elders — no paradigm can take to the air in the first place. But once it does, the higher it flies and the more it scales — and the more there is for those with skin in the game to lose — the more ossified and moribund it will become.
You must, therefore, either get so close to the weeds that you can scarcely see beyond them — and, weeds being nourishing, there is little incentive to look — or you don’t, in which case you never earn the intellectual capital needed to mount a challenge. It is at some stage a Catch-22. Paradigms endure because anyone with enough internal gravitas to pick them apart has too much invested not to keep them together.
Power structures therefore progressively prefer form over substance, it being assumed that, over time, the substance has been proven out by the very success of the paradigm. This is a circularity, but not a vicious one.
Now this is not to say contrarians cannot be popular or correct — Gigerenzer, Taleb, Mandelbrot, Stock, Scott, Jacobs, Sutherland and others ply a healthy trade preaching damningly about the absurdities of our institutions, which blithely carry on regardless.
Well, they do until real-world facts intrude: once it is clear an intellectual construct not only should not work but does not, the paradigm goes into crisis from which it might not recover, and a wholesale redrawing of the landscape is on the cards.
But even then, paradigms have a habit of shapeshifting, reframing around their fringes and boxing on. You cannot defeat a power structure with a purely theoretical argument. You can ignore clever arguments until they punch you in the mouth.
That is not to say we shouldn’t listen to the theoretical arguments of outsiders like Graeber and Farrington. They can in their way shape and direct the way even experts think about the world.
David Graeber was, properly, an outsider. An anarchist anthropologist and one of the leading conceivers of the Occupy Wall Street movement.[1] Allen Farrington is, in one sense, not — he is a well-schooled industry insider who would not tear it all to the ground, but would rather “make finance great again” by restoring capitalism to its Venetian apex — but in another sense he is, because his means of doing so would be with bitcoin, and by destroying what he sees as the “strip mining” version of capitalism yielded by fiat currency. As a grand vision, that is pretty anarchic: more so even than than Graeber’s.
Farrington cautions against excessively theoretical approaches which he says have got us to where we are — this may be an attempt to disarm the elders as aforesaid — but there is some irony, for his own defence of bitcoin is intensely theoretical. What he has on his side, for now, is bitcoin’s sustained defiance of the elders of finance who have predicted seventeen of its last two implosions. At the time of writing, despite FTX’s collapse and CZ’s prosecution, BTC is surging back towards historical highs. This is the proof of the pudding: you can’t, as contrarian but bitcoin antagonist Nassim Taleb would say, “lecture birds how to fly”
You can, however, supply a plausible account of why, against the odds, they continue to do so.
Farrington and Taleb do not see eye to eye: Farrington has published an excellent takedown
On debt and assets
“Since bitcoin is a digital bearer asset and not a debt instrument —”
This is where I v think I part fondant company with Farrington, though we may agree to disagree.
Perhaps this is the nocoiner’s fundamental misapprehension. Bitcoin isn’t even meant to be a currency. If it isn’t, then criticisms that it isn't very good at the sort of things currencies are meant to do fake on deaf ears. So what?
Farrington correctly sees a fiat currency as necessarily an instrument representing indebtedness. A person who holds it has a promise for value from someone else. It is, on this view, not an asset, but an anti-asset: something that is no good in and of itself, but which you can only generate value with when you give it away.
There is an important distinction here between holding currency and putting it in the bank. When, and while, you hold it, for all intents and purposes money is not there. It is meaningless. Worthless. Valueless. (If you are robbed it only creates a (negative) value when it is taken away. Holding currency in person is taking actual capital off the table; withdrawing it from the market. Since capital’s value is a function of time, you would expect a capital instrument you have disengaged from the capital market to waste away, and so it does. Cash in your wallet attracts no interest, so relatively to the value of any particular thing, it depreciates over time. That is the consequence of inflation.
Cash you put in the bank is invested. With the bank. The bank paid you interest — usually not much — but it pays you a return for your investment in its capital. It must sit on some of the cash its customers give it, but that capital reserve, too, will waste away. The rest it will punt out to its borrowers. It's bankers will find creative ways of punting out as much as humanly possible, to increase shareholder return. This is the band leverage ratio.
But let's not get distracted. That cash flies around the system. Depreciating as it does it is a hot potato —