[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.

[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Today on our Friday shows, as always, we’re gonna talk about something that’s in the news, but we’re gonna go one step lower. And I keep saying that and I have to kind of admit to myself that that’s never how that actually goes because today, we’re gonna start talking about cryptocurrency. And I gotta tell you, with Thanksgiving just wrapping up, that like I kind of discovered that talking about cryptocurrency is like talking about abortion or COVID vaccines. There is no middle ground on cryptocurrency. It’s either you’re all on one side or you’re all on the other. I guess there is a third option, which is you don’t know enough to have an opinion about anything, so you just try to watch football instead. 

[00:00:58] But when I started researching this topic, I started questioning my motives pretty quickly. And the reason that it came up is like I try to talk about something that’s in the news and go one step further. And so, like why now? If you’ve been paying any attention, there’s a crypto exchange called FTX that has recently filed for bankruptcy. We know that crypto has been having a terrible year if you watch markets at all. And if you are on YouTube and you are watching anything to having to do with personal finance, crypto is going to come up. People talk about their crypto strategies. It is the talk of the town in certain circles. 

[00:01:32] And so, with the FTX collapse, I was like, yeah, I can do one episode on FTX. Well, that’s not at all how this went because in order to have a conversation about crypto, there’s a lot of background information you need to know. And this is one of these things, like I am professionally a CPA. There is nothing on this show that should be construed as facts or financial advice, but that’s what I do professionally. I’m an auditor. I’ve worked in capital markets. I’ve been around in working with very large sums of money since I got my CPA and started in public accounting several years ago. And to talk to people about what financial regulations are or how markets work, like there’s a laundry list of topics that you kind of have to bring forward before you can actually talk about something like the FTX collapse. 

[00:02:23] I mean, for example, one of the guys involved with the Enron collapse that actually like completely crashed the economy; took a, you know, huge energy company and just found them; they just vaporized overnight; took down. It used to be the Big Five accounting firms. Now, it’s the Big Four. Why? Because one of those firms, Arthur Andersen, just ceased to be because of that. One of the guys involved with that whole debacle was looking at FTX and said that there has never been a point in his career where he has seen a bigger, more fundamental collapse of financial controls. 

[00:02:55] When you have that type of statement, this is not a one-episode thing. And so, this is going to be the start of what is likely to be a four-part series on cryptocurrency. And I say likely to be a four-part currency, and if you’re looking at the calendar, this is gonna bring us to right before Christmas if I in fact am able to squeeze this topic into four episodes. But you know what? I actually think it’s okay because when I started talking about quiet quitting, that turned into a two-parter, and that currently is one of my most popular episodes. So, talking about money and talking about from the beginning and allowing Dylan to go all the way down to the bottom of the rabbit hole apparently is something that you guys want. So, buckle up, buttercups, because we are starting on cryptocurrency. But we’re gonna start somewhere far more fundamental than Bitcoin and blockchains. We’re gonna talk about money. Like for example, have you ever asked the question, what the hell is money anyway? I mean, it’s not a readily apparent type of thing. And I’ve said this before, there is no earthly reason why people should understand how money works, and that’s because it’s not found in nature. It is quite literally something that we’ve made up as people, but I’m getting ahead of myself. 

[00:04:11] When we are talking about cryptocurrency, the first thing that we actually have to be able to answer, if you’re going to answer the question of, what should I be doing with cryptocurrency, is what is currency or what is money in the first place? So let’s just start off with that basic definition. Money is any item or verifiable record that is generally accepted as payment for goods and services, the repayments of debts, and the payments of taxes. That is a lot of words, but this is here are the actual important pieces of that: money is an item or verifiable record. And you’d be like, “I’ve heard this. This is the Bitcoin. This is the blockchain, right?” We have a verifiable record. That’s the blockchain. That’s why and therefore, this is a currency. Well, not so fast. Verifiable record can actually be debts and the debt markets in the world dwarf the stock markets of the world. That is, the trading of debts and IOUs is orders of magnitude worth more than the trading of equity, which are ownership stakes in company. 

[00:05:15] The second piece is it needs to be generally accepted as payment. So, in those debt swaps, let’s say that I have a collateralized debt obligation, also known as CDO, and the collateralization is against student loans, right? Those are debts. Now, that is something that is traded. It is an item and a verifiable record. It’s actually both of those things. But it’s not generally accepted as payment. Therefore, that collateralized debt obligation is not actually money. There are cases in which the payments and the swamps of IOUs and debt is actually a generally accepted form of payment. But, again, I’m getting ahead of myself. 

[00:05:53] It needs to be recognized within the society so you can purchase goods and services that you can pay for your debts and that you can also then pay for your taxes, which are the major things that are in any type of organized society. If you’ve ever actually looked at a US bank note, it says that it is legal tender for all debts, public and private, which means the government states that if you have a private debt between two private individuals, that money can be used to settle that debt. Debt is actually an underpinning part of any financial system, so money has to be an item or verifiable record generally accepted as payment for goods and services through payment and debt and the payment of taxes. It’s not barter when it’s generally accepted. Why, of course, is barter not considered to work with money? Because if I only have goats to barter with and that other person doesn’t want goats, it’s not generally accepted anymore. That’s the difference between a market economy and a barter economy is that in a barter economy, I’m trading actual physical goods, but they’re not generally accepted as payments. I have to find the right person to purchase my goats or whatever it is that I have. 

[00:07:05] But money is a concept. It’s an agreed-upon fiction. It’s not actually a real thing. It’s a generally accepted for payment. You can find a lot more about this uniquely human ability in the book Sapiens by Yuval Noah Harari. But basically, the, you know, TLDR on this is he posits that what makes humans so powerful is our ability to bring into reality fictions. For example, corporations are people. That is bullshit. Corporations are a fictional concept, but we all agree that they function as an entity, so we treat them as an entity, and that’s a type of a fiction that grants a legal shield against assets and complaints and lawsuits and et cetera, et cetera, et cetera. That’s one example. Here’s another example of a concept or an agreed-upon fiction that we all just kind of go with. Traffic lights. Why is it that the red means stop and the green means go and the yellow means hit on the gas and try to get through before it turns red? Well, because we’ve all agreed it does. And society’s function on the agreed upon fiction, money is part of this. It is a uniquely human trait. 

[00:08:11] Currency, though, is the standardization of money in any type of form, whether be it coins, bank notes, debts, pieces of code, et cetera. So when the money as a concept is standardized into a form of something, then it becomes currency. Now, the standardization authority in this particular case is important because it’s the state that does it. So in order to be a currency, there has to be a standardization. And the standardization, of course, has to be governed by something, which so far in human history has almost always been a state. This is not universally true. I mean, Somalia as a country exists and functions with all sorts of different currencies and standardizations. But I, again, am getting way ahead of myself. 

[00:08:55] For the purposes of this discussion in trying to answer the question “What is money?” in order to build up to the discussion on cryptocurrency, we need to understand that there are three types of money. Now, here is my side note. There are a ton of different things that can qualify as an item or verifiable record that is generally accepted for payments of goods and services, the repayment of debts, and the payment of taxes. I’m only gonna talk about three, so please do not write me and say, “But you forgot about this one.” I’m aware I forgot about like three more, but we’re only gonna talk about these three. Okay. End of side note. The three types of money are number one, commodity. What is a commodity money? It’s the unit of a thing itself.

[00:09:38] Let me give you a great example of something that was a commodity that was used as money: salt. If you’ve ever heard the phrase “That person is worth his salt,” that’s because you’re saying he’s worth his salary, because the root word of “salary” is “salt. Roman soldiers were paid in salt. That’s how they were actually paid. They were paid a salary. They were paid a set amount of salt. They used that salt then to trade. It came in a little packet and you took the packet down the market. And that was the currency. That was the commodity money that was used. Other things that we use as a commodity form of money are gold, silver, grain, sheep. These are all things that you’ve had over the course of human history. 

[00:10:20] We’re gonna talk about gold and silver a little bit more here in just a second, but what I want you to understand is that when we use the commodity form of money, this is an agreed-upon form of payment. Salt, gold, silver, grain, sheep, whatever. It comes with a couple of very specific downsides. Number one, well, if your unit of exchange is sheep, sheep require, like those are not inert things. You gotta feed and water them, take care of them. Some of your sheep might die. A fox might come along or a wolf might come along and reduce your currency or your money supply, like that’s not great a plague. You see where I’m going with this. The other thing is is that sheep and grain can be difficult to carry. Even with the salt, well, you’re one bad rainstorm and it’s all gone, right? The other part about using commodities as a form of money is that it can be difficult to divide. So let’s say that I go and I wanna buy a shirt. And they say, well, that’s going to be a third of a sheep, and I got one sheep. So am I buying three shirts or am I just cutting a third off the sheep? You can see why that might be a problem. 

[00:11:23] Which then brings us to the second form of money, and this is the one that a lot of people will key on as the like form of money we should go back to, and that’s representative money. Representative money are pieces of paper that represent the commodity that underlies it. In the United States, these came in the form of gold certificates. This is where the gold standard comes from. And up until the 1970s, US currency was a representative form of money in which it represented a fixed amount of gold or silver. This was not a unique to the United States type of thing. This is what, prior to the Great Depression, almost every government in the planet used was each one of their pieces of paper currency was representative of a set amount of the gold. And this dates back all the way to the OGs of this system, which were the Chinese many, many, many centuries ago. But you could actually take that paper money, go to the bank, and exchange it for the actual gold. And, of course, the biggest problem with this is if the faith in the banking system is shaken, everyone shows up. The bank doesn’t have all that gold just sitting there. They use a fractional reserve system, which means that once they’re out, those pieces of paper that everyone’s sitting there clamoring to get their gold, they’re now useless because their gold isn’t there. 

[00:12:42] Side note on gold, though. Gold was likely a representative form of money before it was considered something that was actually money in and of itself. And the reason that I say this is that if you go back far enough in time, they would stamp records onto gold that this piece of gold represents 10 sheep, for example. Gold is actually a really good form of record keeping because it doesn’t corrode or decay over time. Silver will tarnish. But if you think about all the rest of the metals, they eventually wear out. Gold doesn’t do that. So it was likely that in the very, very olden days, like when commerce first became a thing, we were using gold as a representative form of money for an underlying commodity like salt, grain, sheep, pottery, et cetera. And then it became so widespread as the medium of exchange that we started to think about it as the thing of value itself. So, that’s the end of my side note on gold. We’re gonna talk a lot about gold in the next episode. 

[00:13:41] But form of money number three is fiat currency. What is fiat currency? Now, a lot of economists won’t say “fiat money.” They say “fiat currency” because the word “fiat” means “to declare.” That’s right, ladies and gentlemen. It is literally when we say this thing has value because I, as the government or state authority, declare it to be so. It is a money system entirely based on trust. And if you really stop and think about this for a second, the development from barter to commodity to representative to fiat makes sense in an ever-increasing level of complexity within an economic system. Because at the end of the day, the further you get away, the more you have to trust the system overall. 

[00:14:28] This is why in an industrializing society like we saw at the turn of the 20th century, when you read Upton Sinclair’s book The Jungle, it was supposed to be about worker conditions. But people were horrified by the food that was getting packaged and sold. Why? Because there was enough of a space between where the food was produced and where it was consumed that we really didn’t have to look that person in the eye when we sold them pork that we knew was poisoned. This is why government agencies stepped in and then regulations like the USDA, the Food and Drug Administration, et cetera, came into being because it would then generate, at least in theory, a level of trust in the system that would then make the exchange easier. Fiat currency is basically the same type of thing. In a globalized system. I am never gonna meet the person in China who put together my iPhone. And so, I have to trust that it was done correctly. There is an entire regulatory regime that goes along with this and the money followed suit. Fiat currency is a trust-based system. Or another way to put it, it’s an agreed-upon fiction, which is what all money is in the first place.

[00:15:36] Even when you’re trading salt, even when you’re trading gold, even when you’re trading silver, grain, sheep, pottery, whatever, we all just agree that this is the thing we’re going to accept as payment. Gold, silver, and salt don’t really have an intrinsic value in and of themselves. Grain and sheep might, but it’s heavily dependent on situation now, isn’t it? This is really important, especially as we start talking about cryptocurrencies. The idea that money is an agreed upon fiction, it’s a concept, one that we’ve all fantasized into existence, is key as to how our entire economic system works. You don’t have to like that fact, but that’s not gonna stop it from being true. And they’re all social arrangements. Even if we went back to a commodity-based structure, if you are, if we all agree here in the West that pigs are our medium of exchange, we’re not gonna be doing a whole lot of trading with Saudi Arabia anymore. Why? Well, because that’s against a lot of their food rules there. You can see where this goes. The social conventions drive the money, and the money, in a weird way, drives a lot of social conventions, too. 

[00:16:47] So, now that we got that outta the way, let’s talk about, why money? Yeah, okay. We have this agreed-upon fiction. We at this point are using fiat currency. We used to have representative currency that may or may not be a good thing to go back to. So, why have money in the first place when I could just trade the cows and sheeps and the pigs and all that other stuff? Money has three functions. In order to be money, it has to be a currency. It has to have all three. If it doesn’t have all three, it cannot function as money. It can function as barter. It can function as an investment. But it will not function as money. Those three things are: a medium of exchange, a unit of account, and a store of value. Those three things must be consumed by whatever it is that we’re looking at in order for it to be considered money. 

[00:17:35] Now, number one was the medium of exchange. Anything that society agrees to accept is a general payment for goods and services is that medium of exchange. This could be shells, this could be gold, this could be IOUs in the form of what they were using for currency in Ireland in 1970 when the entire Irish banking system went on strike. People were going to their local pubs, a place where they knew each other. There was a lot of trust in the system. And they could all agree that even though they couldn’t get their money outta the bank, because at that time, Ireland was a cash-based society, that the pubs would sit down and they would write down all the IOUs and they would trade those as currency, at least until the strike was over, and then they could get the money out and they would cash in the IOUs for that strike. Those IOUs became a representative currency backed by the full trust of the local pub. This is a fascinating piece of history, ladies and gentlemen, that’s totally worth reading. But that’s about the end of it for me on this episode. The point is whether it’s shells, gold, or IOUs, the system and the medium of exchange requires trust in the thing being exchanged. The IOUs in the Irish banking strike example worked because everybody knew everybody else at the local pub. The shells worked because that’s just what that society works. Gold works because we all believe gold has value.

[00:18:53] Number two is the unit of account. What is the unit of account? Well, it allows for the meaningful interpretations of prices, costs, and profits. That is to say, ladies and gentlemen, it’s how we account the value of things. Why is it though everybody talks about what’s the price of a gallon of milk? What’s the price of a gallon of gas? Well, the only reason we can put a price on that is because the US dollar functions as a unit of account. And so, I can sit there and say, well, the last time I paid for gas, I paid $2.67 per gallon. Okay. I know that a gallon of gas at current market value is $2.67 as paid for at my local Costco. Okay. That’s a unit of account. So, markets do not exist unless the medium of exchange also functions as a unit of account. Because without the unit of account, you can’t determine a price for anything. And so, in order to be money, you have to not only be able to be exchanged for goods and services, but you also need to be able to determine a price with whatever’s being exchanged. A gallon of gas right now was $2.67. I know my unit of account.

[00:20:01] Number three is a store of value. Now, this is where I typically step on landmines and the conversation goes from just a gentle conversation between two people at the Thanksgiving table to a shouting match in which my wife has to get between me and the other person and then tries to make sure that we maybe don’t kill each other. Because I’m gonna make a statement that’s gonna be controversial and that is stores of value are really hard to determine. Gold is not a store of value. The store of value is an asset that maintains its value rather than depreciating. And a lot of people will point to gold as a store of value and they will claim that it has some sort of intrinsic value. Well, ladies and gentlemen, the only intrinsic value that gold has is that we decided it has an intrinsic value and it’s not lost on me that the people who typically make this argument are either people who hold gold, so it’s in their best interest that we actually believe that it has intrinsic value, or they’re trying to sell you gold, so it’s in their best interest to convince you that it has intrinsic value so you can buy the gold from them and then you can pay the exchange fee, which is called the, you know, the price over spot, spot, of course, being the price of the gold, and then, of course, you have the fee on top of it. And that’s what those exchanges are collecting, which is, again, going to be critical when we talk about cryptocurrencies. But I digress. I’m getting ahead of myself. 

[00:21:20] A store of value has to hold its value against the unit of account. So, dollars being the unit of account inherently hold the value. Now, this is why inflation can be so challenging to any type of sovereign entity because if the state controls the currency, they’re facilitating the medium of exchange and the unit of account. And if inflation starts spiraling out of control, their currency will no longer function as a store of value, which then means they no longer control money, which means they no longer have a role in society. And that is why central banks work so hard to control inflation. It’s all about the store value part. 

[00:22:09] Out of the three ways in which money is determined, medium of exchange, unit of account, and store of value, store of value is the hardest one to nail down. Which brings me to gold. Gold is a commodity, and it functions as commodity. If gold was a store of value, if gold was an inflation hedge, what I should see is that the price of gold should fluctuate against the value of the dollar. Now, if I go to when inflation started to pick up, which was in the middle of 2021, inflation started, so if I go back to the beginning of ’21, then gold was trading at $1,943 as a spot price versus at the time of this recording, so the last spot price I could pull was the 24th of November, which was trading at $1,751. So we went from 1,900 to 1,700, which is, over the course of those almost 24 months, a decline of 9%. That means your gold is worth 9% less than it was at the beginning of ’21 before inflation fully took hold. As of right now, from the beginning of ’21 to current day, we’re running at about a 13% inflation all in over that same period of time. You might be wondering, but hold on a second. I keep reading that it’s 8% here and 7% here. This isn’t average over time. And, again, inflation didn’t really take off till about the middle of 2021. So, when you average it all out, it comes out to be about 13%. So if gold was actually a good store of value, it would be up 13%, not down almost 10%. 

[00:23:44] Land is considered a good store of value. Of course, even that is subject to speculations. As the Fed raises interest rates, real estate property values have been going down. And so, this is where the store of value becomes really, really tricky. Can this function as a store of value? And I have made the argument on the show before, I’m gonna make the argument on the show again, that the best store of value in an inflationary environment is the underlying commodities themselves. I think the database bears me out on that. But on a day-to-day basis, currency works as a store of value. It should not be lost on anyone that the most sought-after form of currency in the world is the USD hundred dollar bill. It is required for a functional economy that our currency holds its value.

[00:24:33] Now, I threw a lot of information at you, ladies and gentlemen. And I don’t feel bad about that because, like I said, if you’re gonna have a conversation about cryptocurrency and whether or not it actually has a future, we gotta start off with the real basics. What is money? Well, money needs to be a medium of exchange, a unit of account, and a store of value. And as we’ve taken you through, there’s lots of things that we can use for exchange, but they might not be a unit of account. I might be able to exchange some of my weights in my gym for a car, for example. I’m just throwing that example out there. But it’s not a unit of account because nobody thinks about cars in terms of their value against kilograms of lead. You see what I’m saying here. We need to have a store of value. We can see that we have tons of fluctuating assets that are not functioning very well as stores of value, but our currency for the most part is maintaining its store of value status. Those three things together are what make money.

[00:25:24] And so, ladies and gentlemen, thanks for listening today. I’m trying to get my Instagram following up to 200 users, and if you have somebody who’s a crypto bro or somebody who’s interested in cryptocurrency or somebody you think would benefit from our message, please send them on over to Instagram @fiscallysavage and give me a follow. If you have questions, comments, concerns, or worries on the show, you can message me on Instagram @fiscallysavage. I wanna be able to start having these conversations. I’d love to be taking more user requests. So, ladies and gentlemen, until next time, go out there, take control of your financial lives, and live free.

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