Broken Money (Lyn Alden): Exploring the Issues and Solutions of Flawed Monetary System

Introduction

In Broken Money, Lyn Alden delves into the structural flaws of the modern financial system and examines the potential of alternative currencies like Bitcoin. She also explores the history and evolution of money, highlighting today’s economic instability to help readers navigate the complexities of the financial world. 

Alden also uncovers the influence of central banks and the effects of monetary policy on personal finances. She offers her perspective on how digital assets like Bitcoin can serve as potential alternatives to the current system. 

Her insightful analysis provides plenty to consider about how to protect our own wealth from ongoing monetary debasement, which appears to be accelerating.

Below, I’ve summarized some passages from the book that particularly resonated with me. Note that I have rephrased , rearranged or condensed some parts. Also, I’ll mark my thoughts as "Neo" to distinguish them from the book’s content. Let’s dive on.

Part 1. What is Money?

Many believe that the concept of money begins with coins or shells, but it actually starts with a ledger - a record of transactions tracking ownership. [Neo: This opening description of money as a ledger will be naturally connected to Bitcoin in Part 5, Internet-Native Money]

Shell money persisted for thousands of years across various regions but ultimately became impractical with the onset of the Industrial Revolution. Other forms of money, such as furs, livestock, salt, and tobacco, also played important roles at different times. However, these too became ineffective as currency.

The evolution of commodity money reflects technological progress. Different forms of commodity money function as honest ledger systems until technology advances, giving one group an advantage that forces others to adapt or be left behind.

Gold is less prone to rotting, rusting, or corroding compared to most materials. Its chemical inertness means it rarely forms compounds, allowing it to be remelted repeatedly. Even when dispersed, gold pieces don’t rust away like other materials, making them retrievable. [Neo: Gold has been and still is the king of commodity money.]

The ongoing mining of gold, combined with minimal loss, gives it an average stock-to-flow ratio of about 67, the highest of any commodity according to the World Gold Council. It means that the world collectively holds 67 years’ worth of average annual production of gold. Its supply growth rate has remained between 1% and 2% over the past century - a remarkably stable range. Gold far surpasses all other commodities in stock-to-flow ratio; for example, silver typically has a ratio of around 10, while most other commodities fall below 1.

However, gold's main drawback is its lack of divisibility. This led to the common use of a bimetallic system with gold and silver in various regions. [Neo: I slightly differ on this point, as gold is financialized through instruments like ETFs. Investors can now buy and sell as little as 0.001 ounces of gold with ample liquidity.]

The definitions and origins of money typically fall into two main economic theories: (1) the credit theory and (2) the commodity theory. The convergence of these theories can be described as a “ledger theory of money.”

(1) Credit use addresses the barter problem between individuals who have established trust or defer to a local authority for enforcement.

(2) Commodity money, on the other hand, appears primarily to ease trade between strangers and to enhance systems relying on flexible social credit by providing a means of final settlement and long-term savings.

Debasement of currency can occur for various reasons, and when it does, it highlights that, over time, it's usually wiser for savers to hold scarce commodity money rather than the promises of kingdoms, empires, or nation-states. The former is governed by the immutable laws of nature, while the latter is vulnerable to human fallibility.

Part 2. The Birth of Banks

Savers and creditors of dollars naturally prefer a stronger dollar, while debtors want a weaker one. Currency devaluation benefits debtors, and the largest debtor is the U.S. federal government.

During the Great Depression in 1933, President Roosevelt signed an executive order making it illegal for Americans to own gold, except for small amounts like wedding rings. Citizens were instructed to surrender their gold for the pegged exchange rate of $20.67 per ounce. The following year, the 1934 Gold Reserve Act prohibited banks from redeeming dollars for gold and required the Federal Reserve to transfer all its gold to the U.S. Treasury.

The government then devalued the dollar relative to gold to $35 per ounce. From 1933 until 1971, foreign central banks could still redeem dollars for gold at this devalued rate, but American citizens and foreign private entities could not. In 1971, the U.S. also defaulted on foreign redemptions, leading to an accelerated decline in value of the dollar. Despite this, the U.S. dollar was the second-best performing currency during this time, as most currencies depreciated even faster.

While gold supply increases by about 1.5% annually, the money supply of major countries has grown at an annualized rate of 6% to 12% since 1960. In contrast, developing country currencies often experienced double-digit growth or hyperinflation.

Gold, as nature’s ledger, has stable parameters for supply and debasement but lacks the speed for verification in the telecommunication age. [Neo: I slightly differ again on this point, as gold ETFs do not require verification of physical gold, provided that the ETF operator can be trusted. Investors can quickly trade gold as a financial asset through ETFs.]

The dollar, as mankind’s ledger, moves and verifies quickly but lacks strong supply and debasement controls. The only long-term solution to this speed gap is to create a widely accepted, scarce monetary asset that can settle transactions at light speed.

Political decisions tend to have local and temporary effects, while technological changes influence things globally and permanently.

Part 3. The Rise and Fall of Global Monetary Orders

During World War I, the losing countries experienced severe hyperinflation, while the winning nations faced only "very high" inflation.

Most new currency is generated through either 1) monetized government deficit spending or 2) an increase in fractional reserve bank lending.

Since 1974, the Eurodollar/Petrodollar system has led to many global entities holding dollar-denominated assets, artificially boosting the U.S. dollar's purchasing power. This monetary premium decreases U.S. export competitiveness and gradually erodes its industrial base. To provide the world with the necessary dollars, the U.S. maintains a persistent trade deficit. Ironically, the power granted to the reserve currency issuer can poison its status over decades.

In prior extended U.S. conflicts before 9/11, such as the War of 1812, the Spanish-American War, the Civil War, World Wars I and II, and the Korean and Vietnam Wars, taxes were raised, particularly on the wealthy, while non-war spending was cut. In contrast, during the wars in Afghanistan and Iraq in 2001 and 2003, Congress enacted tax cuts (the Bush tax cuts) and financed these conflicts through accumulating national debt.

China's top-heavy demographics, less favorable geography regarding coasts, rivers, and borders, weaker rule of law, and shallower capital markets make it unsuitable for the role the U.S. played in the mid-20th century.

The U.S. GDP has declined to 20-25% of global GDP from over 40% post-World War II, leading to a deeply negative net international investment position. While it still boasts excellent geography, the largest agricultural capacity, a strong startup ecosystem, and a dominant navy, these factors alone may not suffice to maintain its status as a single global power.

[Neo: I would add at least five factors: a robust legal system, the second-largest democracy, the largest and most technologically advanced global companies, the highest energy production capacity, and the most influential cultural power. Combined with what Alden mentioned, these factors help the U.S. maintain its status as the most powerful country in the world.]

Part 4. The Entropy of Fiat Ledgers

Base money is the core of the fiat currency system, comprising 1) physical currency in circulation and 2) cash reserves held by commercial banks with the Federal Reserve. Broad money includes this currency as well as checking deposits, savings deposits, and CDs.

Modern commercial banks aim to "multiply" base money into broad money while making a profit, a concept known as the "money multiplier," defined as the broad money supply divided by the base money supply. In simple terms, lending creates deposits.

While ongoing productivity gains should lead to lower prices over time, central bankers actively work to ensure prices rise through increased currency debasement. On the other hand, central planners' attempts to control short-term price spikes can slow down the natural resolution of supply/demand imbalances by market forces ironically.

One major reason policymakers and economists fear deflation is that it poses risks to highly leveraged financial systems. Persistent deflation is incompatible with high debt levels and consequently, the modern financial system.

In 1913, when the Federal Reserve was established, broad money totaled $19.31 billion. By the end of 2022, it had risen to $21.4 trillion, reflecting an average annual growth rate of 6.6% over 109 years. The U.S. broad money supply was below $8.5 trillion in 2010, indicating a 7.3% annualized growth rate, which shows that currency debasement is accelerating.

Holding scarce or semi-scarce assets makes sense when the money supply grows much faster than the interest earned on cash and cash equivalents. [Neo: Alden gives examples of scarce assets, such as luxury waterfront property and fine art from famous deceased artists, and semi-scarce assets, such as gold, oil, beef, and median homes. Now, you know why home prices keep going up!]

Success has hinged on borrowing money, but not so much that one is among the first to fail during a recession. Savers face dilution, overleveraged entities default, and the ideal position is to remain leveraged without becoming overleveraged.

An environment of ongoing currency debasement and selective access to cheap credit tends to favor larger entities, centralizing wealth and influence over time. The biggest debtor (the U.S. federal government) consistently accesses cheap credit and liquidity, with the Federal Reserve purchasing its debt as needed.

Major U.S. banks and corporations also benefit from Federal Reserve actions and Congressional fiscal stimulus, gaining access to cheap, liquid debt markets even during crises. Small businesses and homeowners have more selective access to credit only in favorable conditions, while the working class and those in poverty often struggle to access affordable credit.

Policymakers consistently encourage private sector credit growth. Whenever there’s even a slight risk of contraction in private sector debt, monetary policymakers intervene to prevent broader impacts and some of that private sector debt shifts to the public sector through fiscal bailouts.

Additionally, multiple wars have been financed entirely with public debt. Now that public sector debt is so high, it is likely to be inflated away over time, leaving lawmakers with limited options.

Entropy is the principle that physical systems become increasingly disordered over time, driven by friction and heat loss. A similar financial entropy has developed in our system, where fiat credit can only increase without causing the highly leveraged structure to collapse.

Part 5. Internet-Native Money

Compared to other cryptocurrencies, Bitcoin is the largest, most liquid, most immutable, and most decentralized. It settles faster than dollars and has a lower supply growth rate than gold. In 2024, Bitcoin's total supply is growing at less than 0.9%, dropping to around 0.4% by 2028.

While there’s no guarantee of Bitcoin's long-term success, it is likely to be highly cyclical, with higher highs and higher lows as speculative traders using leverage are repeatedly washed out. Only when it approaches its total addressable market, along with high liquidity and user adoption, can its notorious price volatility realistically decrease.

"Proof-of-work" involves millions of machines using electricity and specialized processors to solve cryptographic puzzles for the latest block. In this system, energy determines truth without a central authority or a small group of validators deciding what constitutes a valid block or transaction. The blockchain with the most work done is mathematically verifiable and recognized as true by the node network, all based on code.

In contrast, "proof-of-stake" allows cryptocurrency holders to temporarily lock or “stake” their coins to vote on new block creation, earning more coins for successful block creation. The main advantage of proof-of-stake is that it raises the cost of brute-force attacks compared to proof-of-work. However, its key drawback is that the ledger's history lacks unforgeable costliness.

While larger Bitcoin miners benefit from reduced overhead relative to their operation size, many of the cheapest stranded electricity sources and productive waste heat are found in smaller amounts, favoring smaller miners. Consequently, proof-of-work miners tend to remain decentralized and dynamic, while proof-of-stake systems often become centralized and persistent.

While some Bitcoin miners utilize traditional cheap energy sources, they also rely on: stranded hydroelectric power, stranded natural gas, or landfill gas. It's a highly commoditized industry. To remain solvent in the long run, Bitcoin miners must use the cheapest electricity sources, which are typically stranded or wasted resources. Bitcoin mining incentivizes the overbuilding of renewable energy sources by allowing surplus supply to be monetized.

[Neo: Critics of Bitcoin often cite its substantial electricity demands as a significant drawback, especially in an era of growing global efforts to reduce energy consumption and promote sustainability. However, Alden points out that this perspective overlooks the potential benefits of Bitcoin mining as a catalyst for renewable energy adoption. By utilizing stranded or excess energy, Bitcoin mining can create a financial incentive for the development and utilization of renewable energy sources, ultimately contributing to a more sustainable energy landscape.]

Unlike traditional offshore bank accounts available only to the wealthy, Bitcoin provides anyone with a smartphone access to a functional equivalent without counterparty risk.

Initially, encryption enabled private information sharing, and now it also facilitates the private sharing of value. Both information and value are essential for individuals to engage in trade.

Part 6. Financial Technology and Human Rights

Over the past two centuries, the world has transitioned from free banking and bimetallic coinage to a central bank gold standard, then to the Bretton Woods system, and finally to the Eurodollar/Petrodollar system. Each of these systems eventually became outdated and collapsed under their own weight, only to be replaced by something new.

Currently, signs indicate that the global financial system is once again breaking down. Factors such as large sovereign debts from decades of deficit spending, increasing wealth concentration, and a shift from a unipolar to a multipolar world order are straining various fiat currency systems. As wealth consolidates at the top and individuals feel the economic system is failing them, they often turn to populism - a cycle as old as civilization.

Governments and central banks have effectively gained a monopoly on fast, long-distance money transmission, allowing them to devalue citizens' savings and redirect that value toward their objectives in opaque ways. Moving forward, bottom-up digital currencies like Bitcoin aim to return control of the ledger to the people, while top-down digital currencies such as central bank digital currencies enhance nation-states' control over the financial ledger.

In fiat currency systems, sovereign governments and central banks can create money almost for free, which others are expected to accept as valuable, even as it becomes increasingly diluted. Many countries mismanage their finances, leading to significant increases in money supply and prices. When people attempt to escape to other assets to protect their savings, authorities often deflect blame onto speculators and external factors, frequently trying to block those exits.

Gold has traditionally served as a form of defense and savings but is less practical as transactional money in the digital age. The Bitcoin network offers a newer, faster alternative, where no one can create bitcoin for free, eliminating the power of seigniorage. [Neo: Seigniorage refers to the profit a government earns from issuing currency. It is the difference between the face value of money and the cost of producing and distributing it, which is nearly zero in the current digital money era.]

Additionally, transactions cannot be censored unless someone controls over 50% of the network's processing power, and it can move globally without central banks as bottlenecks.

Closing Remarks

In "Broken Money," Lyn Alden navigates the complex landscape of modern finance, highlighting the systemic flaws of our monetary systems. She traces the evolution of money from commodity-based systems to today’s fiat currencies and the latest developments in cryptocurrency, offering a comprehensive overview.

By contextualizing historical events alongside contemporary financial dynamics, she provides a holistic perspective that emphasizes the cyclical nature of economic systems and the inevitability of change.

Her exploration of alternative monetary systems, particularly Bitcoin, sparks vital discussions about the future of money. She examines the contrast between central bank digital currencies and decentralized alternatives, prompting critical thought about control, privacy, and the evolving role of money in society.

While enthusiastic about new technologies, Alden also discusses their limitations, allowing readers to form informed opinions about the future of  digital currencies. Alden’s insights are especially timely amid rising government debt around the globe, including that of the United States.

The only drawback in my opinion is its length with 521 pages. And some sections may feel overly technical (though I personally enjoyed such details). Fortunately, it’s easy to skip these parts without losing sight of the author’s main points.

“Broken Money” prompts readers to consider how to protect their wealth in an inflationary and flawed financial system while exploring Bitcoin as a potential solution. Overall, I found “Broken Money" to be an enlightening and insightful read.

Thanks for reading. Wish you grow rich slowly and surely!

This blog post includes excerpts from the book “Broken Money”, published by Timestamp Press, quoted under fair use as permitted by copyright laws in relevant jurisdictions. The content includes both direct excerpts from the original work and my personal thoughts, rephrasings, and interpretations. All original text and images from the book are the property of the respective author and publisher, and are not to be used for commercial purposes.