Deep in the trenches: July 24th 2020
The dollar crisis, bitcoin, Linear and doing things that don't scale
Good morning everyone,
For new subscribers, I share every week:
1) Resources I've learnt from
2) A tool I'm enjoying
3) 1 thing I've learnt building actiondesk
4) What's on my reading list
Some interesting resources I’ve checked out lately:
Money is a fascinating topic to me. Most of us don’t really have a clue about how it works. This book is a very interesting account, data based, showing how the current monetary system is the source of many economic problems the world has experienced in the past few decades.
For most of the 19th century and the beginning of the 20th century, the world’s monetary system operated under the gold standard.
Every currency was redeemable in gold at a fixed rate
From after World War II to 1971, the system while different had similar principles.
The US Dollar was convertible with gold at a fixed rate, and every other currency was convertible into dollar at a fixed rate. This was the Bretton Woods system.
In the 1960’s, the US started to accumulate a significant current account deficit. That means they were buying more stuff from other countries than they were selling.
Under the gold standard or Bretton Woods system, that meant that gold was flowing out of the US.
To prevent this, the US ended the convertibility of US dollar into gold.
Let me stop one second here. I don’t think we realize how crazy this is. The US basically said to everyone else:
Sure, I’ve paid you with USD which I promised you could convert into gold, but actually I don’t want to convert it into gold now
It’s exactly like contracting a debt and then saying you’re not going to pay it. You can only afford this if you have bigger muscles than the person you owe money to, which was the case with the US and the rest of the world.
The main theory of the book is that this triggered a lot of different things that led to most economic crises we’ve known since
First, the US continued to have a bigger and bigger current account deficit each year (again buying more stuff from the rest of the world than they were selling)
For reasons I won’t explain here, accumulating such a big and consistent current account deficit is not possible under a gold standard.
They “financed” these deficits with US Dollar, of which they created a lot more (this is an understatement)
On the other end of the bargain, countries with current account surpluses got a lot of US Dollar, but well they didn’t want to change these USD into their own currencies because that would have reevaluated their currency, and decreased their competitivity.
As a result, they reinvested these USD into USD denominated assets: real estate, equities, bonds.
This led to a bubble of these assets: The internet bubble of the early 2000s, the subprimes (although he doesn’t mention it since the book was written before).
As the world has become very dependent upon US imports, any crisis in the US has ripple effects everywhere obviously.
According to the author, there is no way this situation continues and the USD is bound to collapse at some point
I’m no economist, but I wonder if the current situation is not the type of obvious things that people will point to in the future
Yeah I mean sure, it should have been obvious in the 2000’s / 2010’s that the USD and the Dollar standard built around it were going to collapse. How could world leaders and people not see that?
You know, kind of like:
Yeah I mean sure, it should have been obvious in the 1930’s that Germany was getting ready for an all out war. How could world leaders and people not see that?
This article is a good complement to the book above. Based on the theory of the Austrian school of economics, it provides an interesting explanation of business cycles, and how Bitcoin could help solve this. The main insights:
Economic growth comes from investment in capital goods.
At an individual level, a fisherman for example, might not buy a new TV (ie delays consumption) to build / buy a better net, which will enable him to get more fish. This leads to economic growth
At the level of our modern society, people save, and invest in other people's business.
When you're ready to delay consumption to invest in the future, you show low time preference.
The more people save, the more capital is available to be borrowed to produce, the lower the interest will be.
The business cycle:
According to Austrian theory / Mises, business cycles are caused by intervention of governments in money supply
Particularly in credit expansion.
Credit expansion leads to lower interest rates
Most economists think lower interest rate leads to economic growth.
It's true that usually lower interest rate is correlated with economic growth but it's not a causation.
This correlation exists because economic growth comes from low time preference / more capital invested and low interest rate is a mere consequence of that, not the cause
Credit expansion will lead to an economic boom but an artificial one.
Capital will be allocated to projects that are not good (they wouldn’t have had capital in a “normal” economy)
This will necessarily lead to a correction
Usually, when there's a correction (crisis), governments expand credit even more
This makes the problem worse and will ultimately lead to depressions
Austrian economists traditionally recommended governments to not play with credit expansion.
But it seems that history shows as long as they can, government will play with money supply
This is where Bitcoin comes in. Hakek had somewhat predicted it 25y earlier
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.” — F. A. Hayek
How bitcoin could stop business cycles from occurring?
First because the supply is fixed. Governments can't decide to create more bitcoin
But also, because it would prevent fractional banking. (fractional banking is the system where when you deposit $10 in a bank, they only keep $1, and lend the rest)
Bitcoin enables everybody to be their own deposit bank.
If consumers could store the money they intend to spend themselves rather than relying on banks, banks would have less money
They'd have only the money that consumers want to invest, not the money that they just want to deposit
By far, the best thing I’ve read on the topic.
Every big wave of innovation had it's dominant player:
Mainframes computers ⇒ IBM
Personal Computers ⇒ Microsoft
Web ⇒ Google
Mobile ⇒ Apple
Social ⇒ Facebook
Loss of dominance doesn't mean loss of business. Both IBM and Miscrosoft are bigger businesses than when they were dominant.
We tend to think that the current dominant players will still be dominant when a new cycle comes, but history shows it's never the case
Microsoft lost dominance because the change of cycle, not because of anti trust intervention
Very interesting 4 year-old article from Jessica Livingston, cofounder of Y Combinator
"There's too much downside in sharing any opinion that could easily be misinterpreted online"
"There's a lot of concern about "fake news" lately. That is a real problem, but there's also the opposite problem: true things that aren't being said."
The result of successful people not sharing what they truly think is it makes it harder for people outside of their groups to become successful themselves, or at least to learn from them
A simple and good non technical explanation of GPT-3, this new machine learning API made available in beta by Open AI, an organization led by Sam Altman which aims at ensuring that artificial general intelligence benefits all of humanity.
A tool I’ve just started using
I recently shared a list of about 30 tools I use. You can check it out here.
Since then, we moved from Jira to Linear to handle our software development projects.
Linear is a beautiful product, that you can use (almost) exclusively with shortcuts. While it’s pretty new, it’s already pretty advanced and has most of the features we need as an early stage startup.
One thing I learnt while building actiondesk
While it’s not a new lesson, I often rethink about it and think about how relevant and deeper than it seems it is: Do things that don’t scale
The concept comes from a landmark essay from Paul Graham
As we build a tech startup, we always tend to want to automate things and build the company as we had already millions of users
The right thing to do is to do things that don’t scale, figure out if they’re the right things to do and automate them later.
Most of the time, automating is a waste of time because these might not be the right things to do
Lately, I’ve been building some custom dashboard for some of our customers. This enables me to show users features and to get them up to speed quickly
In the future, it’d probably be through templates and an automated onboarding experience on the product and the features. But right now, it’s great and also helps me learn a ton about what users want and bugs we have on the product.
On my reading list
Exhalation: These are great science-fiction short stories. Highly recommend it!
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