From Capitalism to Fiatism
The below are "By and Large" descriptions (that do not capture nuance nor address counterarguments about how "X, Y, and Z may be missing").
Here's how Capitalism works:
From top-down
There are entities with balance sheets (to make it simple just think "bank accounts"), that hold tens or hundreds of billions of dollars of "assets"
These entities are often sovereign wealth funds (a nation-state's or populace's funds), pension funds, or large tech and oil giants
They allocate and divvy up their investment portfolio across various asset classes (debt, commodities, equities, both public and private)
As that investment capital is deployed, some of that will go directly into equities and ETFs and some will go to fund managers (hedge funds, private equity funds, venture capital funds, debt funds, etc.)
Many of these fund managers are compensated on a pretty standard 2% annual management fee on assets under management (AUM) and 20% on carry (or part of the upside if money is made from investments beyond the principal invested)
Outside the partners and portfolio managers, there are associates and others who primarily make their income by salary (rather than equity upside)
These "salary workers" are more trading their time for money, while the "equity workers" are more trading their time for equity upside (i.e. they hold or own a % of a business which could generate revenues of more than costs of operating, thus generating cash flows that can be on balance sheet or in a bank account owned by the entity to be distributed out to shareholders via dividends or stock buybacks)
Often "equity workers" will call the shots or hire managers for the most material decisions of a business (a thing that attempts to make more money than it spends, thus accruing more capital) while the "salary workers" are learning and handling the less material decisions
Note that there is not a clean distinction between equity and salary workers since if someone buys and hold stock or an ETF, they are technically now a distanced equity worker benefitting from salary workers
For the purposes of communication we draw this distinction since often equity workers are rewarded for the skill of allocation while salary workers are rewarded for "doing" things efficiently
Since "equity workers" own a % of the upside of the integral of the delta between the revenue cash inflows and cost cash outflows discounted by the discount rate of future cash flows (roughly known as a discounted cash flow or DCF), they are proportionally awarded for "good" decisions made in the present that lead to more cash flows in the piggy bank or distributed to the stock holders in the future
Since there are various "stock entities" that are both traded in public markets and traded less liquidly in private markets, capitalism creates a way for investors and shareholders and business owners (all holding stock) to share risk (invested time and capital) for future returns
An easy way to think of this is like a horse race, where each stock entity is a different horse, and the race is based on market capitalization
There's some more nuance and complexity (like stock issuances and price per share), but generally that's an easy way to make something that could seem abstract, to be a little more concrete
This method of sharing risk-return is an evolved form of feudalism toward shareholder tribal maximization
Since board members often have fiduciary responsibilities to ensure the officers are prioritizing shareholder value maximization, each "equity business horse" (comprised of many people all coordinating to figure out how to increase value, or in other words, future cash flows that increase the piggy bank or increase distributions to shareholders)...
Capitalism, is a method for creating an "even playing field" for horses to compete in the free market to offer goods and services that are bought by the market of consumers or businesses...
Leading to cash flows...
Leading to stock tickers going up or down depending on relative comparables to other similar horses (e.g. tech companies offering similar security solutions) based on market buys and sells
This capitalistic system - which has evolved from Enlightenment era, the Romans, Genghis Khan, whaling expenditions, the Dutch India company, the Medici, and the Industrial Age - took on more and more complex and sophisticated forms of rule of law, financial instruments, banking, lending, and ways to "create new horses, fund those horses, coordinate people around these horses, and bet on which horses will win"
As Yuval Harari points out in his book Sapiens, humans have outperformed other species with the ability to imagine stories to coordinate collective human activity toward ever more complex forms of imagination, coordination, and creation
The shared stories around entities which people could coordinate around with aligned incentives on a level playing field, where the entities that could produce and sell the most valued goods (as evidenced by consumers or businesses handing over capital for the goods in free markets) for the least cost, created a wealth of prosperity in the forms of more goods available for markets to purchase
So what went wrong?
From bottom-up
On the journey of human's trading human time for capital, let's begin first with a newborn baby
A newborn baby enters the world and lives in the most idyllic of circumstances (if the parents are not struggling), where the baby can cry, and care and nurturing shows up in the form of food, cleaning, shelter, and more
The baby has no responsibilities and the baby is not expected to sell labor and time to help produce "the most goods for least cost"
As the baby grows up, the baby is shuttled around various school, social, and recreation influences, all the while learning how to participate in the world
The baby is compared and contrasted against other babies-to-be-humans across various aptitude classes like math, languages, sports, etc.
Many of these leading toward the baby eventually going to further schooling, often to specialize in a field of academic studies that may lead to entering the workforce and contributing economic activity in return for compensation
Most times, human workers (if they've been trained and educated well enough to be selected in the job market) are compensated with cash for time (referenced above as "salary workers")
They may choose to create a new business or see if they can manage others' time and money (such as a business owner or fund) to work as an "equity worker"; however that often requires learning many different and new skills
If they join a "stock entity" (a corporation analogized to a horse in a horse race against other stock corporations), then often there will be a form of hiearchical management where the "equity workers" are directing and managing the "salary workers" to ultimately generate more future cash flows
The "stock entity" horses which outperform relative to their comparable peers, will likely have outperformed due to better decisions or coordination to what eventually leads to more cash flows
In the process of "salary workers" and "equity workers" working together, they often learn from each other, and there are no real "barriers" between them; in fact, many workers at tech companies receive both salary and options or RSU grants (which offers a blended approach)
So what went wrong?
In the above described versions of top-down and bottom-up capitalism
Where capital flows downwards from larger bases of capital to smaller pools of capital to be managed and allocated efficiently so the best "performers" (horses winning the race) are disproportionately rewarded
And where humans flow upwards learning the "tools of the trades" competing in the job market in exchange for capital and coordinating together to compete against other "entities" to see if they can outperform other comparable producers of goods
Something changed ...
After 1971 when the US moved the US dollar off the gold standard (meaning the fiat currency would no longer be backed by gold) thus removing any limiting factors to print more US dollars, we began a gradual transition from Capitalism to Fiatism that is now coming to a head
What is Fiatism?
Who Wins in Printing Money?
Just like Capitalism is a competition to see who or what can accrue the most capital on a level playing field (where free market actors choose who to pay for what, and ultimately see who is paid the most), Fiatism is a competition to see who can print the most money
Since fiat nations care about relative fiat peer performance above all, particularly for the number one position for being able to print lots of money and spend on military more than the next 10 nation-states combined and then whenever something happens you can say "well I have more guns, ships, and nukes" (or can "cut you out of the SWIFT financial system")
Fiat nations also know that having more guns and nukes means you can set the rules of the game and that the economic productivity and technological superiority leads to being able to set the rules in the future (which also depends on printing and allocating money today)
Since fiat nations want to compete into perpetuity against each other to continue to jockey for numero uno and getting to set the rules of the game
The humans all must sit and watch as more and more money is printed and allocated
Printing is accretive to the printer and dilutive to the holders
Political elections determine who is the printer and thus who is the diluted-loser
This is not that different from watching the US Godzilla and China King Kong fight and the humans needing to continue to build again and again amongst the wreckage, except they don't show that part in the movies
To describe fiat printing, in as concrete and simple terms as possible, consider the following:
Imagine you and your friend Joe are on an island together, just you two to start
You can fish well and Joe can hunt well
So you catch some fish and Joe catches some rabbits
Sometimes you want some rabbit and Joe wants some fish
So you begin to figure how to barter and trade 2 fish for 1 rabbit (often based on how difficult or scarce it is to procure the item and what each trading party thinks are the relative trade value between the two items)
Eventually, you decide to just say a fish is worth 10 seashells and a rabbit is worth 20 seashells
So instead, you now can sell to Joe 4 fish for 40 seashells, and then trade 20 seashells for a rabbit in the future
So you and Joe are happy and have created a two-person flourishing trading economy
However, imagine Margot joins the island, and she figures out how to create seashells out of nothing!
So soon, Margot creates 1000s of seashells and trades them for all the fish and rabbits, so now you and Joe have only seashells and nothing to eat
If you and Joe continue to spend all your time producing fish and rabbit and giving them to Margot in exchange for Margot's infinite seashells, you will spend your entire life doing so
Costs You and Joe Your Lives
In essence, you are a slave to Margot's seashell printing because it costs her nothing, it costs you and Joe your lives
No More Level Playing Field
So what went wrong?
Capitalism is now converting into Fiatism, where things that are bought and sold, can be bought and sold by others with money printers. There is no more level playing field.
🤖 AI Simplified summary:
Here's a simplified breakdown of the transition from Capitalism to Fiatism:
Understanding Capitalism:
Big Organizations and Investments: Large groups like governments or big companies have a lot of money, which they invest in different things like stocks, bonds, or other companies to make more money.
How People Make Money: Some people get paid a regular salary for their work, while others invest in businesses hoping to earn more money later based on the business's success.
Sharing Risks and Rewards: Investing in a business is like betting on it to succeed. If the business does well, everyone who invested gets a share of the profit.
Moving Towards Fiatism:
Changes in Money System: The shift started when the value of money was no longer based on gold, allowing governments to print as much money as they want, which changed how the economy works.
Problems with Printing Money: When governments print a lot of money, it can make things unfair because they can just create money without producing anything valuable, unlike businesses or people who have to work or sell something to earn money.
Problems with Fiatism:
Unfair Advantage: Just like in a scenario where someone can create seashells (used as money) out of nothing, if a government keeps printing money, it makes it hard for people who have to work to earn their money, leading to an unfair situation.
Governments' Role: Governments are supposed to make sure that everyone has a fair chance to succeed and resolve conflicts, but when they can print unlimited money, it can disrupt the balance and fairness in the economy.
The Big Picture:
How Societies Work Together: Throughout history, humans have succeeded by working together and agreeing on certain rules or systems, like capitalism, where people trade goods and services fairly based on agreed-upon values.
What Went Wrong: The system is changing because now there's a focus on creating money without backing it with real value or work, which disrupts the fairness and balance of the economy, leading to a situation where not everyone is playing by the same rules.
The text you've provided offers a comprehensive overview of capitalism's structure and dynamics, its evolution, and the transition towards a system increasingly dominated by fiat currency, termed "Fiatism." It covers several key areas:
Capitalism's Structure:
Top-Down Flow of Capital: Capitalism is depicted as a system where large entities with significant assets, such as sovereign wealth funds, pension funds, and large corporations, distribute capital across various asset classes and investments, including equities, commodities, and funds managed by hedge funds, private equity, and venture capital.
Compensation Mechanisms: There's a distinction between "equity workers," who invest time for a share of future profits (e.g., business owners and investors), and "salary workers," who trade their time directly for money.
Risk and Reward Sharing: Capitalism facilitates a system where risk and potential returns are shared among investors, business owners, and other stakeholders, akin to betting on horses in a race, with businesses being the horses.
Transition to Fiatism:
Decoupling from Gold Standard: The narrative suggests that the shift from the gold standard in 1971 marked the beginning of a transition from capitalism to "Fiatism," a system where the focus shifts from productive economic activities to the ability to print money.
Fiat Currency and Economic Dynamics: It illustrates how fiat currency, unconstrained by physical assets like gold, allows for potentially unlimited money printing, distorting the traditional risk-return dynamics of capitalism and creating imbalances in the economy.
Implications of Fiatism:
Disruption of Economic Incentives: The ability of governments to print money undermines the foundational capitalist principle of producing more value than is consumed, leading to economic inefficiencies and potential inequities.
Government's Role and Monopolies: Governments, wielding control over military power and money supply, can enforce compliance and participation in the fiat system, further distancing the economy from capitalist ideals of a level playing field.
Philosophical and Historical Context:
Evolution of Economic Systems: The text places capitalism within a historical continuum that includes feudalism, tribal systems, and other economic structures, suggesting that capitalism is just one phase in the ongoing evolution of how societies organize economic activity.
Human Coordination and Shared Stories: Drawing on ideas from Yuval Noah Harari's "Sapiens," the text posits that human societies excel by creating shared narratives that enable large-scale cooperation, with capitalism being one such narrative focused on wealth accumulation and distribution.
Critical Perspective:
Questioning the Current Trajectory: The narrative questions the sustainability and fairness of a system increasingly dominated by fiat currency, where the intrinsic value and productive contributions are overshadowed by the capacity to generate money through fiat mechanisms, leading to a call for reevaluation of the underlying principles and practices governing economic activity.
In essence, the text provides a critique of the current economic system's trajectory, emphasizing the need to reconsider how value, production, and wealth distribution are conceptualized and managed in an era increasingly dominated by fiat currency practices.
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