Book review: The Fiat Standard by Saifedean Ammous

I enjoyed the economics of The Bitcoin Standard, so I gave The Fiat Standard a read. Here’s my review for financial independence campaigners.

The premise of the book

Unlike The Bitcoin Standard, which looks at the advantages of hard money and then ties these to Bitcoin, The Fiat Standard reverse engineers central bank money as if it was crypto.

This is a smart idea. When it comes down to it, cash is just a network ledger. Our cash isn’t actually backed by anything. For more information, see my post on how money is actually made, as told by The Bank of England itself.

Saifedean then continues by saying that while fiat cash has many advantages, the nature of it being so easily created has led to a net detriment for society. He even specifies that this impacts the quality of food, the nature of warfare, the way business operates, and – somewhat bizarrely – climate change narratives.

My biases on the table

The Fiat Standard raises a lot of controversial issues, some of which aren’t well argued. I suspect that this is because The Bitcoin Standard gave a lot of references for academics but then appealed mainly to a mass market audience. The outcome is that the book doesn’t give sources at the end of chapters, so I found it hard to work out the quality of the evidence.

Because of all this, I couldn’t actually write an objective review. My own bias changed the way I read this book.

So that you can interpret this review with the right amount of salt, I’ll give my own biases now. That way, you can make up your own mind.

• I agree that hard money is generally preferable to soft money. I’m not anti-inflation, I just don’t agree that a government needs to steer money. That way lies over-centralisation of power, which I don’t like.
  
• Global climate change may or may not be real. However, local pollution is very real and has very negative health outcomes. There is no disadvantage to treating climate change as a certainty and only advantages in progressing with renewable technologies over fossil fuels. Even if that is not the case, fossil fuels are limited in quantity. For all intents and purposes, I’m in favour of the green agenda.
  
• Food quality is important, but there’s a limit to how much farm space we can have. Meat farming isn’t inherently efficient for feeding a global population. I’m not vegan, but I do eat a few vegetarian meals a week. It also saves me money!

With that out of the way, let’s continue.

What fiat cash does better than hard money

The nice GBP we know and love (?) is fiat cash. It’s basically a debt to be paid in future taxes.

Europe (and the world) used to be on the Gold Standard. Your money could be taken to a bank who would pay on demand a certain amount of gold.

The Gold Standard stopped in the UK for World War One. As Saifedean points out, it was meant to be a temporary ending, so that money could pretty much be printed for the war effort. However, paper cash had existed before then, it was simply that you could exchange the cash back to gold if you wanted to.

Gold is really hard to move for any sizeable quantities. It preserves wealth untarnished for years – it has great salability over time. You can hold onto it for hundreds of years and still find a buyer at around the same exchange rate, give or take.

Paper notes don’t have this. They get replaced every couple of decades for starters, assuming that the currency is still in use. They have low salability over time. However, you can easily carry them and send them in huge quantities. If you use digital cash ledgers (like most money is), it’s obviously really easy to transact with.

This means that they have good salability over space. This is Saifedean’s argument: the fiat system’s advantage is that you can send fiat anywhere, easily. That’s what GBP offers that gold sovereigns don’t.

The downsides of life under the fiat standard

The problem with life under the fiat standard is that governments can inflate the supply to their own will. This is why it was so critical during the first world war. The gold could be used to pay international debts while the home population could use paper for day-to-day transactions.

Saifedean argues that it’s this quality that draws a lot of what he sees are negative impacts resulting from a fiat-based economy.

Food and health

The Fiat Standard is an American book written with a US audience in mind, and it shows a bit here. Not that this isn’t necessarily true in the UK, but it’s less pronounced.

The argument is that food subsidies by governments have led to food industry lobby groups and that over time food quality has decreased as a result. He claims that corn syrup entered US diets because US corn farmers simply needed to find a use for the surplus corn they were being subsidised to grow. Allegedly, the US recommended diet is cereals-heavy, for the same reason, based on the USDA’s “Food Pyramid”.

I looked this up. While the USDA’s Food Pyramid seems to have been cereals-heavy a la 1992, I checked the current guideline to see if this trend continued. I think the jury’s out on whether this is big bad industry of government eccentricity, but the current version – “MyPlate” – does indeed feature a sizeable chunk of grains and no mention of potatoes as a carbohydrate food group, which seems odd. I think it’s a bit of a stretch to make the claim so pointedly as Saifedean does, but I could be persuaded on it.

He also makes a big claim that Tofu, which is a soy curd, is chemically toxic. I’m not sure about this as I couldn’t find any sources that seemed decisive either way. Some studies suggested that tofu reduced presence of bad cholesterol while some suggested that it raised oestrogen levels. Who knows.

Saifedean makes a controversial claim in this section.

Animal fats

Had the argument about fiat currency degrading food stopped at this point, I don’t think it would have weakened the whole book. Unfortunately, it didn’t.

Bizarrely, Saifedean inserts a strange ramble about “animal fats” being healthier than vegetable oils in cooking. That would be fine, were this a book by a nutritionist or dietitian, but it seems an odd and unnecessary point to make without much qualification in The Fiat Standard.

There’s a good article by Forbes that leads me to believe that the problems of vegetable oils were historically true but have since been dealt with. There are studies on both sides of the debate on animal fats versus vegetable fats. However, I don’t agree that this is something that Saifedean is in a good position to comment on it in general. It’s a bit of a stretch.

Production of value

Government fiat money is effectively a debt note. Under the fiat system, central banks act as a lender of last resort for other banks.

Banks make their money by lending and investing capital which is made available to it by customers.

In the days of hard money under the gold standard, banks had to be very selective about who they lend their money to. They needed to take detailed risk assessments to see if a business loan was likely to be repaid.

Saifedean argues that under the fiat standard, there’s no pressure to do these assessments. If it all fails, the central bank will rush in to save the failing bank and protect consumer savings. This leads to risky investments.

It goes even further.

Saifedean points out that inflation eats away at the buying power of capital, so banks are even incentivised to invest quickly. This leads banks to invest in projects that have no real value.

If this idea is correct, it’s troubling. The whole point of capitalism is that value is created over time by investing in capital projects to make life easier/ safer/ more comfortable/ more enjoyable or whatever.

I suspect there’s a solid point here, but The Fiat Standard once again makes a somewhat ludicrous suggestion that I feel is important to discuss.

Climate change

Oh, yes: for Saifedean, hydrocarbons are kings of energy production and investment in renewable energy is a foolhardy prospect.

I’m not going to go too far into how odd this claim is. There’s an article by the World Resources Institute, aimed at a Michael Moore film, which counters most of Saifedeans strange suggestions about investment in renewable energy resources. Like the “Food Pyramid”, I suspect Saifedean is basing his assessments on out-of-date information.

He goes so far as to deny climate change.

Here is a good, well-researched article by NASA that summarises the evidence of human-caused climate change. Here’s a summary for policymakers on climate change that was presented by an international working group to the United Nations in 2018.

It’s possible that an economist who outright states his belief in hydrocarbons has spotted something that most of the scientific community has overlooked. Sure. People used to think the world was flat. New things defy all odds all the time. I just don’t think it’s likely.

The other thing that Saifedean neglects to mention: even if climate change isn’t due to human activity, investing in cleaner energy sources and removing petrol/diesel cars is likely to improve air quality. That’s also a good thing for positive health outcomes.

Simply put, I think this point is completely nonsensical.

Feeding war

Here’s an interesting idea that I believe has some merit.

Because governments can print money, they effectively can create infinite debt to fuel wars. In ancient times, when the king ran out of gold to pay the troops, the army disbanded and went home. No more war for you!

In fiat times, that basically can’t happen.

I don’t think this is a perfect argument. Ancient kings used to pillage the territories they conquered and pay their troops with spoils. Nowadays, we don’t enslave the local population and we try nation-building (not very well, but we at least try it) instead. However, there is a good argument that the first World War and Vietnam may not have happened if governments had to consider warfare as an investment proposition.

How bitcoin can square the circle

Now, assuming that Saifedean is correct in at least some of his assumptions, the problem is that going back to a gold standard is probably a non-starter.

Moving gold to settle the trade balances between countries comes with a hefty premium – Saifedean predicts that this is about 3% on the physical movement alone.

International payment rails currently take days to clear – maybe even weeks. This is broken down well in The Fiat Standard.

However, Bitcoin can achieve perfect settlement finality in minutes. As a hard money (see The Bitcoin Standard for a better explanation) it is desirable that Bitcoin replaces gold for international payment settlements, as it can be accepted anywhere and is on a resilient network. It also costs very little to transact in large amounts.

This means that Bitcoin can achieve salability across space like digital fiat cash while maintaining salability across time like gold. Simply put, it’s hard money that’s easy and cheap to transmit.

Bitcoin on a local level

Critics of Bitcoin point out (rightly, in my opinion) that Bitcoin isn’t a great cash replacement. Transaction fees for small amounts are quite high compared to, say, Visa.

Saifedean suggests that this is where Layer-2 systems like the Lightning Network come in. In simple terms, a Layer-2 is like a side chain. Users on that network transact, that network keeps tabs, then every so often it settles with the main Bitcoin network when funds are added to the Layer-2 or taken off it back onto the main chain.

Layer-2’s are usually cheap to transact on.

The system is roughly how your high street bank interacts with the central bank, other banks and global payment networks: it’s just that in crypto this happens a lot faster and without extra staff.

In Saifedean’s vision, users would use a Layer-2 to buy their normal small items, then use a Layer-1 for bigger purchases that need the hard security of the Bitcoin blockchain. For example, you’d use Lightning to buy a coffee, but you’d use Bitcoin directly to buy a house.

Well, sort of. Good enough for this review, anyway.

My thoughts overall

OK, this review became an epic. I’ve missed out some parts of the book deliberately as this blog post was just becoming unmanageable, but I’ve put in the key themes.

I liked the premise of the book. Saifedean writes The Fiat Standard as a reverse-engineering feat for a crypto user, and that’s a strong starting point. I also believe that hard money is desirable in general, so I could follow the logic quite well.

Unfortunately, I felt that the crazier ideas about animal fats and climate change spoiled the book. They didn’t add to the argument and came across as mad ramblings, which isn’t something that’s helpful to the reader who may be on the fence about crypto. I suspect that these were added in for shock value but they were as big a turn off as wearing socks with sandals.

I really wanted to rate this book highly and I’d been looking forward to it after The Bitcoin Standard. Overall though, I probably wouldn’t recommend this to a friend, certainly not beyond the first few chapters.

How I’m using this knowledge in my financial independence campaign

I have started to add Bitcoin as an asset, based on my other readings, but only in small amounts. I can see how it’s hard money and has many advantages over the fiat standard system. I want to see a world where Bitcoin is an acceptable alternative payment method globally.

However, just because I want something to happen, doesn’t mean that it will. I’m not wholeheartedly committing to Bitcoin as a result.

I also liked the settlement of payments ideas. Sadly, I suspect that this will result in a future for stablecoins, rather than adoption of a Bitcoin standard. This is part of the reason why stablecoins are a large part of my crypto portfolio.

In conclusion: this was an OK read, but I don’t think it’s too useful for financial independence campaigners. If you’ve read The Bitcoin Standard, I don’t think you’ll get anything new from this lesser sequel.